A buddy and I are looking at purchasing a flooring business but have no prior experience in that particular line of work. Anyone own a flooring business and have any tips related to due diligence on something like this?
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Buying flooring company?
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Last: 2 yr ago by Marvin_Zindler
Y'all have any background in construction or anything even related? It's hard to picture success unless you bring in someone experienced with your company ASAP
No prior experience but the current owner who runs the company has offered to stay on and teach us the business before retiring.
Is this a retail shop/flooring supplier or an installation company?
Split deals with buddy? No thanks.
Go it alone.
Go it alone.
He does both.
This isn't a new take or anything, but be careful with that arrangement. I'm not an attorney so I won't get into structure ideas, but a lot of those arrangements flop when the old owner spends more time traveling than teaching.rebel06 said:
No prior experience but the current owner who runs the company has offered to stay on and teach us the business before retiring.
Yikes. Better do an earn out based on financial performance after close for next year following close.
dc509 said:This isn't a new take or anything, but be careful with that arrangement. I'm not an attorney so I won't get into structure ideas, but a lot of those arrangements flop when the old owner spends more time traveling than teaching.rebel06 said:
No prior experience but the current owner who runs the company has offered to stay on and teach us the business before retiring.
Agreed.
There is absolutely no good way to measure whether the guy u buy from lived up to his end of the bargain. And no way to determine damages if he doesn't which makes arbitration or litigation very difficult and expensive if it needs to come to that.
Sometimes arrangements like this end up good for both parties.....often times they don't.
Once he has ur money he has very little incentive to follow through.
One way to structure things to encourage him to stay on and do what he promises is to create a clause with penalties should the business not produce what it produced last year.
But TBH the best thing to do is for you and your buddy to work FOR HIM for a year at a reduced rate, the difference between what you would normally be paid and what he is paying you to work for him to be applied to the purchase price and if you don't purchase it then you lose the difference. Sign intent to purchase documents before you work for him locking in the purchase price.
Then at the end of the year of u working for him, you buy it from him.
That way you can learn the business, get to know the employees, and get ur feet underneath u before you buy.
Worst case scenario is that at 6 months or whatever you decide u don't want to buy and everyone walks away 6 months wiser.
dc509 said:This isn't a new take or anything, but be careful with that arrangement. I'm not an attorney so I won't get into structure ideas, but a lot of those arrangements flop when the old owner spends more time traveling than teaching.rebel06 said:
No prior experience but the current owner who runs the company has offered to stay on and teach us the business before retiring.
Couldn't you structure it so that the old owner has to be in the office "x" hours per week?
Howdy Dammit said:dc509 said:This isn't a new take or anything, but be careful with that arrangement. I'm not an attorney so I won't get into structure ideas, but a lot of those arrangements flop when the old owner spends more time traveling than teaching.rebel06 said:
No prior experience but the current owner who runs the company has offered to stay on and teach us the business before retiring.
Couldn't you structure it so that the old owner has to be in the office "x" hours per week?
You could but then how do you ensure the old owner is actually doing anything, teaching you, etc?
That is where it gets hinky.
At the end of the day, I have seen and heard enforcement of that is difficult to litigate.
You are correct about the old owners going lazy as the deal is inked.
Please don't think attorneys are going to advise how smart a deal is.
They will tell you the deal is all legal.
Legal >< Smart
Please don't think attorneys are going to advise how smart a deal is.
They will tell you the deal is all legal.
Legal >< Smart
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A man with experience is not at the mercy of another man with an opinion.
Texans make the best songwriters because they are the best liars.-Rodney Crowell
We will never give up our guns Steve, we don't care if there is a mass shooting every day of the week.
-BarronVonAwesome
A man with experience is not at the mercy of another man with an opinion.
I have worked some in the commercial flooring world.
Your cost of capital can be high because of pay apps and waiting for payments.
You may very well be using "day labor" or "1099 labor" so knowing how to navigate that world is smart.
Just make sure you are buying a business, not just buying a job.
Your cost of capital can be high because of pay apps and waiting for payments.
You may very well be using "day labor" or "1099 labor" so knowing how to navigate that world is smart.
Just make sure you are buying a business, not just buying a job.
----------------------------------
Texans make the best songwriters because they are the best liars.-Rodney Crowell
We will never give up our guns Steve, we don't care if there is a mass shooting every day of the week.
-BarronVonAwesome
A man with experience is not at the mercy of another man with an opinion.
Texans make the best songwriters because they are the best liars.-Rodney Crowell
We will never give up our guns Steve, we don't care if there is a mass shooting every day of the week.
