Jonathan Jay – When Buying a Business Understand That Due Diligence Won’t Reveal Everything

Nov 21, 2019

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Jonathan Jay has bought and sold businesses for over 20 years, buying from private equity firms and selling to them as well and has also done numerous trade deals. In the last few years, he has brought his knowledge to the world through The Dealmakers Academy, which is a UK leader in training people to buy and sell businesses without risking their own capital.

For the first time, he is now teaching dealmakers how to source and negotiate deals to generate cash flow and exit opportunities without them having to work in the business day-to-day and as a bolt on to an existing business.

You can gain free access to Jonathan's webinars and latest book, “Business Buying Strategies - The Solution to Your Business Growth Problem” and attend one of his low-cost discovery sessions. Each year he manages a select group of dealmakers through their first acquisition and in some cases, partners with them to create a powerful deal team.

“Some businesses are too perfect that there isn’t any value to be added by the new owner. What I look for is a business with enough headroom for myself and my team to actually add value to it. With the value that we add, comes the growth of the business.”

Jonathan Jay

Worst investment ever

The rough acquisition

Jonathan was told to approach a certain company in a sector that he already had invested in before and did well. Since he did not want to let an opportunity pass, he met with the owners of the company and discovered that they wanted to sell the business.

They were open about the finances of the business, and Jonathan could see that it had done better in the past year or so. Jonathan and his team spent a couple of months doing their due diligence with intensive research and crunching some numbers.

Although they had discovered some things that were not particularly good, they had expected these kinds of things in the business of buying businesses. “It’s not all going to be a bed of roses,” Jonathan reminded himself. He dived into that acquisition with his eyes opened. But the reality was just terrible.

A stressful transition

Nothing seemed to be right after the acquisition. The business had every problem and every issue Jonathan could ever imagine. The staff, the delivery, the supplies, and the finances just all went south.

The next six or seven months were a total nightmare because all they did was putting out one fire after another. The only incentive Jonathan had to continue was that at least the company was making money despite being terribly managed.

However, that little profit won’t compare to how stressed Jonathan was for that whole seven months. Indeed, after eleven months of firefighting, he sold the company.

You don’t get the culture during due diligence

Jonathan believed that the people in the company caused one of the main issues of that acquisition. Up to that point, these people were all just names in the spreadsheet with their salaries and starting dates.

However, when he met these people, he discovered the level of training they had, their work ethics, and their company culture. These things did not reveal themselves during due diligence. And due diligence is all that he relied on.

Lesson learned

Resilience is overcoming the unexpected

In a very stressful world of buying businesses, if one can get easily stressed by very small things, then the industry is not for you. Resilience only comes from having been given a chance to work through difficult situations.

The future can never be certain

If you are aiming for something big, then you have to expect that there will be lots of uncertainty. But most of the remarkable lessons you will learn in life comes from uncertainty and disorientation.

Never rely on just due diligence

Do not believe in everything, including due diligence. People can look great in the report, but in reality, they do not know about the business.

Andrew’s takeaways

Due diligence doesn’t reveal the culture of the company

People as a valuable element of a company is much more than names on the spreadsheets. The reality is, they are more complex, and if you want to be successful in this business, adaptability is the key.

Pressure isn’t always bad for you

The business of taking over businesses can be a very stressful thing. But pressure can be a good thing because some people perform a lot better under pressure.

Create a stress-proof team

Sometimes, the team that you have around you may not be able to survive the stress. If your team can handle the pressure, that is one less of your worry. Create a great team with a set of skills where you can delegate the issues that you’ve got but don’t know how to deal with them.

Actionable advice

Work with the right people. Create your “deal team” that will help you with the deals, will get you great deals, and will help you get through those tough acquisition and transition times.

No. 1 goal for the next 12 months

Right now, Jonathan and his team have six day nurseries, and the goal is to buy 30 day nurseries in the next 12 months.

Parting words

“If you’re thinking about buying a business and it can be a very tedious one, I’d be very happy to point you in the right direction.”