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!
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.
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.
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.
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.
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.
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