I have now worked in the onsite industry for 37 years. One might think of retiring after 37 years. One’s wife might think about purchasing the company instead of retiring.
One week ago, on New Years Eve day at noon, my wife and I sat in a bank and signed a large stack of papers, purchasing the company I have worked at for 37 years.
A lot goes into purchasing a company. The whole process took us 18 months. The following are some considerations if you are the potential buyer of an onsite business.
We had to make certain all of the employees would stay. The current employee roster was a major deciding factor in us buying the company. After telling all new hires their job is to grow me out of my position, I finally have those who can do just that.
It really helped that I had worked here for a long time and was in a position of management for a long time. It also helped that I could sit down and show the bank on the financial statements exactly how I was instrumental in growing the company substantially. That consistency, staying within the same industry while having a long and successful track record, made the bank feel comfortable. The bank does take that into account.
It also helped that I reached out to the bank our company had done business with for decades. Familiarity means a lot to a bank.
I needed a substantial loan. I told the bank I wanted to discuss Small Business Administration options. I’m glad we did. The SBA offers options that make the loan easier to get and with very good terms in comparison to a conventional loan.
The SBA’s SCORE program provides retired business persons who mentor small business owners, or in our case soon-to-be owners. We met with a SCORE mentor several times in the early part of the purchase process. SCORE mentors are those who have already been successful in business and volunteer their time to answer questions and offer suggestions on how you can be as successful as possible. Each time we met with the mentor, we had a list of questions prepared so as not to waste his time. Not that he was in any hurry, but I wanted to respect his time as they don’t charge a cent for this service.
We lucked out that our SCORE mentor was an accountant who worked for a very large company and his position was to buy smaller companies. This worked out well as his background in purchasing companies proved to be a great resource for us.
One of the very first things you have to do is determine what price the owner is asking for the business.
The second thing that needs to be addressed for all parties involved are appraisals — appraisals of the assets and a business appraisal. These are two separate appraisals.
Banks are happy to lend on tangible assets that they can use as collateral. Tangible assets such as heavy equipment and buildings are what they want to lend on because these are easy to put liens on or sell if you don’t repay the loan.
The more difficult part is the business. Appraising a service business is an art, not a science. We had three different business appraisals and all three were different.
Our bank was happy to loan on the equipment but the business, not so much. Although they used the business appraisal in their equation of the loan and it was mentioned in the loan documents, the bank loan was merely for the equipment and we had to pay the business portion personally.
Make sure when having the assets appraised that you work closely with the seller so that you list out exactly what assets you want to purchase, and make a separate list of items you do not want to purchase. That way it gives the seller the opportunity to sell the assets you don’t want separately. It’s also very important to list what you are purchasing, so in the end when memories fail, you are able to show exactly what was included in your purchase price.
A third reason for the very specific list of assets is the appraisal itself. You want the appraisal to be very specific and accurate to include exactly what you are purchasing.
As a buyer, we had to get an attorney and our own accountant. We learned that a business purchase really is an asset purchase. You are purchasing the assets; you are not actually purchasing a company. Why not? At the time of closing, you are actually starting up a new company and the old company goes away. That’s one of the many reasons for the attorney and accountant. By purchasing assets only, you don’t assume any of the old obligations, nor any of the liability. You actually start quite fresh and new.
The part of the company you are purchasing in addition to the assets is the goodwill. Goodwill is the name of the company (or one similar to the original), the phone number, the customer list, and the website, domain name and email addresses. Goodwill is all the intangibles that make a company what it is. But remember, that part we had to pay separately. The bank was happy paying for tangible assets, and they also were happy to factor the goodwill amount into the closing documents; but you can’t put a lien on goodwill.
It took me 37 years to go from employee to owner. I hope it doesn’t take you that long.
About the author
Todd Stair is owner and president of Herr Septic and Sewer, Inc., with over 35 years’ experience designing, installing, repairing, replacing and evaluating septic and mound systems in southeast Wisconsin. He is the author of The Book on Septics and Mounds and a former president of the Wisconsin Onsite Water Recycling Association.
