How to figure out if the SMB you want to buy is over-reliant on the Selling Owner- one of the biggest risks in purchasing a business. 🧵
(BOOKMARK THIS)
Buy something from the business if you can. See if you touch the owner at any point in the normal sales process. Now buy a 2nd time and ask for something custom or a policy exception or discount. See if employees can handle the curveball or if they run to the owner.
Read every review on every review platform. See if you see the owner's name mentioned in the review. Seeing the owner's name on 50% or more of reviews is a major red flag. 🚩
Does the owner take long vacations often or have intense hobbies like regular golf, fishing, hunting, etc? Scour their social media for these hints and ask them about what they do for fun and their travel.
One of my Sellers had their best sales month ever when they were in Belize for a month totally unplugged- this was one of my favorite selling points to make to Buyers worried about over-reliance on Seller.
If possible see if you can shadow the owner for a day of remote work. If their day is full of panicked employees calling and asking them what to do, that's bad. If their day is them running payroll and ordering inventory and boring financial/ownership stuff, that's good.
Some owners make it impossible to steal from the business, but that has a downside of an owner bottleneck potentially. Good ones, trusted employees could steal, but it would be impossible to get away with it. Ask them about theft history and potential and how they manage it.
Ask what trade shows they go to and who goes from their company. If only the owner and their spouse go every year, this could be a major problem as owner might have all the critical industry relationships. Like to see teams that go with multiple leaders when applicable.
Dig into reason for sale. If it's burnout and a dad tired of missing all his kids' ballgames, or a mom feeling guilty, that's not a good sign. A well-run company has owners that go to all their kids' games. So ask about their kids and their relationship with them. Dig in here.
If you're able to talk to any managers (not always possible), they're a gold mine. Ask, "what does the owner do you wish they would stop doing?"
The long, interesting, list of addbacks on Broker's recast can be a red flag. Means owner uses business like personal piggy bank and likely doesn't have financial controls in place and all employees are clueless about the $$ aspects of the biz, as owner and CPA have "black box".
Look for awards and accolades on your tour and in the CIM. Do the awards say the company name or the owner's name? Look at the "About Us" on the website. Is the owner 80% of it? 20%? 0%?
20 or 0 is my preference if buying.
Speaking of website, I like to see delegation here. If owner is the only one that updates the website or has admin credentials on CRM, website, etc. That is a sign they don't train and delegate important things or trust their team.
Get an employee list that has position, and TENURE for all W-2s. I like to see a mix on tenure. Everyone having worked there 20+ years is actually a risk they're overly loyal to status quo and Seller, and of course all new could mean owner runs people off and culture sucks.
This one's a little "woo-woo" but ask Seller if they take personality tests like DISC, Enneagram, MB, etc and what they are. If they have a great answer here and seem self-aware of their strengths and weaknesses of personality traits, that's a great sign. Big blind spots, bad.
Ask Seller in what ways they are potentially holding the company back from reaching its fullest potential. Thoughtful, vulnerable answers here can tell you a lot. A good Seller shouldn't take an extreme end of the spectrum stance and answer with nuance explaining their pros/cons.
Does Seller almost always open or close the business beginning or end of day? That's bad. Both is suuuper bad. I love it when Owner just pops in and out randomly and employees never know when they'll be there. Says a lot.
Pull out a piece of paper in seller meeting with columns for 7 days of week and ask them to walk you through what they do on a normal week and fill it in like a calendar. If they struggle to articulate and say "every day is different", that's a bad sign they're the fireman...
and reactionary with a chaotic culture. If this activity is easy for them or they pull out their phone and show you repetivive standing rhythm and their typical week looks pretty boring, that's a great sign! The more boring and routine the better.
Ask about their favorite business books and if they have tried EOS system or read "Clockwork", "Built to Sell", "The Ultimate Sales Machine", etc. If they have good answers and work on their business as a tinkerer, that's good. "I don't have time to read..." is bad.
What other tips and tricks do you have to evaluate owner-reliance in a SMB acquisition? I would love to hear them.
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