-BarronVonAwesome
A man with experience is not at the mercy of another man with an opinion.
I believe something like this is usually done on a buy-down over about 3 years where you come in and if the business continues to meet sales projections, you invest 1/3 of the agreed sales price each year. That way, the previous owner has a financial incentive to see that you get off to a good start. My BIL did this when he came into insurance money and bought into an HVAC company. He did real well with the business and retired after selling it in 15 years. But he previously worked in the HVAC business, so he had a feel for the industry and contacts.
Y'all thinking of going into businesses that you don't know anything about remind me of this...
Can't decide who is more naive - the flooring guys or the farm land guys - neither of which know anything about the industry but are being pitched "we'll guide you through it after you've paid up" and both are considering it. Wow.
Can't decide who is more naive - the flooring guys or the farm land guys - neither of which know anything about the industry but are being pitched "we'll guide you through it after you've paid up" and both are considering it. Wow.
I'm a small business coach/accountant with several years in flooring both as a Controller for a $10M retailer/installer and as a consultant for a couple of companies of similar size. I know the industry pretty well. Shoot me an email and we can get on a call. I don't charge unless there's some real work to be done.
jason@thebeasleygroup.com
jason@thebeasleygroup.com
A fearful society is a compliant society. That's why Democrats and criminals prefer their victims to be unarmed. Gun Control is not about guns, it's about control.
Thank you for all of the input and responses. LOYAL AG, I'll reach out if things keep moving forward.
Lots to unpack here, but I think a lot of the responses in the thread so far are difficult to consider unless we know more about the subject business.
The biggest question I have concerns the mindset and motivation of the seller - is this business actually on the market for sale, or is the owner someone you have a personal relationship with and that's how the discussion about buying his business came about?
The answer to that question will ultimately dictate how you can reasonably expect to structure the deal, mitigate your risk and secure your investment.
If he's looking for a buyer on the open market, especially if he's using a broker, there is little chance he'll be open to some of these suggestions in the thread - they are very unfriendly arrangements for sellers. But if you're his only buyer and you have a prior relationship with him, then he's more likely to consider some of these types of very buyer-friendly arrangements that most sellers would never agree to.
Keep in mind, most business owners sell one business in their lifetime - this is their one shot to recoup not only a financial investment, but an investment of untold hours, stress, family sacrifices and sometimes health. I say that to remind you that as much as you want to ensure you are fully protected, the seller also wants to ensure that they are protected as well, and that their financial plans for retirement aren't in the hands of a couple of buyers with no prior industry experience. By asking a seller to consider options like earn-outs or observation periods, you're putting all the risk on the seller's shoulders - ask yourself why they would do that before you ask them to do it.
The biggest question I have concerns the mindset and motivation of the seller - is this business actually on the market for sale, or is the owner someone you have a personal relationship with and that's how the discussion about buying his business came about?
The answer to that question will ultimately dictate how you can reasonably expect to structure the deal, mitigate your risk and secure your investment.
If he's looking for a buyer on the open market, especially if he's using a broker, there is little chance he'll be open to some of these suggestions in the thread - they are very unfriendly arrangements for sellers. But if you're his only buyer and you have a prior relationship with him, then he's more likely to consider some of these types of very buyer-friendly arrangements that most sellers would never agree to.
Keep in mind, most business owners sell one business in their lifetime - this is their one shot to recoup not only a financial investment, but an investment of untold hours, stress, family sacrifices and sometimes health. I say that to remind you that as much as you want to ensure you are fully protected, the seller also wants to ensure that they are protected as well, and that their financial plans for retirement aren't in the hands of a couple of buyers with no prior industry experience. By asking a seller to consider options like earn-outs or observation periods, you're putting all the risk on the seller's shoulders - ask yourself why they would do that before you ask them to do it.
Where is the business located?
Would love to discuss this with you 4kennygibson@gmail.com
Would love to discuss this with you 4kennygibson@gmail.com
I was a sales rep to flooring stores in Houston from one of the two major manufacturers, and that is a business I wouldn't want.
Simple litmus test.
What would it cost you to open a flooring store across the street?
What would it cost you to open a flooring store across the street?
I don't get this thought process. Given that neither of them know nothing about the business I'd say this is a really bad idea regardless of cost. At least in buying an existing business they're likely to inherit a staff that knows something. Plus they have zero contacts with suppliers which means they're bottom of the totem pole. This is an industry where a Shaw or Mohawk will cater to a big customer to the detriment of others in the market. In that situation they're going to be locked out of the two biggest brands there are. Not a good way to start a new business.birdman said:
Simple litmus test.
