Welcome to the third and final issue on my acquisition of a $1.6 million “boring” business.
If you missed the last two, you should read them.
Your wife/girlfriend thought they were great.
- Part 1: How I found, financed, and won the deal
- Part 2: Why I love this business and how it fits into our thesis
Now let’s be honest…
Not everything in this deal went smoothly.
There were many bumps in the road, some of which were completely my fault.
So today, I want to cover 3 big mistakes.
Collectively, they created a bunch of unnecessary stress.
And almost cost us the deal.
Hopefully by sharing these you will avoid them!
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Mistake #1: Villainizing the Seller
Midway through diligence, we discovered an error in the provided financials.
We wanted to make a small adjustment to our offer.
Just a bit less cash due upfront.
Our ask was met with significant pushback from the seller.
Things got tense.
For a moment the deal was in jeopardy.
Ultimately, here’s where we went wrong:
We didn’t think through the math on what the seller was going to pocket from the deal.
We agreed to pay him $900,000 at closing.
He would take that and:
- Repay an SBA loan
- Cover his tax liability
- Write the broker a commission check
What’s left for him?
Roughly half of what he’d make in 1 year of operating the business.
No wonder he was so stubborn over $50,000!
He’s not a bad guy—just a guy who wants to be fairly compensated for what he’s built over 25 years.
Do the math on the seller’s take-home pay. What may seem like a small ask to you could actually be a big ask in the eyes of the seller.
Mistake #2: Ignoring Net Working Capital
Net working capital is a very confusing topic.
Especially for non-financial business owners.
The easiest way to think about net working capital is to use Accounts Receivable “AR” as an example.
AR is the amount of money you’ve earned (ie. completed the work) but haven’t collected on.
This business carries a relatively large AR balance.
~$150K per month, on average.
That means most of the cash received in the first few months after closing is for work that was performed while the seller still owned the business.
Who keeps that cash?
The seller will say them: “that’s work I did before closing!”
The buyer will say them: “that’s cash the business needs to pay its bills!”
Hence the confusion.
I decided to remove a net working capital peg in the Letter of Intent because the seller included all inventory, a vehicle, and some equipment in the purchase price.
I figured that was fair compensation and would avoid a tough conversation.
Ultimately, the AR balance at closing ended up being $200K.
More than $50K above the “normalized” historical average.
That created an issue.
Negotiations became tense, yet again, just a few days before signing.
A ton of extra stress that could have been avoided with some simple language in the LOI:
“The Purchase Price will be adjusted up or down to the extent the Company’s net working capital at closing is greater than or less than the normalized working capital peg.”
I’ve used that language many times before and intentionally removed it for this deal.
Include a NWC peg in your LOI. Then work with your Quality of Earnings vendor to calculate the normalized NWC and make an adjustment, if necessary.
Mistake #3: Ignoring Clerical Items
Given how tense negotiations were up until the very end, I got behind on clerical work:
- Opening a business checking account
- Applying for a corporate credit card
- Ordering debit cards for employees
- Setting up payroll & bookkeeping
- Obtaining commercial insurance
The list goes on.
I am still feeling the pain from this one.
All of these things are a bit of a hassle, but need to get done.
The sooner you get on top of them, the easier the transition will be.
Don’t procrastinate on admin work. If you do, you’ll feel like you’re constantly playing catch-up.
📚 What Caught My Eye This Week:
That’s a wrap on this series!
I hope you enjoyed the breakdowns.
Going forward, I’ll continue to share occasional updates on the business.
But I want this newsletter to be about helping you.
Actionable strategies to help you keep more of your active income and grow your passive wealth.
So let me ask:
What’s your biggest challenge right now?
I’ll give you my thoughts over email.
And who knows…
If a few of you have the same struggle maybe I’ll write a newsletter on it 🙂
Simply hit reply.
Until next week,