The Biggest Issue You'll Face Buying A Sub $1m Business

Hi all,

The biggest issue you’ll face buying a business below $1m?

You are relying heavily on the assumption that you can match or beat the performance of the founder.

At larger sizes, the founder is probably not involved in the business as much, and has built a solid team who will usually stay with the business.

Below $1m, not so much.

Here’s a framework for trying to figure out how much the founder is driving the business:

1.) Ask them to outline their day to day responsibilities.

2.) Ask them how the business generates leads and sales (usually the founder is doing both)

3.) Check out the founder’s social media. Are they doing a lot of biz dev activities that appear to be working? - Basically content marketing that gets good engagement.

4.) Ask to see their CRM if they have one.

5.) Do a wider analysis of the space. Are all these businesses founder driven? Do they require technical knowledge? Can you hire someone?

6.) Try to speak to some of their clients/customers and ask them why they bought, how they discovered the brand (this is a great due diligence piece for the wider question as well)

7.) Speak to the team. Not always possible for a small business but worthwhile if you can

8.) Ask the founder similar questions different ways to get a more accurate picture.

Ultimately it’s going to be a judgement call and it will take practice, but follow the steps above to arm yourself with the best chance of avoiding a catastrophe.

Here are some specific issues we faced over the years.

Proofreadanywhere

With our biggest acquisition to date, we were aware there was a large “founder face” factor at play. In other words, the founder is the face of the brand.

Before the acquisition, we got permission from the founder to use her likeness in something like a year’s worth of FB ads (the main driver of traffic and sales) and social media profiles, plus the course itself.

We figured that would give us plenty of time to slowly remove the founder from the brand.

We did that successfully, but two things could have gone better:

1.) We “removed” the founder, rather than “replaced” her with a new face. This is a challenge and something we’re working on now.

2.) We underestimated how much the founder’s personal social media following was driving affinity for the brand and winning over customers who were on the fence. She stopped talking about her brand after the exit, and even mentioned she’d sold it, which did have some impact on sales.

Not a huge issue, but something worth checking in the future.

Contentellect

We knew this was a “sales gig” going into it and hired a very good CEO who is excellent at sales and probably better at operations than the outgoing founder, so he has transformed the business into a well-oiled machine.

What we failed to do was figure out how much the founder was doing lead generation activities and marketing.

It wasn’t as “in your face” as most founder marketing, so harder to catch.

Not a hard lesson to learn, because the solution is just “do more marketing”, but something worth sharing as you may miss these kinds of things too.

Asubtlerevelry

This is one of the first acquisitions I made as part of a JV. A large part of the income came from brand sponsorships and relationships, but the founder had led us to believe it was mostly just applying for sponsorships on marketplaces.

Either she was much better at coming up with ideas for sponsorships than we were (highly possible), or she’d built relationships with brand managers that didn’t carry over to us once she’d sold, and our ability to get new sponsorships hit rock bottom.

The lesson in this one is to figure out how much skill/talent the founder brings to a particular activity. They might pass it off as easy and something everyone can do, because they don’t even realize they’re talented at it.

If these three lessons above teach us anything, it is that you should double check all your assumptions about the founder’s role, try to shadow them for as long as possible during the due diligence period, and get an earnout where possible.

Dom

P.S Our SPV for buying agencies is ready to launch. Hit reply if you want to learn more about co-investing with us.