Buying a Business

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trashman
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Buying a Business

Post by trashman » Mon May 16, 2011 7:42 pm

A few months ago, I started a curbside trash pickup company. Basically, households without municipal trash pick up hire me to pickup their trash on a weekly basis. I am now at the point where I am making a profit (I currently work part time with my father for additional income).

The other day I came in contact with another small trash hauler like me who expressed interest in selling his route to me. His route brings in revenue of about $50K. If I were to buy this route I figure I could turn it into a $40K profit. My new costs would be a $3K/year dumping fee and about $7K/year in gas. I already have insurance, etc. so these would be the only new costs. Obviously, I might have to spend more in maintenance, but just keeping things simple. The guy wants $50K for the route - I would not incur any of his liabilities or any of his assets, just his customers.

I have a good friend who has been wanting to invest and would be willing to give me a loan. We have not talked terms yet, but I'm assuming I would pay him back with about $20K for three years.

I am still doing my due diligence (talking to accountant, lawyer, etc.), but wanted to get some common sense thoughts from some Bogleheads! Thanks in advance!

KyleAAA
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Post by KyleAAA » Mon May 16, 2011 7:57 pm

On the surface of it, it sounds like a reasonable opportunity. Only you know all the details, though.

gsmith
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Post by gsmith » Mon May 16, 2011 8:57 pm

My new costs would be a $3K/year dumping fee and about $7K/year in gas.
It sounds like you're valuing your labor for nothing, which would skew the numbers.

I agree with KyleAAA, but you should value your own labor.
The best run small business I've seen was a maid service where they hired someone for $x, and be paid for $y by the customers.
If you think like that, you can better value your own business, as well as take more vacations/expand beyond your personal labor capacity.

billern
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Post by billern » Mon May 16, 2011 9:09 pm

How much work is it to service $50K a year in hauling fees?

Would you need to invest in a bigger truck, hire help to do the work efficiently, and how many more hours of your time would it take to do the additional work?

1x revenue is likely a high valuation especially when you can probably increase your business through advertising and other means that would cost you less than $1 for each dollar of revenue.

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dm200
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Post by dm200 » Mon May 16, 2011 9:17 pm

I would independently evaluate every claim about this business before making any commitment, financially or otherwise. I have heard some real horror stories about folks who have purchased what seemed to be a very viable business that turned out to be a real disaster.

rocket
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owner financing

Post by rocket » Tue May 17, 2011 6:23 am

I would consider making an offer to buy BUT with (prior) owner's financing. If there is something wrong with the deal, he will not accept owner financing. If it a good deal for both of you, he will accept.

Mr Grumpy
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Buying A Business

Post by Mr Grumpy » Tue May 17, 2011 7:06 am

I feel for you. Many years ago (1990) I sold a small, one man, service business. There was no way to navigate the parameters of valuation. The business had an equipment component of known, assessed value (which could be negotiated), but the revenues were another matter. Business brokers didn't want to be bothered with a business of my size. The way I eventually approached it was the current value of equipment and 65% of yearly revenues.
I had done retention studies during the normal course of business and found that 65% to be real. I was spending a fair amount on advertising and tried to figure out how much a repeat customer cost me versus a new one. Even though 1990 was a pre-computer age for most of us, I kept a complete set of books and could verify all expenditures and revenue and was willing to open up the books to any serious prospect (names etc., blacked out on copies)-I would weigh that willingness of openness on the part of the seller very heavily.
I was in a very competitive business and realize that your situation my be more monopolistic for lack of a better term, but the "gardener" example is a valid one Word gets out and you could spend a lot of money for a weak customer list.

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TrustNoOne
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Post by TrustNoOne » Tue May 17, 2011 7:13 am

There has been some great advice so far - esp. the post about verifying everything. A couple more points. 1.) What stops you from just soliciting his customers now? 2.) You must get him to sign an agreement not to compete against you in the area he now serves. Otherwise, you buy his customer list and he takes them back. 3.) What other competitors are there in the area - do you know if he is at risk for losing customers to someone else.

