Buying an existing business

[Devout]

Hi all,

I know we already have some threads about similar things. I am making a new one because I believe my situation is a bit different.

So here it goes; I currently work for a small IT company thats been around for 15 years or so, I've been there for 2 years. The company is actually two companies. One contains all the residential clients (who I have helped single handedly for at least the past year) the other company contains all the business clients.

My boss has been saying for a while he wants to dump the residential side, and has really only been focusing on marketing for business clients. Well, today he offered to sell me the residential side. It has 250-300 long time clients, most of whom I have worked with at some point. However, he doesn't want me to keep the company name, he wants it to die. So it's not exactly buying an existing company, but it is more then just a client list.

The company makes 6-7k a month.

We have unattended remote connections to around 200 of them that can be exported. He threw out $55k as the amount he'd like for it and says he would help me run it at first.

I think I can talk him down a good bit on this number, and setup a payment plan.

Any thoughts? I have never operated a business before and am feeling pretty overwhelmed with all of the unknowns. Any advice or things to think about would be greatly appreciated.

Cheers!

 

[Porthos]

The company makes 6-7k a month.

After expenses?

I have never operated a business before and am feeling pretty overwhelmed with all of the unknowns.

They are going to bite you in the but.

It has 250-300 long time clients,

Break/fix clients are not worth much in this day and age.

but it is more then just a client list.

Not much more.

We have unattended remote connections to around 200 of them that can be exported.

MSP plan's? or just remote support?

 

[kwest]

Instead of paying him. Offer to give him 50k toys paid as a percentage of monthly income. That way you don't start in debt.

But you would be better off spending 50k starting up with flyers and advertising.

 

[SetU2]

At 6-7k a month, based on your description, you're really just buying a job, not a business. Would need a whole lot more info to know for sure. Where is growth potential, will you have a non-compete? As stated before, there is more limited value in residential customers, and shrinking.


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[dgoglio]

With him not letting you use the name right there that would cut you valuation in half, at least. Second, these are residential clients, not known to be the most profitable. There is a reason he has been focusing on business clients.

If I were in your position and actually wanted residential clients I would offer him $20k paid monthly as a 10% of profits. But honestly, you are better off taking $10k if you have it and setting up your own shop if you really know how to run a business. There is a lot more to it than just hanging up a shingle.

 

[Devout]

Thank you all for the responses, I am going to have a sit down with him today to get more information. This has already given me some topics to bring up! I will post a follow-up later on.

 

[Krynn72]

Your residential client list is only 300 people after 15 years and you're pulling in 6k a month?

Am I the only one not seeing how this math works out?

 

[HCHTech]

There were ranges given, so best case is $7,000 x 12 / 250 = $336 per year per customer, or $28/mo per customer. Worst case would be $6,000 x 12 / 300 = $240 per year per customer, or $20/mo per customer.

Both of these numbers seem high for an average, maybe they are all on a managed service plan?

I agree that not being able to keep the name severely devalues the deal (unless they have a bad reputation).

As a comparison, I have several multiples more customers in the residential side of my (13-year-old) business and I averaged just over $177 per year per customer last year, or $14.75 per month per customer. ...and this only includes customers that I actually saw last year, so in reality, the figures are lower. I'm sure there are lots of customers that call for help less than once per year. That is always the great unknown with residential work. People never tell you when they fire you, they just stop calling. It's only when you haven't seen them in 3 or 4 years that you can really drop them from the list - even that may be too soon - I have some customers that only call me when they need a new computer, maybe once every 4 or 5 years!

Figure out what you want to pay, then structure your offer as a % of labor revenue (not profit!) plus hardware/software profit (not gross!) per month for a fixed period. Do your calculations assuming the average he told you comes true. That way, if he balks, he is essentially saying his estimates are no good. Also, you won't be on the hook for customers that go away and he has incentive to make sure as many customers as possible stay with you.

If you want to pay $20,000 (say), then that would be equal to 28% of his $7K/mo estimate. Let's be generous and round that up to 30%. If you go for a 3-year buyout, Structure your deal so you pay him 15% of labor revenue the first year, 10% the second year and 5% the third year.

Put in real numbers based on your own due diligence and go from there. Get an attorney to draw up your offer!


Edited to add more detail.

 

[Porthos]

I'm sure there are lots of customers that call for help less than once per year. That is always the great unknown with residential work. People never tell you when they fire you, they just stop calling. It's only have you haven't seen them in 3 or 4 years that you can really drop them from the list - even that may be too soon - I have some customers that only call me when they need a new computer, maybe once every 4 or 5 years!

