Should I Run from this Acquisition Prospect?

October 05, 2020

by a searcher from The University of Michigan - Stephen M. Ross School of Business in Las Vegas, NV, USA

We're actively acquiring businesses and our screening process is severe, meaning we look to screen most organizations "out" as opposed to "in" (It's a choice we made almost 2-years ago). Long story short, we found a prospect and they passed our initial screening criteria. Our follow-up questions were typical and included 2020 Financials, Seasonality of business, FF&E, and a series of Customer Base questions. The response I got back from the broker was as follows:

- 2020 Financials - I know you mentioned the owner doesn't keep monthly books, but as we enter Q4 any idea of this year's financial performance would be helpful? Believes they'll be up over last year (But doesn’t track anything) - Seasonality - Which 3 1/2 months of the year do they not have business? If you have monthly financials from 2019 that would be helpful (Balance Sheet & Income Statement) - Dec, Jan & Feb, but they don't keep monthly figures - FF&E - Is there any transferring with the sale? - Yes, all equipment used transfers

Customer Base --# of Clients and % business with - 10-15 Customers per year, job site average is 10 days to 2 weeks. --% splits for Commercial vs Residential business 90% residential --Average job $Sale and $Cost All very different

This would be a nice "add-on" to another holding, but the lack of financials leads me to believe that there is going to be difficulty in operations as well (Don't even get me started on Sales/Marketing initiatives!)

My question... Should I run or not if you were me?

Thanks in advance!

Sam P.

Reply by an intermediary
from The University of Chicago in Chicago, IL, USA

Clearly you see something in the business otherwise you would have ruled it "out" quickly. I presume you are pre-LOI and that you have 2019 and prior financials. Why can't you make an offer (IOI or even an range) based on financials you have? See if it progresses to the satisfaction of both sides.. At that point you will have direct access to the seller, thus allowing you to overcome broker limitations. He very likely will open up. Over my 35 years I have run into many such businesses and have solved the issues with available info. You are asking for monthly IS, BS, etc. like a fresh MBA. There are other financial metrics you can ask, and I am confident that the seller has them. For example, does he file quarterly 941? If the business is collecting sales tax, then they are filing sale tax returns. I can think of many more to "gauge" how this year is doing. An easy question is, how is this compared to last? If it is materially better, you can bet seller and broker will have told you so. If it is not you will get a soft answer. My point is, if you like the business, and have previous financials, then find a way to get in front of the seller and get on the good side of the broker and seller. Keep making progress. If seller is committed, he is not going to find a better buyer than you b/c it is a good "add-on" for you. I have handled many such, and even worse situations, and often discussed them when I used to teach at Kellogg for 17 years as adjunct. You are welcome to call.

Reply by a searcher
from The University of Michigan in Las Vegas, NV, USA

^redacted‌ nice answer here... I had similar thoughts and have filters in place to quickly rule-out potential businesses. If interested, I also always try to "find a way" as there's been some real gold in digging deeper than most. Unfortunately, this business owner has provided little/no evidence that they can share any metrics/KPIs. What's even more concerning is the General Manager who is willing to stay onboard after sale has been held to little/no standards (Nor from interview with Broker is he interested in pushing the business to new heights). So I'd be firing in the dark on this one and would need to bring on a new GM. Not that that would be a bad thing, but...

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