Driving the short distance from our warehouse to the meeting point (the seller’s “yard” – his Operating Centre), my colleague Danny and I weren’t expecting much. When I explained to Danny, the General Manager at Nomad, how I had found this business and the very basic details I had so far, he wasn’t optimistic. Neither was I: most acquisition opportunities turn out to have some fatal flaw that kills the deal before we get very far, and this one came with less background than most.
The yard itself was no more than a section of gravel marked out in invisible lines to fit 3 truck & trailer parking spaces, in the corner of a large, empty lot. This is not uncommon in transport – if he had had even a portacabin office I would have been surprised. It was in a disused part of Peterborough, an industrial zone, close to the prison. But the yard wasn’t what we were interested in.
After a quick introduction we were straight down to business. Although it was midday, it was cold in mid-December and the wind ripping through the open yard did not encourage smalltalk. What is he selling? What assets does the business own? What liabilities? Why is he selling? How would we work the company into our existing business? Nomad is in transport, but it is in international removals – a different field entirely to this business. How much administrative burden is there in this kind of haulage? Who does this currently?
The seller, Dane, was pretty open and direct. He explained his cash flow problem in more detail. He was running two trucks on “distribution” work (collecting curtainsider trailers and delivering pallets at multiple drops, organised by the client) with a client that paid on 45 day terms. His third and final truck was taking containers from the ports (mostly Felixstowe) and delivering them in the East of England, on 14 day terms. He had taken out a business loan and spent most of it on a truck – the company’s main asset, without borrowing sufficient working capital to keep the business running while waiting for payment from his clients. As a result he had had to borrow £13,000 from his friend, who was one of the drivers in the business. He wasn’t paying interest on this loan, but he intended it to be a very short-term arrangement and as it stood, he wasn’t able to pay it back quickly. Each time he expanded to try and get ahead, the delayed payment terms would take up even more working capital. He could utilise invoice factoring to get the money in more quickly, but this comes at a cost and reduces margins, especially for a new business with an inevitably low credit score. On top of that, the distribution work took a lot of planning and communication with the drivers. Dane was doing this in addition to driving a few shifts himself every week, and it was wearing him down.
We took the details of the truck to work out its value later – our best estimate was £12-13,000 market value (he had paid £16,000 for less than a year before, but he had bought it from the main dealer, overpaying and accelerating the depreciation). The company owned some tools and 3 dash cameras, but not much else. In terms of debts he had the business loan of £20,000 and the £13,000 he owed to his friend. He was looking for someone to take over the business for a price that would simply allow him to pay off his debts. He wanted to continue working, but just as a driver, although he was open to the notion of continuing with administrative and organisational duties too. Mostly he wanted to be debt-free and rid of the financial hassles.
I knew he would have accounts receivable that would reduce the overall debt position of the company and therefore the price of the business. A back-of-the envelope calculation suggested this would be around a £10,000 to £15,000 unsecured risk (the buyer would eventually agree a price in the region of £22 to £28,000 for a business with tangible assets worth £12-13,000).
He gave us the headline turnover figures and promised to email more detail later that day. This part of the discussion revealed the first interesting aspect of this business – he was running each of the trucks on “double shift”. This was new to us but it intuitively made instant sense – general haulage work like this is such low-margin work that it makes perfect sense to maximise the time each truck is working, while keeping fixed costs the same. It would be like a shop owner deciding (and being allowed) to open 24 hours a day instead of just regular shopping hours, since he knows his rent, insurance etc are already covered. When he suggested earnings figures that were significantly more than we had thought possible (£4,000+ revenue per truck, per week), it made much more sense when he explained that each truck was on double shift. He was effectively doing the work of six trucks with his three.
Speaking of trucks, if he only owned one, what of the other two? Were they on long-term leases? This is common in transport – long-term leases of up to 5 years can be used instead of buying vehicles outright. No: he was hiring them. Short-term rentals. I had never thought it would be possible to make a profit on this basis, but he demonstrated (in quick, verbal terms at least – proof was needed of course), that it was possible. He didn’t have long-term contracts with his clients, but since his vehicles were all hired, he minimised his risk while still making a profit. He was also hiring two skeletal trailers (the kind used for transporting shipping containers) on a similar basis.
We explained a little more about our background and how we felt we might be able to help, as well as our concerns about the administrative burden involved in learning this new kind of business, and operating it on a day-to-day basis. Dane couldn’t quite understand what we were afraid of in terms of administrative work, since we already had offices and staff – luxuries he had managed without. But underestimating costs like this can be very problematic. Someone has to do this work. We did not want to risk taking on an unprofitable business that seemed profitable simply because the administrative costs were not considered. We made some progress in this in the first meeting, but we knew we would have to come back to it.
For his part, Dane was more keen to focus on highlighting the costs of his operation that we would not have to pay, or would be reduced. He was right that some costs would be eliminated altogether (his external transport manager, for example, since our business had one already), and other costs like parking and insurance would be reduced if we took over. These are advantages with any strategic acquisition, and one of the main drivers for Nomad to be looking for acquisitions in the first place.
The cold weather motivated all of us to agree to wind things up and discuss everything further by email. But already Danny and I could see that there was a lot more promise in this business than we had anticipated before the meeting. If the rough figures were to be believed the turnover from these three trucks would be £400 to 600,000 per annum, and Nomad would be acquiring it for between £10-15k of unsecured funds.
The business was high risk – it had only been operating for seven months, and had not filed any accounts. All of its eggs were in only two baskets. But it was intriguing. The seller seemed to have a genuine reason for selling, and it was due to a problem that we could potentially solve. Nomad, as an international removal company, receives almost all payment in advance – the perfect counterpart to a business with a cash flow problem.
For buyers of businesses at this level (sub £50k in this case) this is the reality of what you are going to find: even the best business opportunities will not be without risk.
If you exclude new franchises (where the offering is not so much buying a business as buying the right to start a business), all businesses at this level have something wrong with them. Most of them are tiny, or highly unpredictable; some are outright scams where the seller is trying to mislead the buyer into paying for something that isn’t real; and most at this level are simply unprofitable, where the seller is doing all of the work and not paying himself a sufficient salary. The figures can be manipulated to show a profit, but on due diligence it is revealed that the work done by the owner (and often his family) is not being paid at market rate in many of these cases, and effectively the profits are just in lieu of wages – in other words it is a job, not a business.
The best opportunities at the sub-£50k (even sub-£250k) level don’t fit into any of these categories. They are rare, but they exist. Businesses that are reasonably stable and profitable, large enough to be predictable, and have the potential to grow much further. But they always involve some degree of risk. With this business, at this stage, it looked like the risk could potentially be well worth it.
The meeting itself had gone well too. Dane was honest and straightforward and his story added up. First meetings don’t always go this well – the most frequent outcome is that the meeting is disappointing and the business is ruled out at this stage. Often this is because the details of the business, when finally provided at the meeting, do not match what was promised. Reported profit figures do not match the filed accounts, for example, and the owner’s explanation is unsatisfactory (“It says only £20k profit but that’s because I spent £30k on renovating my house and put it through as a business expense”…). Or assets are entirely different to what is described. Or any number of others – the seller has tried to overstate the opportunity offered by the business, and in doing so has destroyed his credibility and made it impossible to trust him. The meeting with Dane presented none of those issues, and we were able to start forming a basic foundation of trust.
This is as much as we could have hoped for at this stage – an indication that the business might be worth buying, and that the price range would be feasible relative to the risk and potential return. It was a good start, but now we needed more details, and to commence due diligence. We will get into this in the next post.