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Advice on Buying Customers


General Business Discussions

A place to talk about general business discussions.
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Old 07-19-2005, 01:04 AM
mowboy mowboy is offline
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Bruce from Scott Maintenance Company asked the following question.

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Originally Posted by [b
Quote[/b] ]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 aprox. $50,000 CDN. *I am quessing that I am paying him about 9,000 for the 1 contract which is aprox 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 appreicate them.
Hi Bruce,

Excellent question... 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 in any doubt talk to a lawyer and/or an accountant to help you with the deal. If you would like professional and specific consulting for this deal feel free to contact me directly at joel@mowboy.com.

I hope this information helps you and that this works out for you.

* The information presented here is paraphrased from ‘Start and Run a Landscaping Business’ by Joel LaRusic (page 63).
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