Startup or Buy An Existing Business

Discussion in 'Starting a Lawn Care Business' started by srqlawn, May 4, 2006.

  1. srqlawn

    srqlawn LawnSite Member
    from Florida
    Messages: 45

    I am in the beginning stages of looking to go into business in commercial and residential lawn care, then eventually (slowly) grow the business into landscaping design and installation....but still maintaining the lawn maintenance side of things.

    Among the many questions I have yet to answer, the biggest one I am looking at is whether to start this from the ground up or buy an existing business. I am looking at businesses ranging from 20-85 accounts. Other than valuating the business based on the financials (profit/loss), equipment, etc. what are some other ways to look at the value of the business in terms of setting a purchase price?

    By the way, this will be located in south Florida.
  2. Desertdweller

    Desertdweller LawnSite Member
    Messages: 159

    I've been in the biz for over 30 years, mainly irrigation. I've bought 3 companies in that time and what I've found is mowing and chem customers are less loyal than irrigation. It seems the lawn customer will drop you for $5 The only way I would purchase a lawn customer is either from a first class company who has had these customers for a long time or at a such a great price that even if you lost 1/2 of them upfront you would still come out ahead.

    I sold my last company 4 years ago when I moved and I took a % of the gross for 3 years. As a buyer it makes it much easier to pay quarterly and only for work done than all at once for blue sky. I love buying customers but you have to be careful what you're buying.
  3. srqlawn

    srqlawn LawnSite Member
    from Florida
    Messages: 45

    I've taken into consideration the retention factor if the customer finds out about the company changing hands. I really plan on doing my homework if I do eventually buy existing accounts. My ultimate goal is to reduce the amount of startup time required to get the company to where I want it.
  4. lco broker

    lco broker LawnSite Member
    Messages: 9

    I agree with Desert dweller. many issues to consider, the first is Can you duplicate the sales for less than the purchase price?

    Second if you do decide to purchase a going entity, consider a cancellation clause. Set aside part of purchase price in escrow,or holdback. then for every dollar revenue that is lost to cancels, set it off from these funds.

    do your homework very carefully. a good company with goodwill and a aged customer base can be a value.
    good luck.
  5. srqlawn

    srqlawn LawnSite Member
    from Florida
    Messages: 45

    What percentage of the purchase price and for how long would you recommend holding that amount?

    Very good idea buy the way.......
  6. Evergreenpros

    Evergreenpros LawnSite Bronze Member
    Messages: 1,154

    Unless you have a dream of building a company from the ground up, don't do it. If you want to be self employed, buy a company.

    Buying a company vs building a company from the ground up is the same as buying or building a home yourself. True, you might be able to save some money and you will gain a wealth of knowledge if you build but there are huge disadvantages to this route.

    When you buy a home, you are buying something of immediate value. In a regular housing market, like a business market, you are building value from day one. This simply isn't true when you build a business. It can take years before your business is worth anything. Many times it winds up being more expensive to build a business than to buy one, especially with low interest rates.

    If you buy a good business you should walk into a liveable income, if you don't then don't buy it. You have to remember that a business that profits 80k a year is probably only going to cost about 120-240k. Sounds like a lot of money but you have to remember you're walking into 80k a year in profit. Subtract loan payments of about 2k a month and you still will clear 56k a year and in about 5-10 years you'll own the business.

    If you just want to buy accounts only pay 10-15% of the annual value of the accounts unless they are under contract. So 100k in normal lawn mowing accounts is only worth about 10-15k. Better deal to buy an existing business with good profit and employees if you can get financed.

    Make sure you have business books done by a CPA then take them and have them verified by another CPA. It's good to go to a bank because they know how to look for scams.
  7. srqlawn

    srqlawn LawnSite Member
    from Florida
    Messages: 45

    That post just about made my decision on going forward with an existing business....

    What would be the value of an account currently under contract for at least another 6-12 months?
  8. Evergreenpros

    Evergreenpros LawnSite Bronze Member
    Messages: 1,154

    It's hard to say without looking at it but here's some factors that determine value of a contract:
    1. Profit of the contract
    2. History of the contract, the longer history the LCO has with the business the more it's worth.
    3. Type of work and will there be a need for specialized knowledge to perform the tasks. In other words if you have to care for 100 rare exotic plants and you don't have that knowledge it will probably cost a lot of money to gain that knowledge and if you have to hire it out there might not be any money in it.
    4. Equipment needed - if you have to buy a $50,000 WAM to do the job it might not be worth it. If you already have the equipment and capacity to do the job it will be worth more.
    5. Overall value of the contract - even if there isn't much profit in the contract doesn't mean it's not worth much. That revenue might cover your contribution margins and make other jobs more profitable. When you have extra capacity it's sometimes a good idea to take low/no profit jobs to help with office rent, office manager, advertising, truck/equipment costs, etc.

    The problem with buying accounts to start a business is that the buyer generally doesn't have the knowledge/experience to maintain the quaility of service customers are accustom to. When you buy an entire business, there are already employees who have maintained a level of quality and will most likely continue with the company after it's sold. This is why a business with a competent manager and good employees is worth far more than a business without. In addition, this is the reason most businesses that are highly centered around the owner aren't worth a whole lot, the owner is the business.
  9. Evergreenpros

    Evergreenpros LawnSite Bronze Member
    Messages: 1,154

    I guess to better answer you question: Most likely in the 15-25% range if there is ample profit. In other words 1x net. 0.5x net for accounts not under contract. 1.5-2.5x net for an entire business not counting real property for a business existing under 5-7 years. More than 7 year business pushing 10-15 years would be closer to 3.5-4x net excluding real property. Past growth history has a lot to do with it as well. If you do 300k normally and pick up 300k in one contract it won't double the value of your business. If you do 300k and over the past 5 years grew the business to 600k with steady growth it would be worth double, if the profit doubled as well. +

    Of course like houses, if the interest rates are low which makes money cheap to borrow the value of the business will go up.
  10. srqlawn

    srqlawn LawnSite Member
    from Florida
    Messages: 45

    I appreciate the effort into the responses on this post....feeling like I need to send a consultation fee to you!!

    This may be a stupid question, but how do you determine what the business owner is really making a year on the business vs. what he/she reports as personal income to the IRS? A prospective seller could tell me that the company nets 80K.....should this be calculated after ALL payroll, including what the owner has taken out or is the 80K what the owner is making or what is leftover after all expenses during the year??

    It's fair to assume that the owner is probably making more on the business that what they report as taxable income.

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