Buying Up A Contracting Business.

harkkam

Suppose you have the money, would it make sense for you to buy up an exisiting contracting business that has been put up for sale in your area. I saw an ad in the newspaper and he's got his biz up for sale, its an electrical contracting business.

I dont have much experience in that field. But all the employee's are going to be comming with the buy. Plus the owner is willing to stay on and train because thats what he advertised.

His reason for leaving is retirement.

Has anyone done this, buying a biz up?

Mike Finley

That's funny for 2 different reasons.

harkkam

Lol..i think I realized what the first reason is.

Aggie67

When I first started out, I knew of a guy who wanted to retire. He had a guaranteed contract, 3 men, day in and day out, all basically T&M. We took him up on the offer and paid $35,000 for basically 2 beater trucks, a whole bunch of tools, a trailer (we sold), a zero turn radius big deck mower (we sold), some other minor assets and one year left on the contract (and we hired his guys). We figured if we got the chance to re-up the contract for 3 more years, it was a good deal. We ended up doing it for 5 more years.

Was it worth it? Well, it was guaranteed money, direct deposit into our account, every month, net 10 days (they kept 2%, and BTW we call that "2% net 10"). We charged more per hour everywhere else we worked, but this was guaranteed coin with zero management effort (the guys we took on were good). We also convinced ourselves that even though the rate was lower than even our breakeven rate, we were contributing to paying for our overall overhead, without having to add to our overhead, because headcount increased as overhead stayed constant. Se we were essentially lowering our break even rate, making the entire company marginally more profitable. He stayed on for a month to show us the ropes, and then he retired. I have to say the client was a PIA, but it was regular, steady, dependable cash in the bank.

With that said, I have to be honest and say I probably had a 20-40% chance of getting the contract anyway a year or two later, without having to pay $35k. But we got a significant amount of hand tools in the deal, and some specialty power equipment. Overall I think it was worth it.

Now, barring any sort of guaranteed contract, is it worth buying a contracting company? There's a thing they call entry barriers in any industry. Entry barriers can be knowledge, capital outlay, licensing, access to the market through contracts, etc. If barriers are low, like cleaning dog cr@p off people's lawns (there is a guy in the area that makes a living doing this), it makes no sense to buy a company. Just lay the coin out and start it up yourself. If barriers are high, like wanting to own a bar but the town only allows so many liquor licenses, it make sense to buy a bar with a liquor license (as long as the deal is good) if you want to get in.

In this case, the biz probably needs a licensed electrician in there among the owners (at least in my state that's how it works). If you're licensed, well you can check off probably the biggest entry barrier. If you're not, and you need one, how to do you that? If you're not familiar with the trade, I personally think it's nuts to buy it. You as a novice can't be trained to know the ins and outs of the electrical trade by a retiring owner. I can't see that being worthwhile. But if you did, the price is going to be hard to nail down as to what's fair or not. A rule of thumb is you want a 25% return on your investment each year until you pay off whatever note you need. So if the company makes a profit of $100k a year (which you should have an accountant determine) then don't pay more than $400k. That way your $100k in profit theoretically pays off your $400k buy price in 4 years, and after that the profit goes in your pocket.

J F

I'm not sure if this is the 2nd in Mike's opinion, but there sure as hell is no guarantee that the current employees will stay on after a sale. Something about the emancipation proclamation or some such gibberish.

J

Mike Finley

Exactly. That's the first one, the 2nd one is who the hell knows if they are even worth wanting to have?

I think it's nice that they didn't say the employees all said they would quit and go into competition against the new owner, but saying they would stay on just means you have some warm bodies for a little while, either until they quit or you decide they need to be fired or you keep them, might be just buying you some time is all.

J F

Hell, just buy a dunkin donuts franchise....at least you can "eat" your losses pretty easily.

J

Proud Plumber

I started out buying repair business, no employees. Worked out good for me it was a a similar situation owner wanted to retire. He was going to stay on for two weeks and train me. I found after one week I did not want him around. I got lucky the phone was hopping from day one. Most importantly having no employees allowed me to focus and learn the ropes. I would definately focus hard on a labor strategy. If there is one thing I have learned the hard way that is employees do not like change.

