Adventures with lyrical - buying a business

rinthea said:

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.

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Maybe I haven"t made this clear, but the seller does base pricing on the customer"s neighborhood, job and age. If someone lives on a country club where the home prices are a million+, and they pay $30k a year to live on that country club, they get charged more. He won"t negotiate price with a customer once he gives them a price (which could be an opportunity for me given that we net $1 out of $2), but he does price discriminate.

I haven"t really changed how the seller prices things out. He actually came up with the bid himself. I asked him if it was too high, and he said he always bids this customer at $300+ an hour, and they always accept it. This particular job was bid at about $310 an hour, and the customer gave us the go ahead to do it (we did it today). The seller"s had some of the wealthier customers for years - and this customer amounts to about 40K a year in sales (or about $2k a month in profit to me).

The seller has pretty much done discriminatory pricing for the last 45 years. We have three buckets of clients: the middle class, the people in upper middle class/upper class, and the wealthiest 1%. They all have different pricing criteria. The middle class care about mostly price, but also want the job done right/on their time schedule/fully insured. The upper middle cass/upper class care a little about price, and more about having the job done right/on their time schedule/fully insured. The wealthiest 1% don"t care about price, but want it done right/on their time schedule/fully insured. So as we move up the income scale, we tend to charge more. We might bill a middle class customer at $150-175 an hour. The next group is at $225-250 an hour. And the wealthiest 1%, we bill at $300+ an hour.

The funny thing is that the wealthy people tend to not bitch about price, and are more apt to sign up for the job right then and there. The middle class is the group that tends to take a week and try to negotiate $50.

As far as where we add value, none of the competitors are fully insured. We pay out in insurance in a year as much as Doctors do for the business. None of our competitors have equipment like we do: our equipment ranges from $50K-100K apiece for the heavy stuff. The wealthier people tend to want a variety of stuff done, and the other 29 competitors aren"t equipped to do it. We are the largest, and our competition regularly sends us business for the stuff they can"t do. The wealthier people don"t want three businesses doing what they want done, they want one. Finally, these rich people want stuff done according to their schedule. They place a premium on being in control, and once they make a decision, they want it done ASAP. If there is a six week backlog, they don"t care, they want it done tomorrow. That"s fine - we"ll bump other people for you, but we want $300+ an hour. They pay for a sort of "VIP" treatment. Once of the guys that has thousands of acres told the seller that for wht he pays the seller, that he expected to be ahead of people paying less per hour and only getting work done once a year (or two). And since the "Big fish" are usually worth a day"s work and use us every month (versus your average middle class customer that might use you once every two years and ley you bill two hours), we will cater to you.

If anything, the seller follows textbook Discriminatory Pricing that we are taught in MicroEcon 101. I was taught that Discriminatory Pricing is the best way to make profits. We charge customers ccording to their budget. If the customer is in a poor area, and in a house that is 100K, and needs just the bare minimum, we charge as low as possible. We realize that with this type of customer, we are competing against smaller landscaping companies with no staff, overhead, insurance and equipment. It"s hard to get past $150-175 an hour on these people. But if we pull up to guy that lives in the most expensive country club in the state (we do a lot of business there), we charge more, because you have to be loaded to be a member there, and the homes are a million bucks.

We try to charge what each customer is willing to pay, but we don"t go to the people that want us to do less than an hour. The seller has done this for the last 45 years, and his customers are trained this way. When I asked the seller about why he should charge some of the guys that have millions and millions less than $300 an hour, he said that they"ve used him for years, and they are used to being billed this way.

Its kind of neat to see the economic principle of Price Discrimination (as a way to maximize profits) at work in real life.

I want more middle class customers, as there are more of them. They might want to argue over $50, but you can make that up in volume. Right now, I think that 50% of our customers are middle class, and the other 50% make 80K, 150K and 500K+ a year. The customer base is skwed more towards high-end customers. While the middle class customer might pay less, you can make a decent buck on them with efficient work scheduling.

Hebbin said:

What are your thoughts of the risks/rewards of managing a business versus other types of investments? For instance, you could buy stock in 5-10 publicly traded companies instead of concentrating in one startup. These companies would have greater economies of scale, longer track records, and audited financial statements. Instead of owning an apartment building, you could purchase REIT shares to diversify your real estate holdings.?

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You can do the numbers easy. I have about 100K of my own money in the business. Even with the ups and downs, I am netting $8K-10K a week. Looking at the historical averages for the stock market, at best I would net $250 a week. Basically, for the same amount of money invested, one hour of business ops is equal to one week in the stock market.

Hebbin said:

While I am still relatively young in the business world, I am trying to learn from the failure of the adults around me. It"s scary looking at the 40 year old fuck-ups hoping that payroll clears in time so they can make their mortgage payments.

