Lately, we’ve been helping a lot of integrators maximize their company selling prices and find the right buyers. We help the sellers present their companies well, but have we done enough to educate the other side? In other words: When you’re looking for a firm to purchase, look for these things!
Many of our best and brightest members helped us create a top 11 list of things (beyond financials) that, when considering a company purchase, should be examined carefully.
1. Backlog and WIP
Value is often established based on backlog, so you don’t want to find out later that the projects were possibly intentionally underbid. Verify and evaluate the most recent – and all large – contracts. Some companies sell “bad” jobs to build up their backlog. Conduct a comprehensive WIP (work in process) review, job by job, to really understand estimation processes, job costing, etc.
2. Business Mix and Client Base
Verify current relationships with current and old clients. One member says: “The company that bought us actually called over 100 of our clients. Under the guise of doing a survey, they queried our clients about our performance and our relationships in great detail.”
Determine how reliant the business is on any or all services, products, and integration solutions, as well as certain customers. Overstated client relationships imply a preferred or exclusive provider status that may be embellished. Look for product lines that don’t transfer or are undisclosed on the “at-will” nature of the vendor/integrator relationship.
Are the “rainmakers” staying? Are the people responsible for revenue generation staying? Are current employment agreements transferable.
4. Performance and Workmanship Issues on Presumed “Closed Out” Projects
Investigate any poor installation projects that consultants or key customers will hold the new owner responsible for fixing (even those that are closed).
Conduct a thorough ownership audit of IP, claims, reps, and warranties from installed base of systems (limitation of liability clauses). Make sure you ask about any outstanding litigation and billing/financing/collections reviews, as well as pending litigation on employee complaints or claims. Are there unwritten agreements or verbal communications implying that the new owner will have to take responsibility?
6. Assuming New Risk
Are any remote support activities (managed services/cloud/hosted) involved in provided services? If so, what language is written in the service agreements? What method is being used during remote network sessions with client networks, and is an investment required to make improvements?
7. Financial Health Indicators
Take a deep dive into past P&L statements to understand one-time events that may skew valuation.
8. HR Issues
Ask to see all compensation plans, non-competes, employment contracts, and timekeeping practices, including any “unwritten deals” with key employees. Thoroughly understand all benefits and 401(k) plans.
9. Contracts in Place
Ask to see copies of all outstanding leases and inventory levels, along with an overall state of inventory. Investigate the existing IT infrastructure and systems, including ERP/CRM systems and business tools. Will these need to be updated?
During this process, also look at contractual commitments to/with telephone companies, network/Internet companies, subcontractors, and leases.
Review internal agreements as well. Are maintenance agreements transferable in the contract language?
10. Due Diligence
One member told us: “After we gave our approval, the potential buyer actually called our major manufacturers to discuss in detail their relationship with our company. This was especially critical as our major supplier would not grant the continued distribution to the new company until after the sale was completed. So they purchased us based on the contingency that the manufacturer did later agree to sign up the new company. If they had not, then the deal was off.”
In terms of disclosure, an integrator that was recently purchased shared with NSCA: “We were honest and straightforward throughout the entire deal to sell our company, and, believe me, that was a good thing. The company that bought us was beyond thorough.”
Our members have seen things from the other side as well: “We were recently close to buying a company with offices located in several states. First, we begin to notice little white lies and/or some omissions. As we proceeded, we began to feel uncomfortable. We pulled the plug in the 11th hour. In retrospect, it was a great move. Their sales projections were way off.”
More insight from the same member: “This may sound corny, but ask the company you want to purchase whether they’re representing everything honestly and being truthful. When we were purchasing a company, we actually asked one of their branch managers this question and he told us the truth. After we pulled out, he came back and asked us for a job, which we were contractually not allowed to do.”
And last – but not least: “Ask the current owners several times and in different ways why they are selling. I watched our new partners do this and they picked up on some desperation. We then backed out.”
When we really want something, we often see what we want to see. We find ourselves imagining things. Realizing after the deal is consummated that something isn’t right – and trying to take action at that point – is not only difficult, but sometimes prohibitively expensive. We’ve heard horror stories where a buyer realizes after the fact that the deal made was not a good one, for whatever reason. As a result, they wind up closing the firm they had so many hopes for.
Thinking of buying or selling? Have questions? Give us a call. We’re happy to help you through the process! –Chuck Wilson, NSCA Executive Director