Buying Into The Business

BT006

Hello all - I am about to sign a letter of intent to buy a commercial painting business located in the Pacific Northwest. I am an experienced business owner but know very little about painting.

This business has 20 plus employees and does new construction almost exclusively. It is very profitable ($250k a year in discretionary cash flow) and the price is excellent. There are no key accounts and no key employees. Everything looks superb.

However, while the owner is going to train me for two months I am very concerned about bidding out jobs. His method, and it seems to work, is a chart that charges so much per square foot with some modification depending on the type of construction. It looks pretty straight forward but I am still concerned about this and about maintaining quality control. I will have the help of several senior crewmen.

I manage people very well and have good business skills. Any opinions? Any suggestions as to questions I should ask?

Thanks all!

thom

I often wonder why people buy small construction companies. What exactly are you buying?

No key accounts. Probably bid every job and must be the low bidder. If you do residential tract homes, re-bid each project and must be the low bidder.

You aren't getting special accounts.

You aren't getting painters with special talents.

You aren't getting much in equipment. I'm making an assumption here. Maybe you are getting 20 trucks for the 20 men. The sprayers, rollers, brushes, etc. have little value.

You get a couple months training. What does that cost you?

GregS

You aren't getting any key people.. Are you planning on turning into the key person with all this training?

You are an experienced business owner, and if you are considering purchasing this business you probably have some cash.. How quickly do you think you will make this cash back?

Do you have the time to fully manage this company?

Why is this guy selling the company?

Second Look

I'm a little surprised at thom and BuildingHomes' answers. I read the absence of key accounts / employees as an asset, not a liability. It's risky to depend too much one any one account or employee because the loss of that account/employee can be disruptive to the revenues and/or operation of the business.

__________________
Second Look home improvement www.SecondLookHome.com
Handyman and Home Repair Specialist in Rhode Island
RI Licensed Lead Safe Remodeler/Renovator, RI Registered & Insured Contractor

BT006

There are accounts with 7 major contractors. Almost a million gross a year. 5 painters have been with him over 10 years. Second Look is correct - there is no one key account or one key employee so I'm not at risk there - it is an asset.

What I am buying is 15 years of goodwill with the contractors - 98% of the work is spread between 7 contractors. No small jobs, no private houses. Little local competition. And serious cash flow. It would take me many years to build a business from scratch to over $250k in discretionary cash flow. And I would have to go through the craftsman phase before I could get to the business owner phase. (That said, I will learn how to paint.)

The price is excellent. The equipment is in great shape - most of the sprayers were replaced less than a year ago. Even if the equipment was worth nothing the price of the business would be excellent. But, I don't see how $3000+ spayers have little value. By the way - what is the typical life of high end Graco sprayers?

I'm mainly worried about the bidding process because the "journeymen" painters haven't been directly involved in that. To answer the comment by thom - most jobs do not have to be bid - there are agreed upon prices with the contractors. On jobs that are bid most of the time there are no other bidders.

The owner is retiring. For real. If I do as well as the owner I will be making almost 100% on my investment a year. Few investments pay that well. If I make 75% after making mistakes I will be thrilled. The training is included in the price.

Finally - yes I will be hands on full time. Learning how to paint one day a week and working with the vendors, accounts, scheduling, employees and quality control the other 5.

MarkNoV

A couple of observations:

Almost a million gross with 20 plus employees is a joke.


It does not matter what the equipment was bought for, all that matters is what someone is willing to buy it for. With new construction going (apparently) down the toilet it could be worthless.

I am surprised that one of the 7 contractors did not jump at a chance to make a 100% return on investment, buy the painting company and start up a painting division.

The owner rode a crest of a building wave, you will get caught in the undertow.

MARK

tinner666

Like is a risk. If you can afford a 'potential' loss, go for it. YOU know your situation.
None of us ever will.

