Adventures with Lyrical: Buying a Business (REPOST)

THIS IS A REPOST, FROM 11-15-2008:

Inspired by Tuco's thread, I thought I'd throw this out to maybe give info to those looking to start their own business, or start a discussion amongst those of us that are business owner wannabees.

I am hoping the Finance forum could maybe branch out a little bit into the arena that is Enterpeneurialism.

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OK, so I've bought stock for years, and worked for two Fortune 500 companies over 13 years after graduation from college. The first company I worked for, I absolutely loved, but the second one, not so much. I left the first one because I had five promotions in ten years and ended up with a direct responsiblity of about $200 million annually, but they were barely paying me 90K. I just didn't think my pay was right for the amount of responsibility I was carrying, and no one was getting promoted as they were downsizing anyone in the Exec band above me. The second one was right after my MBA program, and I was working in a Junior Exec role (as a Regional CFO with a P&L responsibility of about $2 billion in revenues) that did analyses for the VP's, President and CEO. It was the type of job you dream about in b-school. I rubbed elbows with VP's, and was considered to be at their level in the organization. When people heard from me, they knew it was the same as hearing from the VP. But I ended up hating it - I kept Investment Banker's hours. I got very little free time, and while it was my first true six figure paying job (after bonuses), I just flat out hated being owned. I worked seven days a week, and put in 12-14 hour days each day but Sunay. I think what I loved about the first job was that I had autonomy to make my own decisions, and my boss trusted me enough that he let me run the city I was responsible and only even visited once every six months. We were told we owned our part of the corporation, and that we were to act like entrepeneurs. The second job paid better, but I had no autonomy. If a VP called me at 4 AM or on the weekend, I was expected to stop what I was doing and run a financial analysis for them. I went from almost 100% autonomy to very little autonomy and I hated it.

I have always toyed with the idea of owning my own business. I started doing research in my spare time, and I was trying to decide between starting my own business and buying one. As I did more research, I learned that while something like only 1 in 20 business survives after ten years, that you could mitigate your risk by buying an existing one that has already stood the test of time. Banks saw a business purchase as much less riskier than doing a start-up.

I went to a local business broker's website who explained that buying a business was like buying a job, and that if you had the money down, you could buy an income. A business with a net of $100K might cost 300K, and you could put down 60K, and makes 100K less the debt service to the bank. Most businesses sell for 1 to 3 times earnings. It all sounded so simple.

It all sounded so easy, so I set on the path of being self-employed. Little did I know the pain I would face, or that the process would take up one year of my life.

CONTINUED:

1- The first business I looked at buying was a franchise restaurant that was a local favorite. The SBA loved the franchise because it had a minisicule failure rate. I met with the owner and broker, and he told me about the business. It was a place that specialized in budget gourmet recipes. The business was netting 139K and they were asking 350K for it. The seller's reason for selling was that he had a bigger restaurant in the franchise that he owed $2 million on. And he needed the cash, because when it was making money, it made alot, but when it lost money, it lost alot. There was alot of overhead. I never understood the strategy of selling the profitable part of your business to prop up the part that is losing, but yet you hear of corporations that do this all the time.

We went into negotiations, and the seller refused to lower the price. At the time, it was the only restaurant of this type of franchise for sale in the country. I couldn't find another of this type even if I were willing to move. Furthermore, the franchisor wouldn't allow a new start-up franchise of its type anywhere in the state. The only way to get this was franchise was to buy one. We really liked it, and we ended up giving him every penny he wanted in negotiations. He pretty much broke us after three weeks of negotiations and we really loved the franchise concept.

We took the deal to the bank, and they loved that it had been in business for 11 years, and the low fail rate of the franchise. Franchisees almost never went under. We spoke with the franchisor, and we were confident we would get approval. We needed to get landlord approval, and this is where the problem was.

We were living in Atlanta at the time, and rent for businesses could easily be 10-12K a month. That is pretty high when you are only making 139K. Since rent is so high, landlords have really high net worth requirements. You do the math - a few bad months and you could be teetering at the edge of bankruptcy. The landlord kept asking us for more information from us, and strung us along, all the while acting like he would approve the deal. Two months into trying to get approved by the landlord, he comes out and says NO. We tried to get him to list out his requirements, but he refused. He finally did come out and say that we needed $500K in cash before he would rent to us. Hey, jackass, if I had a half a million dollars, I would buy my own land and not rent, OK? Never go full retard.

