Tip of the Spear Ventures

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Acquisition Entrepreneurship – Selecting Professional Advisors

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If you’re a leader thinking about making a change in your career, a new MBA looking to launch into leadership, or maybe a seasoned entrepreneur through acquisition you know that the road to identifying an organization to purchase is littered with the corpses of  those that did not conduct thorough enough due diligence. In this series, Acquisition Entrepreneurship, I’ll tackle the topics that will make your journey on that road less risky on the way towards successful acquisition of a new entity. In this post, we’ll explore the Professional Advisors recommended to assist you towards acquisition… Enjoy!

Acquisition Entrepreneurship Selecting Professional Advisors

Selecting Professional Advisors

An Accountant and a Lawyer are two of the most important advisors you’ll want to engage during your due diligence phase in acquisitions. You should look for those accountants and lawyers skilled in working with similarly sized firms as the one you’re exploring (Typically, those that work with smaller firms).

The accountant should have familiarity with smaller firm’s accounting practices, including payroll taxes, sales tax, and noncash expenses such as bad debt reserves or accruals for sales force bonuses earned yet paid. The accountant should have well established protocols to quickly determine if the company has accurately accounted for these expenses.

The lawyer should know which contracts are successfully in play at the acquisition and typical terms and conditions therein. This could be the same lawyer that assisted with creating your Letter of Intent (LOI) as well as prepares the final acquisition documents.

Professional Advisor Fees

While accountant and lawyer fees typically vary, depending on geography and especially with the purchase of an organization that can last several months to a year, you could expect that accounting due diligence will cost somewhere between $20,000 to $50,000. The reason there is such a large range provided is that the cliché “it depends” is in play regarding how much work needs to be done to understand the company’s true financial picture.

Legal due diligence is more tightly focused and includes the cost to prepare purchase agreements and related documents. The fees one can anticipate typically are in the $50,000 to $75,000 range.

One last note on professional advisor fees, specifically contingency. In other words, you may want to see if both accountants and lawyers will work on a contingent basis and therefore get paid at the time of closing so that you won’t have to come out of pocket during the due diligence phase. Keep in mind that some professional advisors will do so, some won’t work on contingency. The bottom line is that you typically get what you pay for so select wisely but don’t eliminate these all too important professional advisors!

Other Professional Advisors to Consider

In addition to accountants and lawyers, there may be other professional advisors that you want to bring in while conducting due diligence. I’ve hired engineers to come and inspect manufacturing equipment, IT consultants to inspect software development, Environment consultants to gage appropriateness of the wet excavation procedures, and Marketing consultants to ensure accuracy in market potential was accounted for. Depending on your entrepreneur through acquisition strategy and the organizations you’re considering, it’s important to bring in the professionals at time of due diligence well before you officially take ownership (Again, it’s better to walk away from the acquisitions table because of issues identified by professional advisors than to sit at it and go hungry for a period of time because you didn’t employ them!)

SUMMARY

Acquisition Entrepreneurship is a great way to explore your entrepreneurial spirit and look to “buy then build” an organization (As opposed to the typically thought of entrepreneurial methodology of a startup). Regardless of the industry you’re looking in and the size of the organization therein, you want to ensure that you have the best team of professional advisors employed to serve you. This will help with risk mitigation regarding your entrepreneur through acquisition strategy.

Sam Palazzolo

PS – I’m typically asked what our Acquisitions Strategy is at Tip of the Spear. As such, we have summarized our Acquisitions Criteria here on our website: https://tipofthespearventures.com/acquisitions/. Please review and let me know if I can be of service.

Business Acquisitions – Initial Due Diligence Considerations

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I recently participated in a Business Acquisitions roundtable discussion. The roundtable was made up of acquisition entrepreneurs well known for their roles in company growth and market consolidation. As a result, these successes have afforded these entrepreneurs to live lives with considerably more independent lifestyles (especially for the more well-capitalized entrepreneurs present – perhaps a topic for another post). One of the topics discussed at the roundtable was from a participant’s question, “What considerations should I have when conducting due diligence during the business acquisitions process?” Often times, failed deals are the result of a lack of conducting thorough due diligence on key information items on the buyer’s part. The questions like those below in the areas of Seller, Market, Financials, Legal, Environment and Personnel are initial considerations that should not be overlooked:

About the Seller

Learning as much as possible about the seller’s motivation for exiting in order to provide important insight into what their exit target is. Questions to ask regarding seller due diligence include:

  • How was the business started?
  • Why is the business for sale?
  • Is the seller selling the entire entity or just the assets?
  • Is there a business plan in place?
  • What keeps the seller up at night?
  • If the seller is involved in the business: How much salary does the seller take (now/after acquisition)?  How much vacation (now/after acquisition)?

About the Market

A few questions about market due diligence:

  • What is the size of the market and what market share does the acquisition target hold?
  • To what level can the acquisition be grown to?
  • What are the biggest challenges to growth?
  • Who are the industry leaders (local/national/world)? Is the company considered a market leader in any aspect?
  • Does the product or service have a life cycle, or seasonality?
  • What would the business’ customers and competitors say this business does best?

About the Numbers

More than anything else, it is important to thoroughly understand the financial due diligence of the prospective business acquisition. To determine if the seller’s claims are supported by the figures, ask to review three to five years of history and future projections:

  • Sales
  • Revenues
  • Gross margin
  • Cost of Goods Sold (details)
  • Earnings before interest, taxes, depreciation and amortization (“EBITDA”)
  • Capital investments
  • Taxes
  • Accounts receivables
  • Accounts payable
  • Inventory

About Legal Issues

To avoid hidden surprises, it is important to dive into legal due diligence issues in the company, including:

  • Any possible future lawsuits (If so, due to what?)
  • Is the business location owned or leased (If leased, what are the terms?)
  • Is there proof all taxes have been paid?

About the Environment

Conducting environmental due diligence is a crucial initial step. Governmental guidelines can levy responsibility for environmental issues that existed prior to the current ownership. Find out about any hazardous materials/waste disposal or other environmental considerations that must be taken into consideration.

About the People

If purchasing more than just the physical assets of a company, a potential buyer should understand key personnel issues such as:

  • Who else (besides the seller) has equity ownership in the organization?
  • What employment agreements are in force (FTE/Contract)?
  • What role do other family members play in the business?
  • Who are the key people, what do they do and why?
  • Which key employees are most likely to leave if there is a sale, and why?
  • How well documented are the business processes?

Summary

Business acquisitions are a better way for entrepreneurs to go into business versus startups. However, with that said the business acquisitions market still is littered with deal casualties (Even with showing considerable upside versus startup entrepreneurship). Taking the time to conduct the proper due diligence is the key. Due diligence in the areas of Seller, Market, Financials, Legal, Environment and Personnel are initial considerations that should not be overlooked.

Sam Palazzolo

PS – My firm is actively pursuing business acquisitions of small businesses ($1-$10Million Annual Revenue). If this describes you/your business and you’d like to inquire about our business acquisitions process, email selections@tipofthespearventures.com.