Adventures with lyrical - buying a business

Shonuff · Oct 24, 2009

Candiarie said:
+1. I"m also curious as to what you decide to go with over the slow winter months, especially if you keep up the strategy of giving your guys hours

We haven"t figured that out yet. Winter can be rough, or it can be OK. We"ve started to slow down last month, October ran slow, and then all of the sudden, we"ve got more work on schedule than we"ve had since the Summer. All we can do is do the jobs right. I"ve even started quality checking the guys" work, something the previous owner never did because he trusted the crew leaders so much.

I"ve also increased our advertising, and its going to start having an impact when it hits in the Winter. I rationalize our marketing dollars by having the secretary ask customers where they heard about us. And in the venues where alot of calls are coming from (AT&T yellow pages is still generating most of our calls other than repeat and referral business), we are buying more ads and increasing their size. This thread has been good about making me think of areas of improvement: for some reason, our internet hits have gone down alot.

Cutlery · Oct 24, 2009

Lyrical said:
We haven"t figured that out yet. Winter can be rough, or it can be OK. We"ve started to slow down last month, October ran slow, and then all of the sudden, we"ve got more work on schedule than we"ve had since the Summer. All we can do is do the jobs right. I"ve even started quality checking the guys" work, something the previous owner never did because he trusted the crew leaders so much.

I"ve also increased our advertising, and its going to start having an impact when it hits in the Winter. I rationalize our marketing dollars by having the secretary ask customers where they heard about us. And in the venues where alot of calls are coming from (AT&T yellow pages is still generating most of our calls other than repeat and referral business), we are buying more ads and increasing their size. This thread has been good about making me think of areas of improvement: for some reason, our internet hits have gone down alot.

Maybe consider throwing google some cash for a paid ad at the top of their search engine? If you"re looking for a service you need done nowadays, you either sift thru the yellow pages, or you use google, depending on what you"re accustomed to. Just contracted some guys this week who only got the job because they were the first hit on the google search and then I got lazy and stopped looking.

Eomer · Oct 26, 2009

Regarding the plumbing company, I"d be pretty careful. Construction in general is a very tough business, and it doesn"t operate like most industries. There"s a reason that publicly traded construction companies are the minority, and most are private/family owned. Construction companies don"t need to constantly worry about "growth". I"d be perfectly happy doing the same volume year to year and keeping my eye on our margins. Unfortunately many people who own and/or operate construction companies don"t understand that pretty simple concept, and instead think they have to constantly be growing and getting bigger, and they get fixated on growth instead of building a solid business, and eventually it all collapses under it"s own weight. Pretty sure that construction companies (I would include any trades/crafts oriented company in that, whether they"re service plumbers or electricians) have failure rates comparable to bars and restaurants, or in other words the highest of any industry.

Most construction companies are only worth as much the their reputation and expertise will carry them. Just because ABC construction has been in business for 40 years, if the main managing partners walk out the door and it"s being run by someone with an MBA and no construction knowledge, the doors might be closed in months either because they shit the bed on a project or because they can"t pick up any new work either because they don"t know how to estimate or because the industry knows they aren"t worth a shit any longer. It"s a very fickle business.

I"m sure you"ve given thought to retention of the original owner, because without him the company is probably worthless. I know my company would collapse within months of my bro and I leaving.

Shonuff · Oct 26, 2009

Eomer said:
Regarding the plumbing company, I"d be pretty careful. Construction in general is a very tough business, and it doesn"t operate like most industries. There"s a reason that publicly traded construction companies are the minority, and most are private/family owned. Construction companies don"t need to constantly worry about "growth". I"d be perfectly happy doing the same volume year to year and keeping my eye on our margins. Unfortunately many people who own and/or operate construction companies don"t understand that pretty simple concept, and instead think they have to constantly be growing and getting bigger, and they get fixated on growth instead of building a solid business, and eventually it all collapses under it"s own weight. Pretty sure that construction companies (I would include any trades/crafts oriented company in that, whether they"re service plumbers or electricians) have failure rates comparable to bars and restaurants, or in other words the highest of any industry.

Most construction companies are only worth as much the their reputation and expertise will carry them. Just because ABC construction has been in business for 40 years, if the main managing partners walk out the door and it"s being run by someone with an MBA and no construction knowledge, the doors might be closed in months either because they shit the bed on a project or because they can"t pick up any new work either because they don"t know how to estimate or because the industry knows they aren"t worth a shit any longer. It"s a very fickle business.

