Casting a wide net over the marketplace gives you a lot of choices when it comes to business acquisitions. But without proper search criteria, having many options may result in more challenging decision-making. Tim Lahey joins Domenic Rinaldi to share how he narrowed his business acquisition choices to just a few industries, allowing him to acquire the custom integration company, Homerun Technology. He also talks about the strategies he followed to ensure a smooth transition with its past owners and existing employees, how he used an SBA loan to finance this transaction, and how they closed the deal even with the COVID-19 virtual setting. Tim also explores the many ups and downs of business acquisitions, underlining the importance of having a thick skin.

 


Listen to the podcast here:

Subscribe Now:

Subscribe to K2 Adviser on YouTube
K2 Adviser on Apple iTunes
K2 Adviser on Google Play
K2 Adviser on Stitcher App
K2 Adviser on Spotify

Tim Lahey: How To Narrow Down Your Search Criteria For A Business Acquisition

I’m pleased to have Tim Lahey on the show. Tim acquired a home technology business that he will own and operate. One that will hopefully provide him with both personal and financial freedom. I first met Tim when he was in the early stages of acquiring a business and had the opportunity to do a brief consult. The result of that consult was that we identified areas where he either needed more preparation or professional assistance.

In his words, he knew he needed a jungle guide. In all my years of doing M&A deals, that is the first time I’ve heard M&A advisors referred to as jungle guides, but it’s a spot-on description. In this episode, Tim and I discuss how he realized being an entrepreneur was right for him. The process of narrowing down his search criteria, the highs and lows in the acquisition process, and his approach to ensuring a smooth transition. Tim is candid about his journey. One that all would-be first-time buyers would want to know.

Before we get into this episode, if you want to avoid the common deal pitfalls and the risk of losing substantial dollars, you’d need to know how ready you are to buy a business because proper preparation is so critical to your deal success. We have published a catalog of free resources to help you be better prepared. You can access these resources on our website at K2Adviser.com/resources. Being prepared is critical to ensuring that you maximize returns and minimize risks. Thank you for being here and I hope you enjoy the episode.

Tim, welcome to the show.

Thanks, Dom. I’m glad to be here.

I’m so excited to have you here and dive into your first acquisition. Congratulations.

Change is hard, and you have to understand that you have to be empathetic. Share on X

Thanks. It’s already been a journey. I’ve aged a little bit. I’m not getting the gray hair yet, but it’s coming.

I’m excited to have you share your journey with everybody. Why don’t you talk about the business that you acquired, and then we’ll go back to the beginning and we’ll talk about your journey.

On February 1st, 2021, I acquired Homerun Technology and it has been in business for over twenty years. Traditionally, probably, we all think of Homerun Technology as your classic audio-visual company. Maybe in the ‘90s or in the early 2000s, they would help with the first edition plasma or stereo system, but as we all know, technology in the home has compounded and accelerated by a massive degree. What Homerun Technology does is they fit in an industry that not a lot of us know what it’s called, but what would they call it as custom integration.

Custom integration is the industry that allows all these different interesting technologies to be applied in a custom way inside your home or business. They have the expertise and knowledge to make all these things sing and dance and it’s way beyond TVs and stereos now. Homerun accelerates well into not only just the classic AB, but also lightings and shades automation and installs, and then network as well. We all can recognize in 2020 the reliability and dependence on our technology and home have gone through the roof. I would like to say that’s where I saw the puck was going when I started this journey, but I didn’t. We’re not even at the potential where technology is going to get even more complicated in our home.

You’re in a great space with great timing. Technology in the home has already accelerated and it’s going to take off here over the next couple of years. I’m excited for you and to see what you can do with this business.

Thank you. I’m excited.

We’re going to talk about why this business fits for you and what excited you, but I want to go back to the beginning. When did you first start thinking that owning a business was maybe in the cards for you?

MAU 96 | Search Criteria

Search Criteria: Custom integration is the industry that allows different technologies to be applied in a custom way inside the home or business.

 

There was a specific moment. Before that moment, the idea of being an entrepreneur was always in my blood and in my head. I didn’t tie the two together, but both of my mom’s dad and my dad’s dad were small business owners. I don’t remember early on thinking that was a cool idea yet, but as I got older, I particularly remember my mom’s dad ran a paper company. I remember seeing paper boxes all over their house and thinking how cool it was to do as a small business owner. I graduated from college and I got into a sales job, and then I did well at that. Interestingly enough, that sales job was in technology. I sold technology to public school districts for what we know in Chicago is CDW and CDW-G, but I didn’t want to make a career out of that, so I joined in finance.

