The cost of a new customer?

Discussion in 'Business Operations' started by LawnLad, Feb 8, 2002.

  1. LawnLad

    LawnLad LawnSite Senior Member
    Messages: 738

    Let me first say that I'm no expert in this topic. But I've done it once or twice.

    There are advantages and disadvantages to buying an existing client list. The value of any service business is the owner that runs the business and the type of relationship that the owner has with his customers. What kind of support will you get from the departing owner with his old customers? Will he be there to answer questiosn or help ease the transition if the customer is a little leary?

    You are not guaranteed that any of the customers will remain with you after you 'buy' the rights to contact them. I'll address this in a minute in the pricing part of it.

    When taking on somone else's customer list, you need to make sure that your services and contracts will align - or will the new customers accept your pricing and contracts. How will you manage this transition? Will they pay you? What's in the current contracts about payment? Will they accept your contract?

    How does his customers value his service? How long have they been with him? Are they with him because of price? His service? The relationship? Do they pay on time? Have you seen payment records? Can you take over these assumptions and have the customers appreciate you in the same way?

    Look at the revenue generated from each customer. If he's got a couple of Dog's... maybe you don't buy them, or if it's all or none, negotiate to pay less for these. A couple of Star Customers - you might pay more for them. Particularly if he takes you and personally introduces you to them and walks the customer through the transition.

    Ultimately, the list may be worth something. But how much is more based on how long it would take you to find those 50 hot leads and sell the work yourself through your traditional methods. Guaranteed you'll loose some of the customer in the transition. How well the process is executed will determine the percentage that remains. You've got to overcome any of their objections early through a clear, consise message that is commuincated perhaps by the two of you.

    The list has more value to you if the customer stays with you for a year, two or three years. Structure your buy out so you pay the previous owner a gross percentage of existing sales for the three years. If you upsell a client on a patio or additional service that they didn't have before, you need not pay him back on this sale. So clearly define what service each customer is receiving, what the annual revenue is per customer.

    Maybe give an initial down payment of X dollars per customer for the opportunity to contact them. Offer 3 to 5% (or some number) for the first two years on each customer, and maybe 7 to 10% on the third year. This will encourage the selling owner to hang in there with you, as the big payout is three years down the road. If his customers are not relationship based... this may not work.

    The price you pay also depends on how desperate you are and how he perceives this. Are there any other going concerns that are offering to buy his customers? If not, then you've got more leverage to negotiate terms. Maybe three years is too long... shorten it to one or two years.

    Rather than just basing it on the individual customer, you could base on it gross sales for the group. If total sales for 50 customers is $50,000... than pay a percentage on whatever sales you derive from them at certain points. Maybe the higher the percentage that remain, the higher the percentage you'll pay. So set up a tier structure.

    $50,000 in existing buisness
    $45,000 to $50,000 after one year = 10%
    $35,000 to $44,999 after one year = 7%
    $20,000 to $34,999 after one year = 5%
    $ 1 to $19,999 after one year = 3%

    The stronger the list, the more the seller will make. You could also structure this so there are different payout points over time so it's not just at one year. Depends on what you want.

    Is the seller going to remain in business? Will he continue to offer other services to these clients? You should probably have a non compete for a period of time that prevents him from contacting them or doing any type of work for them for a reasonable period of time. And you need to make sure that he's not selling this list to someone else as well on the side.

    Hope this helps. Good luck.

    PS - only bought clients a couple of times. For all the times that other contractors have offered to sell... I always found it to be less expensive to find my own clients since they usually wanted too much for their list or the needs didn't match up. Don't be afraid to walk away. If it works out... it's a great way to grow. But don't presell yourself on it before you know all the 'dirt' on his customers. Remember, you'll inherit the revenue as well as all the habits, promises, etc.
  2. TGCummings

    TGCummings LawnSite Senior Member
    Messages: 773

    Sent a notice to my customers in December that I'll knock 25% off one month's service for every referral they send me that becomes a part of my regular schedule. Send me 4 and get 1 month free!