What would it cost you to open a flooring store across the street?
Look at it like this:Quote:
I don't get this thought process.
I am selling you a pizza place that makes me $3k a month as an absentee owner for $180k.
You could set up a mirror business to mine for $80k across the street.
Still want to pay me that additional $100k that you will make back at $1 a slice?
Sure there are many other variables, but this is the high level look.
I understand 100% what he was trying to say. In this case it's a bad idea and a pizza place isn't a good comparison. I can buy every ingredient for pizza at HEB. It'll be bad for margins but I don't need Sysco or any other food distributor to get that business opened. More importantly Sysco isn't going to refuse to sell to me to protect the guy across the street and if they do there's Ben E Keith and half a dozen other food distributors in any given market.TxTarpon said:Look at it like this:Quote:
I don't get this thought process.
I am selling you a pizza place that makes me $3k a month as an absentee owner for $180k.
You could set up a mirror business to mine for $80k across the street.
Still want to pay me that additional $100k that you will make back at $1 a slice?
Sure there are many other variables, but this is the high level look.
Flooring is a much different animal. In carpet there are two dominant players and they will protect established clients in a market, I've seen it happen. Your new flooring store would likely be unable to sell the biggest two brands in carpet for an extended period of time. Those two are also huge in wood and tile though not to the level they are in carpet. You're not going to be able to open across the street and get anywhere close to competing with the business you decided not to buy. That's my point.
Or you pick it up yourself from Restaurant Depot.Quote:
I can buy every ingredient for pizza at HEB. It'll be bad for margins but I don't need Sysco or any other food distributor to get that business opened.
Absolutely. Many manufacturers do that.Quote:
Flooring is a much different animal. In carpet there are two dominant players and they will protect established clients in a market, I've seen it happen.
Remember during the great recession the auto dealers that were left to wither on the vine?
Was the OP a supplier and installer or just an installer?Quote:
Your new flooring store would likely be unable to sell the biggest two brands in carpet for an extended period of time.
OP was none of the above. Said neither he nor his would be partner have any experience at all in this industry. That's why I don't think opening across the street is a good idea. No clue what they're doing and no clear plan to bridge that knowledge gap with existing staffing like they would get if they bought the existing business.TxTarpon said:Or you pick it up yourself from Restaurant Depot.Quote:
I can buy every ingredient for pizza at HEB. It'll be bad for margins but I don't need Sysco or any other food distributor to get that business opened.Absolutely. Many manufacturers do that.Quote:
Flooring is a much different animal. In carpet there are two dominant players and they will protect established clients in a market, I've seen it happen.
Remember during the great recession the auto dealers that were left to wither on the vine?Was the OP a supplier and installer or just an installer?Quote:
Your new flooring store would likely be unable to sell the biggest two brands in carpet for an extended period of time.
"Opening a similar store across the street" is a simple and common exercise. It's a good guide line that works for nearly any business.
I'm using made up numbers...
You can buy the flooring store for $1 million. You get his business name, workers, customers (for now), location, etc.
Or you can start from scratch across the street for $200k. You aren't paying the premium for his business, but you own a flooring store.
Is the name, customer base, etc worth the extra $800k? Sometimes it definitely is worth the premium. But plenty of times the "scratch business" will make less income, but doesn't have the extra $800k loan. In the end, they have more profit.
I'd say most businesses that require that previous manager or owner to stick around are a bad idea. Think of worst case scenario. Old owner could quit on second day or get killed in car wreck. That's how you go bankrupt.
And flooring seems like a specialized thing to me. For two guys who have never even worked in one? Seems like a dumb idea.
I'm using made up numbers...
You can buy the flooring store for $1 million. You get his business name, workers, customers (for now), location, etc.
Or you can start from scratch across the street for $200k. You aren't paying the premium for his business, but you own a flooring store.
Is the name, customer base, etc worth the extra $800k? Sometimes it definitely is worth the premium. But plenty of times the "scratch business" will make less income, but doesn't have the extra $800k loan. In the end, they have more profit.
I'd say most businesses that require that previous manager or owner to stick around are a bad idea. Think of worst case scenario. Old owner could quit on second day or get killed in car wreck. That's how you go bankrupt.
And flooring seems like a specialized thing to me. For two guys who have never even worked in one? Seems like a dumb idea.
A few thoughts after 25 years contracting (Another trade though).
