The “boom” in the number of Americans reaching retirement age is driving an increase in the number of small businesses being sold by owners wishing to retire. As a result of this trend, I and my fellow consultants at the University of Georgia Small Business Development Center (SBDC) work frequently with clients wanting our help in the acquisition of one of those small businesses.
I want to discuss three concepts that sometimes get overlooked or receive inadequate attention from buyers operating in “unfamiliar territory.”
In virtually all transfers of ownership of small companies, the buyer finances the transaction with borrowed money – banks, the seller and family members are common sources. Business loans of this kind require an equity injection (down payment) by the borrower, which leads to the topic of return on equity.
It’s natural for a first-time acquirer of a business, in the excitement of putting the deal together and completing the loan approval process, to stop their analysis once the loan commitments are received. However, that is the time to take a final hard look at the most important acquisition criterion – estimates of the 5-year and 10-year returns to the owners on their investment. You know the capital structure, you’ve made reasonable operating projections; so…what’s in it for you?
The process of conducting due diligence on an acquisition is analogous to the business planning process for a new business. Although in a way it appears simpler because the business is in existence and presumably has a successful track record, the process of verifying that track record can be complicated.
When combined with the necessity of being forward-looking as an acquirer – after all, you’re excited about how you’ll be able to grow your business – the task is a large one. I have seen many examples, though, when asking that one additional question unearthed an issue that would otherwise have been unknown until after the closing and which cast the opportunity in a meaningfully different light. Get professional help, and probe, probe, probe.
The third important but sometimes overlooked issue is existing employees. If a small business has several employees, especially employees of long standing, they’re probably nervous about the change in ownership. They’ll have a new boss, and they don’t know anything about you, your values, aspirations, vision or plans for the company (or for them). Every situation is unique, but my advice is to meet with everyone as a team to communicate your positive message about the future.
You should also meet with everyone individually to begin to build personal rapport. You want your vision and mission for the company to be well known to the team – they probably have some great ideas they can share with you as well, and at least some of them may be looking at the change in ownership as an opportunity to blossom personally. Take their “temperature” and create lines of communication you can use.
(Source: Peter Williams, Consultant, UGA SBDC in Macon)