CLOSING AN ACQUISITION DURING A GLOBAL PANDEMIC - 3 MONTH REFLECTION
I've come across several helpful posts from the search community that shed light on their search experience, and I wanted to return the favor to the community.
In early 2019, I took on a self-funded search because I had a targeted regional focus. I managed this process while holding a full-time job in a large tech company and becoming a first time parent in January[redacted]There was a lot to juggle to say the least, but it's certainly possible. Due to the limited time I had to dedicate towards deal sourcing, I chose to predominantly source deals through brokers/intermediaries. There are many drawbacks to going down this deal sourcing route, but it was effective at weeding out sellers who were not certain about selling.
I had a deal under LOI in mid-2019, but it quickly fell apart when early due-diligence of the company's books showed that EBITDA was 40% than what the broker showed. Needless to say, not all brokers are created equal and there's a reason why things happen the way they do. On March 13th, I closed on a leading regional outsourced bookkeeping and accounting service provider that supports growing SMBs throughout the US. We provide a turnkey outsourced bookkeeping and accounting solution that provides growing businesses relief from the day-to-day accounting hassles. Having experienced the global supply chain disruption caused by COVID-19 in my prior full-time job from January - February, I was genuinely concerned about acquiring a business in the middle of a global pandemic. I ultimately decided that moving forward was still the right decision because: - Strong business fundamentals (low customer concentration, recurring revenue, mission critical service) - Concern that the Company would be in a worse position in several months if the right leadership was not put in place - Likelihood that debt would dry up in a few months, similar to 2008
Here are a few key takeaways/reflections, in no particular order, that I hope will help the entire searcher community (mostly focused on operating the company post-close).
1) Be flexible and adapt. Have a 90 day post close plan? Be ready to completely re-write it on day 1. I closed the transaction on a Friday, and on Monday, the outgoing owner and I announced the sale of the Company to the employees and I told everyone that we would all would be working remotely until further notice. Rather than focusing top priorities like I had originally planned, my priority list quickly shifted to ensuring that our team had the right remote work technology (Zoom, Slack, etc.), issue out email blasts to our clients regarding SBA loans and adjust our collections protocol with the concern that client payments would slow down.
2) Trust between buyer and the seller is vital. Don't let the small deal disagreements jeopardize the trust. No matter how prepared and diligent you are during the due-diligence stage, you'll never be fully prepared to manage the Company right away. The new owner will need to rely on the seller. If you don't trust the seller, you should look for another acquisition. Jumping into the driver seat during the early part of the COVID-19 was overwhelming. Because of the rapport and trust that was built between the seller and myself, the seller worked nights and weekends to ensure that the Company would survive this global pandemic. Deal terms will only get both parties so far if there's little trust. The hard work that the seller and myself have put in over the first 3 months have played a critical role in helping to keep the Company stable during COVID-19. 3) Set realistic expectations for yourself with seller transition. Most of us acquire businesses from founders who have been working decades to build that business into what it was that made it so attractive for you to acquire. They're tired, exhausted and most likely burnt out. No matter how much they promise you that they're interested in focusing on sales or staying on to help, the reality is that they will naturally check out and want to move onto something else. Be ready for that moment and don't take the first 3-6 months for granted. I'm just over 3 months in, and the seller has been transparent that she doesn't have it in her to stay to lead sales like we originally discussed. I can't blame her, she's been doing this for 20+ years. Fortunately, the ownership transition has gone smoother than initially anticipated. 4) Build up your recruiting pipeline ASAP. Two employees announced their resignation within hours of being informed of the company sale. These things happen. Since our business is a service business, it was challenging during the first few weeks trying to reassign clients and making sure that we had enough capacity to handle the work. I quickly learned that no matter what the situation is, you should always have a full recruiting pipeline with strong candidates. You never know who will quit or who you will need to let go. Reducing the lead-time between when you realize you need a new team member to when that individual starts can prevent a lot of headache and business disruption. 5) Meet customers early. Although this task was on my first half of my original 90 day plan, it quickly fell to the bottom when other unanticipated priorities popped up. However, I have recently realized that I do not have as strong of a pulse on all of my clients as I would like. I'm meeting with key customers now, but I wish I would have done this earlier to prevent a lot of unnecessary surprises. 6) When it comes to employees, look for easy wins. Others have provided this advice and I couldn't agree more. As the new owner, It's already difficult to gain the trust of the existing employees. You should look for easy wins early on that will make their lives easier and that allows them to do their jobs better. A couple of examples, making a quick decision to switch to a new payment processing vendor at the recommendation of our office manager and providing a small telecommuting monthly reimbursement. I still have a long ways to go before I have their full trust, but these initiatives are a start. 7) Focus on being decisive, rather than always being right. Having spent months staring at due diligence documents, it becomes easy for us searchers to overanalyze data and feel like you have to always make the right decision. When you're managing a business, you may get 40-60% of the data you need to make decisions. I've found that being thoughtful and decisive has been more effective with giving our management team and employees guidance rather than being right. I have absolutely been wrong, but most of our employees just want someone to make a decision so that they can go on about their day. 8) Customer concentration isn't what it always appears. At the surface level, Customer A and Customer F may appear to be unique customers. However, many small business will have customers that are related to each other (e.g. a client may refer his wife to be a customer….clearly if the husband leaves as a customer, so will the wife). As much as I tried uncover these issues during due diligence, there were still several cases where I realized that the actual customer concentration was different than what I had uncovered during due diligence. This issue has not been a significant concern given our broad customer base, but I can easily see this issue be more impactful in other types of businesses. Searchers beware, ask sellers the tough questions about their customers early on.
I want to thank a few of those in the search fund community who were invaluable throughout the deal closing process. Braden Wayne was my legal advisor. Braden was dependable, responsive and knew when to push on certain matters (and he was good at it). At the same time, he was extremely pragmatic when it came to negotiating contentious points with the seller and her counsel. For insurance due diligence, I worked with August Felker and his team at Oberle Risk Strategies. Our deal was not the easiest of the deals when it came down to commercial insurance, but August's team stood by and came through in a short period of time.
Lastly, I want to offer our services to the search fund community. For those of you who are comfortable with analyzing financials and targeting smaller acquisitions when it doesn't make economic sense to spend >$25k for a full QofE, we provide an economical alternative to go through the target companies historical financials and clean it up so that you can trust the accuracy of those numbers. For those who have or will be closing on a target company, consider outsourcing the accounting and bookkeeping role to a company ours. Save the headache of having to hire and manage your in-house accounting team. We can provide you a full suite of accounting and bookkeeping services ranging from handling accounts payable to handling your month end closing and providing monthly financial reporting. If interested, feel free to email me at [redacted] or message me directly.
Happy searching everyone!