I entered the due diligence period, and I have until December 31st to back out. This is my first business purchase, and I want to make sure I am making a good decision. Here is some information over the business. Established in 2013. Over 300 Google reviews (4.5 stars). In 2023, approx $6m in revenue, $1.5m in A/R. currently showing negative $100K loss ( $1.4m net if all A/R is collected). The business has 14 employees.
The purchase price is $1m + $75K from A/R.
The owner says he is selling because he wants to focus on real estate and will sign 3 year non-compete.
A way I can see improving the business is by trimming the unnecessary expenses (currently $270K per month) and focusing on keeping A/R account low.
Does anyone have any experience or advice in purchasing a business for the first time, or in roofing/ construction? What are the most important questions I need to ask the current owner? Are there any red flags I should be aware of?
This is a huge decision and I am looking for any advice or guidance!
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Seller financing (or buying in cash) is the only option, you can’t get a bank or SBA loan with negative cash flow. WTF are you paying for when the primary value to a business is a cash flow multiple?
Right. I’m currently working with the bank and the seller to see why it has negative cash flow. Is it an operation issue? Or straight up trouble collecting from clients.
I don’t know what a typical AR value is that’s normal for a roofing company to carry.
I am in sales. I have many clients and friends in the construction trades. Attaining and retaining quality employees are going to be a challenge as you scale
Thank you!
Yes that’s one reason i like this business. It has tenured employees already.
Do you have any good ideas for how to structure the sales people compensation?
This guy has some great training on sales for roofing companies
Adam Bensman • adam@roofstrategist.com
Why not just start your own. Roofing is not a repeat business unless you’re a sub for a very busy homebuilder. Google reviews are crap. What exactly will you be buying? Here’s a tip: I need a new roof. I’ve been collecting bids. I have 6, starting at $11K thru $19K. Who do you think I’m gonna hire? How’d I find them. They were doing a roof that I passed on my way to work. They had stuck a sign out by the road. I didn’t google it and I did no searches. Except for the guy with the sign they were all word of mouth. I could be in the roofing biz tomorrow if I was so inclined. So could you.
Here are few reasons why I liked this brand I’m planning on purchasing. Established in the area, many word of mouth sales tenured employees, and already established relationship with subcontractors.
The google reviews are more to get the clients to trust the company. There are a lot of construction scams in the area, so I want to leverage the reviews as much as possible.
I do see valid points in your advice which I’m going to consider. We just entered due diligence so definitely have some time.
The biggest roofing company in my area has a whopping 17 google reviews and they have 150 employees and roof everything from a house to a million sqft warehouse. The biggest fab shop in my area has less reviews than that and they’re operating at 300 plus guys and are booked over a year out (personally know them). You’re putting way too much stock into google reviews. I’ve never picked another contractor based on their reviews, it’s always been word of mouth from someone.
I would say you can duplicate all of that for much less than $1M.
Any equipment or real estate involved? And a 3 yr non compete is nothing, it’ll go by faster than you think. Being a roofing company with 14 guys, probably 4 are good hands and the rest you could find at the county jail so it’s not like they’ve got specialized degrees (source a construction outfit that roofs).
$270k a month of trim is absolutely insane. How certain are you that over $3mm of expense per year can be trimmed that easily without impacting production?
Also, you need to call in as a fake customer to “secret shop” the company. Do this several times. Ask as many questions as possible about the status of the company, how do you know you can trust them, ask if they are a “fly by night” sort of shop.
Many roofing companies are really only worth their client list and marketing engine. Ensure you use a drip automation tool to remarket to all of their aged lead database — this can often give you a quick influx of leads for a low price. This may serve to impress salespeople and alleviate their anxiety during the transition. Overspend on marketing the first 2-3 months and ensure the salespeople are extremely well-fed. This short-term damage to your profits will pay dividends as the salespeople get excited about the change in leadership. It is 100% your biggest priority to retain your top salespeople. Tell them you plan on expanding and blowing this thing up, but you need their help. Ask them for referrals.
If lead-flow supports it, hire 2-5 salespeople every month, and let go of the bottom 20% each month. Only start this after 3 months or so once you prove to the current staff that you have their back. Do this for one year and your sales floor will be significantly stronger by sheer, draconian number forcing.
Find your key players and win them over immediately — appeal to their greed by offering bonuses and pay raises contingent on performance. Have daily meetings for the first several months.