I"m sure you"ve given thought to retention of the original owner, because without him the company is probably worthless. I know my company would collapse within months of my bro and I leaving.

I probably should have been more clear. I know that construction is very off in the area. We have to deal with some of these companies in my other business, and they aren"t very pleasant. For example, we had a big bid for a construction company, and the guy expected me to take the job at a price that would make us lose $30K on the job. The appeal for this plumbing business is that they are geared 95% to service, and that is their reputation.

I still haven"t received the numbers I requested, and its been three days. I am thinking that the numbers are really off.

Heavens_Myst_foh · Oct 26, 2009

stopped reading the OP when he mentioned he and his wife were still renting and that his under grad accounting degree was no different then someone with C.P.A. next to their name, lol right.

Eomer · Oct 27, 2009

Lyrical said:
I probably should have been more clear. I know that construction is very off in the area. We have to deal with some of these companies in my other business, and they aren"t very pleasant. For example, we had a big bid for a construction company, and the guy expected me to take the job at a price that would make us lose $30K on the job. The appeal for this plumbing business is that they are geared 95% to service, and that is their reputation.

I still haven"t received the numbers I requested, and its been three days. I am thinking that the numbers are really off.

There"s no distinction between service and construction, from a company standpoint. We steer clear of service because in our opinion, it"s a pain in the ass. But there"s other companies that love it, it"s their bread and butter. I"d rather have 10 large projects at a million a piece, than 1000 small jobs at 10,000 a piece. And I"d rather pursue a single bill for 300k than 30 for 10k each. It all comes down to opinion really.

But when it comes down to it, again, the former owner is going to make or break that company going forward, since you don"t know a damn thing about plumbing. Unless you can find someone else to take his place that you know and trust. Maybe "stress" is why he"s looking to sell, I don"t know. If he was having a hard time running the day to day aspects of it and wants to get back to concentrating on site work and not paying bills, why not hire a management partner or something? If his business is as profitable as he says, why would he be willing to give that all up to work for a salary again?

Again, most construction/trades companies are worth ZERO outside of their established reputation (which is a single bad project away from being destroyed at any time), acquired knowledge base within it"s employees, and maybe some vehicles, tools and material. Without knowing the exact setup of the company it"s difficult to say, but most companies that are owned and operated by a single person or family are completely worthless without said person or family, because they"re the only ones who know how everything operates. Construction companies build shit for other people, it"s not like they have big factories or assembly lines or something as assets.

That"s one of the areas I intend to concentrate in the next few years as I ease out of estimating and take on more of a general management role: shit just doesn"t get done unless my bro and I are involved in some way, and I"d like to change that. But without processes and controls and manuals in place, that"s not going to happen.

Shonuff · Oct 27, 2009

Eomer said:
There"s no distinction between service and construction, from a company standpoint. We steer clear of service because in our opinion, it"s a pain in the ass. But there"s other companies that love it, it"s their bread and butter. I"d rather have 10 large projects at a million a piece, than 1000 small jobs at 10,000 a piece. And I"d rather pursue a single bill for 300k than 30 for 10k each. It all comes down to opinion really.

But when it comes down to it, again, the former owner is going to make or break that company going forward, since you don"t know a damn thing about plumbing. Unless you can find someone else to take his place that you know and trust. Maybe "stress" is why he"s looking to sell, I don"t know. If he was having a hard time running the day to day aspects of it and wants to get back to concentrating on site work and not paying bills, why not hire a management partner or something? If his business is as profitable as he says, why would he be willing to give that all up to work for a salary again?

Again, most construction/trades companies are worth ZERO outside of their established reputation (which is a single bad project away from being destroyed at any time), acquired knowledge base within it"s employees, and maybe some vehicles, tools and material. Without knowing the exact setup of the company it"s difficult to say, but most companies that are owned and operated by a single person or family are completely worthless without said person or family, because they"re the only ones who know how everything operates. Construction companies build shit for other people, it"s not like they have big factories or assembly lines or something as assets.

That"s one of the areas I intend to concentrate in the next few years as I ease out of estimating and take on more of a general management role: shit just doesn"t get done unless my bro and I are involved in some way, and I"d like to change that. But without processes and controls and manuals in place, that"s not going to happen.

Everything is standardized as far as jobs go, to the point that each plumber looks at a menu and gives a flat price. Most of the time, the customer already knows what the price will be before the plumber gets there. Without going too much into it, there is a set policy and procedure for everything they do.