In my career in finance, there were opportunities to scratch the edge of being an entrepreneur, but what happened for me was when I was in business school at night, a gentleman came to a class. I majored in entrepreneurship and innovation. He talked about his journey from leaving his commercial real estate job to buy a small business and it always stuck with me. I took rigorous notes, probably the most detailed notes I took during business school. Fast forward to a couple of years ago, I had this moment where I was driving to work. I didn’t usually drive to work, but I was in the car and I said, “It’s time. This is the avenue I want to go down to, but I had no idea what to do.” I used the power of the internet and tried to find this gentleman’s name. He wasn’t public on the internet, but I found it and shot him an email.

Was this the gentleman who had come to your business school class?

Yeah, at Northwestern. We’ve all probably been there where we’re like, “No one’s going to write me back.” He wrote back that day and he ends up living in the same area as I do. We ended up having coffee on that Friday. For probably 3 or 4 hours, he talked through a lot of his journey, more in detail than I would have imagined. That gave me the confidence to say, “Here’s a rough playbook of what to do. Let’s start from there.” I started that process and ultimately, I got to Sun Acquisitions. That’s when you and I first met and talked.

Before you got to us though, what had you done up to that point in time? Had you started to look at businesses? How did you start the journey? I know at some point in time, you stopped and took a breather and you contacted us. We engaged and helped you, but before that, what were the things that you were doing?

I talked to a lot of people. Having a sales background, you develop a thick skin and you also develop a comfortability around a low hit rate. I knew that if I put my feelers out as much as I could and learn from as many people as I could, the better off I’d be. I started talking to lawyers and business brokers. I didn’t get down looking at businesses for sale. I did start a little bit on the internet just to get an idea, but immediately, it didn’t feel like the depth I wanted.

As I interviewed and talked to more people and some individual business brokers, lawyers, and everything else, the more I learned about what I thought I needed as almost a jungle guide going through this. I got so much information from the gentleman who spoke to my class that got me to a point. I needed enough comfortability around what I was going into. I was looking at leaving a great career. I’m a father of three young kids. I didn’t want to step into this journey without a competent jungle guide. What I learned before I got to you all was more around what I needed and what I didn’t. They helped refine that idea of what I was looking for.

In business acquisitions, you must look for something dusty and not rusty. Share on X

I’ve been doing this a long time and this is the first time I’ve heard jungle guide. I’m going to steal that from you if you don’t mind. That’s awesome because it can be the jungle. There’s no doubt. It’s fraught with all sorts of insects, problems, and areas that can trip you up. In all of your discussions with lawyers, accountants, and business brokers, did you gain more confidence though that this was the right path? Was there a point in time where you took a step back and said, “This is maybe more than I’m willing to bite off?”

For sure, I had moments of pause. Not in a sense of, “This isn’t going to work.” It broadened my idea of the size of the effort and all I had in my head was, “This is what you do and you go do it.” As I talked to folks, the more I learned of like, “This effort is bigger and bigger.” To do a search for a business, talk to business, and do due diligence are big efforts. I had to pause at those moments to say, “Can I do this at nights and weekends while still holding a job? Can I do this while being a father, a husband, and a friend?” I didn’t want to disappear from my career and from my life. Those were the pauses, but in terms of the confidence like, “Was this what I wanted to do?” I didn’t have a lot of those moments. I still chugged ahead because I said, “This is what it takes to do it. I just had a different idea of how much effort it would take.”

That was intuitive and smart on your part. Having gone through the process, you can look back and you know how much time and effort goes into this. Even sourcing opportunities, that in and of itself, if you’re working, it’s a full-time job. Let alone do all the other pieces. That was intuitive upfront. I will say that other clients that we work with that don’t insight decide to engage right away, one of the places where they trip up the most is, they can’t find opportunities. They’re in stuck mode for a long period of time, and then they get frustrated. That’s no good. They lose steam and all that excitement gets dampened by the fact that the process is hard.