Finally, I would suggest you consider working out an owner financing deal with him if you buy. (And I would negotiate the 50k as much as possible.) I'd suggest you work a very simple deal where you pay him x$ per month based on a simple formula (e.g. so much per customer on the route) that can easily be verified. That way if the business fails for some reason you are not left with a big liability.

Good luck.

Hedonic Regression
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Post by Hedonic Regression » Tue May 17, 2011 7:34 am

Why not treat his list more like a marketing proposal. Unless he has multi-year contracts with these customers that he is allowed to pass over to you, it's really just a customer list where his endorsement may help win customers over.

You could pay a nominal fee (or nothing) for the list, plus money for each conversion. Send a letter out saying that the previous hauler is retiring / moving on and recommends you as his replacement, how there'd be no interruption of service, etc. Any endorsement he can give will increase the conversion rate and hence his profit as well as yours.

That puts you two on the same side in case signing up the new customers is not a sure thing.

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Post by imagardener » Tue May 17, 2011 8:37 am

trashman

No way is his business worth $50k. I was a small business owner with three employees who tried to sell our business before retiring and know the in's and out's of doing so.

The suggestion to have the seller finance the sale is spot on.
The price? It should be a fraction of the "revenue". Revenue means nothing, that is the top line. The number that means something is the bottom line, what is the profit after ALL expenses including depreciation are deducted.

Off the top of my head a reasonable offer would be to split the profit for 1 to 2 years and the seller gets nothing upfront. You are basically "buying" his list of current customers which is not locked in.
You will need to see his taxes filed for previous years. If he says he doesn't declare all his income you will know the type of person you are dealing with right there.

Small businesses run by sole/partners proprietors, sorry to say, are rarely sold. There's a reason for that.

We ended up being very glad NOT to sell our business because it would have kept us entangled for little money for many years after retirement.
(Don't tell the seller this haha).

robert2008
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Post by robert2008 » Tue May 17, 2011 8:54 am

Also, I don't know what the trash hauling business is like where you are, but where I live (NYC) the trash hauling business is notorious for corruption (to put it mildly). You'll want to make sure there are no "families" that sell "insurance" you'll need to buy to protect yourself to be able to service the route.

exigent
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Post by exigent » Tue May 17, 2011 9:26 am

When valuing this business, you need to consider not only costs like licensing and gas, but also the value of the labor required to generate that revenue. In that light, $50k in revenue does note equal $40k in profit.

Also, does he have a formal business relationship with his customers? In other words, does he have a company name and send them invoices for services rendered? If so, then the transition will be more transparent to the customers, and there is less likely to be attrition due to the changeover.

You will also, of course, need to explore a non-compete agreement so he doesn't sell you his list and then simply get his customers to continue on with him under a different business name.

trashman
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Post by trashman » Tue May 17, 2011 3:41 pm

Thanks for the replies everyone.

One of my big concerns is that there is nothing locking these customers in - just like many have mentioned. His route includes 4 trailer parks. For me to even consider a serious offer, I will make sure these properties are locked up under contract for several years. I will also want a no-compete clause. But as for the other customers, there is really no way to lock them in unless I can get them to sign contracts. Companies around here do not make customers sign contracts so that may drive many of them away.

Can anyone explain seller financing a little more for me? I like the suggestion about having the guy send out a letter saying he is retiring and recommends me as his replacement. If I pay him based on the number of conversions, this helps to make sure our interests are aligned.

Any other advice is appreciated!

TRC
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Post by TRC » Tue May 17, 2011 7:19 pm

Seems like you already have a decent business established. Why not spend 5 or 10k on an advertising campaign instead?

trashman
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Post by trashman » Tue May 17, 2011 7:37 pm

Yes, you are right, my profit would not be $40K. What I meant to say is that my income would be $40K. Not including the loan repayment, I would be able to reap an additional $40K. I would be able to perform all this work myself, I would not need to hire anyone if I were to purchase the route.

