Having recently acquired Chesapeake Chemlab, a provider of equipment, service and chemical products for commercial dishwashers and laundry machines, Owner Tim Krongard told those in attendance at the 2023 Baltimore Smart Business Dealmakers Conference that the diligence process starts earlier than when a buyer gets into the particular diligence of the company they're focused on acquiring.
"By that, what I mean is, at the top of the funnel, when I think about businesses, because of the situation with labor and some of the economic challenges, I am only interested in companies that don't need a lot of people — they don't need, if you want to double your revenue, you need to double your headcount," Krongard says. "That's not a company for me. And so, I think the harder work and scrutiny starts with that, as you're looking at the business models of what companies you might be interested in."
His experience buying Chemlab differed a lot from the transactions he went through while with venture capital.
"We were looking at companies — Peloton, Invisalign, Virtustream — these are companies that are in the hundreds of millions, if not billions," he says. "There's lawyers involved. There's CFOs and executive teams. There's plenty of information to look at. Well, in this case, you really have to be focused on what it is about a business that you're seeking to understand, and you have to balance getting that information without being overbearing, or a pain, because they have few people."
Because of that, in his diligence, he's trying to talk to customers and explore the business as best he can. But it was much harder to do that than in a venture situation. As a minority investor in a venture deal, it's viewed from 30,000 feet. When buying all of a small company, the buyer is on the ground and the minutia that they have to deal with — figuring out contracts and figuring out the people.
"A lot of times these are small teams, and they're very guarded about you talking to any of their employees," Krongard says. "It's not like a venture situation where the CEO certainly knows about it, but so does the CFO and the VP of sales and other people."
In the case of Chemlab, they had a small team and Krongard didn't get to talk to them until they basically had a deal. But still he felt it was critical to develop a rapport with the seller — which he did and it turned out well.
Another difference was that it was just him doing the diligence.
"You're kind of on your own," Krongard says. "You don't have your associates and other analysts of your venture group doing it. You definitely need to do your homework. You're never going to know everything. If you if you feel like you know 80 percent of what you need to know, then consider yourself lucky."
Buying small or very small companies presents unique challenges. For example, he says he was hoping to do a tuck in acquisition that turned out to be a peculiar experience. When he connected with the target, he says it sounded as if someone had signed up for an evaluation assessment that landed the company on a list that indicated it was for sale. However, whoever put it there wasn't authorized to do so. Still, though they can be more of a challenge, he says they're also much more interesting opportunities.
"You take the good with the bad," he says. "You do your own homework."
He tends to use the same service professionals on the deals he does, but says it's important to know different lawyers and accountants because each circumstance could call for different expertise. In one instance he was selling a company and the CEO was very technical, so he got help from a person who could handle such a highly technical sale and it turned out well. But it's not always enough to match technical ability. Sometimes the personalities need to mesh as well.
"You try and control as best you can the things you can control. By having good intermediaries — lawyers, accountants, whatever — that's very helpful, especially when you've worked with them, and they know the key things for you and you know the rathole they're going to go down. And you know they have your back. They're not just on to the next transaction. You've worked with them, and they know you're going to work with them again, so it gets done and it gets done well."