Hire 3-4 consultants to review and analyze the business on a weekly or bi-weekly basis. A financial consultant, a marketing consultant, an operations consultant, and an industry expert from a different region. You can use score.org for free mentoring and consulting.
Also, let me know if you need help financing that AR :)
I’m definitely not expecting to be able to trim all expenses. Just lean them out. About $135k is in wages and 45k for marketing per month. I’ve reviewed some leaner construction companies that are getting by with not too many op expenses. I will be reviewing each expense and consider if necessary or not.
That’s a great idea about calling them a few times as a potential client. I’ll try that after thanks giving.
Such good nuggets of advice you gave me. Which sound like great ideas to implement.
These next few weeks I’m going to learn about how exactly they are generating leads, and what software they are using for CRM. Do you have any that you used that you like?
I’d love to find only one software that can do all aspects of operations for a roofing business.
“What are the most important questions I need to ask the current owner?”
Am I going to be able to manage this business day-to-day once the transition period for transferring ownership is over?
For example, after the owner exits after a couple of weeks, what would you do if key personnel quits?
Do you know how to install a roof?
I wouldn’t blow off the experience and skill needed to run this business.
- What is your background? Do you have industry experience and/or a complimentary business that can leverage this offer/service?
- How are you financing the purchase? Seller financing?
- Can you increase leads or decrease CAC?
Background flipping homes and in engineering.
I am doing sba + down payment right now. I want to also request seller financing.
Not entirely sure on leads. I’ll have to do some digging in due diligence period
I think a bottleneck could be employees. The construction industry is aging out.
To show employees the benefit of a changing of the guard, should be able to scale the business. Bringing in leads, sales and have your head of operations build new teams and crews will help keep all your good employees and help you pay off the acquisition alot quicker
What do you mean the bottleneck is the employees? Are you saying that’s where it’s at in general?
I work in the due diligence industry and can tell you that you should take a detailed look at the AR. If the AR has been overdue for a long period of time - you need to find out if its because the customers are not going to pay up or there are any specific reasons for it being overdue
Copy. Yeah I’m not assuming I’m getting the all the AR at all. That’s a big question I need answered
Attorney here. Many states have shorter time period set by statute on non-competes (mine is 18 months). Consult on this issue.
So I’d say a few things, and some one who is an expert in roofing can call me out but…
First based on the fact that the business is operating at 90 days behind and at a 100k loss… you are overpaying by a lot… unless you have some genius plan, or have created a very detailed set of terms that mean the seller only gets his money if the business succeeds this seems like a very bad deal to me…
Collectors buy outstanding debt for pennies on the dollar… so 1.4M in AR is worth between 140k and 300k in value given the company’s track record for not recieving payment within 30-60 days
Then there is your business plan… finding 270k/month in fat in a business with 14 employees and 6m gross revenue means very drastic changes to the core of the business. Unless you are an expert in the field this is a very high risk proposition… you are paying 1 million for a business that might be on the ropes, but longterm successful business, only to make drastic changes… cutting 270k/month means cutting half the costs in the business, which means you think half the costs in the current business don’t provide any significant value… which begs the question… Why are you paying such a premium for this business based on EBITDA? since it is currently showing a loss?
The valuation of the business has definitely brought to questioning since it’s marking a cash loss this year. I actually like the idea of the seller having some skin in the game as well. I think he is open to doing that. Maybe 100-200K in seller financing.
From the AR account, 900K is in the 1-30 days old. The rest is 30+. I agree, I cant value the entire AR dollar for dollar.
Right, I don’t know how much (if any) op expenses I can trim while it still running. I don’t know if they are wasting money on anything yet. I plan on getting a detailed picture of each expense. I know the bulk of it is wages (135k), and marketing (50K).
Thats also a good question, if it’s showing negative EBITDA, how can value be determined? They are still generating $6m in 2023.
Cash flow and EBITDA are two different items.
Are you saying they spent $6.1 million to do $6 million in revenue?
Approximate numbers.
6m revenue 3m cogs 1.6m Op expenses 1.5m in AR
AR is irrelevant for this discussion.
That’s a net profit of $1.4 million. No one sells a business that makes $1.4 million for $1 million.
That’s why I said the A/R was a bit of a red flag… because without it they are operating at a -100k loss… I’m betting that big chunks of those A/R are uncollectable without a lot of effort… the numbers as presented just don’t really add up to a million dollar valuation… either the business is worth Millions of dollars or not very much money really at all… but at a Million dollars it feels wrong…
Thats also a good question, if it’s showing negative EBITDA, how can value be determined? They are still generating $6m in 2023.
