Buying Small: Lessons from Acquiring a Residential Technology Company

The Journey to Entrepreneurship Through Acquisition

Tim Ley's path to entrepreneurship through acquisition began during his MBA studies at Kellogg School of Management. A guest speaker, Doug Cook, shared his experience of leaving a successful career to buy a window business. This story resonated deeply with Tim, planting the seed for his own entrepreneurial journey.

After a successful career in finance, including roles on Wall Street and at the Federal Home Loan Bank, Tim felt drawn to entrepreneurship. The idea of controlling his own destiny and building something of his own kept calling to him. Years after hearing Doug Cook speak, Tim reached out and connected with him, receiving valuable mentorship and guidance on how to pursue entrepreneurship through acquisition.

The Search Process

Tim's search for a business to acquire had some key parameters:

• Location within 1.5-2 hours driving distance of Chicago
• Initially targeting businesses with $500k-$1M in seller's discretionary earnings (SDE)
• Open to various industries, looking for "dusty not rusty" businesses he could apply his energy to and accelerate

He worked with business brokers and searched online listings, but found the process inefficient. Tim then partnered with an M&A firm, Sun Acquisitions, to help with his search. This gave him more structure and expanded his deal flow.

Initially, Tim was very industry-agnostic in his search. He looked at diverse businesses like fence repair, garage doors, and event companies. However, his advisors at Sun Acquisitions encouraged him to narrow his focus. They helped Tim realize he needed to find an industry he would be passionate about long-term.

Discovering the Residential Technology Industry

Tim had always been interested in technology, and had some familiarity with the AV (audio-video) industry. When exploring potential industries with Sun Acquisitions, residential technology emerged as an exciting possibility.

The timing aligned perfectly with the onset of the COVID-19 pandemic. Tim realized that with more people working from home, there would likely be increased demand for home technology solutions like improved WiFi, home entertainment systems, and smart home features.

The residential technology industry, which had evolved from the traditional AV industry, presented several attractive qualities:

• Growing market, estimated at $20-30 billion
• Fragmented industry with many small players
• Increasing consumer demand for smart home solutions
• Opportunity to provide ongoing service and support to clients

Acquiring Home Run Technology

After narrowing his focus to the residential technology industry, Tim found and acquired Home Run Technology in February 2021. Key details of the acquisition:

• Revenue: $1.6 million
• SDE: $230,000
• Purchase price: Approximately $530,000 (2.3x SDE)
• Deal structure: SBA loan with 10% seller note

The business had been operating for about 15 years with steady revenue. It had established relationships and a solid referral network, which Tim saw as valuable assets.

Challenges of Buying Small

While acquiring a smaller business allowed Tim to get into entrepreneurship with less financial risk, it came with significant challenges:

Working Capital Constraints

One of the biggest issues Tim faced was managing working capital. The business had many projects in progress, making it difficult to understand the true cash position. Tim quickly burned through the initial $150,000 working capital line and had to invest additional personal funds to keep the business running.

Lack of Systems and Processes

As a small business, Home Run Technology lacked robust systems for project management, job costing, and performance tracking. This made it challenging to understand true project profitability and manage the growing business effectively.

Wearing Many Hats

In a small business, the owner must handle many different roles. Tim found himself involved in everything from sales to installations to customer support. While this provided valuable hands-on experience, it was also extremely demanding.

Managing Rapid Growth

The business experienced strong growth immediately after the acquisition. While positive, this rapid growth strained resources and systems, making it difficult to maintain quality and profitability.

Cultural Challenges

Implementing changes in a small organization can have outsized impacts on culture and morale. Tim learned that the pace of change needs to be carefully managed to avoid losing valuable team members.

Benefits of Buying Small

Despite the challenges, Tim identified several benefits to buying a smaller business:

Ability to Make Immediate Impact

Tim was able to implement changes and improvements quickly, from rebranding to purchasing new vans to implementing new software systems.

Deep Industry Learning

By being involved in all aspects of the business, Tim gained a deep understanding of the residential technology industry. This hands-on experience proved invaluable for developing strategy and vision for the company's future.

Lower Financial Risk

While still a significant investment, buying a smaller business limited Tim's downside risk compared to acquiring a larger company.

Platform for Growth

Starting with a smaller business allowed Tim to build systems and processes from the ground up, creating a strong foundation for future growth.

Growing the Business

Over the past four years, Tim has successfully grown Home Run Technology:

• Doubled revenue
• Improved bottom line to 15% profitability
• Implemented EOS (Entrepreneurial Operating System) for better management
• Built a strong leadership team
• Refined hiring practices to maintain culture
• Developed a unique customer-centric approach in the industry

Lessons Learned and Advice for Buyers

Reflecting on his experience, Tim shared several key insights for prospective business buyers:

Be Prepared for Challenges

Buying small doesn't necessarily mean easier. Be ready for "fetal position moments" and significant personal challenges.

Understand the True State of the Business

The business you buy is likely to have more issues than you initially perceive. Be prepared to roll up your sleeves and get deeply involved.

Manage the Pace of Change

While you may be eager to implement improvements, be mindful of how much change your team can handle. Balance short-term fixes with long-term strategic moves.

Build Relationships

Invest time in building relationships with customers, suppliers, and potential referral sources. This can drive significant growth.

Implement Systems Early

Put systems and processes in place as early as possible to manage growth and maintain profitability.

Be Patient

Many improvements take time to show results. Stay focused on long-term value creation.

Looking to the Future

With a stronger foundation now in place, Tim is focused on growing Home Run Technology to $10 million in revenue. He feels the challenges and lessons of the past four years have prepared him well to lead the company through its next phase of growth.

While Tim wouldn't choose to "buy small" again due to the intense challenges, he acknowledges the experience was invaluable in shaping him as an entrepreneur and leader. For those considering a similar path, he emphasizes the importance of being prepared for the journey, regardless of the size of the acquisition target.

Tim's story illustrates both the potential and the pitfalls of buying a small business. While it can provide a lower-risk entry into entrepreneurship and offer opportunities for immediate impact, it also comes with significant challenges that require resilience, adaptability, and a willingness to get deeply involved in all aspects of the business. For the right entrepreneur, however, it can be a transformative experience that builds the foundation for long-term success.

Article created from: https://www.youtube.com/watch?v=9Af4GbIfymQ