Let me tell you a little secret: buying a business sometimes doesn’t have to be conventional. It certainly wasn’t for me. I joined my current company as a partner and eventually took over the entire business a year later. Buying a company certainly can have its merits; here a few:
- Established customer base
- Easier financing
- Systems and processes
- Established employees
- Less risky than starting from scratch
Just keep in mind any of the above points can easily be negative for an existing business. For example, maybe the business doesn’t have strong systems and processes – mine certainly didn’t. If you’re looking at buying a business, whether conventionally or unconventionally, the first thing you need to do is evaluate the business as a whole and make a list of pros and cons. This also means digging into the financials.
And much more.
Here are 12 lessons I learned from buying a small business.
1. Adapt With The Market
The first lesson I learned was how important it was to move with the market. Our clients were no longer getting results with our old offering. This was because our previous business model was no longer relevant due to changes in the market and we had to adapt. This fundamentally meant shifting the business into new, uncharted territories where we hadn’t had success in the past.
2. Fire Quickly
By now, most of you have heard the mantra ‘hire slow, fire fast’. I can assure you that even after hearing it from many other entrepreneurs, you still won’t really grasp the importance of this until you’re actually in the trenches having to make these types of decisions. My mindset behind this was that I was the first one responsible for putting food on my team members’ tables. I didn’t want to hurt their families or put them in a bind.
The fact that we had to shift our business model meant to some people were no longer relevant to the company. My mistake? Trying to keep employees and shift them into new roles. What I didn’t understand was that I was actually doing them a huge disservice because I moved them to a role that wasn’t related to their core competency. Magnify that with a lack of training and disinterest in the new role and the result is lower productivity and morale.
Here’s a good example of how Netflix eventually made a job irrelevant by automating it (and what they had to do about it):
“One Netflix manager requested a PIP for a quality assurance engineer named Maria, who had been hired to help develop our streaming service. The technology was new, and it was evolving very quickly. Maria’s job was to find bugs. She was fast, intuitive, and hardworking. But in time we figured out how to automate the QA tests. Maria didn’t like automation and wasn’t particularly good at it. Her new boss (brought in to create a world-class automation tools team) told me he wanted to start a PIP with her.
I replied, “Why bother? We know how this will play out. You’ll write up objectives and deliverables for her to achieve, which she can’t, because she lacks the skills. Every Wednesday you’ll take time away from your real work to discuss (and document) her shortcomings. You won’t sleep on Tuesday nights, because you’ll know it will be an awful meeting, and the same will be true for her. After a few weeks there will be tears. This will go on for three months. The entire team will know. And at the end you’ll fire her. None of this will make any sense to her, because for five years she’s been consistently rewarded for being great at her job—a job that basically doesn’t exist anymore. Tell me again how Netflix benefits?
“Instead, let’s just tell the truth: Technology has changed, the company has changed, and Maria’s skills no longer apply. This won’t be a surprise to her: She’s been in the trenches, watching the work around her shift. Give her a great severance package—which, when she signs the documents, will dramatically reduce (if not eliminate) the chance of a lawsuit.” In my experience, people can handle anything as long as they’re told the truth—and this proved to be the case with Maria.”
Key Takeaway: you have to have the guts to fire quickly when you’re buying a small business. Not everyone has the heart to make drastic changes (especially when they first join); but it’s necessary.
3. Process, Process, Process
When I first joined the company, I found that there was a lack of process across the board. Performance reviews weren’t standardized, we didn’t know what people were doing on a weekly basis, the company had no formal goals, and the accounting process was disjointed. When it comes to growing a company, it’s all about establishing processes that people can follow.
Lack of processes is okay if you’re first starting out but it absolutely can’t happen if you’re buying an existing business with full-time employees. I recommend using Hackpad to document your processes when the time comes. It’s an internal wiki that we use and it’s been helpful in terms of onboarding and when people need to reference a specific process.
If you want an example of a process, you can learn more about our hiring funnel.
4. Can’t Have Too Many Chefs
As a result of not firing fast enough, I had a team of people that were originally in mid-level roles that were doing a job that they weren’t adept at. To make matters worse, I naturally had to have mid-level employees managing our new service offering. This meant that we had too many chefs and not enough cooks.
My unwillingness to let people go caused a cascading effect that produced results like this. Just a reminder that you better have courage to make the tough decisions.
5. It Takes Longer Than You Think
When I first joined the company, we projected that we would be able to be much healthier in terms of revenues in 3 months. Always be conservative with your projections because you never know what will happen. Nothing ever goes 100% according to plan. Things change.
