45: Business Adventures: Part 2
The financial statements have a few extra zeros on them but the fundamentals are still the same.
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HT Pipe Repair, LLC
In Part 1 of this mini-series, I talked about my first experience operating a real-world business of my own. Here I discuss another business enterprise. This one goes even deeper and includes a business acquisition, forming a legal entity, tax considerations, and more.
Opportunity all around you…
This business venture began as a result of my interest in motocross. From my teens and into my 20s I raced motocross, traveling all around New England to various tracks. It was a great experience that involved the entire family (my brother and sister raced too), and we made friends with countless wonderful families.
Racing motocross is expensive, in part because you’re on a dirt track with lots of rocks flung at your bike. Exhaust pipes get beat up pretty bad between the rocks and not-infrequent crashes. These can cost upwards of $500 to replace. Enter an opportunity to repair them.
My first business acquisition…
Years earlier, one of our friends had started a business repairing dirtbike pipes for fellow racers. His son now was getting older and he wanted to exit the business, so he decided to try to sell it. Having tasted business with my firewood venture, I was intrigued. I also had the necessary welding skills from a course in high school. We talked about details.
After some negotiating we agreed on a price of $10,500 for the business. Here’s what I got for my money:
A TIG welder I estimated was worth $1,500
Several dozen old 2-stroke and 2-stroke pipes I put down as worth $5,600
Some stainless steel, aluminum, and titanium welding rod: $400
Jigs and other custom-built repair equipment: $500
Add that up and it comes to $8,000. I’d paid 1.3x “book value” which meant there was a goodwill factor involved. The remaining $2,500 goodwill could be attributed to the fact that this was an established business with a built-in customer base. I’d also get consulting help from H.T. when I needed it, and he helped spread the word about me as the new owner.
Making it “official”…
This being my second go-round in business I decided to do things “right”. I formed a limited liability company (LLC) by filing papers with the Secretary of State in New Hampshire, obtained a taxpayer number (EIN) from the IRS, and opened a checking account in the name of the business, HT Pipe Repair, LLC. (The “HT” in HT Pipe Repair came from our friend’s initials, but I kept the abbreviation and said it stood for “high tech”).
With my business education underway (I was still in college at this point) and knowledge of Quickbooks from my time selling firewood, I set up a full chart of accounts for my new LLC. This included setting up an inventory asset for my stock of metal rods which would be depleted down over time, the old pipes I’d gotten with the purchase, and creating a depreciation schedule for the welder. At the end of my first year, I presented clean, well-prepared Schedule C to my accountant.
About that inventory…
Business was okay the first year. Looking at my Schedule C I took in $2,500 in gross revenues and reported a net loss of $750. That included depreciation and a pretty significant $785 in advertising. Interestingly enough I also deducted $29 for meals and entertainment.
As time went on I soon found that my stash of old pipes wasn’t worth nearly the $5,600 I thought originally. It wasn’t the seller’s fault. The main driver behind my inventory obsolescence was technology. You see, dirtbikes used to all have two-stroke engines. About the time of my purchase of HT Pipe Repair four-stroke technology made its way into the motocross world. That meant people didn’t need that 5-year-old two-stroke replacement pipe. It didn’t work on their new ride.
A silver lining…
The advent of four-stroke dirtbikes came with a silver lining. No, the older pipes weren’t compatible with the new bikes. But they were vastly more expensive. Some were made of high-grade titanium. Titanium is a very strong metal but it becomes more pliable when heated. This meant lots of dings, dents, and cracks from hard-fought races. And because the diameter of a four-stroke pipe is smaller than that of a two-stroke, a dent of any size meant decreased performance.
This presented a silver lining: my customers now had a greater incentive to repair their exhausts. In economics, repairing the pipe was a substitute for purchasing a new one. The price of replacement went up, and so did the demand for my repair services.
A “lifestyle business”…
HT Pipe Repair lasted a little longer than my motocross career. It was decent money at the time and paid for some of my expensive hobby. But it was never anything that could grow into a serious money maker. I’d played around with advertising and did a fair amount of mail-order business, but the market wasn’t big enough to support a full-time job.
I filed papers to dissolve the business at the end of 2011. This experience left me with many lessons that more than paid for the goodwill I paid. It also left me with those old pipes. For whatever reason, perhaps because it wasn’t allowable, I never officially wrote off those old two-stroke pipes.
But I consider the entire experience a win. I learned more about business and economics operating my own company than I ever could have gotten out of business school alone. Like the firewood business, I can look back on the lessons learned here and apply them to vastly larger publicly traded companies. The financial statements have a few extra zeros on them but the fundamentals are still the same.
And for that, I’m extremely grateful.
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Stay rational! —Adam