Agree 100% with Mike Finley. Spot on!!!!

Ivinni

These are very solid and smart parameters, but I think they are high side parameters. KNowing all that can go wrong and most likely will, I would say whatever the profit per year is also the selling price (or you're buying price).

That is unless you are talking about a multimillion dollar firm with a SOLID infrastructure of sales/estimating/admistrative staff. When you buy a business where the owner makes up over half of what I listed above, you are saddling yourself with a saddle you don't want, IMO. Therfore, it must pay for itself in one year or less. His loss=your gain. Lowball the offer and you will be glad you did.

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its not going to get better with straps, or new footings or even aroma therapy.

mdshunk

Most businesses for sale are worth exactly as much as their assets are worth. Add up trucks, tools, office furnishings, and real estate, and that's how much 90% of all businesses are worth, and not a penny more. A name is worth nothing. Employees are worth nothing. A customer list is worth less than nothing.

harkkam

You guys are right, thank you for the very honest and detailed posts.
You're right about the barriers to entry, that purchasing an electrican contractor biz, has its plus since not everybody can do it.

My only positive's about buying a running business is the contacts that come with it. And perhaps the repeat business it brings.

You're right the employees could just get up and leave, nothing holds them down. Plus buying a business that I dont have any experience on is also a big negative. I mean relying on the guy to teach me everything might not be the smartest move.

Thanks guys.

harkkam

But I also remb that most times when it comes to buying a business that its not the total that you worry about. Suppose I buy the business for 400K. I get financing for that and I have to front say 15% for it. Say that is 60k. So essentially I am paying 60K downpayment on the 400k note. Now if the company is netting me 100k. We take out loan payments and that makes it say 70K a year net. So in the first year technically you already paid off your down payment. The next year you are already into profit. Because you only paid 60k of your own money to begin with. ANd you made 70k your first year supposedly.

ChrWright

Remember also, that small first generation companies are mostly cults of personality--from the loyalty of their employees to the relationships with their customers--held together by the personal influence and power of their founders.

This is the reason many times they get run into the ground by whomever inherits them. Larger companies have a life and corporate culture that can sustain them through changes of leadership--small companies more often don't have this.

Of course, there are exceptions to every rule--but without a background in the industry you are at an even greater disadvantage in making it work.

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Mike Finley

This is spot on and exactly what harkkam should be focusing on as the very 1st step of due diligence. What is this thing they are selling? Is it actually a business like a Mcdonalds that runs with just plugging in the right people into the jobs or is it more like the electrician who holds the license is the business. That's the first step. If it's the former then it's worth looking further into, if it's the latter it's not.

Carport King

Let me give it a whirl because I have been on both sides of the coin.

First off all your buying is assets. Next if you are not cashing them out then they are holding the paper. No bank loans period! You must be able to get your license if you need it.

If the employees stay fine but do not count on it.When I did it 17 of them stayed. I made it work and ended up with 60.

Attitude has alot to do with it. You can make it work if you want to. The main problem is that the previous owner thinks it's worth alot more then it really is. I like for them to hold a little paper because this keeps them more honest.

I always try to buy a company that has been around awhile with a good name.

It can work with the right deal and seller. Good luck.

Mike Finley

Didn't you say you were 22 years old?

Ivinni

Man, I wish I had had this kind of help when I was getting started. It could have saved me about a million bucks. No stretch there either.

I hope you (harkkam) realize the worth of the advise you are getting here. You guys are great.

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its not going to get better with straps, or new footings or even aroma therapy.

harkkam

Yeah you guys again, thank you very much. Nobody on the street is going walk up to me and help me out as much as you guys are.

I thought about relationships with customers. The old customers know the owner, they have seen his face. Im not such a champ when it comes to formulating new contacts, and Im sure I'll have to be extra charming to get the new business that is going to shy away from me.

Every owner has a tactic to making it work and Im not sure if I will have that.

I should probably buy like a liqour store, now thats a business that actually kills brain cells. JK



Anyway thanks guys.

Carport King

Yes Mike 32 years ago!

Mike Finley

My mistake, I must have you mixed up with somebody else. It would be nice to be 22 again though wouldn't it? As long as we could keep the knowledge we have now!