Hi everyone. I closed on my first acquisition a couple months ago and wanted to post some thoughts and reflections. I have learned a lot from many of you and wanted to share my experience so that I can be of help to somebody. All experiences are different, so please take with a grain of salt! A little bit about me: I am a veteran and am currently wrapping up my second year in an MBA program. I decided long ago that I wanted to pursue an entrepreneurial path, and about three years ago learned about entrepreneurship through acquisition. Like for many of you, that moment was a lightbulb moment and I knew I would pursue that path in one way or another. I devoted my MBA time to taking classes that would give me tools for small business ownership and that has been great. Between my first and second year I interned with a traditional search fund with two awesome searchers (Joe and Jess with Steadfast Horizon). I learned A LOT from them and would highly recommend anyone on here have that experience no matter which path you take. I got so much experience looking at hundreds of businesses, helping with DD on a couple of them, sitting in on investor calls, etc. It was a great education, but pick your searchers wisely, they are not all created equal! After that experience I felt much more prepared to take the leap myself. I decided to go the self-funded route because I was very geographically specific, have capital and a working spouse, and honestly wanted a great lifestyle business that I could grow and enjoy working on for decades to come. I wanted to do this with nobody to report to but myself (and my wife, obviously). I live in Bend, Oregon (please reach out if anyone is out this way!) and came across a great commercial janitorial business. It hit all the marks of a great ETA target: Recurring revenue, simple operations, boring, essential, recession proof, etc. No, it is not sexy, no it will not experience hockey stick growth, but yes, it looked perfect for me. My initial plan was to go into this solo, but after talking with a great friend of mine, I decided to bring him on as a partner, with him keeping his day job. I am a firm believer that 1+1 can equal 3, and he has been awesome to have on the team. Partnerships are tricky, but they can be HUGE value multipliers! Before we submitted the LOI, we knew we were going to hire a General Manager to handle the gritty, tactical, day-to-day. We brought the right guy on board pre-LOI and he planned to leave his previous job once we got to a higher confidence in closing. Hiring him was going to eat a good chunk of the cash flow, but I knew it was the right move to free me up to work on the business and not in it. (More on this later).
LOI: Our seller’s broker was with a large national firm, which many of you have probably seen for main street businesses on BizBuySell. They have their own LOI format, which they call an Offer Agreement (or something like that). You can use your own LOI format, but in a competitive market the broker (often inexperienced) will prefer to take offers that use a template that they are comfortable with. Just keep that in mind when dealing with large brokers. They also retained the right to take back up offers, which meant that we didn’t have any kind of legit exclusivity. I may have been able to negotiate that, but once again, in a competitive market you have a lot less negotiating power. I figured an accepted offer and getting into time consuming DD would prevent the seller from wanting to start over with a new offer, and fortunately that worked out for us.
Due Diligence: Some of the best advice I read on here was the post called “Drop the MBA Schtick”. This is an incredible lesson and I really understood why it is important when dealing with most main street and lower market sellers. We all want to come in and do very thorough due diligence (and you should), but it will not be the same experience as DD for large M&A transactions. Our seller in particular was extremely savvy in running her business but admits that she has a tenth grade education. She’s smarter than most people on this forum (myself included), but I think I lost some credibility when I came at her and her business with a very deliberate and intrusive DD checklist. I forgot to realize that she has been running this show for over 20 years with nobody peeking behind the curtain until I came along. If I could do it over again, I would have approached this in a much more slow and gentle manner with a lot more EQ than IQ, even if it meant the process would take longer.
I found that my due diligence was never going to be perfect, and it took a while to get comfortable swallowing that pill. A lot of her records were in filing cabinets or in her brain, and my desire/expectation for clean PDFs and Excel spreadsheets was not realistic. With main street businesses, get comfortable with hearing “I have no idea” or “I can’t remember” and mitigate as best as you can.
On the topic of due diligence, my business was simple enough in operations that I chose to do it myself. I considered hiring a third party to do some sort of QofE, but I found that my basic knowledge of these topics was more than sufficient to do great DD. I wanted to take a first shot at DD before hiring a third party, and I am glad I did. Please decide what is best for you and don’t take this as a one size fits all approach. Like I said, my business is simple, no inventory, and has years and years of clean books. If you decide to use a third party, I still highly recommend getting in there and doing everything yourself anyway. It was a great way to really become intimate with the business.
SBA Loan: It took us 77 days from signed LOI to closing, and huge thanks to ^ and Live Oak Bank for being so easy to work with. Lisa is a wizard and was an incredible sounding board and mentor during the process. The SBA loan process is daunting, and we worked hard and fast to get everything back to them as quickly as we could so that we wouldn’t be the ones slowing down the process. My recommendation to everyone thinking about going the SBA route is to spend the time pre LOI to get all of your financial “ducks in a row”. For instance, my partner was planning to get a HELOC on one of his homes and learned that once that home is pledged as collateral for the loan, you cannot do any sort of HELOC or cash-out refi. My partner scrambled to get the HELOC in place before the loan closed (which he did), but it came down to the wire. Additionally, we learned a week before close that our five homes between us was not enough collateral to cover the loan and now we needed a life insurance policy. It was extremely important for us to close on November 1st, so pulling off a life insurance policy in a matter of days was no easy task, and one thing we were not expecting at that time. One final thought on dealing with the SBA: Let your seller know that there will be requirements of them throughout the process as well. They will have to sign quite a bit and provide even more DD items as questions come up during underwriting. My seller was not expecting that and got frustrated at times.