It was important to me that if I started the process and it didn’t work out, that I wasn’t losing ground in my career. When I was getting advice, a lot of advice I had was that it’s difficult to do both. You have to be careful and you need to make sure that you realize it is almost a second job. The other thing I also learned was the idea about search funds, which I didn’t think about. That was almost like you leave your career, start a search fund, and try to get funded to pay for that time that you’re spending to try to find a business. I knew I wanted to go at this alone. Not because I’m a lone ranger, just because it was important for that agency to be with me, but you start to understand with these things like, “This can’t be a hobby.” That was also verifying for me that this was the right path forward because I knew if that’s what it took to be a business owner, I can’t imagine what it’s going to be to own a business.

You didn’t set out to buy a technology media company. That’s not something that was on the slate. Yet you’ve gotten to the point where this is your fit and you’re going to move forward with this business. What was that process like for you going through the discovery of what prospective businesses might work for you and also, maybe what did you know wouldn’t work for you?

I cast a wide net. I stole a phrase from the gentlemen that spoke in my class. “You’re trying to look for something dusty, not rusty.” I knew that I was going to apply a lot of energy to a small business and that energy was going to be an asset. If it was rusty and if it wasn’t ready to move, my energy wasn’t going to do anything. If you apply that to a broad stroke of industries, it can apply to a lot of things. What was helpful for me was certainly working with Larry and your team because he applied questions. He didn’t say, “Stop being so broad.” He helped me by asking questions as we go through.

Home technology was in there. Larry’s memory is probably a little bit sharper than mine, but I remember from the early days, I’m an enthusiast for technology. An endearing term might be a nerd or a geek. I would take that, too. I had believed from the beginning about this idea of home technology, but I didn’t want to just stick with that and go. We looked at a lot of different industries, some would have nothing to do with technology. One of the things I’ll never forget that Larry said to me as we were going through a couple of iterations was, “You have to ask yourself when you wake up in the morning, ‘Are you going to be excited to go to work?’”

MAU 96 | Search Criteria

Search Criteria: By having a sales background, you develop a thick skin and comfortability around a low hit rate.

 

I had heard similar advice at the beginning. I heard a story about looking at a car service company. This was a story way before Uber. A guy was looking at a car service company and the broker said, “Do you want to be driving people at the airport at 1:00 AM?” It’s smart advice because as curious and innovative people who are probably on this journey, you’re thinking of a lot of possibilities, but that framework narrows things down to a more digestible focus. Once Larry asked me that question, right away, that’s how we wanted to look at home technology. From there, our search was strictly in that industry.

For anybody reading that wants to do a search, narrowing it down to a sector or two is critical because you can cast this wide net and you can look at lots of different businesses, and that’s fine. That is one way to look for businesses. You’re typically then looking at business for sell websites and you’re in lots of competition. When you can narrow it down to a couple of sectors, the hope is you can now go make a market for yourself and get proprietary discreet opportunities that aren’t on the market for sale, which is what you did in the market. That allowed you to identify opportunities and negotiate one-on-one and not have to worry about other parties.

As we did the industry research, the fragmentation, specifically in the region of the Midwest, was high. That was an interesting note for me as well because historically, customer integration in our area hasn’t seen a lot of consolidation. There’s been a couple of big bites from acquisitions, but not on the smaller side. I appreciate that piece of advice because an additional piece of anxiety that I didn’t experience was a rush or an urgency. It allowed me to go through it methodically and not feel that we were losing opportunities because I was taking my time, frankly.

Whereas, you might need force to have to make an offer if you’re in an auction process and make a mistake. Tim, there’s lots involved in getting a deal done, but maybe you could cover for us the 2 or 3 things in the process that surprised you to the good and maybe 2 or 3 things that you were like, “I never thought that would happen.” Maybe uncover the process a little bit for our readers.

It’s important for the readers to note that I did start this process right before COVID. My experience of search and acquisition was done entirely virtual. Up until the important points of once I had circled it and talked to the owners, the search process was entirely virtual. I thought it allowed us to be much nimbler. I know that traditionally, that trade-off of not meeting in person, we might’ve missed something, or one-on-one, that presence has helpful. We were able to do a lot of interviews in a short period of time and that was a positive discovery like, “We’re moving through a lot of these companies and getting to know.” Those interviews educated me more about the industry. By the time I got to even more interviews, I cared about task-specific questions.

