Avoid The Business Purchase Nightmare!

You did it!  You found a business that matched your wants and made the leap into ownership. So the transition is simple, right?

A business purchase can be very exciting and profitable.  It can also be a total nightmare.  The key to avoiding headaches and challenges is knowing what to look for and how to prepare for the occasional bumps in the road you may miss.  In this episode we will talk about the challenges new owners may face and how to avoid them.

[00:00:01.05] - Alice

Books in the Biz, a podcast that looks at both the financial and operational sides of success. Please welcome our hosts, Dan Paulson and Richard Veltre. Dan is the CEO of InVision Development International, and he works with leaders to increase sales and profits through great cultures with solid operations. Rich is CEO of the Veltre Group and a financial strategist working with companies to manage their money more effectively. Now on to the Hello, everyone.

[00:00:33.00] - Dan Paulson

Welcome back. Thank you, Alice, for a wonderful introduction, as you always do. She's so on top of things. I love Alice. Rich, how are you?

[00:00:41.26] - Rich Veltre

I'm good, Dan. How are you?

[00:00:43.23] - Dan Paulson

I am doing wonderful. So our subject today is going to interest the people in the room who are buying businesses. And I think we belong to a number of groups of some ambitious younger and older people who are out there looking for that next opportunity. And we were talking about this before we got on the podcast. It's always easier from the seller side, because you just collect the check, go to the bank, and turn in the keys, and hopefully you made enough that you're laying on your own private island and calling it a day. However, if you're buying a business, I think it's a little bit different story, and there's different things that go on, and what do you need to do to prepare yourself? So that's where we come with our subject today. Rich, from a financial side, what's going on? And maybe this is the best way to start. So there's probably that we'll cut out the months of vetting and everything else and say, okay, the deal is signed. We know it's going to close. What should you be doing from a financial side before you actually take the proverbial keys and run with the company?

[00:01:58.14] - Rich Veltre

Yeah, I think planning, and I don't mean just, oh, the bank wants to see what my budget is going to be when I go and I start this business. That's all done. So you close. You've already done that. You've already presented that. You've already gotten investors or bank or wherever your financing came from. You have a plan for this is what I'm going to do. So don't just put that in a file and think, I'm going to go sit at a desk, and tomorrow, everything's going to work out great, because it doesn't necessarily work out great. If you do that, you can make it work out great by You're planning for what's going to happen on day one. You have a lot of things that you have to transition that won't happen until the document is signed that puts the business in your hands. But at that point, you have to go and figure out banking. You have to figure out customer relationships. You have to figure out what's your plan for how are you going to make this company bigger? Because you didn't buy it just so it would be the same for tomorrow.

[00:02:54.24] - Rich Veltre

You bought it so you could do something else with it the old owner didn't want to do. So what is that plan and how do you implement it? So I think that's the big thing. What are you going to do to implement day one so that everything starts to work for you as opposed to for the old owner? I think banking is probably one of the biggest ones because I'm going through one now that's just a bit tumultuous. I don't have another word. I think that's a good one.

[00:03:21.26] - Dan Paulson

Well, without throwing any banks under the bus, other than saying it's a rather large bank, which tends to make things more complex when you try to make simple moves happen. What's going on in this situation that's making it a little bit unique?

[00:03:37.11] - Rich Veltre

I think you have to look at it and say, well, if you're buying a business that was owned by a single founder, that person's banking process may be very different than what you're bringing in. So if it's just you and you're acquiring it, you might just take over there how they did it, and it might work out just fine, or you might You have your own bank, so you're going to work with your bank and just cancel all the old banking. But in the case of this, we have where we bought the actual entity. So because we bought the entity, the bank account stayed the same. Now we had to do a name change, and we had to do signature card changes, and we had to get it so that it became ours as opposed to the old founders. And I'm truly coming to the conclusion that the founder had his personal accounts connected to the And then it's an interesting- Because that never happens. So I think as we're going through the process, some bad stuff is happening. And who doesn't have access to this, or who was operating still using features that are only available for the individual.

[00:04:50.15] - Rich Veltre

And now you're doing a corporate level bank account. And so the bank is in the middle going, we're just doing what we're told. Well, I don't know what I'm supposed Just to tell them that I don't know. There's pieces to this that I'm trying to throw everything on the table and say, this is what I need. And they don't understand. So the communication is very difficult. But it's funny, because then we go and we roll over to, well, who's running the payroll for the people that are still in the business? And so we run into the same problems. It's like, well, we don't recognize that you're the new owner yet. You have to show us all these documents, and you have to... So that all takes time, okay? And the biggest thing is the people want to get paid. If they're getting paid on that first week after you move in, somebody has to pay them.

[00:05:44.08] - Dan Paulson

Yes. Because the last thing you want is your employees not to get paid after they've immediately seen you take over the business. It doesn't look good. It doesn't feel good. Bad vibes.

