Geoff Blanco joined Rigg’s Outdoor Power Equipment in 2003 and shortly after became a part owner, with a 49% share. Last March, he completed the acquisition of the dealership and shared a first-hand account of the early stages in Part One of a three-part series. In Part Two, Blanco shares more details about the financial approval process.

Rigg’s Outdoor Power Equipment has locations in Valparaiso, Mishawaka, LaPorte and Lafayette, Ind., and carries Kubota, Hustler, Cub Cadet, Stihl, Land Pride, Western, Honda and Toro consumer equipment. The dealership was featured in our 2014 “Season-to-Season” series and Blanco serves on Rural Lifestyle Dealer’s editorial advisory board.

Rural Lifestyle Dealer: Earlier in our conversation, you shared the challenges you faced when seeking financing for the acquisition — and the changing world of lending in general. Can you share more about your thoughts on this process?

Blanco: The best place to start seeking financing is with someone you are already working with. Check to make sure, though, that your bank is experienced in commercial lending as it relates to mergers and acquisitions. If not, you may want to explore other options because the process is very complicated, especially if you are working through the Small Business Administration. (Read Part One for more details about working with the SBA.) The process could be made much worse if your bank is learning “on the fly.”

The bank we ended up using was not our existing bank. If you have a similar scenario, be aware that they will ask you to switch your checking accounts, your line of credit and any other financials to them. So, in addition to the acquisition loan, your dealership may need to adjust to a new set of processes and banking relationships.

Rural Lifestyle Dealer: Can you provide some more details about the challenges you faced while securing financing?

Blanco: In my situation, I experienced both sides of the equation since I was the buyer of a company I already owned nearly half of, so I had the responsibility of getting the company in shape to sell as well as buy.

As the buyer, it’s not terribly difficult to get a lender to be interested in funding the deal, but the process to actually get the funding is incredibly time- and effort-consuming. Much of the process depends on the seller and how prepared they are.

As a seller, the amount you want to sell the business for is directly proportional to the strength of your balance sheet and the accuracy of your financials. This sounds obvious, but the buyer/lender is going to want proof that your financials are what you say they are and that’s when things can unravel fast. The devil is truly in the details with your financials. The assumption that you can hand over 3 years of compiled financials and get the deal done is a pipe dream.

The valuation stage of proving the worth of the business is again a significant process. That company’s going to come in and review all of your financials with your accountant and office manager. They’ll check your accounts receivables and payables, levels of insurance, year-over year earnings, verify that your ledger matches your inventory and other financials. Again, you’ll spend a lot of time figuring out these things — with no guarantee that you will meet the criteria for lending. Or, “red flags” might be raised that you’ll have to address. You will want (and likely be required to get) audited financial reports as the basis for the valuation.

The Rigg’s Outdoor Power Equipment team includes owner Geoff Blanco (left), Bryon Merritt (center), LaPorte, Ind., location manager, and Jerry Klemczak, Mishawaka location manager.

The credit department at the bank will verify the valuation, which may mean another set of questions and they may want to do a full-scale audit. That means someone comes to the dealership and spends a week or more going through years and years of actuals. They’ll do random inventory checks, which gets down to specifics like checking to see if the $1.29 gasket that you say is in your second store is really there and calling customers that you say you’ve done business with. That is the level of scrutiny you’ll likely face — and the more you are spending or looking to borrow, the tougher the scrutiny is.

Keep in mind that auditors are not there to find what is right with the company — they are there to find out what is wrong. This is where the “skeletons in the closet” come out. As just one example of many, you may have elevated some trade-in values to make a deal. The auditor will look at what you sold the traded-in piece of equipment for and then ask for a third-party valuation. So we had to go to independent industry sources to verify values and provide invoices for what we sold.

This practice, and in fact, most of your business practices, will find their way into an auditor’s report and will need to be justified. Just because something works in the real world of a dealership doesn’t mean that it passes what is considered proper business practices from an auditor’s or bank’s point of view.

As the seller, depending on the state of your financials, the ability of your business system to generate the needed reports as well as your business practices could be an extremely painful process. The best scenario is to have your financials audited before starting the process. This will help justify the selling price and assist the buyer in speeding their ability to get funded. So, you want to be clean going into it in the credit process, getting rid of all those skeletons that have accumulated over the 20 or 30 years the dealership has been in business. Oh, and by the by the way, this is all on your dime in terms of cost.

Rural Lifestyle Dealer:What did you do during this process to ensure the dealership was still making sales and serving customers?

Blanco: It’s a lot of long hours and you don’t want to take this on “in season” because it could be difficult to recover financially if you’re too distracted from business operations. The reality is that, to some degree, some of the acquisition process may slow down because you’re already working 10-12 hours a day. You definitely don’t want to get into a situation where your valuation is influenced by a bad year.

