Avoid seasonal businesses???
May 17, 2021
by a searcher from Duke University in Columbus, GA, USA
Any advice on purchasing a seasonal business using leverage when heading into the off-season? Financing workarounds, deal structure, etc.? Would love to hear from lenders and searchers about any strategies used in this scenario.
from Stanford University in New York, NY, USA
1) Cash Flow - in the off season, especially if collections don’t come in through the year. We’re adding in a minimum cash balance until we have certainty on expenses. Additionally, we adjusted the sellers income and cash flow statements to recognize revenue when the service is rendered, so collections are recorded on the balance sheet as cash and a deferred revenue liability. We’ll now maintain both versions of the I/S (with and without seasonalizing rev rec) to help us forecast accurately while remaining disciplined with expenses in the off season.
2) Working Capital Adjustment - This will be significant depending on revenue/expenses cycles and when in the season you close. WC is complex in most deals anyways but, since it could comprise a larger portion of the purchase price if you close near the start of the season, it’ll be particularly sensitive and important to communicate well. Given that many seasonal businesses didn’t run in 2020, the WC Adjustment is more complex than normal in figuring out how to handle 2020 OpEx and determining how y'all will share (or not) CapEx. We could have done better on this - it almost killed the deal - and will be better prepared next time.
3) Revenue predictability - I agree with Elisandro that revenue predictability is first and foremost. We structured in an earn-out that effectively withheld 20% of the Purchase Price, to be released to the seller if they achieved agreed upon growth targets for the upcoming season *and* the following season (only on repeating revenue streams). If they knocked it out of the park prior to close, the earn-out would be waived and they’d get the full purchase price this year - and we’d have perfect visibility into this, since close is 2 weeks before the season starts. (Our seller did great and is crushing his target, so earn-out is waived and everyone wins.)
I agree with Elisandro re: closing just before the season starts — but would add that it’s high stress because (a) the seller is already so tapped for time and (b) there’s little or no buffer to delay close... but I’m thrilled that we get to go straight into watching the business run in the summer season!
Good luck - happy to talk more in a couple weeks.
from Campbell University in Emerald Isle, NC 28594, USA
I bought a highly seasonal business (~80% of revenues over 5 months). When I closed on the deal we were on the heals of our busy season so cash flows right off the bat wasn't an issue. BUT if I had closed going into the off season, I feel that I would've ran into some cash reserve issues due to contingencies, etc. We are now going into our 5th season and I have an extremely good grasp as to what kind of cash reserves are needed to make it through the off-season.
As for financing: the owner financed portion (20% of purchase price) was delayed with the 1st monthly payment 3 months after closing (more than half way through my first busy season).
If possible, I would try to buy the business right before the busier period. (say 2-3 months, if not weeks!). The seller has an incentive to sell well before the busy season starts as cash flows are typically negative or not much to speak of.
You have to feel REALLY good about the reliability and consistency of the revenues during the busier months. This is what you are banking on! The longer the history to see, the better one can anticipate would be revenues. In my case, the business had been in operations for 15 years with very consistent figures over the 3 years prior to my purchase.
If operations are relatively straightforward, then you will need less time to learn the business before the busy season. In my case, the seller agreed to 1 month of part-time/on call training. I ended up employing the owner for another month as a fill in employee here and there, but soon she was on her way to full retirement.
Hope this helps!