View Full Version : Purchasing an existing business
10-01-2007, 03:10 PM
I discovered this forum when searching for questions to ask when purchasing an existing business. My husband and I are looking to purchase a lawn service. We met with a gentleman today who is looking to retire and wants to sell his lawn service business. The equipment includes a small open trailer, a 2005 Snapper Pro, 2 Stihl weed wackers, and 1 Stihl Edger, as well as a trimmer, saw, fertilizer sprayer. We have approx 5 months of season, and 7 months off season. His seasonal revenue is about $4,000 per month, and off season is $2,500 to $3,000.
He is asking $35k. Using the rule of thumb of one month revenue, and two to three months depending on whether there are contracts and how old the account is. I think the figure is rather high. Even if I allow 3 months revenue, and $10,000 for the equipment (he said he paid a little over 5k for the mower). I am coming in at about $20k. He does not have any contracts (believes in the "my word is my bond"), but says he doesn't have any problems collecting. Most of the accounts are 3 to 5 years old. Is there something I'm overlooking that would make the business worth the $35k. He currently works 3 days a week and every other Monday.
So there seems to be room for growth, he hasn't actively been seeking new customers.
I would appreciate any feedback. Thanks!!
10-01-2007, 04:34 PM
I personally would not pay that much.
I would only give him the value of equipment, and one month payment from each account.
just my two cents.
10-01-2007, 05:09 PM
I have been looking at buying existing lawn care business' myself. The general rule of thumb is 2-3 month at the amount those account generate per month (times 2 or 3 months). If your paying for 3 months their should be a lot of extras your getting to make you want to pay more.
I personally would not buy anything unless your getting clients from him to you by them signing a contract with your company. Which means your going door to door with whomever the company is your buying from and getting his/her customers to sign a new contract with your company. Then your paying based on the numbers that sign new contracts. Just because his word is good enough for him doesn't mean you should follow his footsteps. Get it in writing so you don't get screwed over. Also you would want to have whomever your buying this company from sign a "no compete contract" with you. Basicly stating that he will not go after any of your clients (that are being purchased with the new contracts) for "X" amount of time.
So lets say he gets $4,000.00 per month and every single one of his customers signs a new contract with you. Your being generous and want to give him 3 months since they all signed with you. Thats $12,000.00 there. Then your giving him $10,000.00 for the equipment correct? I hope your not giving him full retail for equipment that is used because whether he used it one day or 3 years its still used and not worth its full retail. But lets say that $10,000.00 is the used price. Then your at a total of $22,000.00 and that is not $35,000.00
Is this person stuck on the number $35,000.00? because is he is and he is not willing to go door to door with you to get contracts signed with your business then he really isn't going to get anyone to sell it to. Offer $22,000.00 only and only if he goes to each client with you and gets them to sign a contract with your company. You can also off a 10% bonus to him for each customer that signs with you and in turn signs a new contract with you next year again. Giving him 10% for those repeat signers.
But I threw in my two cents worth. If he is not willing to go that extra yard for you with the contracts I would walk away.
10-01-2007, 05:44 PM
Can you tell us a little background on this? Why you are looking to buy an existing lawn care business and if you have ever run a business before?
Thank you and welcome to our forum!
10-01-2007, 10:08 PM
Quote[/b] (quickcleanlawn @ Oct. 01 2007,4:34)]I personally would not pay that much.
I would only give him the value of equipment, and one month payment from each account.
just my two cents.
How much does geographic location come into play? We're in SW Florida.
10-01-2007, 10:12 PM
Quote[/b] (Clean Lawn @ Oct. 01 2007,5:09)]So lets say he gets $4,000.00 per month and every single one of his customers signs a new contract with you. Your being generous and want to give him 3 months since they all signed with you. Thats $12,000.00 there. Then your giving him $10,000.00 for the equipment correct? I hope your not giving him full retail for equipment that is used because whether he used it one day or 3 years its still used and not worth its full retail. But lets say that $10,000.00 is the used price. Then your at a total of $22,000.00 and that is not $35,000.00
Thanks for taking the time to respond so thoroughly. My calculations were about the same as yours. I just didn't know if I was missing something that would justify his asking price. I knew about requesting a non-compete, he is also willing to run the route with us for 2 weeks (but from my research on this forum that would be common). We are also concerned about his policy of not using contracts. Thanks again!
10-01-2007, 10:26 PM
Quote[/b] (Team Gopher @ Oct. 01 2007,5:44)]Can you tell us a little background on this? Why you are looking to buy an existing lawn care business and if you have ever run a business before?
