How to buy a business with no tangible assets?

You are buying a "service" business more than a "product" business. They can be tough to value because all you're really buying is the good will of the existing business. Typically they're valued at 1.5 to 2x gross sales at the most. A non compete is standard as is a staggered payout as the transition takes place. You don't want the current owner to tell everyone "I sold, I'm out" you want to be introduced as the GM etc so the owner can take a break, and people see less and less of them over the next year until they don't care he's out. 

In reply to Steve_Jones :

Price tag is less than that

In reply to SV reX :

Even better. Is the owner willing to stay for a little while?

In reply to Steve_Jones :

Not sure on that part yet. 
 

SV reX said:

In reply to Steve_Jones :

Not sure on that part yet. 
 

 

If he's not the face of the business, does not matter too much. If he's the reason people use him vs competition, it matter a lot. It's also easiest to buy whatever entity he has set up (if any). LLC, etc. That way you get the tax Id number, unemployment account, etc. and it stays an ongoing business. That way when you're ready to sell it's a 25 year old company vs a 10, etc. 

In reply to Steve_Jones :

Good point. 
 

But I'd also have to have a good understanding of any outstanding liabilities, which might be tricky to discover. 

In reply to pheller :

Missed your earlier questions...

Yes, they currently rent a shop. I don't think there is anything going on funny with him retaining ownership of assets. 
 

I doubt very many K&B jobs are paid for from insurance. 

If you believe the stock market is going to average lower returns over the next decade that indicates a shaky economy. What does that shaky economy do to the kitchen/bath reno market?

Low interest rates and exploding home values for the last 10 years or so have been exceptionally strong tailwinds for the construction and remodeling businesses. Now that mortgage rates and HELOC rates are much higher, what impact might that have on future revenues for this business? If you truly think that stock market returns will be lower in the coming years, then I'd really do some critical thinking about how this business may or may not be impacted by a similar macro environment.

In reply to STM317 :

That's a good thought.  I'll have to consider it a bit more...

My initial reaction is that I'm not sure I fully connect lower returns to a shaky economy.  I think my perspective is that we may be facing a new normal where returns on market investments are simply lower. 
 

I can remember when bank savings accounts returned 7.25%. That's a thing of the past. I can remember when diesel fuel was significantly lower priced than gasoline. That's a thing of the past. 
 

Sometimes stuff changes, and maybe our old expectations of long term double digit market growth is a thing of the past.  Maybe decent growth will only be found in investments that require more active participation, like running a business. 

I think I am feeling better about investing my money in something I have some input and control over in a solid growth area than in sitting back and letting the market decide for me.

No facts there. Just my opinion (which is not well developed).

But you are right. I will give it some critical thought. Thanks. 

I know you said you don't really want to swing hammers anymore, but to me the idea of managing employees and clients doesn't sound much like "retirement."  

In your case, perhaps do handyman type projects?  For example, an older friend of my mother finished her kitchen as well as did some other repairs to her house after her husband passed.  Since she knew him from their church, she trusted him to do a lot of the work while she was away doing volunteer work.  He worked at his own pace, pretty much by himself.  No big rush. Low stress.  Doing it right was more important than doing it quickly. He was doing similar projects for others through their church for some time before he finally decided to hang up his belt for good a couple of years ago. 

Anyway... just a thought. It seems like there's always work for an honest handyman.

In reply to Ian F (Forum Supporter) :

Yes, there is definitely work for a handyman, and I've considered it.

Pretty sure I could have a super successful business if I started a handyman company and called it "We Show Up".

In reply to Ian F (Forum Supporter) :

FWIW, those are the 2 things I am considering. A handyman service vs buying an existing business.

SV reX said:

In reply to Steve_Jones :

Good point. 
 

But I'd also have to have a good understanding of any outstanding liabilities, which might be tricky to discover. 

There should be nothing tricky in discovering everything about the business. They should be willing and able to provide you with a balance sheet showing everything. Income, outgo, accounts receivable, accounts payable for the last 5 years. Physical asset list with model number, serial number, and age. Intangible asset list including information on trademarks, patents, customer lists, web presence, and brand names. 

They may require some earnest money and a nondisclosure agreement upfront to get the info to prove you are serious, but if all of this information is not provided to you, keep looking. They are covering something up. 

I would definitely require a non-compete agreement from the seller for a span of 5 years. 

The valuation of a business without tangible assets gets a little tricky. There are usually two ways to do it. 

