Buying a business is easy. Running a business is hard.

With enough Due Diligence you can avoid the most obvious pitfalls - but challenges will always pop up post-acquisition. Some of them can be detrimental to your business.

From managing the transition with the seller, to integrating new systems and people, many potential pitfalls can completely capsize your acquisition.

Here's a look at the most common challenges searchers face post-acquisition, and how to best avoid them.

1. Seller-Related Issues

A lot of post-acquisition pitfalls come from not having understood the role of the seller completely. They will always try to paint as bright a picture as possible about their business - and it's up to you find the hidden bodies. Here are a few of the most common ones:

- Dishonesty: Sellers have an incentive to misrepresent their business. The most common areas of misrepresentation are; financials, inventory, or their involvement in the business. All these items can lead to nasty surprises post-acquisition. For example, it’s quite common for a seller to understate their involvement in the business. They may claim to only work 5 hours/week, but if those 5 hours include playing golf with your biggest client, you may have a problem.

- Interference: Even after the sale, some sellers may violate non-compete agreements or badmouth the new ownership to stakeholders. The truth is, it’s hard to let go of your baby. You may find that a seller isn’t happy with the way you’re taking their company and start badmouthing you to customers or even employees. They may also simply set up shop in a different part of town and start stealing your customers. After all, they’ve already built one HVAC-company. Chances are they are pretty good at building another one. Get a non-compete in place!

- Unintentional misinformation: Not all inaccuracies are because of dishonesty. Some sellers genuinely believe their numbers are accurate but lack the skills to provide truly reliable data. It’s quite common in smaller businesses to not have complete financial records. It could very well be that 50% of revenue comes from one customer, and that customer is 65 years old and about to retire. Always do your best to verify incomplete information in whatever way possible. Get creative!

PRO TIP: You’ll never buy a business if you constantly mistrust the sellers. The key term here is "trust, but verify". Always verify the seller's claims with your own due diligence. The more information you can independently verify, the fewer surprises you'll face later on.

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A normal DD leans heavily towards financials, so a lot of pitfalls can be avoided through the normal process - but here are few things to look for outside of the ordinary.

- Working capital shortfalls: Many buyers underestimate cash flow needs for growth and operations. Always plan for more working capital than you think you'll need. Read up on working capital true-ups and how they work - and define the terms before you buy the business.

- Revenue sustainability concerns: Overvaluing "bluebird" sales that may not be repeatable, and failing to account for product portfolio changes when projecting future revenue. A bluebird sale is sales jargon for a lucrative sale that you come across without much effort. For example, the new sales guy’s uncle may run the biggest office building in town and you get the contract to take care of their janitorial needs. It’s a great sale - but it isn’t repeatable or predictable. If the sales guy quits, so do your biggest customer. Always verify that customer acquisition is repeatable and predictable (i.e. there’s an actual acquisition system in place)!

- Short-term performance dips: Expect potential revenue declines and cost increases in the first few months. A “J-Curve” is something that is talked about in Private Equity. Simply said, it means that a fund may dip significantly during the first period of acquisitions, in order to shoot up in value once the acquisition strategy has been completed and value levers have been activated. For a smaller acquisition, the J-Curve can be a very real threat, since it may affect your ability to service your loan. Always expect revenue to dip during a transition-period of 6-12 months after the acquisition and don’t over-leverage yourself to a point where you can’t service your loan if there’s a potential dip.

- Operational blind spots: New owners, especially those lacking industry experience, may miss critical issues during due diligence. Every industry has its specific quirks and insider-knowledge. Things that only a true industry-veteran would know. Access to this knowledge is often what makes the difference between a great margin and an average one. This knowledge could sit anywhere from the sales team to the tradesman performing the job. Consulting a Riverguide (someone with deep industry knowledge) is always a good idea before buying a business in a field where you have limited experience.

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People and culture will be one of your biggest obstacles to overcome. Change is hard, and the most common reason new CEOs fail is trying to do too much too soon. Here are some of the most common obstacles new leaders face when it comes to personnel and culture.

