I Bought a Small Business and Lost $75,000 Making This Big Mistake
Written by
Heather Taylor
Edited by
Molly Sullivan
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Have you ever thought about what it might be like to buy an existing business? Those who are not familiar with the process may imagine it’s an easy way to make extra money especially if the existing business has a history of strong revenue. If you’re not careful, it’s possible to lose some money just from making mistakes after the acquisition.
However, you can conduct as much due diligence as possible and still lose significant sums of money if you trust someone to be honest and your trust is broken. Jason Pliml, owner of LongerDays, shares his story with GOBankingRates of how he lost, and regained, thousands of dollars by making one mistake after acquiring a small business.
‘I Would Caution Others Against Placing Blind Trust in an Individual’
In 2015, Pliml negotiated the purchase of LongerDays, a company that provides executive virtual assistance for small businesses. The acquisition was finalized in April 2016. The previous owner of the company was looking to exit but wanted to remain the CEO for up to three years, post-sale. Pliml said they negotiated a valuation based on a reasonable EBITDA multiple and negotiated an employment agreement with a six-figure base, benefits and performance incentives.
Within the first three months of owning LongerDays, Pliml said client attrition adversely impacted revenue by over 15%. At the six-month mark, the previous CEO quietly quit performing daily duties.
When it became apparent the business was not thriving, Pliml began digging into the company’s financial statements. He discovered the financials had taken a negative turn the month before closing on the sale.
“The prior owner had received financial statements for the two months prior from the accountant,” Pliml explained. “However, when financial statements were sent to the bank and myself prior to closing, the most recent month of financials, showing a revenue decline, was omitted, along with an accompanying accountant note about revenue being down to prior year levels and asking if there were any concerns.”
The Importance of a Financial Cushion
This discovery precipitated a legal case that was resolved via settlement which negated the seller note balance. Pliml said there was an unexpected capital infusion required to cover the monthly losses and to pay legal bills related to the settlement. The amount was approximately $75,000.
Fortunately, Pliml said he had access to credit and liquid cash to carry the business during that rough time without laying off any staff members.
While this capital has since been returned via profits, getting LongerDays back on solid financial footing took some time. Pliml said he paid off the business loan two years later than originally planned.
While Pliml said the blind trust he placed in an individual is something he would caution others against, he expressed his gratitude for the current staff and dedicated alumni staff who carried a heavy load.
“Buying a business is never as simple as the pro forma spreadsheet makes it look. My experience was humbling, eye-opening and ultimately rewarding,” Pliml said. “I learned the importance of having a financial cushion when buying a company, talking directly to staff and not just the owner and asking candid questions and validating information.”
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