Do you remember how many companies you’ve interviewed?

For home technology, it was north of ten, from an initial interview. Outside of home technology, it was a handful. That early discovery of this is the industry for me happened fairly early. We dove right in, so it’s a positive. Being in finance, numbers is a comfortable space for me. As we started to gather information, I had an expectation that I would be going through Excel spreadsheets until my eyes turned red because that’s an easy rabbit hole I could go down to.

COVID-19 pushed people to try doing everything all at once. Share on X

I was surprised and also encouraged that there is a lot of assistance, not only from your team but when we hired Miller Cooper to do their due diligence, it allowed me to focus on the bigger picture and not get super into the numbers. I had a lot of confidence in your team and our due diligence to know, “I don’t need to go down the rabbit hole. I need to make sure things are as tidy and as understandable as possible, but I wasn’t going to get lost in the numbers too much.”

You had a great accounting firm in Miller Cooper to do this work. They’ve got a group that specializes in this. They’re fantastic, so you were in good hands. I will point out the other benefit of focusing on an industry is you got to know the industry. You were having a lot of meetings and you were learning stuff on the fly. You got to understand what was important, what wasn’t important, what you liked, and what you didn’t like. When you look at businesses in different industries, you never get that perspective. If you’re looking at a manufacturing business one day and distribution business the next day, you have no comparisons. We’re big believers in focusing on sectors and it doesn’t have to be one. It could be a couple, but it gives you a unique advantage as a buyer.

In this industry, because it’s heavily fragmented, I wouldn’t have felt as confident as I did with the Homerun Technology acquisition because once I was able to interview the owners and understand their business model and their approach, that helped me say, “This is why they’re different than the others. This is what they offer that is different than the others.” There’s nothing that scared me. I do want to say that I feel like I was lucky because it wasn’t dual ownership and the owners were supportive, open, and encouraging. Our search process is we proactively talk to companies. We weren’t looking at companies necessarily already for sale.

By talking to them and asking if you’d be interested, once they had made that decision, they were extremely supportive and had been encouraged by my vision and energy. Trust me, through all those conversations I did have and your team knows this much more than I did, there are probably some scary stories out there by owners who have hesitation or owners that may be hiding things. I didn’t feel that and I haven’t felt that since post-acquisition. The time had definitely pause. It was a tough year for everyone. Everything going on from COVID and there was a lot going on with me in terms of work and everything else. You’re trying to do these things all at once.

The only moments I had were like, “Is this worth it? Is this what I want to do?” I had to do it in my own process and my own analysis. For me, I also had scoped out maybe a bigger acquisition size, not because I wanted to go whale on it. I had worked in Corporate America for fifteen years and I worked at a fairly large bank here in Chicago. To think about going from big to extra small definitely gave me pause. I also had a lot of confidence that was a huge opportunity.

What I was excited about Homerun was there was a solid foundation. In custom integration, you do have a lot of individuals who are running their own businesses out of their house, who then use contractors. There was no point in acquiring a business like that because essentially it’s just an acquihire. Probably your readers are looking for a scary, dramatic story. I don’t have one, except for maybe the chills you get at night or when you wake up in the morning and you’re like, “Is this happening?” That’s normal.

We hear that from a lot of buyers. There’s a moment in every deal where they know what’s about to happen and it’s the moment of truth. Are they all in? Most wind up fine. Some have some struggles with that and that takes some hand-holding. No doubt. You financed this transaction with an SBA loan. How was your experience going through the financing process? Did that go the way you had hoped it would go?

MAU 96 | Search Criteria

Search Criteria: When you’re investing in the right technicians, you open the ability to get more sales.

 

First off, the SBA program is an amazing program and I knew that before getting into this. My career in finance was in the housing market. I’ve built a belief that there’s a certain role that the government can play to help catalyze things. If you want to support small businesses in the US, this program allows people like me to do that. That risk tolerance completely changes not only from the individual side but the lender side if the program wasn’t there. The warnings I had before doing it were, “It’s extensive. There’s a lot of questions. There’s a lot of things you need to worry about.”

