I gave you the 4 absolutely vital questions to ask before buying ANY business …, and here are some more, in response to Jeff’s quest to buy a business:
This week I found an air charter business for sale for 825K [AJC: Jeff is a navy pilot]. The sale price includes five airplanes (twin engine pistons) and the FAA certificates required to conduct flight operations for hire. Depending upon the condition of the airplanes, 825K, might just barely exceed the cost of the aircraft, leaving me the profits, employees, and business model for free.According to the financials listed on the sales ad, the business brings in 600K in revenue and cash flows 216K. That looks like a 36% profit margin to me, which is good from what I can tell. The revenue comes 80% from freight and 20% from passengers. This tells me that the passenger focus I’m interested in is one that they either don’t have much market for, or maybe haven’t tried to exploit.Needless to say, I’m intrigued. For significantly less than I think I need to start things with my original plans, I could buy an air charter that has airplanes, employees (and pilots), procedures and systems in place AND appears to operate profitably. That would leave me to try and expand the passenger side of the business and as/if it grows, I could slowly begin to acquire the aircraft necessary to take the business to where I want to try and go. All the while having the cushion of a profitable business model to mitigate much of the risk.I’ve shot an email at the broker asking for more details about the business and the aircraft, but am wondering if you have any bits of wisdom and questions I should consider as I begin looking into the details?
So, the first four questions that I would ask are:
1. Do I understand the business?
2. Am I comfortable with management?
3. What is the business worth?
4. What do I have to pay?
… after those have been answered satisfactorily (i.e. now you are serious about proceeding), it’s time to get ‘down and dirty’ with these additional questions (some of which are specific to this business, but can/should be modified for any other ‘capital intensive’ business):
5. Do I want to own an air charter business?
6. If I did, would this be the TYPE / LOCATION of air charter business that I would want to own (at least, to start out)?
7. If I still did, would these be the type / qty / age / condition of aircraft that I would want (or, at least, could work with)?
8. What is the current value of the aircraft (what it would cost you to buy similar aircraft … NOT the value that they list on their books)?
The answers to these 8 questions will tell Jeff:
(a) if he wants to be in THIS business and,
(b) what he is paying for capital (i.e. aircraft) v goodwill (i.e. past/future profits, etc.)
… obviously, if Jeff could start a new business – from scratch – similar to this and ‘buy’ aircraft and customers, these answers will tell you him much time he can save by buying rather than building.
THEN, he should start looking at profitability, which will barely approximate the numbers that the seller provides to him 😉
If Jeff can buy the business for not much more than startup cost (better yet, USED aircraft acquisition cost), as he thinks he may be able to do, then he really only needs to assure himself that the business AT LEAST breaks-even.
Remember, if you undertake a similar analysis for a business that you may be looking at acquiring, when looking at profitability BE SURE TO INCLUDE a reasonable salary for yourself. Many owners ‘bump up’ their profit figures by taking their ‘salary’ out of profits rather than accounting for it as a salary. Is it a family business? They are rife with these kinds of practices …
To protect yourself against this kind of ‘profit inflation’, the question to ask is: “what would I pay for each job that needs to be done” and make sure that you build in the appropriate allowance, whether the current owners do or not.
And, just in case you’re also thinking of buying an air-charter business, here’s the additional questions that Jeff says that he’s started asking:
I’d like more details about the operations…typical freight customers and passengers, typical flight destinations etc…
Plans for future growth?
Condition of the aircraft? Hours, TBO, SMOH.
Expenses…typical employee salaries, pilot salaries, cost per flight hour of the aircraft etc.
Where is the business located?
Is there any real estate included in the sale?
Is the current owner willing to stay on during the transition to help ensure a smooth transfer and train the new owners as necessary?
There you go, a great place to start your questioning process, when looking to buy a business. Now, tell me about your experiences? 🙂
Hey Adrian,
One of the issues that every one forgets when buying a business is the fact that the people dressing it up for sale normally know more about the finaancials than they do.
It is completely naive to think that the financials will tranparently show all the issues and problems with the business
Let’s face the facts.
Some one wants to sell this business
The broker wants to get a commission
It’s no different to buying a car or a home
Never believe the broker without doing your own homework.
Having seen quite a few tragedies in this space I have come to a simple rule
Buying businesses is a skill all of its own
Your first exercise will likely cost you money
If you’re going to get into business this way make sure you’re going to do at least three acquisitions because by then you’ll be developing the SKILL of buying businesses. The skill of knowing how to spot other people’s problems and making sure you’re not paying for them in the purchase price.
@ Andee – Great advice!
On the other hand, one of the problems (for the seller) is actually the reverse: they understate their income to minimize taxes, then find that the buyer won’t pay them enough money because the profits don’t look goo enough.
So, one of the issues for a seller is ‘dressing’ the business for sale. It’s just a shame – as you warn – that many people don’t do this ethically …
Man, that was a great point Andee.
So would it be smarter then to start out buying smaller, less expensive businesses, that still incorporate a typical business model in how it is run? That way if it is just an exercise, you won’t have to take quite so big of a loss and perhaps, have a better chance to make it survive(and learn valuable lessons along the way)?
Hey Scott,
I guess it depends on how big a risk taker you are.