[00:05:56.02] - Rich Veltre

Very, very, very bad vibes. You want to set your culture Sure. I'll put your offer off on a fabulous note, because I'm sure you sold them all on how great it's going to be, and you're going to come in, and it's going to be even better than it was before. And so the first thing you do is not pay them. They're going to call you a liar.

[00:06:14.00] - Dan Paulson

They might not be working with you that following Monday. It's hard to say. They might take the opportunity to free up their future and go work for your competitor.

[00:06:23.27] - Rich Veltre

Yeah. It can be really time consuming. The The one that I'm working on now that's becoming a bit of a disaster, it's now going on two months since the acquisition happened. This stuff should have been figured out already. I'm really amazed that it's taking this long, because usually, even when you get to something that was looking like it was going to go in a bad direction, people jump to get it straight, to get it corrected, and put it on a course correction, so that by month two, you're not dealing with this. But I mean, to be in the middle of month two, and not be able to see the payroll, and not be able to see it's running, I can't see it. So I don't know if it's right I assume everybody got paid the right way, but I don't like assuming. You know what happens when you assume.

[00:07:20.09] - Dan Paulson

Oh, especially with other people's money. Not good. Not good at all.

[00:07:24.29] - Rich Veltre

No. So it's definitely a challenge. So I would tell people, Put those things on a blotter, on an easel, on anywhere. I don't care. Use a computer program if that's your thing. But have it where you know these things have to get done. Are they done? Delegate if you have to, if you have people working for you, and put it out in the forefront so it gets done quickly, then you don't have to worry about it.

[00:07:54.11] - Dan Paulson

So in your situation here, they've been operating for two months under the new management structure. What should they have done probably two months prior to the transition that might have helped eliminate or at least reduce some of these problems?

[00:08:14.29] - Rich Veltre

Well, I use the word plan, and I was, I would say, pretty accurate in saying that's what I think people should do. I don't think there was one here. I think there's a combination of things. I think they closed right before the July fourth holiday. Right after that, the old owner said, okay, I'm going on vacation. I'll be back on July 20, whatever. So he's going away for three weeks. So the person who had all the information was the old owner. He went on vacation. There was no plan for bringing anything in. I didn't actually get involved until the end of July after he came back. So we're looking at it going... It's it's now going on two months, and somewhere in that vicinity, none of this was plotted out. There was a bit of a plot that these are all the things that have to get done, but they just got moved to the next month. So the disaster started. The disaster started to happen in that first month, then all of a sudden it became, well, now we have to address all this stuff. So it's a little late because now you're fighting to get back uphill.

[00:09:26.07] - Dan Paulson

Yeah.

[00:09:26.22] - Rich Veltre

And so that's the challenge. You're trying to actually push to be able to get all these things done and do a good job and show people this. But that's when you start doing it. And that's when if the bank is not helping you, if the payroll company is not helping you, if you have to make other changes, you're starting a month behind. So that plan really needed to be executed on day one. In this case, unfortunately, day one was July fourth. It was a holiday. But that Monday, you could have just rearrange it so that the next Monday, okay, that's the day we have to get things done. So somewhere along the line, someone should have said, these are the things we need, but nobody did that.

[00:10:10.17] - Dan Paulson

And it was always my belief that whenever an entity changed hands, usually where the bank's involvement was, is, well, you can't just take over these accounts. You can't just take over these loans. We want, even if it's with the same bank, we close this loan, we open a new one in the new entity's name. We transfer all liabilities over into that. You start paying on. It's basically like a new loan. Same with the bank account, savings, money market. If you have an operating, all that stuff's got to be redone, basically under the new entity, because it's Almost like their vetting process to say, well, maybe we're not giving you as big of a line of credit, or maybe we're giving you a bigger line of credit because you're infusing more cash in the business. But all that stuff is rediscussed. It seems like in this situation, wouldn't that have been a better path to go than just, again, change the name on the accounts and start over?

[00:11:06.11] - Rich Veltre

Hindsight? Absolutely.

[00:11:08.01] - Dan Paulson

Absolutely. Absolutely. Absolutely.

[00:11:10.25] - Rich Veltre

Give me a whole new system with a whole new set of bank accounts. That'd be great. The only bad part was all the things that were already in there. So you have a enterprise level access that was being run by the founder, but it was still enterprise level access. And in there, you saved all the information for your vendors that you're trying to pay. So especially in this case, they were international vendors. So you're paying people by wire, and all those wiring details were already vetted and already in the system. So one of the things you could probably argue is, well, I bought the vendor list, all the vendor banking contacts. You could probably put a dollar value to how valuable that was to not have to reset up every single connection. Plus, a lot of places that are requiring wires now, a lot of places require verbal verification of the... Or verbal verification of the wiring details, because we've had it where you think you have all the right details in there, but somebody hacked your system, and all of a sudden, the numbers are wrong. So as long as you've voice verified in the beginning, when you set these up, there's no real reason to go back and check it again.

