By Steve Michaels
Q. I have put an offer in to purchase a telemessaging service. The problem is that the owner also has paging and alarm monitoring in the same location, and everything is commingled and run as one company. The owner is having trouble breaking out the specific financial information that relates to the telemessaging service. How can I do my due diligence and be sure that what he is selling me is what I am purchasing? The owner is also having a hard time separating what resources go with the telemessaging service, as some of his agents are multitasked.
A. This scenario pops up all of the time. An entrepreneurial business owner starts an alarm company and has the idea that since he is paying an agent to sit there anyway, he may as well start up a telemessaging service, and the conundrum starts. Then, as long as he is doing that, he may as well sell pagers or cell phones, and the business lines become intertwined and interdependent.
One way to address this problem is to get as much accurate information as possible for the telemessaging service clients’ billing. Then hold back a portion of the purchase price (perhaps 20 percent) for sixty to ninety days with the seller’s attorney after closing. Remember to look at the entire business as a whole, checking for tax liens and making sure they are using general accounting practices. You have both agreed that you don’t know what the outcome is going to be after separating one segment from the group. Until this is done, it is very difficult to analyze the true profit and loss for that particular business.
To make an offer, put a formula together with a multiple based on a net profitability figure and then do the deal. When the dust settles after the acquisition, do the math with a full disclaimer so you can both put the formula to work, resulting in a reasonable and fair selling price. This way you both know what you are getting into when the deal is finalized.
Steve Michaels is a business broker with TAS Marketing and can be contacted at 800-369-6126 or firstname.lastname@example.org for questions.
[From Connection Magazine – September 2007]