Adventures with lyrical - buying a business

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Darph_sl

shitlord
45
0
Before jumping in and diversifying your portfolio, let"s talk about your current company"s growth potential and how you can use your next acquisition to expand your current enterprise.

First, growth potential. Don"t hire people to pass out coupons and fliers if the house is packed every night!

To understand a business"s growth potential, we have to first calculate your practical capacity, and estimate the percentage of capacity that your business is running at.

If you"re less than 100% booked solid during your seasonal peak (taking into account tapering into the season and other business specific tangibles that I don"t know about (i.e. a restaurant has to take into account the hour of the day and day of the week) then good news! You have growth potential.

We can calculate our practical capacity, and what we call "maximum run rate" which is the maximum amount of cash you can pull in with your current resources, such as staff, equipment, and hours worked (and other things like travel time between jobs, etc).

Once you have your Maximum Run Rate, let"s say $100k per month, then you can not only understand how much money you"re not making, but you can use it to understand why you"re not making it, and most importantly,how muchdoes it cost to grow your revenue by a given amount.

It could be that you need to hire a sales person or additional staff and equipment, but you"ll go into these types of investments understanding what money your spending money to make.

So let"s talk about how you can use your next acquisition to expand your current business"s revenue stream.

One of the hardest parts of starting a new service based company is building a client base, and so you can approach a business acquisition as simply an acquisition of clients that may consume your other business offerings.

The beauty of this type of acquisition is that even if it"s a low margin business, when you monetize its clients by selling your other, high margin, business"s services, you can stand to net a lot of money.

An example: You own the "East Side Lawn Mowing Co" you make $500k profit a year off of 500 houses, but only work at 50% of your capacity. You buy up the "West Side Pool Cleaning co" who makes $100k profit per year but is serving 200 houses at 90% capacity across own.

Now you have 200 sales leads to make lawn care contacts with. Let"s say that this nets you an unrealistic 50% conversion rate, that"s 100 houses that are changing their lawn care needs over to you, generating an additional $90k profit per year assuming (after offering them a 10% discount!) Now, assuming your business model scales, you"re still only at 60% of your maximum practical capacity.

You"ve also reduced customer churn by giving them a one stop shop.

Lastly, I think that your employees thinking like business men is perfect. It"s also a lot easier to find employees like that in small businesses, especially manual labor, because the business model is simple. Show up, perform a specific task, company gets paid, company pays you.

As a manger, I make it my top priority to challenge employees to think as if they own the business. If they think like their paycheck depends on every transaction, then everything else falls into place and innovation happens.
 
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Darph_sl

shitlord
45
0
rinthea said:
Ill tell you the sinister part. The economy is fucked and that disclaimer that says "past earnings are not indicative of future earnings" is relevant now. Even if these people are telling the truth about their business history, it wont be like that in the future most likely.
Perhaps in business that deals with the super wealthy as clients this is not so much a problem. But business elsewhere is struggling. Earnings and numbers from 5, 3 or 1 years ago are no longer relevant. Expect things to get worse and stay bad for years.

Having said that, there is also a lot of forced sellers who are having their credit lines cut and can not refinance debt trying to get rid off stuff while they still can. Perhaps there are opportunities here.

So yeah, its a mixture.
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Actually, my Dad does custom wood work for the super-wealthy. Trust me when I say that they"re the FIRST people who cut back on spending, at least until prices hit rock bottom.
 
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Darph_sl

shitlord
45
0
Lyrical said:
This is the entry that I pulled from wikipedia last year when I was looking for recession proof businesses. My wife worked for Careerbuilder, and they sent this post to everyone in the company. They were told to target these types of businesses and to try to sell them job postings/HR services, since these companies still go pretty strong in recession. It helped me make the decision on buying business that I did, as we fall in the category home renovation/improvement. People want their property to look right, and a properly landscaped yard can get a 20% higher sale value. So when real estate is dominated by buyers, sellers are more apt to spend $$$ with us to try to sell their house.

Here is a blurb from the email. I am not sure I agree with all of these. Any other business I look at is going to be a defensive play, it won"t be the type of business that is easily swayed by discretionary income.

