Navigating Partnership Pitfalls in Business Acquisition

In the world of entrepreneurship through acquisition (ETA), the journey is often fraught with challenges. Josh Key's story of acquiring a plumbing business serves as a cautionary tale and a source of valuable lessons for aspiring business owners. This article delves into Josh's experience, highlighting the importance of due diligence, proper legal structures, and partner selection in business acquisitions.

The Path to Business Ownership

Josh Key, a successful sales professional with a background in medical device sales, decided to transition into business ownership. His motivations were clear:

• Desire for greater control over his professional life
• Ambition to build long-term wealth
• Interest in leveraging his sales and management experience

After researching various industries, Josh settled on the plumbing sector, attracted by its steady demand and potential for growth.

Finding the Right Business

Josh's search led him to a plumbing company with promising financials:

• Annual revenue of $1.25 million
• EBITDA of approximately $380,000
• Five employees, including two master plumbers
• Established since 2011

The business primarily focused on commercial new builds and project-based work, with some service operations. Josh saw potential to expand the service side and grow the company's footprint across the Dallas-Fort Worth metroplex.

The Acquisition Process

Josh negotiated a purchase price of $1.6 million, which included:

• $1.4 million for the business
• $100,000 in working capital
• A line of credit

The deal structure was typical for an SBA loan:

• 10% down payment from Josh ($160,000)
• 10% seller note
• 80% SBA-backed loan

Josh withdrew $180,000 from his 401(k) to fund the down payment and cover initial expenses, accepting the 10% early withdrawal penalty.

The Partnership Dilemma

As the deal progressed, the SBA threw a curveball: they wanted someone with a master plumber's license on the capital stack. This requirement led Josh to seek a partner, ultimately connecting with a plumber from his church.

Key points about the partnership:

• The partner insisted on a 50/50 equity split
• Josh agreed, viewing the partner's plumbing and HVAC licenses as valuable assets
• The operating agreement was hastily drafted using an online legal service
• Josh didn't conduct thorough due diligence on his new partner

Early Warning Signs

Shortly after closing the deal, red flags began to appear:

• The partner struggled with basic financial concepts
• He became combative when faced with challenges
• There were instances of verbal abuse and threats
• The partner brought a gun to work, creating an unsafe environment

Josh quickly realized the partnership was untenable and sought to exit the situation.

The Downward Spiral

As the business environment deteriorated, several issues emerged:

• The partner drove away employees and contractors
• He failed to bring in new business
• The company's finances suffered, leading to missed loan payments
• The partner opened separate bank accounts, commingling funds
• New debt was taken on without Josh's knowledge

Legal and Financial Consequences

The situation ultimately led to severe consequences for Josh:

• He was forced to file for Chapter 7 bankruptcy
• His credit was severely impacted
• He was placed on the SBA's blacklist, limiting future financing options
• The business defaulted on its loans and ceased operations

Lessons Learned

Josh's experience offers several valuable lessons for entrepreneurs considering business acquisitions:

1. Thorough due diligence is crucial: Investigate potential partners' backgrounds, financial history, and business track record.

2. Invest in proper legal counsel: A well-drafted operating agreement can protect all parties and provide clear exit strategies.

3. Avoid 50/50 partnerships: Uneven splits can help prevent deadlocks in decision-making.

4. Trust but verify: While maintaining optimism is important, it's essential to verify claims and assumptions.

5. Build a strong support network: Assemble an advisory board of experienced professionals to provide guidance.

6. Consider alternative structures: Explore options like search funds or becoming an operator for other investors.

7. Be prepared for unexpected challenges: The business world can be unpredictable, so maintain flexibility and resilience.

Moving Forward

Despite the setbacks, Josh remains optimistic about his entrepreneurial future:

• He's actively searching for new acquisition opportunities
• His target range has expanded to businesses with $750,000 to $2 million in EBITDA
• He's open to various industries, including manufacturing and healthcare
• Josh is considering roles as an operator for other investors or search funds

Most importantly, Josh has maintained a positive outlook and used the experience as a learning opportunity. He emphasizes the importance of forgiveness and moving forward, rather than dwelling on past mistakes.

Conclusion

Josh Key's journey in acquiring a plumbing business serves as a powerful reminder of the complexities involved in entrepreneurship through acquisition. While his experience was challenging, it provides invaluable insights for others pursuing similar paths. By learning from these lessons and approaching business acquisitions with careful planning and due diligence, aspiring entrepreneurs can increase their chances of success in the competitive world of small business ownership.

For those interested in connecting with Josh or learning more about his experience, he can be reached via LinkedIn or email at [email protected].

Article created from: https://www.youtube.com/watch?v=Rv8GEQu5grU