Posted by Sherri on March 08, 19100 at 07:25:12 :
In Reply to: Should I buy an existing company? posted by Cristina Gentzkow on March 07, 19100 at 23:18:57 :
Hi. Here's another one I can respond to. Right now we are in negotiations to purchase another competitor. We've been around 5 years, they have been around 25 years. Here are some thoughts we put into our proposal to purchase (that has not been accepted yet).
We took a real hard look at the financials. Backed out all of the "one time customer sales" and Contracts they had that were no longer available. The company which did over $600,000 in 1999 has only about $180,000 in potential sales for 2000 if we buy them. Our offer was much lower than her asking price. (can't give the details as we are still in negotiations)I usually think that accounts are only worth 10% of the gross sales. Accounts are intangible, unless there are signed contracts guaranteeing sales. Because as we all know, catering customers have a tendency to move on easily to the next caterer offering a better deal.
As part of the sale, we also get the name of the company, the telephone number call forwarded to our offices, the database of contacts, the account histories on hard copy, the marketing materials and video.
As for keeping the clientelle, when I sold a print business, all but two of my clients are still with the buyer. They worked the accounts well. As long as the customers were happy and satisfied, they may stay with you. but keep in mind that competitors who hear of the sale may go after those accounts. Maybe you could check the accounts by asking for 6 clients, pulled randomly from the files, to contact and determin if they were happy customers. You'll have a better flavor for the accounts and their value. REMEMBER, it must be random.
As for the lease, negotiate your best deal. We just negotiated a lease for almost $875,000 over 10 years. It was a huge deal for us. We were able to play on the fact that the building was vacant for almost 3 years and that the owner was looking for the right person to take over the building. But we could not afford what he wanted up front. So, we built it into the back portion of the lease. He gave us no CAM for the first year and a low payment of $4200 a month. For the first 3 years, our payments will be low while still gradually increasing. About year 5 we will be brought up to market value for the building. This is giving us time to build up the business. We negotiated limits on building repairs such as roofs, HVAC systems, etc.
Really look at their financials. Is there 13% left over to make the monthly payments? Do you have to incur more costs to handle the additional business and what are those costs? How large a market share do they have and can you acquire that market share without having to purchase the business? Are they going out of business or are they going to definitely sell? How long have they been trying to sell? I could go on and on. These questions help me determine the value of the company up and above what the seller is telling me and helps me to decide whether to put in an offer.
SUMMARY OF A BUSINESS SALE:
I sold a print shop 7 years ago and with equipment, inventory and accounts received 30% of my last year's gross sales as the offer price. We accepted the offer and allowed the buyer to make monthly payments based on sales from our accounts. (Monthly payment was 10% of our account activity for the previous month). We received a bonus of $5,000 if the buyer did not pay off in a year, which he did not. At the end of 36 months, he still did not have enough to make a balloon payment and requested an 8 month extension at 19% interest.
Hope this helps.
Sherri
I just spoke with the bank last week about a loan to purchase our competitor and the lending rates here are between 9.25% and 10.75%. Offer the seller what you would be able to get a loan for at the bank. It is still higher than they would earn in a CD or savings account. 13% is quite high. My bottom line after five years still has not reached double digits when speaking of net profit.
: I have an opportunity to purchase a seemingly viable catering business. The mortgage will be pretty high at 13% of current gross income. I'm wondering if anyone out there has bought an existing business and what, if any, negative consequences you experienced. For example, any loss of clientelle, problems negotiating a new lease, any unforseen issues that I should be aware of???? Any help would be appreciated.
: Incidentally, I already own a fledgling company, about 4 months old. Does anyone have advice about whether to stick it out and build my own clientelle or would I be wise to buy up this business that would give me about 50K in state of the art equipment and clientelle.
: Thanks a bunch.