My Journey Buying a Small Business

Intro

I just went under contract this last week on a small pest control business.

Had a friend who bought a business awhile back recommend buying a business. He had done so, and it had gone so well, he was working on picking up another one.

He recommended the book HBR Guide to Buying a Small Business.

Turns out there's tons of baby boomers looking to retire, and many of them are selling businesses for a number of reasons.

In the case of the one I'm getting, the owner passed away and the widow is looking to sell it.

It fits in well with many people with management experience who would rather buy something proven that already has customers and cash flow, vs a franchise you have to build from scratch.

Going forward, I'll be talking about my experience and what I learn, but something interesting if you haven't thought considered it before.

Can I Do This?

For those who missed it, I'm in the process of buying a small pest control business, and providing updates about my journey.

One of the biggest questions I had in the process was can I really do this?

I've never worked in pest control. I've no idea on what the process is like. How do I come in and run a business I know nothing about?

The good news with so many of these small businesses is that they are experts in their field. The previous owner spent 40 years in the field as a pest control expert.

What he wasn't was a business expert.

The company was paying the majority of their marketing budget on the yellow pages, much of which covered outside of their area.

They have a small FB page but basically no social media presence.

They have a software to help them route trucks and automate the payment structure, and they're still doing everything manually, entering over a thousand credit card numbers manually every month.

There's no bonus structure to align employees with the success of the company.

Even the tax structure was paying way too much.

A key element I was looking for when I bought a business was a strong foreman who understands the operations, and I got that.

I expected to add some value, but I didn't count on was how much that was.

The sad part is that because the company was profitable, the owner had no motivation to find any kind of a coach to help them.

If they had, a good coach would have had a huge ROI.

So I'm excited about the opportunity with the new business. I'm not expecting everything to be smooth, but it does look like I can add value.

Numbers

I had to look twice the first time I saw the numbers.

I had been looking for a business for awhile when I found this one that I'm buying. I subscribed to the listings and I would wander through them.

Most of them people are selling a job. I'm a painter, make a good living, have a helper and a good system, want to retire and sell the business.

But there isn't a business, just a job. There might be some customers another painter might want to buy, but that's it.

On the other hand, when I saw this business, it was different.

Business was selling for $850k and bringing in $240k a year in profit (not revenue, cash).

That's 3.5 EBITDA, and believe it or not, 3-4x EBITDA is fairly standard.

Even better, it was running itself. Unfortunately the owner had passed away and his wife was running it till she could find a buyer.

Good office manager and field manager already in place (met them yesterday and they both look great).

I'll need some time to fine tune things at the beginning but then I would guess it will take me what the previous owner was investing - less than 8 hours a week.

SBA loans require 10% down, so I need to invest at least $85k (it will likely be more after closing costs), but I can use my 401k to do it.

And I still have to pay a business loan. Interest rates are high, so that will be $130k a year for 10 years.

But even if the business doesn't grow the 6-7% it has been and I can't do anything to improve profit - that's still $110k a year for a part time gig ($240k after the loan is paid off).

I have to invest time, but the down payment should be covered in the first year.

And I'm guessing I can get that $240K profit up to at least $300k fairly quickly, that extra $60k will be a big boost.

Not every business will look this good. The majority are smaller.

However, many of them are much bigger, and the 3-4x EBITDA is standard. So a $1.5M business will have a $375-500k cash flow, leaving more left over after the loan.

Something to think about as you look at options. Nolan Baum at Transworld is my broker and where I found mine, but there are a variety of brokers and options out there.

Just take your time looking - the right one will be there and it's worth it.

Built on Service

I paying $875k on proof that you can build a business on service.

We've seen three key mindsets gain significant traction in the last 20 years.

- Growth - Based on Dweck's work, everyone has the ability to change and grow.

- Agile - We know we're wrong, so we experiment to adjust quickly.

- Servant - You end up with more when you focus on serving others.

Yesterday my wife and I went up to meet the widow of the man who built the business we're buying.

This man spent 27 years building a business focused on service.

Not only did he make sure the job was done right every time, but he went above and beyond.

His widows knew they could lean on him when they needed a light bulb changed.

Or something small around the house done.

It wasn't part of the job, but it didn't matter. He wasn't focused on the job. He was focused on taking care of his customers.

When the widow asked if we would keep the name, the reply is absolutely, and we plan on the web page focusing on continuing his legacy.