As far as the marketing vs. buying the route goes, marketing would be a much, much cheaper way to get clients. The issue is the time to get new customers via marketing. From my experience, I am attracting about 2-4 new customers per week. I have relationships with a couple other small companies in proximity to me and they say that is about what they get too. I have done postcards, door hangers, flyers, etc. all with poor results. My most effective tool has been Google AdWords. So while this may be cheaper, I will have to wait a long time until I reach the number of customers I would get if I acquire this route.

exigent
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Post by exigent » Tue May 17, 2011 9:09 pm

I'm only partly kidding when I say this... What about something like Groupon, or whatever local clones happen to be operating in your area (we have several). You could offer something like a month (or three) of service for half price. I bet it would be more effective than door hangers, flyers, or even AdWords.

trashman
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Post by trashman » Tue May 17, 2011 9:34 pm

My initial postcards had a "sign up and get one month free" offer. My second round of door hangers did not. I did not notice any difference in their effectiveness. I will check out Groupon.

trashman
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Post by trashman » Sat Jun 11, 2011 12:53 pm

Hi Everyone!

Thanks for all your helpful responses. I wanted to provide an update and try to get some more advice.

So after looking over this company's tax papers, the revenue is about $50k and the sellers discretionary earnings are about $30k (in my first post, I used the term "profit", but SDE is what I meant).

As far as synergies go, the only new costs I would incur would be a dumping fee and gas. This comes out to about $10k, leaving me with a number of $40k in SDE. I would not need a new truck or have to hire anyone. More money in maintenance is a number I have left out for simplicity reasons, but I realize there could be small unexpected costs.

We have talked about a sale price of $47,500 with seller financing over two years with an interest rate of about 8%. While the asking price is almost 1X revenue (a little high) the SDE multiple is about 1.58 based on his numbers and about 1.2 based on the synergies I anticipate (these multiples do not include the interest on the note).

Anymore thoughts or suggestions?! Thanks in advance! (And yes, I have been seeking other's advice, but always like to hear and read what common sense Bogleheads have to say!)

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Post by tripleb » Sat Jun 11, 2011 2:34 pm

Unless this guy is in the mafia, I would just spend $10k on marketing, and offer the equivalent of $10k in discounts to the new market customers. That will be $30k cheaper than his price and will accomplish much of the same.

I was just kidding about the mafia joke. There is no such thing as the mafia.

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jeff mc
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Post by jeff mc » Sat Jun 11, 2011 3:11 pm

Hedonic Regression wrote:Why not treat his list more like a marketing proposal. Unless he has multi-year contracts with these customers that he is allowed to pass over to you, it's really just a customer list where his endorsement may help win customers over.

You could pay a nominal fee (or nothing) for the list, plus money for each conversion. Send a letter out saying that the previous hauler is retiring / moving on and recommends you as his replacement, how there'd be no interruption of service, etc. Any endorsement he can give will increase the conversion rate and hence his profit as well as yours.

That puts you two on the same side in case signing up the new customers is not a sure thing.
i would do exactly what HR suggests... alignment of incentives, sliding scale of cost based on getting actual customers from his route. if he doesn't like the sound of paying for each converted customer, then something is fishy. either he is losing customers already, has overstated his client base, or wants to take your money and run, leaving behind only a $50k spreadsheet of names and addresses, which may or may not be worth it.

don't make the "all or none" if it doesn't need to be.

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Post by leonard » Sat Jun 11, 2011 3:42 pm

Seems the choices are:

1. undertake a time consuming, intensive, and expensive analysis of the particulars of this persons business. Also, undertake the risk that his customers may not come over to you or stay with you. Also, the very notion of monitoring - let alone enforcing - a complex contract with "incentives and a sliding scale and seller financing" sounds like a pay off for the lawyers when someone doesn't comply to this complexity. Gives me a headache just thinking about it.

Or.

2. Simply market to his existing customer right now, w/o incurring any of the costs above.

In this analysis of this business, it really seems there is nothing to "lock in" the customers if you buy that business. So, why not take advantage of that fact by skipping buying the business and just marketing aggressively to them now.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

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Post by leonard » Sat Jun 11, 2011 4:03 pm

jenny345 wrote:
Also, the very notion of monitoring - let alone enforcing - a complex contract with "incentives and a sliding scale and seller financing" sounds like a pay off for the lawyers when someone doesn't comply to this complexity.
I don't think so. Paying for business leads is pretty common. Many web site owners make their livings this way.
this isn't paying for leads, it is paying for the business. So, the analogy of paying for click throughs doesn't really hold up.

