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Owner equity to Profit Ratio or ROI

Discussion in 'Pesticide & Herbicide Application' started by Ric, Nov 11, 2010.

  1. Ric

    Ric LawnSite Fanatic
    Posts: 11,946

    yo

    I want to bring up the subject of Owner Equity to Profit Ratio. The reason is I believe many don't realize they are working for free or cheaper than they realize.

    ROI stands for Return On Investment and every business must have investment of some sort. The larger the business normally the larger the Investment. If you barrow money you have to pay interest. If you bank your money you are paid an interest. So are you accounting for that Interest on your investment in your business when you figure your profit at years end. You might be very surprise at your profit margin once you pay your self interest on your investment of owners equity.

    In My case the reverse of this is true to some extend, but I am still behind the 8 ball. My investment has long been written off and the value of that investment in equipment is decreasing in value. I am making no provisions for replacement equipment with an equipment account. Therefore part of what I take out of the business is in fact a percentage of Owner Equity, Not Profit.

    One of the points I would like to make is. In some cases, in fact many cases your employees are making more money than you in the form of salary. Your higher income is actually interest income.
     
  2. RigglePLC

    RigglePLC LawnSite Fanatic
    Posts: 11,768

    What do you think is a good ratio, Ric? And if you drive your truck for personal transportation--can you count that as half business, and half personal? Suppose you had a 20,000 truck and 5000 in equipment--minimal, you could spray weeds with that. And probably hit 60,000 in sales. But a (one-person) mowing plus spraying company would probably have about 50,000 in equip. And depreciation would cost you about ten percent per year.
     
  3. Ric

    Ric LawnSite Fanatic
    Posts: 11,946

    Riggle

    My main point here is to realize how your profit level is derived. It is not all profit margin and Investment interest is a factor

    Any time your equipment can make you more than the interest from the same amount of money plus Depreciation and your overhead and pay scale it is a winning ratio. Each piece of equipment has a different life span and income factor. I believe a 10% depreciation factor is WAY TOOO LOW. I prefer double declining balance over the shortest expected life period. It is better for taxes.



    When buying or selling a business of ANY KIND, It is not the assets that make the price. It is the ROI (Return on Investment) that dictates the selling price.
    Take a company with 1/4 million in equipment and a Million in gross sales. What is it worth if it only has a 60 K profit margin for the owner??? Maybe two years income which isn't the cost of the equipment. In that case the parts of the business are worth more than the whole.



    AS for dual use personal and business equipment, That is the perk of being in business. My children owned stock in my Corporation and were board members. As Officers in the company they got perks in the form of Education assistance from the company. They also had Company cars.
     
  4. Harley-D

    Harley-D LawnSite Senior Member
    Posts: 508

    I agree with you Ric but that changes the subject to why someone would buy the business. They may buy it for the pieces and just sell off the parts rather than continue to run the business.

    I think the ROI for a business that has been born from the owner is worth more to the owner than any investor would pay. (Remember we are subtracting AR which plays a big part in buying any form of company that can directly produce revenue) Blood, sweat, and tears. I talked to a lawn dr franchisee and he wanted what i considered to be about 3 times what the business was worth. Because he started it 13 years ago and figures he is owed the nest egg retirement lump sum. Not gonna happen.
    I'm not an accountant but you have to remember there's an income statement and a cash flow statement. Cash flow can look great while a company is failing. Investors will sometimes consider a company's EBIT for a guage of value. (Earnings Before Interest and Taxes) Interest can go both ways. Interest you pay is tax deductible while interest you earn can be credited toward profit. It goes much deeper than just ROI. The word investment means more to people that start businesses than it does to accountants.
    Good thread!
     
  5. Will P.C.

    Will P.C. LawnSite Senior Member
    Posts: 966

    I also want to bring up the 'present value of money' idea. Money you have in the bank/investments is earning interest. Some guys like to go out and pay cash for a new truck/equipment. I prefer to finance it with 0 interest rates or extremely minimal. Look out for promotions like 0 interest for 36 months. You can let what you have in the investments keep on making money while getting a new piece of equipment at the same time.
     
  6. Ric

    Ric LawnSite Fanatic
    Posts: 11,946

    Will

    Leasing has better tax advantages. However you generally pay more when leasing. But I understand the advantage of working on barrowed money. Having that nest egg for an extra shot of Cash Flow can also mean the difference of Make it or Break it.



    Honda Dream

    I hear you but sometimes you make decisions based on gut feeling and not proper business protocol. In the case of buying Lawn account, These new accounts might be in gated communities and give you the inside track to expanding that route. Or in my case when I had a mowing service, I had the Pesticide License plus Irrigation and could up sell new customer Fert & Squirt and irrigation service. This is called vertical Marketing because you up sell each customer more services as opposed to Hortonizal marketing where you sell one service to many customers.

    Of course to purchase a company and cull all the bad accounts keeping the good one can be profitable also. If your account are spread out from East Jesus to Tinbuc2, you might want to consolidate the routes and sell off sections to other companies in those areas. Sometimes when people start making money in a business they lose sight of the goal and grow too big with out a Profit good margin.

    Of Course some companies are just not run correctly and experienced management can turn a profit very quickly.
     
  7. olcllc

    olcllc LawnSite Member
    Posts: 202

    You use to see a lot of criticism from folks on here toward people that financed equipment... if the interest is 0 then there is no down side. Yes there is and always will be a doc fee of 125.00 or higher but that amount over 3 or four years is minimal.
     
  8. dwc

    dwc LawnSite Senior Member
    Posts: 619

    Most hose jockeys and chop and drops don't worry about about anything but making enough money from their little side business to buy a case of beer and maybe some football tickets for the weekend. They would be better off working an extra hour or 2 at their day job than out here in the real world screwing up the lawn care markets. It has always amazed me at the guys, especially the mowing guys, who will work for $5 an hour or less, but think because they charged someone $20 they made out big. If they truly knew their costs, we might all actually be able to charge a decent price for our services.
    Posted via Mobile Device
     
  9. Harley-D

    Harley-D LawnSite Senior Member
    Posts: 508

    Probability numbers are not fun to calculate but can help you make decisions with better accuracy. Real world=doesn't happen. If buying a company and planning on selling off accounts that are not in a tight route, you better do the homework and make sure you can either sell off the accounts for what they are worth or not pay for them up front at all. Remember accounts receivable! Do the customers pay? Are they pita's? All these questions can help place a value on each customer and might change the value of the company. I would want to see records of the company i was buying to see how long it took certain customers to pay
     
  10. fl-landscapes

    fl-landscapes LawnSite Silver Member
    Posts: 2,542

    due diligence is always a wise idea when purchasing a business
     

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