If you've ever bought a business...

[Fuamami]

are you glad you did?

Did it work out the way you had hoped? Why or why not?

What would you have done differently?

Are we absolutely crazy to consider buying a business in this economy?

Some details: Dh has worked at the same company for 7 years. He's in construction, pretty skilled at this point, has even surpassed his boss, but he's still really topped out salary-wise (currently making about $55,000 pre-tax, no benefits whatsoever). Last week his boss told him he couldn't afford to keep him on salary due to the slow-down in building and he had to either go to piece-price (this means a significant reduction in wage) or buy the business from him. He threw out a price of $400,000 off the top of his head, but he's researching how much he really wants and when he decides we're going to get look at the books, etc. Meanwhile, we're discussing. We don't have any cash, we have about $40,000 equity in a rental property (most likely dropping daily), and we could get a private loan from a friend for $115,000. So we're not even sure what kind of financing we're going to be able to put together. Or if the business is even viable. I'd love to hear from someone who's BTDT.

TIA!

[LoMaH]

I haven't bought a business myself ...... but I grew up involved in my father's businesses (several incorporated rental multifamily -RE, various small commercial businesses).
Based on the little info you gave...... rushing a bit here and rambling.
I don't think it's a good idea for you to buy. (and for the record, I'm Pollyanna-ish optimistic)
I'm sorry to say this, I really do mean well, but I think you'll be getting way in over your heads (in debt and setting yourself up for financial disaster).
1. You'll have to borrow 100%. (that's a huge risk and will put you in a hole- just like purchasing a house, if you don't even have the downpayment- you definitely can't afford it.)
2. I'm sure your husband's very skilled, however, he needs to know the business side of it (how to run a business) - it's crucial (to get good financial advisors, lawyers, accountants... have basic knowledge of payroll, marketing, taxes, insurance, etc., etc.), have access to more $$ to reinvest (often from another source), expand, emergency fund to carry you through hard times (both personally and for the business), $$ to even begin a job.
3. His boss, who does have some of this knowledge of running a business is not doing well, so imagine .... you already know business is slow now and have no clue when things will pick up again. Does he have a specific plan to turn things around?
Has his boss gotten other offers? (I bet not)
4. What is it that he'll be getting anyways? (contracts, company name/seal, equipment?)

Why doesn't he just figure ways to find extra work for now?
Get a successful mentor/s to tag along with and learn the business side- even on a voluntary basis. Read, research, talk to others, read some more and network...... and save, save, save $$$..... learn the legalities, licenses, permits, funding, financials, business plan, etc.... so that in the future, if he's still interested- he can start his own business.

Do your homework!
The majority of businesses fail because people plunge in w/o contigency plans and sufficient knowledge.
JMHO
Good luck to you.

[Caneel]

I have BTDT in a construction business purchase personally as well as an underwriter for commercial business loans and as a business analyst consultant.

I agree with all of the previous poster’s points.

My quick thoughts:

I don’t like the boss’s guilt trip tactic of “I can’t afford to pay you.” Big red flag about his character and likely a red flag about the financial stability of the current company.
In my banking and analyst experience, most owners are completely delusional (ok, maybe a bit strong of a word but I have yet to see someone sell an undervalued business) about the true value of their business. If you pursue this purchase, get an outside opinion from a skilled accountant.

A third-party accountant can guide you on whether or not the business is viable. A lender (from a reputable bank) can also take a look at the business financial statements and evaluate the business’s ability to repay its debt.

Does DH have any desire to be an owner? Or is he just trying to save his job?

If he likes his current job, he can kiss it good by, seriously.

Owners no longer have time to go out and do the hands-on job that they love. They are stuck behind the scenes doing taxes, dealing with employee problems, chasing customers for money, etc.

DO NOT BORROW THE MONEY FROM A FRIEND! Go to a bank or let the current owner finance it for you. If either option isn’t available, don’t buy the business.

Construction businesses can burn through cash so fast it will take your breath away. In my construction experience, the seasonable nature of the business, tax payments, insurance payments (often need to be prepaid) are a huge drain on cash flow.

Good point about “buying” the business – Just what are you buying? If it a bunch of well-used equipment, it is likely cheaper to start your own business. (This also requires capital.)