There are some opportunities for growth, some technology, marketing, operation tweaks that will help things run smoother.

But when it comes to a reputation built on quality and customer service, that's far too valuable to part with.

Growth Mindset

I think we often forget that everyone started somewhere.

For those who don't know, I'm buying a business and documenting the process. You can read previous posts in the attached article.

27 years ago, Dennis, the guy who started the business, left Truly Nolan, bought a truck, and started finding customers.

Over the years he figured out how to connect with more customers. He built a reputation on doing the job right every time, and slowly built a company.

At the end, he was working 4-8 hours a week, making $240k just keeping an eye on the business he made.

And his wife is ending up with $875k which will will help even more with retirement and leaving something to his kids.

One of the mindsets that has been really powerful in the last 20 years is the Growth Mindset from Carol Dweck.

We may not remember it, but a long time ago each of us walked into kindergarten, and based on how the other kids were doing, decided how smart or dumb we were (even though it relied far more on our parents than us).

And we often live our lives with that same assumption. Dweck's work focuses on the fact that we all can change, we all can grow.

I think when it comes to being more, too many of us look at CEOs of Amazon or Nike, and think we could never be like them.

We forget that Bezos started on the floor of his parents garage packing books, till somebody suggested the buy a table.

Phil Knight started selling shoes out of the back of his car at track meets.

Dennis was never a billionaire, but he created a great life for himself and his family, and served thousands of people in the process.

Maybe we're not Bezos or Knight, but most of us have the opportunity to add more value to the world.

Location

Location, location, location - but what if you don't have one?

Just survived my first surprise (though I'm sure there are many more to come).

The business I'm buying is a little unique. Normally you would have an existing owner that will help with a transition, normally from 3-6 months.

You would also have an existing location you would be working out of.

In this case, the previous owner was running the business out of a small office behind his house, and passed away last year.

His widow has been "running" the business in his absence (really just signing payroll checks and doing some basic book keeping).

In one way, it's an ideal business since you know it can run independently.

However, to get the existing office, you needed to buy the $550k house that goes along with it, too expensive, especially since they were estimating the office rental at $750 a month.

For pest control, you don't need a customer facing office at all, so I figured a small office would be easy to find.

And there's the first roadblock - there was nothing. It's a small town and everything commercial was already leased out.

The only things available were two retail locations, both at $1,600 a month and that was before utilities. Otherwise, nearest town was 30 minutes away. We were getting worried at the addition $12k a year in expenses.

But the field manager had been keeping his eye out and provided an invaluable lead.

There's a small office space that wasn't advertised anywhere because the landlord hadn't decided what to do with it.

It's perfect, 400 sq ft with utilities and internet included. It even has a small supply closet in the back that will work for the chemicals.

And it's only $450 a month with the utilities included. Only needed expense will be two phone lines.

Bottom line - when you're buying a business, expect the unexpected. This is the first, but I'm sure there's more to come.

Reach out to others, you never know who will help you.

And have faith. If you're looking, generally there's an answer. You just have to keep looking.

Paperwork

It probably goes without speaking, but when you're working to close on a business, plan on extra steps and delays.

I'm getting down to the wire, have my business plan created, all the accounts set up, insurance taken care of, new LLC created, list of accounts for the deposits, and we're just waiting for the business valuation.

It's a lot of paper work, but it's been a good experience. The SBA asks for a ton of items I need and would not have thought of.

Creating the business plan founds some pleasant surprises.

- Company has been paying $6k a year for a website, I only pay $150 for mine.

- $14k was spent on yellow pages ads, including in a city they don't even cover, so that frees up money for marketing.

- Was spending money on office repairs and utilities that will be far more than the new office I'm getting.

- Phone costs are $1k a month, including what feels like personal costs. New phones will be less than $100.

- Also, team was down a person and had held off on hiring, but after meeting me, decided to hire two new people. It saves me time and effort later.

It's over $35k in additional annual revenue I hadn't counted on. Broker could have put them in as ad backs, but decided business looked good enough already. And the new people makes my life easier when I start.

First week is going to be crazy. I need to get all of the new accounts transferred over to my name. I'll let you know how it goes.

First Week

Business closed on Tuesday. I knew the first week would be wild and it did not disappoint!

Tuesday we signed closing docs.

Wednesday morning the office staff called that they had credit cards to process where did they need to process them.

