We Are Acquiring a Business!

We Are Acquiring a Business

Hello everyone! I have some exciting news to share today and that is my small business has successfully closed on an acquisition! That’s right, my small business is acquiring a business. We are expanding and we’re super excited about this new opportunity.

The Process

2017 has been a wild ride for the The Green Condor (the pseudonym for my biz). We had initial conversations with an owner (referred to as Sean for anonymity) to acquire his business (very much related to our business in an adjacent part of the metro area). The talks went cold as Sean pursued another buyer with a higher bid (we refused to go offer any more). When those talks with another buyer fell apart because of financing, Sean was back to the table with us hat in hand at the prior negotiated price.

If you recall from my October 2017 update post, Sean came back to us with a desire to close ASAP. The sweetener for us was for him to then take back a bigger seller note (at effectively 0% interest…), thereby helping us finance the deal.

Now here we are in late January having just closed on the deal. The process was long and drawn out, but it worked ok for us. Not all that different from buying a house, we signed an initial letter of intent (LOI) with Sean which started a 45-day clock in which we began a deep due diligence process. Having a lot of boxes check out ok, we began approaching banks for financing with our detailed plans.

Ultimately, we were able to get a bank loan approved which was the third leg to our stool in financing the deal. Along with seller financing (the owner taking part of the sale price as a note payable over 5 years from us) and additional equity contributions from me and my three brothers (co-owners), we scrounged up enough money. The three legs to our stool were complete and we were ready to close.

The Diligence Process

For those interested, I’d thought I’d share some of the key due diligence points for us. While I don’t care to divulge too many specifics about the nature of the business, in general terms we are an industrial service company (cleaning, restoration, etc.). While a broad universe, hopefully this helps you picture some of the details better.

Major diligence items for us included vehicle inspections, equipment inspections, warehouse and office inspections, meetings with certain key sales reps, discussions with Sean’s landlord, and research and analyze various moving costs.

The to-do list was significant including legal items (e.g. creating new LLCs, drafting the purchase agreement, etc), personnel considerations (creating a combined staffing map / hierarchy, background and drug testing, determining and meshing compensations structures and benefit offerings, etc.), operational (plans to consolidate facilities), and various services (re-bidding service contracts such as insurance, software, SEO, etc). There was a whole litany of things and the list was quite long and detailed.

The end result was positive and we have lots of confidence in our planning and execution now that we’ve officially closed. We found a number of places to save meaningful money for various costs and solidified our expectations to make a meaningful return on our investment (see below for return expectations).

Ownership Splits

As I mentioned back in my October update, a big key for us brothers coming together on this is determining the appropriate ownership splits. It isn’t as simple as taking a percent of what we all contribute to the deal. My two younger brothers don’t necessarily have the means to contribute much financially, but they run the business from a day-to-day perspective and put in a lot of sweat equity. To give credence to this and their equity ownership split, they get paid a salary that may be on the lesser end of the spectrum and limited to no bonus potential.

We all come to the table with different things to offer and we all need each other to get it done. Everyone has an important role to play. As a result, it’s been a grind to figure out how to share equity and determine compensation. We all hate these conversations. One thing to be sure is that nobody gets everything their way, we all sacrifice a bit and there is a healthy give and take.

I don’t think these are uncommon circumstances. I’m sure many small businesses that have multiple constituents (not simply a sole proprietorship or spousal deal) have to go through this. It creates tension, no doubt. It can affect some people more than others, but I think with me and each of my brothers we can keep business and personal separate. After tough business calls together we can still kick back, put it to the side, and enjoy each other’s company. But I’m not going to lie, there are occasions that require a bit of a cool down period too 😊.

The Return Profile

What makes everyone happy is that we all succeed if the business succeeds. The beauty behind many small businesses is the ability to make an outsized return. While I may not be getting as much of an equity split as I’d like, I still can’t beat the returns anywhere else.

As a rule of thumb, I expect a long-term return on my investments in the stock market to be approximately 8% per year. The nature of my small business is that there is lumpiness and a degree of volatility from one year to the next. But in an average year with some conservative assumptions, I expect to achieve a near 20% return! That’s big!! Based on the Rule of 72, this means I’d expect my investment in the small business to double every 3.5 years as compared to my expectation for the stock market doubling every 9 years!

Side Note: The Rule of 72 is used to determine how quickly an investment doubles. For instance, if I invest $100K in something, when should I expect it to double to $200K if it is to return 8% per year? 72 divided by 8 equals 9, which represents 9 years to double.

One other consideration is that while there are ups and downs in the economy and stock market, The Green Condor is not closely correlated with them and it isn’t a cyclical business. From that perspective, The Green Condor represents a good diversifier to my entire pool of investments.

Final Thoughts

There’s a lot to unpack here, but I hope this gives you a sense of what’s been going on for the business in recent months as we’ve progressed on acquiring a business. But that isn’t all. For me personally, I’ve had a lot to weigh in making the decision to invest more. Not only as I determine and conclude my appropriate ownership split in the company based on my new equity contribution, but also how it impacts my plans to retire early. As this post is already getting long I plan on saving that discussion for next week. Return then to find out my early retirement considerations and how it may impact my retirement date!

Thanks for taking a look!

The Green Swan

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12 Comments

  1. Congrats on closing the deal, JW! I can only imagine the tension that comes from “negotiating equity stakes” with family. Focus on what matters, and balance the details with the big picture. Glad you got through the external AND internal negotiations successfully, look forward to the impact on your FIRE date (I suspect it pushes it later, since you’re tying up some liquidity in the biz?). Congrats again!

    1. Sage advice, Fritz! I always appreciate your perspective. It’s so great to now have the deal closed and focusing on growing the biz. Thanks!

  2. Great news! Congrats on finalizing the deal. The due diligence work and negotiations sound intense! You must be happy and relieved to be on the other side now. I remember the October post and other discussions — your patience paid off.

    With a 20% expected return rate I can’t wait to hear how this impacts early retirement.

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