Buying a Custom Homebuilding/remodeling Business - Contractor Talk - Professional Construction and Remodeling Forum

seekingadvice · 02-23-2007, 07:26 PM

Hello, I joined this forum simply to elicit advice on buying a residential construction business.

I've worked for a top 500 remodeling company for nearly 10 years. I started as green as Amish Hemlock. I have a college education, but in the fine arts, not business. Like many of you I've worked my way from pure laborer to lead carpenter/project supervisor.

My company was started nearly 30 years ago and became a local heavyweight about midway. The company is now jointly owned by two men. One is 61 the other in his mid fiftees. Our company consists of 15 carpenters/ 4 crews, and 8 office staff, along with a number of loyal subs.

The founder took me to dinner a month or so ago and informed me that he and his partner are looking towards retirement and would like the company to continue forward. They both agreed that I was their choice to inherit the business.

Neither has any concise plan and have decided they need to start forming one. One of the partners met with me to see if I had any interest so they could continue formulating a feesible solution. We've since met again and plan to continue the discussion over a number of future meetings. I was given an artical to read "Trusted Handoff" by Kathy Price-Robinson which lays down a rough framework and equation to put a value on a remodeling business.

I was able to express a few of my concerns:
1. Employee fallout
2. My lack of business experience
3. My skepticism towards being offered such an opportunity when there are others with more experience and more time invested with the company.

I believe I am the best choice (everyone in their own self-image thinks so), and I believe it would be crazy not to take advantage of an opportunity like this. I doubt I'll have this opportunity ever again. Therefore, I want to go about this as methodically as I'm capable to prove to myself as well as to everyone involved that indeed the company is making the right decision.
I'm asking those of you in similar situations or from experience how I may best approach this opportunity. Any and all advice is welcome...
Thank You!

Mike Finley · 02-23-2007, 07:53 PM

Approach it S L O W L Y.

wackman · 02-23-2007, 08:07 PM

I have nothing really to offer in terms of advice but good luck and welcome.

Blackbird · 02-23-2007, 10:37 PM

I would have part of the deal be that they agree to work as consultants. Agree on an hourly rate. If things aren't going the way you want call one of the previous owners and have them come hold your hand for a while.

seekingadvice · 02-23-2007, 11:04 PM

one of my thoughts was to transition to a more formal board of directors and me being CEO....but honestly, my knowledge is lacking, which has brought me here. Would speaking with an attorney do me any good?

Mike Finley · 02-23-2007, 11:45 PM

What are the financial terms for taking over this business?

seekingadvice · 02-24-2007, 12:25 AM

Well, the only base I have is stated in the mentioned article. As stated...A years gross profit averaged over the past five years multiplied by up to three. The way I understand it, when you multiply by three, your stating you have a damn good base of clientel, and referral rate that adds to the value of the company.

I'd say, and I've been reticent to ask this early on, is $300-$500 gross proffit. I wouldn't be suprised if the owners asked 2 mil or upwards of 3 mil to sell....But, maybe I'm too optomistic, I think if they can keep their baby alive in house they may sell for less. Again, that's why I'm here.

Also...is it gullible to think founders would rather see their name and life's dream carry on than to fold and sell for the money?

Bob Kovacs · 02-24-2007, 08:18 AM

Quote:

Originally Posted by seekingadvice

Also...is it gullible to think founders would rather see their name and life's dream carry on than to fold and sell for the money?

Fold and sell for what money? If they closed the company, what would they "sell"? The equipment, tools, trucks, etc? That's probably worth next to nothing. Of course they'd love to find someone to give the a few million for the business- the question you have to figure out the answer to is "is the company really worth anything?"

To figure out that answer, you've got to look at what makes the company what it is today:

- Are the owners deeply involved in all aspects of the business?
- Do clients feel like they're buying from the owners themselves, and not a "company" that the owners happen to own?
- Do the employees feel like the company could possibly go on without the owners?
- How much of the company's business is referral vs advertising?
- Is there anything proprietary that you couldn't duplicate on your own?

These aren't easy questions to answer, but at first glance, I'd say there aren't many "remodeling companies" that I'd say are worth paying $2-3 million to acquire- there's just not enough value in them unless they're something truly unique. BTW- what list are you saying that they're in the "Top 500" in? I don't recall ever seeing something like that, and I'd be a little suspect as to how the list was compiled, especially since remodeling is such a fragmented business.

Bob

Mike Finley · 02-24-2007, 09:00 AM

Quote:

Originally Posted by seekingadvice

Well, the only base I have is stated in the mentioned article. As stated...A years gross profit averaged over the past five years multiplied by up to three. The way I understand it, when you multiply by three, your stating you have a damn good base of clientel, and referral rate that adds to the value of the company.

I'd say, and I've been reticent to ask this early on, is $300-$500 gross proffit. I wouldn't be suprised if the owners asked 2 mil or upwards of 3 mil to sell....But, maybe I'm too optomistic, I think if they can keep their baby alive in house they may sell for less. Again, that's why I'm here.

