Biggest reasons for lower than expected cashflow in Year 1
October 21, 2023
by a searcher in Petaluma, CA, USA
I have heard repeatedly that many/most buyers are disappointed in cash flow in the first year or two after acquisition.
What are the most common reasons for this? Specifically, what are buyers missing in these cases?
Some that I can imagine:
1. Attrition of key employees leads to lower business performance
2. Customer acquisition (or revenue generation) was more dependent on the owner than the buyer realized
3. Buyer realizes that the business was understaffed at the time of sale
4. Buyer missed some material information during DD that triggers a decline (eg: a new competitor, a key contract is not renewed .etc..)
5. Buyer did not consider the full impact of taxes or interest rate changes in projected cashflow
What's real?
from California State University, Long Beach in Las Vegas, NV, USA
We acquired our business about five months ago, and what we learned is this:
Do not take the word of the sellers on the amount of hours they work, literally anything regarding their role in the different aspects of the business, or how handy they may be if there’s equipment or vehicles that need to be fixed because they’ll either unconsciously or consciously underestimate it.
Consider all the ways that the owner can manipulate any and everything related to cash. If the business is paid in cash or pays in cash there’s multiple ways to easily manipulate the #s.
Research insurance to get an understanding of what it may cost you as the new owner because if the current/previous owner has had minimal claims and a pretty clean record, cost of insurance for a new owner could be significantly higher.
Hope this helps!
from California State University, Sacramento in Seattle, WA, USA
All of your points are REAL.
And, it's not just about what you missed in diligence. It's also about the fact that growing the company takes money. You need to hire people, you need to spend money on more equipment or more marketing. And often growth is delayed or much more muted in the first years due to a whole host of other things you didn't think about.
Doesn't mean SMB acquisition is over-rated. Just the opposite. SMB acquisition can be so rewarding and lead to real wealth building. When you go into this with a range of expectations and a good acquisition structure, you can get through the first few years of transition and set yourself up for a strong trajectory.