Adventures with Lyrical: Buying a Business

[Desx]

Such an amazing thread.

Can you list the 3 top things you've done to increase the bottom line? You mentioned how workers are payed.. maybe this is a better question in 12 months

[Cad]

Good thread Lyrical, fun read. As to paying off the debt vs. buying another business, aren't you taking on a lot of risk if you buy a 2nd business (or even the first) if you don't have the net worth to pay the loan outright? If one of these businesses fail, who is on the hook for the loan? The business? Or you? If you are on the hook personally, by taking on two leverage-bought businesses, aren't you doubling down your risk (and reward, of course) if one of them fails and you might be in danger of personal bankruptcy because of the business loans?

[Lyrical]

Originally Posted by Desx

Such an amazing thread.

Can you list the 3 top things you've done to increase the bottom line? You mentioned how workers are payed.. maybe this is a better question in 12 months

I haven't posted in a bit - mainly because my flu has gotten worse (ugh). The advice that brokers give you is to not make changes to any business for six months. They advise you to learn as much about the business as you can. Also, since Winter tends to be the slower months for the business, I have been intent on making enough to carry me through these months. In the past, the owner has lost up to 40K in the Winter months, and then when Spring hits, he has to turn away customers. In the Winter, people don't usually think about landscaping, but when they start spending more time outdoors, is when they start calling us.

One area that could be improved: the business uses almost no technology other than the equipment (no Internet advertising, no website, no email). For me, personally, I don't use the paper yellow pages, but this has been this business' main means of advertising. I use the Internet when I need to find a service, I couldn't even tell you where my yellow pages are. I've signed up for more Internet advertising, but supposedly Google won't register any changes for up to six weeks from now.

If 70% of people prefer to use the Internet when making purchases, does this mean that if I can use Internet advertising correctly, my sales should increase by an amount of up to 70%?

[Lyrical]

Originally Posted by Cad

Good thread Lyrical, fun read. As to paying off the debt vs. buying another business, aren't you taking on a lot of risk if you buy a 2nd business (or even the first) if you don't have the net worth to pay the loan outright? If one of these businesses fail, who is on the hook for the loan? The business? Or you? If you are on the hook personally, by taking on two leverage-bought businesses, aren't you doubling down your risk (and reward, of course) if one of them fails and you might be in danger of personal bankruptcy because of the business loans?

I don't worry about the debt, because the price I paid wasn't too high. Banks will usually balk at a price of four times earnings, because in some cases, this means half your net could be going to the bank. In this situation, with a monthly net of 30K, the debt service is just under 6K a month.

The business I bought has been around for more than 40 years, and its brought in 300K a year like clockwork. The true net is closer to 35K a month, and not 30K. I am finding out that there is more actual income in the business than what was reported by the seller. The amount of income that I found out about is almost equal to what my debt payment is. The main part of this is that the seller has another business, and he's been paying for labor from that business in this one.

And there is a big difference in cash flow from paying off 600K in debt, to saving up 80K for another business (and then keeping the rest of the money for a rainy day). In a way, I'd have much more working capital by not paying off the business (and buying another).

[Mimirswell]

Originally Posted by Lyrical

If 70% of people prefer to use the Internet when making purchases, does this mean that if I can use Internet advertising correctly, my sales should increase by an amount of up to 70%?

It could increase it by far more than 70%. I mean it's just the average and it varies heavily on businesses. For example, if you built websites, virtually all of your business comes from the internet whereas if you are booking rooms/homes for a retirement community, you probably would do far below 70%. Certainly though it will increase sales by a factor far greater than what you pay into it though since getting a decent web site and ensuring google ranks you high for your business + your city in search is very cost efficient. There is almost no negative for doing so and each year, the trend of users will only go higher and the longer the site has existed, the better it will do on a search. From your posting, I am guessing you intend to keep your business for an extended period of time.

[Lyrical]

Originally Posted by Mimirswell

It could increase it by far more than 70%. I mean it's just the average and it varies heavily on businesses. For example, if you built websites, virtually all of your business comes from the internet whereas if you are booking rooms/homes for a retirement community, you probably would do far below 70%. Certainly though it will increase sales by a factor far greater than what you pay into it though since getting a decent web site and ensuring google ranks you high for your business + your city in search is very cost efficient. There is almost no negative for doing so and each year, the trend of users will only go higher and the longer the site has existed, the better it will do on a search. From your posting, I am guessing you intend to keep your business for an extended period of time.

I will take any advice I can get on driving webtraffic. I have:

1- Signed up for AOL Yellow Pages, Google Maps, etc. We still aren't showing because they are telling me it will take 6-8 weeks.

2- I have made up a website, and I am using Google Adwords. I am only getting 2-3 hits per day.

The previous owner did sign up for a minimal contract involving AOL Yellow Pages and Google Maps. This is only for an area involving about 20% of his customer base.

