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Discussion Starter · #1 ·
I'm new to forum. I'm looking at buying an established excavation business. The business is well established with over $2.6m in turnover last year. Sale includes a huge amount of equipment. It looks reasonably priced. Cash flow is very healthy and increasing. I have NO experience in excavation but I have some experience in construction. I have owned my own businesses since i left high school. I started with a hauling business which i sold. i have owned a successful furniture import/export company. I finished that a few years ago when the economy and lost a certain amount of money in this and some property investments. I have commercial property income but I would love to invest in a profitable established business. Total investment would be $1.3m for business. Cash flow $7-800k. Is it a business that someone with NO excavation experience can possibly be successful. I love to work. I'm a decent communicator. I'm reliable.
 

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I would call past customers and see whether you could expect repeat buisiness or not.
They may have a hate on for him.
 

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Discussion Starter · #5 ·
My question is "is it possible or likely/unlikely to be successful in an area(excavation) with no direct experience"?
 

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Discussion Starter · #6 ·
According to the owner and biz broker they are 3-4 weeks out on jobs and are turning away work. Obviously thats what they will say. Things do seem to be picking up. Cash flow 35% of income. Is that reasonable? I'm sure the market is improving and a lot of smaller businesses stop trading in the past few years. Whether this creates an opportunity and I can capitalise on it I'm not so sure
 

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fenno said:
According to the owner and biz broker they are 3-4 weeks out on jobs and are turning away work. Obviously thats what they will say. Things do seem to be picking up. Cash flow 35% of income. Is that reasonable? I'm sure the market is improving and a lot of smaller businesses stop trading in the past few years. Whether this creates an opportunity and I can capitalise on it I'm not so sure
What's the value in the equipment . It's owned or bank notes . 3 week booked out is not a lot for a any business .
 

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I can't answer your question about being able to run the business without experience. My recommendation is have a 3rd party evaluate the value of the business. Don't have the companies accountant do it. Pay a 3rd party to look at the books the last 5 years.
 

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Are all those machines currently all being used, all the time? If not, why not? If not, then don't buy the ones that aren't being used. 3-4 weeks of jobs lined up isn't much.
 

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I think it's important to understand how much the owner is doing for the income he's earning. Let's say the owner is able to pay himself $150,000 a year but he's also the estimator, scheduler, buyer, machine operator and part time account. If that were true your investment would be nothing more than buying yourself a job. I can also tell you that despite unemployment numbers finding reliable employees is a total nightmare to say the least.
 

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You might be able to buy into the business and keep right on moving forward. There are alot of things that need to be checked out. I'm not trying to be negative, but you need to look at it from a negative viewpoint so you identify any problems.
Machinery. As someone said, Ritchie Bros. value. For example a backhoe with 2000 hours is most likely good (as long as maintained properly). A backhoe with 5000 hours could be ready for some overhauling.
Having the current owner stay involved for the next year is critical. Alot of his customers aren't hiring the company, they are hiring him. You loose him and the business goes also. Happens alot.
3 -4 weeks of work is nothing.
Be skeptical. For 1.3 mil you can buy alot of your own equipment and a few good operators to run the machines.
Not having any experience in the business will make it rough going for a while.
Good luck
 

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Alan Mullally turned Ford around with a background in aviation, not automobiles. A good businessman can run any business. Many of us in the trades like to believe that you have to have extensive knowledge to be successful. While it is helpful, it is not essential.

I'd try to make some sort of transitional deal. So much down payment in good faith, and the owner hangs with you for a year or so.
 

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So you know the cash flow but what is the profit? That is the only way to evaluate the investment. What is the return on your cash? Sounds like it's like 8% or less. I can think of a lot of businesses with much smaller risks that would bring similar returns. Like buying an apartment building. Or a laundromat. Netflix made 200% last year.

Excavation is right up there with operating cranes and building skyscrapers. A lot can go wrong and when it does it will be catastrophic. One death, bad client or unforeseen condition would burn through your 1.3 quickly.

If you want an excavation company why not dip your toe in the pool. Buy a used excavator and try and land some residential work. It'll be a 40k investment and you can learn all the joys of being a contractor on a smaller scale.

One more note. I think we're at the top of the construction cycle. Expect a down turn in 24-36 months. Nothing is tied more directly to building than excavation. There is no remodel excavation to get you through the lean years. Feast or famine. If you spend your savings buying the business will you have enough reserves to operate at a loss for two years? I think the seller of the business sees this writing on the wall and knows that his business will never look better than it does right now.
 

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I think some of the others have hit the nail on the head. Knowing about excavation means nothing, knowing about business does. Of course you will have to hire someone (hopefully the old owner) who does know excavation until you are competent but that doesn't mean you can't reap the profit

One of my favourite customers was an engineer for a mid sized excavation company, probably the size of the one you're talking about. When the owner retired he bought it and it's now 10x what it was, but he has a good business sense, he also bought a controlling share in a 5 person demo company and turned it into a 150-250 person union labour company. Knowing the EXCAVATION business isn't important, knowing BUSINESS is.
 

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good luck, your gonna need it, old equipment has its costs, down time, parts and service.

I know many companies that got burned really really bad on used excavating machinery.
 

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I think we're all dancing around this much too delicately, trying not to squash the poster's dream. It makes no sense. The default value of a small private construction company is the distress-sale value of the physical assets. I know of a few examples of the successful sale of a small contracting company, but it was always to an insider, with a lengthy and very carefully orchestrated transition.

Imagine that your brother (not your real brother but some guy whom you respect and love like a brother), came to you and said, "Hey, bro, I have a great investment opportunity; I can buy a small excavation company with a yard full of machines, and 3 weeks of work already booked. As you know, I don't have any experience in that business, but I did have that furniture business that folded after the market went bad. What do you think I should do?!"

What would you say?

Running a small contracting business isn't an investment - it's a nightmarishly risky and difficult job. If my brother came to me with that scenario, I'd tell him to spend a couple of months working as a salesman for the guy, and then make his decision. If the guy sells the business to someone else in the meantime, OK, if he was selling jobs he can, as Metro points out, buy an excavator for $40K. If you really want to do it, make an offer for the distress-sale value of the physical assets. I bet a dollar the guy takes it.
 

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Why is the current owner selling?
This should always be question number 1, if the business is bringing in piles of cash and has customers lined up around the corner waiting to bring in more business, there should be a short list of reasons to sell.

Remember the grass always looks greener on the other side.
 

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Why is the current owner selling?
A good question.....if they'll answer truthfully. i doubt they'll answer "because all our equipment is patched together, the crew is about to mutiny and we've only got 2 weeks worth of work left" If that's the case he'll just say he's bored and wants new "adventures"
 

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Loans, payables, lines of credit, receivables, ins cost, repair/ maint. Costs, vehicles, shop costs, tools, office staff, training? There is way more to look at than just the cash flow.

You need to know the market as well, it might look good on paper but how about in 6 months? Are there others that are out 3-4 months? The 3-4 week backlog seems ok to me depending on what you are doing. That is about where we stay through the year, sometimes we need to get creative and split ourselves the owners into a few small crews to keep up. Sometimes we need to go out selling to keep going though.

How much bidding do they do, and who does it? The only way that I know how to bid the work is because I was in the field being the grunt for a while. You don't have to be a good operator, but you need to know who is and how fast they can do it. I can't run any of our machines that well, but I can tell you who can and how good they are.

Having a good business sense will help a good bit, but you need way more knowledge. If you were to buy it I would work a deal to work with the current owner on the business side and also retain him/her while you work with the employees in the field for a few months at the very least.
 
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