One parental responsibility no one told me about was the duty to investigate weird smells.
As soon as I walked into our garage, I knew something was off. There was a new smell. It wasn’t overpowering, but it was there, and it was not right. I looked around and saw a karaoke machine plugged into the wall. Kids wanted to sing along with Taylor Swift. Not the problem. Then I looked to the right and saw the freezer that the kids had unplugged so they could power the karaoke machine.
I knew you were trouble when I walked in, I thought.
If you’re buying a business, you must train your senses in a similar way to investigate when things don’t smell right. You should be looking for surprises – both happy and, well, nasty – along the way to your close date and beyond.
Buying a business is hard enough. Buying a business without investigating suspicious smells can be catastrophic. Here are a few questions to ask as you go through a business purchase:
Why does the business owner want to sell? This doesn’t have to be a “bad smell”, but if you don’t hear that they’ve done their exit readiness, you may rightly assume they are fleeing from something. Keep sniffing.
Does a significant percentage of sales come from one customer or group? If they fire you or somehow no longer need the service the business provides, what was the value of what you just bought?
Does the company have any outstanding legal issues? Especially if you are engaged in a stock sale, you need to know if the seller’s company is trying to make their legal liabilities your legal liabilities.
What is the employee turnover like? Some turnover is good. A lot of turnover, especially recent turnover, can point to existential problems inside the company.
What is key employee longevity like? Have there been any recent changes in ownership or management structure? If so, what are the reasons for this? Are the key employees folks you want to keep around if and when you buy the business? Will they want to stay with you?
What is their process/documentation like? How easy (or hard) will it be for you to a) continue to operate the business with current successful practices, b) replace departing employees and train new ones, and c) make enhancements to existing processes? If nothing is written down or systematized, what are you actually buying?
What intellectual capital will leave if and when the current owner leaves? And do you have a plan to capture that knowledge before it walks out the door?
Do audited financial statements make sense to your outside CPA firm? Can you and your accountant tell what’s truly happening in the financials of the business? Are there unexplained expenses, losses, revenues…
What's the company reputation like? With suppliers? With customers? With the community and general? This is especially important if you plan to retain some of the branding.
How dependent is the business on current market trends? Is the recent success of the business more easily explained by market trends then by the success of the business on its own? Think about tech companies in 1999. The rising tide was raising all ships. Then the tide went out, and as the saying goes, “we found out who was swimming naked.” Make sure you're buying a successful business and not buying a market peak.
Buying a business can be a tremendous opportunity, and if you have your senses trained, the ensuing growth can be impressive. And if something doesn’t “smell right” as you do your diligence, you can walk away.
Any opinions are those of Timothy Weddle and not necessarily those of Raymond James. The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Exit Planning.
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