As the broker (who is now a friend of ours said), a landlord blocking a business purchase rarely happens. And in this economy, with all of the open store fronts, you would think that landlords would take just about anybody. She said that landlords sometimes have ulterior motives, like they want to kick everyone out so they can tear down a building and put up a newer one to get better rents. Sometimes, they might have a grocery store wanting to move in, and the only way to clear up space is to kick out the existing tenants, which isn't easy.

So after all this time of trying to get the landlord to commit, and the threats to sue him for breaking the state law of blocking the resale of a business, the seller refused to follow through and take him to court.

I lost five months of time, and all those hours of me conducting due diligence. Ouch.


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2- The second business I looked at was a pair of health clubs. Together, they were netting $500K a year, and the seller and broker wanted 1.2 million. It seemed that one could make a decent living off of this! I was able to negotiate them down to 990K. Both clubs had managers and staff, and they sold me on the fact that owner spent very little time running them.

The owner was actually a franchisor who started up locations, and then sold them off to potential franchisees. So they stressed that they were going to be open and honest, and that since it would be a franchisor/franchisee relationship, I was very important to them bla bla bla. We had several meetings, and they told me that sales were up, in year to year sales, because the strength of their business model allowed them to do better in recession, etc. They looked me dead in the eye when they said this, without flinching.

So we enter into due diligence (the process where you look over the books). I have an undergrad degree in accounting, so it helped. But the biggest thing to remember is that businesses of this size don't have audited statements. So you better be super careful. Its not like looking at a corporation's books, even though the financial statements might look similar. Throw out FASB standards when looking at small businesses. I asked for a ton of info to be sent me, with the rationale being that if you ask for something ten different ways, most people aren't smart enough to falsify everything.

Five minutes after they sent me the due diligence packet, I knew something was wrong. Having already been through due diligence on the first deal, and talking with CPA's specializing in due diligence, it wasn't the first time I had been here. On the previous deal, I talked with a CPA and asked him what he would be doing. He basically said he'd look at the tax returns, and also bank statements. And that the cash flow on the bank statements should be close to what they were reporting in sales. I didn't want to pay this guy $500 an hour when I had the same coursework that he did, but not the three letters after my name.

On this deal, based on the sales they were reporting, $80-90K a month in sales dollars should have been hitting. In reality, only 35K in sales a month was hitting. Given that the combined rent was almost 20K, adding in employee salaries and then the debt service to the bank, there was barely enough money to pay the light bill!

They abolutely didn't care that if they sold these location for one million and had a franchisee go under, that future franchisees would see it as a negative. All they could see was the cash. When I confronted them with it, they finally admitted that they had lost 452 members.

So I wasted a month on this one, and I had now gone six months with nothing to show for all the long hours.

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3- My wife and I toyed with the idea of moving back home to a small rural town. Her family was there, and my karate studio was there. We had alot of friends there. Also, the rent there might be 1k a month compared to 10k for Atlanta.

We looked at buying a business that dealt with livestock. The claimed net cash flow was $330K a year, and the price tag was 900K. We negotiated them down to 800K. Given that this is a rural area, any business that nets 100K usually sells within a week of going on the market. In a small town, demand is much higher than supply, and for every good business, there are 100 buyers clamoring to grab them. So we moved fast to take it off the market.

The same day the seller accepted the offer, I looked throught the financials a little closer. Sales were declining from year to year. I already knew that. But I looked at the percentage of profit to sales from year to year. And the scary thing was that while sales had declined 30% from the previous year, the net profit margin increased from 33% to almost 50%. I asked the broker about this, and he did more digging. It wasn't his listing, it was a fellow broker's. The bottom line is that this sweet old couple who was getting ready to retire (they were of retirement age) was flat out lying. The net wasn't 330K, the broker figured that it was close to 50K. 50K wouldn't even pay the debt to the bank. The broker said that it was a good thing because it showed that due diligence actually works, but for me, it was another 45 days I wasted on sellers that were lying.

So now I am getting really frustrated, and thinking I should just stick with Corporate America, and that it just wasn't time to buy my own business. I tell my wife that we'll look at one other business, and this will be the final one we look at.

