Building, Buying, Running and Selling Companies – Part Two

I have built businesses from scratch, bought existing businesses, run businesses and sold them.  Here are a few quick things I’ve learned along the way on buying a business.

Buying a Business creds.  Early in my career, as we were building a national business-to-business service, we purchased small accounting and payroll companies to augment our professional employer service offering. Later, in a different setting, I acquired technology companies as part of a roll up.

Here are three of the many things I learned:

1)     Buy for the right reason. Since I love the hunt – and should have been an Investment Banker in another life – I had to discipline myself to keep it simple. I often got carried away with comprehensive multi-layered spreadsheets. You can almost justify anything with heavy analytics, but the decision to buy versus build should be governed by a simple criterion: will the return on investment of the acquisition exceed internal growth projections, or is it better to increase the size of the business from our own internal efforts? 

2)     The CEO needs to remain engaged during due diligence.  In some of the smaller acquisitions, I was not involved in the due diligence. Our ROI expectations were high, some of those acquisitions did not hit the threshold, and that was my fault. I’m not suggesting that the CEO get into the weeds, but he or she must be involved in developing the questions that need to be answered. Later, I developed a comprehensive due diligence package that included six separate thorough reports with tables of analysis that answered about fifty questions in each of the following categories:

a.      Technology due diligence.  In addition to current licensing, development, capabilities and the risks related to disruption, what will we need to invest here to accomplish our goals?

b.      Human resources due diligence.  What is their current talent acquisition strategy? How many key employees are a flight risk? Who will resist our way of doing things? What gaps in talent do we have? Which org chart changes make sense?

c.      Financial due diligence.  In addition to digging into bank statements and following the cash and rebuilding financial statements, what is the realistic return on investment of this company based on actual free cash flow? Is it above the cost of debt and equity?

d.      Operational due diligence.  How strong are their customer contracts? How organized is the connection between the customer and the service delivery system? How bad are the lease agreements? What are the current internal bottlenecks?

e.      Legal due diligence.  What are the international risks? What dormant family ownership issues need to be unearthed? If our analysis points to a stock purchase, have we seen proof of verification of all Corporate book recordings?

f.       Marketing due diligence.  What are the risks of losing distribution channels? Do we have opportunities to leverage our skills here? What happens if after the acquisition we lose their top five clients?

3)     CEO effort is required to reshape the culture.  In each acquisition, as buyer and CEO, I was inserting myself into an existing culture. Each business had good people, yet they didn’t have a clear cultural identity. Along the way, I made it one of my top priorities to lead the company meetings related to building culture. The modules we developed drive Customer Success training, connecting to three values: Integrity, Innovation, and Invitation.

The elements of Customer Success are detailed my book Go Ahead! In short, the CEO needs to connect with both the current team and the selling company’s team often. This communication needs to be emphasize the transcendent purpose for being in business. This is how the CEO can reiterate the missional purpose for the business and generate renewed enthusiasm.

On my next blog, I’ll share a couple thoughts on the CEO’s job, or running a business.