[00:12:27.02] - Rich Veltre

But a lot of places now require that you do a verbal verification of the instructions, because you'll get wiring instructions from someone by email, and somewhere in the middle, it'll get hijacked, and you'll be sending the wire to the wrong place. I've seen it happen. So To have to go back and redo that for everyone is a bit scary because that's a lot of work. And if you're running lean and you have a small amount of staff, that's That's a time killer.

[00:13:01.21] - Dan Paulson

Definitely. And that goes back to your point, how important it is to have a plan in place ahead of time. Even from my end, that plan becomes very critical because, as you pointed out, from the payroll side, the financial side, they don't get paid. They're not going to be happy, and they're probably not going to want to work for you much longer. But they already might not be happy if they don't know what's going on. And in so many cases, I've been involved in, I'm sure you've been involved in it, too, where sales taking place, usually the last people to know are the employees. The owner typically doesn't want to tip his hat that he is selling the business to somebody else for fear of upsetting the apple cart. Let's face it, people don't like change So they're more likely, even if things are going to remain the same after the new person takes over, to want to jump ship, because the old person who was there is no longer there, and they don't know what to expect. So I'm even looking at planning process by saying, okay, what do we need to make sure it's in alignment here?

[00:14:04.20] - Dan Paulson

We need the vision mission values of the existing company. How does that align with the vision mission values of the new company? As soon as it's made open, that the sales going to take place and that it's going to go through, I think you need to start talking with employees individually. What's going to change? What's not going to change? Ideally, in my world, you change nothing for at least six months. Now, the exception to that would be if there's something so critical that it could cost the business. Of course, you got to make changes then. But we're assuming that if it's a fairly well run company, if things are chugging along, everything's all right, I just I can touch anything until I had a handle and got to know the employees really well. They got comfortable with me. I understood the workflow of the business, what's working, what I believe is not. And again, that allows you to ask more questions. If you see some bottlenecks that need to be changed, maybe part of the influence is you ask the employees about it. Maybe they say, yes, it's been like this forever. It sucks. Now you empower somebody to go fix it.

[00:15:11.18] - Dan Paulson

But to me, whenever there's this transition happening, the less that changes from an operations side, the better. Get people comfortable. Let them know their world's not going to be upended. And there's a good chance you won't lose anybody. Not Guaranteed. But who are the first people to go in those situations? You and I both know it's not the worst person on your team. It's the best, because they have the most mobility, and they've probably already been courted by other companies to come work for them anyway. So this is just incentive for them to move quickly. If, for example, your paycheck doesn't bounce, or your paycheck bounces on the first day that the new ownership came in. So that's where keeping things as smooth and as consistent And no big waves that first month or two, I think, is very good. If you can get through the six month period, that's going to be even better. Yeah. You'll be on that, then you have your assessment of where people are at, how people are doing, what's working, what's not, what you see that can maybe grow or expand further, what things maybe need to go away because they've just always been done.

[00:16:27.14] - Dan Paulson

And there's a lot of that that goes on.

[00:16:30.05] - Rich Veltre

Yeah, I think I totally agree with the six month movement. I think in this case, I probably would say, I don't think that you can go six months because I think there were certain things that because it was a founder owned company before, there was a lot of stuff that was not based around good financial structure.

[00:16:52.25] - Dan Paulson

It was based around the owner's financial structure and how it is with that person.

[00:16:57.01] - Rich Veltre

Yes, that's exactly correct. The The interesting part of it is that I find this stuff very interesting because when I come in, I start to look at, okay, if the company is going to scale, which is usually what happens when you have a investor-back group comes in and wants to buy the company, they're looking at growth. They're looking at how do I get to the next level. But they're also looking at good financial structure and putting it in if it's not already there. So in this case, you start to look at, okay, I look at my internal control structure, my whole process, and I'm like, okay, that one failed, that one failed, that one failed, that one failed. And it's not that it overall failed. It failed because it was overridden by the founder being that overseer, the fact that he was actually looking at all the processes all the time. His hands were in everything. So in that In that case, the internal control structure was him. Problem is you took him out. Because you bought him, and he left. So he's gone. So what's the new control structure? Now you have to build all what I call six processes, right?

[00:18:13.20] - Rich Veltre

There's six pieces to the puzzle. So now you need an internal control structure around all six. And it's funny. I walked in. They gave me access to the bank account. One of the first days, I sent out a $500,000 wire. Nobody questioned it. And I didn't get it through. So it's a little scary because you sit there and you go, okay, from an internal control structure, I just scared myself, let alone the fact that in another case, someone else I made sure that the first thing I did was tell somebody, I just sent a half a million dollar wire. And they went, oh, that's not normal. In a company that's set up to scale, in a company that's set up to eventually be audited, to have an outside auditor come in and look at it and say, you didn't have to get an approval on that? No. These are the problems that come up, and people write that stuff up. So it's time to really put those controls in place. And the fact that they're not there, and now moving into the point of, we're going to scale this company, those things need to be there.

