Great article. Can you share what areas of your diligence you did yourself vs. outsourced, if any? Assuming you hired someone for QOE, but I'm curious about the legal, regulatory, HR, tech, etc.
Thank you! I hired someone for QoE and for Insurance review. I hired a mechanic to do inspection of vehicles. I did most of the legal/regulatory/HR/tech myself, but it was a small service business, so not super involved on that front. I did have my QoE provider do sales tax review as well.
How do you approach balancing the upfront costs of acquiring a small business with the potential hidden expenses that might arise post-closure, as highlighted in this article? Does it tend to be with set percentages, contingencies, etc or is it case-by-case? You can never be sure to uncover everything with due diligence
Upfront costs are hopefully considered in your actual financing (part of your debt or equity financing) so that you're not dipping into your working capital to make those payments. It's effectively part of your purchase price.
The post-close costs are more about being realistic in your model as to how the business will change over the first 2 years. So building your projection model to assume EBITDA declines for the first year is usually appropriate. You just have to make sure you feel confident that the potential new costs (with some margin for error, as you can't uncover everything) still provides plenty of cash flow buffer against your actual debt payments.
Great article. Can you share what areas of your diligence you did yourself vs. outsourced, if any? Assuming you hired someone for QOE, but I'm curious about the legal, regulatory, HR, tech, etc.
Thank you! I hired someone for QoE and for Insurance review. I hired a mechanic to do inspection of vehicles. I did most of the legal/regulatory/HR/tech myself, but it was a small service business, so not super involved on that front. I did have my QoE provider do sales tax review as well.
Just outstanding. Thanks so much for a highly reference-able post.
Thank you!!
How do you approach balancing the upfront costs of acquiring a small business with the potential hidden expenses that might arise post-closure, as highlighted in this article? Does it tend to be with set percentages, contingencies, etc or is it case-by-case? You can never be sure to uncover everything with due diligence
Upfront costs are hopefully considered in your actual financing (part of your debt or equity financing) so that you're not dipping into your working capital to make those payments. It's effectively part of your purchase price.
The post-close costs are more about being realistic in your model as to how the business will change over the first 2 years. So building your projection model to assume EBITDA declines for the first year is usually appropriate. You just have to make sure you feel confident that the potential new costs (with some margin for error, as you can't uncover everything) still provides plenty of cash flow buffer against your actual debt payments.