Buying a business sounds like the exclusive province of fat cat bankers and captains of industry. But acquiring another company can also be an effective way for smaller businesses to grow.
That’s exactly what Solve IT Inc., a $2.4 million-dollar-a-year IT services company based in Denver, has done. Solve IT’s CEO and founder Garrett Brucker is keen to keep growing (they made the Inc. 5000 list last year), but in the competitive world of IT services, finding new customers can be tough. So SolveIT is growing, at least in part, by acquisition, with Brucker recently acquiring a small Denver-based IT services company that specializes in serving non-profits.
Of course, there are plenty of pitfalls to growing by acquisition. Here are four of the most common.
Tying the owner’s compensation to profit
If you’re buying a very small business (a few hundred thousand dollars in revenue), you can probably structure things so that the owner gets paid largely for the future performance of his or her company.
Instead of paying a bundle of cash upfront, Brucker offered the owner of the company he wanted to buy 16% of the services revenue collected from clients who were successfully transitioned over to Solve IT. He guaranteed a minimum of $40,000 per year for three years.
“Brucker developed a simple yet elegant way to acquire a company without laying out a lot of upfront capital,” says Susan LeTerneau, a certified business coach with The Alternative Board in Denver. “You may be tempted to tie the owner’s sale proceeds to the future profits of their company as a division of yours,” she says, “but that may cause disputes about how profits are counted and where expenses are allocated.” Instead, tie the owner’s take to a revenue figure that is hard to dispute.
Being vague about the support you will provide
Take the time to document exactly what support you are going to provide the target company to help them achieve the goals you agree upon. Be very specific about sales and marketing support. Decide upfront how new customer leads will be generated, how leads will be shared, what support you’ll provide to the owner, and what you expect them to do on their own.
Picking the wrong lawyer
The lawyer who incorporated your business may not be the right person to help you buy a business. For that, you’re looking for a corporate or business attorney who has represented a buyer in at least 10 acquisitions over the last three years. Interview a few and find out the average size of their last few acquisitions and how many of the deals that they’ve worked on have actually closed. If the lawyer’s average deal size is a lot larger than yours, you may get hit with higher legal fees than expected. A low batting average can indicate a lawyer who is overly argumentative.
Underestimating the difficulties of integration
Brucker considers his first acquisition a success, but says he should have budgeted more transition time to ensure the integration was handled properly. Ultimately, 23 of 25 clients were successfully transitioned, but Brucker’s underestimate of time required made for some stressful moments for the Solve IT team.
Buying a business can help companies of all sizes grow. By avoiding some common pitfalls, you can make the deal work for both you and the seller.