After having spent 12 months as a “searcher” I finally got what every buyer dreams about: a company to call my own. The ink had not even dried on the purchase and sale documents when it struck me that transitioning from the search to actually running a business are two entirely different tasks.
The company I bought is a simple to understand business that conducts fire hose and related fire equipment testing for firehouses across the country. It was an honor to find a company that helps keep America’s heroes safe while on the job. What is not simple is the actual process of taking over the company — a process that requires a careful juggling of previous ownership, financing, and employees.
I’ve learned 4 important lessons since my purchase that may prove useful for soon to be business owners.
1. Settle on the right financing decisions from the right sources
Finding the right financing can be just as difficult as finding the right company. The best combination of debt to equity can be confused by the plethora of choices, such as SBA loans, seller financing, owner retentions, and partner splits.It is important to keep in mind that the cheapest source of funding may not always be the best option. An example of this is seller debt. Given today’s low interest rates, why would anyone decide to take on usually more expensive seller paper? The benefit of course is non-financial. By having the seller take a financial position in the company post-sale, the buyer is almost guaranteed that they will have the full cooperation of the seller to help if any issues arise. This may be worth more than any non-compete or consulting agreement between the parties.
Just as important is the flexibility of all the parties involved. Be sure to analyze both upside and downside revenue scenarios so everyone understands the risk and rewards. The downturn of only a few years ago hurt many companies as their revenues were hit hard yet banks still demanded payments. I spent many weeks sharing best case and worst case scenarios with each funding source and confirmed they will still be committed.
2. Be open with employees because they are the company’s greatest assets
The first day a new owner walks on the premises is the first day the acquisition should be announced to every employee. Afterwards, they will all have one question in mind: “what does this mean about my job?” In my company the employees are the most important asset to success and letting them know their jobs are safe is the first step in gaining their trust.
The second step is asking them what they liked, didn’t like, and what they would improve about the company today. The feedback was tremendously helpful. The best lesson I learned was that payroll checks could sometimes take too long to get to each worker. By figuring out a way to optimize the flow from hour entry to check in hand I made everyone a little bit happier.
Without that valuable input from my employees, I would have never known about this relatively easy-to-solve pain point. I learned that the transition of ownership for a company is a rare opportunity where management can make changes not hampered by tradition and employees can be critical in making sure those changes are for the better.
3. Heed the advice of previous management
You bought the company to improve it, that’s a given. However, do realize that the company is where it is today because of previous management. There is information contained in habitual routines and dialogues that usually can’t be gleaned during due diligence.
Something as simple as imitating the way in which previous ownership would talk to customers can give insights into how the company keeps its customers happy. Physically creating a script based on customer conversations will allow new ownership to analyze current protocols so they can be iterated on in the future. Not everything will make sense at first, but the best way to figure out what works and what doesn’t is to try it for yourself. I know I’ve been surprised many times by doing or saying things to customers that at first I thought wouldn’t work, but after seeing how they responded, I better understood the original reasoning and kept the original approach.During the negotiations, work out an appropriate transition timeline that allows you to gain the knowledge you need to successfully run the business.
4. Take it slow
Being at the top of the management hierarchy usually means being able to institute changes quickly. However, do not mistake quick with effective.While some changes should be made immediately, do not rush decisions without being fully informed or having the hands-on experience. My advice is to run the company as it has always been run for the first few months. As new ownership grows more confident, improvements can be made slowly over time.
For example, I would advise not to change the benefits package during the transition period. Such a change can cause unease in the company’s already anxious employees and it may result in the loss some of its best performers. Ease employees into the changes and you can reduce the probability for a mutiny.
For many companies the transitional phase can be difficult. The most important goal is not to lose the company’s momentum. Dealmakers should be aware that the acquisition is just the beginning of the journey for a new owner.