Show notes from Episode #134 of the Sweaty Startup Podcast.
In a direct application of what we discussed with Nick Bradley in episode 95, Sam from Kansas City calls in to seek advice on buying an existing business. At 28 years old, Sam has a background in sales but has always wanted to dive into entrepreneurship and now has $100-200k to explore buying a business. He’s found a few appealing options on BizBuySell, and now has to consider if they are the right move for him.
Key Considerations
The first lawn care company Sam reviews provides a fantastic case study on how to think about opportunities that surface. On a high level:
- Annual revenue is $900-950k, with $200-250k profit each year
- This is about a 50/50 split between basic lawn maintenance work and higher margin landscaping
- The profit numbers don’t include the value of the work the owner puts into the business. To buy the business, Sam would have to quit his job, which provides a clear tradeoff
- The asking price is $935k, for which Sam would look for both bank and seller financing
- At asking price, the owner is looking for around 5 times earnings
- Applying for an SBA Loan can help minimize the amount of capital Sam needs to invest upfront
- The business has a set of trucks, 15 employees, and rent an office from a friend of the owner for $800 month to month
- The owner handles scheduling, sales, and visits to job sites.
Many businesses will sound great on initial review, but they won’t all provide the investment value that you’re looking for. There are key principles to keep in mind as you explore these opportunities:
- Remain patient
- You can always negotiate on price, especially when nobody else is looking to buy the business right now. Brokers will try to create a scarcity effect, but patience is key.
- Buying a great business at a bad price is essentially buying yourself a low paying job.
- Identify the low-hanging fruit
- Sam’s immediate goal would be to begin targeting markets that the business hasn’t penetrated, such as commercial clients, via the Max Maher approach.
- Does the business have a customer relationship management software in place? Implementing a service like Jobber into a small business can save hours of labor and, by extension, widen profit margins.
- Are they delivering suboptimal service? Many contractors are slow to come out for a quote, don’t provide follow-up, and frankly aren’t professional. Understanding how to quote jobs and provide quick turnaround can turn you into a local market leader.
You don’t always need to do more work to get more revenue. Sometimes the low hanging fruit is in raising prices, increasing efficiencies, marketing effectively, or hiring salespeople on commission, but having a clear vision on how you can improve the business day 1 is key.
Questions you’re always asking
Try to verify everything that the owner says to you. Conversations with employees, especially the ones you’ll rely on day to day, can be extraordinarily revealing. Perform all the due diligence you can, and assume the worst for anything that the owner can’t tell you.
Financials
How is the owner spending money? What are his trucks, mowers, and other equipment? Are they paid off? What’s the total debt? Where is the equipment stored? What is the status of the lease? How much does the owner pay himself, and how many hours is he putting in?
Employees
What are the roles for each employee? How long has each one been there? Are the key components, like foremen or managers, happy with their job? What would they like to change under a new boss? What are their struggles? What would you look for in hiring new staff? How easy is it to find new workers with the required skills in your area?
Customer base
Are past customers happy with the business? Look at the billing history and addresses of past work. How much does the business spend on marketing, and where? Do customers leave satisfied reviews online?
Buying a business that already has an established employee and customer base is appealing, and it’s a great time to do so. These key components will help you evaluate the opportunities you come across and seperate the valuable investments from the junk. Look at hundreds of deals, learn by talking with and meeting owners, make lowball offers, investigate businesses and their financials. If you’re confident in your sales skills and your ability to put efficient processes in place, you can turn a business around from day one.