The idea of growth is always attractive to entrepreneurs, who are optimists and risk takers by nature.
When owners come to me and say they’re thinking about acquiring another HVAC company, one of my first questions to them is, “What’s your timeline for selling your business?” If the answer is three years or less, I advise them against buying another company. Here’s why:
Acquisitions increase your sales. But they also increase your debt and expenses. Whether you pay cash or finance the purchase, you’ll be paying fees, paying for help with diligence, and paying your accountant to run the numbers. If you’re servicing debt, it may take years to get back to the break-even point, probably more than three. Your financials will show less profitability and higher expenses, which will make your pool of buyers smaller and more cautious with their offers.
You don’t know what you don’t know about the new company. You have undoubtedly done some research, but don’t have a way of knowing details that could be costly after the sale. Have the vehicles been well-maintained? How accurate and current is the customer database? Is a disgruntled employee about to quit or file a lawsuit? How many employees – or customers – will leave when there’s a change in ownership? It takes months to figure out what’s really going on in a company, and issues may take months more to resolve. Buyers will see all that uncertainty as risk and discount their offer accordingly.
Integration takes time, resources, and money. Changing out uniforms and vehicle wraps. Advertising and marketing. New software or equipment. Evaluating and retraining the workforce. Fixing operational problems or terminating employees who won’t make the cut. All these issues take your time and attention away from your current business, which may start losing momentum and profitability while you’re working on the other business. Your paperwork, time investment, and stress will go up exponentially, on top of having to figure out how to find the right buyer so you can retire in a couple of years.
Buyers are looking for a company that has room to grow, not one that will take a while to reach its baseline potential. It takes months, maybe more, for two companies to operate like one. Furthermore, running a larger company is not simply a matter of scaling what you’re doing right now. Every milestone, from reaching a million dollars in sales to hiring a manager to run the business while you grow it, comes with a learning curve and plenty of mistakes along the way. It takes a completely different set of skills to run a $10 million company than it does to run a $2 million company. You might find that both companies begin to underperform, which definitely hurts the business’s value.
If you’re planning to sell within three years, my advice is always to ensure your company is running at peak efficiency before considering growth. Make sure your operations are tight, that you have the right processes and systems in place, and are delivering great service to your customers.
In fact, I might even advise you to wait three years after the three-year mark to list your company. By then, your performance, profitability, and growth potential will be known quantities, rather than optimistic estimates.
