When the QoE has a 40x ROI
How one buyer saved $25k only to lose $1 million a year later
I regret not working with you on my last deal. Hoping to get this one right I ended up in litigation because of lack of financial due diligence and screwed myself.
MESSAGE FROM A BUYER TO ELLIOTT
Why you need Guardian Due Diligence
This person reached out to Elliott about a QoE. Instead of paying the $25k for the QoE, he did the “diligence” himself. Almost immediately after closing, he regretted that decision. Everything that could go wrong did go wrong. And ultimately, he had to shut the business down.
Elliott Reveals 12 Major Mistakes This Buyer Made
Missing Bad Debt
$300k Bad Debt = at a 3.3x multiple would be $1 million of over-payment for the business acquisition because “bad debt” affects EBITDA dollar for dollar.
Not Adjusting Price Based on New Data
$300k price reduction conceded by Seller already b/c of downward performance. BUT, could not explain why the $300k downward price adjustment AND an adjustment for $300k of bad debt were BOTH warranted in this situation. The business was having downward performance AND had $300k of “bad debt” or payments a customer was not going to pay, which meant $300k of EBITDA was likely not coming in which dropped EBITDA down $300k and thus the business value down $300k times the purchase multiple of maybe 3.3x or $1 million.
Structured Deal Poorly and Didn’t Tie Seller to Business
Seller was “gone” Day 1.
There was not sufficient structure to keep the seller accountable (seller note, escrow, etc.) BE SURE ANY SELLER PROMISING ANYTHING HAS A KNOWN CONSEQUENCE IF THE YDO NOT PERFORM
Under-Paying for Lawyers
Lawyers had so many post-close issues in this deal that they took forever. It’s likely that once they started on the issue of “bad debt” they could not be pulled into more urgent but shorter term issues like employment and non-compete.
Employee Leverage
Key employee yelling at Buyer because they’re mad and KNOW they have leverage.
a.
“I’m taking my 4 weeks of vacation today! Get someone else to do my mission critical job for 4 weeks” (essentially threatening the new Buyer).
Underestimated Communication Barrier with Employees
Employees in an industry somewhere between Blue and White collar. But they were not used to the professional communication style of the Buyer who was used to professional or Fortune 500 communication (total communication disconnect between Buyer and her new Employees).
Didn’t See Employee Resentment Coming
Employees who wanted to purchase - weren’t able to - and were mad.
Allowed Employees to Force His Hand
Employees promised retention bonuses that were supposed to be funded by Seller.
a.
$750 thousand of retention bonuses promised by former owner/Seller. Not paid. Employees expected it and were pressing the new owner for it.
b.
He paid out the bonus AND THEN the employees still left - now funded/capitalized by the Buyers cash - cash the Buyer didn’t have!
Underestimated Challenges of Low Barriers to Entry
Acquired business had low barriers to entry meaning that anyone could get into it. So employees who were mad - started their own competitors.
a.
Mad - couldn’t buy the business themselves.
b.
Mad - were promised $750k of retention bonuses by Former Owner/Seller who did not pay and then New Owner/Buyer was delayed in paying.
c.
Mad - a newbie who didn’t have direct experience in the business was now their manager and they could do it better themselves.
d.
Mad - employees owned customer relationships that they were “giving” the profit from to him and felt they could keep the profit if they had their own business/entity.
Employee Burglary & Protection
An employee burglarized the office - stole from the Boss/Owner who was slow to pay the $750k retention bonus.
Only Kept Bad Employees
Those who “stayed” in the business…didn’t stay because they trusted the New Owner….as he wished was the case. They stayed because they were incompetent.
Paid Bonus Without Sufficient Non-Compete
Key employees who were likely paid a retention bonus started competitors. It’s likely he wrote the non-compete for employees that went alongside retention bonus because the lawyers were tied up fighting the Seller over the “bad debt”.
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