The Green Condor Opportunity: Business Expansion

Business Expansion

Hello $wanigans! Hope I find you well today. As I teased in my article last week on the Joys of Small Business Ownership, today I am going to talk about one of the ways it will all hopefully pay off for us. Business expansion is knocking on our door!

I have always been a believer that “opportunities multiply as they are seized“, a great quote from Sun Tzu (author of The Art of War). And that is exactly what we’ve experienced lately.

Being a small business owner sounds glamorous and enviable, but as I explained last week, there is a lot of muck you have to deal with. While we could never have guessed how many crazy things we’d experience with our new industrial services business (after all, it hasn’t even been a year!), we did know that there would be challenging times.

We didn’t shy away though. While tough, my siblings and I knew being small business owners is a great opportunity to rapidly grow wealth. And one of the primary objectives to grow the business is through continuing to acquire more businesses as soon as there is a good opportunity and as soon as we can afford it.

Business Expansion

While I wouldn’t say we’ve completely reloaded our finances after having just acquired this business last year, we now may have an opportunity to buy a related business nearby. We took advantage of the opportunity to buy the initial business and now have new opportunities to expand the business available to us. It’s a great opportunity for us for many reasons as I’ll discuss more.

The Related Business

We’ve started to build a reputation for ourselves with our industrial services business. By successfully changing the culture of our business, improving the operations, developing close relationships with other similar businesses, and actively pursuing multiple new lines of business and revenue growth, we now have an opportunity to drastically change our business for the better and enhance the potential financial gains of the business.

We’ve networked and gained many good contacts. And one in particular has been so impressed by the work we’ve done, that he’s brought up how he’d like us to buy his business as he looks to exit. Will call this guy Sean. He runs a similar business in a neighboring city. There are a few unique characteristics of his business that would be different than ours, but in terms of running his business it would be mostly similar.

The one big difference, his business is much bigger than ours…almost 3 times bigger! While this is great to have the opportunity to expand operations in a such a dramatic fashion so quickly, it would no doubt present numerous challenges as well.

Timing

The timing of Sean wanting to sell his business isn’t great, but we can deal with it. He’s hoping to exit in the next year.

From a financial perspective, for our sake it would be nice to have even another year to save up some more money in the business. But he’s a good guy, is willing to work with us and be flexible, and by coming to us first (and wanting to avoid a business broker who would take a big fee) we should be able to negotiate certain things in our favor.

From an operations perspective, we’ve been able to run our business for almost a year, we have fixed things up and turned our business around, we have gotten to know the industry and we have a number of good learning experiences under our belt. With that, I think we are in a good position to take on the new business.

Savings

Since Sean’s business is more similar to our business than it is different, there are many potential cost savings available to us as the buyer. The biggest of which is the cost of real estate, but it would also include front office staff and greater operational flexibility with our tech workers.

Both Sean and our business rent big office warehouses. But together, we wouldn’t need both. This would be a pretty big cost savings and attained very simply. A huge benefit is that the businesses operate in neighboring cities and a future location right in the middle would be ideal.

By combining the two businesses we wouldn’t need the front office and administrative staff that both businesses have today. And on top of that, we would also save Sean’s managerial salary. James, my brother who runs our day to day business, would be able run both for the most part. Sean has been delegating much of his responsibilities and doesn’t even work full time as it is.

Lastly, each business has busy and slow periods. The busy times result in overtime pay to the tech workers (or hiring temp staff) while the slow times mean we often send folks home early (unpaid for those missed hours). Having the businesses together which offers much more scale would mean we can cross-train and staff the tech workers more efficiently and save on the overtime while also keeping them happier and whole in terms of the hours of work they want.

Purchase Price

As I mentioned above, Sean’s business is almost 3 times bigger than ours. This means it will be expensive! While we will be able to swing it, we will be relying on borrowed money for more of the purchase price than what we’d ultimately like. We’d prefer this than putting additional equity in (our personal money) as we can always do that as a last resort option.

Instead, we’ll be using mostly all debt. Those that are debt averse will cringe at this notion, and we cringe ourselves a little, but the opportunity is worth it. And it’ll only be temporary as we use the earnings from all our businesses to pay it down as quickly as we can.

I’d think of it like buying a vacation home with an 80% mortgage. You’d be putting on a lot more debt and taking on a lot of risk if something doesn’t work out. But the one difference with our situation is that our “second home” will earn us a lot of money that can be used to pay down the debt along with the income we make in our “first home”. We would combine the cash flow generation from our existing businesses plus the new business to pay down all the debt.

The Wrap-Up

While we know Sean is wanting to avoid using a business broker, we don’t know if he has put out feelers to other folks. One thing we are confident in is knowing what the business is worth and we won’t be willing to overpay. While it is a great opportunity, we’ll see if it is the right price. Time will tell.

As I said in the outset, opportunities multiply as they are seized. We have a very exciting opportunity in front of us and just like the first one, we hope to seize this one as well. It’ll take some time to pan out, but we are optimistic.

Just like the first opportunity to buy the industrial services business last year, this new opportunity will have a number of challenges. Given the shear size of the acquisition, we’ll need to make sure we have all our ducks in a row. But if executed correctly, we will have a much larger and excitingly strong business.

And not to get ahead of myself, but looking further down the road, the combined cash flow generation of our business (once we repay debt again) will be significant and allow us to make even larger acquisitions in the future. That’s all part of our growth strategy!

As we move forward and learn more, I’ll be sure to keep everyone posted.

