The restoration industry is experiencing a substantial shift in ownership. This is caused by a generational shift in the age of the existing owners, a very fragmented industry, the recession-resistant nature of the industry, and relatively healthy profit margins. If you are considering purchasing a restoration business, then you should know the answers to the following 7 questions prior to buying any restoration company.
- Are you buying a business or a 70 hour per week J-O-B? There is a balance between owning a company and being responsible for the daily activity of the business. The company needs to be able to support your salary and have a team that can take on many of the daily challenges. If the existing owner is in the middle of daily operations, then consider what the company looks like without that person – and if you want to fill the same role in the business? Often, owners of this type of company could make more money if they took a job with another business – and without the same risk.
- How is the team? Is the business dependent on the presence of the owner? How is the “number 2” in the company? Can he or she continue the success of the operation after the old owner transitions out?” Don’t get me wrong, as the new owner, you will be able to fill some of the old owner’s role – but having a core group that continues with the company after the sale can make all the difference in the world.
- Do any of the competitors have a competitive advantage in the market? How difficult will it be to overcome this competitive advantage? Overcoming existing relationships and getting adjusters, agents, property managers or others, to work with a new company can be very difficult. Restoration is dependent on events and not marketing activity, you will need to take the work from another contractor. This is possible but it may not be as easy as you initially anticipate.
- Is the company adding or losing market share? A company that is declining is size may have quality issues, company culture challenges, competitive disadvantages, or other struggles. There is a strong chance that a change in ownership may not be able to change these trends. It is important to understand the cause of the diminishing work and then understand if that will be an easy fix – or will take substantial effort.
- Do you have sufficient operating capital to pay the company debt while meeting the cash flow challenges in the business? I have seen companies that did not understand the restoration industry and failed to account for the working capital requirements when planning the needed funds for operating and growing their new business. Often this does not end well for the new owner.
- What is the quality of the assets in the business? The assets in most restoration companies are not the major driving value in the business – they are resources to complete work. They are often replaceable and when in used condition, not as valuable as they were when purchased and can be replaced. The challenge is when they are the victims of deferred maintenance. If the vehicles have not received routine maintenance, the drying equipment is not functional and the specialty equipment in poor or non-working condition then trying to balance replacing this equipment, while paying for the business and floating cash, may be impossible.
- Is there balance in the work sources? If only a couple of companies are responsible for sending most of the work, this creates substantial risk to the ongoing business. Consolidation, changing staff, personal relationships and changing market conditions could cause any of your top clients to disappear. What does this do to the value of the business and the ongoing operations? I like to see less than 20% of overall work coming from any client which will reduce risk. Many restoration companies do not have this desired mix of work sources – so you will have to determine an acceptable balance of clients and risk. If the company only has a couple of major clients, then you will have to decide if the risk of losing one of these clients is worth the value of the business.
If you are thinking about purchasing a restoration business and want to discuss the opportunity or an individual company, contact our office today! Phillip@businessmentors.net