Adventures with Lyrical: Buying a Business

[Lyrical]

Originally Posted by Tuco

With the amount of money you're generating, why not stave off extra expenses/charity for some measure of time until you can pay off your debt and buy a business without requiring much if any credit? Is the gain from using credit to purchase business enough for your strategy?

I believe you get back what you give. Pay it forward and all. I have given to charities even when times are tough and the budget has been tight. The problem with the world as we see it now is that everyone is worried about "me and my four and no more." /end sermonette.

As far as getting out of debt, I thought about that. I think the best way to look at this is the marginal decision of paying down the debt versus buying another business.

If I paid down 600K in debt, it might take a couple of years, and that would only be if I wasn't paying taxes. I could choose to dodge taxes like most business owners do, but I will be honest and do everything legal.

So let's say I pay down 600K. The business nets 30K a month on average, and my payment to the bank is $5,900 a month. So I could plowbakc every penny for a few years, and increase my net by 20%.

Or I could plow back a few months' earnings at 30K a month, and have 30K times 3, or 90K for another business. Assuming I find a business this same size, I would be netting 50-60K a month, rather than about 30K.

Wouldn't it be a better use of money to spend 90K to make 50-60K, and do it it in a few months, versus spending 600K over several years to make another 6K a month?

Wouldn't it be smarter to diversify? Most enterepeneurs I know that get in trouble are in trouble because they only have one business. To me, its like having a stock portfolio of one stock. Sooner or later, the systemic risk of the one industry is going to bite you in the ass.

I am thinking I'd rather have three businesses generating 100K a month, and then get debtless. I actually have some more crazy ass ideas along these lines, but you guys would think I am crazy.

Originally Posted by Tuco

Is the gain from using credit to purchase business enough for your strategy?

I like Donald Trump's viewpoint on debt. He says to use OPM (Other's People Money). Why should I use my own money to make money, when I can use someone else's? Not all debt is bad if you generate a sufficient ROI.

[Lyrical]

Um, which mod added that guy to my handle? I always thought if I were to have one on my posting avatar, it would be the guy from "There Will Be Blood."

edit: nm

[Tuco]

fpine whatever dont like my monopoly avatar gift to you and instead run to daniel day lewis getting some preaching

[Silence]

Originally Posted by Lyrical

Um, which mod added that guy to my handle? I always thought if I were to have one on my posting avatar, it would be the guy from "There Will Be Blood."

edit: nm

It works.

[Lyrical]

Originally Posted by Tuco

fpine whatever dont like my monopoly avatar gift to you and instead run to daniel day lewis getting some preaching

ROFL. I was thinking about maybe another scene where he tells someone off or bludgeons someone to death

[Lyrical]

Originally Posted by Snugglebear

I hope Lyrical is a real successful black dood and not just another intricate Khorum-esque troll. His posts make me want to read this board moar.

This thread has been therapeutic for me. I have worked incredibly hard in since college, and the last year has been hell. But its like Diddy said in the one song called " 'Mo Money, 'Mo problems." Other than my Dad, and two best friends, no one knows about it in RL. I don't want a ton of problems with family and friends all asking me for money, treating me differently, or acting trippy. They'll never know.

Being able to use Internet anonymity makes it easier to talk about it. No one in RL will know.

But even moreso, I like to hear other people's stories, because I want to learn.

[Silence]

Originally Posted by Lyrical

This thread has been therapeutic for me. I have worked incredibly hard in since college, and the last year has been hell. But its like Diddy said in the one song called " 'Mo Money, 'Mo problems." Other than my Dad, and two best friends, no one knows about it in RL. I don't want a ton of problems with family and friends all asking me for money, treating me differently, or acting trippy. They'll never know.

Being able to use Internet anonymity makes it easier to talk about it. No one in RL will know.

But even moreso, I like to hear other people's stories, because I want to learn.

Can you front me $50 till pay day?

