Acquiring a small business

I have been presented with an opportunity to purchase an equipment rental business. The owner has mentioned to me his intent to sell twice now and that has gotten my wheels turning about what my next moves are.

Being that I didn't have all the greatest options available to me in my youth, my business education has come in the form of trial by fire, so to speak. I built up a career in technology, dipped my toes into corporate leadership, then walked away to start my current business in excavation and hard scape.

What types of details would I want to focus on for this type of transaction? Obviously I'm interested in what revenue looks like and also which assets are still being paid off, but what else? Employees are not a factor in this particular case.

For the money folks, this is a huge financial jump I'm considering and I have a few money people to help facilitate this transaction but what is typically the nature of those conversations? I'm assuming there's a percentage attached to the money in some way within a given amount of time to pay off the note. Is this where I'd be putting up collateral as well?

All in all, I want to be as educated as possible for both sides of the discussion since I'm not sure if this makes any sense. Part of me is saying it does make sense because the rental business is turn-key and would, in part, serve to compliment my existing company however my pause comes when the dollar amount is 7 figures that I'll be responsible for.

Any guidance or advice would be greatly appreciated

 

@Boman Forklift

Rob might know some things about this.

 

cash flow...cash flow...cash flow

 

Own the property, Good Mechanics, good clean equipment and some staying power....$$

I know several rental companies that were built for the sole purpose of getting bought out by the big boys. It worked and they now have FU money. Both opened in growing areas with a lack of competition from the large rental companies.

It's kinda like the storage biz. Easier for the big companies to buy out someone with the units all filled than to start from scratch and build the buildings etc.

 

Make sure the fleet is fairly current and dependable, if the business currently has good mechanics figure out a way to keep them. Sell off aging equipment sooner than later. Hope to get bought out by a big rental house at some point. Some equipment still has quite a bit of lead time if you need to update or upgrade it might not happen overnight or within 8 months. If the business is not on a 28 day rental cycle get it there after you buy it unless you want to save a 30 day cycle for your big customers.

 

Have the owner carry the note for the buy in. That way he is vested in your success.

 

Good info above. I was going to ask if the owner is financing? If not, call around and speak to some banks and ask for their SBA department. They generally want around 20%, as I recall, and will walk you through the process. Work on a business plan and get the financials from the current owner to get approved.

My SBA loan was for 10 years. They do also hit the equity in your residence.

 

Are you buying the entire business or just the assets? What's valuation? Unless he's flipping businesses for a living, no one let's go of a cash cow. If you know nothing about this business, are you planning on hiring someone to run it for you?

I think my biggest 3 concerns are:
1) What's the market like for his business. Does he have a solid book of business for the next 18 mos.
2) Condition of his equipment and the maintenance logs. Talk to his mechanics because there isn't a single piece of a construction equipment that gets treated well. If he doesn't have mechanics, is he farming everything out?
3) You are bringing investors into this deal. Are you bringing a bank in as well.

 

Boy, this a huge rabbit hole. There is a million different ways to do this. What type of busneiss is this and how is it setup (llc, s-corp, etc?)

 

I would add: how is your business set up (LLC, s-corp, etc.)?

1) set up this business as its own corporate entity:
a) do not mix with your personal assets if possible
b) do not mix with your other business if possible (easier in case you need to sell later)
2) Review all the books. One thing with equipment rental could be insurance and liability.
3) Determine your financing options:
a) Bank business loans are preferred, as they might not require a personal guarantee (provided you have sufficient liquidity or assets)
b) SBA loans are also an option, however they require a personal guarantee (like a lien on your house etc.)

Financing should be pretty easy for capital equipment and real estate, especially if it is being purchased at a good price. In general, if there is something tangible to recover (I.e. repossess), the finance people view this as less risky.

I am not an expert in this, but I sit next to one all day.

 

Hull brothers rental in my area actually bought and sold the same rental business in the same building TWICE

The little guys in my area rent all the weird shit the big guys don't have. Something to look into.

If you have the property and can do fuel/propane sales thats always a bonus.
If the mechanics are good and have good service vehicles the guys in my area sub out to work on other companies stuff as well.

Sounds like a great opportunity and if the same dude that boomed the construction industry 4 years ago gets a good seat in Washington in 12 months, and weird weather patterns keep happening, I don't see you having any shortage of business

The first rule is this....check your emotions at the door. If the math doesn't work out.....walk. Fast.

Sometimes the best deal is the one you DIDN'T make. Any dumbass can sign paperwork to buy a building and business. Make sure your math is in order.

