Buying A Service Business

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The first business I sold as a business broker was a small car wash.  It operated out of a commercial location garage, large enough for one vehicle.  The only assets were a hose, a bucket, and other needed washing supplies like you would use if you were washing your own vehicle.  What the owner did have were good financial records.  He had proof of his income and expenses and had tax records to match.  I listed the business and confidentially marketed it.  It actually sold quickly to a young lady who was excited and increased the value each year until she sold it.  Amazing, yes, but real!  When she first bought it, she questioned her sanity but soon discovered she had a little gold mine.  It was in a prime location and had a good history.  When you buy a business, you are actually buying the cash flow.  If it needs assets, they come with the cash flow.  If it doesn’t need assets, you just have to keep the cash flow as is and growing and don’t have to replace broken or worn equipment.

Financial institutions will loan to purchase service businesses now more than a few years ago, but their preference is still to have assets they can put their hands on if the buyer defaults on the loan.  An ideal situation is to find a seller who will carry the note for his/her business.

Most service businesses will be larger than the little car wash business, but they operate under the same principle.  Whether you buy a business with no or few assets or a business with lots of assets, the major consideration is the cash flow.  It is cash flow that funds debt service, all operating expenses, and your living wage.

The non-compete agreement is extremely important when purchasing a service business.  Many were started by entrepreneurs who turned their prior job into a business and have built the customer base.  If the seller started the business and is very active in the business, the customers may think of him or her as the business and a long-term relationship may have developed.  This is a positive thing; but, as a buyer, you want precautions in place to protect the business after the sale.  Included and very important in the non-compete agreement is the area protected.  This needs to be a large enough area and for a long enough time to prevent the seller from competing with you.  An option to explore is the limitation of the business as to where it can operate and if expansion is a viable option to grow.  Also, build into your business plan ideas to provide additional services to your existing customer base and ways to increase your customer base.    

During the training period after the closing, it is important for the customers to see you with the seller, showing confidence in your ability to take care of their needs.  Depending on the business, it may take a longer training period, which would also be an introduction period. There are times when a buyer will pretend to be working for the seller for a period so customers and employees can get to know him/her before being introduced as the new owner.  During the due diligence before closing, investigate the suppliers, customers, and contracts in addition to the financials.

As with any business purchase, it is wise to operate the business as it has been operated while you learn the business.  Although you will probably want to make some changes and incorporate your ideas, immediate drastic changes are not a good idea.  Change is tough on everyone, and you especially don’t want to frighten and confuse your employees.  It is expected that the employees will remain with the business, but they are not required to do so.  It is important to have a smooth transition and make the employees see they are important and secure in their jobs.

Before buying the business, check out the competition, is there a similar business in your service area; and, if so, what does the business you are buying do differently or offer from the competitor?  If the financials show a good profit, will the change of ownership cause a loss of customers?  There are many good service businesses; and if you are fortunate enough to purchase one of them, you will be ready to step in and start making a profit immediately.  Be sure to write that business plan so you have a guide to follow. Welcome to the world of business ownership!      

 
  • Author: Pat Jones
  • Title: Business Broker - Owner
  • Company: Pat Jones Business Brokers
  • Company Website: http://www.patjones.biz/
  • Date: July 21, 2016
  • Category: Buying a Franchise or Business
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