View Full Version : Selling the Business
05-13-2007, 10:19 PM
Need some opinions:
I had a local competitor approach me a few months ago about "buying" his lighting business. I did not entertain the idea at great length, because this person had not been offering renewable service contracts. His concept of value was that because he had such a great report with his customers that the potential buyer would gain the service work and all of the "word of mouth" referrals. My response was that he had already received the main benefits of installing the original lighting systems, and if the homeowners needed service, they would probably end up calling me anyway because I'm the only one in town that answers the phone when it comes to service work. If he had a residual income from service contracts, then I would have been able to identify and quantify some kind of actual figure. I probably would have entertained this idea, but I really didn't want the extra service work. I figured it would just bogg me down and force me to focus on service more than actually selling new installations.
For you "lighting only" guys, do you think you could sell your business in the event you wanted to retire or relocate? If so, why?
05-13-2007, 10:53 PM
hey Chris. While we are not yet lighting only we are working on heading that way. The same goes for lighting or any kind of service industry.
Without the contracts and service obligations it really lowers the overall value of his business. Having a residual income would be to his advatage. While you could still go in (with a list of systems he installed) and get them under a maint agreement your chances of it are alot slimmer in my opinion since they have not been conditioned to it yet.
If we were to sell off the landscape maint business tmrw it would probably be worth alot less than we would like because only half of my clients are under contract for year round. The other half are just good will clients who I start every spring and end every fall. Basically if there is no regular income then his business is only worth little more than his assets and name recognition.
05-13-2007, 10:55 PM
Your right it's hard to quantify a service business. In general there is no real value other than equipment and tools. That is about all I would purchase. Most of the time it is a one time shot. Service contracts on quality systems are just a way to fill empty time slots and keep in touch with the customer for referrals.
05-14-2007, 07:47 AM
Chris, my plan is to sell my company in about 10 years. By that time I will have several hundred renewable service agreements which will give true value to my company. Someone making a purchase of a business wants to know that they will make that money back in about 5 years. Of course there is the name recognition and reputation that are not quantifiable but if you can show that very little advertising is needed to generate new business it means that the company has higher profit margins.
Yep, I'm lookin forward to 2017. I think I might be able to go fishing about then.
05-14-2007, 08:09 AM
Well, as you may or may not know I have recently been purchased by a competitor of mine in the past 2 weeks. It was a 5 month project honestly. There are non disclosure stmts, lawyers involved, brokers involved, etc...It was a horribly excrusiating 5 months...but at then end of it the buyer gets a great business and I'mnm alot closer to retirement. I was approached by them not the visa versa. I would have never considered selling only 9 years of owning the business but it is a great opportunity for me. Chris, the only advice I have is get a good broker and lawyer and get them involved asap and make sure you get a non disclosure stmt. It will protect you and the other guy if things don't work out. I would have to be concerned abut the vlue of his business if he's offering it for sale though. Also be sure to only do an asset purchase not a stock purchase, you don't wantt o buy any of his liablities and/or pending suits against him or workers comp claims etc...agian get a lawyer
05-14-2007, 08:16 AM
That sounds really good, but it shouldn't take you ten years to do that. I have almost 400 renewed service customers now, but I wonder what that would be worth to a potential buyer? Of course I'm not sure, but it appears that most contractors would rather not do service and only do installations. Even if someone were focused heavily on servicing, I would expect they would need well over 1000 annual customers to keep themselves busy every day.
Whatever happens, the fishing sure does sound good!
05-14-2007, 02:26 PM
Chris, if your maintenance contracts are worth an average of $500 a year (just figuratively speaking) and you have 400 of them, that would mean that you have $200k in annual income every year just in maintenance. Multiply that by 5 years and you have a $mil. That would be the minimum that I would ask. I would actually ask 3 times that amount because of new installs and the companies reputation. I could take a few fishing trips on $3mil, couldn't you?
