Dominant Niche Hardware Business
One Part Brick and Mortar, Nine Parts Internet
The American Dream in Action!
All of my clients use the Internet to market their businesses, and so do I. Some of them do it especially well. I mean, they REALLY do it well. This is one of them.
This husband and wife team works together (typically in the mornings, from 7 to12.) They pick, pack, and prepare shipments for pick up. Some moderately heavy lifting is involved from time to time, done by the husband. There is also some telephone order-taking and phone calls from customers and prospective customers.
Sometimes the work day goes longer if there are a lot of orders to fill, but the valuation has taken into account an average annual workload and has provided a replacement adjustment at fair market value. So, if you would rather hire people to do these functions the budget is there. It hasn’t been included in the cash flow, and thus it doesn’t contribute to the price.
Yes, there are some other functions involved, such as picking up inventory and the like, but nothing that takes a college degree. Presently, there are no outside employees.
I must say that again, because it is so unusual to make this much money so simply as a family business: NO EMPLOYEES.
You could operate with a couple of employees if you like, and the owner will help you get oriented so you can do that. But you don’t have to. You could just put the replacement allowance in your pocket, on top of the very significant profits that have been dependably demonstrated over the years.
Take another look at the cash flow numbers above, and you will see the American Dream in action.
You might wonder—maybe this is an Internet flash in the pan? Here today and gone tomorrow? Maybe it relies on some special Internet marketing formula that will change next year (or disappear next month?)
No, apparently not. Now twelve years old and remarkably stable (in revenue, COGS, expenses, and of course net profit), this company has found a niche that it just “owns.” It dominates that niche, and it has some really strong barriers to entry that will keep it that way.
Why then is the owner selling this plum of a business? For the best reason possible: to have what investors call a “liquidity event.” He and his wife are simply going to retire and do whatever they please!
Make no mistake, the operation is simple, but the business model is based on over 40 years of industry experience. The owner has distilled that into an operation that is rifle-shot precise in addressing some un-met customer needs. He did his marketing work, you don’t have to.
And you don’t even have to work mornings if you don’t want to. There is plenty of net income to hire help, and the business valuation takes that into account. No parading a “job” as an “investment” here. In fact, the price is based on historical cash flows and a capitalization rate over 30 %.
Growth, Expansion, Scalability
It is refreshing to have a seller candidly describe a reasonable path to continuing growth in a clear and balanced manner. Not just “great potential!!” as one often sees. Here are a few excerpts from his comments on the subject:
So far, growth has been organic. We have attempted to keep up with demand (yes, we get inquiries all the time regarding items we don’t have, or don’t have in that particular size), and have let the search engines bring the customers.
We have stayed away from consumables (grinding/sanding accessories, etc.) and safety (gloves, goggles, etc.), but we can see possibilities there. Most of the time, a good price equals a large part of justification for bringing on a new line.
Expansion into new lines via mill orders means sinking significant capital into inventory. Expansion into consumables and safety is more doable.
All specialty items are limited by the depth of the market. No one buys our stuff to sit on their coffee table; they buy it to hold together a project. This is the primary reason we haven’t wasted money on advertising. When a need arises, people search for the product on the web, and here we are.
No advertising campaign is going to move the needle much, in our opinion. Fulfilling needs does. We’ve always tried to anticipate needs.
My comment: this company can be expanded. No pie in the sky implied here; it will take intelligent management and additional capital investment, but it appears to be achievable. This phase will be for the next owner, not the one who is retiring!
The owners will provide intensive orientation for the first month, and will be available for email and phone support for three months from the date of purchase. After that, they will consider a consulting arrangement if you wish.
This will be the time to get familiar with the operation, and to bring in an employee or two if you wish. This really can be an investment, if you have other things to do!
The owner is retiring, and is not interested in becoming a lender.
Fortunately, SBA lending has become more accommodating in the past year and a half. The SBA has loosened some of its standard operating procedures, and the result is a higher loan to value ratio to qualified buyers.