Before I joined, I thought we needed to:
- Find a few new vendors to help us cut costs
- Trim some of the fat (inevitable because we were overstaffed)
- Assist with marketing for our publishing arm
When I joined, here’s what we REALLY needed:
- Sales support. We weren’t tracking conversion rates, sales activity, etc. There was little to no sales process. *facepalm*
- Operational support. Who was doing what? What were the company goals? Individual goals? Where was all of our documentation? Do we have any kind of KPI dashboard? (even a simple spreadsheet?)
- Financial support. We had someone helping part-time but needed more scrutiny on the numbers.
- To pivot from our original business model while maintain our clientele. This fundamentally meant starting a fresh new business.
- To trim A LOT more fat than I estimated.
So to recap, I had to pivot the company, worry about more staff cuts, and add processes that either weren’t present or needed significant adjustments.
Just remember: Nothing ever goes 100% according to plan. Things change. 🙂
6. You Are Responsible To The Company First
Whether you are an owner or a senior level manager, you feel some responsible for the people on your team. That’s natural. After all, you’re the one responsible for making sure they get what they need to be successful, promotions, etc.
I felt so responsible thatI at one point took out a loan to protect some of the team members’ salary when it actually didn’t make business sense to do so. But I felt personally responsible to them and their families. Who would put food on the table?
I’ll be the first to tell you that why it seemed like a valiant move, it was a stupid business decision because I put more unnecessary pressure on the company when the people in question were actually no longer a fit. The company comes first before anyone else.
As icing on the cake, one team member that I actually took out the loan for decided to try to poach someone else from the team IMMEDIATELY after finding a new job. What goes around, comes around right?
You’re responsible to the company first before anything else.
7. Entrepreneurial Organizations Help. A Lot.
I’ve talked about the benefits of joining great entrepreneurial organizations in the past because they simply help. To be able to get with a group of likeminded individuals from different industries and talk about your business and personal problems while maintaining confidentiality is therapeutic. Think of group therapy but for entrepreneurs. In Entrepreneur’s Organization, we follow a rule called the Gestalt Protocol that only allows us to share stories with each other instead of giving actual advice. This allows each entrepreneur to come up with their own action plan based on their own experiences.
I can speak from experience that Gestalt does have a significantly different effect than actual advice and it’s been helpful. That’s not to say that you can’t receive advice from your group (you can); just at other times.
From the group, I learned about strategic planning, cash flow forecasts, how to optimize my sales processes and more; things that would have taken me months or years to discover on my own. For me, the benefit has been undeniable.
Here are a few groups to look into:
- YEC (Young Entrepreneur’s Council)
- EO (Entrepreneur’s Organization)
- YPO (Young President’s Organization)
Here’s a more comprehensive list of entrepreneurial organizations.
8. Indecision Kills
We already talked about how devastating firing slow can be because the negative effects compound quickly. But indecision in other areas can be just as bad. If you’re too slow to move with the market, you’ll die. If you’re too slow to realize that one arm of your business is a cash killer, you’ll die. Even if you are wrong, making firm decisions is better than indecision because people will be more confident in your ability to lead. You’re definitely going to get some things wrong, but at least people won’t be confused. Moving back and forth ultimately leads to inaction and confusion; not the traits of a leader.
9. Every Company Is Different (just because you were at a great company before doesn’t mean everyone is going to work the same way)
I previously came from a company that was everything I could ask for:
- Great CEO
- A mission I believed in
- A great product
- A tremendous team. I can’t emphasize this enough. Every single person I worked with was top tier.
- World-class investors e.g. Kevin Rose (founder of Digg), Chamath Palihapitiya (founder of The Social + Capital Partnership, former VP of Growth at Facebook), Reid Hoffman (founder of LinkedIn), Mark Suster (Upfront Ventures)
Because I was so used to the previous world that I lived in, I had expectations (unrealistic) that things would be the same at this one. The fact of the matter is this: every single company is different.
The core values.
Just because something was done one way at another company doesn’t necessarily mean it’s going to work at your new company. You have to wipe the slate clean and start fresh. That means re-evaluating to see if you can carry a process you learned into the new company. Does it make sense? Do you have to sell it to the team? How long will it take to implement? How much will it cost?
10. Have A Banker, Accountant & Attorney
When you’re evaluating a business to purchase, you have to put together your ‘due diligence team’. They’ll help you verify all the relevant information that you’re taking a look at. Your team will help you dig into the numbers and spot things that you might have overlooked. Leave no stone unturned because sometimes the smallest things can come back and haunt you.
Having a due diligence team is necessary doesn’t free you from responsibilities completely though – you still need to talk to current and past customers and even look at the Better Business Bureau or Rip Off Report to get a better feel for the company’s reputation.