One is gross sales. Basically, the business is worth whatever it grosses in one year. This is adjusted according to what the receivables, debit, and payables are worth. So say the business grossed an average of $1m over the last 5 years. Receivables are worth $150k, payables are worth $50k, and the business is carrying $50k in debit. The business would be valued at somewhere around $1,050,000.

The other is net income. Basically, the business is worth whatever it turns in profit per year. If they are making a profit of 30% on a million dollars then the business is worth about $300,000. Again that is minus debit and plus outstanding receivables.  

Those choices are frequently decided by how important the owner's name and face are to the business. If the business is based on the owner and he is gone then the value of the business is lower. If the business does a pretty good job of standing on its own, then the value will be higher. This is where you need to contact the pros. 

When I bought out my business partner we went with the lower number, less the outstanding debit and plus the receivables, divided by 2. 

If you talk to 10 different people you will probably get 10 different answers. You and the owner will have to get together and agree on something. 

Again, I'd look real close at the employees.

Maybe he's got a rock star employee who runs the show, but is moving on. It's not the owner you gotta worry about competeing with, it's that employee. 

Or, maybe that employee just left and ship is hitting the fan, and the owner can't find someone to replace the all-star. 

In reply to Toyman! :

That's good info. Thanks!

In reply to pheller :

Yep. Makes sense. 

In reply to SV reX :

You don't give us much to go from as far as valuing the service. From what you describe, you are buying a trade secret ( of some kind) with a barrier to entry for competition. If the product has a market, then this barrier to entry is what you are paying for.

What would it cost you to replicate the business and how long would it take? How close are potential competitors from entering the market? 

Read enough of your post to think that you are far from naive and looking at a magic bean enterprise, so curious what it might be. Standing by...

Pete

SV reX said:

In reply to STM317 :

That's a good thought.  I'll have to consider it a bit more...

My initial reaction is that I'm not sure I fully connect lower returns to a shaky economy.  I think my perspective is that we may be facing a new normal where returns on market investments are simply lower. 
 

I can remember when bank savings accounts returned 7.25%. That's a thing of the past. I can remember when diesel fuel was significantly lower priced than gasoline. That's a thing of the past. 
 

Sometimes stuff changes, and maybe our old expectations of long term double digit market growth is a thing of the past.  Maybe decent growth will only be found in investments that require more active participation, like running a business. 

I think I am feeling better about investing my money in something I have some input and control over in a solid growth area than in sitting back and letting the market decide for me.

No facts there. Just my opinion (which is not well developed).

But you are right. I will give it some critical thought. Thanks. 

I guess my main point was related to the bolded part above. It's been a solid growth area, but a huge part of that likely has been due to low interest rates which allowed homeowners to accumulate massive equity gains, and made HELOCs super appealing in order to unlock that equity. And during the pandemic there was widespread debt forgiveness and real stimulus on top. Tons of people were flush with cash, and financing made debt very appealing. So this business has seen strong growth no doubt, but it's had some terrific tailwinds at it's back too.

As you said, things change, and a "new normal" takes time to reveal itself. If the new normal is going to be mortgage and HELOC rates above 5%, with super high monthly payments due to a combination of higher interest rates and elevated purchase price, then there won't be as much money flowing as easily in the real estate/housing/remodel sector. There are far fewer real estate transactions taking place these days than there were 18 months ago. What does that do to your potential customer? It probably means fewer people remodeling to sell and fewer recent buyers "making it their own". But perhaps it means people choosing to stay in their current home are more likely to renovate?

I guess I'd just approach this business with the same caveat that people always give for the stock market "Past performance doesn't indicate future returns."  Consider what it is now with current cash flow, etc before buying. Any growth would be gravy on top.

If the guy has rockstar employees and you have enough contacts, set up a nicer shop, pay more, and poach his employees.  

Or don't, because attempting to buy and manage and turn a profit on a small business with a time-span of only 5 years sounds like hell.    In 3 years, just about the time you get your feet wet, you will only have 2 years to actually make money and retire.  And then find someone else to buy this business from you.  

NOHOME said:

In reply to SV reX :

You don't give us much to go from as far as valuing the service. From what you describe, you are buying a trade secret ( of some kind) with a barrier to entry for competition. If the product has a market, then this barrier to entry is what you are paying for.

What would it cost you to replicate the business and how long would it take? How close are potential competitors from entering the market? 

Read enough of your post to think that you are far from naive and looking at a magic bean enterprise, so curious what it might be. Standing by...

 

 

Pete

 

I'm thinking you may have missed a few posts.  I added more infor later. 
 

