Part III: Transitioning a Business

(Plan, Negotiate & Agree on the Business Transition before closing!)

This is part 3 of a 3 part series. Check out ​Part I here​ and ​Part II here​.

Remember, you bought a money making machine, a business that is already successful - Your job is to not screw it up!

So find the spots that need a little WD-40, but DON'T go in hard or fast.

Take your time.

Learn.

Fill in any gaps and transition slowly.

To help create your business transition guide, we’ve broken the process into five core areas:

1. The Business Set Up

2. People, including your seller

3. Processes

4. Product or service

5. And the Finances

Core Area 4 - Product

Between your due diligence, People and Processes, you are likely to have learned a lot about your product. Take that head start and dive even deeper.

Inventory can be a tricky part of the acquisition process. You may or may not have been able to do a physical inspection of the inventory during the diligence period. And if you did, it may not have been as thorough as you would have liked. Now is the time. A full physical count may take several hours or even several days to complete so this may not be possible. But definitely do a thorough “spot check” of as many aspects of inventory as possible. Be sure to check the work in process as well.

The seller I mentioned earlier that I want to strangle over inventory? He got burnt on supply chain struggles during and after the pandemic, so he feels like he’s providing a safety cushion for his business. But like the little kid you bundle up so much they can’t even move? That’s more like what he’s actually doing to his company.

Freight and delivery should also be evaluated along with inventory.

• How large of an impact does this have on the company?

• What changes have been made since COVID?

• Are those changes still relevant?

What quality control processes are in place?

• What happens to products that don’t measure up?

• Are they reworked?

• Trashed?

• Sold at a discount?

Customer Feedback

It's unlikely that you were able to meet with customers during due diligence. But now they’re your customers. And frankly, this is often an untapped source for business success. Your customers are the best way to know:

• What you’re doing well.

• Problems you may not even realize exist.

• How to upsell them.

• What additional services or products they need.

• Unusual ways they are using your stuff.

You should definitely connect with as many of your customers as frequently as possible. If nothing else, they will appreciate your outreach.

A few tips for creating a feedback survey include:

• Skipping the jargon. No one likes to feel confused.

• Keep the questions and the wording simple.

• Test your questions on a small group first, maybe friends and family.

You should be asking your customers things like:

• What is the biggest benefit you’ve received from our product?

• How easy was it to use?

• Do you see our product as a good value for your money?

• Have you recommended our product to anyone else?

• How can we improve?

• What is one feature you’d like us to add?

• How disappointed would you be if our product were no longer available?

• What frustrates you most about our product?

Core Area 5 - Finances

And then my favorite topic! The money of business! This is our last core area, but definitely not the least. I could go on for days and days…

But the most important point I’d like to make is that as a successful business owner, you have to get comfortable with your numbers. You don’t have to be an accountant, but you can’t be an ostrich either.

Just like during due diligence, you can start by looking for patterns.

The first thing you’ll want to do is meet with the bookkeeper. This may be an in-house person or an outsourced firm. Or it could be the seller.

• How do the books work?

• Who does the day to day entries?

• Get a grasp of the cash management, the money flow.

Small business books are often a disaster, but you may not want to say that out loud.

• Does the bookkeeper need to be aware of your “deal structure”?

• Do transactions need to be recorded in a certain way for the earn out to be calculated?

• Are freight and shipping costs being passed on to the customer? Are they included in the COGS?

• How often are returns and refunds being given?

• Are accounts receivable almost as high as sales? Meaning you’re selling a lot but no one is actually paying.

• This one is huge! Pricing and profitability.

Assess the profitability of every product and service offered. I know there will be some surprises during this exercise. Start with your most expensive product, or if appropriate, start with your highest paying client. Just because they pay you the most money, doesn’t mean they are the most profitable. I have an entire training on this and it’s so enlightening.

• Are all tax and compliance filings up to date? I have a 7 page Tax deadline checklist for you. Reply TAX to get your free copy.

