I was having so much success acquiring businesses, friends and family wanted in on the action. My brother-in-law (and childhood friend) found a business for sale in Sonora, CA, a sleepy foothill town on the way to Yosemite. The business was in the HVAC industry, which seemed to fit in the realm I was comfortable with. We started in on due diligence. It looked like a 6/0/20/15, but it was relatively cheap and the seller would carry the loan, 50% down and 50% financed for 60 months at 8%.
We certainly felt like we could, again, be the big fish in a small pond. The business had an emergency service element to it and seemed like a good situation. The only red flag was that the seller was a little flaky and kind of hard nosed. We found a manager with tons of experience to take over the day-to-day business operations. Tragically, it only took us us 90 days to figure our he was a drug addict. We had to scramble to quickly find another manager.
The new manager we found took a ownership position with a small amount of equity, which we thought would drive great results. His first suggestion was that we stop renting and buy a place to run the shop out of. This seemed like a great idea at the time because real estate was starting to take off. We found a little house that was zoned commercial and figured we would use the house as the office and then build a shop. We closed the deal on the little house and started planning the move when a much better shop came on the market. Our partner suggested we could rent out the little house and as the area developed around us, it would increase in value. He was insistent we needed the larger shop. We reluctantly bought the second shop, all along thinking real estate would be a great investment. Well we all know what happened to real estate. We should have kept our eye on the ball. We needed to build our business, not our real estate portfolio.
We put our faith in the new manager’s abilities, but he led us off track in the type of work we performed. His vision did not match ours. He had good skills, but lacked focus and work ethic. He made money for employees, but not the company. We had several high volume, low profit years. Whatever money we did make, you guessed it, we invested in real estate. In additional to all this, he hired his wife and a small time criminal as office managers, which proved to be good for him, but bad for the business. We had to let him go.
As is always the case with being business owners, we were left holding the bag. Without the time and energy to build the business back up, we orchestrated an employee buyout and are still waiting to see how it all shakes out. We currently still own the little house and the shop and rent the shop back to the business. However, these properties are cash flow negative. Business #7 was definitely more learning than earning.
Keys To Success
- Don’t spread yourself too thin
- Owning your building seems like a great idea, but it locks you in and complicates the exit strategy
- Pick partners carefully because your future is, in large part, in their hands