One thing I learned in Corporate America is to ask customers where they are finding you. Unfortunately, most of the customers are either past ones, referrals or using the paper Yellow Pages. Actually, that's not a bad thing, because it means there should be an opportunity to increase the business by a percentage up to 70% (or more according to Mimirswell).

Any info or links you guys can give would be great. In a week, we might get calls for 20-30 estimates, and we close half of those. So If I can increase the numbers of calls by 10 estimates a week, this would have a huge impact on the bottom line. It would be somewhere to the tune of about $7K-10K in net profit. This is one reason why I bought the business - I believe I can grow the business because the seller hasn't really changed anything in the business in the last 20 years.

[Lyrical]

So I was asked to do an estimate today for the property of an ex-CEO of a Fortune 200 company. He's been a past customer of the business.

I drove past the security gates, and didn't think there was anything spectacular. As I drove further in, there were street signs. I asked the seller why there were street signs, and he said it was because the guy owned so much real estate that he needed street signs on his own property (WTH). We drove up to the guy's house (or so I thought it was). It looked to be just shy of 6k square feet. I asked if it was the CEO's house. The seller then informed me that it was not the CEO's house, but one of his groundskeeper's homes. I was told that the CEO had several thousand acres, and that each of his servants had their own mansion. The seller told me that the CEO also owned some professional sports team.

Needless to say, we padded the bid a little.

[Silence]

Originally Posted by Lyrical

So I was asked to do an estimate today for the property of an ex-CEO of a Fortune 200 company. He's been a past customer of the business.

I drove past the security gates, and didn't think there was anything spectacular. As I drove further in, there were street signs. I asked the seller why there were street signs, and he said it was because the guy owned so much real estate that he needed street signs on his own property (WTH). We drove up to the guy's house (or so I thought it was). It looked to be just shy of 6k square feet. I asked if it was the CEO's house. The seller then informed me that it was not the CEO's house, but one of his groundskeeper's homes. I was told that the CEO had several thousand acres, and that each of his servants had their own mansion. The seller told me that the CEO also owned some professional sports team.

Needless to say, we padded the bid a little.

Why would they need you if they have their own groundskeeper?

[Lyrical]

Originally Posted by Silence

Why would they need you if they have their own groundskeeper?

It was more like a staff of people just taking care of their property. I have yet to meet either of the two CEO's that we've handled in the last month. I have been told that the closest I will get is to their Foreman. The seller said he only had one time when the actual CEO called him, and that was when he screwed up. As long as they know who to write their checks out to, who cares, eh?

Because some of our equipment runs upwards of 100K apiece, and like I said, we do such specialized landscaping that not many people can do it right, even CEO's with a full staff of groundskeepers. They try to do some of it, but either they don't know how to do it all, or don't want to do it.

[Mimirswell]

Originally Posted by Lyrical

Actually, that's not a bad thing, because it means there should be an opportunity to increase the business by a percentage up to 70% (or more according to Mimirswell).

Well more if your clientele is more oriented towards the internet and vice versa. Without sufficient demographic data on your clients, there is no telling if it's more or less than 70%.

Any info or links you guys can give would be great. In a week, we might get calls for 20-30 estimates, and we close half of those. So If I can increase the numbers of calls by 10 estimates a week, this would have a huge impact on the bottom line. It would be somewhere to the tune of about $7K-10K in net profit. This is one reason why I bought the business - I believe I can grow the business because the seller hasn't really changed anything in the business in the last 20 years.

Since a lot of your business is referrals, a relevant, short (fits on business card), easy to remember domain name is great. The great thing about the internet is a user is more likely to casually check your website than outright call you when they are only slightly interested. A good website can then take that casual interest and enhance it into real interest that results in an email or call. Check out the competition nationwide and find the best features to mimic and then hire a professional. This also alleviates the need to have a really high google hit (though you definitely still want one) since the previous owner had such a well established referral network.

[Lyrical]

Thanks for the info.

Just as an FYI, I think we'll end up about $32Kish in net profit for the first month in business. The secretary had me closer to 40Kish, but she forgot that I spent $4K in payroll in the first week of my own money to keep everyone paid and keep the transition smooth. The crews also use credit cards to pay for gas, and the secretary doesn't record the gas expense until I actually write a check to pay off the credit cards. So there is about $6-8K that she didn't put on the P&L that needs to go on there.

Its been a great first month in business. 32K is more than I made in a year after I got out of undergrad, and it is almost half a year's pay after my MBA program. It has been a stressful time in that I have had to do more sales and marketing, and that the business isn't just leaping into our laps. Given that we are in the landscaping industry, people aren't outside as much, and the business that comes in, you have to fight over. In Spring and Summer, when you have a six week backlog, you can charge a premium, but right now, the competition is pretty fierce. When we do an estimate, we leave all sorts of marking and tape on the people's yards. In the winter, competition is fierce enough that they will drive around all day, look for the markings and tapings, and then tell the customer they will undercut us.

December and January tend to be the slowest months for the business (when I look at the historical reports) but we are fighting hard to stay profitable. The seller has either made a little money in these months (like 10K total) or lost 40K over these two months.

