Hi, my name is Dave. Over the last two years I bought and sold my first company – a generator installation and service business in the Midwest. It was very difficult at times, but overall the experience has exceeded my hopes. The employees are in a much better situation than they were two years ago, the deal economics worked out, and I learned more than I ever imagined.
These days I still run the business as a division of the acquirer, and I have had more time to reflect on the lessons so far. Take these with a grain of salt. They’re just one person’s perspective.
Try before you buy.
When I got interested in ETA, I decided to work part-time for a former colleague who had recently bought a tree care company in Chicago. Through that experience, I was able to get a front-row seat to all the challenges that come along with a new business: the seller relationship, employee issues, CRM implementation, and all the other nitty-gritty that comes in the first 90 days post-acquisition.
I worked for free, and in retrospect – earmuffs, Kevin – I would have even paid for the experience. There was simply no other place that I could have learned what I learned there. Naval Ravikant calls this specific knowledge, and it’s pure gold. You can’t learn it in school, you can’t learn it from a book, and you can’t learn it from a conversation. It’s the kind of knowledge that illuminates your blind spots, gives you direction, and builds your confidence.
So if you’re thinking about buying a business, go work for someone who owns a similar business to the ones you are considering.
Don’t do it alone.
If you’re going to do a solo search, you have to get help. You want people who you can go back to again and again for advice as things unfold, therefore I recommend forming a board of advisors from pre-existing relationships wherever possible. Wherever you have to branch out of your network to fill out your board, you will need to accept a very low batting average. I fired two lawyers before I found the one I use today. But I love the one I use today.
I found###-###-#### people to be about the right size for my board, with a few committees:
Strategy Committee – These are people who will help you decide whether to do the deal. They can assess business fundamentals, audit your LBO model, and help you think about risk. Pick smart people who are willing to think deeply with you.
Deal Committee – These are the people who will help you execute the deal. Your broker, lawyer, accountant and lender. DO NOT rely on these people to help you decide whether to do the deal. They get paid more if you do the deal. Of course they want you to do it.
Operating Committee – These are people who can help you through tricky employee situations and growth challenges. The best people for this committee are operators of similar businesses (e.g. for me, a friend in Seattle who runs a generator business has been invaluable).
Personal Committee – This is your family, close friends and maybe even a professional or two (pastor, coach, therapist). They keep you from crawling up into a ball and crying on the shower floor.
Define and accept risk.
Defining risk is an analytical exercise. Accepting it is a personal one.
To define the risk, build a basic LBO model with upside, downside, and base cases. If you don’t know how to build a basic LBO model, don’t buy a business until you learn. Share your model with your Strategy Committee, ask for feedback, and use them to develop a consensus downside.
Your downside should represent the bottom decile outcome absent major strategic pivots, growth initiatives, etc. Think of it as the business ‘glide path’ in really bad market conditions. Make sure it’s an intellectually honest downside. Recently I reviewed a deal model for an HVAC business where the downside was flat revenue. That’s intellectually dishonest.
For my business, the downside would mean layoffs, bumping up against my debt covenants, maybe even skipping my salary. Not fun, but also not bankruptcy. It’s extremely important that you keep the ability to make debt payments even in the downside.
To accept the risk, talk with your Personal Committee about the implications of the downside. Ask “If this were to play out, would we still be satisfied with the decision to proceed?” If the answer is no, don’t do it. It’s just that simple. Don’t go back to your model and change the numbers. Just don’t do it. But if the answer is yes, then stop dwelling on the downside and focus on creating the upside. I spent far too many unproductive days wringing my hands over the downside. Total waste of time. I could have been learning jiu jitsu or something.
Show up with a scorecard.
As part of your diligence, put together a scorecard that shows the most important metrics or leading indicators in the business. Imagine you are already operating the business and ask yourself what metrics you would track on a weekly basis. You can borrow from metrics the previous owners track, but you need to make it your own. Once you have the metrics that matter, fill in with as much historical data as possible. Use averages or estimates if needed. Based on that data, develop go-forward goals around each metric.
Not only is this a great diligence exercise, it can be a great leadership tool. On Day 1, show the scorecard to employees, finding proxies for sensitive data if needed (e.g. we started by showing “number of jobs” instead of “revenue” for our install program). Tell them why each metric is important, what the goal is, and who is on the hook for it. People like it when you have a plan!
Be a technician.
I have heard people say things like “you don’t have to be a plumber to run a plumbing company.” I guess that is technically true, but it’s the wrong approach.
On Day 1 you should assume that you hold zero credibility with employees. They won’t care about your past accomplishments, your resume, or your SAT score. It’s your job to build credibility, and it’s pretty hard to do that from inside a cozy office. You need to get out in the field and let them show you how to do their job. If you’re running a plumbing company, get into a basement and learn to swap out an ejector pump. Do the dirtiest part of the job. Learn the names of all the fittings. Learn what the tools are called and how to use them safely. The training will be a good bonding experience, and it will build trust.
More importantly, as the leader it’s your job to set expectations. How are you going to do that without experience in your employees’ shoes? I have lost count of the number of expectations that I have instituted and then scrapped because they’re either unimportant or unrealistic. I could have avoided all of them if I had spent more time in the field.
Every time I go into the field to work with my crews or sales team, I find a process or tool that we should improve. It makes everyone more efficient. If you never do your employees’ jobs, you’re destined to be out of touch.
Simple, steady technology.
For technology decisions, I recommend two biases:
Bias 1: Keep it simple.
I used to dream of custom-built webs of software that eliminate the need for any human intervention in my business. It’s a nice dream, but I suggest starting smaller. Like, maybe get Slack so your employees don’t have to yell to each other through the office walls.