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I think having the attitude of learning from others" mistakes is key. Let someone else make the mistake and pay the consequences. A few things I try to work on are:

1- Maintaining and presenting a positive attitude. HBS has some great research on this (in the area of Emotional Intelligence). As the leader, whatever attitude I have will impact my bottom line. If I am in a bad mood, it puts my people in a bad mood, and then they deal with customers in a poor manner, which lowers my sales dollars.

2- I monitor cash flow all the time. When I bought this business, I did enough analysis to know that it has the potential to lose $30K a month, or mkae 100K. The previous owner never tightened up in the Winter months. He"s had Decembers where he"s lost 30K. Traditionally, landscaping demand is soft in the Winter, and in Spring, Summer and Fall we have to beat customers away with a stick. I imagine we"ll break even or make a little this month. I have cut about 7K-10K in monthly expenses that the previous owner was just flat out wasting. This will pay dividends in the busy time.

My goal is not lose money in the Winter, while maintaining profits in the busy months.

3- I let my employees know they are working for me. I have seen businesspeople go bankrupt by letting their people walk all over them. In the last week, I have given feedback to everyone that works for me some changes I expect to take place. I don"t yell or scream, I say what I expect in a nice manner. Without getting too specific, there are two parts to the job. There is the part the requires heavy machinery and lifting, and then there is a part that requires an aesthethic eye. The first part usually pays alot more. We"ve had glowing comments on our big jobs (one was for $3400 and the other for 4K+), but on the little jobs that require aesthetics, we"ve had two complaints (one for $200 and the other for $340). So I congratulated the guys on the big jobs, and got on them about the little ones. Given than 50% of our business comes from repeats or referrals, we need to be careful and do the job right the first time.

Hebbin said:

There is definitely more room for growth with owning your business outright, but at the same time you run the risk of over levering and being crushed through a lack of diversification. Is it worth it in your opinion?

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Over levering is not an issue here. The bank would have allowed a price of five times earnings, but we bought it for about two times earnings. Generally speaking, if you can buy a business for less than two times earnings, there might be real problems with it. For instance, you can buy some franchises for less than two times if the franchise has a poor reputation (like the UPS stores) or you can get a car dealership for less than one times earnings (but the manufacturer needs to be bailed out).

I really do think owning the business is worth it. I"ve cut down my involvement in it to just 30 hours a week, and the staff is running it just fine. Eventually, I will cut down to two days a week, and look for other opportunities.

I don"t know why I wasted so much time working in Corporate America.

Divinefactor said:

Ive worked pretty extensively as a Landlord in the Hollywood area, if you have any specific questions you want answered, just ask, if you want some general information, I will make a little write up for ya.

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A write-up would be great (it probably deserves it own thread). I hear alot of landlords screaming in RL right now. I don"t know anyone with rental properties right now that claim to be making money - maybe I am talking to the bad landlords.

Sharmai said:

I read this thread and think "Wow all of this is absolutely amazing it would be awesome to be able to do this." but reality sets in and I realize there"s a reason why the top 1% make that kind of money.

So I have a couple of questions for you Lyrical. Is this the kind of thing that can only be done after many years of business school and/or having an MBA?

I"m 26 and hope to own my own business one day but I am starting slower and a bit later in just getting my initial experience. My background is in small physician office management (or lab management) and I can see owning one of those one day but if I wanted to save up a 100k with my wife to buy a small business is that something I should only really consider after getting a business degree or MBA?

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An MBA is nice, but not necessary. Of course I think getting an MBA from a t1 or t2 school is worth it - I already got one. This is nothing but confirmation bias from me.

I do think that getting business training in the core areas is important (Econ, Accounting, Management, Finance, Ops, Law). One thing I have seen about business people that don"t have college degrees but learned through hard knocks is that they don"t have a huge decision set. They usually have the same few answers that they learned through experience or from others. And a lot of times, since they don"t have the knowledge themselves, they pay CPA"s, Finance Advisors and Lawyers out the wazoo for stuff that they should be able to do themselves.

P.S.: I didn"t save 100K, I invested in mutual funds until I had the jack.

Mimirswell said:

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%.

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.

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It seems like we are starting to get more hits from the Internet this week. I have been having the secretary ask customers where they found us. One thing I learned in Corporate America is that if you are spending money in Marketing, you better have some accountability. So if you are doing an ad campaign, you should measure what your customers are saying. Up until now, 0% of our calls from customers have been from the internet. This week, 20% of customers are saying they are using the internet. This is a good thing, these are new customers.

Repeat and referral customers are our bread and butter, but I want new ones. Part of the reason I bought this business (even in the down economy) is that I believe the previous owner was leaving "money on the table."

I still see a ton of opportunity, given that the seller has ignored the internet, he"s not managed expenses in the Winter, he"s had too many people on staff, and there are also other lines of landscaping that we could extend into.