Closing: Closing day was pretty much the same as buying a house. We all met at an escrow office, signed a mountain of paperwork, and shook hands. I figured I would take the seller out for a celebratory coffee afterwards, but she basically said, “we need to get back to the office, we have shit to do”. As soon as she said that, I knew she would be great during transition! It was important for us to close on November 1st, because the last pay period ended on October 31st, and all the seller’s final invoices were for the service period of October 1st-31st. November 1st for closing was going to be the cleanest break and would result in not having to prorate anything. Fortunately, we were able to close on the first!
Transition: We devised a detailed “transition plan” that looked a lot like a GANTT chart and thought it was perfect. That pretty much went out the window when we got in there with the seller and saw that everything is always happening simultaneously. Our thought of “today, let’s focus on payroll” was naïve. Basically, we buckled up and jumped on the train moving 80 miles per hour. Our transition has been just a nonstop whirlwind of absorbing how the business operates and trying to pull so much resident knowledge from our seller (and trying to document it). We negotiated a 90-day transition with our seller, and she has been incredible. Her son had been handling the back office (and spent the last year or so trying to professionalize the business for sale). We kept him onboard fully paid for a month, and then worked out a consulting arrangement as needed basically indefinitely. Regarding messaging to our customers and employees, we spent a lot of time thinking through (with the seller) our best approach. With our customers, we decided to have the seller introduce us as “new partners as she prepares for retirement”. I think this was a great approach and really reduced the shock announcement of a sale, especially for very long-term customers. For our staff, we told the key ones about the sale, and everyone else just that there were new managers on board. Given that it is a commercial janitorial company with most work done during nighttime and weekends, there is very infrequent interaction with team members, and in fact, most of them have never met most of the others at the company. As long as we didn’t mess up the first payroll and got up their supplies/equipment on time, nobody really cared.
-Had to fire an employee on the fourth day. He was the ex-husband of the seller and had been around for years as a task rabbit and somewhat managing the warehouse. In my opinion, the seller knew he had to go, but wanted to save face and let the new owners do the firing. We realized very quickly that he was going to be a problem, and with two customer complaints the first week, we knew letting him go immediately was the right thing to do.
-Our lead cleaner, who acts as our liaison with most of the staff since she is bilingual, started crying when she was told about the sale. Her reaction was that she didn’t want to work for a man after working for the seller for so many years. Should have seen something like this coming! I think we have since started to earn her trust, but it was my fault for not thinking about this possibility.
-I did extremely thorough DD to really understand payroll costs over the last several years and was very satisfied with the predictability and the consistent margins. What I did not know was that the seller gave everyone a healthy raise during DD (to keep up with the extremely tight labor market), so my first payroll was significantly higher than expected. The lesson here is that models are only as good as old information and assumptions about the future, so be prepared for shocks to the system.
-Costs. Plan for more than you think. Our insurance costs way more than what the seller had, so our budget was off again. I would take the seller’s historical monthly expenses and tack on a healthy premium in your planning.
-Employees testing the boundaries during transition. This is human nature, but we found a lot of folks trying things, asking for things, etc. that did not happen while the seller was in the seat. There was a little bit of “playing mom off of dad” happening, and fortunately the seller is helping us to really figure out what is legit and what is not. As the new owners, we want desperately to be “liked” by the staff, and they know that. We contributed to more student raffles the first week than I ever had in my life, have been approached about giving a loan to an employee, about buying a company van from an employee, donating to sick friends, etc. Prepare for this happening and have your own personal policy, otherwise you may be taken for a ride!
-The administrative part of transition has been way more time consuming than I ever thought. I spent nearly the whole first month just getting all the minutiae taken care of and there is still a long way to go. Fortunately, we had our GM in the seat so he could focus on the customer/employee facing side of the business while I took care of the tedious stuff. Plan for admin turnover to take much longer than expected!
-I have learned a lot about the “transferability” of small businesses. Even though our business is simple, transferring it is not. Our seller has decades of resident knowledge and relationships, which you can only do your best to absorb as quickly as possible. If you are looking at a more complex type of operation, think long and hard about how transferrable (to you) it is. Really understand the seller’s role, their knowledge, and their relationships, and be honest with yourself if you can step into their shoes. This is more challenging in smaller businesses where the owner has been doing everything themselves for years.
That’s it for now. Thanks for reading, and please don’t hesitate to reach out. I’ve only been in the seat for couple of months, but I want to be as helpful as I can no matter what stage you are in! Happy New Year!