BY: Jeffrey D. Jones, ASA, CBA, CBI
In Part 1, Part 2, and Part 3 of this series of articles, I discussed 9 of the twelve factors that 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, (3) replace key employees, (4) refuse training from the old owner, (5) absentee ownership, (6) make significant operating changes in the first year, (7) purchase expensive and modern equipment to replace old, outdated equipment, (8) under estimated the amount of working capital needed to operate the business, (9) allow your ego to make all the decisions, or put “your stamp” on the business. 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 to develop a relationship with the vendors
If you have vendors, then you do have a steady supply of inventory or supplies. Without those things, you cannot stay in business. Get to know your vendors. Find out their policy on extending credit and for shipping product. Find out who the key contacts are at each major vendor. Make sure those people know who you are and how to get in touch with you if there is a problem. Do not allow the relationships with vendors to deteriorate. It is just too costly in the end.
- Hire your friends and family to help run the business.
Employees are very smart. Typically, they have more experience in the industry than you do. So when you hire your brother-in-law to run the warehouse, you made an enemy out of every other employee. Particularly when the newest employee-family member is hired to supervise key employees. It has never worked. It will never work. If friends or family are hired in they must start at the bottom, like everyone else. You must be fair in your hiring. Not for legal reasons, but for morale reasons. The employees must know that you are a fair person who is not running the business as a country club for your close associates. Otherwise, they will feel their hard work is for nothing.
- Partners/shareholders fall out
It is not uncommon for 2 or more people to put their money and skills together to acquire an existing business. Then a few months later, otherwise good friends have a falling out due to issues such as who manages the business, lack of a complete understanding of job functions, and division of salary and profits. There are two critical documents that are needed whenever there are partners/shareholders. First, you should have a Shareholder/Partnership Agreement that spells out the functions of each shareholder/partner regarding job junctions, division of profits, distribution of dividends, and repayment of invested funds. Second, is a Buy/Sell Agreement that will specify the terms and conditions under what I call the “4 D’s” (divorce, death, disability, and dissolution. Most everyone is happy following an acquisition, but months later, issues come up that were not addressed up front. The Shareholders/Partners then are unable to adequately resolve the issues and end up in Court and/or cause the business to fail. Had there been a Shareholder/Partnership Agreement and Buy/Sell Agreement in place, most all of these issues could have been avoided.
Jeff is President of Certified Appraisers, Inc. and Advanced Business Brokers, Inc. 10500 Northwest Frwy., Suite 200, Houston, TX 77092, (713) 680-3290, firstname.lastname@example.org