Also...is it gullible to think founders would rather see their name and life's dream carry on than to fold and sell for the money?

Those are the guidelines they are using to value the company, I'm asking what are the terms they are proposing for you to take it over. I'm assuming they didn't pay you so well you have 2-3 million dolllars in cash laying around.

It's easy to sell a business, it's much harder to find somebody who can actually buy it. Most owners want to cash out, that is the reason to sell it. In an ideal situation an owner selling a business for 3 million would want a check for 3 million, in reality businesses in the 750k-3 million dollar range are the hardest to sell because of the lack of buyers with the financial means to cash the owner out. A business in the 50k range is easy to cash out of, lots of people can come up with that, a business in the 50 million range is easy to cash out of, institutional financing is available to players in that range of buyers.

What's is the plan they are proposing for you?

Grumpy · 02-25-2007, 01:25 PM

I have four experienes when it comes to buying a busines. MY first experience was the company I last worked for, the VP bought out the Pres when he wanted to retire. The transitiion was smooth from what I could tell, since I was the first peron the new pres hired after he took control. I attribute the smoothness to the fact that the VP already new everyone, worked with them for years, and wasn't interested in making much change.

My second experience was the sale of my own web design company. Not much to tell there, it was a one man show, but I learned the basics of selling a biz.

My third experience was the HVAC company my brother worked for. It got bought out by a larger more well known HVAC company that was buying this company to expand it's service area. Within a year everyone who worked for the old company had quit, and from what I am told most of the customers didn't like the new higher price so also found new companies. I really wonder if ti was a failed investment, if they retained enough customers to make it worth while.

My fourth experience was that I thought of buying a business when I started my company. I looked long and hard and did lots of research but decided against it for many reasons. None of the companies I could afford were worth buying, everything they had to offer was only their assets, no "good will". And any company worth buying was way out of my price range.

Why would I buy a company with no good will, being the value of the company is worth more than the value of the assets? I can go to the store and buy trucks and ladders etc... I'd have alot of risk in regards to warranty claims and so forth, but what reward?

Many times when you buy a small business, alot goes when the previous owner goes. Alot of the time the previous owner had built the business on his own personal relationships, and he takes those with him.. even if he retires. So what's left? You are stuck building from scratch!

If i were ever to buy a business it would be one with a self sufficent company. A company that is more than just the owner and his helpers. A company that I can just pick up the ball and run with it.

A few questions you might want to ask...
-Can this company oeprate without the current owner?
-Will the current owner stay aboard for X months and introduce you to all his contact and assist in the transitition?
-Are you buying any contracts that will yield profit down the road? Such as maintenance agreements, or projects scheduled for months down the road.
- What is the asking price of the company based upon?

Part of the services my account offers is company valuations for sale etc... so I'd get my accountant involved for sure and see if he thinks the asking price is realistic and ask him if he thinks I can pull away any prifit from my purchase.

seekingadvice · 02-25-2007, 02:29 PM

Thanks for everyone's responses. You've all given me much to think about.

I've entertained the thought of starting my own company, but I wasn't expecting to be propositioned by the owners. The founder of my company has explained to me that throughout his career he never had much of a plan and built this company from the seat of his pants.

The founder has been slowly handing the company over to his partner. He no longer is as involved in the everyday workings, but is there in namesake. It's his name on the business and he is mostly public relations and spends much of his time getting to know his employees. He's charasmatic where his partner is reserved. His partner is who all of us in the field consider the true owner. The partner who has for the most part taken control now wants to start being less involved but has no-one to hand over responsibilities that they both trust is capable.

In our conversations, as it's understood by me, is that we're building a plan together. I think ulimately they want a seemless transition and are willing to see it through. This will happen over the course of 5, 10, or 15 years. I'm trying to stay ahead of the 8 ball by investigating, listening, and researching the best way to go about doing this.

The analogy I've put on this is marriage. This is the stage in a relationship where one asks the other..."hey, what do you think about getting married"...there hasn't been a proposal, yet. The stage we're entering into is now that both sides has interest, where do we go from here. We all agree that we need to move in together first, then we'll see how to progress from there. There are (figuratively) children involved as well. I have no children and I've never been married so I'm asking my peers what the hell do I do.

As far as how much their asking, I need to broach that subject, but I'm currently more interested in how I fit my funiture into their apartment, and how do I get it there...

Please continue to offer suggestions! Each post gives me more to consider.

Grumpy · 02-25-2007, 02:34 PM

I could be on a 5 year plan, never a 10 or 15. That's just dangling a carrot. No? Make me a Jr. partner now with maybe 20% of the shares and the option to buy 20% more per year for the next 4 years. That's 100% total for those who are counting.

Alot of rookies fall for the trap, when I'm ready to retire maybe you can take over. When's that going to be? 40 years or next month?

Mike Finley · 02-25-2007, 10:48 PM

I would agree with Grumpy, it's all nice talk until you actually move forward with something concrete. Lot's of discussions go around like that in businesses, lots of people get put on the bubble to keep them around.

I'd like to know once again, no matter how nice, nice they make with you, how they expect you to come up with the finances to buy out a company worth multiple millions of dollars?