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4- The fourth business is a bland type of business that specialized in a specialized type of landscaping. It claimed that it had a net of 300K, and the seller was asking 800K. The broker gave away too much background info. You learn in negotiations class in b-school to use every piece of advice you can get. Bring overly friendly is a negotiations technique i learned best in my class. Make the other party your friend and they will give info that will weaken their bargaining position later. Most people try to be aggressive and ruthless in negotiations, and no one expects you to be a super-nice guy. They don't realize that you are just gathering info. The broker said that the business had been on sale for too long, and he was really frustrated at the length of time he had spent trying to sell it. It was a decent commute, and none of the past sellers wanted to make the drive.

The business had several things that appealed to me. One, it had been around for over four decades, and it had stood the test of competition and multiple recessions. Businesses that make good money for multiple decades are worth way more than a business that has been around for a year or two and the latest tax return isn't even filed (get ready to get ripped off in this case). Two, I really thought I could get it for a great price, based on the broker giving me too much info. Three, I was doing my research and everything I had read about this business was that it wasn't really affected by recession. Finally, the owner was past the age of 60, and was able to only work two days a week. He also went overseas for months at a time on vacation, and his managers and crews did a great job.

We got into negotations, and I was able to get them down to 650K. I used what the broker had told me against them. One thing about brokers is that if they think they have spent too much time and money on a deal, they fold like accordians if they think they can close a deal.

I got through due diligence, and I couldn't find anything wrong at all. I was shocked. I had never seen a business with such clean books.

The problem was that this was the week of the financial meltdown, and you couldn't turn on the news without hearing about how banks weren't going to lend. In a normal time, this deal would have been considered a slam dunk, because the financials were clean, it had stood the test of time, and sales were actually up this year by 20% (and that is in a recession). It should have been a 45 day close, but it was closer to 75 days. The bank took its sweet time, and our close date kept getting delayed every day. This is unheard of. You would go to close, and the bank would delay another day. This happened for 2.5 weeks. I yelled and screamed at the broker enough that he yelled and screamed at the banker. The broker did have a little leverage in that he'd sent the banker alot of business in the past.

We finally closed three weeks ago.

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My first day owning the business, I was nervous. After all, no matter how closely you look at the books, if someone is clever enough, they can falsify anything.

We go on our first job, and I watch the crews work. I shoot the breeze with the owner, but the whole time, I was wondering if I got ripped off. He goes into his house, and presents me a check for $5k. This is a service business, and typically the net is 50% of sales. I was at the job a total of two hours, and I was handed a check where the profit was $2500! I felt vindicated for putting a year into buying a business.

I have now owned the business for three weeks, and have netted $29,300 in this timeframe! This is about what I made in my first year out of college at the first corporation I worked at. Also, in terms of my post MBA job, I have been making more in one day in the business than I did in a regular, non-bonus check coming out of a tier one b-school. The banker who closed my deal was getting his MBA at a t1 school, and he commented that the business would pay much more than what you would make at a t1 school upon graduation.

In terms of my family, we live the same way we did before. This time of year is typically the slow time of year for the type of landscaping we do. And in December and January, in the past, the business has lost 40K in those two months, and then made money the rest of the year (in the Summer months, it makes $50K a month easy). We have equipment that runs 50K-100K apiece, and the maintenance on them can be 5K a month. Finally, the competition tries to steal our employees, so we pay them really well, and try to make sure they are getting 40 to 60 hours. The way the economy is right now, we can live off of 4K a month, and plow back the rest for a rainy day.

I have to say that earning a two week check in a day is a bit disconcerting. I could go out and increase my standard of living, but there are alot of business owners right now that wish they didn't spend everything coming in. And there is alot of stress in making decisions that affects the workers' families. We pay double the going rate for laborers in the local, and the laborers are the main breadwinners for the families. They have kids. The business is their sole income, so this has freaked me out a little bit.

I put the money I made from buying beaten down stocks in recession, and put down about 80K on the business. The seller put in some financing. We bought it for 650K. It has netted 300K+ for the last three years, and is on track to do 350K this year. If anything, I see a ton of opportunity to increase this business past 350K, because the seller has done almost no advertising, isn't on the Internet, and he subsidizes his other business at least 30K+ a year from ths one. The seller also doesn't negotiate with his customers. He charges them $225 an hour, but he could still make money at $150 an hour. He'd rather have an open spot on the schedule than charge less. His attitude with customers is that this is the hourly rate, take it or leave it.

The business hasn't slowed down with me at the helm. The prior business had such a great reputation, that the past customers don't care the owner has changed. 80% of the time his managers ran it for him anyway, as he would go on vacation four months out of the year, and when he was in town, only work two days a week.

I wonder why I worked for Corporate America so long. This is so much more rewarding. But I wasn't born wealthy, and the money that I was so frugal with that I made in Corporate America and invested has now alowed me a new way of life. I have been able to go from dirt-ass poor to making what the wealthiest 1% of Americans do.

I thrive on challenge and thrive that no one else believes in my dreams. In another few months, I should have the cash to buy another business this size. I love a challenge (like running a business unit of $2B in revenues, getting my black belt, going to a t1 b-school) etc. Life is boring with challenge and struggle. One day I will own two other businesses this size, and donate 80% of it to charity. I guess you could say I am a bleeding heart, but my non-profit activities are at the end of the day and on the weekends. I just don't think we should try to get change by taxing the hell out of people and redistributing it. I'd rather make money and give it to the charities of my choice. We've already given $1500 away in three weeks, and we plan to give away more when the busy time of the year gets in full swing.

I'm going to post more of what we do, since I get a lot of questions about labor and skills. I enjoy my anonymity, but it's not hurting me to say what we do. None of these are my companies.

Getting a guy who is not afraid of heights is one thing, teaching him to climb up and not take all day takes one year. Then it take another year to learn what to cut, and then another year to get fast and good.

Like I said, I'm able to charge $80 an hour times four doing this, so $320 an hour. We used to run two crews and bring in almost $500 an hour, but I can't find anyone who can do this, and have good work habits. As we come into fall, other companies start slowing down, so there will be more good employees that just get cut because of the time of year. With all of the advertising I'm doing, we are the only company that works all year round. My competitors just get business from word-of-mouth, but we get it from word-of-mouth, repeat biz, radio, billboards, yellow page ads, internet directories, google adwords, etc.

We do work for the local cities, CEO's, and Execs. No bull, rich people have a lot of land, and they will spend $20k an acre making sure their tree work is perfect. Since this is dangerous work, we are fully insured, and it means a lot of times we are the only ones able to bid on big commercial jobs.


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And this would tell you all you need to know about equipment. My buckets cost up to $110k, we don't buy the cheap ones.


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I know that some of us are business owners, so what are some of you guys doing? What types of businesses do you own? What kind of crazy-ass aspirations do you guys strive for? I know that having a business this size is just one of many goals I am aiming for in life. The whole time, I had naysayers that said I shouldn't expect to make upwards of 250K in a business, and some said I wouldn't even reach my goal of owning a business.

OneofOne_sl said:

Dude Lyrical, we all know you don't own so much as a lemonade stand.

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Bleh,Tuco already post this in that other thread:

Tuco_sl said:

To the cynical posters: Lyrical sent me undeniable proof that he is who he says he is and that he's an owner of the business he describes.

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OneofOne_sl said:

I just had to be the first on this new forum to say that bud =P

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I know, but at least it's out of the way now.

So, as an update, we are doing very well for December, which tends to be the worst month in the year. Sales are going to be up at least 35%, and may end up 50% over last December. This will be the second best December we've had in ten years, and my best one ever. At this point, other than divine help, it's the mass advertising. None of my competitors are working, and they are all laying off. The phone is ringing off the hook from people looking for work, so eventually, I'll be able to cherrypick the best guys.

I'm not going to sit around curled up in the fetal position until Spring. I'm looking at doing a mega radio blitz for January and February. I've been studying a local HVAC company here that is doing 10 million in sales, and I'm going to start copying their strategies. Our businesses are pretty similar, in that you have small companies that can do the same, and you have to seperate yourselves from them. I've talked to someone that works for them that actually sat down with me for an hour yesterday giving me tips.

Tmac47_sl said:

What percent of your annual/monthly revenues are you spending on advertising?

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Right now, I'm spending 6k a month to try to do 35K. That seems high, but I'm just not cutting my advertising in the slow times. 6k a month is nothing when you are doing 100k+ in service fees. We tend to be seasonal, so I've found I have to spend more to get people's attention. For ten months out of the year, I have more business than I know what to do with, but for two, it's tough. And then March can be anemic also.

