Buying a Business: The Need for Continuity
01 August 2022: Buying a Business: The Need for Continuity
Buying a business is an exercise fraught with pitfalls even when you have the best advisors. It can be a nightmare with anything less.
This is a true story taken from an article in the U.S. edition of the Wall Street Journal last week. It’s about a couple that bought a small town business that had been operating for more than a century, their concern that long-time customers might abandon the business once news of the sale got out and the steps they took to minimize that possibility.
Any of you who read the story know that the business was an old-time hardware store sold by a retiring couple who bought the business in 1996 from the descendants of one of the original founders. The buyers were a younger husband and wife team. The experience underscores several critical issues that buyers, and to a lesser extent, sellers have to keep in mind when structuring a deal. If these issues are not considered throughout the process, the potential for a fall-off in sales increases – often to the detriment of both parties.
A change of ownership of any small business, if that change becomes public knowledge at around the time it occurs, can have a significant impact on sales. But the risk is especially high when the sellers have been in the store serving customers every day for the past 10 or 15 years. If the transition is not handled properly, the revenue fall-off could be as much as 20%-30% – a plunge that will keep the new owners – and, in most cases, the sellers – awake at night.
Confidentiality
In the case of the New York business, both buyers and sellers appear to have understood the importance of maintaining confidentiality even after the deal closed. In fact, multiple customers were quoted as saying they didn’t realize the business had been sold until they read it in the Local Font of Knowledge.
Of course, there’s not much we can do about the media. They have column inches they need to fill and in a small town, the sale of a landmark business is news.
But both parties to the sale have an interest in keeping the transfer confidential for as long as possible.
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In our experience, a disquieting number of buyers – new business owners who have just realized the dream of owning a business – want to shout the fact from the rooftops. They change the business’ name to their name, they issue press releases, they invite the local star reporter to do an interview and story. Many even hang a two-story tall “Under New Ownership” banner so that everyone in a ten-mile radius gets the news.
But unless the business was suffering from a bad reputation and the customers and community all knew it needed new blood, doing any of those things can jeopardize the business’ performance. The buyer can be in for a rude awakening.
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Cha, Cha, Cha, Cha, Changes
Changes?
Don’t make them…at least not right away.
Long-time customers value continuity. Yes, you Mr. or Ms. Buyer, have countless monumentally brilliant changes planned that will surely (or so you hope) light a booster rocket under sales, but human beings are generally change-resistant. If the business you’re buying deals primarily with the general public, make changes slowly – and make the minor ones at first. Drastic changes can drive the customers you need away.
The biggest and most visible change is the change of faces. If customers are greeted by the same tried and true owners on a Monday and a completely different owner on Wednesday, the likelihood of trouble is high. Customers don’t like surprises and the physical embodiment of new owners standing behind the register is a shock of the first rank.
We advise our sellers to plan for a gradual transition post-closing; maybe six-nine months, but certainly no less than 30 days. Granted, some buyers have such high opinions of themselves that they don’t want the sellers “meddling” in the business for 10 minutes after the closing. There’s not much we can do about that; it is, after all, the buyers’ business at that point.
But the importance of familiarity cannot be overstated. And there’s noting more familiar in a small, family-owned business than the owners who have been assisting customers for years.
The Seller’s Perspective
The seller will almost always have an equitable interest in making sure any fall-off in revenue is minimal. Why?
Because something north of 80% of small and lower-middle market transactions involve some level of seller financing. We’re not privy to the financing details of this particular transaction but in most similar transactions, the seller will be holding paper – and be very concerned with any fall-off in revenue for fear that the new owners won’t be able to make their payments.
The business that inspired this post had pre-pandemic sales of roughly $2 million and the transaction was consummated in 2020, just as Covid was starting to cripple everything. Because the pandemic impacted sales of nearly every business, it’s impossible to estimate what, if any, revenue was lost due to the change of ownership. But the new owners made sure that the sellers were “on call” and to take advantage of their nearly quarter-century ownership of the business.
And the sellers made a point of being available. They were present in the store to various degrees during the extended transition and helped in any way they could.
The Bottom Line
If the business is owned by a curmudgeonly old fart that few people like or get along with, new blood will probably find themselves quite welcome in a small, close-knit community. But if the current owners are friendly, helpful and highly regarded in the community, new blood will have to prove itself worthy of the continued loyalty of the customer base.
Keeping the sale confidential will help. Being slow to institute changes – switching out products, altering store or facility layout or adopting a new business name, logo and color scheme – will make the transition less jarring to long-time customers – and reduce the degree the revenue sags and increase the speed of its recovery.
Given the high likelihood that seller financing will be involved in most private business sale, both buyer and seller have a strong interest in maintaining continuity.
If you’re a broker representing either or both sides of any deal, I suggest that you advise your clients on the wisdom of a slow transition with modest early changes and the importance of continuity. Maintaining that continuity will lessen the risk of revenue fall-off attributable to the sale.
I’d like to hear from you. What topics would you like me to cover? How can we tailor these posts to be more useful to you and your business. Let me know in the comments box, below, or email me at
jo*@Wo*******************.com
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If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
Joe
Searching For…
The founder of a U.S.-based investment group has contacted us about acquiring U.S.-based businesses with Discretionary Earnings of at least $1 million, three successive years of profitability and portion of its revenue from recurring sources.
If any of you know of something that might fit, please let me know.
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 500 in the world. He can be reached at
jo*@Wo*******************.com