"Recession-proof industries

Some industries are considered by economists as recession-proof industries. Goods and services produced by theses industries have a low income elasticity of demand and thus business involving these goods remains relatively stable despite the fall in discretionary income that occurs during an economic recession. These industries are in contrast to those that produce high priced durable goods and luxury goods such as automobiles and jewelery. Most recession proof industries produce soft goods which are necessities. Corporations historically associated recession-proof industries have included Kraft, Procter & Gamble, and Gillette.

The reason these types of companies are often called recession-proof is because they produce and sell products that consumers use regardless of their economic status or level of income. Men and women need to shave no matter what happens in the economy, families need to wash their clothes and feed their children.

The following is a non-definitive list of recession-proof industries:

Medical Services / Health care
Pharmaceuticals
Necessities: food/grocery stores/chains
Cosmetics
Education[1]
Entertainment
Home & vehicle repair & maintenance
Home renovation / improvement
Debt collection
Tax preparation / simplification
Career/Job search/Life coaching
Energy
Electric
Oil
gas
Security/Alarm services companies
Weapons industry
Vices
tobacco
liquor
Adult related entertainment"
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Tony Soprano: Sil, break it down for "em. What two business have traditionally been recession-proof since time immemorial?
Silvio Dante:Certain aspects of show business and our thing
 
Shonuff

Shonuff

Mr. Poopybutthole
5,538
791
Darph said:
One of the hardest parts of starting a new service based company is building a client base, and so you can approach a business acquisition as simply an acquisition of clients that may consume your other business offerings.

The beauty of this type of acquisition is that even if it"s a low margin business, when you monetize its clients by selling your other, high margin, business"s services, you can stand to net a lot of money.

An example: You own the "East Side Lawn Mowing Co" you make $500k profit a year off of 500 houses, but only work at 50% of your capacity. You buy up the "West Side Pool Cleaning co" who makes $100k profit per year but is serving 200 houses at 90% capacity across own.

Now you have 200 sales leads to make lawn care contacts with. Let"s say that this nets you an unrealistic 50% conversion rate, that"s 100 houses that are changing their lawn care needs over to you, generating an additional $90k profit per year assuming (after offering them a 10% discount!) Now, assuming your business model scales, you"re still only at 60% of your maximum practical capacity.

You"ve also reduced customer churn by giving them a one stop shop.
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Nice line of thinking. It is definitely one that I struggle with - how to add new services. We are going to do about 110K in sales this month, which is the most that the eight employees can handle. They are working 12-13 hours a day, six days a week right now, and that is too much. I"ve now put it to a vote three times now (whether or not they work six days a week), and every time, they vote to work six days a week. We have lots of heavy power tools, and if the guys are tired, there is a risk of them getting hurt. So I"ve told them we are going back to five days a week, whether they like it or not.

The problem with what we do in landscaping is that it is all high-end stuff. And because of this, we are charging $225-300 an hour. And since we are charging this, the laborers are paid very well. We pay them double the going rate of the laborers in the market. We aren"t doing things like mowing lawns. I don"t think the guys will let me pay them lower for lower end types of jobs like mowing lawns. If I am paying a guy $18 an hour for our core business, he"s not going to want to work for $8 an hour mowing lawns (unless there is nothing else to do). And in the peak months, there is no time to do anything else but the high-end stuff. Like now, these guys are working insane hours just to deal with our core business.

It might be best to do something else in the off-peak times (Winter) to keep the guys busy. This winter, the guys worked on the weekends as farm laborers, and I don"t think they were getting 1/3 of what I pay them. It is pretty seasonal work, and I think I need to find ways to extend the season, or find substitute work for them.
 
Shonuff

Shonuff

Mr. Poopybutthole
5,538
791
Darph said:
Actually, my Dad does custom wood work for the super-wealthy. Trust me when I say that they"re the FIRST people who cut back on spending, at least until prices hit rock bottom.
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I"ve found it to be the other way (but of course, I am still new to owning my own business). The middle class customer started dissappearing towards the end of Nov, was totally gone in Dec, and starting calling towards the end of Feb. For about seven weeks, at least 80% of the sales came from high net worth individuals. The rich folk never stopped buying.