[Snugglebear]

Originally Posted by Lyrical

This thread has been therapeutic for me. I have worked incredibly hard in since college, and the last year has been hell. But its like Diddy said in the one song called " 'Mo Money, 'Mo problems." Other than my Dad, and two best friends, no one knows about it in RL. I don't want a ton of problems with family and friends all asking me for money, treating me differently, or acting trippy. They'll never know.

Being able to use Internet anonymity makes it easier to talk about it. No one in RL will know.

But even moreso, I like to hear other people's stories, because I want to learn.

Yeah, having a brokeass family makes you want to hide your success for sure. Members of my family have gone to prison for dumb shit like beating up old ladies to get their checks. God knows what they would do to me.

[Lyrical]

Originally Posted by Snugglebear

Yeah, having a brokeass family makes you want to hide your success for sure. Members of my family have gone to prison for dumb shit like beating up old ladies to get their checks. God knows what they would do to me.

Coming from a poor family is the worst (my wife's side is even poorer). They make all of these jealous comments about how I am spending too much money, but in actuality, I don't think we spend more than 15% of our income now, while they devour more than 100% of their meager incomes on every little stupid thing (through the use of credit card debt). Seriously, when I made the type of money they did, I didn't blow money like they do, I budgeted like mad. And they won't take promotions on the job, because they don't want the headache of dealing with people, and they wonder why they aren't making any money. I took every promotion that came my way.

Its like they live in this fantasy world where they don't budget, they take take any promotions, they take no risk, and yet they somehow think things will get better. My brother-in-law makes the ugliest comments, and I just keep my mouth shut while I make more in a day than he does in a month.

[dolaan]

This has been a great read I really appreciate it.

I have been considering this for a while now, although I considered a restaurant as my brother is at CIA so someday soon I will have a Chef. But I know restaurants are fairly risky so I was thinking diversifying by owning multiple businesses that are not related sound like a great idea. Main reason I chose a restaurant is that I would love the work and have a genuine interest in the subject.

Where did you look to find local businesses that are for sale? I am not ready yet but it does not hurt to start looking and beginning the process so when I am ready with cash in hand I know what to look for and especially what to avoid.

I have talked to a few friends of mine from grad school and we have considered a startup Pharmaceutical Company. We have a few ideas but without a way to bring in constant cash it is hard to find the money to do the R&D necessary to really get the company working. One advantage is though if you have good research you can get government grants, which would help a bunch. Most of the friends I am talking about are Post-Docs just trying to keep funding (very hard lately) and I am working at large Pharma but hate the work. I feel as I have sold out.

Any comments would be great and good luck in your endeavors,

[Lyrical]

Originally Posted by dolaan

This has been a great read I really appreciate it.

I have been considering this for a while now, although I considered a restaurant as my brother is at CIA so someday soon I will have a Chef. But I know restaurants are fairly risky so I was thinking diversifying by owning multiple businesses that are not related sound like a great idea. Main reason I chose a restaurant is that I would love the work and have a genuine interest in the subject.

I know nothing about pharma. I do know a bit about restaurants, as I have worked in them to get through school. And we did have a contract on one.

Right now, banks are saying they will not finance restaurants or health clubs. I guess in recessions, they are the worst hit. When people's discretionary income is cut (by high gas prices or a lost job) then these are the first things they cut.

Originally Posted by dolaan

Where did you look to find local businesses that are for sale? I am not ready yet but it does not hurt to start looking and beginning the process so when I am ready with cash in hand I know what to look for and especially what to avoid.

The process went like this:

1- I looked typed up "businesses for sale, and my location" and it pulled up a number of sites. I bookmarked them, and started visiting them every week. From there, if the ad sounded interesting, I would ask for preliminary numbers from the broker. Keep in mind, they have to make sure you qualify financially, so they make you sign a net worth statement. If you don't have the money, they will tell you.

2- I would ask for three years' tax returns, three years of P&L's, a description of the business, etc. Not every broker will give you three years' tax returns, but you can try. They also make you sign non-disclosure agreements.

