Adventures with Lyrical: Buying a Business

[Eomer]

Originally Posted by Lyrical

I probably should have been more clear. I know that construction is very off in the area. We have to deal with some of these companies in my other business, and they aren't very pleasant. For example, we had a big bid for a construction company, and the guy expected me to take the job at a price that would make us lose $30K on the job. The appeal for this plumbing business is that they are geared 95% to service, and that is their reputation.

I still haven't received the numbers I requested, and its been three days. I am thinking that the numbers are really off.

There's no distinction between service and construction, from a company standpoint. We steer clear of service because in our opinion, it's a pain in the ass. But there's other companies that love it, it's their bread and butter. I'd rather have 10 large projects at a million a piece, than 1000 small jobs at 10,000 a piece. And I'd rather pursue a single bill for 300k than 30 for 10k each. It all comes down to opinion really.

But when it comes down to it, again, the former owner is going to make or break that company going forward, since you don't know a damn thing about plumbing. Unless you can find someone else to take his place that you know and trust. Maybe "stress" is why he's looking to sell, I don't know. If he was having a hard time running the day to day aspects of it and wants to get back to concentrating on site work and not paying bills, why not hire a management partner or something? If his business is as profitable as he says, why would he be willing to give that all up to work for a salary again?

Again, most construction/trades companies are worth ZERO outside of their established reputation (which is a single bad project away from being destroyed at any time), acquired knowledge base within it's employees, and maybe some vehicles, tools and material. Without knowing the exact setup of the company it's difficult to say, but most companies that are owned and operated by a single person or family are completely worthless without said person or family, because they're the only ones who know how everything operates. Construction companies build shit for other people, it's not like they have big factories or assembly lines or something as assets.

That's one of the areas I intend to concentrate in the next few years as I ease out of estimating and take on more of a general management role: shit just doesn't get done unless my bro and I are involved in some way, and I'd like to change that. But without processes and controls and manuals in place, that's not going to happen.

[Lyrical]

Originally Posted by Eomer

There's no distinction between service and construction, from a company standpoint. We steer clear of service because in our opinion, it's a pain in the ass. But there's other companies that love it, it's their bread and butter. I'd rather have 10 large projects at a million a piece, than 1000 small jobs at 10,000 a piece. And I'd rather pursue a single bill for 300k than 30 for 10k each. It all comes down to opinion really.

But when it comes down to it, again, the former owner is going to make or break that company going forward, since you don't know a damn thing about plumbing. Unless you can find someone else to take his place that you know and trust. Maybe "stress" is why he's looking to sell, I don't know. If he was having a hard time running the day to day aspects of it and wants to get back to concentrating on site work and not paying bills, why not hire a management partner or something? If his business is as profitable as he says, why would he be willing to give that all up to work for a salary again?

Again, most construction/trades companies are worth ZERO outside of their established reputation (which is a single bad project away from being destroyed at any time), acquired knowledge base within it's employees, and maybe some vehicles, tools and material. Without knowing the exact setup of the company it's difficult to say, but most companies that are owned and operated by a single person or family are completely worthless without said person or family, because they're the only ones who know how everything operates. Construction companies build shit for other people, it's not like they have big factories or assembly lines or something as assets.

That's one of the areas I intend to concentrate in the next few years as I ease out of estimating and take on more of a general management role: shit just doesn't get done unless my bro and I are involved in some way, and I'd like to change that. But without processes and controls and manuals in place, that's not going to happen.

Everything is standardized as far as jobs go, to the point that each plumber looks at a menu and gives a flat price. Most of the time, the customer already knows what the price will be before the plumber gets there. Without going too much into it, there is a set policy and procedure for everything they do.

The real issue that I have is that I finally got the comp financials through September, and they look really wrong. It just so happens that while sales are down 25% (comparing Jan-Sept '08 to Jan-Sept '09), the profit margin has doubled LOL. Even worse, for the six months comps, the business only made 70K, and now through Sept, the net is at 133K. The broker is claiming that the seller has implemented new policies towards managing labor and materials, but I find it hard to believe that sales are down 200K, while profits are up 70K on the comp reports.

While this looked like a good business for me, I don't feel as though I can trust the seller or broker. I will talk to a partner at the brokerage firm tomorrow. I'm not an idiot, and I know when people are trying to rip me off. I don't care what business you are in, increasing profits 100% while sales are down 25% would be almost impossible.

[Eomer]

While this looked like a good business for me, I don't feel as though I can trust the seller or broker. I will talk to a partner at the brokerage firm tomorrow. I'm not an idiot, and I know when people are trying to rip me off. I don't care what business you are in, increasing profits 100% while sales are down 25% would be almost impossible.

In most businesses where there's fixed costs and assets, sure, that might be the case. In construction/trades related work where you're only paying labor and material on work you're actually doing at the moment, it could well be true. But doubtful of course. Maybe they did a couple jobs that went extremely well, much better than normal, but because they have a fixed cost "menu" for their work the margins doubled?

Our margins can swing a ton from month to month, depending on how much of our revenue was subtrades (we only markup subs 5-15%, while our own work is marked up 10-30%), if we were over or under progressed on a job, and so on. In the past year it dropped in half, but from 2003-5 it doubled. Again I don't know the nature of the business, but profits increasing while sales decrease for my business is well within reason, and not particularly unexpected.

[Lyrical]

Originally Posted by Eomer

In most businesses where there's fixed costs and assets, sure, that might be the case. In construction/trades related work where you're only paying labor and material on work you're actually doing at the moment, it could well be true. But doubtful of course. Maybe they did a couple jobs that went extremely well, much better than normal, but because they have a fixed cost "menu" for their work the margins doubled?

Our margins can swing a ton from month to month, depending on how much of our revenue was subtrades (we only markup subs 5-15%, while our own work is marked up 10-30%), if we were over or under progressed on a job, and so on. In the past year it dropped in half, but from 2003-5 it doubled. Again I don't know the nature of the business, but profits increasing while sales decrease for my business is well within reason, and not particularly unexpected.

The more I look at the P&L, the more I think it is b.s. Its almost never a coincidence that the financials amazingly get better just before a sale. I can compare this year to the last five years, and sales are the worst, while profit is the best. This smells like "window dressing." The last time I looked at a business that was this much down in sales (but profits were up), the seller claimed the numbers were real, but a few months later, he shut the doors for good. I will ask more questions of the broker and seller, but am highly doubtful I will pursue.