John Dolan has been part of many exits and acquisitions. From that experience, the president and CEO of PFI InStore has learned many lessons, many on the human capital side of the deal.
For example, while speaking at the St. Louis Smart Business Dealmakers Conference, he put emphasis on sellers’ need to consider what life looks like after the deal.
“So many times you don't think what things look like post transaction and where are you going to be and if you're going to be part of the team,” Dolan says.
In two acquisitions he was a part of, he says one former seller became a strategic member of his management team while another soon left the business entirely.
“I should have spent more time with his leadership team and understand where they wanted to be,” he says.
When it comes to exit options for sellers, Dolan says it’s about being prepared — either to stay in and have a plan for what it looks like to be a part of the new ownership group, or to get out as clean as possible.
“And I think you better be prepared to come up with those things that you've done to make that business more sustainable — that you haven't been operating it like a mom and pop. Or even if it's a recapitalization that you were looking at some of the things that make you look more professional,” he says. “So, if you are that one that wants to sunset, that's fine. If you're tied to it, you're going to want to make sure that there aren't any gremlins out there because you're going to be standing there answering to them. You got to look at what side of the fence you're going to be on.”
Further, he says seller post-closing considerations just don't happen often enough.
“You’re thinking so much to that date and maximizing your wealth, but what's after that?” Dolan says. “And not only for you, but for the people, family, employees and customers for that matter?”
It's also important to look deeper into the human capital element, beyond the seller.
“There might be a handshake deal between the seller and a couple of key people,” he says. “He might be getting cashed out, but you're not seeing it above the deal in the due diligence. And today, that might be enough to go retire on, or somebody might think they want to retire on it.”
Today, there are a number of snags that can be encountered during due diligence. In addition to the human capital elements with the seller and the leadership team, he says buyers should look to see how clean it is. That doesn’t mean just looking over NDAs, but instead how to resource from an HR standpoint because it is challenging.
Another issue he says he’s seeing is sales and use tax compliance, especially in companies that have an ecommerce channel, as states continue to crack down on it.
“That's a big liability right now for a lot of companies if they've been skirting the issue on sales tax or use tax,” he says.
Inventory is another significant issue, as is environmental on real estate.
“Get that stuff done now. And you should do it anyway just so you got a clean bill of health with your senior lender or even your insurance companies.”