The idea of a personal guarantee was new, but I had all of these conversations where it’s table stakes, and I felt some comfortability around that. What was challenging is that we were onboarding funding as COVID relief packages were coming out. There wasn’t a lot of clarity of how those packages would help or would not help. For me, I probably applied too much optimism that these things would help aid the transaction. When the clarity was pulled away, that was difficult because you get your hopes up, so you think, “This is going to make this transaction more digestible.” That’s no one’s fault. This was in September, November, December timeline in 2020. There wasn’t a lot of clarity coming through.

You got caught up in the in-between time, unfortunately, so you didn’t get the full advantage of some of the current programs, but the SBA program, nonetheless, is a tremendous package, especially for deals that have loan values of $5 million or less. The ten-year amortization, the low-interest rates, and access to working capital. It’s a tremendous program. When you compare it to conventional lending where amortizations are 3 to 5 years and you don’t have a personal guarantee, but you also don’t get some of the other benefits of SBA. It’s a trade-off, but at the end of the day, it’s a hell of a program.

The other complication was how do you acquire a business that may or may not have participated in the PPP program? There were a lot of small businesses and there was hardly any, I would imagine, that didn’t participate. At the time, I know that you’re probably on the sell-side that there were probably a lot of sellers who were concerned because the forgiveness process was differing between lender-to-lender, and what was free and clear was hard.

It was a smooth process. This is typical up until the end, but that’s because the information that was coming out was hard for both the sellers and myself to figure out. I would echo completely that there’s a lot of work involved to make sure that you qualify, but if you understand what the SBA program is doing in terms of backstopping the loan, you can understand why they do that. I had benefited coming from banking, almost having empathy for the underwriting process. You’re like, “This is the lay of the land.” It’s absolutely worth it.

Let’s move on to when you’ve acquired the business. What’s transition been like? Talk a little bit about what you’ve experienced, highs, lows, and how it’s gone.

That feels like, “I’m getting my feet on the ground.” I don’t know a lot of people that can say that first meeting, that first day isn’t awkward. I’m sure the team will read this. It was awkward for everyone and that was unsettling to me because you have this vision of like, “Let’s go. Let’s do this.” It was a good first day. The Homerun had established and had been together for a long time. There was loyalty in it and an understanding of each other that I was the new guy. I made that clear that’s okay. I’m not trying to enter into this loyalty package, this loyalty group on day one. They were open to that. There were a lot of things I knew I wanted to do out of the gate. One of the technicians had left in the late fall, early winter of 2020.

If you have doubts when the rubber hits the road and those difficult days hit, it will be a lot tougher. Share on X

They were essentially down an employee, so that was step one. I wanted to get support back. Our business is headcount-driven. We look at things as best you can on a revenue per billable employee. Theoretically, the more employees you get, the more business you can do, etc. It doesn’t work overnight, but you can feel confident that when you’re investing in the right technicians, you’re going to hopefully open the ability to get more sales. I had a plan in my head and I’d written it down of where I wanted the first 100 days to go and where I wanted the first 45 days to go. I can’t remember who your guest was, but there was someone who talked about, “If you can define the first 45 days’ roles and responsibilities, you’re ahead of the game.” I forgot the guy’s name, but that piece of advice stuck with me.

Jen Goldman.

What I was careful doing is not saying, “You do this. You do that. You do this the first day.” What I’ve been doing, and this is still going on, is letting things happen to a degree but talking and having a lot of conversations to see where the pieces fall into place. If we do that at least in the first 100 days, we’ll be in a good spot. That’s been good. I bought a van. I was excited about that because we were supporting the business out of the employees’ personal cars. What was important for me is to show the team a sign of good faith like, “We’re going to invest. We’re going to invest to grow and we’re going to invest in the things that make your job better and our work better.” I’m proud of that and that’ll be one of many. Those are some of the good things.

How about the owners? Did you sit down with the owners and have a plan on what transition would look like and their thoughts on what they thought a good transition would look like?

Yeah. That was a big part of the discussion before and after the acquisition. In dual ownership, there are probably some natural skills that they had both gravitated towards that complimented each other. Where they were at was they were overlapping a lot of things. They were both doing a lot of different things. What we saw as an advantage was in lightings and shades, particularly in our industry, it’s becoming more technology-focused.

One of the owners had already started to plant those seeds. We said, “Why don’t you do that full-time and make that a growth department for the company?” I don’t want to speak for him because it’s unfair, but there was an agreement that would work. Change is hard and you have to understand that you have to be empathetic. As an exciting, energetic, new owner, you want to go in there and be like, “We’re going to do it this way tomorrow.” You have to be patient and you have to be empathetic. I felt that respect for the two owners and we’ve applied that well.