Sounds sensible to me though to start small, get to know what you’re doing before betting your whole existence on something you know little about.
Good luck in your journey on finding the right acqusition to start with.
I thought $825K is starting small. To start things in the manner I had originally planned would require close to $20M by my last estimates.
The entry price on this deal has gotten even lower as this air charter is now listed at $595K. It’s tempting. I paid almost that much for my house.
Thanks for the insight everyone. Unfortunately it’s too early for me to pull the trigger on a purchase like this yet. I’m about three years out from being in a position where I could step and run it full time.
But it’s not to early to start hunting and practicing the analysis.
Oh and Adrian….my answers to the questions above are….
1. Do I understand the business? – Mostly. I understand flight operations from a military perspective, but not yet from a civilian “for profit” perspective.
2. Am I comfortable with management? – Of my own….yes. Of those currently in place…no.
3. What is the business worth? – Not sure
4. What do I have to pay? – $595K now.
5. Do I want to own an air charter business? – Yes
6. If I did, would this be the TYPE / LOCATION of air charter business that I would want to own (at least, to start out)? – Not really the location I want to be in but it could work. Not really the operation I ultimately want, but it could be molded into my dream over time.
7. If I still did, would these be the type / qty / age / condition of aircraft that I would want (or, at least, could work with)? – I could work with these aircraft for now, but will need to replace them over time to take the business where I want to go.
8. What is the current value of the aircraft (what it would cost you to buy similar aircraft … NOT the value that they list on their books)? – I think the 5 aircraft would cost me about $550-$600K USED on the open market.
@ Jeff – I’m not sure that the air charter business @ $595k is a one-to-one replacement for your $20 Mill. concept; rather it is a (much) lower cost way to start very small and build from there.
What a business like this may allow you to do is to start small and test your ability to manage/grow a business in this industry before you find a way to aggressively expand.
To that end, it may very well ‘fit’ Andee’s criteria (relatively speaking) and/or you could buy/start a small business ‘on the side’ right now – provided that it doesn’t conflict with anything that you are currently obligated to – (doesn’t need to be airs services-related) to hone your commercial skills.
Either way, if these are the aircraft that you might choose to start with and the location acceptable, then you would be buying a business for the reasonable cost of the aircraft, so any business goodwill that you can salvage (customers, staff, operating procedures, etc.) would be a ‘bonus’.
get an audit of their financials before buying.
There are a number of issues with getting an audit of financials.
We all need to remember that an audit only does selective checking of transactions and tries to pinpoint discrepancies in the business.
So much ‘dressing up’ goes on in the selling process that in my view that sometimes the cost of an audit can outweigh the benefit received from it.
Sometimes it gives peace of mind that an audit was done but if there really is something wrong with the business it is not an easy process to get reimbursement from an auditor after the event.
@ Andee – I wonder if brad meant a full independent audit or if he meant some form of ‘due diligence’; what due diligence do you recommend Andee, once you find a suitable business and want to investigate a little deeper to see how much the business has been dressed up for sale? Or, in your opinion, is this an impossible task?
Hi Adrian,
I would suggest that the term due diligence is applied to ALL areas of the business not just the financials.
When looking at a business I think that you should look at a minimum of three years history. If this is a business which is an add on to an existing business then really important to check the shape of both the Profit & Loss Account and Balance Sheet compared to your existing business.
If you are new to the business then find someone who has been in this sort of business for a long time and ask them about the shape of P & L and Balance Sheet and then check the target complies with the shape.
A key part financial due diligence is to compare any selling financials to the tax returns of the business. This can come up with interesting differences which need to be understood.
Also check that ALL tax and coporate filing is up to date.
Other than that there are specific due diligence items for each acquisition which are about the risk of the business.i.e. currency in some businesses is a huge risk and exposure needs to be identified and understood
Andee – thanks for the additional insight.
I guess in this situation, my due dilligence would include…
1. Learning about the air charter business from a third party, established and successful air charter company. I’ve identified a company here in the Boston area that is running the type of business I hope to own someday. Looks like it’s time to take the owner out to lunch and start building a friendship.
2. Having the planes inspected – not too different from buying a car (or airplane for personal use). One red flag I came across in the financials is that maintenance costs have decreased significantly. That sounds like deferred maintance to me, which is usually a train wreck of broken airplanes and high costs waiting to happen.
3. Getting three years of financials. I asked for 10 years, and recieved three. Overall the profitability trend is downward over that time with a blame/reason/excuse identified as the overall economic environment.
Thanks again, Jeff
Gre
@ Andee – Thanks for your advice; it comes from experience and we appreciate you sharing it with us, here
@ Jeff – I had two major businesses and I nurtured strong relationships with the CEO’s of my largest competitors in each of those businesses; I still play golf every Friday with one and am proud to say that I count the other as one of my closest/best friends even though we are separated by the breadth of the Pacific Ocean. In short … great idea!
Interesting concept. However how much do similar businesses earn, and what the ratios on similar businesses are?
How often do you get to buy new airplanes?
Hi there,
some really good points well put, thanks for the post. Far too many people dive into a business commitment without fully understanding the business and how it works. Its wise to spend time at the premises to understand the workforce too.
Cheers