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Buying an existing business


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  #1  
Old 08-26-2007, 11:45 PM
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Hey Team Gopher. I know there was a post recently regarding someone wanting to buy lawn care routes/ accounts and I remember reading it and it came to mind when I was approached regarding the purchase of a lawn care business. I am due to speak with a gentleman within the next couple of days regarding the purchase of this 7+year old lawn care business that he wants to sell. Now I don't have all the ins and outs of the business yet but I can post the little I do know and see if you all can think of anything else I might want to ask regarding the business before the discussion of purchasing it comes up and thoughts on how I should offer a price to him (if he doesn't have a price in mind or if a negotiation comes up).
7 year old business, 75+ accounts, 2 new trucks, trailers, 52" toro, z-machine, etc.. yearly work, incorporated...$75K + yearly
Questions I thought of were how many accounts are residential and commercial? How many are new accounts? I was curious on the residential accounts how many were more than just weekly/bimonthly/monthly mow services? Meaning how many of them purchased additional services from them. I wanted a more detailed list of the trucks and equipment. Would the owner of the company be willing to say on for at least 30 days to make this a smooth transition for the customers and would he be willing to send a newsletter to all of his customers letting them know about the sale of his business and who the new company is that would be taking over the company, meeting with the new customers for signing of new contracts between the previous lawn care provider and myself.
Some of the questions came to mind due to the post I read regarding a similiar purchase consideration. But something like this would take a 2 1/2 month business that is only part time right now to a full time status
Is there anything that you all might think of that might be important that I am forgetting?

Thanks
Rhonda
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  #2  
Old 08-27-2007, 10:02 AM
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Hi Rhonda,

Did you get a chance to see this article? Does it offer you more ideas on what to ask?

Quote:
Originally Posted by [b
Quote[/b] ]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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Old 08-27-2007, 04:22 PM
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Yes, that was the article that I read regarding it and I found a lot of very helpful information in it.
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Old 08-28-2007, 09:03 AM
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Keep us posted on how everything goes with this process and if you have any insight to share with others to avoid pitfalls and find success with purchasing accounts.
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Old 08-28-2007, 09:43 AM
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Right now I am going to let some time go by. The man who is selling the business is looking at the sale like he was selling a restaurant or a piece of real estate and the big difference is that selling a lawn care business and selling a commercial restaurant don't value the same.
Lawn care by the post would be 2-3 months tops of the value of the contracts (and from what I have seen and read that is being generous), the equipment, trailers and trucks.
A restaurant your buying the equipment, the name, the recipes, the clients, the whole business. I'll see if I can find a better way to explain it this afternoon for those who have never owned another business other than a lawn care business.
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Old 08-29-2007, 12:07 AM
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I agree with most of the line of thinking of the Gopher Team.

You have to calculate the net worth of each customer. Valuing an existing business is something I have written quite a bit about.

A customer is only worth the cost (in time and money) it would take you to get that customer, or a similar customer, and integrate him into your regular schedule.

Here's an example: If you place a $200, one month, advertisement in the newspaper and you expect that ad to gain you 10 new customers over the course of the month, the advertising cost is $20/new customers. There are other expenses too. You might only get 1 new customer for every 2 estimates you give which takes considerable time answering phones and driving (gas costs) to the customer's house to give estimates and explain your work and get a contract signed. You can easily spend 2 hours worth of work for every new client added to your roster. What do you value your time when giving estimates. Is $25/hour reasonable? If it is and if you spend an average of two hours getting each new client and the advertising cost is $20/client then the value of each new client to you is $70 plus a premium (finance people call it the "time value of money) for getting your clients now instead of having to wait the course of a month. So, you might find that a new client is worth double the $70 figure....$140 each, as an example.

You also have to look at the time of the year. It's almost September and, believe it or not, it's fairly easy to get new clients right now. There are many reasons for this including the fact that a lot of kids are going back to school and dropping customers. Those customers need a new LCO. Don't pay a huge premium if you can get new clients on the cheap elsewhere.

What is his fee structure? Take a careful look at what he is charging his clients. He will be reluctant to give you his client list but, make him take you to at least 10% of his clients and tell you the nature of the work and what that client pays. If he is doing work at a discount of what you normally charge, those clients are not worth as much to you. Look at his acct. payables. Ask him how many accounts are 60 days past due...90 days past due. This will give you an idea of the quality of clients he has attracted. He is perfectly within his rights to ask you to sign a confidentiality agreement before he gives you any actual data about his business.

Equipment - Though it might be packaged to the point that you have a turn key operation, the equipment is only worth it's individual value. Call dealers, check ebay, look in the classifieds for each piece of equipment. Once again, it's almost September and this is the time of year people begin selling equipment. Calculate the worth of the equipment based on an itemized list and not on a package deal. "Package Deal" often aren't a deal at all especially when dealing in used equipment. Check his maintenance records. Grill him on the operation of the equipment. Did he run the equipment or was it a haphazard employee with a tendency of running the mower low on oil?

These are only a few areas you need to look at in consideration of purchasing a business.

Hmmm...I just read over what I have written, gosh it seems negative. I certainly didn't mean to be totally negative. Buying this business might be a great idea but go into it with these questions in mind.

Oh, one more thing, do you have an accountant? It might be worth $100 to get an accountant to look at this business and give you an idea of a proper valuation.

I hope this helps.

Best Luck:

Keith
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Old 08-29-2007, 12:22 PM
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Hi Keith,

Great information. I don't think you were negative at all! I think you are able to speak to us from a position of authority on the matter.

I really do appreciate your insight.

When you reflect on your past, what % of your client base have you purchased from other lcos?

Was this an avenue you pursued frequently or was it more hassle than it was worth?
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