05-14-2007, 03:04 PM
I've never figured it out, but I know they don't average 500. Probably more like 300-350. Yes, I know what you are saying... I just find it hard to believe that I am actually going to find someone who has that kind of cabbage for this business when the time comes. I guess I am looking at it from a different point of view: When I started, I didn't give anyone any money to get this business off the ground. So why would someone pay a million bucks or more to do the same thing?
I'll be definately making that pitch when the time arrives though!
05-14-2007, 03:42 PM
Think about all of the work it takes to develop the business. For someone to just come in and have a fully established business with immediate return on investment. I know that my first year I only grossed $70k. This year we will be well over a half mil. It took a lot of blood, sweat and tears that some people just don't want to invest. They would rather invest the cash.
05-14-2007, 03:54 PM
Yes, but if someone gives you that much cash for your business then they will be investing nothing more for the next 5 years except the blood, sweat and tears in order to break even and make a small profit. Their profits will not come until the initial investment is paid off. So, instead of spending your first five years paying off a loan to purchase a business like this, why not spend the first five years building it exactly the way you want it (just like you and I did).
Again, when it comes time for me to hang it up I will most definately try to sell what I have built for the highest possible $$. I just can't wrap my brain around this at the moment.
05-14-2007, 04:13 PM
I know what you mean Chris but alot of people today do not want to invest the time to build a business. They want to purchase something that will generate income immediately. I started this company with about $100 in the bank!! I do believe I could get some pretty good change for it right now if I wanted to.
05-15-2007, 12:29 AM
This is a tough question. I think a lot of people believe that their business is worth a lot more than it acutally is. The problem is that some so called "experts" will appraise a service business solely on numbers alone. This tends to be an inflated number and is in no sense accurate to what the value of the business really is. The best way to sell a business is just like anything else...you have to have assets. Customers alone don't constitute true assets, therefore there is no real way to determine a value of a business on that basis alone.
Case in point...I know of a lighting company that just sold out after 12 years in business. Average revenue was just over 900K/yr. gross total business. Here's the problem...besides a few trucks and trailers they didn't have anything... where are the assets? I won't mention the selling price, but it was less than a third of the yearly revenue. Sure they had a huge garage/shop, but that wasn't part of the selling price. People won't pay top dollar just because you have service contracts. Just because they are there now doesn't mean that they will be there next year, and a true business person realizes that....especially when a lot of money is on the line. I've sold 3 other businesses before getting into lvl, and I know that contracts and customer lists are only a small fraction of what people want to see when purchasing an existing business.
If you want your business to be worth something down the road you need to put money into it. Buy a building (not lease), don't listen to accountants who tell you to bury everything into your business to help bring down the profit numbers for tax purposes. That makes any business look worse. Just remember....Realisticly, unless business just takes off like crazy, most owners won't make hardly any money the first 3-4 years in business. If they are, then not enough money is being put in the business. I can't believe I remembered all that from my college days...phew. Also think about this. If you bought a building now and 10 years from now you're business tanked, instead of having nothing left....you'd still probably make a decent amount of money off of the business by selling the building. This is why assets are so important.
05-15-2007, 02:10 PM
I agree with ext lights- I built and sold a million plus lawn/landscape company 3 years ago- and got VERY little for it. the main problem- who wants to buy? the only people buying business's with serious cash want to make serious cash right out of the gate. If your business isn't generating 150-250k plus in cash flow to you, then the buyers are not there.
but assets-you can always sell those. trucks, trailers, and especially real estate, have a value all thier own.
a friend of mine ran a nursery for 13 years on a busy street here. he had over 2 million in sales, but only made about 120k a year net. he paid 400,000 for the property, and he said he couldn't afford it then or now, but he figured it out. no one wanted the business, but he sold the property for 2 million. the nursery paid the payment on the property and provided him a good income, but in the end he could not sell the business with the real estate attatched, because the nusery business couldn't make the new payment !
I own a property now with a friend, but it is way too small for my needs . I am selling my half to him and hoping to put a down payment on a larger place.
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