The big difference this month is that we had a billionaire call and sign up for a job. I went out with the foreman, and the estimate took three hours to run, as we walked five acres with the guy. He"s down to earth, and one of the only super high net worth customers we have that actually manage their estate themselves, instead of having a crew of handlers. He looks like any other middle class guy, and his house is nothing special. He just owns alot of land, and he doesn"t like anything out of place on it. He wants every bit of his 13 acres manicured. Anyway, the estimate ended up being just short of 22K. I"ve never done an estimate that high. And then after that, he has us run two more estimates for a total of 11K on his other property. Add that in with the middle class customer coming back (even if we can barely get $200 an hour), and we"ll do 110K of business this month. There is just a lot more of them, even if their jobs only are $400-800 apiece.
 
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Darph_sl

shitlord
45
0
Lyrical said:
Nice line of thinking. It is definitely one that I struggle with - how to add new services. We are going to do about 110K in sales this month, which is the most that the eight employees can handle. They are working 12-13 hours a day, six days a week right now, and that is too much. I"ve now put it to a vote three times now (whether or not they work six days a week), and every time, they vote to work six days a week. We have lots of heavy power tools, and if the guys are tired, there is a risk of them getting hurt. So I"ve told them we are going back to five days a week, whether they like it or not.
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Nice, I"m glad things are working out for you.

You sound like a great boss to work for.

If your employees want to work Saturday, let them come in. Have 1 or 2 jobs lined up (so they can be done by noonish) and then have a bbq and beer lunch then send em home.
 
Elerion

Elerion

N00b
735
46
Gauss said:
It"s mildly amusing to me seeing shit that I learned in signal processing and quantum mechanics has a different name in finance (we call it correlation). Statistics is ridiculously useful in so many areas.

Very interesting thread, by the way. I gobbled it up even though I have no real ambition to own my own business.
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Yeah, beta is very similar to correlation coefficient.

Where correlation coefficient is:
Code:Corr(a,b) = Cov(a,b)/(Stdev(a)*Stdev(b))Beta is:
Code:Beta(a) = Cov(a,b)/(Stdev(a)*Stdev(a))(with a being portfolio and b benchmark)



Meaning:

Code:Corr(a,b) * (Stdev(b)/Stdev(a)) = Beta(a)andCorr(a,b) * (Stdev(a)/Stdev(b)) = Beta(b)
Unless I"m too tired and botched that up. 55 hour work week so far, one day to go, zzz.
 
Shonuff

Shonuff

Mr. Poopybutthole
5,538
791
Darph said:
Nice, I"m glad things are working out for you.

You sound like a great boss to work for.

If your employees want to work Saturday, let them come in. Have 1 or 2 jobs lined up (so they can be done by noonish) and then have a bbq and beer lunch then send em home.
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I don"t know that I am a great boss to work for. I remember what it was like to work for some pricks, so I try to not be too much of a prick.

My secretary just told me that she"s going to kill the guys if they keep fussing at her. They are liking their checks (my Foreman and other crew leader will draw more pay this month then I will), so they keep grinding. They still want to work this weekend, but they need to be sitting at home. They are sounding a little burnt out. As someone who has worked crazy hours before, I know firsthand that you can be burnt out and not even know it.

With two reporting days to go in the month, we have done $98,250 in sales with a profit of 62,400. We just may break 70K profit this month, with what the Foreman has scheduled out for the next two days. I am thinking that we need to have a day for maintenance, as we"ve done about 130k sales in the last 4.5 weeks. The equipment has been running non-stop, and so have the workers.
 
Shonuff

Shonuff

Mr. Poopybutthole
5,538
791
This thread has been great for me - since I still can"t tell anyone in my personal life that from Jan 1 to June 30 of 2009,we"ve done $478, 805 in sales, and $183,175 in profit(and that"s after I made some adjustments downward for net profit, and donated almost 20K to local charities). Friends and family can tell we are doing better, as evidenced as we"ve moved to a neighborhood full of doctors (as we still don"t qualify for a home loan LOL, and our last landlord has gotten foreclosed on). But we"ve had problems with some of them asking for money (and getting rude about it), and there"s no way they can know that we are making more than most of the doctors living in our "hood. It would just make it worse. Only my wife and I, our CPA, God, and the FOH boards know, and that"s going to continue.

Halfway through the year, w"ve had higher profits than the previous owner did in 2007 or 2008 for the whole year. What do I attribute it to? We"ve had one client who spent 70K with us this year, we are spending more in advertising, internet is now 15%+ of our business (where it was 0), and I"ve worked with the Secretary, Manager and Assistant Manager in developing sales skills. I"ve given them brochures to hand out while we are on competitive bids (so that customers remember us more when they are deciding on who to pick). I"ve also tried to beat out the sense of entitlement that they had - we serve the customer, they don"t serve us.