Thanks for taking a look!

The Green Swan

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24 Comments

    1. Thanks Claudia. We’re looking forward to learning more about this opportunity and having the chance to seize it. We’ll keep everyone posted.

  1. My friends who’ve run multiple location businesses tell me that operating secondary/satellite locations is harder/less-profitable because the owner (the one with the most skin in the game) isn’t there. The financials for Sean’s business are predicated upon Sean being there.

    You’ll want to have a fella there and running the joint who’s as good as Sean or better. Buying out Sean will disrupt the operation. Since it’s 3x bigger than yours, it’ll be >3x harder to get flying trim and level.

    Debt is a tax on your future profits. I hope that you can prove to the most skeptical member of your team that the after-disruption cash flow from Sean’s business can cover debt service.

    If you’ve read The E-Myth you know a business goes through stages of maturity. This opportunity will force you to transition to the next level or crush you.

    1. Love feedback like this, Steve. Thanks. You sound like a banker (coming from a banker I mean no disrespect). Very grounded and sage advice.

      We definitely won’t under take something like this lightly. I tend to be the most skeptical and I share your worries. You raise a good point about the disruption. Our intent would be repaying debt super fast (just a couple years) which our other more stable financial service business will help.

      Lots to think about and it isn’t a done deal yet, but I’ll keep you posted. I haven’t read that book but will put it on my list to read soon, thank you!

  2. Excited to see you’re willing to take on the new challenge!! I feel that the challenges you take like this in your life will be the ones you grow through the most.

    It sounds like you’ve did the research and decision process, hopefully he gives you a good price.

    Was the Art of War worth the read? I’ve had it on my book list and haven’t got to it yet!

    1. Yes I completely agree!

      It’s definitely worth the read. It’s more than just how to fight a smart war, very applicable to everyday life and situations.

  3. Check with your accountant first; if you do not want to invest more equity to close the deal, loan your company the money at a competitive interest rate. This creates another passive income stream and allows you tremendous flexibility on loan terms (i.e. no refi costs, payment amount, length, int rate, etc.). It’s also exempt from certain taxes depending on your company’s structure (i.e. Self-Employment Tax, SS, FICA, Medicare, etc) and the interest is tax deductible to the business. This was one of my favorite strategies when growing my business. Best of luck on the new venture.

    Lee
    The Dividend Times.

    1. That’s a very good thought, Lee! Very advantageous on many fronts, especially since the cash need would ultimately be short term or temporary. Thanks!

  4. Sounds like a very exciting time for you! I’m facing something similar with taking on more rental properties. It’s going to be a lot more work, and a lot more debt, but they will pay for themselves and more! I just have to figure out financing and I’ll be set! Good luck with your business adventures!

    1. That’s great, Gwen. Yes very similar situations. If the timing is right, might as well keep looking for growth opportunities. Best of luck with expanding your real estate business!

  5. It sounds like you’re in a pretty good position. You know what the business is worth, and that fact that you can cut down on warehouse space and employees should really make a difference! Still, I’m sure there’s a hell-of-a-lot of analysis that goes into this that I’m not familiar with. But I have faith in you, JW!

    Thanks for giving us a peak behind curtain!

    1. There certainly is a lot that goes into these decisions. Sometimes they work out and sometimes they don’t. Fingers crossed on this one as there are a lot of good strategic reasons to do this deal. Thanks Mrs Groovy!

  6. Thanks for sharing. Lots of risk here, but potential for a huge upside. But looks like you guys are already aware of this. At our company, we run things pretty conservatively (mid sized business, roughly $40MM in revenue). We’ve entertained buying out or merging with a competitor but we ended up not going through with it. But good thing because they’re dying. And we’ve picked up a ton of business from their previous customers because their service level was declining. It’s a 3rd generation business. So yeah. It ended up being the right decision. You just never know what you’re buying. I’m sure you guys will do your due diligence though. Because leverage can cut both ways.

    1. Yes, leverage certainly can. Well said Tim. And thanks for sharing your experience. Sounds like you’ve had some inside looks with M&A for small to mid sized businesses as well.

      Diligence can certainly be difficult. Sounds like you made a great decision to rather just compete and steal business than buy. That can be a great solution, less expensive and less risky and still a great outcome.

      I wish the situation was as applicable for us. We do feel like we have a good inside view of the company. It’s helpful having other information sources and contacts inside the company as well as from other third party sources.

      We’ll see how the situation evolves though. Thanks for the great comment!

  7. “Opportunities multiply as they are seized”. What an awesome quote, first time I’ve heard it. Thought provoking.

    Sounds like you’ll be cranking up some spreadsheets, and figuring out what multiple of earnings makes sense for a purchase price. Sounds like a great opportunity. Look forward to hearing what you decide. At your age, and with your experience in the biz and inside track with “Sean”, it sounds like an opportunity to seize. Keep us posted!

    1. You bet, Fritz, we have the spreadsheets firing on all cylinders!

      Thanks for sharing your thoughts. I’ll be sure to keep you posted!

  8. I’m just catching up, rather new to your site but wanted to say good luck! I’ve had various investments and by far the most difficult one has been the small business (albeit I’m a more passive investor in the business while you are closer to operations). It has upside but also risk, debt, and other market and technology and personnel factors.

    Looking forward to future updates … –Rich

    1. Thanks Rich! I need to consider posting more frequent updates but I try to keep everyone posted on major developments. Expect another one soon! Thanks for following!

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