Buying an existing business can be an excellent way to become a business owner or to expand your present business. You can save time and effort of building a customer and supplier base. You may also avoid the trouble of locating equipment and hiring and training employees. However, you should abide by the Latin slogan which translates “Let the buyer beware.” If you are not careful, acquiring an existing business can lead to disaster. (Poznak, 1998)
Joe’s Landscaping and Tree Trimming (Joe’s) began as a small sole proprietorship. In efforts to expand and become a company that investors would be interested in, the company has ventured into new commercial landscaping technological processes and restructured as a Limited Liability Corporation. Joe’s is being considered as a potential business investment, however, after reviewing the requirements of the legal due diligence process, it is my recommendation that an investment is not made into Joe’s.
In the third quarter of 2002, investors pumped $4.5 billion into 647 entrepreneurial companies, a decrease of 26% from the prior quarter, which saw $6 billion of funding to 838 startups. While IT startups consistently gain venture capitalists’ attention, software companies continue to gather the largest amounts of cash despite a 10% drop in funding from the prior quarter. Representing 22% of total investment dollars, 180 software companies got funding, totaling $993 million.
“Software is once again leading VC back to its roots, being the largest category in all of 2 but the last 10 years,” says Tracy Lefteroff, global managing partner of the venture-capital practice at PricewaterhouseCoopers. He says that software companies are a safer bet for investors, as they have lower initial capital requirements and early milestones for achievements. (www.informationweek.com)
While startups at all stages are struggling in this down market, the stakes are highest for new companies who want to gain first-time funding. Only 159 entrepreneurs received first-time funding in the third quarter, compared with 214 in the second quarter. Software startups took 30% of that money. Overall, the tightened investment belts and commitment from VCs to invest long-term mean that only the brightest and the best entrepreneurs will get money. (www.informationweek.com)
As a landscaping company, the laws and regulations of the Environmental Protection Agency (EPA) as well as the Occupational Safety and Health Organization (OSHA) regulate Joe’s. The company’s contract states that the company uses an all-natural product made from a diverse blend of yard trimmings, ice cream waste, food scraps, and nutrient rich horse and cow manure. No sewage sludge or chemicals are added.
Yet, it also states that they cannot completely eliminate the possibility of chemical contamination, or guarantee that all inputs are from certified organic sources. Most landscaping companies use chemical fertilizers and pesticides which can be misapplied or overused and can soak into the soil and possibility contaminate groundwater or runoff and pollute lakes and streams. These types of potential liabilities can be very costly and the insurance expenses to cover any damages from a liability claim can diminish expected profits.
Another concern is the exposure of the workers to hazard conditions. Workers are sometimes exposed to various chemicals that can have a severe impact on their health. Workers do not always handle chemicals and equipment as carefully as they should. Potential hazards include improper handling of chemicals, accidents while using equipment and injuries from repeated lifting of heavy equipment.
Carrying and lifting heavy loads and awkward body postures such as bending, kneeling or stooping can cause back strain; prolonged or repeated exposure of unprotected skin to ultraviolet (UV) rays can cause sunburns and increase the risk of skin cancer; prolonged exposure to heat and humidity can cause heat stroke, heat exhaustion, and dehydration. Any physical condition could cause the company to pay exurbanite workers compensation premiums. Companies often violate the law by not carrying enough general liability insurance, because they are not aware that it must be purchased separately from workers compensation insurance.
Finding ground workers is becoming increasingly more difficult. A typical beginning lawn care service has between one and three employees. The U.S. has one of its lowest points of unemployment rates, which means there is work available but no one to do the job. In order to hire skilled labor, most companies are having to pay above average wages; even as much as 10 percent higher than in previous years. If unskilled labor is recruited, money and time must be spent training that individual. With the growth and high demand for lawn care services, it is difficult to find time to train anyone without taking away time from the clientele. Since more revenue dollars are used for labor expenses, it is imperative that management maximizes the productivity they get out of their employees. (www.asbdc.com)
It is imperative to mitigate major risks when considering investment opportunities. Potential liabilities are often over looked in the excitement of the investment opportunity. Liability claims from hazardous working conditions and potential environmental concerns makes Joe’s a risky investment. More research needs to be done to ensure the company is utilizing environmentally safe products, tools, and is creating opportunities to produce safer materials and processes.
Arkansas Small Business Development Center. (2003, April). Retrieved June 23, 2004, from http://www.asbdc.ualr.edu/bizfacts/8002.asp
Cuneo, E. C. (2002, October). More Venture Capitalists Keep Their Wallets Closed. Retrieved June 23, 2004, from http://www.informationweek.com/story/IWK20021028S0010?ls=TW_012803_fea&fb=20030128_software