Forgot to add....if they do have fuel tanks on the property don't forget to do Phase I and legally cover your ass if the ground is already contaminated.

 

I would think the purchase price would be a major consideration here. There's the value of the hard assets, less any liabilities etc. But what value is the seller putting on the intangibles? There's various ways to value that but I'd definitely want some professional input before committing.

 

My buddy and his wife are in the equipment rental and sales business. The place was started by the FIL, decades ago. It has survived on the FIL’s honesty; nothing else. When my buddy married into that family, he went to work for them. My buddy is passionate, personable, and the most knowledgeable equipment dude I’ve ever met. He’s divulged a lot of info about the goings-on of the place. We both can tell you, if you’re financing the rental business, you’ll struggle to make it without a retail side to bolster the cash flow.

The FIL was always a hindrance (set in his ways) and a payroll liability (taking the most for himself), so they bought him out. They financed the property and the inventory, at the time. The rental equipment was junk, the property inadequate, and retail brands lackluster. But, his wife knew the financials and they saw the potential. They started replacing equipment, by financing it through equipment partners. They started tweaking the existing buildings to be more efficient for the day-to-day, while planning for the future. They started looking at the best retail brands (how I met him) and started bringing them in, via flooring, which was more financing. The business was heavily leveraged. However, the place blew up. He’s the #1 dealer for most of his brands, in multiple states, on some of those brands. There were two other stores who popped up, trying to do the same. Both ditched their rental equipment, fairly quickly, and are struggling on the retail side, per their brand reps. With the economy and interest rates how they are, my buddy has faced a massive drop in sales. A lot of what the manufacturers are doing goes against the manufacturer > dealer relationship model and is outright greed. Rentals are still doing pretty good, though.

The business you’re looking at needs to be scalable, if you’re financing it. And, you better have a steady cash flow, to keep the business loans in check. If the seller will allow you and your accountant access to the financials, that’ll be easy enough to figure out. That’s about all I can offer.

 

We have one of those close to where I live. Chainsaws, snowblowers, small trailers, residential ditch witch, etc.. Nothing really huge, but stuff the average guy only needs once or twice a year. I'm not saying he kills it, but he has a very steady business.

 

It’s actually pretty easy on a high level. Businesses like this usually sell for 3x-ish ebitda plus a negotiated amount for any assets and working capital. Owner financing, at least partially, would be typically expected. I would do a lot of due diligence. The biggest issue is what are you buying? Likely there is nothing stopping you from starting the same business and, therefore, not paying someone for theirs.

 

what he said…. Pay attention if it is a stock purchase vs. buying the assets and customer lists. In a stock purchase any corporate liabilities will follow you where an asset purchase there is some level of protection.

 

Just to follow up, there is certainly some excellent advice and knowledge posted here and I do thank you for taking the time to reply.

In the end, the business in question is not something I'll be going for. There simply isn't enough meat on that bone.

The business is small in the sense that it's been one guy handling everything other than the largest of repairs.

Most of the equipment is owned outright and all is kept in very good condition.

And while he has good contacts in the area, as well as a decent customer base, I couldn't possibly continue growing my own business while stepping into someone else's, even though it would compliment my business perfectly.

Again, thank you for taking the time to reply.

 

If the seller won't hold a decent sized note he probably has very little confidence in the business going forward. Non-compete non-compete non-compete. I can't stress that enough non-compete. Find out what the principal driver of the business is usually it's a couple large commercial contracts not just Joe schmo walking in Renton equipment everyday. The value is also usually in a couple key employees whether it be sales or mechanics make sure they are retained. The owner is selling for a reason find out what the actual 100% real reason is if this guy doesn't have cancer or he's 80 years old there's some other motivation make sure you find it out and don't fall for whatever bullshit he says it is.

 

I bought out a shop from a former employer/friend two years ago combining it with my already open business.
Did it because of Main Street property, more room for employees and the numbers made sense. If it isn’t a good idea from a really rough tally of income and expense don’t do it. If it won’t pay for itself with 50-60 percent rentals rate don’t mess with it.
There are ALWAYS hidden cost that you won’t think of, or expenses that will go up.
If it’s owner financed it will help. Keeps them vested in your success, and most of them deals are because of retirement.

JMO

 

If anyone in the State of Ohio has a brownfield property or a property needing demolition, check with your local land bank and municipality/township. There's quite a bit of State grants to clean these properties up. Can be a significant savings/increase in value with a disproportinate investment.