July has started off to the slowest start of the year. We have had no backlog, and I"ve had to start giving the guys more days off. Call volume has dropped in half - where we might get ten calls on a certain days, we"ve been getting three or four. I don"t know it its because the market has had alot of bad news lately, or what. Thankfully call volume has picked up and is back to normal again.

I want to do a million in sales every year. I"ve had an epiphany of sorts. In our industry, the average household spends $400 a year on our services. We have 2,300 customers in our database (and most of them are extremely loyal). Multiply 2300 customers by $400 a year, and you get almost one million in sales, and 450-500K a year net profit. So I am doing things to make sure they are happy, such as allowing the staff to spend almost any amount (that hasn"t bit me so far) to make the customer happy, and I am experimenting with different mailers to them. We just sent out a Thank You mailer to all 2,300 of them last week, and they just started receiving them now. We had a customer call us up flabbergasted that we would thank them for their business, since this is old-fashioned and no one does it anymore. They said they would definitely call us the next time they had a need. I am trying to maintain brand awareness among the normal customer base, while adding new ones. We also got a call from a customer who not only thanked us, but also said it reminded them that they needed some work done. So they wanted us to come do an estimate.

My people think I am crazy, because I am doing new things, but since I can"t find a good second business to buy, I"ll reinvest in this business and grow it. I might be crazy, but they are making more under me than they did under the previous seller.

I"d also like to experiment with discount mailers, but want to be careful. The previous owner never discounted anything - which is why we are doing better. If my margins are 45-50%, I can take a 10% cut in profit and be good. He"d rather lose out on an 8K job and get $0 from it, rather than discount it to $7200 and still make $3200. As long as I don"t let repairs get out of control, or payroll, I can still do OK. In April, repairs on equipment destroyed my net.

P.S.: I am frustrated to no end that I am having a hard time qualifying for any sort of home loan. A couple of years ago, I could have taken my mid 700 credit score, showed no income, and closed on a house in two weeks with very little down. We tried in Feb, and were told HELL NO YOU ARE SELF EMPLOYED by several banks. We finally found a bank to finance us, but they want 35% down. WTH!
 
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DisgruntledOrangatang_foh

shitlord
0
0
Glad you are doing well Lyrical, it"s great to see you making the cash. I hate when people start asking you for money (not that people ask me, but I wouldn"t like it).

Please keep inspiring me !
 
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DisgruntledOrangatang_foh

shitlord
0
0
Oh random aside, @ lyrical. remember that post a while back in this thread where I asked you about how I can go about starting my ideas, and you came to the conclusion that I have good ideas and seem to have a good perspective but with not enough initial capital, thats what I should do?

Well, about 2 months after making that post, one of those ideas (pinkberry type place) was put into action. It"s been open for 2 months now (I think?) and has been doing great business. So yay one of my idea"s is a success...I just didn"t do it lol.
 
Jalynfane

Jalynfane

Phank 2002
719
563
I"d also like to give positive feedback to Lyrical, the information he has shared is aspiring.

Right now I am currently managing a P&C (property and casualty, think car/home/boat) insurance agency and will be purchasing the business in 3.5 years. Hopefully I become familiar with the pitfalls in owning a business so that I can avoid thrown good money after bad. Right now the current owner will not budget $1 for any customer retention when our business thrives on keeping clients around forever.

My hope is that Day 1-60 of my accquisition will have a good amount of positive data. I can"t even get the owner to budget for a website and that will be the first thing I do, seems like the best potential for growth.
 
Shonuff

Shonuff

Mr. Poopybutthole
5,538
791
Jalynfane said:
I"d also like to give positive feedback to Lyrical, the information he has shared is aspiring.

Right now I am currently managing a P&C (property and casualty, think car/home/boat) insurance agency and will be purchasing the business in 3.5 years. Hopefully I become familiar with the pitfalls in owning a business so that I can avoid thrown good money after bad. Right now the current owner will not budget $1 for any customer retention when our business thrives on keeping clients around forever.

