When Buying a Business?

TreeVB

Well-Known Member
A tree service has come up for sale in my area and we are looking for advice on the right questions to ask/how to go about it. I know the owner and have contract climbed for them in the past. His reason for selling is that he is tired of running it by himself (bids, scheduling, climbing, babysitting, the works), and is also ready to retire. The sale includes a 2010 Vermeer bc1500, 2006 GMC 5500, 2006 Chevy 2500 crew cab, 2015 Rayco RG 70 stumper, 2012 Rayco RG 25 stumper, 2006 GMC 60 ft. Bucket truck with forestry package, and the owner will stay on with company for six months to smooth over any any business relationships and to show how he has been running it. He has been in business for 15 years and moved to this area 4 years ago so he is well established with great reviews and is always busy. He only runs one crew (I see value in adding another chipper and easily be set up for two crews) and his annual gross is $400k. Asking price is $250,000.

I'm a CA, CTW, and have been in the industry since 2009. I had my own business here for two years that I ended last year because I was scared of the growth of it and didn't want to invest at that time. This seems like a crazy good deal and would be bummed if we didn't try and go for it. My wife and I are going to schedule a meeting with the owner and would like some advice on what questions to ask. Any advice would be greatly appreciated.
 

Jehinten

Well-Known Member
Are you buying the company name and a backlog of customers, or just the equipment. If the former consider the name and if it works for you. "Joe's tree service " will always bring up questions if your name isn't also Joe. Sure you could change the name, but you'd basically be starting over on the reputation of the company at that point. A backlog of customers would also be nice, if he's already sold $20,000 worth of work, that gives you a bit of security heading into it.

When he stays on for 6 month's, will it be as part owner and he receives 50% of the profits or as an employee at an hourly (or salary) amount?


Could be a good deal, especially since you already know the owner.
 

TreeVB

Well-Known Member
Good info guys and I am taking notes.

Equipment is all owned and will look into back taxes. Included in sale is all the equipment, phone number, web site, all client list and the name. It's the guys last name which could be a bit different but it will work.
 

Reach

Well-Known Member
Get a hold of his last five years of tax returns and financials. Take them to your accountant, or find a good accountant if you don’t have one, and have him go over them all very carefully. If anything looks too good to be true, or any even very slightly red flags, run away very quickly! And whatever you do, do not go against the advice of your accountant or business lawyer. That is always a bad idea. As one who has been through all of this before from a buyer‘s perspective, I speak from experience.
 

Gorman

Well-Known Member
If that bucket has a cat you’re good. If it’s navstar bridge engine watch out for that thing.
 

ATH

Well-Known Member
Don't look at gross revenue. Look at net profit of the business.

Dave Ramsey suggests valuing a business as follows (best I remember from sometime past):
*Assume you hired somebody to run the day to day operations and you just sat at home. How much money would you make? That reflects how much the BUSINESS makes. What he is currently making as the manager is what an EMPLOYEE makes. (yes...most of us small business owners are an employee of our own company and the majority of our income reflects our value as an employee more so than as an owner...until you have multiple crews running).
*If the answer is $0, you don't own a business, you own a job. People shouldn't buy jobs, they should buy a business.
*Once you know how much the BUSINESS makes, multiply that by a number that is an acceptable return on investment - often that is going to be around 3-5. If you can get it for less, that is a great deal. If you are paying 7-8 times the annual income for the business, that is not a good ROI.
*Note, this formula may not equal the value of the equipment. If that is the case, think about the value of purchasing just the equipment and make that your offer to buy the whole business.

Other ramblings/my thoughts:
Don't overvalue somebody else's client list. Just because they removed a tree 3 years ago for Mr. Jones doesn't mean Mr. Jones considers them "his arborist"...they were just the low bid on a single removal. Look at what is on that list...annual maintenance clients - much more valuable. But a percentage of those will go shopping when they find out the business was sold.

Do you currently own a company or are you just a contract climber? If you already own, you gonna own 2 companies or merge them into one? If so, which name you using? If your's, what is the value in buying his?

If you don't currently own a business, why do you want to? Don't get me wrong...I love it. But there are times it would be nice to have a paid vacation day and be able to close the computer at 5:00 and call it a day. It is 8:30pm now. After wasting a few mindless minutes here and elsewhere, I'll be doing bids and invoices until 11:00 or later tonight...and I will be no where close to being caught up.

Not only do you need to check for debt and unpaid taxes, look at Workers Comp claims (and possibly insurance...not sure how that works). In Ohio if I buy a business that has a bad Workers Comp rating because of claims, I get that rating to go with the business.
 

ATH

Well-Known Member
That all depends on what you are buying. If you are buying the whole business (or example it is an S-corp or an LLC and you are purchasing all ownership interests in that entity) you agree to take on their liabilities. If you are just buying their assets you would not take on their liabilities...or their name, contracts with that company, trademarks, etc...
 

southsoundtree

Well-Known Member
What is the going rate on that equipment?


How much time are you going to put into the equation that is not recorded 'on the clock' that the owner has done? How does that affect the business' profitability, absent the existing owner?
 
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marlinspiker

Well-Known Member
That all depends on what you are buying. If you are buying the whole business (or example it is an S-corp or an LLC and you are purchasing all ownership interests in that entity) you agree to take on their liabilities. If you are just buying their assets you would not take on their liabilities...or their name, contracts with that company, trademarks, etc...
Not necessarily true. You can buy a business or sell a business without assuming the liabilities. I did just that.
 

southsoundtree

Well-Known Member
Go work on his crew for some time. Get the feel of the management and employee culture. Will they stay under your style? Is your style jiving with their existing style?
 

TreeVB

Well-Known Member
Go work on his crew for some time. Get the feel of the management and employee culture. Will they stay under your style? Is your style jiving with their existing style?
That's just it. He is the management and he has been complaining about how bad some of the employees are. He also mentioned how they dont always do proper work. A lot of do what the customer wants as easy as possible to save them some money. Starting to veer away from the thought. Probably too much of a headache to fix at this point
 

Reach

Well-Known Member
That's just it. He is the management and he has been complaining about how bad some of the employees are. He also mentioned how they dont always do proper work. A lot of do what the customer wants as easy as possible to save them some money. Starting to veer away from the thought. Probably too much of a headache to fix at this point
If the business owner is complaining to you about the employees, my thought would be to run away. If the employees were doing the complaining it might be a little different, but either way I would want to have someone work with them for a time to make sure everything is going as well as the owner says.

Business owners are never entirely truthful about their company, who doesn’t try to make themself sound at least a little bit better than they really are?
 

southsoundtree

Well-Known Member
Beyond equipment value, how much are you spending on 'the business'?

What is the business profit margin, on $400k in revenue?




ahhh, I don't see a material handling machine.
Why by an outdated company?
If the employees are doing things the old, hard way, do you really want them? If they were proficient with a mini-loader at feeding that chipper, and could run a GRCS, sure you want them. If not, are some/many of the guys just sticker-picker-upper-guys-feed-stick-eater-machine-guys?
 
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