This is why I suggested experts speak up, there are lots of different ways to value a business… cashflow is just one of them… there are some industries like tech that rely heavily on speculation that you will eventually create a new market… There are other industries like certain types of commercial real-estate where on paper a business might be operating at a loss, but using things like depreciation and creative accounting to actually be running in the green… Cash flow is just the most obvious and obvious way to look at a business… its pretty easy to understand that if you are buying a business with negative cash flow you are buying one that is losing money today… and if you are buying one that has positive cash flow then they are gaining money today, and even if all things stay the same its easy to get figure out how quickly you will see a return on investment…
From the AR account, 900K is in the 1-30 days old. The rest is 30+. I agree, I cant value the entire AR dollar for dollar.
So the great thing about Business purchases is they are very flexible… you can write up a simple contract that amounts to “in return for 1MM I get ABC Roofing Company”… but you can also say “I will take posession of ABC roofing company on date X, in return I will transfer 300k up front, the other 700k will be transferred pending on the following A/R milestones over the next 90 days”… there are dozens of ways to write something similar into an agreement, and just negotiating it into your contract will often let you know if the accounts receivable is something you need to worry about and a red flag meant to prop the books up… or if it isn’t a problem and just how the industry works as some one else suggested…
Negative cash flow is not even close to the same thing as a loss. Construction businesses are frequently cash flow negative.
It would also be extremely normal to not get paid for 60-90 days if they’re doing commercial projects or getting paid through insurance companies.
You’re making a lot of big claims based off very little info.
You’re making a lot of big claims based off very little info.
And that’s why I started with "some one who’s a subject matter expert can come in and tell me I’m wrong.
I’ve spent the last year and a half selling my business and buying 3 different businesses and I make “at a glance” valuations on businesses based primarily on net revenue/cashflow…
Negative cash flow is not even close to the same thing as a loss.
Generally speaking the definition of operating at a loss is that you have a negative cash flow… on the books this means the business is losing money… you might be able to fix things but that’s not how things are right now, it might be a slow bleed and you might have a big bank account… but those are the numbers…
There are certain types of business that can do some accounting tricks where on paper they operate at a loss but in reality they maintain a profit… but if you aren’t already well versed in those worlds (Commercial real-estate for instance… it is very easy for taxes, commissions, and brokers fees to eat up most or all of your profit especially if this is your first venture or if you are an outsider without a mentor showing you the ropes and helping you watch for pitfalls…
There are also other ways to value a business… but a lot of them get complex and very speculative very quickly so its not the type of thing you give advice about over the internet…
It would also be extremely normal to not get paid for 60-90 days if they’re doing commercial projects or getting paid through insurance companies.
Absolutely there are lots of businesses that operate at net 60 or net 90 or even net 100+… but its still a big risk to have a quarter of your A/R sitting in unreceived A/R even assuming you were net 90 that means the business isn’t exactly growing… Having your purchase agreement acknowledge it is just acknowledging the risk… Having a line that says “X% of the agreed upon 1MM will only be released if 75% of the outstanding A/R is cleared within 60/90/100 days of purchasing the business” is a very reasonable milestone and should throw a whole bunch of red flags if the seller isn’t open to it, because it means they don’t expect to collect that money in full in a reasonable amount of time for various reasons…
It sounds like the business has cash flow issues already, as they have $1.5 million in A/R. I’m assuming you plan on using a SBA loan to finance the purchase, that’s going to be about a $12k a month payment you will have to make. I would really dive into the numbers with an accountant to make sure the cash flow works.
You aren’t really getting much for $1 million. The business is a couple of trucks, a GMB profile, and some employees. If you have never ran a roofing business before, there’s a chance the employees will leave and start competing businesses. If you haven’t ran a roofing business before, there’s a chance you will make mistakes and get some negative reviews (hurting the GMB profile).
Buying a business, especially with debt, is life-changing. You can buy a great business, survive, and end up years/decades ahead than starting from scratch. Or you buy a not-so-great business, go bankrupt, and end up losing your house and reputation.
Unfortunately, I think most roofing businesses fall into the 2nd category.
You are correct. Definitely some cash flow problems. I really want to understand why that is. And see if there is a way to help that.
It can’t be really good or really bad. I’m trying to do as much investigating as possible. I know the owner has a small role in day to day operations. But you’re right. 1mm basically is getting me the reviews, reputation, trucks and employees.