The real issue that I have is that I finally got the comp financials through September, and they look really wrong. It just so happens that while sales are down 25% (comparing Jan-Sept "08 to Jan-Sept "09), the profit margin has doubled LOL. Even worse, for the six months comps, the business only made 70K, and now through Sept, the net is at 133K. The broker is claiming that the seller has implemented new policies towards managing labor and materials, but I find it hard to believe that sales are down 200K, while profits are up 70K on the comp reports.

While this looked like a good business for me, I don"t feel as though I can trust the seller or broker. I will talk to a partner at the brokerage firm tomorrow. I"m not an idiot, and I know when people are trying to rip me off. I don"t care what business you are in, increasing profits 100% while sales are down 25% would be almost impossible.

Eomer · Oct 27, 2009

While this looked like a good business for me, I don"t feel as though I can trust the seller or broker. I will talk to a partner at the brokerage firm tomorrow. I"m not an idiot, and I know when people are trying to rip me off. I don"t care what business you are in, increasing profits 100% while sales are down 25% would be almost impossible.

In most businesses where there"s fixed costs and assets, sure, that might be the case. In construction/trades related work where you"re only paying labor and material on work you"re actually doing at the moment, it could well be true. But doubtful of course. Maybe they did a couple jobs that went extremely well, much better than normal, but because they have a fixed cost "menu" for their work the margins doubled?

Our margins can swing a ton from month to month, depending on how much of our revenue was subtrades (we only markup subs 5-15%, while our own work is marked up 10-30%), if we were over or under progressed on a job, and so on. In the past year it dropped in half, but from 2003-5 it doubled. Again I don"t know the nature of the business, but profits increasing while sales decrease for my business is well within reason, and not particularly unexpected.

Shonuff · Oct 28, 2009

Eomer said:
In most businesses where there"s fixed costs and assets, sure, that might be the case. In construction/trades related work where you"re only paying labor and material on work you"re actually doing at the moment, it could well be true. But doubtful of course. Maybe they did a couple jobs that went extremely well, much better than normal, but because they have a fixed cost "menu" for their work the margins doubled?

Our margins can swing a ton from month to month, depending on how much of our revenue was subtrades (we only markup subs 5-15%, while our own work is marked up 10-30%), if we were over or under progressed on a job, and so on. In the past year it dropped in half, but from 2003-5 it doubled. Again I don"t know the nature of the business, but profits increasing while sales decrease for my business is well within reason, and not particularly unexpected.

The more I look at the P&L, the more I think it is b.s. Its almost never a coincidence that the financials amazingly get better just before a sale. I can compare this year to the last five years, and sales are the worst, while profit is the best. This smells like "window dressing." The last time I looked at a business that was this much down in sales (but profits were up), the seller claimed the numbers were real, but a few months later, he shut the doors for good. I will ask more questions of the broker and seller, but am highly doubtful I will pursue.

Tunk_foh · Jan 6, 2010

Thanks for the thread Lyrical + others. An interesting and enlightening read. Good luck with your future business endevours

Heylel · Apr 19, 2010

Rise from your grave zombie-thread...

So Lyrical, being one of the resident business gurus on the boards, can you recommend any good resources on starting a small business? I"m at the earliest possible stage of considering it (which is to say, I"ve thought "hm, what if...") and feel the need to educate myself.

Zeste_foh · Apr 19, 2010

Heylel Teomim said:
Rise from your grave zombie-thread...

So Lyrical, being one of the resident business gurus on the boards, can you recommend any good resources on starting a small business? I"m at the earliest possible stage of considering it (which is to say, I"ve thought "hm, what if...") and feel the need to educate myself.

I am in the process of starting a new side-business with a partner, and here"s my 2cents for April 2010 after speaking with various banks and lenders:

1) You will need startup cash from private investors. If you aren"t planning on buying assets for this business (a building, a 100k dollar printing press, a backhoe, valuable equipment) the banks are pretty much going to give you a straight No.

2) Banks that I"ve been too have all had their pee-pee smacked by the 2009 crash, and every single one of them are only loaning on SBA (Small Business Administration). So, go read up on the SBA 7A and 504 loans. Banks will make it sound like they"re playing "hard to get", but in reality alot of them are so burned and bruised from 2009, they just don"t have any money to lend on risky stuff like startups, even if they wanted to.

3) Very few people have liquid cash. Plenty of people might have cashflow, or assets, but when you go around asking for 50,000 dollars and giving them back a great return, no one has 50k they can loan out. Everything is "tied up" right now.