My experience exactly.

EDIT...
To add to this. When I started in this shop in 2003 break/fix was very alive and profitable. You could build a decent computer for less than a cheap OEM.

In 2009 I had an offer just like the OP.
At the time income was OK enough to make a living. I took over the shop and used my new name. Fast forward to today the issues above have made me wind down to getting prepared to work from home. Slowly cleaning out the scrap because when I move all I am taking with me are 3 benches,fridge,microwave, my computers,monitors,printers,tools,copy machine,risograph( for those that know what that is) and any good assorted parts and a file cabinet.

Think twice on what you are getting in to in the current economy and the decline of break/fix work.
I believe if you are already have clinets a MSP plan it MIGHT work for you.

 

[callthatgirl]

I would consider a few options. Tell him he can gift it to you, it's up to you to keep up. I was gifted a few businesses instead of purchasing and here is why...the clients (even though you are the main support for a year now)....will be loyal to him. So, after the "purchase" you might and will probably lose people after time. And then you have to manage, operate and market the new business. $7,000 a month after expenses? You might want to look for another job if you don't want the ownership responsibilities. Think about everything before you consider it, and as for buying? If you decide, I would do it only on a monthly paid commission to him on what clients stayed on with you. I would consider 10-15%. That is a fair deal, so he will make on-going revenue and only on the clients he had.

 

[Markverhyden]

In addition to the great idea information above consider spending some money for a real CPA to go over the books. When it comes to $ never assume someone is being completely honest, etc. Take the time to put together simple business plan. Depending on where you are there may be a nearby SCORE office. They can provide some ideas and guidance.

Back when I went 100% on my own, '06, I gave serious thought to getting a store front. I'm happy I did not. Having worked at CompUSA for years before I watched as the break/fix business started to shrink, as it continues to even today. There are plenty of threads on here about others having made the move from consumer to business customers. There are consumers that will spend some money, it's just that their habits have changed.

 

[labtech]

If considering to take over the business, I would pay serious attention to rent/lease over long term. Being on hook bankrupts people.
Also, do NOT be too optimistic about the revenue numbers. Whatever numbers you project, cut it by at least 30% to reflect more with reality.

 

[occsean]

As morose as it sounds, I don't think my client list has any value to anyone but me. Since I don't currently do MSP there are no contracts to fulfill and the business exists on having the phone ring. I've been in business for almost 10 years and have better revenue and more customers than what you stated. I still don't think my business is worth anything to another person. At the end of the day, my business is really just my relationship with my customers and that can't be sold. Good luck in whatever you decide to do.

 

[Rocco]

All you are buying is a client list that may or may not follow you. I can't see that worth anywhere near that much money. As others have said, I would construct a deal for a percentage of how much you make off those customers you get, for a period of time.

 

[glennd]

Sounds like all you are buying is client *history*.

 

[DeanB]

Whose phone number are those 250-300 clients going to be connecting with? My business has always depended on the phone ringing.

 

[nlinecomputers]

Run away now. Dude you are about to get fired. He is going to cut the residential and lay you off. He is hoping to get you to pay for something that isn't other wise making him anything.

 

[nlinecomputers]

I wouldn't pay a cent. Like I said I think he will let you go soon. If you really think there still is a market for Residential, some places do better than others, then I would just spend the money for advertising your business. I think you will get a better return than buying a list that ISN'T making any money for the guy selling it. (That's what's called a clue folks.)

 

[Devout]

After expenses?

They are going to bite you in the but.

Break/fix clients are not worth much in this day and age.

Not much more.

MSP plan's? or just remote support?

The 6-7k is gross income. The remote connections are just for remote support, but I think that does make it fairly certain they will keep calling whoever is on the other end of that connection.

 

[Devout]

Run away now. Dude you are about to get fired. He is going to cut the residential and lay you off. He is hoping to get you to pay for something that isn't other wise making him anything.

You don't think the list + referral is worth anything for me?

During our sit-down yesterday He has said he would allow me to continue to work out of the office for maybe 6 months or something while I get it going, and he would help me with the things I don't do now (accounting, taxes, marketing).

He said the plan would be to send out a email blast to all the clients plus a physical mail saying they are done with residential but their tech (me) would continue to support them. He refuses to give me the company name or phone number, but said they would take messages for me for whoever still calls the number and pass it to me and be willing to sign a non-compete.

That make any difference in your opinion?