3 Questions to Ask When Buying an Existing Business
Last year, I finally acquired an interiorscape contract from one of the large office buildings I’ve been soliciting for over six years. Since my company already handled their Christmas installation, the management team knew me personally. They were familiar with my work but despite offering them design idea after idea, it still took that long to finally acquire them as a regular interiorscaping and holiday client. I’m very grateful my persistence finally paid off, but to be honest, I almost gave up. Although sales have gotten much better since the housing crisis, interiorscapers still have to be resilient, persistent and not let rejection dampen spirits. The time and effort required to grow your clientele list can often be a long and arduous process. If you’re looking to quickly expand your business, you might want to consider buying an existing interiorscape service.
In theory, by purchasing a competitor you could double your business almost instantly. All the hard work of gaining new clients is already done. The experienced staff is already in place along with the necessary systems and equipment. It seems like the perfect solution for expansion.
However, acquiring another business is a much riskier financial investment if you don’t also invest your time to do some research. Here are a few key questions to ask when buying an existing business.
Who are the current clients?
The most important aspect of our industry is the quality of the clientele. If you don’t do any inside research on these accounts, you could end up losing a big part of your investment. Honestly, even if the seller shows me a bunch of binding contracts, it doesn’t prove these customers will continue to be loyal. For instance, I had a wonderful client for over ten years, and one day I got a phone call telling me to immediately stop service since she sold her building to a New York investor. And just like that, my contract was over. It’s the information that isn’t always public, that can make a big difference.
At 27, when my family looked into purchasing one of the original local interiorscapes, I checked out the twenty or so local businesses that comprised their annual sales. Some names were big, nationwide corporations most people heard of and others were local law firms, mortgage brokers and restaurants. Bank of America comprised more than forty percent of their annual revenue. A big, national financial institution as a major source of income seemed like a goldmine.
Fortunately for me, I had a neighbor who recently quit working for the bank’s downtown headquarters. After many years, she was unhappy with recent changes in company policies, new leadership and also the fact that its headquarters was moving out of its century old high-rise to a smaller building located on the southside of town.
According to the interiorscape charts, the majority of their serviced accounts were at the downtown building, while a competitor held the service contracts for the southside location.
To the seller’s credit, he admitted there was a fifty-fifty chance that the interiorscape contracts would be cancelled when the bank downsized to the southside office park.
With this risk in mind, we were able to settle on a much lower asking price. If it weren’t for my neighbor or the seller being an honest person, I could have lost a big chunk of my family’s money!
How healthy are the plants in the account?
This isn’t a business where you can make a decision by just looking at the numbers. There’s a good chance if the interiorscape business is up for sale, the quality of foliage material has suffered.
If an owner is burnt-out or in financial stress, the first signs of that will be reflected in the plants that could be a nightmare to inherit.
For example, on paper, having a Fortune 500 company as a client may look great until you walk inside the atrium and see twenty-foot adonidia palms covered in white mealy bugs and spider mite webs with foliage dying everywhere. Replacing that alone could be thousands and a continual pest control nightmare. Knowing about potential replacement costs are an important bargaining chip.
Be leery if the seller only allows you to visit what I call “public accounts.” These are locations the general public enter such as malls, hotels, and restaurants. A seller can easily hide their failing accounts and poor customer service by putting all their resources into those few places to give a false impression. And if you notice a poor quality of service at these locations, then be really afraid of the others you can’t walk in to see.
What other professionals can you get advice and guidance from?
I was completely naive when my family and I purchased our first interiorscape business. The only thing I knew was horticulture and retail management. I needed assistance on the legal and accounting fronts. Money was extremely tight, so I used free business advice from local SBA mentors and the free legal help clinic.
I learned about ways to protect myself against any lawsuits associated with the seller by only purchasing the company assets.
Make sure there is a non-compete clause and have a good accountant look over the company books for anything that looks fishy.
Even with all my due diligence, I was still risking my family’s hard-earned savings in this business venture. Armed with a few key questions to ask when buying an existing business and my gut, I truly believed I could make that business even better. Two decades later, I’m very thankful my family trusted that instinct.
Have you bought another interiorscaping service to grow your business? How did it go? Do you have any other suggested questions to ask when buying an existing business?
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