3- If the prelim numbers made sense, I would meet with the broker and seller at the business location. Usually, sellers don't want employees to know, so alot of times it meant meeting at the business at 7 AM or 8PM (after hours). From there, if the meeting went well, I would ask the broker for more follow up numbers and info.

4- From there, my wife and I would visit the business to mystery shop it as anon customers. One of the things that made us want to buy the restaurant is that we visited it multiple times, and every time, the place was packed.

5- From here, if it passed the other tests, we would negotiate a price. This might take weeks at a time. Most brokers would tell you at this point that there was someone else bidding on the business, so you better raise your offer bla bla bla. Only one time did another bidder actually buy the business. One broker I had a feeling he was lying. This happened this Summer, and I told him to go fly a kite. He is still calling me trying to get me to buy it. Funny how the "mysterious bidder who has more money, industry experience and is more interested in the business than you" all of the sudden disappeared. I got to the point I just ignored when brokers said this. It came true, in our case, 1 out of 10 times, that there was a higher bidder who was ready to make a decision. Brokers say this to hurry up your decision making AND get a higher price. It is illegal for them to do it, but they figure they won't get caught.

6- After we settle on a price, due diligence starts. Usually, they make you put some earnest money down. Some brokers tried to make due diligence binding, meaning that if you found nothing to be materially wrong you were locked in. In these cases, I would build in some contingencies that would let me out. I would use "mouse words" like "Buyer must interview managers and they must meet his reasonable expectations" to get out. Other brokers would make due diligence non-binding, and you'd be good.

7- Only two businesses cleared my financial tests. Once they clear, then you have to shop the deal around to banks. Yuck. Some banks take up to two months to make a decision. So I always would look at other businesses while banks were making their decisions. It is always best to develop your alternatives.

I did hear horror stories about brokers keeping earnest money, but this never happened to me. I always checked the credentials of the brokers beforehand.

[Tuco]

I got you a new avatar. I figured the oil on the face would symbolize the hard work you've put in, and the satisfied smile and pipe would symbolize your current status.

1. How did you decide if you wanted in a certain type of business? You seemed to have a diverse selection of types (landscaping to restaurant etc), what went into your consideration for the type of business that it was? Were there profitable business that you turned down because you didn't want to be involved with it (either because you didn't see a future in that type of business (selling A-Track tapes and encyclopedias, or possibly because the nature of the business required some advanced knowledge you didn't have)

2. How did you cope with the learning curve of the business subject? Unless you were a great landscaper already, how did you manage taking up a business where a lot (all?) of the employees knew more about landscaping than you?

[Lyrical]

Originally Posted by Tuco

I got you a new avatar. I figured the oil on the face would symbolize the hard work you've put in, and the satisfied smile and pipe would symbolize your current status.

1. How did you decide if you wanted in a certain type of business? You seemed to have a diverse selection of types (landscaping to restaurant etc), what went into your consideration for the type of business that it was? Were there profitable business that you turned down because you didn't want to be involved with it (either because you didn't see a future in that type of business (selling A-Track tapes and encyclopedias, or possibly because the nature of the business required some advanced knowledge you didn't have)

LOL, I like the pic. I tried to pick businesses that were either close to my hobbies (health clubs) or that I had experience in (restaurants, I've always wanted to own one). Unfortunately, those are the usually the first and he hardest hit in recession.

Outside of the issue of seller fraud, I did turn down businesses for other reasons - mainly sustainability and my lack of understanding of the industry. I was presented with a glut of construction type businesses - from plastering to HVAC installation. I have a friend in my MBA program who worked for a construction business, and the one thing he said they had a problem with was when work slowed down. You had to be willing to go anywhere in the state to do business, so if construction slowed down in your city, but was picking up four hours away, you were expected to drive eight hours a day to work. No thanks.

On the HVAC business, I looked at his business, and 80% of his business came from fresh installs, and only 20% of it was service contracts. This business made me nervous, because he did installs for apartment complexes, and it seemed like there was a finite set of customers. The seller also started businesses in other areas that were like this, and then he sold them off. To me, it seemed as if he would build a business up, and then sell it off while business was still good. And when sales fell off, the buyer might be holding the bag.

