2nd deal one year on - lessons learned - 1st time acquirors take note
May 03, 2023
by a searcher in Alpharetta, GA, USA
This is my first post on SF (other than responses to others) but I think it's worth sharing. Back story: I had 20 years Wall Street experience in i-banking and sales/trading. A self funded search commenced in 2018 led to me acquiring a specialty cleaning business in###-###-#### That deal was a home run - I got a fantastic business for a good price and despite some bumps in###-###-#### we clean new commercial construction so were negatively impacted by Covid delays) it's been extremely profitable and overall a big success.
Fast forward to late 2021, feeling restless and bored, I found a commercial maintenance cleaning business for sale, smaller (about 1/3 of the revenue of my first deal) and on the opposite side of town (1.5 drive through downtown Atlanta traffic) that had been growing rapidly, and sure, maybe it did have some customer concentration> Oh and had no operations manager in place.
Red flags much??
Undaunted I pressed on. I added back a bunch of SG&A costs I knew I could take out (no salary for me, no office/admin, etc) and I had it as a steal at 2.5x cash flows. When the seller wanted an earnout because of growth, I rationalized it as still cheap given the strong growth. When my lender came back with a business appraisal $100,000 below the original LOI price I pushed back on that lender, and got their appraisal value up, while also agreeing to write a bigger equity check.
Can anyone see where this is going? Some of you definitely can.
Don't ever fall in love with a business!!! I should have known better, I DID know better, yet....
Lessons learned the hard way are less easily unlearned. I paid for my education dearly - here are the takeaways:
1 - Don't ever - EVER - buy a service business that doesn't have a trained and experienced operations manager in place (and get a non-compete signed). My attempts to train one (and then another, and then another) of the "good" cleaners to be manager ended in abject failure, hours spent on the phone dealing with drama, pissed off customers, texts by the hundreds. The skill set to manage is different than the skill set to be a production worker, and anyone who is promoted above their peers is likely to immediately become arrogant and lord it over their peers, ask for more $$, etc etc etc.
2 - think very long and hard about buying a business located more than an hour from where you live - especially if you already own a business that takes a lot of your time. Post covid traffic in the ATL is worse than it was in 2019, and dealing with it created such a sense of aversion that I destroyed significant value just by neglect.
3 - if you buy a fast-growing business (don't!) you need to understand very well what is driving growth. In my case it was (i) Covid cleaning and (ii) owner/seller extremely involved and hands-on. We lost about 25% of our revenue (most of that was due to Covid cleaning cutbacks) within 6 months of closing, and while we've added some new customers and are growing, we are still below trend. The seller flat out lied to me about how much time she spent on growth but also on doing cleaning every day, but I should have been more skeptical.
4 - if the seller comes in at the 11th hour asking for more $$ AND your lender values the business lower, either stick to the original lower price or walk away. If I could put this business back to the seller at the deal price I would do it in a heartbeat. Instead I'm now stuck making addl monthly earnout payments for the next year.
I'm sure this story is familiar to many on SF, but it does have a happy ending. I hired a manager who is doing a great job, gets a perpetual 20% of gross margin on all new customers that he brings in, is aligned with me and has eliminated my day to day stress. Even with the loss of business and higher SBA loan service, we are still cash flow positive and adding customers. And the lost revenue got me laser focused on marketing, which is going to pay big dividends down the road.
Most importantly, I learned a few lessons which will come to bear on my next deal, and the next one and the next one.
from Harvard University in Toronto, ON, Canada
Be slow, but be sure what you are doing. Check, watch, ask questions to seller, to industry specialist, to forums such as this. We kicked out a deal last year after 8 months of back and forth because parties tried hard to negotiate that the 50% increased revenue and ebidta was "organic" revenue during covid cleaning. I did not even take deal for underwriting, i declined to do dd unless I get every piece of documents I asked for. Once I got the documents (After 8 months), it was a cake walk to prove that the revenue was 50% higher because of Covid the ebidta was 50% higher too. Once normalized the business cannot even pay its own debt services forget about real estate. Owner still believed he can get (basically fool someone else) the price based on bloated ebidta we showed him out.
You cannot close a deal in 30 days
You may think you are experienced and will be the best CEO but you are not (at this time the seller is most experienced in this business, the broker is most experienced in playing you)
You cannot fall for TTM
You cannot pay 4X for a market doing 5X to larger platforms
You cannot buy a business whose name/IP is compromised with other brands
You cannot let broker/seller push you on valuation
You cannot fall in love with the business, lower your vetting skills
Just move to the NEXT dont waste your time
from Harvard University in Boise, ID, USA
Even still, no Ops manager is place so maybe it’s a “no go” either way.