11. Document Everything & Keep It Safe
Here are a few things you want to keep handy after the purchase:
- Buyout agreement
- Any past agreements
- Tax returns for last 5 years
- Operating agreements
- Articles of incorporation
- Statement of information
- Financial statements for last 5 years
Keep the hard copies and store them in a safe area. I like to add a second layer where I store the documents in Dropbox (just in case).
12. Always Ask For More When Negotiating
When you’re negotiating the purchase of a business, always stack your demands sky high because the other side is going to try to negotiate you down. Do what you can to minimize downside/risk for the purchase. As an example, instead of taking your own cash to pay for the business you can negotiate to use the profits of the business to handle the buyout. To further mitigate the risk, you can add a clause saying that if the company fails, you will owe nothing else. It’s a tough sell, but hopefully this will get your creative juices flowing at the very least 🙂
15 Important Things To Check Off
Here are 15 important things you need to think about when taking over a company.
1. Marketing strategies and advertising costs
What types of marketing strategies worked/failed in the past? It’s important that you find out what the numbers were for each channel. What were the cost per acquisition numbers? How much was spent on average per channel? What types of creatives worked/didn’t work? What targeting worked out best? If you don’t find out this information ahead of time, you’ll be losing valuable time and energy.
2. Financial Records
This is when it’s smart to bring in an accountant to assist. Ask for financial records up to the last 5 years and compare the numbers/ratios with industry standards using reports from sites such as Dun & Bradstreet(www.dnb.com). Pull all P&L and balance sheet information; as well as any other pertinent data.
Make sure you check what state your company is registered in if it’s incorporated and whether it is operating as a foreign corporation within its own state.
4. Contracts & Legal documents
All partnerships, lease/purchase, subcontractor, sales contract, employee agreements and any other legal documents should be kept for safekeeping. If you have any doubts, bring in an attorney to help analyze the documents.
5. Sales records
Look for records of sales for the past 5 years and pay attention to each categories so you have a solid understanding of how the business performs. Compare the numbers to the industry and also analyze the top 10-20 accounts for the last year or two. You’re looking for rates (percentages) and patterns to help inform your decisions.
6. List of liabilities
Are there any liens against assets? Lawsuits? Any other claims? Bring in an attorney and accountant to help you sort this out. There could be legal ramifications if you don’t.
7. Reputation of the business
What are customers saying? Google [company] ‘scam’ and see what you come up with. If there are negative results on the Better Business Bureau and ripoffreport.com, dig deeper to see what the real story is. A negative image can be a liability and hurt overall business.
8. All accounts receivable and payable
Ask for a spreadsheet with all receivables/payables 90+ days beyond. For receivables, if a client is clearly taking advantage of you (e.g. not paying past 90 days), you should consider severing the relationship. Make a list of your ‘top 10’ clients for both sheets.
9. Seller-customer ties
Are there any customers with special ties to the seller. Is there a particular deal with a segment of customers that you might not be aware of. Will these customers continue to buy after the company is purchased?
Analyze all the current salaries and look for any inflated salaries. Also look for salaries for people that don’t play an active role for the company (e.g. relatives).
11. Location and market area
For online businesses, this isn’t such a big deal. For retail businesses, it’s all about location. Walk around the area yourself and survey the surrounding stores, the people, and your overall gut feeling about the place.
12. List of current employees and org chart
You must understand who is responsible for what and who reports to who. If available, ask for access to the internal wiki or documentation and audit the company processes.
Is the business insured properly? If so, what type of insurance is covered and what do the premiums cover?
14. Merchandise returns
What is the percentage of returns? Per product/service? How do the return rates compare to industry averages?
15. Customer patterns
Is the business seasonal? Do certain segments of customers prefer certain products? How are they broken out? Any type of learned patterns will speed your learning process up.
If you’re looking to purchase a business, sometimes you don’t have to go down the traditional route. I certainly didn’t.
In all respects, the type of business I stepped into was a fixer upper business. I’d even venture as far as to say that it isn’t a typical fixer upper, as defined by venture capitalists because we didn’t have any proprietary technologies we were developing. If you’re more interested as to how stepping into a fixer upper can be beneficial, read this post by venture capitalist Mark Suster.
Personally, I don’t regret my decision one bit to take on the challenges of turning this company around. We still have a long ways to go before I’m satisfied (it takes a lot to make me happy). The lessons I’ve learned have been invaluable and it’s tough to find learning opportunities like this.
Just remember, if you’re going to take over a company, there’s a good reason it’s up for grabs. And you know what you need to have? Look at the main image of this post.
I’m excited to see what’s next.
Disclaimer: As with any digital marketing campaign, your individual results may vary.