The essence of qualifying is still Debt Service Coverage Ratio, along with the usual creditworthiness and collateral considerations. This company is highly financeable on the debt service coverage ratio part, and the buyer will have to be qualified on the other two parts.
As with many companies nowadays (especially the Internet-savvy ones), the cash flow stream comes from intelligent market positioning, buying right, and from just being highly customer-centric. It does not come from having a lot of assets in play. Consequently, the buyer will have to have some assets to bring to the loan app process.
We have some of the best SBA lenders on the West Coast to assist, and they get very creative when the buyer needs to do that.
The owner has been operating out of about 2000 square feet, and no walk-in traffic is permitted or required. The buyer will need to rent a similar space, preferably in the Portland metro area to stay close to the proven suppliers. Nothing fancy, just a warehouse space. No showroom needed. Not even an office.
All of the furniture, fixtures, and equipment necessary to operate the business in its customary profitable manner are included with the sale. The only other assets the buyer needs to provide will be two computers and a used vehicle to pick up supplies.
As is the case with virtually all of my clients, the reason for not including the computers is that the present ones are loaded with personal data and apps. The used vehicles are mostly personal transportation. The necessary data for accounting, customer service continuity, and vendor relationship management will be included, of course.
One of the more interesting components of the asset picture is the highly specialized and proven saleable inventory. To get the best cost of goods sold and a very competitive market position, the company orders in large quantities at extremely low cost. This carefully managed inventory provides very competitive pricing.
Cost control is extremely important, of course. But perhaps even more critical is the company’s ability to ship highly specialized products immediately. This is a true barrier to entry, and it has stood the test of time against competitors (even big box stores!)
The inventory is large, so the buyer will have the protection of a good percentage of the purchase price in saleable current assets. The highly specialized inventory is truly a part of the identity and branding of the company, and it provides a strong presence in search engines.
This is just a brief description; the company is real, the cash flow is real, and the organizational and marketing work is done. Where else would you expect to make 30% on your investment? Your bank CD? Please…
Clearly, this operation would be well-suited to a buyer who has some familiarity with the “nuts and bolts” side of construction (literally.) Beyond that, it is about being sensitive to customer needs and customer service.
If you would like to explore this further, just request an NDA. You will get a complete three-year report of cash flows and an objective risk analysis. You take it from there.
Multnomah County, OR.
Not included in asking price.
The business operates out of two locations, mostly warehouse and storage space. The location is not critical to the operation, and the buyer will need to provide similar space. Minimal office space requirement to manage orders, billing, receiving phone calls.
This business dominates its highly specialized market niche, due to rifle-shot marketing, immediate shipping capability due to extensive inventory, and customer-centric focus. The big-box construction material chains sell a few of the items on occasion, but they don’t even come close to satisfying the need. There are a few competitors, but none with this level of product selection and availability. In short, this is the dominant player in a niche market that will never go away.
Growth & Expansion:
Here is what the Owner says about growth and expansion. Refreshingly candid… So far, growth has been organic. We have attempted to keep up with demand (yes, we get inquiries all the time regarding items we don’t have, or don’t have in that particular size), and have let the search engines bring the customers. We have stayed away from consumables (grinding/sanding accessories, etc.) and safety (gloves, goggles, etc.), but we can see possibilities there. Most of the time, a good price equals a large part of justification for bringing on a new line. Expansion into new lines via mill orders means sinking significant capital into inventory. Expansion into consumables and safety is more doable. All specialty items are limited by the depth of the market. No one buys our stuff to sit on their coffee table; they buy it to hold together a project. This is the primary reason we haven’t wasted money on advertising. When a need arises, people search for the product on the web, and here we are. No advertising campaign is going to move the needle much, in our opinion. Fulfilling needs does. We’ve always tried to anticipate needs.
Support & Training:
The owners are retiring, and will provide a month of hands-on orientation at no cost. After that, another 6 months of email and phone support.
Reason for Selling:
Licensed in Oregon