BY: Jeffrey D. Jones, ASA, CBA, CBI
In Part 1 of this series of articles, I discussed the first three of twelve factors to tend to kill a business acquisition after the sale. These factors were: (1) poor price and deal structure, (2) refuse to develop a relationship with the customers, and (3) replace key employees. The majority of business acquisitions are successful. Those that were not usually fell apart within the first year following the acquisition. This article is not about cases where the buyer knowingly purchased a failing business and was not able to successfully turn the business around or changed the concept, or buyer fraud was intended, but rather this article will focus on those transactions where the business was profitable prior to the sale, but failed shortly thereafter. The following is a review of 3 other factors that commonly lead to business failure following a business acquisition.
- Refuse training from old owner.
Most transactions call for the seller to stay in the business for training for 2 weeks to 60 days, depending upon the experience of the buyer or the technical aspects of the business. Yet too often, the buyer believes that once he knows where the light switches are located, they no long need the seller’s help. A buyer should not fail to utilize all of the training that is part of the agreement. Time with the seller should be treated like gold. There is simply no excuse for not wringing all the information possible from the outgoing owner. Failure to learn all you can from the seller is a sure way to get in trouble. Worse, some buyers assume that the employees know enough. Our observation in case after case has taught us that the employees are important, but the owner is the one that built the business and the one that knows what is required day-to-day to run it. Always listen to everything the old owner says.
- Absentee ownership.
Frequently we get buyers come to our office seeking a business they can buy and then operate it “absentee” because they do not want to take the risk of leaving their present job. Many business brokers will tell you, “There is no such thing as an absentee owner.” In almost every case involving an “absentee owner” there is a problem. When this type of buyer acquires a business, and then delegate to the employees most, if not all, of the day-to-day responsibilities, the new owner begins to work fewer hours. This begins gradually, but within a few months the business will have gone from an owner-seller that worked 50 or 60 hours a week to an owner-buyer that works less than 30 hours a week. Ultimately, you cannot expect employees to have the same care and concern that you have as owner. Eventually, without a steady hand on the controls, the business will begin to falter.
- Make significant operating changes in the first year.
This happens very often: Old owner sells medium-grade widgets. New owner reviews the widget catalogue and realizes that the margins are much greater on high-grade widgets. Therefore, he slowly transitions to high-grade widgets. It seems to make sense because even if sales were to slow down, he would make up the lost sales in higher margin. However, the reality is that the old owner probably sold the medium-grade widgets for a reason. Maybe they were more durable or the customers had an affinity for that grade or brand widget. The truth is that the new owner is just too inexperienced to make any significant operating changes in the first year. The business was operated profitably using a certain paradigm. The new owner is no more qualified to make substantive changes in operation than a new salesperson or a new stock clerk. The difference is that the new owner just happens to own the business. This section is addressing changes as small as changing the price of cokes in the break room. You will be tempted to make changes, just don’t do it! Don’t reorganize the work force. Don’t change the commission structure. Don’t retool the employer’s manual. Just don’t do it. Wait. Observe. Learn. The prior ownership was successful for a reason. Don’t make any changes for a year. You will be glad you did.
A business acquisition can be a great way to get into a business or expand an existing business. Avoid the above factors that can lead to failure and enjoy the benefits of being an entrepreneur.
Jeff is President of Certified Appraisers, Inc. and Advanced Business Brokers, Inc. 10500 Northwest Frwy., Suite 200, Houston, TX 77092, (713) 680-3290, email@example.com