  • Your deadlines and filings will vary through the months depending on your type of entity, the size of your payroll, if your product is subject to sales tax and your state statutes.

  • The beginning of the year is very busy with 1099s and W-2s.

  • Most business tax returns are due in the first quarter.

  • Then April is for C Corporations and personal returns.

  • The end of each quarter will have lots of payroll filings due.

  • Business extensions are due in September.

  • October is another end of quarter plus a great time for tax planning.

  • In December we begin to wrap things up and get ready to start all over.

Don’t be an ostrich!

I’ll take that one step further and encourage you to become a part of Finance Fridays.

• Create the habit of reviewing your numbers once a week, on Fridays.

• Review the P&L and Balance Sheet every Friday.

• Look for patterns in:

  • Sales

  • Expenses

  • Profit

  • Cash

  • Accounts receivable

• Pay bills once a week, on Fridays.

• Review current bank and credit card statements in detail, on Fridays.

• Review time sheets, every Friday.

In addition to the 5 core areas, I also broke the transition process into the 3 stages of transition, and made that into a checklist. I love me some checklists! Reply with Before/At/After to get your free copy.

Before you get to closing, and before you finalize the purchase agreement, because that’s ​The Point of No Return,​ this is what you should be doing:

• Determine if your deal is an asset purchase or stock purchase. (This should be in your Letter of Intent.)

• Consult with an attorney regarding a Special Purpose Vehicle.

• Establish any required entity.

  • Get an EIN from the IRS.

  • Open bank account.

• Share with the seller that at closing, you expect to:

  • Have passwords and keys.

  • Be added as a signer to the stock purchase bank account.

  • Have a list of all company equipment in employees’ possession:

    • Such as small tools.

    • Laptops and cell phones.

  • And you also want to have the details of employee held business credit cards.

• Plan team meeting and announcement to other parties ahead of closing, such as:

  • Employees

  • Customers

  • Vendors

• You should also secure for a business line of credit. If you’re financing the business purchase, you should try to establish the line of credit in conjunction with your main financing.

At the closing meeting you should:

• Collect the items listed above:

  • Any keys to safe, real estate, filing cabinets, lock boxes.

  • Passwords.

  • List of all company equipment in employees’ possession:

    • Such as small tools.

    • Laptops and cell phones.

  • Details of employee held business credit cards.

• At the closing meeting you should also confirm transition details with the seller, including:

  • The team meeting/announcement.

  • The first week shadowing.

  • And your on going training.

• Have seller add you as a signer to bank accounts and such.

And the real work begins after closing the deal. Here is a rough guide on how the timeline could look:

• Day 1

  • Confirm you’re added to the bank account in a stock purchase.

  • Hold employee meeting/announcement.

  • Setup workspace in seller’s office.

  • Begin shadowing seller.

  • Begin documenting all seller functions.

  • Implement transition plan.

  • Consider freezing all payments (especially if it’s a distressed deal).

  • Don’t sign any contracts for the first 30 days.

  • Check and record your 3-5 key metrics.

• Day 2-7

  • Begin employee 1:1 meetings.

  • Schedule meetings with extended team such as accountant, attorney, tech person.

  • Open a line of credit.

  • Inspect inventory.

  • Review supply chain.

  • Learn and document any customized technology.

• Day 8

  • Once a week, on Finance Fridays, review and record your 3-5 key metrics.

• Day 8-14

  • Schedule vendor meetings.

  • Schedule customer meetings.

    • Create customer feedback plan.

    • Develop feedback questions.

  • Review top 3-5 problems discovered in due diligence.

    • Do they still appear to be top problems?

    • Who is responsible for these areas?

    • Review with appropriate personnel to dive deeper

  • Review any upcoming tax and filing details

Any tips I missed?

Getting a deal together is a ton of work, but don't get sloppy at the end. Make transition planning a part of your deal from the beginning.

And please, learn from my mistakes! 'Cuz I've made a few...