Photo by Lukas Blazek
More and more people are looking at getting into entrepreneurship by buying a business, so much so that an acronym has cropped up: ETA, which stands for Entrepreneurship through Acquisition. One such ETA move was made in November 2023 by Dave Gilbert when he bought Proven CFO (now rebranded as Proven). We will look at what he learned as he took over the business.
The Deal
Dave’s background was in credit risk software and cybersecurity and as he explored the possibility of acquiring a business he zeroed in on profitable service businesses, particularly accounting and fractional CFO firms. He looked at 120 different firms before making an offer. When he did, he bought Proven CFO for $2.8M using SBA financing, which included $500k from friends and family, $300k working capital, and a 15% seller note. The sale was calculated on the business having $2.1M in revenue and $750k EBITDA.
Problems
Right away, Dave saw that things were not as they were represented.
Family Matters
Dave had actually passed on Proven CFO the first time he saw the CIM for it. The red flag was significant family involvement. It turns out that red flag was valid. There were multiple relatives in the organization which complicated restructuring, created cultural challenges, and hid operational inefficiencies. It also meant that these family members received salaries and benefits that were counted as addbacks, but they were actually ongoing/unnecessary costs.
Unbalanced Customer Mix
One client actually represented 30% of revenue but in the sale process it was represented as less than 10%. That client was lost shortly after the sale. It also meant that true EBITDA was closer to $375k, not $750k.
Incorrect Pay Structure for CFOs
The fractional CFOs had a variable compensation component as part of their pay structure. Certain of those thresholds were met or crossed right at or after closing, leading to higher-than-anticipated payouts after the sale.
Actually, It’s a Turnaround
As Dave worked through the problems listed above he realized that this was less of a standard acquisition where he could simply build on the existing success and grow a company. He had to, in his own words, go from “zero to one.”
Here are some of the actions he took:
- Aggressive cost cuts, revenue replacement efforts, operational overhauls, better processes, improved culture and onboarding
- Moved the model towards mid-market consulting, added services like debt sourcing, quality-of-earnings reports, and fractional executives in HR, Ops, etc. in addition to the CFO services.
- Changed the CFO model: the company had originally had a model to take someone from bookkeeper to accountant to controller to CFO through in-house training and learning, but that meant the CFOs produced were “academic,” not trained out in the field, which made them less desirable for customers. Dave hired top-level CFOs.
- Trimmed the fat: from 20 original employees down to two, including many of those “academic” (read: underqualified) CFOs.
FAQs
Dave made some excellent changes to rescue his acquisition and put it on a great trajectory for the future. What are three lessons we can ponder about the deal itself:
- How should I approach due diligence when a target business has significant family involvement? We would never say that heavy family involvement is in and of itself a red flag. Be detailed in your due diligence regarding compensation, benefits, real contributions, and the validity of any salaries or benefits counted as addbacks.
- How much risk is posed by a single large client? A single, large client adds risk and will impact the value of a business. Although having a whale client is exactly what most startups need, it’s a red flag at the time of sale. In general, try to ensure that no customer is more than 20% of the revenue of a business.
- If I find the business is not what was represented, should I stick to the original plan or pivot? Don’t fear serious change. Follow what the market demands, not the status quo of what you’ve acquired.
Are you interested in Entrepreneurship through Acquisition? We’re here to help. Reach out today.