Buying a Business in 90 Days: Lessons from a Quick Acquisition

The 90-Day Business Acquisition: A Case Study

In the world of business acquisitions, the idea of buying a company in just 90 days may seem like a pipe dream. However, it is possible - but it comes with its own set of challenges and potential pitfalls. Today, we'll examine a real-life case study of a couple who managed to purchase a garage door service and installation business in just three months, and the valuable lessons we can learn from their experience.

The Story of Britney and Her Husband

Britney and her husband were experienced small business owners, having run a successful real estate management company for over a decade. After bootstrapping their way through the first five years, they had established a well-oiled machine that required only about five hours of work per week from Britney.

Inspired by a podcast about entrepreneurship through acquisition, Britney became excited about the idea of buying another business. Within 90 days of hearing this podcast, they were under contract to purchase a garage door service and installation company.

The Deal Structure

The business they acquired had the following characteristics:

• Revenue: Approximately $2 million
• Seller's Discretionary Earnings (SDE): $350,000
• Purchase Price: Just under $1 million (about 3x SDE)
• Deal Structure:
  • 5% down payment
  • 5% seller standby
  • 50% SBA loan
  • 40% seller note

Key Takeaways from the Acquisition

1. Understanding the Industry is Crucial

Despite their experience in real estate management, Britney and her husband found themselves in unfamiliar territory with the garage door business. They faced unexpected challenges related to:

• Cost of goods sold
• Labor and equipment margins
• Business culture differences
• Seasonality of the business

Lesson: Before acquiring a business, gain deep industry knowledge or consider working in the industry first.

2. The Importance of Physical Due Diligence

The couple underestimated the need for operating capital and faced issues with deferred maintenance on trucks and equipment. They didn't conduct thorough physical due diligence, which could have included:

• Inspecting machines and vehicles
• Getting professional mechanic reports
• Analyzing maintenance records and expenses

Lesson: Always conduct thorough physical due diligence, especially for businesses with significant equipment or vehicle assets.

3. The Necessity of a Detailed Cash Flow Forecast

Britney and her husband were caught off guard by the seasonality of the business and the differences in cash flow compared to their property management experience. They didn't create a detailed, month-by-month cash flow forecast based on historical data.

Lesson: Develop a comprehensive cash flow forecast using monthly historical data to anticipate seasonal fluctuations and cash needs.

4. Setting Realistic Post-Acquisition Expectations

The couple approached the acquisition with a startup mindset, expecting to work hard without immediate returns. However, this approach isn't ideal for a business acquisition, where the buyer should be able to see immediate returns on their investment.

Lesson: Set realistic expectations for post-acquisition performance, including the ability to take a salary and service debt from day one.

5. The Danger of Overpaying

The purchase price of approximately 3x SDE appears to be higher than industry norms for similar businesses. Research suggests that garage door businesses in this size range typically sell for closer to 2-2.25x SDE.

Lesson: Conduct thorough market research and get professional valuation advice to avoid overpaying for a business.

6. The Value of Professional Guidance

While the couple had help from an accountant and lawyer, they didn't seek specialized advice on business valuation and acquisition strategy.

Lesson: Engage experienced advisors who specialize in business acquisitions to guide you through the process and help you avoid common pitfalls.

Strategies for a Successful Business Acquisition

1. Thorough Industry Research

Before considering an acquisition in a new industry:

• Study industry reports and trends
• Attend industry conferences and trade shows
• Network with industry professionals
• Consider working in the industry for a period of time

2. Comprehensive Due Diligence

Develop a due diligence checklist that includes:

• Financial analysis
• Legal review
• Operational assessment
• Market analysis
• Customer and supplier relationships
• Employee interviews
• Physical asset inspection

3. Detailed Financial Modeling

Create a comprehensive financial model that includes:

• Monthly cash flow projections for at least 3 years
• Sensitivity analysis for different scenarios
• Debt service coverage ratios
• Working capital requirements
• Capital expenditure forecasts

4. Realistic Valuation

Use multiple valuation methods, including:

• Comparable company analysis
• Precedent transaction analysis
• Discounted cash flow analysis
• Asset-based valuation

Consider engaging a professional business appraiser for an objective valuation.

5. Negotiation Strategy

Develop a clear negotiation strategy that addresses:

• Purchase price and structure
• Seller financing terms
• Working capital adjustments
• Representations and warranties
• Indemnification provisions
• Transition services

6. Post-Acquisition Planning

Prepare a detailed post-acquisition plan that covers:

• Day 1 priorities
• First 100 days action plan
• Communication strategy for employees, customers, and suppliers
• Integration of systems and processes
• Key performance indicators to track

Conclusion

The story of Britney and her husband's rapid business acquisition serves as both an inspiration and a cautionary tale. While it's possible to buy a business quickly, doing so without proper preparation and guidance can lead to significant challenges.

By learning from their experience and implementing the strategies outlined above, aspiring business buyers can increase their chances of success. Remember, a successful acquisition is not just about closing the deal quickly - it's about ensuring that the business you buy is the right fit, at the right price, and with the right structure to support your long-term goals.

Whether you're a first-time buyer or an experienced entrepreneur looking to expand, take the time to do your homework, seek professional advice, and approach the acquisition process with patience and diligence. The rewards of a well-executed business acquisition can be substantial, but only if you're willing to put in the work to get it right.

Article created from: https://www.youtube.com/watch?v=uN8pZ5cCcic