Buying an equipment-based business? Do this to save 6 figures

Continuing on the topic of “financial traps” from earlier this week...

If you’re thinking of buying any business that relies on equipment or heavy machinery, today’s email is for you.

By “equipment,” this can be anything from:

• Washing machines and dryers (for a laundromat)

• Trucks (such as garbage trucks for a waste management company)

• Or even heavy-duty drilling equipment (for a drilling company)

And so on.

A huge financial pitfall people run into here is:

Deferred maintenance.

What is deferred maintenance?

This is where a business owner has been putting off doing maintenance on (or buying replacements for) essential equipment.

If you don’t catch this during due diligence, and the seller isn’t forthcoming, this can turn into a huge financial headache!

As an example, picture this:

You’re buying a laundromat.

The numbers on the business look good, and the margins are fantastic.

But the seller neglected to tell you that all of the washing machines and dryers are over 25 years old and haven’t been maintained properly.

Unaware, you close on the business...

And get an unpleasant surprise 12 months later, when you have to spend hundreds of thousands of dollars to replace or fix those machines.

Why don’t sellers volunteer this information?

As with most things in life:

They want to make more money.

Sometimes sellers will forego doing essential maintenance on equipment because:

1. Maintenance is an ongoing cost

2. And/or so that the business shows a higher profit margin

And if they can find an unsuspecting buyer to happily inherit all of those maintenance costs after the sale?

That’s free money in the seller’s pocket, right there.

How do you protect against this?

The best way is to have a third party do an appraisal on all of the equipment inside the business.

They’ll come in and tell you:

• The value of the equipment

• What stage of its lifecycle it’s in

• How long it’ll last

Then, use this information to calculate the true replacement cost of anything that might need to be replaced in the short term after buying the business.

This way, even if you find out you have to drop a few hundred thousand dollars on new equipment in the first 12 months...

You’ll at least be going in with open eyes, and you can decide whether the deal is still financially worth it for you.

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Onward,

— Ben Kelly