BUSINESS GROWTH: BUYING & FRANCHISING Business smarts

AUTHOR: NICK WALKER

In the previous edition of NZ Plumber, we ran a case study on selling a plumbing business (page 63).

Now, with the help of two plumbing businesses, we consider the flip side of the coin—growing a business by purchasing other operations.

Foleys has a network of 13 New Zealand plumbing businesses, from its stronghold in the lower South Island to Putāruru and Rotorua in the North. The business started in Dunedin in 1934 and has grown to employ around 270 staff working across plumbing, gasfitting, drainlaying, electrical and mechanical services.

One of the key aspects of its growth has been purchasing other businesses. General Manager Bruce

Muldrew says the businesses they have bought are wholly owned rather than franchises.

Meanwhile, Straight Flush has slowly built its operation from the lower North Island. It’s been running for 16 years, and Director Ngaire Mansfield says they’ve bought four other businesses in that time. She and husband Jeremy began the business with an eye to making it franchisable from the start.

Both Ngaire and Bruce see significant advantages in purchasing an existing business compared to growing and expanding organically. “You bring on skilled staff, an established customer base and a recognised brand,” says Bruce.

It’s also a neat way of getting around staffing and capacity issues that tend to come with growing a business from the ground up, as Ngaire explains.

“We have a team lead, who looks after a team of five or six people. When we’re doing up to 150 maintenance jobs a week, that’s about the limit one person can handle. If we get beyond that number of jobs, it’s too much for one person to handle, but if we bring on another team lead, there isn’t enough work and it’s not as financially viable.”

While purchasing a business certainly comes with its challenges—customers and staff can be wary of a new owner, for example—both Ngaire and Bruce agree that the pros outweigh the cons if you get it right.

Going about it right

So how to make a success of a business purchase? Ultimately, it depends on who you are and what you’re hoping to achieve.

Bruce and Ngaire are quick to note that each purchase is unique in some way, and there’s no set way to go about it. There are some parallels and guidelines, but mostly it’s about assessing the individual circumstances of the business you’re looking to purchase and figuring out if you can make it work.

“We look at things including profitability, people, location and marketplace,” says Bruce. “The business needs to be financially viable, the location is somewhere we don’t already have a business, and there are a number of factors around the environment.”

There are individual aspects of a business that make it well suited to Foleys, he adds. For example, businesses already on a tech platform are typically better suited, because staff don’t need quite as much training.

Ngaire has 11 points she works through— many of which are specific elements of the factors mentioned by Bruce. For example, she looks at revenue trends, charge-out rates and team culture. She says all points are important, but the cold, hard financials are worth thorough examination, because this is where some of the hooks can be.

“Most businesses go on the market at around three times their earnings, which means it takes the new owner three years to get their money back,” she explains. “But it needs a closer look, because you might see that drawings have been high in the lead up to the sale, which inflates the earnings.

“You need to factor in things like vehicles. If you have to replace them straight away, then that has to be reflected in the price.”

Many of her other points relate either to the performance of the business or its suitability for Straight Flush. The ideal situation is being able to take over the business seamlessly.

“Minimising change is ideal. The more change it requires, the more risk involved and the more it costs. So, if you’re bringing people across to new software, you lose productivity.”

Getting good advice

Doing your due diligence on a prospective acquisition takes time, and it can take up to several months to go through the entire process.

“Generally speaking, we’ve figured out a due diligence process that works for us,” Bruce says. “We have quite a bit of documentation around that process that we put in front of the business, and then there’s things like working through it all with the bank.”

If you haven’t purchased a business before, it pays to have good advice from people like accountants and lawyers you trust. In fact, Ngaire says having an accountant in the know is a good first step to make it known that you’re in the market to purchase a plumbing business.

“Accountants know other accountants, so if someone’s looking to sell that’s how they get the word out there. We’re at the stage now where most people know we’ll have a look at a business that’s for sale, so we get contacted directly fairly often.”

Bruce says Foleys also get approached by people who know they’re a business open to purchasing others. They also have relationships with agents and keep an eye on public listings.

Top tip for businesses

Interestingly, Bruce and Ngaire echo each other with one of their biggest pieces of advice… and it’s not for those buying businesses, it’s for potential sellers. They both say it’s crucial for business owners to prepare to sell well in advance.

“Anyone who’s thinking of selling or retiring needs to be thinking five years ahead of when they want to do it,” says Ngaire. “If something happens and you’re forced to put the business on the market at short notice, you won’t get a premium result.”

“We often see older business owners looking to sell and they haven’t thought about succession,” says Bruce. “Or they have, and it hasn’t worked out.

“For a business owner who’s looking to retire, selling is a great opportunity to realise a payout for all the good work they’ve done. It also helps them to look after their staff by making sure the new owner prides themselves on a good company culture, rather than just winding things down.”