If there is no one within the business to take over the senior role you will have to recruit someone from outside of the company. Depending on the arrangements you have made with the seller you may be able to have the seller operate the business for a three to six month period after you have acquired it allowing you the necessary time to recruit a General Manager or President. You should have a reasonable comfort level that the right individual at the right price can be hired before you commit to acquiring the business. Do not forget to include the associated recruitment costs in any cash flow forecasts.
Remember that an employee does not usually work as many hours or have the same overall business commitment that an owner will have. It is highly likely that you will find out that it will take more than one individual to replace the current owner of the business.
As the owner was also managing the business the current financial controls may not be adequate for a business that is going to be operated with absentee ownership. This is your investment and it is prudent that you ensure that the financial controls are more than adequate to secure your investment.
You must decide how much time, effort and involvement you want to put into your investment. This can be from twelve hours a day to a few hours a year, or anything in between. The more involvement that you determine that you want in your business the more constraint this will place on your personal time and other commitments that you may have. Also remember that you are acquiring the business as an investment. You are not acquiring the business because you want to manage it.
Some investors have no involvement in the business whatsoever. They receive a monthly or quarterly management report complete with financial statements. Others may have weekly, monthly or quarterly meetings with the senior management of their business and maintain control or final authority over certain types of expenditures such as capital commitments and/or the overall direction of the company. Still others may maintain control over the bank accounts, pay the bills and provide the general accounting function.
I know of one situation where the investor owner was retired from a large corporation. He acquired a small business as an investor owner and would come to his business’ facilities every morning around 11 a.m. and pick-up that day’s deposit and deliver it to the bank. He would, pending other commitments such as golf games, act as the company’s courier and deliver or pick-up items around the city. His involvement in the business was not to oversee or manage the day-to-day operations but to have something to do, rather than sitting at home watching the television.
Remember the more control you take, the more accountability you are placing on your own shoulders. As an example do not undertake to do all of the accounting function and then during the year take a three-week cruise. A business, no matter what its size, cannot properly operate without its accounting function for more than a couple of days.
Reporting:
Whatever you determine is your comfortable level of involvement; you should ensure that you have adequate reporting in place. I recommend that you mandate a formal reporting requirement to your senior management.
My personal favorite monthly reporting structure or system is the S.O.F.T. report:
Successes
Opportunities
Failures
Threats
Along with the S.O.F.T. report you should receive financial statements (providing you are not performing the accounting function). This report, along with the financial statements should be available no later than the tenth of the month following the month being reported upon.
The S.O.F.T. report and its accompanying financial statements should, if written honestly, give you a clear and concise understanding of where your business stands, where it is headed and give you advance warning of any potential problems that may be on the horizon.
In my opinion the S.O.F.T. report, along with the financial statements should also be sent to your bankers (along with any specific lending forms that your financiers require), if you are operating with a line of credit or revolving term loan.