One thing I am learning about internet advertising is that it is an iterative process. We put through the changes, wait weeks for Google et al to pick them up, and then reevaluate. Hopefully we"ll get the internet advertising fine-tuned by Spring.

Given this economy, I think it is prudent that a business owner look at ways to make things better. We"ve cut $7-8K out of our monthly budget, but have doubled our advertising budget (from $400 to 800 a month). The way I look at the internet is that these are new customers that won"t use the yellow pages, and that they are plus business. Given our high profit margins, the two customers we"ve picked up off of the internet will pay for our entirely monthly internet budget (although this might not be the correct way to look at it, given that we are paying per click).

Divinefactor said:

Ive worked pretty extensively as a Landlord in the Hollywood area, if you have any specific questions you want answered, just ask, if you want some general information, I will make a little write up for ya.

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I have this fantasy (or so current landlords tell me) that owning rental properties is easy profit in four steps.

1- Find a rental property.

2- Find good tenants.

3- Find a rental manager, salesperson and maintenance person.

4- Profit from passive income and don"t do any work yourself. All you have to do is count the money.

But I talk to people who do it for a living that say it is much harder than this. One guy said he was done renting, as his tenants would do more damage in dollars than he would receive in rent. And I know someone who bought a commercial real estate strip (renting to businesses) that lost her ass and had to sell or go bankrupt.

Still looking for the write up, dude.

Divinefactor said:

Sorry I am in the middle of finals at the moment, i was going to chime in real quick and explain why there is an application fee as thats quick and easy.

But I can tell you with 100% certainty that its not profit in 4 easy steps

The application fee exists because someone actually has to go through your application and look at it. My experience is in several locations in Hollywood so it may be a bit skewed... However, in order to fill an apartment, I would have to go through at least 10 applications per apartment. So that means I have to run 10 credit checks as well as take the time to contact previous landlords. Charging 55 dollars to account for actual time spent looking up the information, plus having an account to run credit checks is entirely acceptable to me and has become pretty standard around here.

One thing I did do with application fee is if the person signed a lease, I would take the application fee out of the first months rent (along with any other move in bonus)



As for making easy money... it can be easy. Just like you can play the lottery and become a millionaire overnight.

It requires alot of work, unless you want to get a management company to take a % of your profits.

If you dont get a management company... you will need to be in charge of maintenance and be on call... all day everyday, it is absolutely horrible to be called up by a drunk tenant at 3am in the morning to unlock their apartment.

If you have a Super (which I highly advise if you dont get a management company) you lose out on a one units rent, which isnt as bad as the % the management company takes. In rental apartments you are really trying to balance your profit with your own time.

Things to look for when you are purchasing:

How many years will it take for the unit to pay for itself. In Hollywood, anything more than ten is worthless. How many units does it have? The more units you have... the more problems you will have. What level of apartments are they? (Luxury, Standard, Slummy etc) Luxury apartments in Hollywood are great, renovation used to be ridiculously cheap, less than 20k to renovate a slum apartment into luxury. What is the average time it has taken to fill a vacancy? Whats the population growth of your city?

We had an apartment building where the rent for a 1 bedroom was 900 a month at slum level. When the tenant finally moved out, we renovated it for about 14k, the renovations took approximately 2 months (had other projects at the same time) The DAY it was finished we had someone move in paying 2,200 a month. Luxury apartments also draw a different type of tenant, this is the type of tenant you want. They wont destroy the surroundings and will generally be able to afford anything they do break. However, they are also the ones that will call you at all hours of the night when a neighbours dog is barking, or they clogged their toilet.. (invest in a good super!)

I have never had an issue with sales, but I think that is mostly due to the area I live in and the style of apartments we rent... it was VERY rare to have an apartment vacant for more than 2 months. And aside from putting upcoming avialability in westsiderentals (local craigslist type system for apartment rentals) and a sign on the corner of the property, we have never had any real type of sales/marketting.

More things on tenants... depending on where you live, it can be a god damn nightmare. Tenants have a ridiculous amount of rights in Los Angeles County and depending on where they file anything they have two different set of rights (this is entirely dependant on where you live, Hollywood falls under 2 sets of court jurisdiction) Also, depending on the judge you get... god help you. We had a tenant with stellar referral, high paying job in the music industry... pays first month and security deposit. Never pays again, have to wait for 3 months of past due rent, which never came... gave him notice... ignored... gave him pay or quit, ignored... took to court, judge sided with giving him more time... Meanwhile he owes close to 10k... huge hassle as I had to appear in court every single time. In the end, gets forcibly evicted, still paying back money he owes.


posting what I have now, in case things get messed up, will edit or add more posts to answer any questions this part spurs

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Is renting more stable, cash flow wise, compared to owning a business? How about time-commitment wise (compared to owning a business). With all the nightmares some landlords tell me, I almost think I"d rather own a 2nd business, than to own several rental properties.