My husband is a certified auto technician, who is tired of having his pay manipulated, basically working for free, and killing himself trying to make 40 hours a week. I have a BS in Accounting and an MBA. We live in an area that has been especially hard hit by the decline in the housing market. I have been actively looking for work since January and have thought of starting my own bookkeeping service. My husband has had experience in the lawn service business many years ago. He came across an ad on Craigslist offering an existing lawn service. I just think the price is too high, and even a reasonable offer would be way under his asking price. I'm wondering where he came up with his asking price. With our current financial situation we would prefer to buy an existing business, rather than starting at ground zero. I feel very confident in handling the marketing and bookkeeping end, especially with the help of great resources such as this forum.
10-02-2007, 12:51 AM
There's another thread somewhere on this board covering some of the theory of pricing an existing business. *I won't go over all that again.
I also cover this exact question in my materials: Lawn Care Business Program
With an MBA, you surely know quite a bit about Cost vs. Benefit analysis. *Basically, you have to look at it from that exact perspective. *How much will it cost you to acquire a customer list similar to the one he is selling? *Once you find that answer, you must calculate a premium by doing a Present Value of Money calculation in order to have your customer list now instead of building it over time. *This is basic junior year finance course work. *So, I know you have that covered.
Where did you get your rule of thumb on the earnings multiplier? *Lawn service is not brick and morter. * How do you figure $10,000 for his equipment? *For a lawn mower, a couple weedeaters, and miscellaneous equipment? *What is yearly depreciation on lawn equipment, anyway? *I am not saying you are wrong. *I am just asking you to tell me where you get your calculations.
Blondyeee, I'm being a bit harsh here but please take it the way it's meant. *With an MBA and a confident feel for marketing, why do you think it would be cheaper for you to buy an existing business rather than working your butt off marketing your new business? *You can make great money with lawn care but it is not a get rich quick business. *Read some of my messages on this board. *I talk about nurturing relationships with your customers. *It is more than just cutting grass. *It is a business built on trust. *Think about the guy you are buying the business from. *His entire business is built on trust. *He does great without contracts. *Why is that? *It's because his customers know him and the work he does. *You can't buy trust.
There is no way to accurately value a business such as this on a message board. *I will not even try to guess at the correct value but given the assets you list above, I think even 20 Grand might still be too high for your particular case.
Good luck with your decision making. *I speak with new (and prospective) lawn care business owners almost everyday. *It's great hearing different perspectives and it's a great business if you get off to the right start.
10-02-2007, 04:41 AM
Quote[/b] ]My husband is a certified auto technician, who is tired of having his pay manipulated, basically working for free, and killing himself trying to make 40 hours a week. I have a BS in Accounting and an MBA. We live in an area that has been especially hard hit by the decline in the housing market. I have been actively looking for work since January and have thought of starting my own bookkeeping service. My husband has had experience in the lawn service business many years ago. He came across an ad on Craigslist offering an existing lawn service. I just think the price is too high, and even a reasonable offer would be way under his asking price. I'm wondering where he came up with his asking price. With our current financial situation we would prefer to buy an existing business, rather than starting at ground zero. I feel very confident in handling the marketing and bookkeeping end, especially with the help of great resources such as this forum.
The reason I am asking this is because I don't want you to have problems just getting out of the gate here. This is all going to be new for you. Running your own business is a new skill set that you will all have to pick up on to be successful.
I think you should start looking into offering your bookkeeping services. I think your husband should start experimenting with lawn care. Has he also considered offering auto repair services? He knows how to do this and could charge a premium. He could offer 2nd opinions to people who take their car to a shop and then aren't sure if they are getting ripped off. Maybe he could do both! He could advertise that he is a "certified auto technician."
It's my view that you will find more success, faster, by building off your strengths.
Sure you could go and buy this existing lawn care service and things could be fine. But since this is all new, there are soo many variables here, a lot could go wrong and you could be out some serious money. Personally, I would just start it from scratch and learn as I went. I think that would improve my chances of success. I would use that money as a buffer to live off of as I grew. If you were already running a lawn care business and wanted to expand by buying an existing one, you would be able to better judge if it was worth it or not and you would be able to see any pitfalls, a lot sooner.
But if still want to consider this, let me cut and paste an article that might help you.
Keep us posted as to what you are thinking.
One of the easiet yet most often overlooked way to aquire lawn care customers
Suggestions on buying lawn care customer accounts.