Also, there is significantly more monitoring with incentives and sliding scales and seller financing. If i pay a flat fee, I never have to monitor a thing or talk to the seller again. Are you seriously saying that the more complex contract is the same amount of work as a flat fee payment and the seller goes away? I want to hear how that works.

Not to mention the fact that if you are running a busines, you want to focus on executing that business. Not backoffice monitoring of contractual terms.

Finally, the whole problem with this proposition is that the customers have not reason to stick with the buyer. That also means they have no incentive to stick with the seller. So, just go after the customers. Also, these "leads" aren't secret. Just take a look at the guys route and you know where the "leads" are. No need to pay for those.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

leonard
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Post by leonard » Sat Jun 11, 2011 4:25 pm

jenny345 wrote:
Also, there is significantly more monitoring with incentives and sliding scales and seller financing
I don't think anyone is arguing with the seller financing. Trashman has to pay for marketing either through the current owner or by distributing flyers, Groupon, Adwords, taking the time to go door to door, paying a sales person to go door to door, etc.

HR just suggested treating the transaction like a marketing proposal, not a business sale. Why not? Marketing isn't free even if you go door to door yourself. There is still the opportunity cost of your time. Under HR's proposal he only pays for converting customers. If Trashman pays for Adwords he is out the money whether the ad clickers become customers or not.
The biggest benefit of paying for leads - in real life or online - is that you wouldn't get to these customers otherwise. however, the buyer could simply follow the guys truck one time and see precisely who those customers are, where they live, and whether or not they want his services. He also already knows they can switch.

Why precisely would I pay for these leads when I can get them for free?
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

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Post by leonard » Sat Jun 11, 2011 4:46 pm

jenny345 wrote:
Why precisely would I pay for these leads when I can get them for free?
Following his truck is not = getting customers for free. What specifically comes next?

So Trashman follows his truck, which takes time to do. He is not picking up trash during this time or earning money in any other way.

The current owners sees this and instead of endorsing Trashman he tells his customers he's heard the guy is unreliable and doesn't show up half the time. Then what?
obviously, the "following the truck" was a joke. obviously, the buyer knows what route he is paying for and how many customers.

But, we have alread established that buying the business also does not guarantee the customers. So, again, why pay the money if there is no guarantee.

And competitors can say anything about any of their competitors. The seller of this business may be saying that exact thing about the buyer right now. Consumers see right through that usually. that's the risk of competing in business - it isn't unique to this transaction. Personally, I think a business should spend customer time discussion the value they can add to the customer, rather than what their competitors don't add. Time spent bashing competitors indicates to me that the business has ran out of positive things they can say about how they add value to me, the customers. That in turn makes me not want to do business with them. Plus, it is common knowledge that competitor bashing by name unprofessional. Again, I am not inclined to do business with unprofessional service providers.

Plus, how many conversations have you had with your trash collector? Let alone conversations where bashing competitors comes up? how realistic is that downside scenario anyway?

Bottomline: spending money on this business is a waste of money and the time spent to monitor compliance the transaction is a waste as well, versus just hustling to win the other guys customers directly.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

leonard
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Post by leonard » Sat Jun 11, 2011 5:27 pm

jenny345 wrote:
So, again, why pay the money if there is no guarantee.

Under the marketing suggestion, Trashman would only pay the lead referral after the new customer had signed up for his service. If no customers signed up, he wouldn't have to pay any money. Just like realtors will often pay a bounty if you send them a new customer who lists with them.

A repiping company we used offered us a $200 bonus for referring new customers, i.e. neighbors with other aging money pit houses who actually signed contracts to have their houses repiped with them.
The point we disagree on.

It makes sense to pay for leads that you wouldn't have otherwise.

I agree to disagree. Thanks for the discusssion.
Leonard | | Market Timing: Do you seriously think you can predict the future? What else do the voices tell you? | | If employees weren't taking jobs with bad 401k's, bad 401k's wouldn't exist.

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