You Can Buy the Dip in Business Too
Don’t Buy the Dip
A common stock investing strategy is to “buy the dip”. Buying the dip is buying into a position after the stock has dropped, or “dipped”. Hypothetically, the argument is that stocks oscillate or gyrate and a stock that has had a recent dip should bounce, providing immediate returns.
I want to share about another dip that happens; that is the dip that happens right after you buy a business. As a business owner this is something that you need to plan for. I’ve seen it in my own experience and other businesses that I am familiar with.
When I sold a business in 2021, I sold to one of the larger players in my industry. Before I sold I did my research and made sure that they were an ethical company because I wanted to make sure my team was taken care of after I was out of the picture. I found them to be a very ethical company. They were a company that I honestly felt that my employees were better off in their hands than mine.
The transaction happened, and as I stayed in contact with my previous employees I heard that a couple of my previous employees left to go work at other companies. Just because a company is ethical and a great place to work, doesn’t mean that they are the kind of place that everyone wants to work at. If you are buying a company you can’t expect that every employee will stay on. They won’t stay if you’re good and leave if you’re bad. You’re just different, and sometimes that’s enough of a reason.
The other thing I heard, from competitors in the industry that had become friends, was that they were picking up some of my old customers. Some customers weren’t comfortable with the sale of the business either. They liked the personal touch that I provided. They knew me. It became clear to me that some customers were customers of me, and not the company I sold. When I was no longer in the picture, they felt free to move on as well. Other customers wanted to buy local, or support small businesses. Whatever the reasons, some customers will leave. It’s just part of the buying a business process.
All this is fine, if you plan for it. If you project a dip in income in your first year projections and it still looks like a good deal on paper, Go for it! But if you are using rose colored glasses and aren’t calculating that employees or customers or both might leave in some percentage you are setting yourself up for failure.
So how can you mitigate the loss of customers or employees or both?
First off, it’s important to purchase a business in an industry that you have experience in. Gaining the respect of employees and customers will be easier as an insider. As an insider, you also might have contacts within your network so that if an employee does leave you might already know a replacement. Even better, if this is an ancillary business, or a bolt on to an existing business, you might have strategies or cross marketing opportunities to mitigate a dip in revenue from customers leaving.
Another way to mitigate a dip in revenue is to have adequate reserves. Buying a business doesn’t just include the down payment on the purchase price. It also includes the working capital to get you through the inevitable dip in revenue that comes when you first purchase a business. You also need to have adequate reserves in another form of capital, your Time. Buying and stabilizing a business is going to take more time than you anticipate, as well. Especially when you consider that you may have employees who leave.
Experienced business acquirers as the company that bought mine know and have a plan in place to handle the drop in revenue or productivity when employees or customers leave. My guess is that if they knew 10% of customers and 50% of employees would leave within the first 12 months of purchasing the company they would proceed anyway. It was built into their calculations, based on experience buying other companies.
My concern is for the little acquirer, maybe this is your first acquisition. Don’t underestimate the costs or difficulty of buying a business. You do so at your own peril. I’m not trying to discourage anyone from purchasing a business, I’m simply advocating for preparing for all the “will” happens and “could” happens before you take the leap!
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