Over the last two to three years, investment and consolidation companies have been doing all they can to acquire profitable plumbing businesses across the U.S. Most plumbing companies do not meet their requirements due to small profit margins. On the other hand, some excellent companies have been sold that produced excellent margins – 20% Operating Profit or better. A company with $5 million in sales and better than a $1 million Operating Profit is the sweet spot for these investors.
A company’s value is based on Operating Profit – not sales. If you have a $3 million dollar sales company, it is not worth $3 million if you have a 5% Operating Profit. If you do not have a good profit margin, call me. I can help.
In all cases, the owner needs to understand their financial numbers or be taken advantage of. A case in point: a large up front price is paid; then the additional purchase money is paid out over the next three years. “We will pay you on Gross Margin,” they said. At no time did they mention that your “bonus” toward the balance of the purchase price was based on “Contribution Margin.” What is Contribution Margin? It is when the investment company pushes General and Administrative Expenses into the Cost of Goods Sold to reduce the Gross Margin. In essence, they took advantage of you because you did not understand your financials nor did you know what questions to ask at the closing. And, you had no knowledge on how to structure the sale so you could get the full value.
Most consolidation companies want the owner to stay at least 3 years to continue running this profitable, smooth operation. Then comes the “bonus payout” and former owners find they have been taken advantage of, due to their own lack of knowledge, and quit. So, the investment company made out even better than projected as the “total sales price” was not received by owner. The fine print makes a big difference.
You work night and day to build a business; think you have found the gold mine with their purchase, only to find out all you got was the gold mine shaft. Don’t be their victim. If it sounds too good to be true, it is probably not a good deal for you.
If you want to grow your business and it be a Profitable Business – contact me. That is what I do all day, every day. KeithGlass@ThePlumbersCoach.com. 727.451.9160.
The Plumbers Coach™ Detailed personalized business coaching and training for plumbing and electrical contractors. Like us on Facebook @ThePlumbersCoach, follow us on Twitter @T_PlumbersCoach and LinkedIn @KeithGlass1. More information is available at ThePlumbersCoach.com.