When you are trying to get your lawn care business to grow, there are many ways to gain new customers. A very simple yet often over looked method is to simply buy them from another lawn care operator. These ideas came from our free e-book Be A Lawn Care business Rebel.
Instead of trying all these different tactics to gain new customers, what if you simply bought them from another company? Eric of Lepping Lawn & Landscape asked "Is there a basic valuation when buying an existing mowing business from another company? The company is reasonably large and would like to get out of the residential lawn business."
Joel Larusic of http://www.mowboy.com and author of Start and Run A Landscaping Business said "This is a very good question . . . one that comes up a lot. It is touched on in pages 63-64 of my book but I can give you the short answer here.
As a very general rule I would say that a residential customer is worth about the value of one month's revenue. However, it may be more or less depending on a several factors:
1 ) Where you live? In my area, residential customers are not all that hard to come by so it is not likely to go much higher than 1 month's revenue. If you live in a 'tighter' area, be prepared to spend a little more.
2 ) Is there a signed contract? How long is the contract for ( 1 year, 2 years ). This will affect the price too.
3 ) How much do the customers spend in extras each year. If they spend a lot in extra work consistently then expect to pay a little more for them.
4 ) Are the customers new? In other words, what is the existing customer loyalty like. If they are new to the seller, they are likely to drop you after you buy them. If they have been around for a while they will likely trust the decision of the seller to have you take over.
In any case do your due diligence in researching the customers. Find out the answers to the above questions and ask for job costing information on each of the customers so you can see what the actual profit of the job is. Also ask for a complete accounting record for each customer ( do they pay on time? ). Work with the seller to come up with a suitable transfer period. At the least, have them write a letter of explanation/introduction. Ideally though, they would personally introduce you and perhaps even work side-by-side with your for a few weeks to ease the transition for the customer."
Bruce from Scott Maintenance Company asked "I am currently operating a business in which I am buying from another company who is getting out of the business. The selling price is the value of 1 year on a 2 year service contract in which I perform the service and the seller gets the money for that year. In return I get the balance of his customer list. The business gross per year is approx. $50,000 CDN. I am guessing that I am paying him about $9,000 for the 1 contract which is approx 1- large and 4 small properties. This deal is verbal only. I want to write up some form of "transfer" or "non-compete" agreement. If you have any comments I would appreciate them."
Joel LaRusic responded by saying "buying customers is a great way to build your business but there are some important things to consider.
I would use caution proceeding with your deal. Currently your seller is holding all the cards. I am assuming that, for the first year, you are doing the work and he is getting the money? ( as opposed to you getting the cheques and then paying him ). So he is in control of the money. As well, he has indicated only verbally that he will hand over all of his $50,000 in contracts at the end of the year. Short answer then is that you are smart to demand both a signed agreement regarding the conditions of the sale and a non-competition agreement. Consider these other points too.
- General rule of thumb for buying customers is that they are worth about 1 month revenue. If they are commercial you'll pay a little more and if there is a signed multi-year agreement in place ( which you said there is ) then this will push the price up too. So it could be worth as much as 2 or 3 months revenue depending on the situation.
- What about the other $40,000 worth of contracts? Are they commercial or residential? Are they long term customers or brand new ( the longer that the selling company has served the customer the more likely that the customer will trust that he or she is being treated fairly ** and will accept you as the new contractor ). The $9,000 you mentioned seems a little steep but it really boils down to the value of the other customers on his list.
- Ask to see his books ** you have the right to examine them. Ask him to provide job costing information so that you can see if the customers are profitable. Ask for a complete account history of all his customers. Ask to see them now, not at the end of the year. If he does not want to produce them, be prepared to call off the deal.
- I am leery about going a full year doing the work for him. Working together for a couple of months makes good sense and helps make the transaction smooth for the customer . . . but a year? If possible offer to reduce this time even if you have to pay some cash. A year is a long time and if things get awkward half way through, you will likely end up with the short end of the stick.
- Having said that put everything in writing whatever you decide to do. Record customer names, addresses, revenue and costs. Make sure the selling company agrees to help you with a smooth transaction ( ie by writing letters explaining the situation and assuring customers that quality will not drop ) and document this in the signed agreement too. As well, as you mentioned, put that the selling company cannot compete against you ( at least for the customers on the list ) for 2 years or so.
There is a lot to consider and a lot to lose here so caution and prudence is key. If you have any doubt, talk to a lawyer and/or an accountant to help you with the deal."
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