Every time a business goes up for sale, the seller will tell you how many hours they typically spend on it.
In today’s issue, I’m going to focus on ways a buyer can estimate how much time a new acquisition is going to take to transfer, operate, and make successful.
How much of that estimate should you believe?
And how much work should you budget once you acquire and operate the business yourself?
The time commitment from a new acquisition can really make or break a purchase. If you’ve ever started a project thinking it’s only going to “take a few hours” and, next thing you know, you’ve lost your weekend to it, you know how easily this can happen.
In every acquisition, my time estimation was too little.
As in, I didn’t budget in all the time needed correctly. Fortunately, with a little practice, I feel I can offer some guidelines on how to estimate these time obligations during pre-LOI, DD, and post-close.
Here’s what we’re going to cover:
- Estimating the Business Time Needs
- The Likely Truth About Seller’s Reported Hours
- Decoding the Reason for Selling
- The Power of Customer Service Insights
- Assessing the Impact of Existing Staff
- Reviewing Performance Since the Listing
- The Crucial First Year Commitment
When you first get the Prospectus or Confidential Information Memorandum (CIM) of a business that’s up for sale, one of the first things to look for is the seller’s reported hours of involvement in the company.
There are several different ways I turn that number around in my head.
Evaluating Seller Claims: “Hours Spent” on the Business
I always double the number of hours stated in the CIM, for two reasons.
First, the sellers are almost always going to tell you that it takes them fewer hours than they actually work to make the business seem more passive. Additionally, it’s very difficult to honestly tally how much time one spends working in their own business.
The second thing I recognize is the sellers are experts at running the business and I am not. It’s going to take me some time to learn how to do things at the same speed that they can.
If you were to ask me a question about a business I’ve owned for 10 years, it’s going to take me five seconds to answer you. If I’ve owned the business for 10 minutes, it’s going to take me two weeks.
Remember, when you’re starting something new, it’s going to take you a lot longer than the seller says it’s going to take that same person to do the same task.
Over time, as you become more familiar with the business, this type of time commitment discrepancy should decrease, but initially, you’re going to have to get through a steep learning curve.
Decode the Reason for Selling
The second thing I would dig into is; what is the stated reason for selling the business?
Is the seller saying that they have something else they are going to do and they don’t have time for this current business?
Are they looking to put money into a different investment opportunity?
What you’re really trying to learn is, does the stated reason for selling the business actually match the urgency and behavior of the seller?
If those things are a little bit out of sync, it might start to give you an idea that the business may cost you more time than you expect. It’s a possible indication that the seller may not be completely forthcoming with how much time they spend running the company.
For example, if a seller claims they don’t spend a lot of time on the business, yet there’s a sudden drop in performance while the business is for sale, it might suggest the business requires more owner time and effort than they’re willing to admit.
Analyzing Customer Service Queues
The third thing I would look into is the customer service ticketing queue.
This will show you how much time is taken by either the owner or the team to resolve customer service questions. You learn how much help you’ll need to be able to survive the business customers successfully.
The customer service queue will tell you almost everything you need to know about the business.
A high volume of support tickets means that resolving customer problems is likely a significant part of daily operations.
What about the “type” of questions that come in?
For example, if you get a lot of rage emails, then you’re dealing with a business that disappoints a lot of their customers. That translates into higher disputes, more time working on customer complaints, and a lot of refunds, which take up a lot of time.
The customer service queue is a gold mine for figuring out how much time it could take to run a business.
Remember that someone always has to answer those tickets. When your team is new, it will probably take double or triple the amount of time to research and get those answers before writing up a response.
The customer service queue also helps you learn the cadence of the business on a day-to-day basis and understand how much time it will take for you or the business out of your day.
In case you can’t tell, I ❤️ getting into the customer service tickets to learn a lot about the business.
Evaluating Technical Support Demands
But, on the other hand, it also means it might take a lot of time to answer those questions. You either need to resolve them yourself or train someone else to be able to answer those questions in a timely manner.
So… look at how technical the questions are and assess whether you or your team have the necessary skills to handle these inquiries or if you’ll need to hire and train staff to manage this aspect effectively.
Assessing Existing Staff
The fifth question I would dig into is, is there already staff in place? Is the staff coming along with the business? If you need to train new people, that’s going to take a lot of your time.
It doesn’t matter if the owner says that business only takes one hour a day. If you’re training new people, it’s going to take a ton of time. Therefore, if there’s a team coming along with the sale, and they handle the majority of the work, then you can start to believe that a business might only take a few hours a week.
If the staff is not coming along and you need to train somebody else or take it over yourself, that’s where a business that claims to be 5 to 10 hours a week is really going to be 30 plus hours.
If I’m running something another business, or have a full-time job, and adding another 30 hours to your week, what’s that going to do to your lifestyle?
Reviewing Performance Since the Listing
The sixth thing I would look at is the financials for the business since the business was publicly listed.
If the seller is truly trying to sell the business, it becomes close to a part-time or full-time job for the seller. Do you see a drop in revenue, a change in the growth numbers, an increase in expenses during that time period?
That shows you how much the owner might be actually involved in the day-to-day running of the business. And now that the focus is 100% on selling the business, is the revenue topping out, is it starting to decline?
If you start to see those types of signs, it shows the owner might be involved in the business more than they’re claiming. As a corollary, always make sure you’re getting the most up-to-date revenue numbers. Don’t let them say, “here’s the data from last quarter, I’ll get you this next quarter when we close it out”.
Make sure you’re getting the most recent numbers for the most recent month during the sale process. Get the monthly data.
Both of these metrics can help you get a better idea of how much the seller is involved in the day-to-day of the business.
Understanding the Seller’s Portfolio
The seventh thing I would look for is…does the seller have other businesses?
Many times you’re looking at companies run by serial entrepreneurs that are selling one of their less interesting businesses from their portfolio.
In such a case, I actually believe that it’s more likely that person is a manager on top of the business and they really are just spending a few hours each week with the company.
If they’re selling the team with the business, which they should be, then you know that you can also probably only spend a few hours a week (once you’ve gone through those first 3-12 months of learning the business).
In a weird way, when the seller has multiple businesses, it shows they can only time slice so many hours a week for this particular one.
The Learning Curve
The final thing I’m going to leave you with – that I touched on a bit earlier – is that a seller can always do things five times faster than you can because they’re used to the business and answer comes right off the top of their head.
When you start, everything’s going to take five times as long as it does for them. Assume it’s going to be like that for the first six months (and maybe up until the first year anniversary) before you’re moving at the same speed as the seller.
For me, I’m usually buying software companies. During that first year, I have to be really serious about learning the business.
They’re always going to have some staff that I need to get to know. There’s always going to have some legacy code that we’re going to have to work through.
There’s always going to have customers that I need to speak with. And there’s always going to be tickets I have to review and new features we need to implement.
That all takes a year to get my mind around.
So if you’re like me and interested in acquiring a software business, or a SaaS business that has a real business component to it, just assume for that first year, double (or triple) the time the owner says they spend on the business.
Only after that first year can you plan on starting to move yourself out and be more of an owner operator that manages the business from “above” or “outside” the business.