Sort of depends on what sort of business you"re trying to start. If it"s a low/zero overhead business, it"s alot easier right now, but you"ll need private money. You are NOT going to get a bank loan without collateral, sometimes in the 100%+ range (meaning if you want to borrow 50k, you need to have at least 50k of collateral they can repo).

If it"s a business with overhead but also will have assets, you might get a bank to loan on assets/buildings and real property. I know right now, they are willing to loan me 85% on a building if I come up with the 15%, but they will NOT loan cash on the business that the building is for... which sort of shoots us both in the foot, since the business is what is supposed to pay the buildings loan payment.

So yeah. Make a GREAT business plan (not as hard as it sounds) and start hitting up private people. They are out there. Even though we"re still in the death throws of 2009, this is a GREAT GREAT time to snatch up things CHEAP CHEAP CHEAP. So people with liquid cash need somewhere to put it, so if you can start a business now that purchases it"s own building, and then gets equipment for pennies on the dollar, in a few years it could be a GREAT investment provided that you have strong business plan and realistic goals.

I don"t know if it"s growing up in Utah that does it to me, but Entrepreneurship seems like the ONLY way to do things. I literally live in the area where the "wild west" took place (I can drive to Butch Cassidy"s hideout within 30 minutes). Sometimes I think it influences how I see the world. Everything is a frontier to be conquered.

If you want to PM me your idea, I"d love to tell you what I"ve learned in the last 1.5 years after inheriting my late dads business, and my own personal business, and my new business idea

Fair warning: I"m no Lyrical, I"m still waiting for something to get off the ground. But I"m learning alot about the process of getting started.

Heylel · Apr 19, 2010

My dad and my uncle both own their own businesses, so I"ll be asking them about the process as well. It"s something I"ve wanted to do for a long time (be self-employed), I just never really found a niche for something I could do all the time without it not feeling like work until recently. It may sound strange, but I"d really like to open a craft brewery.

I don"t have hard numbers, but it"s definitely the sort of business that would require considerable assets. I"m also not sure how difficult it is to get started in my state since Georgia has some very draconian laws about distribution of alcohol that tend to favor established businesses. It *can* be done, and has been quite successfully by a couple of companies (Sweetwater, Terrapin, etc), but start ups get caught in a catch-22 of not being able to distribute without a distributor, and no distributor will give you the time of day because you"re known well-known.

Like I said, I"m just looking into it recently, and it wouldn"t be for a couple years before I could wrangle the cash together for very much. I just want to learn more about it.

Zeste_foh · Apr 19, 2010

A brewery would be the sort of thing where if you could find a out of business place selling their equipment, that"s much better deal for a bank. Then, they at least have something to repo if you fail. Especially if you get it at a cutthroat price from someone who was foreclosed on just trying to sell it off.

It"s the kind of thing where if you could find a building to do it in, buy the building with the SBA 504, and then get the money for the equipment, you"d have a much more attractive loan package. Banks HAVE to have something to repo nowdays, and a cheap building you bought to put your brewery in would be great, since I am guessing you could find somewhere that someone lost and now is up for sale as a bank-owned repo.

Basically, every bank has asked if I am buying property, and if I can get their loan to value down enough to make it a deal.

Heylel · Apr 19, 2010

Yeah property is a must. From what I"ve read, the specific needs of a brewery operation make building choice fairly important since you need moisture and temperature control, significant water and drainage needs, etc. Apparently old brewery buildings are some of the hardest sells because the structures are largely obsolete and difficult to retrofit.

I guess to really see this through I"d need to have some inkling of true start up costs so that I could determine what kind of funding it will take.

Shonuff · Apr 19, 2010

Heylel Teomim said:
Rise from your grave zombie-thread...

So Lyrical, being one of the resident business gurus on the boards, can you recommend any good resources on starting a small business? I"m at the earliest possible stage of considering it (which is to say, I"ve thought "hm, what if...") and feel the need to educate myself.

Guru I am not. I am just a guy who saw an opportunity, and took it.

What Zeste said was pretty spot on. Banks are pretty tight right now. They really don"t want to do start-ups. At one point, I saw companies selling franchises recommending that potential franchisees tap their 401k to pay for their idea, because of the lack of funding. As far as the private investor thing goes, I wouldn"t know, because even when I was a kid, I was determined to do it on my own. Ironically, today, we just had some close family friends ask us for funding this morning. They want us to put 50K in, and then they put 50K in. I am not too big on the idea, because it is a restaurant start-up (and those can"t even get bank funding right now), and the guy who would be doing the cooking just went out of business. So obviously, something was wrong with his business model. I have no desire to be on the hook for a multi-year rent agreement that could cost way more than the initial start up money either. And I am not ready to have a partner.

