Company Buyout

Discussion in 'Business Operations' started by greenturfde, Jan 16, 2008.

  1. greenturfde

    greenturfde LawnSite Member
    Messages: 21

    I'm looking for help on negotiating a company buyout. It's a smaller maintenance company that would like to sell me their yards only... i don't want their equipment as we are already equipped to handle the extra work load. Let's just say last year these yards grossed 50K. What would be a starting point or suggestions as to how this would normally work? thanks for any advice.
  2. Flow Control

    Flow Control LawnSite Bronze Member
    Messages: 1,267

  3. dutchhook

    dutchhook LawnSite Member
    Messages: 93

    I can help, I've done acquisitions for lawn care/landscaping.
    If you want a BUSINESS VALUATION, below is a very real formula. If you want a REAL LIFE VALUATION, a lot of times it's two guys over coffee, going over customers and employees, then they agree on a percentage of revenue (20-100%) plus maybe buying out some equipment.

    Short Answer:

    I'd start out with a number of mows per client, so I'd offer to pay the previous owner the payments received for the first 2-3 mows. You can do it the week after you mow them, or if you wanna be a nice guy, you could pay them for 2-3 mows once they sign your contract. If that isn't good enough, below is very valuable information on larger business acquisitions:

    Answer that imparts wisdom for this and future transactions:

    A REAL VALUATION, which you should run at least once per year so you know what your business is worth goes like this:

    Technically, it's based on EBITDA, which is Earnings Before Interest, Taxes, Depreciation and Amortization. If you would like to know more about that, just reply and I'll give you a better explanation that should be useful.

    It's basically a "cash flow" formlula. You take your profits, depreciation, interest expense, and any of your pay that is "excessive" to what you do. So, if you're running a crew and making $80,000, you could put $40,000 back towards cash flow because a new owner would have to hire on a new foreman to run that crew:
    Formula works like this
    Profit $20,000
    Depreciation $30,000
    Interest Expense $8,000
    Excessive Owners Income $40,000
    Total: $98,000. Then you use a multiplier on this EBIT or EBITDA formula. Something like 2.5 to 3.5, so the business would be valued at $250,000 to $350,000. In this sort of equation, the value of the equipment is negotiated. IT can be rolled into the price, or the net value can be added, or the buyer may ask that the equipment be paid off from the $350,000 and be free and clear.
    The way to keep this clear is to think from the buyers view is:
    I'm going to buy a business for $300,000. I expect to earn $98,000 per year or get 33% for my money which is a lot better than Wall Street!

    Other factors, it's based on:

    1. Size of company. I would rather buy companies over $750,000 because there has to be some management or systems in place, but a business broker friend of mine says he finds many many more buyers of businesses of around $200,000-$400,000. We think it's because it's easier for another contractor to add that much service to his present line.

    2. Type of billing. Since we're in the Lawn Maintenance forum, I'll assume that we're talking about mowing. "recurring billing" is what brings in a bigger amount. When you have solid monthly billing, this is something that buyers can count on more than one time landscape sales. Commercial usually worth more than Single Family Residential.

    3. Spread out customer base. A Customer base that doesn't consist of 3 clients that make up half of the billing is going to scare some people away. A base with 50 clients with no one client making up more than 25% is pretty solid. This is also something that banks financing your company, or financing a sale

    4. Growth. Most buyers prefer some decent, but not excessive growth. A 10 year company growing 15% every year sounds pretty solid to me with probably a solid customer base.

    5. Gross Profit margins.

    Anyway, if you have other questions, let me know,

    Best of Luck!

    Steve Hoogenakker
  4. bj1bmx

    bj1bmx LawnSite Member
    from NJ
    Messages: 76


    it sounds like you know what youre talking about and that you have either done valuations for a career or have bought several business for yourself.

    with that said, i want to restate (as you have above) that the "proper" calculations you have shown below hold very little merit to the typical lawn care company.

    the MAJORITY of the time, we are talking about a 1 man operation grossing $50-100k a year with some used equipment. these operations are NOT going to sell for even 50% of gross. a broker may tell you its worth 2.5-3x earnings, but unless you have a wealthy buyer with no real clue of the industry, its not gonna happen.

    you are likely looking at a months worth of gross sales + FMV of equipment for a sales price. dont think youre gonna have a huge sale, make your money while you own it.

    bigger operations are a different story.
  5. dutchhook

    dutchhook LawnSite Member
    Messages: 93

    i totally agree.
    That's why I said the short answer was paying for a few mowings.
    I included the rest for perspective!
  6. greenturfde

    greenturfde LawnSite Member
    Messages: 21

    Thank you. The current owner talked with his accountant and his accountant said 1.5 to 2 times what he grossed. He actually grossed 46k. I agree that it should really be close to what dutchhook said... 3 cuts worth. most of the lawns are not on irrigation and i was thinking even 46k to buyout after me grossing the same amount would still take two years to break even after paying for overhead, taxes.. etc. Again thank you i appreciate your time.

  7. paydex

    paydex LawnSite Member
    Messages: 64

    make sure you don't get ripped off.

    can he go back to those customers the day after you pay him and sign them up to his "new commpany"?

    or is there a noncompete? for how long? one season?
  8. qwerty

    qwerty LawnSite Member
    Messages: 25

    paydex has a point. The sale is only a portion of the negotiation. What will the seller(s) responsibilties be after the sale: contacting clients, no-compete, assisting with overall transition etc.? What happens if the company doesn't perform as well as the seller says it will?

    You should also expect that not all clients will want to remain with you. Unless they are all under some sort of transferable contract, there will be attrition.
  9. dutchhook

    dutchhook LawnSite Member
    Messages: 93

    Green Turf. One last point (maybe!)
    Many times, purchases have an earn out. You might pay half of the agreed on price (2 mowings?) upfront for good faith, or 1 upfront, then one mowing when your contract gets signed, then a final one when the first mow is paid.
    It's easy to figure, both parties have to perform, and there isn't really a lot of risk on either side that way.

    Email me if you need any further help.

    Best of Luck!

    Steve Hoogenakker
  10. paydex

    paydex LawnSite Member
    Messages: 64

    i'm curious for an update- what did you end up doing?

    don't leave us wondering! :)

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