I received so much help along the way that I wanted to pay it forward for the next generation of searchers. I'm going to post a couple things that will hopefully make valuable lessons for some on the same path!
These are super in-the-weeds lessons specific to my deal, but I always found that was the stuff that was hardest to find.
POST 1: WORKING CAPITAL
Plumbing company, 60% service 40% construction, 35-40 employees, 15 vans. EBITDA/purchase price was right in the self funded sweet spot, requiring a little bit of investor equity and a lot of SBA debt.
Define it Upfront
This was a negotiating point as the deal was marketed without NWC. I was able to get it included with some help from the broker. One of the things that helped was defining a crystal clear methodology with the seller - I demonstrated my draft definition using his actual last 12 months balance sheets and left a few items blank where I knew the small-biz accounting would have to be adjusted (for instance the company didn't carry shop inventory on its balance sheet but I wanted to make sure a normal level of shop inventory came over. Another common one is accrued payroll - the employees get paid weekly, so there could be 7 days of payroll or 1 day of payroll outstanding at closing, and you want the buyer and seller to not care which happens.)
This exhibit was discussed prior to the LOI and included as an Exhibit to the LOI.
The company turned over a billing person and bookkeeper in December '21, leading to large delayed billings that were caught up in February '22. This threw off 2021 revenue which we proved out in QofE, all good there. But the problem was this led to an increase in AR that we were watching & discussing between LOI and close. It was supposed to be one-time but it stayed stubbornly high - the replacement hires weren't collecting like the old team. Using round numbers, NWC went from $500k avg to $750k and stayed there for the 3 months between LOI and closing.
Max Lummis did my QofE and did an outstanding job helping with working capital structure (always wearing the business hat over the technical hat). Nearing closing I really didn't want to lose the deal or harm my relationship with the seller since we had agreed to a 12 month methodology in the LOI, but Max encouraged me to try to get a 3-month average which meant the seller would have to deliver $750k vs. $500k. This worked and helped my post-close cash position hugely.
What I Missed
This was such a technical thing, I don't think the lesson here is spend more time on financial diligence. Maybe keep your QofE team involved all the way thru closing which I didn't really do except for a couple pieces of transaction advice. Or just realize that you will miss things and they will pale in importance with the softer things like company fundamentals and seller relationship.
So this business is 40% construction, focused on ultra-high-end custom residential homes which can be multi-year projects. Progress billings were an area of focus from the bank and QofE, but we got comfortable and Max helped put some guardrails in my APA to protect against over-billing without having to teach the seller how to do complex accounting.
Despite that, the seller over-billed a little heavier before close, and it took me a couple months to really recognize it. I don't think there was bad faith, I'm sure it exceeded our threshold in the APA, but I've never bothered to calculate it because it wasn't worth fighting over. How do I tell a 40 year master plumber that he was 40% complete on a project not 50%? Small impact on the business as a whole but it threw off KPIs for a couple months.I remembered talking to Aaron Kinsey who had a seller do some serious bad-faith stuff (he talks about it on some podcasts, worth a listen) - instead of chasing after justice, he knew there was only one choice: focus 100% on running your new business. My case was nothing like his - the seller has gone above and beyond to ensure my success and has been highly generous. But it's a good lesson to keep cushion in your deals and focus on the positive not the negative.