A great place to start to look for general business stuff isBusiness & Small Business. I"ve read them for probably the last 15 years, and it has pretty much any subject about business. That"s a good place to start. If decide you are going to do it, then you"ll probably need to start reading specific books on the various disciplines (accounting, market, econ, management, finance, operation). Remember, you are asking for books to read from a guy who has two degrees in business, studied in high school, and read any number of books on it. Its almost too much to list what I"ve read, but that site is a great start, and it helped me when I got serious about wanting to own my own business. It really has an article on almost every question you could think of when getting started, and it has sections for the various disciplines. I also used to read Forbes, Fortune and Businessweek pretty regularly.

Shonuff · Apr 19, 2010

P.S. I think its nuts that the bank won"t loan you cash. Maybe you should switch bankers. When I started this company, I negotiated a line of credit of 150K, that would be wired to my account whenever I request it. We only drew 20K out of it when we first started, since we were spending 8k a week and we put every penny into the down payment.

So we pretty much keep the 130K left on the line of credit in case business gets bad (but also keep 200K from retained earnings in cash for working capital). I"ve studied enough business to know that most businesses go under because the owners start on a shoe string budget, and they can"t weather the bad times.

Heylel · Apr 19, 2010

Reading everything I can is the big reason I"m asking now. I"m not in a financial position to make it a reality, and won"t be for a couple of years. It"s a very long way from the pipedream stage right now.

Shonuff · Apr 19, 2010

For anyone that cares, 2009 was a record year for the company. We netted 305k.

I"ve said it before, since we are in landscaping, the more people spend in their yards, the more they notice they need work. Literally, the call volume is 5x more on a sunny day that is 70 degrees, versus a cold rainy day.

We had a great year last year, right up until Dec 1. Winter was one of the worst ones on record for the company. I think alot of it had to do with it being one of the coldest winters in 20 years, and all of the snow we got.

We lost 50k in the Winter, but March started picking up, and now April is on track to be stronger than normal. I imagine we"ll make 20-25k this month, and this is not our peak time. Its still early in the season, given that our peak months tend to be the Summer. I think what happened is that the normal business we would have gotten in the Winter is coming back. People are now going outside, and they are calling in for work they need done. The customers didn"t defect or decide to not do the work, they just delayed work a few months.

I need to a better job in managing my stress. I spend a ton of cash on payroll, because I don"t layoff people, and we give them a check regardless of what they work. Some weeks in the winter, the guys were working 8 hours, but we paid them 35. That is half of the loss right there. But we have highly trained guys who can do any size job, and it costs money to keep them. I guarantee you if I only paid them 8 hours, they"d be gone. We usually make up for this in the peak time, because we don"t have a revolving door of employees, and they have years and years of experience. Case in point, we bid on a state job that was 87K. Some screwball company comes in and gives them a super low cost. They said they"d do it for 20K. We know what the job should have priced out at, we do big jobs. It turns out that the company didn"t have the staff, and they were hiring guys off the street with no landscaping experience. They are still working on the job three months later, and are only 15% of the way done. The state has called me expressing their frustration, but I"ve reminded them that we could have the job three or four times over, and you get what you pay for. I also reminded them that we"ve always completed our jobs for them on time. Its always fun dealing with local, state and federal governments, because they go for the lowest cost, regardless of how qualified the company is. They called us up telling me that they"d wished they"d picked us originally, and they left the door open for us to finish the job the other company can"t do.

Anyway, at this rate of calls coming in, and the two state jobs we might get, it might be getting close for me to hire some people. No one wants to hear that you can"t get to them for six weeks.

Shonuff · Apr 19, 2010

Heylel Teomim said:
Yeah property is a must. From what I"ve read, the specific needs of a brewery operation make building choice fairly important since you need moisture and temperature control, significant water and drainage needs, etc. Apparently old brewery buildings are some of the hardest sells because the structures are largely obsolete and difficult to retrofit.

I guess to really see this through I"d need to have some inkling of true start up costs so that I could determine what kind of funding it will take.

How old are you? Are you in college? Because there are a ton of resources there if you are.

Adventures with lyrical - buying a business

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