We have looked at the numbers of three different competitors over the years. One of them on two separate occasions. We found on three of the four occasions that we knew the business better than the owners after reviewing their income statement for 10 minutes. Believe me, this is not a slight to the sellers we dealt with as we have been in their shoes in the past. The point is you understand their business on a deep level without ever having to set foot in the building. You are also getting answers to the questions business owner themselves cannot even answer. That is the strength of knowing your own numbers.
Look for improvements
There are many reasons to sell, but most of the deals probably involve the seller unloading their problems on the buyer. You need to know what those problems are and how to fix them before you buy.
Once you have seen the numbers and asked all the questions, you should have a good understanding of what changes can be made to improve the bottom line. Are they still writing up invoices by hand? Are they overstaffed or understaffed? Are you going to be able to eliminate some expenses (accounting, legal, utilities, etc.)? Do they have old inefficient equipment? Are they undercharging? Does 30 per cent of their business come from low-margin products that can be cut from their services?
In our recent acquisition, we immediately cut vehicle tint and PPF from the services offered. Combined, they only accounted for 11 per cent of their gross sales. The pricing in our market is incredibly low, and our facility is not set up to do either properly. It was an easy decision to let everybody else in the market lose in a race to the bottom. Some days we refer five-plus calls a day to one of the tint shops. We would make the same decision again and again. No sense working for the sake of working. We will focus our time and energy on things that make money.
Run projections
Once you have a handle on where things are now and what improvements you would like to implement, you should run some projections. What are the numbers going to look like after you take over? Are you going to be able to maintain 100 per cent of gross revenue? Are you adding marketing expenses? Is your material cost going to go down because you will be ordering more volume? Take your income statement and balance sheet, plug in the new numbers, and see what the new bottom line might look like. Does that number look juicy or scary? Now punch the numbers in again, but be more conservative. Would it still make sense to make the deal if things are not quite as rosy as you expect?
