Just Buy The Customer

Dec. 1, 2007
One of the simplest ways to acquire new customers is to buy them from your competition. In other words, buy your competition. It doesn't have to be that difficult, especially if you target small operations.

One of the simplest ways to acquire new customers is to buy them from your competition. In other words, buy your competition. It doesn't have to be that difficult, especially if you target small operations.

The trick is that you don't buy the company, you only buy the customer list and a few assets. This is an important distinction, because by avoiding an out and out acquisition, you simplify the transaction and avoid all of the hidden risk (e.g., lawsuits from old customers, debt, etc.). You pay cash for the assets you want, a royalty for business from the customer list, and employ the owner. This won't work for large companies. It won't even work well for some smaller ones in the industries that have been mucked up by consolidation.

Here's the way it might work. The owner of your acquisition target tells you that his company has 1,000 customers and he does $380,000 annually. You figure that two of his trucks are worth keeping at a street value of $25,000, with inventory worth $5,000. You figure the owner will make about $45,000 plus benefits working for you. You offer him a three year package worth $222,000. Breaking it down:

He gets $30,000 for his trucks and inventory.
He gets $45,000 per year (not counting benefits) X 3 years for $135,000
He gets 5% of every ticket from his old customer base, or 5% X $380,000 X 3 years = $57,000

What if you don't get at least $380,000 from his old customers? You don't pay as much. You don't pay as much because his old customer list isn't worth as much as you and he thought. If you get more, he gets more.

In truth, you're probably going to lose a few customers. But you're probably going to charge more than he will. Let's say he charges $60 per hour and you immediately bump it to $95. However, you lose 20% of the customers. He comes out ahead. First, the lost business: $380,000 X 80% = $304,000

Assume the $304,000 works out to around 50% labor content. It could be more or less, depending upon the amount of material (more equipment sales lowers the labor content, less raises it):

$304,000 X 50% = $152,000 labor.
$152,000 labor X ($95 / $60 per hour) = $240,667.
$240,667 labor + $152,000 material = $392,667.

He makes more.

You can play the scenario out a hundred different ways. The point is that he's probably going to come out okay, if he's being realistic about the loyalty and resiliance of his customer list.

Lets go back to the original numbers, where you're paying $57,000 over three years to acquire 1000 customers. Divide the $57,000 by 1,000 and your customer acquisition cost is only $57 per customer. That's a cheap price to pay for a customer that's going to stick around (and you aren't paying for the ones that don't stick around).

Who in your market is struggling to get by? Who's ready to get out of the business, but can't see a way to do it? Who likes turning a wrench, but doesn't like the hassles of dealing with the paperwork? Ask around. Tell you suppliers that you might like to buy a company or two, then offer the profile (i.e., one that's continually behind on their obligations).

More than likely, you'll get a suggestion or two. Invite the owner to breakfast or lunch. Try to find out where he's going in life and business. Maybe you can offer to buy him out. The contractor I learned this from used it to acquire three small companies. He added customers. He recruited new employees. And he did it with virtually no out of pocket expense. It was pay as you go.

Matt Michel is president of the Service Roundtable (www.ServiceRoundtable.com), an organization dedicated to helping contractors prosper. Matt is also the publisher of Comanche Marketing, a free marketing e-zine. Subscriptions are available at www.ComancheMarketing.com. You can contact him directly at [email protected]. Or send your comments to Contracting Business at [email protected].
About the Author

Matt Michel | Chief Executive Officer

Matt Michel was a co-founder and CEO of the Service Roundtable (ServiceRoundtable.com). The Service Roundtable is an organization founded to help contractors improve their sales, marketing, operations, and profitability. The Service Nation Alliance is a part of this overall organization. Matt was inducted into the Contracting Business HVAC Hall of Fame in 2015. He is now an author and rancher.