- Cultural integration: Merging new leadership styles with the existing company culture is a delicate process. Understanding and bridging cultural differences is key. A good rule of thumb for the first 6-12 months after buying a business is don’t f*ck with the employees. You don’t know whose uncle runs the biggest office building in town, or if the front desk person is not only answering the phones but also maintaining the website. The best way to build culture is to only implement life-improvement changes. Things like making sure people always get paid in time, or finally updating that invoicing system that everybody hates. Basically, look for easy wins that can earn you some goodwill.

- Employee retention: Keeping key staff can be a major hurdle, especially if they were close to the previous owner. Again, don’t f*ck with the employees. They know the business better than you, and you need them to stick around.

- Hiring challenges: Finding new talent that fits the evolving company culture is often harder than anticipated. Hiring is always challenging, and especially when you’re the new owner. Try to hold off on hiring until you’re sure you know the current workforce and culture well enough. If that’s not an option, you should hire for where you want to take the company and not for where it’s been before.

- Change management: Employees may resist new processes or leadership styles. Be prepared for some pushback and potential turnover.

- Identifying key personnel: You may find that some employees aren’t a good fit for the evolving culture and operations. It's critical to identify these situations within the first 6-12 months and take action to avoid prolonged issues. Again, don’t make any drastic changes - but put all your efforts into truly getting to know the workforce. You will have to make personnel changes eventually, since your ambitions are different from the previous owner’s - but be careful with whom you replace.

- Partnership dynamics: If the acquisition was made with co-investors or partners, failed partnerships can exacerbate challenges. Forced partnerships, particularly those without a strong pre-existing relationship, often lead to conflicts and eventual dissolution.

PRO TIP: Every company has hidden key employees. Things that you can’t identify from an org chart. For example, in a tech company, it may turn out that one engineer is responsible for 80% of the code and if they leave, the whole frontend falls apart. Well, you better figure out who that person is and make sure there are redundancies in case they leave.

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The former owner being too close to customers and suppliers is a major red flag. Here's a closer look.

- Customer relationships: Often more tied to the previous owner than anticipated. This is one of the most downplayed issues from the owner’s side. Of course they all want you to think that the business is totally independent from their involvement - but more often than not, they’re more involved with customers than they may even realize themselves. Consider adding a transition period where you shadow the owner and take time to solidify the connections yourself.

- Vendor relationships: Key suppliers may need reassurance or renegotiation under new ownership. The main thing to watch for here is getting taken for a ride by suppliers who are trying to make a quick buck from the new owner. Make sure solid contracts are in place before buying the business.

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This is a common pitfall when a searcher's previous experience is with a larger organization; expecting things in a smaller business to be organized and systemized. Hint: They won't be.

- Lack of robust systems: Smaller businesses often require significant investment in new tools and processes in order to grow the way you want them to. It’s not uncommon for a front desk person to also do the bookkeeping, or for the sales team to keep their own rolodex of their main contacts, with no CRM in sight. You’ll face pushback in implementing every single new system - but it’s a necessity if you want to take the business to the next level.

- Unrealistic expectations: Buyers sometimes expect large-company systems in a small-business environment. This simply won’t be the case. If you come from a large-corp financial institution or similar background, you’ll be surprised to find that your newly acquired carpet cleaning business still runs their A/R with pen and paper, or that Bob the Salesguy has 8 unpaid IOU’s from 2012 in his desk drawer.

PRO TIP: Assess the tech stack (if there is one) early. Basic changes like updating outdated tools can have a big impact on efficiency and employee morale - either increasing or decreasing productivity.

Navigating Post-Integration Challenges

1. Due Diligence Best Practices

A lot of post-acquisition pitfalls can be avoided by doing the work pre-acquisition. Here are some things to look for during the Due Diligence process.

- Seek industry-specific mentors or advisors to help identify potential blind spots, particularly those that arise from not knowing what you don’t know. In traditional search they’re called Riverguides - people who can help you navigate the intricacies of a specific industry. Try to consult with a couple before you buy a business - it will save you a lot of headaches down the line.

- Conduct thorough customer and vendor interviews to gauge relationship strength. In whatever capacity possible, this should be done before buying the business. The owner will often gatekeep this interaction - but if you can’t talk to customers directly, try to access as many old invoices and customer records as possible.

