Posted 2 10 13 How one entrepreneur turned a zero down

Buying a small firm to get contacts
By KC Truby How to Buy -­‐ Fix and Sell small companies with annual sales of $250,000 to $10,000,000 That are in trouble. From Lonesome Cowboy Publishing Inc.
www.KCTruby.com
Box 2254, Casper WY 82602
Phone 866-586-2144 Email [email protected]
Mission: To help entrepreneurs, professionals and vendors put together deals that save small companies in trouble with the hope of an extremely high personal ROI (return on investment.) Basic premise of this report: Sometimes we buy a business not to get the cash flow, but to acquire control of a technology, access to a market or a readymade employee team. This is one of those stories. Disclaimer: All of the case studies you read here are modified enough that even the seller would not recognize themselves in the case study. That is to protect our buyers, vendors and sellers that are always under strict NDA (non-­‐disclosure agreements.) They are presented here as 'stories' to give you a clear idea of what is possible and what others have already done. How one entrepreneur turned a zero down deal into a million dollars in 3 years. Here is one example that I recently reviewed. A small California food manufacturing company in business 15 years had not been able to grow past $230,000 in annual sales. The good news is that it had hit that number for five years in a row so it was a stable business with a few good whole sale accounts. She also had a team of 5 long term but low paid employees in place, more good news. However the seller was tired and wanted to move back to her native country. The asking price started at $300,000 but dropped to $200,000 over the course of a year as the 'dog' business was shopped around. The buyer was intrigued by the company because the asking price was falling, a sure sign that the business is not saleable. A company that has not sold for a year is an owner that will deal. The buyer pulled a total back up of the QuickBooks file (with an NDA in place) and started drilling down into the company. Upon review of the financials it was obvious that the owner was really stretching her claim of $45,000 net operating profit. $30,000 was a more realistic number. However the bills were paid and the QuickBooks tied to the income tax return so the buyer was confident that even though the business was a 'dog' it had potential in the right hands. The buyer knew that a manager would cost $40,000 a year so it looked like the business would be negative immediately. No wonder it could not sell. The business was so thin that operations left no money for debt service so a bank loan was not going to be possible. This would have to be owner financing or nothing. So this little company had nowhere to go and the owner was seriously thinking of closing the doors and walking away. By the way that is a very common outcome for small companies that are struggling. Upon conversations with the seller it was discovered that she needed $10,000 to move back to Asia and would need a few thousand a month to live on for the next few years. So the buyer made a strong presentation about the real value of the company. Equipment was worth about $10,000 at auction and the real value of the company based on forward looking net income after a manager was hired was zero based on 4 times net. "But, I have an idea. I will be right back" our buyer said. With a few hours on the phone the buyer found a local restaurant owner that was hanging on by a thread and asked him how much his rent was and would it help the restaurant if they got free rent over the next five years. Giving him a chance to put that $1,500 a month in cost reduction into advertising to grow the day time revenue. Our buyer then offered to pay the rent in exchange for using the kitchen between 10PM to 6AM after the restaurant closed. With nothing to lose the restaurateur readily agreed. Closing the food manufacturing facilities would cut operations cost by $52,000 a year so the buyer is now up $34,000 after the $1,500 rent. Almost enough to cover the $40,000 manager he needed. The buyer did need a place to put raw goods and finished product during the day time hours so he had to buy a 40 foot refrigerated storage unit used at $4,500 and parked it in the back of the restaurant parking lot. By the way he painted the storage container as an giant billboard on behalf of the restaurant for $97 a month lease (the exact payments on the $4,500 unit). The sign could be seen from the highway and the restaurant saw a bump in daytime revenue immediately. With production facilities secured by tapping into unused assets (a kitchen that sat idle during the night hours) he went back to the food manufacturer and said "based on your valuation formula of 4 times net, this business is worth less than zero as I will lose money on it immediately. But I am going to pay you $75,000 for it if you can accept my terms of $10,000 down and the balance over five years. Your monthly payments will be $1,250 at 6% interest with no pre-­‐payment penalty. This offer addressed the sellers needs. To come up with the down payment he handed the seller his Visa card and asked her to run it for the $10,000 down payment. The seller then called a used restaurant equipment dealer that had offered to buy the entire place out for $10,000 and gave them a date to clear out the building. Our buyer knew he would have his $10,000 check in hand before the Visa bill was due -­‐ so he was getting the business for nothing down. The building lease was month to month so that was an easy exit. He was even able to get a refund from the utilities and damage deposit so that was a windfall of a few thousand dollars. Once they had a deal our buyer went to the 5 employees and said I would like to keep you on payroll, plus I am giving you a 10% raise after 90 days, but you must agree to working from 10PM to 6AM instead of the normal 8 to 5 that you have now. Two of the five employees turned in their resignation as they did not want to work nights. That turned out to be ok, as it was already determined in the due diligence phase that the company was over staffed. So the buyer saved another $50,000 a year in labor. Those savings were enough to cover the installment payments and the balance of the managers salary. So no negative cash flow. The two employees quitting turned out to be just good luck as the plan was to eventually reduce the work force any way. The bottom line was the company was his at no out of pocket cash. Even considering the new debt service and a new managers payroll to replace the owner our buyer was going to do slightly better than break even. So now how does this make a million dollar deal Now here is what our buyer knew that the seller did not. The real value of the business was the connection with the 2 wholesale accounts. He immediately drove to Los Angeles to see those buyers and find out what kinds of needs they had or if any line extensions (new food products ) they might have an interest in. Our buyer was told that the stores needed to take the regional brand national if it was going to ever be a big seller. They promised that with good terms they could double the orders in the next few months. We just went from $200,000 a year to $400,000. But the biggest need he learned of was 'grass fed organic beef' the natural food stores were in need of more suppliers. Our buyer was not a rancher, but read the last paragraph to find out what happened to that information. Our buyer also looked into using some of the same exact recipes' for the Ethnic Asian food and repackaging them into authentic Mexican food and Cowboy novelty foods. Both of these were popular in the Southwest and interestingly used 98% of the same raw ingredients. Starting two competing brands with different labels and web sites was a weekend task. The competing brands strategies cost less than $1,000 for marketing, printing new labels and a few spices. Next step, find the people who wholesale to 'gift basket' and corporate Christmas gifting and start moving the unique brands out the door at zero mark up. That made sales easy. The plan was to capture the customer with the 'at cost' sample in the gift package and get the customer to log onto the web site for recipes' and re-­‐orders. Expanding the brand without advertising expense. This one step took the sales up $100,000 the first year -­‐ but no extra profit. Either way were now up to a $500,000 a year in sales business in less than six months. Now let's get back to the grass fed beef. Our buyer started looking for ranches for sale in the Southwest due to a death in the family or retirement. He found a ranch that had started a grass fed campaign two years ago but the owners failing health left the project unfulfilled. Perfect. He quickly made a deal to broker the beef back to the organic grocers. Within a 18 months he had the total sales up to $1,000,000. Then the ranch owner passed away and our buyer immediately went to the widow with the suggestion that he buy the ranch, keep the management in place and ramp up production. He rented back the ranch house to the family for $1.00 a year so they could still bring the grandchildren out and enjoy country life. All our buyer wanted was the beef production. Since they had a long term contract with the grocery stores for the beef, financing the ranch was a done through Farm Credit at 95% and our owner now had a company with net profits of $250,000. The combined company if sold today would go for 4 times net multiple plus the value of the ranch land. What made this plan work was the horizontal expansion of offering additional products to the same buyers and then horizontal expansion in buying his supplier. During that entire time the buyer never put on an apron or climbed on a horse. He saw his job as promoting the business and building equity.