Their support has helped me feel comfortable at the end of the day. I don’t think it’s been easy for them. I don’t think it’s been easy for anyone, but as long as I’ve made it clear to them that I understand this is difficult and that things are going to change, they know I’m not just there to move their stuff around. There’s a ton of emotional equity in a business that’s been around for twenty years. It started from scratch. For any of your readers, you need to respect that as much as you may see things differently. That experience is a tool that you’re going to need. Whether you think it was done poorly before or not, they’re their jungle guides.

MAU 96 | Search Criteria

Search Criteria: If you’ve settled at your core that this is what you want to do, then you’ll continue to be persistent and patient.

 

The last thing that a former owner wants to know is that if you think their baby is ugly and start to undo everything they’ve done, it’s also a mistake because you haven’t spent any real-time in the business. You start making those team changes on day one. You may be sorry 2 or 3 months or a year later because you didn’t have enough information.

I came from a career that ended at the bank with a lot of techniques and skills I learned. I was an internal consultant, so I learned tools and process improvement like Lean Six Sigma and Change Management. That’s a great playbook to have in your back pocket. I remember the first thing I did, which I hopefully didn’t send a bad signal, is I took down some pictures on the wall and put up a whiteboard. Talk about don’t calling your baby ugly. Imagine going to someone’s home and being like, “Let’s take down the family photos and put a workspace.” They got what I was trying to do. The day after I put that whiteboard up, we walked through some of the processes. Hopefully, that demonstrated to them like, “I’m willing to learn. Let’s hear about your ideas for making it better.”

Listen, learn, ask questions, and get your arms around it. It doesn’t mean the change doesn’t have to happen, but do it with all the information, not half the information. Tim, as we get ready to wrap up here, I’m excited for you. If there’s a big message or a couple of things that you would leave the audience about approaching buying a business, what advice would you have if you were to pull it all together?

At the end of the day, you have to want to do this. That felt so cliché coming out of my mouth. What set my compass right is that no matter how difficult, challenging, or fun it has been, if your gut and you’ve settled at your core that this is what you want to do, then you’ll continue to be persistent and patient. That’s an important assessment that anyone who’s diving into this needs to think about because if you have any doubts when the rubber hits the road and those difficult days hit, it’s going to be a lot tougher. To some degree, you got to want to find this fun. It is fun.

The world of small business is such an important part of our economy. There’s such a need and the challenge of figuring it all out is fun. I know there are probably some current owners reading this that probably think I’m crazy. If you look at it as fun and as exciting, the people, operational, and financial challenges, you can look at those as puzzles to ultimately figure out. I wish I had that rosy picture every day, but at the end of the day, that’s where I settled. That would be my advice for anyone who’s maybe thinking about this. Try to vision going forward if this is going to be something that you’re going to wake up every morning and be like, “This is what I want to do.”

That’s awesome advice. Tim, assuming anybody in the audience needs some home technology, how can they reach you?

It’s because I did go to a business school, I probably overthink a brand change was important, but we are going to be changing our company name to RHome. You will be able to find us at Homerun-Tech.com. Our new site will be up and running at the end of April 2021 and that’ll be RHome.co. You should be seeing it with bands running around in the suburbs and everything else. We’re excited about the brand change. If not, if you want to reach me individually, I’m happy to give out my email. It’s [email protected].

Tim, thank you for coming to the show. Congratulations. I wish you the best.

Thanks, Dom.

I hope you enjoyed this episode. If you enjoy our content, please remember to subscribe and review our show. I look forward to seeing you again on the next episode of the M&A Unplugged. Until then, please remember that scaling, acquiring, or selling a business takes time, preparation, and the proper knowledge.

Important Links:

About Tim Lahey

MAU 96 | Search CriteriaTim Lahey is the new owner of a home theater company, Homerun Technology. He was a previous buy-side client of Sun Acquisitions and bought a business through a targeted business search with us in 2021. Tim has always been in interested in entrepreneurship and small business. His career background includes 20 years of home technology integration.

 

 

 

Love the show? Subscribe, rate, review, and share!

Join the M&A Unplugged Community today: