Adventures with lyrical - buying a business

Frax said:

any updates? The Grobbee "Debt Free" thread was too boring to reply to, and this topic is still interesting!

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YTD, I"ve netted:

$177 K net profit to the company
19.66K in charitable contributions
37.06K in owner"s draw
20K in misc add backs to me (Mercedes Benz payment, Toyota Rav4 payment, cell phone, internet connection, meals)
54K in payments to the bank (considered discretionary income)
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307 K through the end of September


It"s been a good year so far (better than we expected with the economy the way it is). Given that through that timeframe, we only had about 160 days to work (we don"t work in the rain), I am netting $1920 per workday, or about $166 an hour. Since the guys get to work before we wake up, some days my family has netted $332 before we get out of bed!

We actually lost money in September (5K). The phones died off in September, but have picked back up in October. At this point, since Winter can be so slow, we are in conservation mode, but hoping for one last big spurt. Looking at history, there usually is a big spurt of business before Dec 1. And we are getting people calling in saying they want their landscaping done before Winter hits. The previous owner had Winters where he lost 50K before it got busy again. Last Winter, we lost 30K in December, but made money the rest of the Winter.

The only reason I ever lose money is because I try to make sure the workers get 30-35 hours a week regardless of whether or not there is work. None of the competition does this, but we feel that the extra productivity of the workers brings a net profit. The workers don"t worry about their check, so they do 50% more in a day than our competitors. When the competitors get down to $0 work, they pay $0 to the laborers. Our guys get almost full time pay, so it makes them loyal, they know that no one else will offer them "free" hours.

While the calls have gotten better, they still aren"t what they should be. But the job amounts have gotten higher, instead of getting jobs for $300, we are getting organizations calling and doing $3,000+ jobs. And we just bid a job for almost 100K for the state about an hour ago!

Frax said:

Earlier you posted about trying to things for your employees to do once winter hit and caused a drop in your main business. How is that working out?

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The main thing I have thought of is splitting firewood and selling it. The seller used to do this, and had customers pay him cash, and then he paid the guys cash. The problem is that selling firewood really only covers the cost of labor, it doesn"t pay overhead. And on top of that, my rent is dirt cheap. I need land to store firewood, and the lease won"t let me do that. The problem is that there are other tenants with lots of machinery around, and the land around the building is pretty much spoken for. I would need to buy a building or break the lease, but then my rent/lease payment would triple at the current rate.

Maybe I should talk to the landlord about allowing me to store firewood. I"d also need to drop about $1500 on the proper equipment to split wood.

TheCutlery said:

What are you talking about? You got guys who wanna feed their families, and an axe is 20 bucks. I think you"re set!

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I know jack squat about splitting wood into sellable firewood. This is a number my Foreman told me that he thought the machine would run.

So I had a meeting with a local plumbing business owner that is for sale. He wants to sell the business and continue to work for it, which would be fine as he"s a master plumber. My wife and I met with him, and he just looks kind of burnt out from the stress of owning his own business. It can be more stressful owning your own business if you aren"t taking care of your body (eating right, working out, etc). Probably the biggest stressor is that employees do stupid things, and sometimes they can put the company at risk (like when one of the guys kept playing grab ass with my secretary).

I keep reading about how plumbers are faring well in the recession, because for the most part, if there"s no hot water, the basement is flooded, the toilet won"t work, or the pipes have busted, people get that stuff fixed. In this case, if I look at comp financials through mid-year (which is defined as comparing sales and profits Jan-Jun of both years), his sales are down almost 25% and profit is down as much.Unfortunately, he is asking for a multiple of last year"s income, when he should be asking for a multiple of this year, and this is making the business a bit pricey.That is a concern of mine, is when is the decline going to end? Also, when I asked about how hard it is for him to find new plumbers, he said it used to be hard, but with all of the other plumbers going under, he has more to pick from.

I am asking the broker for more info, but am leaning towards waiting until the decline is over. Either that, or I don"t pay him the 3.6 times earnings he is asking. I"d pay closer to 2.75 times.

Grooverider said:

So this guy is going to sell you his business, then work you for and start calling you boss?

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He"s said he"s prepared to do it. He told us in the meeting that he"s been divorced, and has a ton of debt hanging over him from it, plus he"s stressed from being an owner. I asked him to his face how he"d be able to handle if I go in a different direction on some things, and he said as long as he doesn"t have to do stupid things like hopping around on one leg when he walks up to a customer, he doesn"t care. The business pays the best in the city, and he"s not ready to retire. He says he just wants to work with his hands and live a simpler life, and he comes across as very believable. Since he"s a master plumber, a new owner would need his certs to do some jobs.

I am less concerned with him being an employee than I am the drop in sales and profits through six months, and comments like "the competition keeps going out of business" and "Summer was worse than earlier this year." I"ve requested YTD comp P&L"s, and when I get them, I have a hunch that they"ll be worse than 25% down. If they aren"t, then I"ll be interested in maybe doing due-diligence, and if they are, I"d rather take a "wait and see" attitude. The owner is claiming the business is still on track to net six figures in a down year, and that will be (or won"t be) born out in the reports and records. Most owner don"t even read the stuff they send, and usually in the reports, there is a real zinger that disputes what the owner is saying. Of the 40-50 businesses I"ve looked at, only two of them made it past my litmus test (and one of them I bought).

Aetos said:

How do you plan on managing two businesses?

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By paying people more than they can get in the market, giving them a piece of the profits and pushing responsibility down. In the business I own now, each crew leader is responsible for staying on track and bringing in the $ volume each day. They are paid bonuses based on their output. Each day, the crew can give themself a 20% raise if they do the right things. The Foreman is responsible for making sure each crew leader is doing the job for their crew. He"s paid a percentage of the profits, paid on the $"s the crews do each day, has a company car, and has other perks. The secretary gives daily reports as to what each crew does daily, and is also paid a bonus based on how the company does. Everyone in the company is paid well if the company does well, and not as well if it doesn"t do well.

Basically, I pulled something out of an old Economist"s textbook about aligning my employee"s interests with the company"s. If they do what they are supposed to do, they make anywhere from 20-50% more than they would elsewhere. I am pretty much making them part owners, but I make a ton more than my competition because my employees give a damn. The choices they make effects their paychecks. Hardly anyone ever quits because they know that no one else will offer what I am. My crew leaders won"t find anywhere in the area that will pay as much as I do, and my Foreman I would hazard to say couldn"t find anywhere in the country that he"d make more money.

Because they get paid this way, and they are good workers anyway, I have the option of working as little or as much as I want. Some weeks I don"t work ten hours, and if I work more, its because I choose to.

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I haven"t quite figured out all the moving pieces in the plumbing company. And since the current owner pays them 18% of every job they do, if they are doing managerial type stuff, they aren"t making $. Anyway, its taking them a long time to come up with comp YTD P&L"s, so I bet that there is a problem with the numbers, and that all of this pre-analysis might be moot. My intuition tells me there"s something amiss, and I"ll test that with hard analysis if they ever get me those numbers. And then if I decide to move forward in the process, I will test and re-test against the sea of documents I can look at from the business, bank, CPA and government.

Grooverider said:

Do you not think your business model is a bit questionable? i.e. Over-paying your staff.

I"m curious because I run a single man consultancy business, which has a bottom line net profit about 1/3rd of your entire company except I don"t have yourenormousliabilities..

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First off, in a buy-sell, getting a business for two times earnings is considered very low. If you can get a business for less, than there is probably something wrong with it. Secondly, considering that your average business has a net income of 5% of sales, I consider making $1 out of every 2 pretty good. You are going to be hard pressed to find many businesses netting 50% of every dollar. Third, in our industry, we are very profitable compared to our competitors, because we are more productive. When your productivity is 2-3 times higher than other companies, you can afford to "overpay." Look at it this way, if workers are on a bell-curve, we only keep the ones that are on the high end of the scale for productivity, and we pay them for it. Only 1 out of 20 people hired will keep pace, and since bonuses are based on the team, if a guy slows them down, the rest of the team does the managing for me. If a new guy comes on and doesn"t do well, I will get laborers coming in asking me to cut him, because they want their check.

The business model is inherent to why we are alot more profitable than other companies in our industry. And when you consider that in peak times, we lose 10K a month due to cancellations, the guys need incentives to get to the work in a timely manner. As productive as we are, I lost 20-30K this year in jobs we never got to.

So the flip side is that if workers aren"t paid incentives, than they"ll just sit around on break, soaking up their $15-18 base pay, and there won"t be anything in it for them to work hard. We drive around and see our competitors sitting around soaking up pay, and not bringing anything in. We"ve gone to customers, seen them sitting, then circle back around, and an hour or two or three they are still sitting around doing nothing.

Bottom line: The increase in productivity nets me 100,000 a year over the increase in pay.

Grooverider said:

How do you know the profitability and margins of your competitors? Didn"t you buy this company a year ago, with preciselyzeroexperience in the field?

I"m curious about your actual justification for your business model, not some "Driving around and seeing people" rhetoric that means entirely dick. You talk like you"re in the retail industry- I thought you were in the service industry..

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Try not to be too much of a dick. We are members of our industry association, and know the benchmarks and know where we stand. Our guys also have worked for other companies in the area and have told us that alot of them do 40% of what we do in a day (and pay less). And I"ve looked at some of our competitors for sale, seen their financials, and have talked to other owners that brag about how productive their guys are (but really aren"t).

TheCutlery said:

His justification is that paying people a decent wage makes honest men work hard for it. And it seems to be working out for him. It"s the way it should be, not this "pay the lowest wage possible and hire an endless stream of shit to fill the revolving door" crap that"s become commonplace these days.

I know it"s hard to believe, but if you actually pay people for the work they do, they"re happier with their job, they work harder and get more done, and that leads to higher productivity. Customers notice that shit too. Had 2 guys come in and do my carpet this week, but pretty much only one of them was working at any given time, while the other was out in the truck smoking. I asked em how many jobs they do in a day, they said they"d usually only do 1 on a job my size (96sq yd basment), but it was quite obvious to me that they could easily fit in 2 if they picked up the fucking pace a little.

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Lower turnover is kind of hard to measure the effect. Our skilled guys are still here. Last Winter, we were slow, but when we started to get busy, I hired more guys. And wouldn"t you know it, the customer complaints at that time came from the new guys. We are in a service business, and that"s not good. And the problems were stemming from them not being trained enough (so the job wasn"t done right).

As far as customers noticing it, you are 100% right. We get more positive comments from customers than negative, which is pretty rare in any business. We get customers calling in telling us that they use us and refer us because our guys don"t sit around on the job screwing around. Again, this is stuff you can"t measure, but not every thing comes to dollars.

About the only thing I can measure is that we do alot of volume, our competitors sales numbers have dropped in half, and we are netting good $. I constantly drum it into the guys, that in a recession, you have to give better service. The company that is the most efficient wins.