    Haven't received one referral from this yet... :(
  3. HOMER

    HOMER LawnSite Gold Member
    Messages: 3,183

    I don't think referrals are as plentiful as some make out. I know I do good work but I can count on one hand the number of customers that have referred me in the past 2-3 years. They like me but don't want to share for some reason. As for cost to gain a new customer? Personally I think that cost can be re-couped within 1 or 2 visits. It's just part of it. If you want the business you have to go see the customer.
  4. 65hoss

    65hoss LawnSite Fanatic
    Messages: 6,360

    I guess keeping customers are like wives:

    It's cheaper to keep her!
  5. marcie

    marcie LawnSite Member
    Messages: 21

    65hoss............. be nice;)
  6. Nebraska

    Nebraska LawnSite Senior Member
    Messages: 525

    As far as referrals, keep asking. In person, with letters, etc...develop something that will make it easy for them to refer as well as benefit them in a perceived positive way; of which there may be a multitude of ways. Referrals are the most cost effective method of attaining a customer.
  7. Tim Canavan

    Tim Canavan LawnSite Member
    from Houston
    Messages: 218

    I will also be offering a price reduction for referals from existing clients. Just do as much as you're comfortable with. I think it's a great idea and it's a cheap way to advertise. Getting someone else to do it for you can be done another way too. Get with your local realtors. Make up a catchy flier and put it in each one of their mailboxes at the realty office. They need you to help sell their homes. What's the first thing a potential buyer sees? The yard. You get the point. Anyway, after you get a couple of realtors in your pocket, hopefully you are also getting the people moving in. Maybe even the people moving out if they stay in the area. Also, when doing jobs other than just mowing ( clean-ups, mulching, planting, etc.) you should have a yard sign. Leave it for a week or so. I hope you have signs on your vehicles as well.
    As far as buying an exising company, I would not pay more than 2 to 3 months of what it's worth minus 5 to 10 percent for those you would probably lose. In other words, If 50 yards gross 5,000 a month, then I would go 15,000 minus 5 to 10 percent. I would also make sure they are under some sort of agreement. Make sure the seller takes you to each and every one of those accounts to meet and talk with them personally. Good Luck.
  8. B. Phagan

    B. Phagan LawnSite Member
    Messages: 95

    One major thing about referrals........IF YOU DON'T ASK OR SOLICIT FOR THEM, YOU PROBABLY WON'T GET ANy!

    If you are simply buying customers from someone else and equipment, etc is not involved:

    1. Look at the profitability of EACH customer
    2. Will that customer mix fit into your schedule
    3. What additional services could you add to increase profits
    4. How many of them will you lose in the transition and is that provided for in the agreement
    5. What is your return on investment, over what period of time, etc

    Just wrote an article for purchasing and selling businesses. Check my site and I'll send it to you if interested.
  9. TGCummings

    TGCummings LawnSite Senior Member
    Messages: 773

    Hey Bill,

    Good to see ya! I'll be keepin' a lookout for your advice here. Always a pleasure to have you on our favorite forums, spreading the wealth (of information!) as it were.

    So far I still haven't had any luck soliciting referrals. I get 'em, every year, but I sent out a letter with an offer of reduced cost services for more referrals. My hope that it would make folks work a little harder for me, getting me more business. Hasn't panned out yet, but the season is still real early...
  10. B. Phagan

    B. Phagan LawnSite Member
    Messages: 95

    Hey TG,

    Well, first suggestion is to NOT give discounted prices for referrals.........possibly a gift certificate to Outback, Carrabas, Red Lobster, etc. Buy a few extra for your use!

    Best time to ASK for referrals is when you just got that new customer, monthly newsletters, surveys, etc. Keep pounding'll happen.

    Don't know where you are located but due to a great demand, I've put together "Bill Phagan's Green Industry Sales Pro Jubilee" in Florida and coming to NC, SC, GA and Virginia. E-mail me for more info. This is a full day on marketing & selling to the commercial and residential marketplaces for landscaping and maintenance. Also blending in other info that's biz related.

    Good luck!

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