Acquiring Another Small Firm? Watch Out. How to avoid costly mistakes—and make the most of the deal

Acquiring Another Small Firm? Watch Out.

How to avoid costly mistakes—and make the most of the deal

BARBARA HAISLIP

December 2, 2013

You’ve done your homework. You’ve chosen the perfect business to acquire. You’re ready to sign the deal. Now the real hassles begin. For many small businesses, buying another company seems like an attractive way to grow: They get a new batch of customers, along with trained employees and sales systems, all set up and ready to go. But bringing even two tiny operations together can be a big challenge. At every stage, problems can crop up that mean headaches, money and extra work.Here are some things to keep in mind to avoid costly mistakes—and make the most of a new purchase.

PUT A PRICE ON COLD FEET: Before you close a deal, always specify “some fee or penalty for backing out,” says Scott Wilson, founder and chief executive of Marathon Consulting LLC, an information-technology company in Brooklyn, N.Y. One attempted acquisition by Marathon fell through after six months of negotiation, and “it cost us upward of $25,000 for the attorneys to draft all of the paperwork, and the other party was able to back out with no penalty.”

LOCK UP DIGITAL RIGHTS: In an acquisition, buyers are usually careful about securing the rights to intellectual property, such as trademarks. But they sometimes forget about getting passwords and rights for digital property, such as Web domains, social media and email that the old business held, says Annette Giacomazzi, owner of CastCoverZ, a Hollister, Calif., seller of orthopedic goods.

If you don’t get rights to social media, you may be locked out of those services or have someone hijack them.

Similarly, if a website domain expires, “someone or some entity can and most likely will pick them up,” Ms. Giacomazzi says. “Some will try to compete with you as an established brand. A few will be negative and trash the brand. Some will just purchase and hold them, to extort a purchase price.”

Also make certain the seller transfers all customer emails to you and sends a message telling them you’ve bought the business, she says. If not, any email you send to your customers may show up as spam—which happened to Ms. Giacomazzi after one acquisition.

WATCH OUT FOR TRANSITION COSTS: Mark Hemmeter, founder and CEO of Office Evolution, a virtual-office-space company based in Denver, says he misjudged basic expenses during acquisitions. “We simply underestimated the conversion cost of changing the technology and replacing the common-area furniture,” he says. “In hindsight, we discovered that it would have been faster, cheaper and less stressful just to rip out the old system and replace it entirely.”

He also didn’t budget for things like employee and client education, which ended up being a big hassle because “we had a more sophisticated technology system that required more upfront training.” Eventually, he had to sell the businesses back to the original owners at a loss.

Also remember to budget time, says Robb Lippitt, CEO of Revolution Dancewear, of Niles, Ill. If senior leadership doesn’t spend time at the new operation to show how things should be done, “people are more likely to continue with their existing culture and habits, which leads to at best a slowdown of the integration and at worst outright conflict between the two organizations.”

CUT REDUNDANCY QUICKLY: Tim Scahill, president of Layer 8 Group Inc., an IT company in Rochester, N.Y., says the integration of employees, customers and systems has to be as fast as possible.

“Duplicate expenses, people and systems will financially kill you,” he says.

After a recent merger, he got caught up in the logistics of bringing the companies together and didn’t eliminate redundant services quickly enough. “I turned a January 2013 $80,000 loss into a July 2013 $30,000 profit, but it should have taken two months, not six,” he says.

THINK LOCALLY: If the companies that you’re buying have a good local reputation, don’t erase that goodwill with rebranding. When Willan Johnson does acquisitions for VivoPools, his pool-service business based in Monrovia, Calif., he often takes two years to phase out the old company’s name.

Also recognize the importance of having locals as the face of the business.

Mr. Hemmeter bought three locations in Colorado Springs, just an hour’s drive from his headquarters in Denver, but “we were viewed as outsiders,” he says. “People like to do business with local businesses. We weren’t going to the local chamber of commerce, the same health club and seeing people in the grocery store.” The experience made him decide to expand his business through franchising instead of acquisitions.

It can even help to keep the sellers around. Jason Griffith, co-founder of De Joya Griffith, an accounting and consulting firm based in Las Vegas, offers sellers the chance to stay on in some role, such as sales, community relations and attending events. “Having the seller be your advocate post-sale is an intangible value that is hard to quantify,” he says.