Was able to find a great system, went up on Thu, and was able to train them on the new software. (If you don't know, Costco works with Elavon bank, and the rates seem really good).

And the office had $4k to put in the account, so income coming in.

New office is ready and I wanted to move this weekend, but phones would take 1-2 weeks to move.

Was able to get the existing lines forwarded, get VOIP service same day, and with a $60 converter, we can even use the same phones.

Needed to transfer all of the accounts.

Turns out that because the business name isn't changing, and most don't use the EIN, we're able to just add my name as an approver, remove the previous owner, and we're ready to go.

Was worried about QuickBooks.

Broker suggested I just open a new account, which makes complete sense. Account is open, already connected to my bank, and I'm building out my chart of accounts as I get new purchases prioritized.

Worried about making sure I had payroll covered.

Previous owner covered the last one on 5/25, next one isn't till 6/10 and income should be in great shape to cover, as well as any small expenses with the office.

Speaking of which, got an incredible deal on the office for $450 a month with utilities. The VOIP phones is the only office utility for $60 a month.

Spoke to my field manager. He handles all the sales, let me know he relaxed last year which is why things were slow with the uncertainty. Plans on turning it up this year, and has been able to bring in great sales in the past.

I still need to work on marketing, but explains why the slow down in business, since they've grown 7-10% previously.

Grabbed a U-Haul today, three of us moved the office in a few hours. We were able to get everything moved and in under a week from closing we're ready to open Tuesday morning in a new location.

Business license gets tricky if I changed the name, and the previous owner is keeping their LLC.

When they opened the license, they abbreviated the name, so I was able to get an LLC that exactly matches the name. Checking, but so far, haven't needed to change anything.

I worked hard to get as much as I could before closing, and still found out so many obvious items I should have thought of before this week.

Been crazy, but it's all come together in amazing ways.

Great People

As owners and leaders, I don't know that we appreciate our best people enough.

Just closed on the business last Tuesday, so it's been just over a week.

As I'm working with my field manager, who is really my top leadership person, I can feel how much he loves the business.

Unfortunately the owner passed away last Aug, and his widow has basically been signing off on payroll, so I don't get a good sense from them what leadership was like in the past.

But working with those in the business, you get to feel from the culture some signs.

What I do know is that the field manager is there shoulder to shoulder with me every step of the way, treating the business just like it was his own.

It makes sense. I've always been dedicated to the companies I've worked at, focused on doing the best thing for the business, and have been blessed to work with many others who were the same.

And I've always tried to appreciate great team members who were focused on being their best and growing.

And yet, somehow it means more when it's my business. I'm here working to make things come together, because this is now my baby to grow.

And just like a child, it means to the world to me when the people I have on my team, treat it the same way.

One of the benefits I knew I would get from ownership was an owner's perspective. It's a tough job, and nobody gets it like you do.

And this was an interesting discovery I didn't expect.

Overcoming Challenges

I swear, everything always takes twice as long as it should!

We have 8 trucks as part of the business. At closing, the title company let me know the liens would be paid off and gave me documents for each to go switch over titles at the DMV.

I'm moving vehicles into a business name. I have all my documents, but counted on something probably going wrong and needing at least one more trip.

It did. I got there, liens are not paid off and I don't have the right documents. Seller has a form they need to fill out and have notarized.

Setting up IP phones took 2 hours on the phone with tech support and then they crashed, so I needed to order more phones.

Closet where we were going to store chemicals has other items in it, so we'll need to get a shed. Luckily my field manager has a spot where we can put the shed.

Website went down yesterday and we have no idea where it's hosted.

And the list goes on and on.

It's easy as leaders to look at things and wonder why they take so long.

Even on the ground you wonder why.

The truth is that things always take longer than you thought and there's always a twist you didn't expect.

As project managers, we're used to it. I once had a PM where everything went right, and he didn't know what to do with the extra time he had built into the plan, since it never happens.

(The shock quickly wore off as the next issue hit him ??)

It's all part of the game. Over the next couple of weeks, I'll get everything in place to have the business settled in and what it needs.

And then we'll tackle the next list of where do we find more clients, or how do we improve service, or how we improve training, or whatever other item we can find to improve and grow.

Life is like an adventure game. You start out with each problem, and as you overcome it, you gain experience and grow.

When you hit a problem you can't beat, or choose not to beat, you stop growing.