To answer your specific questions:

Are we glad we did it? Yes

Did it work out the way we hope? Yes and no. It turned out to be far, far more work and harder work than we ever could have imagined. We hoped to have more money by now. While our business is profitable, the capital requirements to keep the business upgraded and competitive eat up some of the profits we hoped to have in our pockets.

What would you have done differently? Learned to handle employees better. Mistakes were made here that are hard to undo.

[Fuamami]

Thanks for the input! I'm going to answer some of your points below.

Originally Posted by LoMaH

I haven't bought a business myself ...... but I grew up involved in my father's businesses (several incorporated rental multifamily -RE, various small commercial businesses).
Based on the little info you gave...... rushing a bit here and rambling.
I don't think it's a good idea for you to buy. (and for the record, I'm Pollyanna-ish optimistic)
I'm sorry to say this, I really do mean well, but I think you'll be getting way in over your heads (in debt and setting yourself up for financial disaster).
1. You'll have to borrow 100%. (that's a huge risk and will put you in a hole- just like purchasing a house, if you don't even have the downpayment- you definitely can't afford it.)

Yes, this is the frightening part. We have various assets, but nothing very liquid, especially nothing we'd like to liquidate right now.

2. I'm sure your husband's very skilled, however, he needs to know the business side of it (how to run a business) - it's crucial (to get good financial advisors, lawyers, accountants... have basic knowledge of payroll, marketing, taxes, insurance, etc., etc.), have access to more $$ to reinvest (often from another source), expand, emergency fund to carry you through hard times (both personally and for the business), $$ to even begin a job.

I actually think he has a pretty good idea of how to run this business, in addition to his skills, because he has been doing a majority of the sales and management for the past three years. Neither one of us have any knowledge of payroll, though I have worked in marketing and sales. The money is the big issue, again.

3. His boss, who does have some of this knowledge of running a business is not doing well, so imagine .... you already know business is slow now and have no clue when things will pick up again. Does he have a specific plan to turn things around?

Oh, yeah. A lot of it involves letting go of some key employees, and being much more diligent about sales and follow-up. They're the biggest and best-equipped company in town in this industry, but they lose jobs left and right because they (they being his boss and another manager) don't follow up or make people mad or lie to them, etc. Dh goes and makes the sales, but then no one ever orders the stuff, calls them back, faxes them the bid, etc., etc.
Has his boss gotten other offers? (I bet not)He hasn't shopped it around at all. He really wants dh to buy it and has been "grooming" him for quite a few years. He's mentioned many times that when he retires he wants it to go to dh. Good, if he'd be willing to finance it. Bad, because it makes the whole situation more emotional.

4. What is it that he'll be getting anyways? (contracts, company name/seal, equipment?)

10,000 square foot steel building with office and showroom, tons of tools, current inventory, name, contracts, staff (most of whom dh hired anyway)

Why doesn't he just figure ways to find extra work for now?

He definitely could. The thing is, which I didn't fully explain in the first post, was that we've been thinking about buying this business for a long, long time. We just sent in all the paperwork to get his contractor's license, and then we were going to start more of a slow, gradual takeover. But partly due to a side business of the boss's taking off, and partly due to the economy, things have been sped up. So we'd love to be able to take advantage of the opportunity if we can.

Good luck to you.

Thanks!

[Fuamami]

Originally Posted by Caneel

I have BTDT in a construction business purchase personally as well as an underwriter for commercial business loans and as a business analyst consultant.

I agree with all of the previous poster’s points.

My quick thoughts:

I don’t like the boss’s guilt trip tactic of “I can’t afford to pay you.” Big red flag about his character and likely a red flag about the financial stability of the current company.

Yes, there are red flags all around this guy's character. Sort of. But even though he's got some personality issues, I don't think there would be any surprises there. Dh knows Boss very, very well and often predicts his responses almost verbatim. He has successfully worked with this guy's idiosyncracies many, many times. We have yet to see the official books, but dh has a pretty good idea of the current financial picture.

In my banking and analyst experience, most owners are completely delusional (ok, maybe a bit strong of a word but I have yet to see someone sell an undervalued business) about the true value of their business. If you pursue this purchase, get an outside opinion from a skilled accountant.

A third-party accountant can guide you on whether or not the business is viable. A lender (from a reputable bank) can also take a look at the business financial statements and evaluate the business’s ability to repay its debt.

