Buying Your Competition is Not so Easy
Fair Market Value is Only 1 Part of the Equation
According to the experts, the fastest way to get into the HVAC business or to grow your existing business is to buy out your competitors. After all, in one fell swoop you eliminate some competition, take their trucks and equipment, keep their employees, and, most importantly, gain their customer base. Who wouldn’t want to do that? In all honesty, it’s sound advice. Anyone with cash, or access to cash, should be able to stroll into town and start buying up mom and pop shops. In a few months, you could be the largest company in town without ever going through the hassle of starting from the ground up. So, if this is all true, why aren’t businesses being bought up left and right?
Like most things that look great on paper, reality is not quite that simple. Once you’ve made the decision to buy a business, buy into a business, or sell your business, you need to prepare yourself. You are going to invest a lot of time and effort as well as experience some ups and downs along the way. It can be a real roller coaster ride, so, hold on to your seats.
Finding a Business is the Easy Part, Right?
Ah … No. Imagine you’re the business owner announcing to the world your business is up for sale. Would customers be as willing to buy from you knowing some unknown person was going to service their warranty? Would employees stay with the company knowing a new owner with new policies is coming on board? Would your vendors be as willing to extend you credit knowing you are on your way out? Individuals interested in selling their business keep this information confidential so the company will be as profitable as possible before the sale. Because of this, getting buyers and sellers together is one of the more difficult steps in the process.
You can go to the Internet; there are a lot of “business for sale” websites that will email you listings on a regular basis. There are a few downsides, however. You will begin receiving emails that start with “Based on your profile, you might be interested in these businesses,” followed by listings for barber shops, gas stations, bars, and my favorite — tanning salons. I have no idea how these are related to HVAC contracting, and I don’t know anyone in the trade who woke up one morning and thought their true calling in life was to run a tanning salon.
When you finally get a listing for an HVAC company, it is likely located in another part of the country. Then there is the risk that the listings are out of date. I know of at least two active listings for companies that sold more than two years ago. The odds of finding a business in your market through a website are low.
Using a local business broker is an option. However, most mom and pop shops don’t hire brokers when they are ready to sell. One local broker told me they had only listed a couple of HVAC businesses in the past five years. Not all brokers are created equally; one actually asked me to call his listing to see if it was still on the market. I did and it wasn’t. Having a broker keep an eye out for businesses that come on the market can be a great asset, but don’t expect him or her to have many opportunities for you.
Direct mail seems a little old fashion but, believe it or not, it gets the most responses. Start by getting a list of companies in your market. Many times the local licensing board maintains a list of licensed contractors that you can download. If not, get online and search air conditioning companies near your zip code. You may be surprised by the large number of companies in your market. St Louis, for example, has about 900 licensed contractors listed.
The next step is to draft a pleasant letter that includes who you are, that you are interested in purchasing a company, your contact information if they are interested, and a note assuring them this conversation will be kept confidential. Don’t forget to thank them for their time and consideration. If you currently own a company, don’t use company letterhead or envelopes for the mailing. Be sure the letter is addressed to the business owner, not just the business, and include “Confidential” on the envelope itself. An employee inadvertently opening this letter can kill an opportunity before the owner has a chance to consider it.
It’s best to send your letters during the first quarter, when most companies are slow and some owners are trying to remember why they got into business in the first place. The majority of your letters will go in the trash. About 10 percent will be returned because the businesses have closed. (This can be very valuable information, but that’s a topic for another article.) Roughly 1-2 percent will be curious enough to contact you.
Is it Worthwhile?
Ultimately, a business is worth what the buyer is willing to give and what the seller is willing to take. That said, you have to have some starting point to determine the worth of a business. There are a couple of different ways to go about determining a company’s worth. One way is to take the fair market value of the assets, the trucks, tools, equipment, buildings, etc. plus 3-5 times profit. Keep in mind that fair market value is what you could sell the assets for and not what it takes to buy them new. Another way to value a business is to take the fair market value of its assets and factor in its potential revenue. Its potential revenue is how much work the company does and what that work would be worth if you were running the show.
For example: If the company you are looking at has $75,000 in assets and $10,000 in profit, but the asking price is $250,000 you may pass on the opportunity because, based on assets plus 3-5 times profit, the company is worth at most $135,000. However, if the company runs 2,000 calls a year, and, under your management, they should generate $250 per call, the potential revenue is $500,000. If profit should be 10 percent, the company should have a $50,000 profit. This means the company’s potential worth is $225,000-$325,000, and the owner’s asking price is in the right range.
One last thought on a company’s worth: Many owners who are selling their business get emotionally attached to the company name and inflate the asking price because of how much they perceive its value to be. The bottom line is: If you walk down the street and ask 10 random people to name the first air conditioning company that comes to mind and at least four of them don’t give that company’s name, it has no real value.
Dealing with Delusions
I don’t say this to be mean, but many owners don’t know the most basic information about their businesses. What they think the business is worth is, in reality, what they would love to get for the business and not based on the business’s performance. Recently, I spoke to an owner who stated, “If the price is right, I’m ready to sell.” When asked what the right price was, he responded, “I need to clear $800,000.” After a little more conversation, the owner admitted he didn’t know the company’s revenue or profit margins over the last couple of years. The business only staffed four employees, including the owner, but he replied, “The building is really nice.” Another owner I met with, who was getting older and wanted to slow down after running his business for 40 years, insisted that his company had a great reputation and was well known in the community. While he claimed it was well known, he didn’t know how many customers he had, and all his records were filed on paper. After a little more investigation, it was found the company had in fact been in business for a long time but had no website, logo, or singage on the building. When asked why he never put the company’s name on his trucks, he responded that he was trying to fly under the union’s radar.
Trying to manage these owners’ expectations and educate them about what they can reasonably expect to get for their companies can be a delicate process. To them, the business is like part of the family, and that impacts how much they are willing to accept before they part with it. You can make headway with these types of owners, but it’s likely to take a lot of patience.
Do Yourself a Favor
If you are thinking about selling your business, learn everything there is to know about the business and the selling process. The more you know about your numbers, the better. Know what your assets are and what your balance sheet looks like. Know how many customers you have and how often you serve them. After that, if your business isn’t truly worth what you need to get out of it, work harder to make it more valuable.
As I said in the beginning, buying a company to break into the business or grow your existing outfit is sound advice. Just be sure you can afford to invest the time and effort necessary to find the right business and negotiate the sale. You will experience some setbacks along the way, but if you stick with it, eventually you will be the largest company around.
Publication date: 6/23/2014