I also stayed away from declining businesses like manufacturing, or businesses I couldn't understand that were of a highly technical nature that might require me to have an engineering degree.

Originally Posted by Tuco

2. How did you cope with the learning curve of the business subject? Unless you were a great landscaper already, how did you manage taking up a business where a lot (all?) of the employees knew more about landscaping than you?

One thing my MBA program instilled in me is to have the crazy-ass notion that I can do anything. They stressed the notion of being resourceful, whether or not it meant finding info, getting start-up funds, or being confident in any situation. They tried to instill moxy, although I think you get that from competing on a graded curve in a t1 program. I had to compete against engineers and PhD scientists, and for me, it was a huge confidence booster. You could say that failure NEVER crosses my mind, and that even in my nightmares, I conquer them. Sometimes my wife wakes me up in my nightmare, and I ask her why. I tell her was getting ready to pull out the bazooka and blow up everyone causing the problems in my nightmare. You could say I thrive on winning and overachieving.

It is typical that the seller give 30 days of training, and anything past this, the buyer pays the seller. I negotiated for 45 days. It also helps that when the seller has gone on vacation for months at a time in another country, the Foreman has run the business and made every decision. Currently, I am only working hands on in the business three days a week, and the Foreman runs it the other two. The previous owner only worked two days a week, and the secretary, Foreman and Crew Leader picked up the slack. I am purposely hands on part of the week and hands off. I want to be able to buy other businesses, and I don't want to make them dependent on me. I also monitor how they are doing when I am not there to see if they take advantage and screw off or screw up. I am not seeing a change in production, whether I am there or not, they production is the same. I know some might think this is crazy, but I firmly believe that I can make them dependent on me, and if the goal is to own at least two other businesses the same size, I can't put in 80 hours a week in any one business. The staff needs to be self-sufficient. If I had to buy a business with no managers, I either would pass, or I would buy a business where I could pay a manager to run it. So there would need to be enough cash flow to support a new manager.

I know a businessperson who amassed a ton of businesses that annually did $300 million a year that he owned. And he did it by making sure he had good managers. I have this natural need for control, and I am learning that I have to give it up - its either that or I will have to be shackled to one business.

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One of my profs that taught my Ops class in my MBA program taught us that most businesses aren't that complex. He did consulting for companies like Dell, Texas Instruments, Motorola, etc. He believed that most businesses that are highly technical can still be boiled down into simple processes.

All Ops is really is the study of how cash flows through a business. If you know how cash flows through a business, you know the majority of what is going on.

I simplified the business down to how cash moves.

1- Customers use the yellow pages, or call from references or have used the business in the past. (The previous owner was not computer savvy and did not use the Internet, I am)

2- They call for estimates and the secretary puts them on the schedule.

3- The estimator (me) goes out to meet the customer, looks at what needs to be done, and then writes the estimate. The customer either commits then, or calls the secretary.

4- My Foreman and Crew Leader are provided a list of jobs every morning. They are trained to maximize the amount of sales dollars to work on. They try to clump up jobs in one area as to maximize sales and cut down on gas expense. Some of our equipment weighs 5 tons or more, so this is a consideration (the owner does not charge gas surcharge - I plan on doing so)

5- The crews are paid a $2 an hour bonus if they each do $2,250 in work for that day. This is good for me, and for them. I pay them double the going rate for laborers in the area, so if they don't do $1,500 per crew per day, I might not make money.

6- Crew leaders are trained to ask for checks the day the work is completed. If the customer isn't home, the secretary bills them within 24 hours. The terms are for ten days.

7- On average, the customers pay 50% in the first month, and 50% in the second. But my staff expects to be paid every week, they will go on a mutiny if they aren't. Hence, I asked for 150K in working capital, plus I have another 20K cash injection to cover me.

