Three experts weigh in on the four questions to ask when acquiring a screen printing business.
IN THE FALLOUT OF the COVID experience, there naturally will be some winners and some losers. On the winning side are businesses that were able to weather the storm or pivot, and are looking to expand. On the losing side are shops that are wanting to sell or get out of the game entirely.
To discover the key elements of this process, I asked three top business people in the industry for their recommendations. Huge shout out to Tom Rauen with Envision Tees, Brett Bowden with Printed Threads, and Rock LaManna with the LaManna Consulting Group. Tom has bought several businesses; his latest acquisition was 1-800-Tshirts. Brett just recently purchased another shop in his area, and then formed “The Creative Situation.” Rock is the self-proclaimed “Deal Flow Guy,” and helps business owners either buy or sell print shops all across the country. [Check out Rock’s article on selling your shop in the December/January digital edition.]
I asked them to expand on these four questions:
- “When buying another shop, what is the number one thing to consider?”
- “What is the biggest mistake that could be made, and how do you avoid that?”
- “How are you evaluating if the business is something that potentially is a good fit for you?”
- “What is your best tip for a successful purchase?”
Their answers can help make an impact on how you’re organizing your thoughts surrounding your next business acquisition.
When buying another shop, what is the number one thing to consider?
This is crucial to get your mind right. Asking a simple question like, “Why would you want to do that?” gets you thinking about the reasons behind the deal. Just because you can, doesn’t mean you should.
For Tom, he asks, “Does it align with your company? The culture, the owner’s values and beliefs, the customers, the equipment, the services offered? The more these align with your current business, the smoother the entire process will go.”
It has to fit together like a jigsaw puzzle. Everything has to mesh together and work, otherwise there may be a hidden challenge that won’t appear until long after the deal is struck.
For Brett, he asks, “What are you really buying?” Is it the equipment, the customer list, something they own like a patent, contract with a customer, or relationships into a new market segment that you want to explore? Is real estate included? Make sure you ask a lot of questions.
Rock mentions you should be looking for the “reputation of the brand” that you’re buying. For example, if a business is for sale because the current owner does a subpar job, there isn’t much to that name. You might ask to see their customer list and randomly give some a call to find out what they think. Don’t get caught buying a shop with a less-than-stellar reputation.
What is the biggest mistake that could be made and how do you avoid that?
Tom says it’s “not asking all the right questions and getting the details up front.” They say the devil is in the details, and buying another company requires access to take a closer look at the inner workings of the company.
You need to closely examine their financial statements with an accountant. Make sure you get your hands on the past five years of balance sheets, profit and loss statements, tax returns, audited financial statements, accounts payable and receivable, and any governmental loans they may have outstanding.Advertisement
Make sure you ask questions regarding their business debts. Do they have any liens on any of the business assets? If any bank, supplier, or creditor has filed a UCC-1 Form when they extended credit to that company, they can seize and sell secured assets to collect their money if the debts are not paid. Even if you are the new owner.
Brett’s answer involves retaining the current customer base. For example, what if “you buy the customer list and none of the customers come over?” This begs the question: Why is the owner selling? In the printing industry, the majority of customers have built a personal relationship with the owner of the shop. When that changes hands, or suddenly their “go-to” person is no longer available, that loyalty vanishes.
One way to ensure a smooth transition is to have the old owner personally introduce you to the top 20 or 30 percent of the customers on the list. Typically, these are the customers who drive most of the sales. Setting the tone and having them help you with a smiling introduction can do wonders to ensure the sales continue.
Rock’s answer is “underestimating the target’s talent to grow the business.” Before you spend money acquiring new customers, think about how you’re handling your current list of customers.
Are you doing all you can to maximize their potential? If your goal is to grow sales by acquiring another company, take a long, hard look at your methodology of engaging your current customer base. If there’s room for improvement, maybe you should work on that first.
One trick many business buyers have up their sleeve is holding some of the purchase price at closing. This is part of the deal. This way, if the previous owner fails to work with you, or an unexpected lien or financial problem arises, you have the ability to deduct money from the final payment.
How are you evaluating if the business is a good fit for you?
Tom goes back to his original statement: “Alignment. Does the business align with what you’re currently doing and complement it?” Brett also shares this sentiment: A similar culture, with a good knowledge base.”
Let’s say your current business is mainly screen printing for the CrossFit and athletic markets. You work with gyms, fitness instructors, and health-oriented businesses. On the market is an embroidery and promotional product business that also serves this same industry, but is in a city about 60 miles away. The owner is retiring and wants to sell.
This may be a great fit and opportunity because not only are you adding a decoration method that you currently don’t handle in-house, but you’re also gaining another group of similar customers a short distance away. In this case, the alignment and fit covers both production areas and the sales segments.
For Rock, it’s all about the data. He wants you to make sure you “complete your due diligence and look to their processes.”
We mentioned looking at the financials earlier, which certainly is a part of that process. You should also add your research and investigation into their physical assets, such as equipment. If the shop leases their space, make sure you review the lease agreement. Some landlords have leasing contracts that may not allow you to simply acquire the business and stay in the same spot without their consent. Plus, make sure the previous owner is up to date on the rent.
You may also want to investigate if the business is in good standing with the state from a legal perspective. Do they owe back taxes and have all of their paperwork up to date? Are there any potential lawsuits or legal challenges on the horizon?
Don’t walk into a hornet’s nest.
Your best tip for a successful purchase.
Everyone, including the buyer, wants the deal to go smoothly without a lot of drama. However, for a lot of business owners, the shop is “their baby” and they may have an over-inflated opinion on what it’s worth.
If you’ve completed your research, and everything looks promising, it’s time to take the deal to the next step.
Tom recommends “building a relationship with the seller to ensure a smooth transaction and post transaction transition.” This allows you to understand them better, and for them to get to know you, too. Tom tells me he spoke to the previous owner for years before his most recent acquisition of 1-800-Tshirts. Engaged conversation and persistence works.
Brett says to “make a mutually beneficial agreement, it’s best if the previous owner still has a stake in the game for a period of time.” Typically, this is handled with a percentage of sales or profits going to them for an agreed upon duration. This tactic keeps them engaged and involved should you need them to help bridge the gap or nail down a long-term customer on a new program.
Rock says to make sure you have “an experienced integration team of professionals.” He’s correct. You don’t have to go this alone. In fact, bringing in people who are skilled at valuations, estimates, real estate, contracts, and accounting will always be a good idea.
Lastly, even after you’ve completed your investigation and research, there may be a revelation that comes forward after everything is said and done. Be sure to have the current owner personally guarantee that all of the information regarding the company is true, complete, and accurate. On your purchase agreement, add a section about this and label it “Representation and Warranties.”
Just like the boy scouts, you need to “Be Prepared.”
Send us a quick video sharing your top tips for buying a business. We’ll share the responses on Instagram @screenprintmag.
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