We've had Winters where we've had zero calls that week. We lose our ass when we don't work ($2,500 a day). One Winter month, I lost 8k a week due to not working. The advertising is like an insurance policy against losing 8k a week.

I'm forecasting that once Christmas is over, we'll be at breakeven. We always lose in December, because we shutdown from Christmas to New Year's and pay vacations. Last Winter was my best Winter, and we lost 32k. I'm forecasting, that if sales continue to be up 50%, that this will be the last month we lose money. Last year, I lost 10k in both January and February. But as people have left, I haven't replaced them. So sales are higher, payroll is lower. Also, we moved to be more centrally located (we had a break in at the office and moved to a 24 hour monitored place). The break in has been a blessing in disguise, as we are saving $1k a month right now, and will save 2k a month in the busy times.

I've never been so glad to lose money. When you own a business, you have to understand the cyclicality of it. I can go back ten years and see the same behavior.

curriedbeef_sl said:

Cheers for reigniting the nuked thread here. Occasional lurker at the last joint for this plus one or two other discussions. Glad the old stuff will be archived and updates continued.

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I'm glad Tuco ripped the whole thread also.

Tmac47_sl said:

So, is that normal or are you spending more now? Do you only advertise in your slow months? Right now you're spending 17% of monthly revenues. How does that compare to high grossing months?

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Last year, I spent 4-5k a month. I'm increasing advertising as a whole to keep working every day. But the long term goal is that sales have increased 50% since I grew the budget, and I want to grown another 25% next year. The previous owner only relied on word of mouth, which is great, but you can't manage it. When it gets slow, you starve. We've now worked every day for like 20 months, which is unheard in my industry. Most of my competitors have shutdown until April. Profits are up double since I've ramped up ad spending also.

My goal is to be able to get up to doing one million in sales, non-assisted through big commercial contracts or emergency work. We've done that like two out of the last ten years. At one million in service fees, my margins are dang close to 50%. I miss those days. But as I intelligently increase ad spending, sales keep increasing. The last three years have been 15-20% increases in sales, year over year. We should have been up 50% in 2012, but as the saying goes, there is a such thing as sustainable growth. You don't want to grow so fast as a service company that you start giving poor customer service.

There are two suburbs that have 80k people in them that are my target customer, and I've put a billboard in their main highway (they all pretty much drive in one area to do their shopping or to work) and I've bought more yellow pages there. I'm now the number one ad in my industry in the local yellow pages there. I've committed to about 20k in ad spending there alone in 2013. Previously, we just ignored them and told them we didn't drive that far, but since I've moved my office to be more centrally located, we can drive that far and still be competitive on bids.

So, based on % of sales, advertising is high, but it will pay dividends later. I'm pretty much finding that for every one dollar I spend in advertising, I'm getting six sales dollars back. And that's with no COGS.

Nice. Just caught an employee going offsite to bid a job from a neighbor asking for a bid. He was bidding a side job against the company.

I'll let him finish out the day and then fire him.

Tuco_sl said:

Gotta be frustrating. How often does this happen and do you notice that it's usually the smarter/harder working/more entrepreneurial workers that do this? Or does everyone do it and only the retards get caught?

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It is frustrating. I lose money on them in the Winter when other owners layoff. I don't cheat them (but other owners do). One of my biggest competitors regularly pulls $200 out of his workers' weekly check whenever he feels their check is too high. I pay 30% more, bare minimum. I treat them honestly and with respect, but I don't always get it in return. For some, the lure of being able to pick up $500-1000 extra on the weekend is too strong.

It's been 1.5 years since I've caught anyone doing this. I'd like to think it happens on an isolated basis. I'll reiterate to the guys tomorrow that they are not going to steal $500-1000 from the company and stay employed. Now this guy gets to go up the street and look for work. The only company that hires in the Winter is me. In my industry, if you aren't in good with someone in December, you won't have a job until April.

He's just cost himself four months of paychecks.

edit: To answer your question we are like plumbers in that once a guy gets trained, they think they can do it all. One time, I caught a guy taking my equipment out on the weekend to do bigger jobs.

double edit: We just got a big commercial job thirty minutes ago, and I'm short handed because of this guy, and another guy deciding he was going to visit family on vacation on the other side of the country for Winter.