My hope is that Day 1-60 of my accquisition will have a good amount of positive data. I can"t even get the owner to budget for a website and that will be the first thing I do, seems like the best potential for growth.
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My unsolicited advice is to try to learn as much about the business as you can. I used to think my bosses were idiots for the stuff they used to worry about, but now I find myself worrying about the same things! For example, one of the corporations I used to work for used to threaten managers with getting fired if they didn"t control their payroll. I used to think that was a bit too far. But now owning a business, I see why they were so focused on it. My payroll can go anywhere from 5-10k a week. Paying 10k in a week is fine, because it means the guys are putting in the hours. But when business slows down, party time is over. I could lose 5K a week if I don"t control payroll.

I also demand that my employees bust ass. There"s no slacking here. I pay you more than what you can make at the competitors, but you better produce more than the guys do at those companies. I met with a competing company that was for sale, and was surprised that one of my crews can do more volume (in sales dollars) than two of the his crews could do.

You have to demand your people work an honest day. I like my employees, and consider them friends, but wouldn"t hesitate to fire them if they don"t work hard. We are going to have a talk with a guy tonight who is slowing down the rest of the crew, and doesn"t want to be held accountable. If he quits, or the conversation goes the wrong way and we fire him, so what? He might have alot of skills compared to some of the guys, but he"s starting to demoralize the crew he is on.
 
F

Frax_foh

shitlord
0
0
Fascinating topic, Lyrical. I just read through the entire thing this morning, and I had a couple of questions.

How do you plan on machinery replacement? You mentioned your company uses some pricey heave equipment as part of the business. Do you retain these machines on lease or are they owned? What is your plan if one of your trusted Formen leaves? Do you trust anyone else to step up?

I liked where you were talking about sending "Thank You" notes to your previous customers. Personal touches like this often will retain a customer easily; if you did a good job for them before and the price was agreeable, they are more than likely to go with the known quantity (you) than putting effort into bargain hunting.
 
Shonuff

Shonuff

Mr. Poopybutthole
5,538
791
Frax said:
Fascinating topic, Lyrical. I just read through the entire thing this morning, and I had a couple of questions.

How do you plan on machinery replacement? You mentioned your company uses some pricey heave equipment as part of the business. Do you retain these machines on lease or are they owned? What is your plan if one of your trusted Formen leaves? Do you trust anyone else to step up?
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As I understand it now, the machinery should last quite a bit, as long as we take care of it. We basically have anything that has a serious problem rebuilt. For instance, one of the machines that the originally owner bought would cost 50K to replace. An engine blew out on it (he bought it in 1991, so that"s a pretty good run). I ended up paying almost 5k to have the engine rebuilt. I"d rather not replace machinery for a bit, since I owe on the business. We"ll just do our best to repair and rebuild. One of the pieces of equipment the seller wrote a check for $140K! Since I am just starting out, to me, its more important to make sure there is adequate working capital.

As far as the Foreman goes, I"ve been grooming one of the crew leaders to take over for him. One week, the Foreman had the flu, and we had problems operating. Ever since then, I"ve been training the crew leader to be able to do everything that the Foreman can do. I don"t think the Foreman will leave, because I am paying him much more than he"ll get from a competitor. But its never good to build a business around just one person, and when that person leaves, have to stop working. In any business, there is a capacity for theft, and both the Foreman and one of the crew leaders have proven that they can be trusted. Because of the size of the business, I am not at every customer meeting, and unfortunately, it would be very easy for a guy to poach small jobs off of me. I could hire someone from outside of the company, but you never know what you get with people like that. I also want to send a message to the guys that if they work hard and are honest, they"ll get first shot at promotions.
 
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DisgruntledOrangatang_foh

shitlord
0
0
Lyrical said:
I don"t think the Foreman will leave, because I am paying him much more than he"ll get from a competitor. But its never good to build a business around just one person, and when that person leaves, have to stop working. In any business, there is a capacity for theft, and both the Foreman and one of the crew leaders have proven that they can be trusted. Because of the size of the business, I am not at every customer meeting, and unfortunately, it would be very easy for a guy to poach small jobs off of me. I could hire someone from outside of the company, but you never know what you get with people like that. I also want to send a message to the guys that if they work hard and are honest, they"ll get first shot at promotions.
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Haha dude these lessons can be learned from MMOs! Don"t have just one MT, if he don"t show up you"re fucked! Oh shit, we forgot to put it on master loot, same MT didn"t ninja item he really wanted? He can be trusted!
 
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