Herman School of Business
Buying a Bargain VS Acquiring an Albatross
It is very often the case that someone who starts a company makes a fortune…for the next guy who owns his company. Great ideas are starting great companies that can’t survive the first owner’s lack of capital, inadequate experience, or maybe just plain bad timing.
But how do you know when you are buying a company at a bargain price and not acquiring an albatross that will sink you? One sure way is to see that everyone involved in “Oldco” is leveraged in some way when you form “Newco.” That means if the prior owner owes a million to the bank and can’t pay it back, will they reconstruct the loan for you so that the monthly debt payments are less? Is the Landlord willing to restructure the lease? Are key employees willing to stay because they still believe in the idea? Will the current customers make any commitments to buy going forward? Now, never expect much help from the old owner who just lost his dream and can’t believe you are going to be the one to cash in…he won’t cut a break on the selling price to himself…so you may have to make the other people he stiffed help you remove him from the scene of his crimes. You can find a hundred or so examples of owners getting crushed in both of my books.
The prior owner may be losing money for dozens of reasons that you can fix. It may be an addition to your own great idea and save time and money using his failure to catapult you further ahead.
Just like the millions of homes coming into foreclosure soon, there are hundreds of thousands of business loans about to go belly-up. And banks don’t want write-offs, they want performing loans. Paying a loan off in cash gives them no profit stream unless they can immediately lend that money to someone else. They would rather do a profitable work-out on a loan, than eat some of their reserves in a write-off situation. A painting contractor may lose a business with multiple contracts because he can’t make those payments on the new fleet of trucks he just had to have last year…with his catchy logo spread out on the side of those three new Hummers. My twenty-five year old van can haul more paint and ladders and equipment than any of his Hummers and I don’t worry about “dinging up” my Hummer. On a larger scale, an owners “must have” new plastics equipment may be sinking another manufacturer, when your older equipment (or buying his stuff for half price) puts you in a better profit position.
But don’t be too quick to jump. I once bought a metal stamping factory for just the back taxes…and assumed his current debt…I should have done more due diligence because there were several offices with bills stuffed in drawers that were not listed yet by his accountants…and while I had a great case to sue him for failure to disclose, he was broke and I was left holding the bag. Just as there are houses coming soon for a bargain, there will be great business opportunities for the taking. Check back soon for a blog posting on how to buy a troubled company.
- Posted: 24 October 2007
- Comments: 2
- Category: Starting a business
Comments
a good idea is to work in the business before buying in. Spending time with the owner day to day is very insightful. Love the blog
HERMAN SAYS...Bruce is right on the money....it would make more sense to "spend a month" at the company before closing a deal....what you learn could save you a fortune.Written by Bruce on 24 October 2007
So what happened to the metal stamping factory? Was it an Albatross or did you turn it around?
HERMAN SAYS: The metal stamping factory was a disaster...the old "cost of goods sold problem" was at the heart of it....while the machinery was supposed to do "so many pieces an hour" the estimating department did not properly calculate set-up and take-down times and costs...then a wokrer who had just completed safety training...violated safety rules and took off a safety harness and cut off her hand...the case was actually a great example of knowing when to throw in the towel...but not before losing over half a million dollars.Written by Richard on 24 October 2007