- Avoid "deal advocacy": Look, it’s hard to keep your standards up when you’re 15 months into your search and you’re running out of downpayment capital and your spouse tells your in-laws that you’re wasting your life away. But the best protection you have against making a bad acquisition is to make a great one. Your framework is good, and it should be hard to find a good business. During due diligence, it's important to maintain objectivity and avoid the mindset of a "deal advocate" who may end up overselling the business to investors (or to yourself). This scenario has led to many failed acquisitions, with issues only surfacing post-acquisition.

PRO TIP: Before an acquisition, put yourself through the customer's journey—look at things like marketing, customer service, and reviews. Go through their sales funnel and take note of any inconsistencies or gaps. If you don’t see a clear path through the funnel - that’s a major red flag.

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Here are some general integration strategies that many searchers have found helpful.

- Hire an integration consultant (like me!), if you haven’t done the work yourself before - or if you’re planning on hiring a GM/Operator. I’ll work alongside you (or your GM) for 6-12 months to make sure you have systems and processes in place to take your business to the next level.

- Bring in specific functional experts (e.g., accounting, IT) on an as-needed basis. So we’ve decided don’t f*ck with the employees for the first 6-12 months. Well, you still need to get stuff done. Bookkeeping and accounting shouldn’t be handled by the front desk person. Consider temporarily (or permanently) outsourcing it to an expert.

- Set the tone for the new culture early, but be prepared for some pushback. The goal should be to establish the new culture while maintaining balance between stability and performance. Quality-of-life improvements like replacing an invoicing system that everybody hates should be priority.

PRO TIP: Be visible and communicate clearly with your new team. Let them know what to expect from the transition—change is less frightening when people know what’s coming. In the maritime industry, people are taught to always provide as much information as possible in case of an emergency. If people know what’s going on, they’re more likely to make rational decisions.

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Financial management is a completely whole chapter on its own. It's the lifeblood of the business and is critically important. These are just two examples of often overlooked post-acquisition issues:

- Plan for more working capital than you think you'll need to ensure smooth operations, particularly during the initial growth phase.

- Be prepared for a potential "J-curve" in financial performance during the first year, with revenue declines and cost increases.

PRO TIP: Build a worst-case scenario plan for working capital. It's better to have more cash than needed rather than be caught off-guard.

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Here's where most new leaders fail. Mainly, trying to do too much too soon. Please, do not make this mistake. The business has functioned for###-###-#### years without you (that's why you bought it). Let it run for another 6-12 months before you make any major changes.

- Avoid coming in with a "know-it-all" attitude, especially if you lack industry experience. Never buy a business with an attitude that; they don’t know what they’re doing. I assure you they do. They may not be as tech- or marketing-savvy as you are, but chances are they have run a profitable business for 20+ years and only a tiny fraction of businesses ever make it that far.

- Take time to understand the existing culture before making sweeping changes to avoid alienating key employees. Say it with me.. Don’t f*.... employees.

- Identify key employees quickly and work to secure their buy-in. Go beyond the org-chart. It won’t tell you the whole picture. You need to understand the inner workings of the company and who does what. Once you’ve identified key employees, you need to build redundancies and documentation so that the business survives if they leave.

- Expect team adjustments as the company transitions to new ownership. Some employees may leave, and new hires will be needed to align with the evolving company culture. A hiring plan should be part of your first integration efforts. They must align with the culture, but also be able to operate at a level of where you want to take the company. The hiring plan doesn’t have to include specific roles - but it should outline what is important culture-wise and ambition-wise in the people you’ll be looking for.

- Transparency and accountability: CEOs must prioritize transparency, especially during tough times. Hiding issues from employees, investors or the board (if there is one) can lead to severe trust erosion and ultimately to CEO replacement.

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Post-acquisition integration and operations are challenging, but by understanding the common pitfalls and preparing accordingly, you can set the business up for success.

Focus on due diligence, relationship building, cultural integration, and financial management. The goal is not only to solve problems but also to uncover opportunities for growth.

Need help? I help searchers find, train, and integrate GM’s and Operators - and make sure they’re aligned with where you want to take your new acquisition. Learn more at services.nextleveloperator.com