Grow Your Business by Adding Locations Part Three
This is part three of an article addressing some success strategies for opening a second location. The first part included creating a business plan and choosing a location. The second part started to delve into more specifics regarding acquiring and evaluating existing turnkey operations. Today, we will finish addressing those specifics.
Land & Buildings
Does the seller own the land and the buildings? We almost always advise our clients to purchase the land and the building at the same time they buy the business. This enables them to build equity as well as cash flow.
If the seller owns the land and buildings, negotiating for their purchase along with the purchase of the business is the best approach. After a business-only purchase, the seller is still in the driver’s seat.
If the seller owns the facility and it cannot be purchased along with the business, you should try to negotiate as favorable a lease as possible. Make sure the rent is no more than 5% of the sale.
If the seller doesn’t own the facility, you may want to ask if they have spoken to the landlord about their intention to sell the business. Before you go any farther with negotiations, you should meet with the landlord to determine what the terms of a new lease would be.
When considering leasing the facility, either from the seller or another owner, you should investigate the cost for a similar facility in the immediate area. This will give you comparable information to use to ensure a reasonable per square footage cost. Your cost for the lease of the facility should at least be competitive for the area.
It’s imperative that you acquire a copy of the lease and have it read by an attorney. Armed with your attorney’s findings, you can ask the landlord to rewrite the lease and conditions in terms more favorable to you. Secure at least a 20-year lease, which should be broken up into smaller increments, such as three- to five-year terms that include options to renew and spell out increases up front.
- Are there any other assets, such as a used-car inventory? If so, you must deal with establishing a value as you did with the parts and chemicals inventories.
- Is there an agreement not to compete? Many buyers request that the seller sign such an agreement. A value is generally placed on this agreement when purchasing a business. Consult your accountant and attorney regarding such agreements and their value.
Stuff They Want to Keep
Most sellers have items on the premises that are part of the sale. You need to determine if there are any tools, equipment, parts, office supplies, etc., that the seller wants to keep. Record a video when you first preview the business. Then, when you enter into final negotiations, review your video to see if anything is missing or different (such as a substitution) from the inventory you filmed.
You’ll want to review all the personnel and payroll records to decide whether or not to retain existing employees. To protect yourself and to make the right decisions, you may want to determine the following:
- How many employees have been fired or quit over the last two years, and what were the reasons?
- Have the employees earned paid time off which is accrued but not yet taken?
- If the business is sold, how many employees will commit to staying with it? Are there any contingencies to their commitments?
- How is each employee’s pay determined?
- Have any promises been made to employees regarding raises, bonuses, benefits, or possible ownership?
- What benefits (including time off) are currently being provided to employees?
- Are overviews of the seller’s current and former pension plans available for review?
Each and every one of these seven questions should be carefully considered, as there may be some hidden liabilities.
Warranties offered by the seller to their customers represent a potential liability for you, the purchaser of the shop, even if you purchase only the assets of the business. You’ll want to incorporate legitimate warranties concerns as part of the customer retention plan. Questions regarding warranties should include:
- What kind of product and service warranties has the seller provided?
- How do they compare with those of competitors?
In addition to getting answers to those questions, you should determine whether or not you’re going to honor the warranties as they were presented to customers. Often, as a part of a sale, funds are deposited into an escrow account to cover the warranties on previously purchased products and services. Usually there are guidelines established by both the seller and purchaser as to how these warranties will be honored.
Other Business Debts
The answers to many questions asked by purchasers require disclosures by the seller. All items of disclosure should be kept confidential between the seller, the purchaser, and the purchaser’s advisors.
Every effort should be made to have the seller disclose to you all outstanding debts of the business, including contracts such as ad campaigns, monies owed to vendors and suppliers, utility bills, payroll, and accrued benefits, etc.
During your evaluation and feasibility study, you should also get answers to the following questions:
- Is there any pending litigation against the seller or their company?
- Is the business in default on any of its contractual, warranty, financial, or other obligations? Are all up-to-date taxes paid?
- Does the shop use chemicals or products that are subject to government regulation and/or require a permit, inspection, or license to own, use, relocate, or dispose of?
- Has the business, or the site upon which it’s located, been the subject of any government investigation?
- Does the business have a “sweetheart” relationship with any customer, supplier, lender, landlord, or employee that gives it an advantage that will discontinue as a result of the sale?
Negotiating with independent auto repair shop owners can be a very trying experience. These owners often have an unrealistic idea of what their business is worth. However, most eventually recognize the true value.
Before you take the plunge, take a good look at the marketplace. Ask yourself if the economy is too sluggish or credit too tight. You need to decide if now is the most opportune time to buy, and if you’re totally prepared. Also, pay close attention to how the sale may affect your financial and personal situation, and what impact it might have on your current employees, suppliers, and family.
Do you intend to seek financing from the existing owner? If so, how much money do you have to put down? How long would you intend to finance the balance? Would you entertain any balloon payment(s)?
If you’re seeking financing from a lending institution, you’ll generally be required to put down at least 20%. What are you willing to pledge for collateral for the loan? Generally, lending institutions require a personal guarantee. Would you be willing to supply this guarantee?
Certainly, there are many more questions and considerations involved in an expansion to multiple locations. One final tip: Above all, refrain from draining financial and staffing resources from your existing shop(s) to expand to additional locations. We’ve seen many successful operations ruined by their attempting to spread limited resources among multiple shops during an expansion. However, we’ve also observed hundreds of single-shop owners successfully expand their operations into multiple locations.
Maybe it’s time for you to consider adding shops to boost your business!
Do you need more help with your business plan? Guerrilla Shop Management covers business planning and so much more. The next section of Guerrilla Shop Management begins April 21st – call 800-755-0988 to enroll today!