What to Do When the Company You Bought Faces Hidden Challenges You Didn’t See Coming
You can spend a year doing due diligence, and still run into problems after buying a business.
PHOTO CREDIT: Getty Images
When Matt Barber and Joel Doub bought a fishing rod manufacturer two years ago, the plan was for previous owner Tom Morgan to stay with the business for five years to mentor them. But six months after the deal closed, Morgan died unexpectedly.
"It forced us to sink or swim and accelerated our learning curve," says Barber, co-owner of Tom Morgan Rodsmiths in Bozeman, Montana. "My approach was, OK, here's a setback, let's put our heads down, stay positive and persevere."
Small business owners can face unexpected challenges after buying a company, whether they're impossible-to-foresee events such as Barber and Doub experienced or problems that weren't apparent or that prospective owners didn't investigate. Among them: defiant staffers, outdated technology and shaky finances. In each case, an owner must regroup and figure out how to overcome the obstacles.
Business advisers say it helps to go into a purchase knowing there will be unknowns, surprises and disappointments.
"It's always a leap of faith that you're taking," says Gene Marks, owner of The Marks Group, a small business consulting firm in Bala Cynwyd, Pennsylvania. "You think you've figured out 80 or 90 percent, but there's always another 10 or 20 percent you can't predict."
Barber and Doub hoped to learn the craft of making fly fishing rods from Morgan, as well as the nitty gritty of running the company. "I would have relied on his expertise, have him be the brains," says Barber, who estimates the loss of Morgan set the company's transition back by a year. But the partners received guidance and assistance from Morgan's wife, Gerri, the company's vendors, customers and even competitors.
When Cathy Miron bought eSilo, a data storage and recovery company, she expected to use the firm's cash flow to fund a refresh and upgrade of the technology. But eSilo turned out to need more work and more of an investment than Miron anticipated. Her vision was to begin introducing new products six months after the May 2018 purchase. Now, it's looking like she won't do that until this coming May.
"This is ironic, since my main motivation for buying an established business with a 17-year history was the hope that I could bypass much of the early chaos," Miron says. She realizes she needs to work at a "comfortable pace that you can sustain for the long-distance marathon that is business ownership."
Before buying a company, it's standard operating procedure to do what's called due diligence, examining a company's books and talking to employees, customers and vendors to get a sense of what the company needs. But, Marks says, "when you're given the numbers for the business, you have to take them with a grain of salt." Sellers who want to close a deal may not reveal some of their issues.
And even a veteran business owner can fall short on due diligence. When Rob Basso learned in 2012 that a competing payroll company was available, he thought, "we can't pass this up." But when Basso started to combine the business and his firm, Advantage Payroll, he encountered an uncooperative new staff and two hard-to-integrate software systems and sets of vendors. It took more work than he expected.
"I wrongly estimated, probably because I didn't do some of the heavy lifting I should have," says Basso, whose company was based in Freeport, New York.
It took about two years for Basso and his managers to consolidate the companies. They lost all 17 employees of the acquired business and had to meld the software systems into one that would fit all the customers' needs. But the work paid off: Basso sold the combined company last year at a profit.
The floral retailer Brad Daniel bought also seemed like a great deal until he realized the company, formed from the previous merger of two businesses, had 250 staffers who were in separate camps and didn't want to work with one another. Daniel bought the company, which had 30 stores in the Southeast, out of bankruptcy in 2001. A serial investor who turns businesses around and sells them, he had a sense of the retailer's financial problems but didn't know there was a huge internal cultural split,
"I didn't realize how much these two companies hated each other," Daniel says. "Everyone kept information close to the vest. They weren't helping each other out."
Daniel found that many staffers refused to adjust to new procedures and many were underutilized. Delivery employees made three to five stops a day, a tenth of what they should have done. He and his management team had to streamline the company while dealing with angry workers.
"I should have looked more closely at the retail locations, spent more time in stores before the acquisition," Daniel says.
Some situations are disasters out of the blue. A month after Catherine Sullivan bought a Monkee's women's clothing franchise in 2013, a rainstorm that struck during roof repairs sent water into the Fredericksburg, Virginia, store, collapsing ceiling tiles and damaging merchandise. Sullivan had to move her goods into storage and was closed for six weeks.
She ran into more unexpected challenges -- her insurer denied her claims because the roofing company was responsible. Then she had to do a lot of arguing with the roofer's carrier. Sullivan says she learned "how to fight, what to fight for, what to move forward on, what to take as a loss."
--The Associated Press
BY Marishka M. Cabrera