I cant stress enough how important it is to know the cyclicality of a business you are buying. A friend of mine bought a business, and it is slowing down right now, and he has no idea if this type of busness tapers off or not at this time of year. For all he knows, December could typically be the worst month, and January could be great. He bought a drug rehab center, and I bet that people might want to wait until after the holidays to go into treatment (but that is just a guess). So they are in a panic because less people are starting the program, yet they have no idea if this is just normal for this time of year for their business.

At this current rate of income, I think I am going to start looking for another business soon. Considering it took me a year to find legit sellers, it probably isn't too early to start. I still need to move into new office space, and we have systems that are incomplete. Once this stuff gets hashed out, I will look for something else. I could probably buy a businss producing six figures with my retained earnings of 32K (if a business producing 100K costs 300K, and I can find a bank willing to do a 10% deal). I am thinking maybe some type of commercial real estate or landord situation where I don't have to be super-active. But I don't know much about being a landlord at all.

Is anyone dabbling in commercial real estate or being a landlord and care to share? Any good books on this?

[Mimirswell]

Originally Posted by Lyrical

Thanks for the info.

No problem.

December and January tend to be the slowest months for the business (when I look at the historical reports) but we are fighting hard to stay profitable. The seller has either made a little money in these months (like 10K total) or lost 40K over these two months.

How did you determine this? Part of the due diligence or did he offer an annual cash flow estimate?

At this current rate of income, I think I am going to start looking for another business soon. Considering it took me a year to find legit sellers, it probably isn't too early to start. I still need to move into new office space, and we have systems that are incomplete. Once this stuff gets hashed out, I will look for something else. I could probably buy a businss producing six figures with my retained earnings of 32K (if a business producing 100K costs 300K, and I can find a bank willing to do a 10% deal). I am thinking maybe some type of commercial real estate or landord situation where I don't have to be super-active. But I don't know much about being a landlord at all.

This is the same situation I'm in. I'll have between 50-100k to put into a business and I'm looking at real estate because my city is going to nearly double in population in the next 3 years but I'm at a loss on where I can learn specifics of the business.

[Lyrical]

Originally Posted by Mimirswell

How did you determine this? Part of the due diligence or did he offer an annual cash flow estimate?

The seller provided me with three years of monthly P&L's, so I could tell that December and January have traditionally been the months where he bleeds red ink. He's had Decembers where his sales volume is only 20% of what it is in the peak Summer months. He's also lost money in every January the last three years in a row. And then in Spring and Summer, he's had to turn people away after he gets about six week backlog.

The added benefit of having the monthly P&L's (other than seasonality) is to be able to cross check the monthly P&L's with the yearly P&L's, the bank statements and the tax returns. So there is a sanity check, as the monthly P&L tends to be for the manager, and you can compare this to what the owner actually claimed in taxes. Like I said before, most sellers that are committing fraud I have seen aren't smart enough to falsify all of their statements and have agreement in all of them. Usually, there is something in there that shows they are falsifying stuff.

[Mimirswell]

Yeah, I will definitely follow your example on due diligence, certainly was eye opening for me. I'm fortunate in that my father is a commercial real estate appraiser, my brother a residential real estate appraiser, my stepmother is a loan officer and two of my uncles are lawyers. I also have a CPA, Personal Banker and Stock Broker on retainer. My graduate studies are in Computer Forensics but I'm picking up accounting and business classes concurrently right now.

[rinthea]

Great read Lyrical and everyone.

So Lyrical, most of your business pretty much comes from word of mouth referrals and repeat business and now you've gone and changed your charge structure from something consistent to something discriminatory by padding that guys bid.

The way you've done it seems like a short term decision that could bite you in the arse to me. Discriminatory pricing as a way to pick up the consumer surplass works great if you are a monopoly when it cant effect future business (or if the product can't be resold, which u dont have this problem I'm assuming) OR if you ADD VALUE. But if you arent a monopoly and not currently adding value, and if the customer or his referrals can do without your product its probably a bad idea to pad bids. Especially since you want future business originating from the client.

Just look at the way airlines do it. Its a good model. The added value is stuff like, a price for the ticket immediately, a price for schedule sensitive (business, car races people have to be at, etc), more comfortable accommodation, early booking discounts, internet orders, etc etc.

If I were trying to capture this surplus, I'd offer some sort of 'premium service' quote (most likely a number of different options a customer could 'add', look at the DELL online store too, thats a good example) too that offers some value, i.e. after sales service, guarrantees, faster completion dates, whatever I'm sure you can think of them better than I.
Give them the choice. You never know, you might get some penny counter who will find out your bid has been padded and this could fuck you over for the future. You might find a lot of other clients who you thought wouldnt pay this surplus and hadn't planned on padding their bids, will in fact pay it. Let them fucking know EXACTLY what value your adding and then give them the choice.

my fee is 10% of future profits (minus losses from the non padding ofcourse) if you decide to go this way, I'll accept yearly off balance sheet paypal payments kthx