The J-Curve: Why Income Dips Before It Rises (And How to Survive It)

I know there's some joke about writing a good hook and the letter J, but I can't find it. My wife and I bought a house last summer. As far as I could tell, I did everything right during the process. I went through the inspections, completed the due diligence, negotiated the price, and even ended up with a tractor getting thrown into the deal (John Deere 2210 for the folks who are wondering). When I closed on the house, I felt the relief and happiness associated with closing a big deal. Then, a few weeks after we moved in, the basement flooded. Nobody was at fault. The previous owner wasn’t hiding anything. It just happened, the way things tend to happen whenever there’s a lot on the line. To be honest, it might have had something to do with my toddlers flushing wipes down the drain… we’ll never know. Buying a business seems to work the same way. No matter how thorough your due diligence or how clean the financials look during the process, there is almost always a period right after the acquisition where things start to look ugly or just straight-up break. This is what we call the J-curve. While it’s certainly no fun, it isn’t necessarily a sign that you made a bad deal. It’s really just a natural side effect of a massive transition for the business. Understanding why the J-curve happens is the first step toward surviving it and, more importantly, shortening it. I’ll talk about four areas where I see the J-curve playing out. Sales As anybody in the ETA world can tell you, things don’t always go as planned. When you acquire a business, you inherit the seller’s sales pipeline on paper, but you likely won’t inherit all of it. A meaningful percentage of those leads are probably planning on calling the previous owner’s personal cell phone directly. It wasn’t your business card being handed out. Unless you specifically negotiated for call forwarding or a structured handoff period in your LOI, those calls won’t automatically reroute to you. So from the very beginning, your opportunity volume is lower than what the historical numbers might have suggested. Beyond that, you’ll likely have a worse closing rate than the previous owner because you’ll still be learning the lingo. When you think about it as a formula (total sales = opportunities * close rate * price), it becomes clear how quickly revenue can fall when two of the variables are dropping. Processes Every business runs on a set of processes that the previous owner developed and refined over time. Typically, those processes worked because they were built around that person’s strengths, preferences, and habits. If you can think back to whenever you had a substitute teacher take over a class, I’m sure you’ll get the picture. Rather than working on your multiplication tables, you’re pledging allegiance to the band of Mr. Schneebly. When you step in, you’re not going to run the business the same way, nor should you. But it takes time to figure out what to change and how to change it. As you start tweaking workflows and changing SOPs, things will slow down before they speed back up. That slowdown has a real cost that shows up in the numbers. Team Most employees have thought about what their next opportunity might look like. Whenever there is a significant change, this question will only get asked more often. After an acquisition, the employee no longer knows the owner. Even if the last owner wasn’t great, the “better the devil you know” rule would still apply. Some employees will give you the benefit of the doubt and grow into some of your most valuable people. But as some employees choose to leave, you’ll be at risk of losing someone with a store of institutional knowledge. Rebuilding that gap in continuity takes time and money to close. Clients In small businesses especially, clients aren’t always loyal to the company. A lot of times, they’re loyal to the specific person who built it and ran it. These clients will hire the business because they trusted the owner, and they will stay because of a years-long, working relationship. When ownership changes, some of those clients will understandably want to move on. Depending on how the cookie crumbles, it could be a few of your top accounts that shrink or disappear soon after the acquisition. There’s not much you can do to prevent this, unfortunately. But there are some things you can do to shorten the J-curve. Shortening the J-Curve The J-curve is a transition cost that, like most costs, can be managed and reduced with the right preparation. The buyers who navigate it most efficiently are the ones who enter ownership with this understanding (and don’t listen to Brad Evilbroker). They know they need to address the changes in the four areas I just talked about (plus one): learning how to sell in this specific business, leading this particular team, improving these existing processes, communicating their value clearly to clients who didn’t choose them Having enough cash in the bank to prepare your business for this transition phase. That kind of preparation takes place far in advance of the actual ownership of the business. Being prepared is exactly what our firm, QOE Prep, is designed for. If you’re in the process of acquiring a business and you’re not feeling prepared for things like the J-curve, reach out and let’s talk. redacted Link to ETA newsletter in comments