__________________
Frank Slate Roof Repairs, Richmond, Va.

Second Look

Well that pretty much nails it. If it sounds too good to be true.....

And $50k revenue per employee does seem pretty skimpy. If you subtract out the claimed $250k discretionary cash flow you're getting by with only 37.5k per employee. I have to wonder if that even leaves money to buy paint.

Have you seen audited financials? If not, how about bank statements and tax returns. I'm sure you know that all of these are fair game when buying a business, and for good reason.

__________________
Second Look home improvement www.SecondLookHome.com
Handyman and Home Repair Specialist in Rhode Island
RI Licensed Lead Safe Remodeler/Renovator, RI Registered & Insured Contractor

Mike Finley

I don't know about anybody else but -

7 account are responsible for 98% of the sales would scare the crap out of me. But I guess that is the nature of being a painting sub for builders.

What's the new home market projections for the next few years look like?

As for all the rest ? Who can say. You're the only one that has seen the books, talked with everybody and investigated this. The rest is all conjecture by most here.

BT006

Only 10 of the employees are full time. The books do pan out. The area is one of the fastest growing in the US - mostly high end construction from high end baby boomers. While most of the rest of the US is in a housing slow down this area is not, and wont be, unless we enter a really nasty recession.

I'm not worried about the business - other than the bidding process. Any thoughts there?

Thanks guys - many good points - if a little negative. :-)

kanadaeh

I would go for it. Go with your gut, chances are it's right. One good thing I think is new construction is easier to put systems in place due to repetition. Watch your numbers and you should be fine. That would be the type of business I would hope to own/operate one day.

Richard

I'm disgusted about some of the answers in here. How should we know what is best for you? We can analyze all we want, but you've obviously done some research and planning about the idea. How will you know until you give it a shot?

Good luck, sounds like the company is serious

__________________
Rich

concretemasonry

It appears there is a key employee - the present owner.

He probably has the relationships with the 7 customers. To hold those customers, it takes more than just bidding - there must be contacts and mutal trust developed or there would be more customers that are bid using the same pricing charts.

You do not have a small select list of customers without a lot of personal contact over the years.

Can you keep him on in a consulting/advisory role?

How about a "no compete" agreement?

__________________
Dick

Engineer, designer and consultant recently active domestically and internationally on construction and design in about 35 countries.

realpurty2

Are you taking the owner's word and personal records as proof on the financials or have you already completed the due diligence process and just didn't mention it?

If your serious about this and have the capital to buy and operate a business, you should have the capital to hire an attorney to do the due diligence before signing the letter of intent.

__________________
Woman in a Man's World.

BT006

The present owner will sign a non-compete (75 mile radius) and is willing to work, occasionally, as a consultant. He is also financing the deal which indicates some confidence in his own company.

I have gone through much of the due diligence process except to verify claimed cash sales. I am going to have to call past customers at random to verify those. They are a small percentage and not a big deal though.

kanadaeh I agree regarding the new construction angle. I wouldn't even consider this if it didn't have a narrow focus.

True - the present owner is a key employee. He will be introducing me to the contractors and I will be able to get a feel from them as to their comfort level before we close. I should be able to keep their business, at least on a trial basis, by showing my professionalism and letting them know that nothing is going to change - not the work, quality of the paint, prices. No changes for a year at least if possible. I'm there to make sure employees and materials are where they need to be when they need to be, to maintain quality control with the direction of the journeymen painters, and to provide direct customer service to the GC's and their supervisors.

If there are any general contractors reading this - from your angle, if I was being introduced as the new owner - what would you be looking for? What would mitigate my lack of experience in your mind? And what do you look for in painting contractors in general?

Thanks again all for your comments.

Mike Finley

I would give him absolutely zero credit in the "confidence in his own company" column. Percentages show that the vast majority of companies sold in the $150,000 - $1,000,000 range have to be partially seller fianced.

