Numerous resources are available to aid aspiring small business buyers in their journey towards business acquisition. Our Resources page at Private Market Labs, a platform dedicated to democratizing small business acquisition, is one of them! When developing your strategy for navigating the world of small business mergers and acquisitions, sidestepping pitfalls can be as valuable as following successful pathways.
One of the best resources for searchers starting on their acquisition journeys is the Stanford Search Fund Primer. It lists the Top 10 Traps for new CEOs, as explained by Thomas Neff and James Citrin. This is valuable advice for business owners in their first 100 days of operating a small business. However, the path leading to a business acquisition is also filled with traps.
To ensure you become the “new CEO” described in the Primer, here are 10 pitfalls to avoid on the path to your first acquisition:
- Building criteria that are either too loose or too broad – if your search criteria are too broad, you’ll be unfocused and unable to communicate to sellers and brokers why you’re the right fit to take over the business. If your search criteria are too narrow, you might miss out on an adjacent opportunity with a great company.
- Not doing your homework before talking with brokers – in addition to establishing your acquisition target, you need to have a baseline level of knowledge about the acquisition process before communicating with brokers in order to be considered a serious buyer. This means understanding the stages of an SMB acquisition, various funding models, and the documents involved.
- Ignoring either on-market or off-market search – both on-market and off-market acquisitions have their advantages and disadvantages. It’s essential to explore both avenues to maximize your chances of finding the right acquisition target. People who shut themselves off from one side or another are constraining themselves unnecessarily.
- Starting conversations with lenders and investors too late – acquiring a company takes funding, and it’s essential to engage lenders and investors early in the process to ensure a smooth closing. If you’re scrambling to find money for the first time when you’re under LOI, you may lose your deal.
- Putting all of your financial hopes on a single lender or investor – diversify your funding sources to add redundancy into your process and reduce the risk that a single lender or investor could upend your deal by pulling out of the process.
- Being overly aggressive with the broker early in the process – being overly aggressive with brokers before receiving a confidential information memorandum (CIM) can damage your reputation and derail the deal. For example, read the NDA carefully, and if the terms are standard, move forward without nitpicking. Graciously sharing reasonable amounts of financial information is also a sign of seriousness.
- Failing to detail expectations in the letter of intent (LOI) – taking shortcuts when constructing an LOI can lead to pain down the road. You should clearly outline your expectations, key terms, and conditions of the deal to smooth final negotiations over things like working capital and seller transition support.
- Underinvesting on due diligence – underinvesting in due diligence can lead to unforeseen issues and liabilities. Make sure to hire the right experts and do a thorough examination for red flags. This is your opportunity to truly understand the risks involved in your specific acquisition target.
- Failing to build a personal relationship with the seller – acquiring a company involves more than just the financial parts of the transaction. Building a personal relationship with the seller can help facilitate a smoother acquisition and provide valuable insights into the business’s history and operations. Sellers want to know who you are as a person and operator to ensure that you’re the right person to continue their legacies.
- Failing to plan ahead for post-acquisition life – search is not just a deal-making game. Unless you’re hiring an operator on day 1, you’ll have to run a business after the deal closes. If you don’t build your financial and operational strategies ahead of time, you may misprice your deal, you may fail to account for key risks, and you may set yourself up for a rough transition in your first 100 days.
Overall, avoiding these pitfalls enhances your chances of success on your business acquisition journey. Once you reach your first acquisition, advice from resources like the Search Fund Primer for new CEOs becomes invaluable. A strategic and thorough approach to the process of small business mergers and acquisitions yields considerable dividends down the road.
At Private Market Labs, we’re democratizing the small business acquisition process, smoothing the path for buyers, sellers, and brokers by providing timely connections at every stage. Ready to start your journey? Register for our waitlist to be the first to access proprietary resources tailor-made for your acquisition needs.