Thanks for this tip! For some reason, I was thinking we should find a lawyer. We'll definitely go to an accountant first.

Does DH have any desire to be an owner? Or is he just trying to save his job?

Yes, we've actually been planning to buy the company for about four years now. But we were thinking we had a few more years, at least.

If he likes his current job, he can kiss it good by, seriously.

Owners no longer have time to go out and do the hands-on job that they love. They are stuck behind the scenes doing taxes, dealing with employee problems, chasing customers for money, etc.

Well, he'd have to keep doing it, because he's the only one who can. So that presents a problem. The plan has always been that I would run the business end because he's rotten at that part. But I am concerned that if things get too bad, I'll have to look for full-time work for myself and then be trying to do that. Definitely a consideration.

DO NOT BORROW THE MONEY FROM A FRIEND! Go to a bank or let the current owner finance it for you. If either option isn’t available, don’t buy the business.

What's your objection to borrowing from a friend? Ideally, we would like Boss to finance us.

Construction businesses can burn through cash so fast it will take your breath away. In my construction experience, the seasonable nature of the business, tax payments, insurance payments (often need to be prepaid) are a huge drain on cash flow.

Good point about “buying” the business – Just what are you buying? If it a bunch of well-used equipment, it is likely cheaper to start your own business. (This also requires capital.)

We've also talked about this. Because dh could easily woo most of the current clients/builders away from Boss, this is a consideration. But dh's specialty, and his corner on the market, is his ability to build massive, high-end circular staircases. And for that, he really needs Boss's tools and shop. Or something similar, but that would get pretty spendy.

To answer your specific questions:

Are we glad we did it? Yes

Did it work out the way we hope? Yes and no. It turned out to be far, far more work and harder work than we ever could have imagined. We hoped to have more money by now. While our business is profitable, the capital requirements to keep the business upgraded and competitive eat up some of the profits we hoped to have in our pockets.

What would you have done differently? Learned to handle employees better. Mistakes were made here that are hard to undo.

Great advice, thank you so much for helping me work through this.

[llamalluv]

1. This line "He threw out a price of $400,000 off the top of his head" makes me doubly nervous. What is the book value of the business (what is all the tools/equipment used in the business worth)? If jobs are slowing down, it makes no sense to price the business on the basis of how much it will make each year.

2. You don't have the money to buy this business. I wouldn't borrow money to buy a failing business. The boss is not selling because he wants to retire and live in a lake house. He's selling because the business is failing, and he likely has a lot of debt pulling him down. Looking at the books tells you nothing - I know people who looked at books that turned out to be completely fake. You need to look at all the tax returns for the business and the owner and credit reports on the owner, and those will likely tell you the true story - the business is bleeding money.

3. Why can't your husband just strike out on his own without buying the business?

[Caneel]

Concerning borrowing the money - By friend, I thought you meant a personal friend, not the owner.

In my banking career, I saw many, many businesses fail and not just start ups. I saw a number of well established businesses go under due to a chain reaction caused by a single event like one large customer not paying, an illness in the family, etc. It happens and my feeling is better the bank or ideally, the seller take the risk instead of a friend or family member.

I actually support the idea of having the current owner finance the sale. I have seen this work out very well for both parties. Getting a good accountant and lawyer to handle the transfer is very important. This type of sale can be structured to benefit the seller and the buyer.

Lawyer or accountant first, I don't know that it matters. One could likely recommend the other. I would interview at least three.

I handle the financial side of our construction business and I can totally relate to your statement of "The plan has always been that I would run the business end because he's rotten at that part. But I am concerned that if things get too bad, I'll have to look for full-time work for myself and then be trying to do that. Definitely a consideration"

It works for us. Prior to getting involved I had the opportunity to talk to several spouses that have successfully worked together. My advice is have clearly defined duties and don't expect the other to pick to the slack. Treat your spouse like you would a regular co-worker in the sense of respect and honoring job responsibilities.

It sounds like the business is highly specialized, which can be a good and bad thing. Questions I would consider are:

How will the business be effected by an economic downturn? Does the business sell to high or low end customers? How might these customers be effected by the economy?
Who are the competitors?
Any seasonality in the business cycle? Will some times of the year be busier than others? Will you need outside working capital to purchase inventory or equipment?

