CHICAGO — While healthy competition can strengthen a drycleaning company, one of the quickest ways to grow a business is to simply buy out that competition. Mistakes made in this strategy, however, can hurt the bottom line for years to come.

In Part 1 of this series, we examined how to determine if a competitor’s company is worth making an offer to buy, and today we’ll continue by looking at potential hidden liabilities and seeing if the existing staff will be able to handle the change in ownership.

One of the trickiest parts of any acquisition is determining what the existing customer base is actually worth — and how many of those customers will stick around after the sale.

Kermit Engh, owner of Fashion Cleaners in Omaha, Nebraska, and managing partner of Methods for Management (MfM), advises buyers to go beyond the numbers and evaluate the seller’s operation the way a customer would.

“I would certainly do a deep dive and secret-shop the seller to see the quality of their work, what their packaging is and what their price points are,” he says. “If the buyer’s prices are quite a bit higher, they’re going to have a real challenge in bringing those customers along for the ride.”

Robert Strong, president of California’s Country Club Cleaners, uses a simpler calculation rooted in profitability: “I take my profitability and I ask, how profitable will it be if I lay that volume over my current volume? If I know it’s going to generate $100,000 to my bottom line, for instance, I might give them three times that number.”

For Joseph Hebeka, vice president of franchise redevelopment for Clean Brands LLC, and owner of Belding Cleaners in Grosse Pointe Park, Michigan, the value of a customer base depends partly on geography and demand. When an acquisition eliminates a direct competitor, it can be worth paying a premium. “I ended up overpaying for one and I did so quite intentionally,” Hebeka says of acquiring a competitor near his own Grosse Pointe stores. “He knew I needed him, and I knew I needed it. It was the last piece in my puzzle, and I dominated the entire market.”

Hidden liabilities can lurk in unexpected places. Engh warns buyers to look for informal agreements the seller may have made. These might be discounts for friends, unwritten arrangements and other deals that never made it onto paper but that customers will expect to continue.

Hebeka’s team performs comprehensive background and lien searches on every potential acquisition coming into the Clean Exit program. “We have the most sophisticated software on earth to search background data — from the seller to any liens they may have on equipment, on taxes, everything,” he says. But he adds that finding a lien isn’t necessarily a deal-killer. “With some, it’s an honest mistake or oversight.”

Strong learned about hidden debts the hard way. After one acquisition, he discovered the previous owner owed $45,000 to a vendor Strong needed to do business with. “We didn’t legally owe it, but we made the business decision to eat that and pay the guy,” he says.

On the environmental side, Engh offers a practical tip for anyone acquiring a plant that used chlorinated solvents: see that everything related to those chemicals is physically removed before closing. “That way, there is a break in the chain of liability that can be proved,” he says. “You take photos, you get written documents from the seller that those things have been removed so that you’re not carrying that potential liability forward.”

When it comes to equipment, buyers should take nothing at face value. Engh recommends photographing serial number plates to determine equipment age, pulling maintenance records, and bringing in an equipment dealer for an independent evaluation.

Hebeka’s team runs full mechanical inspections and builds a detailed condition report.

“We have a list of assets that we’re buying with the business, and we just do a rundown on the condition, what’s working, what needs replacement,” he says. While equipment condition won’t break a deal, “it may change the price.”

Staff is where acquisitions get personal, and where the biggest surprises tend to surface.

Hebeka prioritizes continuity: “We don’t come in and clean house and get rid of everybody. We identify the key players, and we keep them engaged. We let them know we have a commitment to keep them doing what they’re doing.”

Strong takes a different view, shaped by decades of acquiring struggling operations.

“A lot of these companies were broken to some extent,” he says, and this can impact employee attitudes. “You can come in and say, ‘Hey, you’re going to be paid a little more and you’re going to be paid on time. But, you’re going to wear your uniform, you’re going to show up on time and we’re going to monitor your mistakes.’ When you do, some people just grab their purse and walk right out the front door.”

Engh suggests having the seller formally terminate all employees before closing, then re-interviewing everyone. He recommends that the buyer come prepared with a package of benefits to show staff “that they’re going to be taken care of and not deserted.”

He also cautions against tolerating bad attitudes during the transition: “If you’ve got negative people, you can’t let any of those folks hold you hostage.”

Come back Tuesday for the conclusion of this series, where we’ll explore how to structure the deal and what to do after the business changes hands. For Part 1 of this series, click HERE.