If they are telling you something along the lines of how they want you to run it... don't get too shocked when one day they introduce you to the new owners who cashed them out.

seekingadvice · 02-26-2007, 05:05 PM

I've been thinking a lot about what you've been saying Grumpy and Mike. My helper has been saying the same thing. I was close to leaving the company a year ago and now all of this...I'm an admitted sucker!

It's an excellent point for me to ask for a percentage of profit NOW. The example from the artcle I mentioned, and i'd like you to read, followed that exact path. An agreed percentage each year for 5 years was put into an escrow account to cover a down payment. After that 5 years the company was handed over and a payment plan was set up as an owner financed loan until the selling price was payed in full. The selling price was set at the beginning of the five year period. If you use the exampled equation of Gross proffit x(1-3) The new owner can't let the profits drop to lower the value, the owners get the value they set, and the new owner has the opportunity to exceed profit expectations for a more expediant buyout.

As for now, I believe the next step will be to up the ante to really understand the motives of the owners. I don't want put my life on hold because some arrogant jerk likes my work and has to resort to manipulation to keep me as an employee.

Thanks again, you're helping me work this out....I came to the right place!

seekingadvice · 02-26-2007, 05:19 PM

Assuming the buyout is legitimate, and I know I'll be running the company in five years (this seems like a lot of dreaming)...what skills, knowledge, anything, would you advise I take into consideration now? This information will work for me whether I buy a company or start my own. I know I don't want to break my back for someone else for 30 more years!

It's painfully obvious that you can't pluck someone out of the field and expect that person to be able to successfully run a company with 22 employees, no proprieties that I'm aware of, and some 60 odd loyal clients.

Mike Finley · 02-27-2007, 09:32 AM

Quote:

Originally Posted by seekingadvice

It's an excellent point for me to ask for a percentage of profit NOW. The example from the artcle I mentioned, and i'd like you to read, followed that exact path. An agreed percentage each year for 5 years was put into an escrow account to cover a down payment. After that 5 years the company was handed over and a payment plan was set up as an owner financed loan until the selling price was payed in full.

So you are saying the owners will basically sell the company to you and give you your down payment to buy it from them, and then take a personal note against the business with the profits of the business paying them for what? 20 years to finally pay them off?

I would burn the business to the ground before I would do a deal like that, and I find it hard to believe anybody else would want to 'sell' their business that way.

It would be far better in my opinion to develop the business to a point where I could have you run it without me being there and keep collecting a monthly owners salary while I was sailing in the tropics. I would give you a % of ownership matched by the % of ownership you bought into so you had a vested interest in keeping it profitable. Meanwhile I would be looking for an outside buyer who could give me a substantial cash down payment and then consider taking a note on the balance.

Mike Finley · 02-27-2007, 09:34 AM

Quote:

Originally Posted by seekingadvice

what skills, knowledge, anything, would you advise I take into consideration now?

Learn everything that is unrelated to the actual work your company does.

seekingadvice · 02-27-2007, 08:33 PM

Quote:

Originally Posted by Mike Finley

Learn everything that is unrelated to the actual work your company does.

I'd need you to explain the exact meaning, but what I get is that I should keep my tool belt on and get my head out of my ass, or concentrate on basket weaving. I don't take offense to that, Every aspect of this is new to me and I lack business savvy. That appears to be an understatement.

What's your plan for retirement? Would you sell to the highest bidder, or would you feel it necessary to play a part in a handover that could allow your lifes work to carry on?

It seems endemic to the trades that it is easier to find flaws in others work, proposes better solutions after the fact, and look over a shoulder and critique methods than it is to teach a beginner the ropes. Nothing is more entertaining to a tradesman than watching a rookie make the same mistakes one has learned through experience. Everyone of us is here because someone at some point in time saw something in us and decided we were worthy of becoming one of them. It's funny to you, and sometimes frustrating, when a beginner doesn't understand laying out 15 1/4, 31 1/4, 47 1/4 etc... then switching to 16, 32, 48. some get it faster than others, but we were all there!

Gordo · 02-27-2007, 09:16 PM

Hire a Business Valuation Specialist.

Mike Finley · 02-27-2007, 10:25 PM

Quote:

Originally Posted by seekingadvice

What's your plan for retirement? Would you sell to the highest bidder, or would you feel it necessary to play a part in a handover that could allow your lifes work to carry on?

Discussing stuff like "life's work" and having something carry on is discussions that workers or (employees) have about what they think owners talk about. Owners have discussions like, cashing out and move to Bali, or cashing out and play golf every day. Discussions like, you have the cash? Here are the keys. Everybody is going to be dead a long, long time, we've each got only a very tiny window of opportunity on this planet to enjoy ourselves.

Keep your tool belt on during work hours and learn everything not about work outside of work. You want to run a company that installs windows, learn how to run any company, (a flower shop, a bar, a janitorial service... whatever), learning about how to install windows is a nice beginning but it has nothing to do with running a company. It's the work your company does, it isn't the work it takes to run a company.