*Your install crews are absolutely freaking key. Good ones can make you, bad ones will break you.
You need to know with 100% certainty if your crews are employees or 1099 subcontractors who you have real control over. If you get sideways with a crew, they will go find another company to work for.
That said, good installers can teach you a ton about the business.
*How is your Spanish? Learn it & earn some respect with the guys that will be working for you.
*Partnerships are VERY tough.... seldom work out in construction unless it's family like father/son.
Think about the worst thing that could happen with the business & think about your friendship. Weigh that carefully.
*Investigate potential supply chain problems... they are everywhere now.
*Who are you installing for? One off clients or builders? If builders, keep in mind they are notorious for going elsewhere if the price is lower unless you have trust & get in real good with them.
*Flooring isn't rocket science... you'll be able to pick it up pretty fast especially if you have good installers to teach you.
*Construction scheduling is going to be fun for you to learn. Learn your top excuses & use them well:
1. Sick foreman. 2. Broken down truck. 3. Job ran long 4. Materials didn't come in. 5. Weather
*You're buying when construction & the market in general is at an all time high. Not the best timing IMO. You'll be overwhelmed & learning while going 100 MPH. Money will be coming in & there is a tendency to be careless in this environment. DON'T BE. The good times won't last & you need to have a plan for when things slow down.
*Prepare your brain for the mental gymnastics required to talk about a floor problem in Spanish to your installer who dropped out of 8th grade in Guadalajara and then translate that for your multi millionaire Client who is pissed.
*Your install crews are absolutely freaking key. Good ones can make you, bad ones will break you.
You need to know with 100% certainty if your crews are employees or 1099 subcontractors who you have real control over. If you get sideways with a crew, they will go find another company to work for.
That said, good installers can teach you a ton about the business.
*How is your Spanish? Learn it & earn some respect with the guys that will be working for you.
*Partnerships are VERY tough.... seldom work out in construction unless it's family like father/son.
Think about the worst thing that could happen with the business & think about your friendship. Weigh that carefully.
*Investigate potential supply chain problems... they are everywhere now.
*Who are you installing for? One off clients or builders? If builders, keep in mind they are notorious for going elsewhere if the price is lower unless you have trust & get in real good with them.
*Flooring isn't rocket science... you'll be able to pick it up pretty fast especially if you have good installers to teach you.
*Construction scheduling is going to be fun for you to learn. Learn your top excuses & use them well:
1. Sick foreman. 2. Broken down truck. 3. Job ran long 4. Materials didn't come in. 5. Weather
*You're buying when construction & the market in general is at an all time high. Not the best timing IMO. You'll be overwhelmed & learning while going 100 MPH. Money will be coming in & there is a tendency to be careless in this environment. DON'T BE. The good times won't last & you need to have a plan for when things slow down.
*Prepare your brain for the mental gymnastics required to talk about a floor problem in Spanish to your installer who dropped out of 8th grade in Guadalajara and then translate that for your multi millionaire Client who is pissed.
This is 100% correct. I work in Preconstruction for a large Commercial GC. I know exactly who my flooring contractor will be on any project, before I even request bids, just by seeing what manufacturer/product was selected by the architect or client.LOYAL AG said:
Flooring is a much different animal. In carpet there are two dominant players and they will protect established clients in a market, I've seen it happen. Your new flooring store would likely be unable to sell the biggest two brands in carpet for an extended period of time. Those two are also huge in wood and tile though not to the level they are in carpet. You're not going to be able to open across the street and get anywhere close to competing with the business you decided not to buy. That's my point.
I know that if manufacturer X was selected, then subcontractor X will have the best price. If manufacturer Y was selected, then subcontractor Y will have the best price. Competition is driven away. If an owner is smart, they leave the flooring selection open and let competition drive prices down, but too often interior designers want a specific "look" and get their way.
I own a fairly large commercial and residential flooring company. We actually acquired out San Antonio branch. Shoot me a message, if you'd like to visit. I can share how we structured our deal, and give you some insights to all of the moving parts of this business. First pointer: don't get in the flooring business! Ha!
TxTarpon said:
I have worked some in the commercial flooring world.
Your cost of capital can be high because of pay apps and waiting for payments.
You may very well be using "day labor" or "1099 labor" so knowing how to navigate that world is smart.
Just make sure you are buying a business, not just buying a job.
Yes. Payment may be 60-90 days behind depending on the type of work, GC, owner, etc.
Username checks out
OP. I'm a lawyer. Shoot me an email at the link in my profile if you want to discuss.
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