You have to put this whole process into a timeline and figure out how much time you can dedicate to it, so you’re prepared when it’s time to work through the valuation and the audits.

Rural Lifestyle Dealer: How did you manage employees during this time in terms of keeping them on task as well as sharing information with the entire team outside of the accounting staff?

Blanco: You have to determine what you’re comfortable telling your employees because it could create anxiety, which translates into lower productivity.

You have to trust at least one or two key people because you are going to need their help. Make sure they are people you can trust with confidential information. The longer the process is for the acquisition, the higher the chance rumors will occur and your manufacturer reps may find out and then you have to go into “damage control” mode. The fact is that until the paper is signed, there’s no assurance that the deal is going to go through. There is the potential to create a lot of distraction with employees thinking about many other things besides their jobs.

Rural Lifestyle Dealer:How did you manage the manufacturer relationship during the acquisition?

Blanco: It depends on how the dealership is structured. For instance, if the dealership being acquired has a single owner, then all of those contracts go away and have to be reestablished with the new buyer. That’s when you have to figure out the best time in the process to be honest with the manufacturer’s rep about the acquisition plan.

However, when you do that, you bring more people “into the circle,” and you have a little less control over things. And at any given time, the financing might not go through, the seller could change their mind — or any number of things could happen. You have to be able to manage the situation with that rep and ensure the plan remains confidential.

As the seller or buyer, throughout those discussions, you have to make sure you completely understand what the contracts say about an ownership change because what you’re buying is based upon what’s currently being sold at that dealership. If a change in ownership affects your ability to sell that current brand or line, you have to consider that significantly. After all, you’re not really selling, for instance, a Kubota dealership because those contracts might not carry through with the acquisition.

Rural Lifestyle Dealer: You mentioned there is still more documentation to prepare, such as personal financial statements. Can you explain?

Blanco: Yes, as the buyer you also have to get your personal financial statements in order — and make sure that you don’t have any skeletons in the closet there, either — because you are becoming the personal guarantor for the floor planning. Make sure that you have enough personal resources to back up the lines of credit that you’re getting from your manufacturers.

That’s all part of the process again. Now the manufacturers’ lawyers are engaged and you’re getting new agreements and you’re sending financials, personal financials and company financials and they’re doing their entire due diligence on all of it.

I’m sure many dealers are thinking, “It can’t be that bad.” It is that bad because of the dynamics of the whole process. And so when you first talk to your bank and they agree that an acquisition is a great idea, you get this false sense of the process being easy. You have no idea until you’ve gone through it.

My advice is don’t believe the hype when the bank promises what they can do for you, even though it may be well-intentioned. There are so many steps to go through and you’ll be surprised learning what you think you know that you really don’t. There are things that have been tucked away in some barn for 20 years and you’ve completely forgotten about them, but there’s an invoice for it that never got taken care of and that’s going to be found.

It’s not that anybody has done anything wrong or bad, but if you’ve been in business for 20 or 30 years, you’ve got 20 or 30 years of transactions built up.

Rural Lifestyle Dealer: Now that some time has passed, is there anything that you would have done differently?

Blanco: If there was a mistake or misstep that could possibly be made in this process, I’m pretty sure I made it. Simply put, I didn’t know what I didn’t know about the financials and reporting of my own business. And, that’s even after spending a fair amount of time over the years working on the financials of my company.

I can’t emphasize enough that everything about the acquisition is about the numbers, not the aesthetics. If you are the seller, know the difference between audited, reviewed and compiled financials because the level of effort, time, cost and follow-up will vary dramatically and can delay the sale significantly.

If you are the buyer, having the accounting and banking relationships lined up ahead of time will expedite the due diligence through funding process. Be prepared that your current relationships in these areas may not have the expertise to really assist you in this process.

Rural Lifestyle Dealer: What’s ahead for Rigg’s? Expansion, acquisition, new lines?

Blanco: The industry is fairly dynamic right now and it’s going to be all about focus and scale. For our company, I define “outdoor power equipment” as a blend of traditional lawn and garden equipment with equipment that serves small-to-mid market ag, commercial and municipal customers.

Ultimately, that will mean that we focus on selling equipment that is priced $5,000–$100,000. We’ll still let the smaller dollar equipment sales happen, but without a lot of investment. The box stores are going to win the battle selling the $149-$2,999 equipment.

As for scale, I believe it’s a matter of time before consolidation happens in companies with revenues between $2 -$10 million. The weight of box stores will squeeze smaller dealers on one end and the consolidations among large ag and construction dealerships will squeeze the smaller dealerships on the other end.

It’s going to be very difficult for a single- or two-store dealership to compete and we will be opportunistic in light of the industry and market developments.

Part Three will feature an interview with Mikal Christopherson, vice president of TCF commercial banking, which financed Geoff Blanco’s acquisition of Rigg’s Outdoor Power Equipment. He’ll provide insights from a lender’s perspective.