We’ve talked a lot about evaluating a company to decide whether it’s the right deal for you. Every acquisition has to cover the cash flow needs of the company and the debt service for the loan. If you’re considering buying another company, here’s how to get started on your analysis:
First, do some “kitchen table” math. Take a look at line item expenses and compare them to your company’s. Are the employee salaries in line with the market right now? Does the staffing appear to be right for the size of the company? Are their vendor costs about where they should be? Based on your own business, you can see where you might be able to save money or where you might need to make investments or re-negotiate agreements.
Look for low-hanging fruit that could make the company more profitable right away. Is the company using a Customer Relationship Management System (CRM) to save time and resources for scheduling service and sales calls? Could you consolidate office or storage space? Could you consolidate staff or find other economies of scale that will pay off quickly?
Look for gaps that might present opportunities for more revenue. Is the company selling maintenance agreements? What is the average ticket for a service call? Is there market demand for add-on services in other trades?
Look for trends that indicate potential – or the potential for trouble down the road. Are sales trending up or down? Have expenses increased beyond what inflation would account for? Have certain expenses, such as legal costs or debt services, been surging? How much of the company’s revenue is based on new construction? New construction sales are profitable in the short term, but they don’t foster lasting relationships or generate repeat business.
Be alert for red flags. One of the first line items I examine in a company’s financial statements is advertising and marketing. Some companies spend almost nothing on marketing because their satisfied customers are continually referring new customers to them. If company’s marketing spend is higher, you may have to continue that in the future to attract customers to keep sales up rather than relying on existing customers. They might be selling new units, but miss getting the business for service or repairs. That means they’re not buying customer relationships; they’re buying a portfolio of equipment warranties.
Investigate intangibles. Take a careful look at metrics such as call-backs: how many times a crew had to return after an installation or service call. That might be a sign that you’ll need to invest in training or in hiring better talent. Ask about the last time the company raised its prices. Look for customer reviews online. A small number of good reviews might not indicate a problem, but a large number of bad reviews might. Even if you’re planning to change the company’s brand, it can be expensive and time-consuming to override years of poor customer service or shoddy work.
The bottom line is, of course, the company’s bottom line. The cash flow numbers must make sense, and the asking price must align with your long-term financial goals. A broker who specializes in the HVAC industry can help you decide whether an acquisition is a good deal – or help you find another one that is.
