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!
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.
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…
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…
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…