Seller financing is pretty much a given for most owners trying to cash out. So while I wouldn't look at it as a negative, I certainly wouldn't look at it as a positive in any way.

Personally if a key sub of mine was selling to somebody else, I would be pretty sure I would be needing a new sub. Look at the odds - there are maybe 50 subs in my market place available to hire, probably 5 of them are going to be acceptable matches with me just in regard to the way they do business. Those are very low numbers. Now what are the odds that you are going to come in and still run this business in a way that is going to keep you as one of those 5 that I find acceptable?

Strictly speaking the odds are against it and I would be thinking about not getting caught when my fears are realized when you end up fulfilling what I was worried about.

So what could you do to mitigate this with me? Take me and the wife out to dinner with you and your wife and sit down and talk some shop about yourself, what you are bringing to the table, what you are planning on doing to keep my business and most importantly ask me a lot of questions about what your new company could do to help me out. That would probably keep me from picking up the phone right away and looking at your competition for you long enough to maybe prove yourself.

But boy oh boy, you really better be on top of everything those first few jobs you do for me, cause I'm going to be looking for things to prove my fears right.

You have to keep in mind that 99 out of a 100 companies in this business are basically the owners. The owners made and make those companies what they are. Very few of them can run without the owner involved. Very few of them have systems in place for quality control where anybody can be brought in and keep things running the same. This isn't a secret in this buiness. I'm pretty sure every one of your clients knows this and realizes who the business is that has been doing their painting.

BT006

I appreciate the posts. I don't think the situation is as dire as you paint - I have been in this position before with a cleaning company and didn't lose any clients - but in that case there were contracts in place. I figure on the bad side I might lose 20% of the business because 1 or 2 of the contractors might bail on me.

Dinner with spouses is a good idea. I had been thinking of dinner with his / her supervisors and my journeymen painters.

I plan on drawing my journeymen painters into the process by offering them $2000 bonuses if we don't lose any contractors the first 3 months and we maintain last years profit levels. Maybe $1000 bonus if losses are limited to 10%. They will be getting hefty bonuses anyway based on growth and maintaining ratios.

I also have some unique angles. I have a web site, that will be modified for this business, where the contractors can log in and check the status of all their jobs including detailed notes. They also have the ability to make notes, change requests etc. right in the site.

I would think showing up on time, finishing on time, doing the job right, and communicating well would about cover what most GC's are looking for. The journeyment are going to have to step up to the plate in terms of quality control. I can handle the rest.

Any other thoughts from you GC's out there? Throw your best bombs please!

atlas06

I see your attitude as a mix mix between a maverick and a rookie.
I admire your guts for jumping into something you know very little about. On the other hand, from what I read, you don't seem to be planning for the worst.
I sense a bit too much hope for the best and not planning for the real downside. You are assuming that you will be losing 20% of the business for something you do not know much about, that is very optimistic.

But most importantly, do you like painting?

BT006

I can lose 50% of the business and survive. However, I have an agreement (will be in the contract) that if I lose 3 of the 7 contractors within 6 months I can turn the business back to the owner and get part of my down payment back. I would lose $50k which would hurt but it wouldn't be catastrophic.

So Atlas - you're a GC. Are you going to give the new owner a chance or bail? Keep in mind there is a shortage of all types of professional subs in the market I am in. Are you going to tell me you will bail up front, when I meet you with the current owner, or are you going to be a prick and wait until after I'm committed and you have stated you will give it a try. Or will you give me a try but fully expect me to screw up?A thoughtful answer please.

Yes I do like painting. But I believe this company is big enough, and has enough management in place, that it is more about business than painting.

BT006

Oh to respond to some of the other posts. I would never trust an attorney to do the due diligence properly. I do it myself with the help of an accountant and an attorney on certain items.

Mike, I'm pretty sure I have purchased more companies than you have and I don't agree with your assessment of the value of the owner financing the company - it does have meaning. It doesn't mean everything but it has some weight.