[LoMaH]

Fuamami
Glad to see that you've given it some thought w/o just jumping into it.
Playing devil's advocate a bit here to give you more things to consider.

Originally Posted by Caneel

In my banking career, I saw many, many businesses fail and not just start ups. I saw a number of well established businesses go under due to a chain reaction caused by a single event like one large customer not paying, an illness in the family, etc. It happens and my feeling is better the bank or ideally, the seller take the risk instead of a friend or family member.

Yes, lack of planning for unexpected events.

Fuamami
Besides financing the entire purchase..... where will extra capital come from to keep the business running? (I hinted before and I think Caneel also asked this)
You're saying you'll take on a job while running the business. That's going to be real tough- you'll have to be super organized.
Is it going to be easy for you to find a job in this economy? And since you most likely won't get paid in advance- where will the money come from when you need to pay large amounts up front?
Do you have an emergency fund for your own personal expenses? There may be times when your husband will have to take a paycut on his own salary, definitely have a plan in place for those times.

Have you looked into insurance (worker's comp, liability, ...)- whatever fits your line of business?

Questions I would consider are:
How will the business be effected by an economic downturn? Does the business sell to high or low end customers? How might these customers be effected by the economy?
Who are the competitors?

yes. know your demographics. If it's high end work- are there also lower end jobs- for when customers are watching their spending?

One good thing that you mentioned is that the current boss has had poor business practices with sales/clients...... and that's definitely an area that can be cleaned up. Now my question is, if your husband was doing the sales and management, why wasn't this taken care of?
Was there ONE designated person who was supposed to follow up- or just no one in particular? Consider *writing out* a specific procedure that should be taken and that could be taken by anyone easily- to follow up with clients.

Fuamami wrote: dh's specialty, and his corner on the market, is his ability to build massive, high-end circular staircases.
You also wrote: Well, he'd have to keep doing it, because he's the only one who can. So that presents a problem. What happens if God forbid, something happens to your husband and he can't work -even if only temporarily? How long will it take him to train another employee?


I 2nd- not borrowing from a friend- unless you're willing to lose him/her. Your friendship will change. Obviously, it's your choice.

You also wrote: 10,000 square foot steel building with office and showroom, tons of tools, current inventory, name, contracts, staff (most of whom dh hired anyway) Well, the staff can quit, no?... lol On a serious note, make sure if you buy, that you get exactly what you're buying on paper. List every single piece of equipment/tool- every fixture.

Again, good luck to you.

[Fuamami]

Thank you all for your responses! Lots of things to think about, and discuss with dh!

Just to answer/respond to some of them:

Originally Posted by llamalluv

1. This line "He threw out a price of $400,000 off the top of his head" makes me doubly nervous. What is the book value of the business (what is all the tools/equipment used in the business worth)? If jobs are slowing down, it makes no sense to price the business on the basis of how much it will make each year.

Yes, it's difficult to price the business because the last 2-4 years have been huge boom years, and now that's over. However, he's been in business for over 20 years, and through some rough times. So I think we can get an idea of how much it's worth, and how much the tools are worth.

Originally Posted by llamalluv

2. You don't have the money to buy this business. I wouldn't borrow money to buy a failing business. The boss is not selling because he wants to retire and live in a lake house.

Well, actually he is. I don't think he has much debt, though we could be wrong of course. And he has been talking about retiring and dh buying it for quite a while, about 3 years at least. Yes, we don't have the money. But I'd still love to make it work.

Originally Posted by llamalluv

3. Why can't your husband just strike out on his own without buying the business?

He could, and that's probably option 2.

Originally Posted by Caneel

Concerning borrowing the money - By friend, I thought you meant a personal friend, not the owner.

In my banking career, I saw many, many businesses fail and not just start ups. I saw a number of well established businesses go under due to a chain reaction caused by a single event like one large customer not paying, an illness in the family, etc. It happens and my feeling is better the bank or ideally, the seller take the risk instead of a friend or family member.

I actually support the idea of having the current owner finance the sale. I have seen this work out very well for both parties. Getting a good accountant and lawyer to handle the transfer is very important. This type of sale can be structured to benefit the seller and the buyer.

Lawyer or accountant first, I don't know that it matters. One could likely recommend the other. I would interview at least three.