But in the video game, you don't just stop looking for challenges.

In life we need to do the same, face each one, grind through them, knowing it's all part of the game.

Industry Knowledge

"But you don't know anything about pest control!" - my wife when I started to look at this business.

She was right, I don't know anything more than the normal person about pest control.

And what I've learned from helping businesses under $5M is that you don't need to.

The reason these businesses have gotten to where they are is because they have found market fit.

They have a good product that people are willing to buy.

What they don't have is business knowledge.

Admin is the bookkeeper. They've promoted some guy in the field to be operations manager. Bosses daughter who just graduated is trying to figure out marketing.

It's why they are stuck and not growing.

Don't get me wrong, stuck making $240k a year for a bug guy isn't a bad place to be.

And there is so much opportunity with a little bit of help.

As you think long and consider if owning a business could be an option, don't let industry knowledge stop you.

Not having it could be an advantage.

It gives you a fresh pair of eyes, and you trust your team, building great relationships as partners since they know they bring something valuable to the table.

What you really need is business acumen.

If you work in a larger business, it's not hard to find.

You're surrounded by it. VP's have 40+ years, Directors 30, Managers 20.

When you walk into a small business, you'll be quickly surprised at the opportunities you see.

It may not be now, and it doesn't have to be.

But as you're thinking long term, it's definitely something to consider.

For $160k down (and you can use your 401k) I estimate $180k a year until I pay down the 10 year loan and then $300k after that, with 4-8 hours weekly investment once I get the business settled in.

That's a pretty comfy retirement gig at any age.

Cleaning House

Had to let an employee go yesterday. As business leaders, as hard as it is, it's one of the most important things we do.

For the most part, I inherited a great team when I bought the business. But there was one employee with performance issues.

More than performance was simply attitude, they often created issues with customers and other employees.

Any time we talk about firing someone, it's a tough issue. I don't think employees realize how much leaders care about them.

We worry about families and livelihood. Employees are an important reason every business exists, and we want to make sure we give back.

Which may be why in every case that I've seen an employee let go, we've waited too long.

We've given them more chances that we probably ought, done more coaching, let them slide with wrong decisions, or poor performance.

When it's the right decision, what we don't realize is how much happier everyone will be.

Teams feel lighter, work seems easier, and there's a sense of relief that it's done.

And for the person leaving, they are often much, much happier. It's always a shock at first.

But now they don't have to live with the worry that they're underperforming (it's always obvious and they always know).

And they have the chance to find a better place that fits their skill sets.

I don't think the decision should be taken lightly.

And I've also not seen anything that will destroy a culture faster than leaving the wrong person in the wrong seat.

Employee Appreciation

We really need to normalize taking care of employees, especially with smaller companies.

One of the great things about buying a small business is you're normally buying something successful (which is why you're buying it in the first place, you skip all the ones who have issues).

And there's generally some opportunity to make it even more successful (which is why it's small enough you can afford to buy it).

Definitely true with mine. The strength was a dedication to great service. While other companies just spray, our teams spray chemical, dust with a long lasting organic powder, and then set traps to even further eliminate bugs.

There are a number of opportunities with technology, efficiency, and marketing, but making it a great place to work has been a big one (even though I have a long tenured dedicated team).

First issue I mentioned yesterday, we had a member who was making things miserable for both employees and customers.

Getting rid of them was a huge positive for culture.

We're on the lower end of the pay range, so there was also an opportunity to raise wages. The team was excited about a raise this year, that made sense when I ran the numbers.

And team was surprised when I suggested we have Gatorade available in the office for techs.

I needed to be careful with raises. It's my first year, and even though it's small compared to total revenue, it can quickly add up against profit.

Little things like Gatorade was much easier. Case at Costco is $15, 4 cases a month is only $60, or $500 a year.

The team is currently running $85k a month in revenue since it's summer, so it's a tiny amount, but it goes a long ways in showing appreciation.

As small business owners, we can't always afford larger bonuses or raises, and teams often understand that.

And little thank yous like small gift cards, occasional pizza, or having free water, pop, or soda go a long ways.

Talk to your teams, find out what they would like, just let them know you appreciate the work they're doing.

From a business perspective, happy employees are more engaged, take better care of customers, are more innovative, and are more productive.

But from a human perspective, each of us should feel like we make a difference and someone appreciates what we do.