It's not really a secret. It's a kitchen and bath remodeling company. Trade secret?  Not really. Barrier to entry?  Sure. The barrier is having the skills available to complete the work, and market the services. 
 

I have the skills to complete the work. Far more than most.  The skills to manage the work, and to do the work, hire and train.  
 

What I lack is the skills to market the services. Been there, done that. I fully understand the value of the name recognition, the internet presence, and the marketing abilities necessary. It's not my skill set. It's what limited my previous company. Anybody that thinks it's just a matter of a few Google ads is crazy.

I am hoping this business has the name brand  in the area, the presence online, and the skills to sell and market the service. If it doesn't, I'm not buying. 
 

As previously noted, it would take me 5 years to build from scratch. IF I was fortunate enough to land the marketing prowess. If not, then I'd never be able to build it. If the numbers are right, then the revenue generated immediately would offset the amount I would lose building it for 5 years.  It would also enable me to give it full-time effort now, instead of needing to maintain an income while I tried to build a business at the same time in a different location. 
 

Competitors?  Of course. There are always competitors entering the market. Everybody thinks they can do it.  Most will be my own employees. But they can also make the best subcontractors if handled well. 
 

Thanks!

How much time are you willing to look for customers?  Have you picked a quality/price point that you are going to put on the market?  

How much time are you allocating to quoting the jobs?  Do you have a support staff that will help you run payroll, purchasing, answering the phone?

I find the three aspects of any business to be:  Find it, Do it and Follow up.   If you can only do two of the three on any given day, something is falling behind.

Make your self sign every check.  Do you have a bank that will help you establish a working capitol account?  

STM317 said:

SV reX said:

In reply to STM317 :

That's a good thought.  I'll have to consider it a bit more...

My initial reaction is that I'm not sure I fully connect lower returns to a shaky economy.  I think my perspective is that we may be facing a new normal where returns on market investments are simply lower. 
 

I can remember when bank savings accounts returned 7.25%. That's a thing of the past. I can remember when diesel fuel was significantly lower priced than gasoline. That's a thing of the past. 
 

Sometimes stuff changes, and maybe our old expectations of long term double digit market growth is a thing of the past.  Maybe decent growth will only be found in investments that require more active participation, like running a business. 

I think I am feeling better about investing my money in something I have some input and control over in a solid growth area than in sitting back and letting the market decide for me.

No facts there. Just my opinion (which is not well developed).

But you are right. I will give it some critical thought. Thanks. 

I guess my main point was related to the bolded part above. It's been a solid growth area, but a huge part of that likely has been due to low interest rates which allowed homeowners to accumulate massive equity gains, and made HELOCs super appealing in order to unlock that equity. And during the pandemic there was widespread debt forgiveness and real stimulus on top. Tons of people were flush with cash, and financing made debt very appealing. So this business has seen strong growth no doubt, but it's had some terrific tailwinds at it's back too.

As you said, things change, and a "new normal" takes time to reveal itself. If the new normal is going to be mortgage and HELOC rates above 5%, with super high monthly payments due to a combination of higher interest rates and elevated purchase price, then there won't be as much money flowing as easily in the real estate/housing/remodel sector. There are far fewer real estate transactions taking place these days than there were 18 months ago. What does that do to your potential customer? It probably means fewer people remodeling to sell and fewer recent buyers "making it their own". But perhaps it means people choosing to stay in their current home are more likely to renovate?

I guess I'd just approach this business with the same caveat that people always give for the stock market "Past performance doesn't indicate future returns."  Consider what it is now with current cash flow, etc before buying. Any growth would be gravy on top.

I'm hearing you. Those are good points. 
 

I think the core question is "Why has there been growth"?  You are speculating that the primary driver for that growth is available money, which may very well be true. I am speculating that the primary driver for the growth is the changing demographics as boomers age and retire and move into the area from other areas, bringing with them the equity they have established in more expensive locations.  It's a vacation/ retirement area. The growth predates COVID by a LONG shot.  I tracked it to the early '80's and found no low spots. Probably goes back longer than that.

Your concerns are valid, and I appreciate the input. I am of the opinion the growth is caused primarily by demographics, not short term economic changes, but I could certainly be wrong (and value your perspective). 

A lot to think about...

In reply to 93gsxturbo :

Setting up a better shop and poaching his employees would be easy if I was established in the area. 
 

I'm not. 

In reply to SV reX :

I read this and wonder if this is really what you want out of a "retirement job" - which to me is a job with income when you want/need it, and time flexibility when you don't.  This sounds more like a career shift that will not really give you much in the way of easing your work load - more likely add to it.  If that's what you want, then more power to you.