Buying a Service Business
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, A New Jersey Buying a Business Attorney
There are a large number of service sector businesses in New Jersey available for purchase. This is a huge sector ranging from cleaning companies to consumer services such as home health care, pet grooming, carpet cleaning, etc. There has been a lot of publicity about how the American economy has moved away from a manufacturing base to service based. A service business can provide you, the business buyer, with a wealth of purchase options.
The good news about the service sector is that it offers you the greatest potential to acquire and learn the skill sets needed to be successful. It is a more general industry in scope than a manufacturing business where prior experience is a must.
What to Consider When Buying a Service Business
Here is what you need to be aware of when buying an existing service business:
It is generally more difficult to obtain bank financing because there will typically be less “hard assets” (known as collateral) such as machinery and equipment that banks want in place to finance a loan.
Customer location and concentration can be a factor. Many service businesses are started by business entrepreneurs who simply turned a hobby or idea into a business and may have built the business with a limited customer base. If you buy this service, you will want the purchase contract to provide you with protection that will ensure these relationships will continue after you buy the business. Indeed, the seller of the business may be “the business” who has built long-term relationships with the clients who see him as the face of the business. In such a case, you must ascertain whether the business will survive and transition successfully to you. This is a decisive issue and you have to truly look at this issue objectively.
- What are you really buying? Is there some element of exclusivity to or with the product that gives it a value equal to what the seller claims?
- Are you more comfortable dealing directly with consumers or other business owners/managers? Make sure that the business fits your strengths and preferences.
- How easily can a competitor enter into your business? What are the barriers to entry, if anything?
- Is there an “800 Pound Gorilla” in the business – meaning a huge competitor who can ultimately impact your business (i.e., WalMart, Wawa, Starbucks)?
- Is the business physically limited to where it presently operates, or is expansion a viable option to allow for growth?
- How easily can employee(s) quit and become your new competitor?
- What can you do to build up the gross sales of the business? Can you add additional products/services and sell them to the existing customer base?
- During the due diligence phase of the negotiations or contract, be certain to investigate the suppliers, customers, and contracts in addition to the financials of the business.
- Include a non-negotiable and solid non-compete provision in your purchase contract that survives closing for at least three (3) years.
- Allow yourself a sufficient transition/training period with the seller before or after you close on the business. You want to know each detail that the operator incorporated into the day-to-day functions of his/her business.
- After you take over, do not make any drastic changes. You must first learn the basics of the business; who the customers are and what their preferences are.
A service business is easier to learn and operate than other types of business. It generally holds above average profit margins compared to other businesses and can provide you will an excellent platform to grow. Moreover, the working capital required when starting out is usually not prohibitive. Therefore, as long as you properly prepare, you will be able to locate and buy a service business that makes sense for you.
Interested in buying a service business in NJ? Then please call Fred Niemann toll-free today at (855) 376-5291 or email him at firstname.lastname@example.org to schedule a low cost and convenient consultation.