What Are the Steps to Buying a Design Firm as a Tuck-In?

Rock, I recently inherited money I’d like to put toward my specialty printing company. I’ve always wanted to grow, and this seems like the perfect opportunity. I’m thinking about buying a small design firm that works with us regularly. I think they’d be a really good fit. Everyone on their team gets along well with us. They do top-quality work, and they know how to prepare files correctly for the specialty work we do – which isn’t always the case with other designers. Working with them means jobs usually make it through prep without issues, and that’s less stressful and quicker for my team. The owner of the design firm says she’s open to a discuss it. I’m a younger owner, and I want everything to go right with this tuck-in so I can continue to grow through acquisition if all goes well. What are my next steps?

Growing your specialty printing business through a tuck-in is, for many buyers, a lower-risk way to achieve a first acquisition.

In your case, you have a good relationship with the owner, and you are very familiar with the company you want to buy.

It sounds like there are good reasons for you to buy the design firm, as it will help you do better, quicker work, though it won’t necessarily generate new business, and that’s a consideration.

The next step is to give us a call. We can properly research the company and craft an informed offer.

In the meantime, the owner of the design firm will obtain her valuation and set her asking price. You’ll need to understand what companies like hers are commanding in the current market.

You probably want to pay her a fair price but not overpay. You’ll need to reserve funds to improve the company after you acquire it. No matter how perfect the company seems, you’ll see areas you’ll want to fix or adapt to your needs. Also, you’ll need to budget for integration, which does have a price tag.

In addition, you’ll want to get your internal financial affairs organized before the purchase.

Each case is different, and I don’t want to oversimplify things, but you should talk to experts before tying up all your funds in the acquisition. We can help you make that decision with your CFO and CPA. As I said, there are additional costs to buying a company, and those get stretched out over time. You’ll have expenses you do anticipate and plan for, and you’ll probably have some surprises.

A frequent surprise and hidden cost is when employees from the acquired company leave. Even happy employees can use the excuse of an acquisition to make a job or life change, and you can’t take it personally. But there is a real financial impact. Think about it. Even if you can get a replacement for the same salary (doubtful), you’ll probably pay fees to a search firm, invest in training, incur other one-time costs, and potentially have out-of-pocket costs to the departing employees, depending on their agreement with the former owner and the terms of the sale.

Another surprise cost is when the former owner thinks they want to work as an employee in the acquired firm – but changes their mind. Or, you decide it’s not working out the way you hoped. If that’s the case, you may need to buy out the former owner instead of staging the payments as salary, and sometimes there are tax consequences plus the unexpected lump sum payment. These are all contingencies you must spell out completely in the terms of the sale.

These are situations we’ve seen from being involved in many transactions. I’m not saying it’s likely to happen in your case, but you don’t want to end up borrowing money in a hurry when you could have planned more strategically. It boils down to this: things change after the sale. They just do, and you need to be an educated buyer and prepare yourself.

We recommend working with us on scenario planning. Are you open to exploring all funding avenues before you decide on a cash sale or financing? As I said, I hate to see a young person tie up all their cash in the business. It’s good to have a cushion for what life throws at you.

Next, before you make any kind of written offer, you must consult with your attorney and advisors. We want you to minimize risk and protect confidentiality. You don’t want to make any promises during the discovery phase. If you have a good CPA, they may be giving you advice based on your financial picture. CPAs often think they are qualified in all areas, but your ability to purchase is only one element in choosing and buying a business. You need an expert advisor who knows the pitfalls.

We recommend you get a financial check-up first. We don’t want to go into buying mode and discover you can’t complete the sale. We want to uncover any issues before you make an offer.

Here are areas you’ll want to discuss with your advisor:

• • Does your advisor have a trustworthy local broker you can work with?
  • Is there real estate involved?
  • Is there equipment and furniture?
  • Is there intellectual property?
  • Are there commitments to software subscriptions and machine leases?
  • Will the owner of the design firm become your employee?
  • What are the ideal terms of the sale?
  • What are the tax ramifications according to your tax advisor and personal wealth advisor?
  • What research have you done on the design firm?
  • Are there any skeletons in their closet? If so, are they remediable?
  • What is your timeline to exit?
  • How much time do you have to make this acquisition successful?
  • How does this acquisition fit into your long-range business and personal plans?

  As you say, a typical way to build companies in the graphic arts industry is to grow through acquisition. Get the groundwork laid, and keep channels open with this design firm owner.

  In the meantime, I recommend you read our complimentary publication Demystifying M&A Jargon, to familiarize yourself with common terms you may encounter.