Acquiring a company is nothing more then marketing for customers. When you deal out your money for a yellow page ad, a direct marketing piece, or any other conventional marketing tactic what are you expecting in return—A customer, right? Well, I believe conventional marketing is the riskiest investment you can make in business today. No one can guarantee a specific marketing tactic will work for you. You can hope it does. Maybe you have historical evidence that a particular tactic works. That’s great. Keep riding the success of your tactic until that trend falters. Trends are like tides—always changing.
If the trends your marketing tactics have been riding are on their way out, give acquisitions a try. Acquisitions are the safest marketing tactic you can do for your company. Why? Acquisition customers are REPEAT customers. Repeat customers close 95{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} of the time. First time customers may be closing 80{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} of the time. It’s a better customer. Repeat is the lifeblood of the service business. You’re also getting hundreds; even thousands of customers at a time.
You may be surprised just how simple the process of acquiring a business can be. Ready, here are the steps to the best marketing tactic in your toolbox.
Step 1: Bird-dog Your Market Area
Send letters to all contractors in your market area. The object of this letter is to let them know you are expanding into their territory and looking for companies to join you.
A sample letter could be as simple as this:
Hello <FIRST NAME OF ADDRESSEE>,
As you probably know <YOUR COMPANY NAME> has had fabulous growth in the past few years. The growth is part of our plan to become the largest service provider in the area. We will do this by purchasing several businesses in the area. If you have any interest in selling your company, please give me a call. I look forward to speaking with you in the near future, or even today.
Sincerely,
<YOUR NAME>
<YOUR COMPANY>
This letter will start a buzz with contractors in your area. Technicians get wind of your intentions and soon you will be on the map as the company on the go.
Send these letters out during your valley seasons. We all have valleys in our business. These are times when contractors are asking themselves, “Do I really want to do this anymore?” or, “I wish I could find a way to get out from under this business.” Become their self-fulfilling prophecy with your letter offering them a way out.
Step 2: Schedule the First Meeting
This acquisition tactic is like any direct mail piece—sometimes it makes the phone ring, sometimes not. If the message in your letter doesn’t work, change your message; keep mailing it.
When the phone rings with a lead (contractor), schedule a meeting with the owner. At your first meeting, you have few speaking parts. The meeting is solely a discovery of opportunities. Here is your agenda for that meeting:
Ask these questions:
Why do you want to sell?
What is your time frame to sell?
What are you asking for the business?
Are you asking for a lump sum or would payments work?
How many customers do you service in a year?
How many technicians do you run?
How much of your business is residential service?
How much of your business is commercial service?
How serious are you about selling?
What are your plans after you sell?
Step 3: Schedule the Second Meeting
Set up a second meeting. Tell the owner you want to come over to look at his shop. Say you want to look at things and see his invoices. Be vague enough so he will be thinking of a price for components in his shop and not focus on “manufacturing” fake invoices. For the second meeting, your agenda is to physically count and review all of their company’s invoices for the last year. Do not shortcut this step. This is the most important step in the process. Don’t accept a printed list of calls run, as you will need to verify the nature of every call. Leave it up to the owner whether he wants to be with you during this process or not. Many times, they will start reviewing with you, get bored, and move to something else. You may be left alone. That’s OK. It doesn’t change your process, you’re still counting invoices and eliminating any commercial or installs from your count.
Look at every invoice. Sort them into two piles. One pile is the verified residential service invoices. Place all other invoice in the other pile, including;
The commercial invoices
The installation invoices
New construction invoices
Remodeling invoices
Now you have a count of the entire residential service invoices. Here’s where math assumptions come in. I use these assumptions;
Every 650 invoices are equal to a year’s work for one service technician
Revenue assumptions. This assumption is different for every company. What is the potential revenue if these hours were translated into your shop rate?
Plumbing technicians should sell $300,000, at a minimum
Electrical technicians should sell $250,000, at a minimum (I’ve never had an electrical department, so this is my best guess)
HVAC technicians should sell $175,000, at a minimum
So let’s say I counted 650 plumbing service invoices and 650 HVAC service invoices. I could assume the business would support two service techs; one plumber and one HVAC technician. So now what do I offer?
Step 4: Determine the Price to Offer
Based on one plumber’s revenues of $300,000 for the year, if I were to spend my marketing dollars to generate $300,000 of revenue, I would spend upwards of 10{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} of those sales. So my offer for plumbing would be $30,000 maximum. I also have enough work for one HVAC technician who can generate $175,000 in additional revenue. Once again, I would spend upward of 10{938cd9e8dae860e800efc538277d4f7684e6f6981618ba70d1c34357a53c2e1f} on marketing to attain this revenue. I could now add $17,500 to my offer. I have now identified the top price I would pay for this company is $47,500.
Step 5: Presenting the Offer
I will now meet and present my offer. I know from my first meeting, the owner is willing to take payments, remember? The question you asked in step three can help you in the negotiations now.
My offer: I am willing to purchase the company name and phone numbers for $28,500. Don’t say another word!
The owner will come back and say: “My inventory is worth $30,000.” I say, “I agree with you, you should keep that.” “My accounts receivables are worth $80,000,” he’ll retort. I respond by saying, “I agree, you should keep that, too” He will continue this line of thinking by saying, “My trucks are worth $20,000.” I say, “I agree, you should get that much for those vehicles—from someone else.” You see what’s happened here? My offer was $28,500. He was expecting $158,500 for lock, stock and barrel. Don’t argue with the man about the value of his assets. That’s not the first order of business. The first priority is to buy the name and phone numbers.
Let’s continue now with the terms. I will pay you $1000 per month for the next 28 and a half months. Starting the day you transfer the phone line in my name. If he balks more, I could say: I can go to $47,500, but the payments will be $500 per month for the first 48 months and I’ll pay $1000 per month for the remaining 23 and a half months.
Once an owner told me he wouldn’t take less then $1 million dollars for his business. I said okay, “I will pay you $1 per day for the next million days.” He looked at me and said, “Are you nuts?” I said, “I would be if I had to pay it all up front.” We chuckled, and made a deal—not for a $1 a day, but we met somewhere in between. I gave him about $75k over the 3 years. He kept all his other assets and sold them off.
The conclusion here is to buy only what will generate revenue in your company. Anything else is the seller’s property and responsibility. If you can stretch your payments out, the assets you’re buying will have time enough to generate adequate income to pay for themselves. If done right, the draw on your financial resources will be little or nothing.
Jim “Bone” Hamilton is a business coach for Nexstar Network®, a world class business development and best practices organization that provides business training, systems and support to independent home service providers in the plumbing, electrical and HVAC trades. Nexstar members get rapid results, guided by experienced coaches, surefire systems and incredible peer connections. For more information, visit http://www.nexstarnetwork.com.