Counting Customers

When you buy a business or commercial property, you will request time to perform Due Dilligence (DD). The Purpose of DD is to research anything that may affect the income, cash flow and value of the investment. I no longer practice accounting, I am merely the transaction broker for the business sale, so I cannot help you. You must rely on yourself, or your own team of experts. The bigger the investment, the more likely you will involve your attorney and or accountant to help you analyse the investment.

I sold a Lawn Service business once for $49,000. It had two employees, a good commercial grade mower, lots of poorly maintained equipment and seventy-five customers. The Buyer eventually lost the investment and walked away from the business. I hope there is something you can learn from their loss.

The difficulty in due-dilligence in a business this small is to verify the customers without notifying them of a change, and allowing them to consider their own change. Do not let that deter you. When you are buying a 'route' of customers. You must verify that those customers are current clients, not 'former' clients. The only way to do this is to see when they last paid and tie that out to your list and billing cycle. If you take the buyer's word, then you may be paying for customers who have fired you long ago, and your employees are still mowing their lawn.

The buyer's accountant suggested they mail a letter to the customers. The seller did not like this idea, as it might signal a change in ownership and move the customers to some sort of change, before the transaction was complete. Another suggestion was to tie out the deposits from each customer to a bank statement to show that they were actually customers. The problem was that this was Winter (in Florida) and the grass does not grow alot in November and December, so there would be several who had not paid lately. Also some people only paid periodically; quarterly, semi-annually etc.

As you might expect, the client accepted the client list and retained the same employees. It was a small investment and if it produced twenty-five percent less, it would still make money. I can give you a littany of things that went wrong in this transaction, but the biggest thing was not enough DD, and verification of the customers. Those customers who were no longer customers and were getting free lawn service. Dishonest employees who stole and sold everything not tied down, and ran up personal charges on the gasoline card for thousands of dollars. The same employees who dumped the $8,000 commercial mower upside down in a canal and turned it into spare parts instead of their main mower.

Slow down when you are looking to spend money. If the Seller is in a hurry, then you should be even slower. Don't trust people you do not know, until they prove themselves trustworthy. Determine what has the biggest value, and verify it's real value. Don't make drastic changes until you have spent time to determine if they are really necessary. And most important, do not leave new employees unsupervised, especially if they know more than you. Good Luck.