While you may have just spent a day or two on the potential up to this point, if it is still of interest, you should now commit significantly more time to preliminary due diligence, which is a concentrated period of rapid learning in advance of making an offer. This is the stage at which you put to the test the seller’s initial assertions and confirm the information that has made the business attractive to you. Since the company had a low churn rate, you assume it has many loyal clients. However, how successful are the companies that are now using the company’s services? You believe cash flow is stable, but consider how the books looked during the last economic downturn. How reliable are the current procedures (for quality assurance, billing, refunds, compensation, and benefits)? You’re poking around for any possible downsides to buying this company.
You may estimate future earnings and your return on investment based on the company’s financial data. An offer price of three to five times EBITDA is common. This exercise will help you assess the company as precisely as feasible. To get the money for the purchase, you need go to banks and your investor network. Be ready to share data about the company and its industry, the results of your due diligence, your financial forecasts, and the proposed terms of the deal.
If you’re competing with other buyers, now is the time to convince the seller that you’re the best option. Bautista overcame competition from private equity groups who were willing to pay more for Fail Safe than he and his investors were able to muster by demonstrating how much he valued the company and his commitment to carrying on the founder’s vision.
In the event that your offer is approved (or after some negotiation, your offer is accepted), you will enter a period of confirmatory due diligence during which you will have full access to the company’s records. You and your accountant and lawyer will normally have around 90 days to look for red flags and discrepancies. It’s crucial for the buyer and the seller to be calm and patient throughout this tense period. (It’s preferable to wait until this stage before bringing in these outside consultants so that you don’t have to pay them should the sale fail, which is more likely earlier in the process.)
Ambrosia reflects, “I was continually attempting to indicate that progress was being made.” When Braus’s company signed a major new client ten days before their agreement was supposed to close, the seller threatened to bail out, but Braus and her investors convinced the seller to stay by renegotiating some of the terms. She explains that it was challenging to deal with the period of uncertainty, but the company would not have been ready to risk closing because of it.
Making the Jump to Leadership
Following the sale’s completion, your top priorities should be to introduce yourself to all management and staff, engage with external stakeholders, share the transition plan with everyone, and get your cash flow under control.
Financial difficulties are the number one issue for newly-owned small businesses.
When you first meet your new coworkers, promise them that they won’t notice any major differences right away. Instead, communicate the company’s larger vision (such as providing superior customer service, being dedicated to quality, and having a positive work environment) to keep employees focused. Allow children to question you, but don’t stress if you don’t have the answer right away; saying something like, “I want to learn more about that subject before I make a judgment,” is also OK.
When Ambrosia bought City Wide, he addressed his fifty or so employees and told them he did so for three reasons: the company was fantastic as it was, everyone’s job was safe, and he was excited to learn from them. After that, he had a meeting with his superiors where he laid out his demands for them (really just formalizing existing obligations) and told them what they could expect from him. In his first few weeks, he made it a point to “lead from the front” by getting his hands dirty with his day and night staff as they cleaned windows.
Your new neighborhood, clients, and suppliers will all require the same proactive attitude from you. The new boss will undoubtedly be sought out by all these interested parties, many of whom may provide insightful feedback on how to further refine your services. Two additional acquisition-focused business owners we know made it a priority to meet with each of their most important clients as soon as possible, and they credit those first discussions with inspiring their subsequent product and service innovations.
Employees and customers alike need to know what to expect from a management transition agreement with the outgoing owner. Lay out the new procedure for making choices and who to go to with specific inquiries or requests.
Cash flow should be prioritized alongside your connections. Most problems encountered by newly acquired small businesses are monetary in nature, as the new owners will likely have acquisition debt to pay off. Establish a system whereby payments must be approved by you before they are sent, and check your accounts receivable amounts on a weekly basis. Furthermore, you should institute a cash flow forecast that looks out 90 days.
The weeks after closure are sure to be action-packed and instructive. There will be more demands placed on you than a 24-hour workday can handle. Bautista says, “It’s a shock to everyone.” You’re scared that your staff will go, and they’re afraid that they’ll be let go. Also, you’ll be expected to take charge immediately. When I was 28 years old, I realized I was in charge of a staff of fifty.
Both Ambrosia and Braus acknowledge facing difficulties at the outset that they hadn’t anticipated. Senior and junior staff members left the companies in the first few months of the new owners’ reigns for a variety of reasons, including the new owners’ emphasis on stricter management practices. A payroll mix-up angered Bautista and his employees, and he had to let go of some long-term clients who weren’t profitable.
There will always be growing pains like this, though. Things will settle down if you’ve taken an analytical approach to the purchase process and started using effective management. Then, you can put all your energy into expanding your company into a more respectable size range.