Consuming Competitors

Now may be a great time to expand your business by acquiring another well-established side business that complements what you currently do. It's one of the most effective ways to grow your client base and your bottom line.

The economy is expected to rebound later this year. That spells good news for the housing market. It's also a shot in the arm for the ground maintenance industry. So now could be the time to buy a well-managed operation at an attractive price. Next year, as business profits rebound, it could cost you more.

ENCOURAGING ECONOMY

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Federal Reserve Board Chairman Alan Greenspan recently told Congress that he saw encouraging signs that the economy is improving. Greenspan expects a pick-up in industrial production. An improving economy also should spur business investments.

Economists agree. Alfred Kugel, executive vice president of Stein Roe & Farnham, a Chicago-based investment company, sees a strong housing market developing as the economy picks up steam.

“The current outlook suggests that the 2001 and 2002 recession will be one of the mildest on record,” he says. “This reflects low interest rates and the government's efforts to stimulate the economy. The fuel for the upturn is at hand.”

Meanwhile, James Swanson, economist with MFS, a Boston-based advisory firm, says low interest rates are here to stay for a while. Over the last five recessions, interest rates didn't turn up until 8 to 12 months after the recession ended. The bottom line: Low interest rates and inflation should be good for all kinds of business — particularly housing and real-estate-related concerns.

All this points to a healthy economy for anyone interested in acquiring a business with a good long-term track record.

THE ACQUISITION ADVANTAGE

Buying a business with a good reputation is a much simpler way to enter the market than developing a successful team of employees from scratch. Building a company staff often takes years and can prove very costly.

Acquisitions have a multitude of advantages. You literally can consume competitors; increase your buying power for advertising, raw materials or services; and gain greater market share. If you already are a business owner, you rapidly can become a recognized leader by making multiple acquisitions.

Another way to compound your company's growth is to buy a business that complements your business. For example, if you already own a lawn-maintenance or landscaping company, you might look to acquire an irrigation company or nursery; if you own the irrigation business, you might look to acquire a landscaping company, and so forth. An owner of a janitorial company might consider buying a window-cleaning, pressure-cleaning or even a lawn-maintenance business to become a full-service property maintenance company.

DON'T RUSH IT

However, you can't buy a company with the snap of your fingers. Rushing into a deal can prove suicidal. When considering a potential acquisition, the devil is in the details. You need to consider the required capital investment, as well as the working capital. You should consult with your financial advisor after talking to a business broker. Business brokers can help you find a business that meets your needs. They have contacts with experts who can help you develop a business plan.

Before making any decision about acquiring a business, you should have answers to these questions:

  • What were the company's annual sales over the past three to five years?

  • Do the company's corporate tax returns and financial statements reflect an accurate profit picture?

  • What is the prospect of the owner staying on board, and for how long?

  • What makes this company different, special or unique?

  • What defines the product? Will it require bid work or repeat business?

  • What can be done to grow the business?

  • What value can you bring to the company?

  • What is the profit picture in both good and bad times?

While finding answers to these questions may be possible on your own, you still shouldn't try to go it alone. Consult a business broker, who will not only help you find the answers, but help you interpret them and evaluate how they effect your decision to buy. Without practical, business advice, you could be opening yourself up to making the following costly mistakes:

  • Suddenly realizing after the acquisition that you're not willing to put in the hours or do the kind of work necessary to operate and grow a successful business.

  • Creating unrealistic expectations about the price of the business. Failing to recognize the concept of “fair and present market value,” which is the value of a business based on comparable sales of similar businesses through history. As a result, you could lose out on great opportunities by not realizing what businesses are actually worth.

  • Not considering other factors that come into play, such as the quality, consistency and longevity of the company's past, present and future cash flow. In some cases, this information is more important than the sales price.

Buyers, uncertain how to make a proposal to buy a company, tend to rely too heavily on accountants and attorneys. Attorneys specialize in legal advice, while accountants specialize in accounting of figures and cutting taxes. Outside professionals normally won't tell you that you should buy the business. That's not their role. In fact, if pressed for an answer, they will give you what they consider to be the safest answer for them, “No,” effectively killing your deal.

By consulting a business broker's firm, you'll be able to use the firm's forms and contracts to make proposals to purchase a business. These forms are easy to read and understand. For assurance, you can include the following contingency clause: “This agreement is subject to approval by the buyer's attorney.” Why rack up hefty professional fees with your attorney before you've agreed to the general price and terms?

REDUCING RISK

The best way to reduce your risks is to buy a profitable business. The reason: The owners put countless hours of blood, sweat and tears into building a profitable business. This added value is calculated into the price of the business in the form of Good Will.

Due diligence, or a thorough analysis of the business and its records, is critical, but not until you first agree on a price and terms and provide a small refundable “good-faith deposit” to the seller. This customarily is 3 percent to 5 percent of the sales price, which is deposited into an escrow account by your broker or attorney. The deposit is held subject to your approval of the company's books and records. The deal is also subject to obtaining an acceptable lease or financing.

If you really want advice about owning a business, try talking to various business owners. A business broker specializing in bringing buyers and sellers into a deal is one option that often works well for both parties. Brokers are experts at dealing with the intricacies and deep emotions that are always a part of buying or selling a business.

The landscaping market is full of opportunities. The kicker is that there is favorable financing offered from sellers as well as agreeable terms (up to 90 percent financing) with Small Business Administration (SBA)-guaranteed loans. A business broker can provide you with referrals to these lenders.

Like many real estate agents, business brokers often represent the seller. You can find a professional business broker by contacting a chapter of the International Business Brokers Association (IBBA). Agents who are members of these associations are required to take continuing education classes to stay informed of the best ways to operate in the industry. There is a code of ethics and a high degree of professionalism. They also have access to the vast multiple listing services database, which gives potential buyers the widest possible selection of businesses for sale.

Frank Arena is an active FBBA member and a Florida licensed business brokerage associate with Business Specialists, 103 South U.S. Hwy. One, Suite E-1, Jupiter, FL. He has 25 years of experience as a successful business owner, buyer, seller and real estate investor. You can contact Frank at 561-744-9313 or by e-mail at FArena7572@aol.com.

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