Here are some other simple technologies that have worked remarkably well for us:
Trello – Boy do I love Trello. It’s so great for keeping priorities straight for you and your team. Some people hate it because it keeps them accountable. Those people don’t last long around here.
White boards – Every room in our building has at least one white board. We put job schedules onto boards, keep track of lists on them, map processes, etc.
Paper checklists – Don’t hate. They work. Job completion forms, customer signature pages, truck inventory sheets, etc. Just remember to recycle. We’re not animals.
Excel – Everyone who interviews for an office job completes a short onsite Excel exercise. The only way they can fail is to complain about it. That’s a deal breaker.
Email – Yes, email. You need to get everyone an email address and make sure they know basic email skills (e.g. same-day reply rule, forwarding, copy relevant people, etc.). When hiring office folks, I recommend reviewing all the email correspondence the candidate has sent prior to extending the final offer. Were they responsive? Proactive? Despite my better judgement, I once hired someone who didn’t email well in the application process. Then sure enough, they sucked at email. It became such an issue that they ended up quitting.
Bias 2: Delay any major change until you’re sure.
For example, one of the most vexing decisions for a searcher in a new business is whether to keep or scrap a CRM. In that situation, consider a 1-year decision rule.
Switching CRMs in the first few months is extremely hard. Only do it if you absolutely cannot envision running the business for 1 year with the current CRM AND the business is fairly stable (not a turnaround). Obviously a paper-based business will need a CRM ASAP.
In all other situations, run the business for 1 year before switching. You’ll be in a much better position to select new software and run the transition once you know the business.
The same principle carries over to other major technology changes. Be sure, then don’t turn back.
Sell, sell, sell.
As you all know, first prize is a Cadillac El Dorado. Anyone wanna see second prize? Second prize is a set of steak knives. Third prize is you're fired. - Blake from Glengarry Glenn Ross
When I came into my business there were several months of orders piled up. It was tempting to prioritize production levels so we could boost revenue, but I focused on building out a sales and marketing capability instead. I’m really glad I did because it set us up for great long-term performance.
In home services, there are a few practical pieces that make a good sales & marketing capability:
Brand identity – Find a designer on Upwork to make/update your visual identity, and work with your team to define your unique value proposition to the market. Build sales collateral and web content consistent with the brand.
Online marketing – I steered clear of “Full Service Marketing Agencies” who claimed to “handle everything.” They lack transparency, they’re slow, and contrary to their sales materials, they don’t do anything special. There are only a few essentials of online marketing:
o A killer website – You absolutely need a great website. There’s no secret recipe to a great website. The ingredients are well-documented. We built a good one with some fairly complicated custom content in 3 months for about $15,000.
o Search Engine Optimization (SEO) – After you build your website, have someone improve your ranking on keywords for 3-6 months and then pause. Ask them to measure and show you their results. Do NOT pay someone monthly to “handle SEO” for you in perpetuity. It’s a scam.
o Pay-per-click (PPC) management – Get someone smart to manage PPC. Ideally you can use the same person who did your website and SEO. Focus on Google Ads first.
o Content – Read “They Ask, You Answer” and do what it says. Do it in-house.
o Email marketing – Design campaigns and execute in house. We use Mailchimp.
Inside sales – Hire someone hungry to field and convert inbound sales leads, manage email marketing, and follow up on dead leads. Give them commission.
Outside sales – Get yourself honest, smart, consistent outside sales people. Give them commission.
And of course, do some sales yourself. You should aim to be the best salesperson at the company.
Coffee is for closers!
Hire fast, pivot fast
We once hired a senior employee with significant management duties. I had looked for someone for about two months, which was as long as I was willing to wait. I knew it would be a stretch role for the person I hired, but I was surprised how hard he faltered in the role. It was a mess. After a few weeks, I was very direct with him. I told him that he was nowhere near meeting expectations on management and that he didn’t have nearly the technical skills required in the role. Then I demoted him. Despite all that, he showed up the next Monday. He ended up being one of my best employees for a long time.
Since then my rule is “hire fast, adjust fast.” When you find someone good, get them in the door and then figure it out with them. Don’t wait to hire because you don’t have all the little details worked out. But once they’re in, don’t be afraid to give direct feedback, adjust their role, or fire them if they’re not working out.
Baby steps.
In education people refer to the Zone of Proximal Development (ZPD). The idea is that with a little help someone can learn a skill or habit that is just beyond their grasp. But it’s counterproductive to try to teach someone something way beyond their grasp. Translation: people need baby steps.
I once had an ambitious office worker who was looking to move up. I offered her a 10% raise if she learned to drive the forklift so that she could offload deliveries if needed. We spent a morning driving the forklift, and we showed her simple drills she could do during downtime to learn. I found out later that she found the task practically impossible and therefore de-motivating. I was shocked. I had over-estimated her ZPD by quite a lot. If I had a do-over, I would have offered something even more simple like “practice the forklift once a week” with even more support like daily reminders and a forklift buddy who was in charge of teaching her. She needed baby steps.
Simplify instruction more than you think is necessary, and provide much more support than you think people will need. Baby Steps.
Don’t be a jerk.
This one is simple, but it is the most important. My professional regrets in the last few years have come from times when I didn’t treat people as well as I could have.
Treat people with respect, encourage them, praise their accomplishments, get to know them, and look for the best in them. Take an interest in their success both professionally and personally. This extends to everyone you work with – employees, vendors, other business owners, and customers.
You should still tell people when they mess up. You should still have difficult conversations with people about their attitudes and habits. You should still fire people, negotiate aggressively, or even file lawsuits.
But you can do all that without being a jerk. So don’t be a jerk.
Hot Takes From A Deal That Went Pretty Well
by a searcher from Northwestern University - Kellogg School of Management
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