The Ins & Outs of Buying a Service Business
There are many service sector businesses in New Jersey available for purchase.
Service businesses range from cleaning companies to consumer services, home health care, pet grooming, and carpet cleaning. There has been a lot of publicity about how the American economy has shifted from a manufacturing base to a service-oriented one. A service business can provide you, the business buyer, with many opportunities.
The good news about the service sector is that it offers you the immediate 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 fewer “hard assets” (i.e., collateral) that banks want to hold to secure a loan.
Customer location and concentration can be a factor.
Many service businesses are started by entrepreneurs who simply turned a hobby or idea into a business and may have built it with a limited customer base. If you buy this service, you will want the purchase contract to include a customer list to ensure these relationships continue after you buy the business. Indeed, the seller of the business may be “the business” that has built long-term relationships with its customers who see it as the face of the business. In such a case, you must determine whether the business will survive and be able to transition successfully to you. This is a critical issue, and you must look at it objectively. Will the customers stay with you?
- What is it that you are really buying? Is there some element of exclusivity to or with the service that gives it a value equal to what the seller claims?
- Are you comfortable dealing directly with consumers? Make sure the business aligns with your strengths and preferences.
- How easily can a potential competitor enter 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., Chick-fil-A, Walmart, Wawa, Starbucks)?
- Must the business physically remain where it currently operates, or is expansion a viable option for growth?
- How easily can an employee(s) quit and become your competitor(s)?
- 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 negotiations or a contract, be certain to investigate suppliers, customers, and contracts, as well as the business’s financials.
- Include a solid non-competition restraint in your purchase contract that survives closing for at least three (3) years.
- Allow yourself enough of a transition/training period with the seller before or after you close on the business. You want to know every detail the owner/operator incorporated into the day-to-day operations of their business.
- After you take over, do not make any drastic changes at first. You must first learn the basics of the business, who the customers are, and what their preferences are.
Fredrick P. Niemann Esq.
A service business is easier to learn and operate than other types of business. It generally maintains above-average profit margins compared to other businesses and can provide you with an excellent platform for growth. Moreover, the working capital required when starting out is usually less. Therefore, if 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 today at (732) 863-9900 or email him at fniemann@hnlawfirm.com to schedule a low-cost and convenient consultation.
Written by Fredrick P. Niemann, Esq. of Hanlon Niemann & Wright, a Freehold Township, Monmouth County, New Jersey Buying a Business Attorney