Cleaning House

Letting go of your worst employee is the best thing you ever do for your business.

It's not uncommon when you buy a small business to have some dead weight.

Small businesses are often heavy on family, and it's really hard to let someone go when it's your sister, or your son, or your aunt, and the reason they started in the first place was a favor.

But as a new business owner, you only have one question you have to ask: Is this person doing a good job taking care of customers and other employees?

If the answer is no, they have to go.

I was really fortunate to only have one.

They weren't doing anything close to pulling their weight, they had cost the business customers, and even some really valuable employees.

It was an easy decision, but it's never an easy conversation.

It was the best decision I could have made. The business feels lighter, we realized how much of a mess their work was, and now we can focus on getting it cleaned up and taken care of.

Bad employees are bad for customers, bad for other employees, bad for the owner, and bad for themselves.

The vast majority of the time, people who have been let go are much happier afterwards.

They've found a better job, that's a better fit, with a place that appreciates who they are.

So coach who's coachable, work with the ones that need it, but when it's obvious, pull the trigger and let them go.

It's better for everyone.

So Much More To Be Done

As business leaders - our work is never done.

It's nearly two months since I bought the business and the major items are in place.

In the first week we were in a new office and everything is working well.

Figured out all the accounts I need to pay, they're all moved over, so I can make needed changes

I had the one employee that needed to go. They are gone, and their replacement is learning quickly.

We're not even sure who designed or hosted the last website. But I was able to get the domain, and get a much more modern one up and running. (Btw, for a small business you shouldn't be paying more than $500 a year).

The field manager is brilliant technically, understands the business inside and out, and great with sales, so I've moved him to Operations Manager and everyone reports directly to him.

Techs hadn't had a raise in ages, ran the numbers, made sense and got some badly needed ones in place.

The company is settled in and the day to day stuff is done.

And it turns out my work is just beginning.

We're manually routing the techs (have been for years), and I think there is a huge opportunity in using our ERP's system to save time, money, and free techs up for more appointments (they're all commission so they'll love it).

Everything is paper based, and our ERP offers an inexpensive solution that will take everything digital, reducing trips to the office, paper, processing, and storage (just sign a tablet, and done).

The company hasn't ever really had a marketing effort, so researching Fakebook contests, Yelp, getting better coverage on Google Maps, improving reviews, and a host of other options.

And these are the obvious ones. I need to do some value and process mapping to find the ones I don't even know are there.

The point is that the work is never done.

As business owners, there is always an opportunity to add more value, to be more efficient, to serve more customers.

Think about how many customers Apple, Amazon, Google, Walmart, Microsoft and so many others are serving, and they aren't done.

It's not just about the money, it's about what got us here in the first place. It's a desire to change the world.

After scrambling to get the basics in place, it was interesting to see how much more there is left.

There always will be.

And I think that's what makes this the most fun.

Too Good of a Deal

I'm not complaining, but I think I got a really good deal on my business. It's a lesson for anyone who is thinking about selling theirs.

For those who aren't familiar with John Warrillow, he wrote the book Built to Sell that focuses on 8 areas any buyer looks at when buying a business.

He's created a program around it that both helps those getting ready to sell as well as existing owners who just want to run a better company.

It's a little like when you stage your house to sell and then wish you weren't selling since now it would be a great place to live.

I've been working with the company and out of curiosity, looked at the company I bought.

Price that I paid was about right, but the program indicated that with a little work, it could have gotten $400k more.

I can see that. When the business listed, broker was overwhelmed with offers. I ended up bidding above asking to make sure I got it.

Don't get me wrong, I'm grateful for the price I paid. In fact, I think it would have been much harder to finance at a higher price.

And I think the seller was grateful to get out of it. I think she worried that running the business, it would decline in value and she wouldn't get the right amount out of it.

But it speaks to anyone getting ready to sell their business. Before you rush into it, make sure you're working with a broker that understands Warrillow's model. It will help your broker build a much better package.

And if you're getting closer to selling, it definitely makes sense to look at the book, and may make sense to work with a coach that understands it.

In this case, it would have been close to 50% more money. That's a lot when you're using the money to retire, invest, or just to leave to kids.

I'm glad I looked. It reaffirms the great deal I got.

But it also reminds me how much need there is in the market. Too many owners don't know how to get the money they deserve out of their business.

And that's sad since you only get to sell your business once.