Buying Businesses 2

In the next three posting I describe three investment opportunities in buying businesses that my wife and I exploited and results to date.

Having worked for another dentist for some years, we felt that we had acquired the necessary skills to run our own business. The good book says that if you are faithful with another man’s, God will give you your own. I had diligently and faithfully served this mature dentist for three years. I learnt a lot from him. Working for another person is a great way to learn – read “make mistakes at someone else’ expense.” Many prefer to start their own businesses straight from school and so they pay a heavy price in the costs of their own mistakes, whereas when you work in someone else’s business you make mistakes and are paid for the learning experience. My boss then was demanding and many colleagues would put in the basic minimum required but I extended myself because I knew I wanted to learn so much about the business before venturing into my own. Towards the end of the three years we made an offer to purchase the practice and the owner in his attempt to retain us made promises and started the negotiating process but would not come down to close the deal. Once we discovered that he was not sincere we moved on and started looking for opportunities. We considered starting from scratch and felt that it would delay our wealth creation mechanism, so we opted for a purchase.

On surveying the dental industry in our city we discovered that there were a few white dentists who were aging and so would be amenable to sell. We narrowed down the search to one practice which was close to the CBD which included a purpose built two story building and was run by a partnership of five dentists. After paying a courtesy call and being shown the building we were convinced that this was the place. Unfortunately as far as we knew this practice was not for sale. After much thought and prayer, I felt that I should proceed and make an unsolicited offer on the practice. So I wrote the owners a letter appreciating the service they had rendered dentistry in our country for years and expressed interest in purchasing the Practice if they ever felt like retiring. I mailed the letter in October 2000. The following two weeks were extreme agony as I thought of what the colleagues would think of my unsolicitated offer. At the end of the two weeks I got a call from the lead partner of that Practice indicating that they were keen to discuss the deal. We set up the discussion meetings. It was only then that we discovered that these partners had put their building for sale with no meaningful offers. They introduced us to the real estate agent who was handling the sale – and we discovered that this building had been on the market for at least two years. The agent was too keen to off load the building such that he now acted more like our agent than they sellers’.

Since the building was registered as a private limited company, we opted to purchase the building and negotiated the two year old price since there had been no takers. At that stage mortgage financing was available and so we arranged to buy the business as a building and financed it with mortgage finance. This allowed for leverage. We negotiated the inclusion of some equipment into the purchase price. The mortgage valuation was lower than the asking price and so we negotiated that the sellers would allow us to pay the difference over 18 months at a nominal interest. We then asked them to lease back a portion of the building and we commuted their first year rental into the purchase price. We also negotiated that though it was a purchase of the building, if any of the partners retired while still practicing they would release their patient book to ourselves. Agreement was reached by November 2000 and the mortgage finance was released by end of January 2001 resulting in our taking over the business by 19th February 2001. That business has been running profitably since as DentalCare Services Harare.

Because of inflation we managed to pay off both the mortgage facility and the owner funded loan within the required period. I loved structuring this deal because we did not have to pay goodwill and we also purchased a business through long term mortgage financing.  I was also thrilled to discover that we could negotiate a discounted purchase price by paying a two year old price since the sellers were desperate for a deal and there had been no takers. The information that the building was on sale for two years with no takers was crucial in our negotiations. It is critical to be well informed during decisions to purchase businesses as information can be used to best advantage. The timing was also excellent as inflation started chipping in 2001 which meant that a Z$ based purchase via bank financing was an excellent deal as repayments were eroded by inflation.

Another critical aspect in the deal was that we were not starting from scratch as the venue was already an established dental practice. The sellers though still practicing were on cash basis while we accepted medical aid, and so this gave us a starting customer base and a ready market. This immediate take off of the business ensured that we could start repayments immediately.

Another divine insight was that though we did not know that the building was for sale, we just trusted God and acted on the insight we received even though it did not sound logical. It is important to hear God in terms of investments. However this is a process which takes time but it is critical to start practicing hearing the voice of God.

We started with a team of nurses and therapists who I had worked with in my previous engagement and so the whole treatment and admin team was in place with the requisite skills.

To effect the purchase we had 10% of the required amount from previous money market investments, 15% was obtained by disposing a new luxury vehicle we owned, 24% was paid in terms to the sellers and the balance was paid through mortgage financing. In actual fact we used only 25% of our own money in this business purchase hence exploiting leverage. The decision to sell the luxury vehicle was a protracted negotiation within the family but was worth it as the building and practice are now worth much more than ten times the value of the new vehicle – meaning that with time the Practice can now replace the vehicle. Friends who did not know what we were up to in selling the vehicle thought we were going through tough times because they did not see what we were seeing. Investors are not moved by what people think but by what they see. They are not worried about public impressions management.

This purchase has allowed capital appreciation in the building as well as the growth of the dental practice both as capital and as an income generator. The Practice now pays rentals to the building owning company. A significant part of our wealth creation was now based on this initial purchase serving as a cash cow to fund other investments.

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  • Reply ARM August 12, 2010 at 2:48 pm

    Bill Gaither and friends sang “May all the dear things I hold so close to my heart….are mine to hold only by the grace of God!!!!” … true. There are times we need to let go…..and let God have His way….important in investing!!!!

    • Reply nurturingchampions August 12, 2010 at 2:59 pm

      You can say that again my dear. Many times one has to make decisions to let go of things they can not keep in order to gain things they cannot lose. That is an important investment distinction. To use things perishable to acquire long term wealth preserving assets. Am so glad you accepted to give up the Prado for the commercial building we acquired. bless you.

  • Reply Norman August 13, 2010 at 9:52 am

    Thank you Sir. This is very practical, challenging and relevant.

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