8- The big corporate and wealthy customers can pay up to 90 days late. Its what they do. We bill them the same as regular customer ($225 an hour). So they can cause a major cash crunch on the big jobs. The owner told me of a time where a big corporation agreed to pay him 90K in three months. His cost was roughly 45K. So he had to be able to outlay 45K and wait three months to be paid. His profit was about 45K, and it only took two weeks' work.

The comment that he made was that his competitors will go for the big jobs, and not realize that they don't have the cash to do them. As an aside, of the 30 companies in the area doing what we do, only 2 of us (including my business) are fully insured. The other businesses don't see the value in paying the amount of insurance, but the benefit is that for the big clients that demand full insurance, there is only one other bidder for the jobs. The little guys are screwing themselves.

We just did a job yesterday for a wealthy person who is worth $40B. We did about $2k a of work, the profit to me was $1k. And the only thing seperating us from the competition (other than giving good service) was being fully insured.

9- I constantly monitor the cash flow of the business on a daily basis. I know how many estimates there are to run (which is a good barometer of future business), how much work in dollars is on the schedule, and how much work the crews did yesterday. I have to monitor the sales dollars the crews did, because the previous owner paid them hourly, and not by the job. So the last thing I want to do is pay a crew $60 an hour and have them sipping Mocha Lattes for hours. We bill at $450 an hour, and I want them working 10-12 hour days. We can't bill if they are screwing around. Maybe one day I will just pay them a percentage of the job - but right now no one has tried to screw me over for hours.

In pretty much every b-school, Benihana restaurant is used as a good case as how the whole business is structured to keep cash moving efficiently. The previous seller didn't really watch his cash flow as much, but I know every penny spent on everything in every account and know how cash is coming in and coming out on a daily basis. Maybe it is the educational background.

At the end of the day, I have a bunch of laborers who can handle doing the work, and maybe a little ops. The Foreman and other crew leader do their best to maximize the schedule to bring in the most revenues with the lowest costs. But its up to me to finesse the regular customers, the corporate clients and the wealthy millionaires and billionaires. Right now, billionaires account for 10-15% of our total business. It only takes one or two. One of them owns 10,000 acres, and we are the only company they use for the type of work we do. They are building a park, and they are spending stupid types of money getting it in shape. We imagine we'll get more of his business once visitors start coming in, because the person wants every inch of the park to be immaculate for guests.

Oddly enough, the regular customers tend to be the worst to deal with, as they want to cut my nuts off over $50. The corporations, millionaires and billionaires just want the work done right, they want it done now, and they want to be insured. Cost is secondary. In the last week, I have had four wealthy individuals call me and not even want an estimate. They just want us to do the work and bill them later. I have been blessed that some of these people have been the previous owner's clients for decades. You can't beat the type of customer that will let you bill them whatever.

[Tuco]

Other than buying a business with that kind of clientele, is there anything you've done to build it? A quick google search says that there are only 470 billionaires, so how is it that you can secure a pocket of billionaires? I know you want to remain anonymous (for good reason), but can I ask where your business is? (It's okay if you say no, because I can just look up your IP!!! =D)

[Lyrical]

Originally Posted by Tuco

Other than buying a business with that kind of clientele, is there anything you've done to build it? A quick google search says that there are only 470 billionaires, so how is it that you can secure a pocket of billionaires? I know you want to remain anonymous (for good reason), but can I ask where your business is? (It's okay if you say no, because I can just look up your IP!!! =D)

Check your PM's. Regardless to say, there would be all types of asskickery if I broke an NDA. The original owner has died, but has pretty much made his brothers and sisters billionaires with company stock. And one of them referred us to the others, as well as the current CEO of the company. There's no way I'd say the location, because they pretty much own the city they live in. If I say the city, I'd pretty much be saying their family name. I've probably gone too far out on a limb as is, and I should respect their privacy.

And yes, I think I want to increase my business among households making 70K+, just for the fact that I don't want any single person to have too much power over me. I have increased advertising past what the previous owner is doing. We hope, that once the park is finished, they will still use us, but there are no guarantees. We need to be prepared if they decide to start doing the work in-house.