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!
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…
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…
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…