[00:19:25.29] - Rich Veltre

Otherwise, you're going to hit a wall somewhere, and it's going to be an ugly one.

[00:19:29.29] - Dan Paulson

Well, and this isn't really planning, but it's analysis. So here would be my question. I agree with you 100 %. All that stuff should be in place. It wasn't in place. What vetting was done before the company was purchased? Because to me, there should have been an analysis financially, operationally, whatever it might be. Plug, we can do this for you. You can come in and look at what's going on, and have maybe some outlines to what needs to be changed, because we've talked about this before, and we've talked specifically about owners having full control over every aspect of the business, and how that impacts the overall value. It takes away from the value of the business when the owner does everything, because as you've pointed out, I now have to add maybe two, three, four bodies that are pretty pricey at the senior management team in order to fulfill what one person was doing because they're no longer here. So you have a financial guy, you have an operations guy, you might have a marketing person, you might have a salesperson. And last I check, those people, in most cases, come with a good six-figure salary, plus benefits, plus incentives, plus everything else.

[00:20:52.20] - Dan Paulson

You're talking about if you added four people like that, for example, that would be upwards of a million dollars in salary and benefits alone, in many Well, that affects the value of the business. So if you haven't done your due diligence upfront, you didn't uncover all this, and then the guy leaves, or gal, because it could be either or, you're up a creek, because there's no incentive for that guy to come back and help you out. That person is gone. They've got their money, they got their check, they're on their island, they're done. That's why they sold the business. They didn't want to come in to work every day to figure out what's going on.

[00:21:29.04] - Rich Veltre

That's right. And I think in this case, they clearly did a lot of due diligence in the beginning. They didn't know where the problems are, whether they planned on waiting a month to really start to attack them or not, I don't know, or why, or maybe it was getting done behind the scenes. I don't know. I mean, I'm in a temporary basis, so they could have been looking for somebody permanent and then said, no, we just have to take the temporary- Or they assumed it wasn't that bad.

[00:21:59.01] - Dan Paulson

Yeah. Fine. We can fix that. That's a quick thing to take.

[00:22:03.23] - Rich Veltre

Yeah. And I think that nobody could have expected the banking problems. Nobody could have expected the payroll. I don't want to call it problems because everybody's been paid. Okay. But it's But there's a hole and lack of control. The system should have been moved over, especially that one, because that's so sensitive. Banking, we hit some snags that nobody would have been able to actually anticipate. But in other words, that's why I'm pushed to get it done sooner rather than later, because if you do hit a snag, you want to be able to deal with it without it becoming monumental.

[00:22:43.16] - Dan Paulson

Right. So I think there the key is, you better have some people in your portfolio that you can tap into to fill expertise that you might be lacking once these issues start popping up.

[00:22:57.04] - Rich Veltre

Right. Agreed. Absolutely. And Definitely tap into who you know, tap into who you know and how you can get it done.

[00:23:08.09] - Dan Paulson

Well, we would like to know more of our listeners. So maybe this is a good plug to say, hey, if you are looking Being in a situation like this, I know two people that can help you out. One of them is my good pal Rich here. Rich, how do they get a hold of you if they need some financial help and figure out how to get money out of the bank and do a $500,000 wire transfer?

[00:23:30.05] - Rich Veltre

Yeah, just give me an email. If you have these types of problems and you need some help, give me a call or send me an email. It's the best way, rveltre@veltregroup.com.

[00:23:39.14] - Dan Paulson

And as I pointed out, you're going to have operational issues. You definitely want to keep the talent that you have on staff, the good, the bad, the ugly, at least in the beginning, figure out how to get rid of the ugly early on. But that's something I can help you with. Actually, both of us can help you by doing that analysis report that we're talking about. So we've done it for succession for other companies, but we've done for a number of other reasons. So that might be something to consider. It's a great way to find out maybe some of these challenges ahead of time, so you know what you're getting yourself into. But you can contact me at danpaulsonletsgo.com. And there's an online request form there. You can just fill that out and get a hold of me. That's the easiest way to do it because my email is too damn long. Blame me for being silly 20 years ago when I created it. But Rich, this has been a good discussion. I think we've educated our listeners a little bit on maybe what to watch out for as they're thinking about that next business purchase.

[00:24:33.23] - Dan Paulson

Till next week, we'll talk to you then.

[00:24:36.29] - Rich Veltre

All right. Sounds good.

[00:24:38.06] - Dan Paulson

All right. Thanks, Rich.