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What Can First-Time Business Owners Do If Earnings Slide After the Deal Closes?

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I’ve had the opportunity to work with and/or support various organizations in town that promote entrepreneurship and have also had the pleasure of working directly with many first-time business owners. What I’ve found is a group of really smart, focused individuals who wish to achieve their dream of owning/operating their own business.

These people come from a variety of backgrounds, interested in a myriad of different industries and are both young and old (I refuse to establish guidelines as to what is young or old).

Now the obligatory pre-holiday A Christmas Story allegory: closing on the purchase of a business confers a level of excitement not unlike Ralphie finally getting that official Red Ryder, carbine action, 200-shot, range model air rifle, with a compass in the stock and this thing that tells time. Life changing for sure. That is, until you shoot your eye out.

Last year I wrote about deals repricing during the due diligence process because company performance continued to improve from the time the initial letter of intent was issued. Three years into a post-pandemic boom for many companies, the question becomes at what point will the performance peak, and earnings start to fall? And what can first-time business owners do if earnings slide after the deal closes? That perfect looking turkey is no good once the Bumpus’ dogs get to it. And unlike Ralphie crying through broken glasses, your momma isn’t here to lend a hand. Unless she’s liquid.

Structuring transactions with contingent payments is one way to protect the first-time buyer against buying at the top of the market. This allows for the seller to achieve their price target if the business maintains its current level of performance while protecting the buyer in the event of a fall in revenues or profits. They may not work in every situation, but they are an effective way to bridge the value gap and get the transaction closed. So, before you find yourself stuck in the business equivalent of a bunny suit, triple-check that price tag and make sure you're not paying a premium for a business that'll leave you saying, "Oh fudge."

I wish you all a wonderful holiday season and hope you have a chance to spend time with family and friends over the last few weeks of the year.

Tell me what's on your mind. Write me at lbell@meadenmoore.com or try the old fashioned way by calling 216-928-5360.  

Lloyd W.W. Bell III is Director of the Cor­porate Finance Group at Meaden & Moore. He has over 20 years of experience in financial management.

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