I handle the financial side of our construction business and I can totally relate to your statement of "The plan has always been that I would run the business end because he's rotten at that part. But I am concerned that if things get too bad, I'll have to look for full-time work for myself and then be trying to do that. Definitely a consideration"

It works for us. Prior to getting involved I had the opportunity to talk to several spouses that have successfully worked together. My advice is have clearly defined duties and don't expect the other to pick to the slack. Treat your spouse like you would a regular co-worker in the sense of respect and honoring job responsibilities.

It sounds like the business is highly specialized, which can be a good and bad thing. Questions I would consider are:

How will the business be effected by an economic downturn? Does the business sell to high or low end customers? How might these customers be effected by the economy?
Who are the competitors?
Any seasonality in the business cycle? Will some times of the year be busier than others? Will you need outside working capital to purchase inventory or equipment?

Thanks for the ideas. There's some seasonality, but not too, too much. The boom in the business has come from all the new subdivisions, which are no longer being built. But in the meantime, dh has learned to do the more specialized jobs, which are higher-to-highest end. We're in Reno, so we can tap the Tahoe market which still seems to be growing. Those AIG execs gotta have somewhere to while away their hours, right? Seriously, though, I think there's enough of a market there to keep things going. They just did a job that grossed about $125,000. So jobs like that, as long as dh got them, would really help keep things going.

Originally Posted by LoMaH

Besides financing the entire purchase..... where will extra capital come from to keep the business running? (I hinted before and I think Caneel also asked this)
You're saying you'll take on a job while running the business. That's going to be real tough- you'll have to be super organized.
Is it going to be easy for you to find a job in this economy? Yeah, I don't know about this. I've been out of the workforce for 5 years now, aside from p/t work, so that's a good question. It may have to happen anyway, though.

And since you most likely won't get paid in advance- where will the money come from when you need to pay large amounts up front?The standard practice has been to ask for a 50% deposit before starting any job, which should cover materials. But I don't know about the rest, insurance, etc. Dh is working on all of that so we should know more by this weekend.
Do you have an emergency fund for your own personal expenses? There may be times when your husband will have to take a paycut on his own salary, definitely have a plan in place for those times.Yeah, but it's small.


Was there ONE designated person who was supposed to follow up- or just no one in particular? [B]There was one person, he's in charge of scheduling, bids, ordering, and some manufacturing. He's really underqualified, and he's an alcoholic. He's been at the business for 17 years, though, and my personal armchair psych analysis is that the boss has some sort of fatherly/guilt-induced relationship going on with him. We'd most likely fire him immediately.

Fuamami wrote: dh's specialty, and his corner on the market, is his ability to build massive, high-end circular staircases.
You also wrote: Well, he'd have to keep doing it, because he's the only one who can. So that presents a problem. What happens if God forbid, something happens to your husband and he can't work -even if only temporarily? How long will it take him to train another employee?Great point. There is someone who is equally qualified who the boss ran off because he couldn't get along with him. Dh plans on hiring him back, because he could also expand their areas of specialization.


I 2nd- not borrowing from a friend- unless you're willing to lose him/her. Your friendship will change. Obviously, it's your choice. Yes, this is a good point. This is dh's friend, I talk to him only occasionally. But it's a point I will bring up with dh.

You also wrote: 10,000 square foot steel building with office and showroom, tons of tools, current inventory, name, contracts, staff (most of whom dh hired anyway) Well, the staff can quit, no?... lol On a serious note, make sure if you buy, that you get exactly what you're buying on paper. List every single piece of equipment/tool- every fixture.

Again, good luck to you.

Thanks!

[Caneel]

Best of luck in your journey! Keep us posted. Feel free to PM me with questions, concerns or to just bounce ideas around. Between trying to buying business #1, which didn't work out, my banking and analyst years, and business #2 there isn't much that would surprise me.

[SleeplessMommy]

With a construction company purchase, I would suggest fire sale pricing. This is not a great time to buy. Ask some friends in the local building or real estate or banking for an opinion on this!

A good deal would be "value" of real estate + used value of equipment + inventory.

An alternative would be the above + 1-2 years profit expected for 2009 - 2010. In "good" economic times pricing might be based on 2 (good) years profit. (plus equipment, etc) these are not good economic times.

If the owner "believes" in his company, he will offer owner financing.