Tuco said:
Finally read the thread, thanks for posting it.
How much debt do you have now, and how much will you have before you buy another business?
No problem. The process was pure hell, but maybe someone else can learn something from my errors and save six months" if they decide they want to do it themselves. After going through a gruelling year of getting jerked around, I wouldn"t wish it on my worst enemy.
I will be open about my debt. The business is trending to do 350-400K this year. I paid 650K. So that is less than two times earnings (most businesses sell for two to three times earnings). Last year, it did 300K. The sales price was based off of last year. While we were in negotiations, the seller had some two killer months where he was netting 50K. He actually had four months this year where he netted 50K each month. The seller could have actually tried to raise the price (because the purchase contract had enough loopholes), but the broker didn"t want to push it, as he had other deals where the seller thought the current year would be better, so he raised the price, and then the buyer walked.
Right now, with 10% down, I owe about 600K. I took out 20K from my 150K line of credit because some customers pay late. Its a classic b-school analysis. You have a business with a strong cash flow, but customers take up to 90 days to pay. You have to account for the cash flow you are outlaying for business ops in those months. Some people get into business, and don"t account for this. A friend of mine bought a business in a non-bank deal (the owner financed the deal). But he forgot about the pesky little thing called working capital. They are making money, but forgot that customers pay later, and they put every penny into owner financing.
Some people forget that you can"t pay bills with accounts receivable, you have to find ways to convert your A/R into cash.
Having worked for Corporate America for so long, I have known people that have made the jump and gotten into trouble, so I try to learn from their mistakes. I monitor my cash flow pretty close. Customers get billed pretty quick. When you go from a corporation that has billions of dollars in resources, to being a small business owner, you have to make adjustments. We just don"t have the capital that we are used to having. So far, we"ve done a little over 50K in sales in last three weeks, yet 80% of our customers have paid us in the form of checks. We only have about $9,500 in receivables right now. At this rate, I am hoping to be able to not draw down any more from the credit line and have the business be able to live off of its own operations. Typically, this is the slow time of year for the business, and we are struggling to keep one week of business on the schedule. We are still netting about $5K a week, but unfortunately, people start to think about Thanksgiving, Christmas and New Year"s more than they do about landscaping. The business typically loses money/hovers at break-even in December and January, and makes money the rest of the year. In the Spring and Summer months, we"ll have six weeks of work backlogged, and then you have different struggles (like trying to keep customers on the schedule after they"ve waited a month).
I also realize that most b-school students ignore limited resources. In my program, a professor gave us three projects and told us that we only had money for one, so pick the best one. The majority of the class tried to vote to do all three. B-school students are notorious for trying to spend way more than even banks will lend.
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After paying ourselves we have 30K put aside for buying a new business. Another few months, we"ll have the down payment to buy another business this size.
I really hope that it won"t take another year for me to find another good business that will pass the strenuous due diligence I will put it under.
I am also starting to think that as the recession goes longer, than we"ll start to see business valuations come down. Right now, everyone wants their pre-recession 2007 price, but after a year"s worth of bad earnings, hopefully they"ll lower their price. A problem is that most businesses are down 20% this year, yet they still want three times earnings, which for alot of businesses equates to four times earnings. At four times earnings, unless there is a huge cash flow, most banks won"t want to finance the deal. Oddly enough, if you have a really high cash flow, than the debt service you pay to the bank becomes smaller as a percentage of the NOB (net owner benefit). In other words, if you pay 200K for a business with an NOB of 50K a year, it hurts your net way more than if you paid $2 million for a business with an annual NOB of 500K.
I do know that the
Millionaire Next Doortalks about how the more mundane a business is, the more profitable it tends to be, because it doesn"t invite as much competition. Most people ask what type of business I own, and when I tell them the specific type of category, their eyes glaze over. Its boooorrrrriiiiingggg. Yet we bill our customers $225 an hour, and in the peak times, run two crews both billing at a combined rate of $450 an hour. But our marginal costs per hour (mostly labor, gas and equipment repairs) in the peak ties are just a little over $100 an hour.
