Randy (not his real name) called a few weeks ago about his desire to buy a business. He told me he has a great job now, “But I’m not creating any long-term value for myself.”
Randy knows how M&A works. The Nashville-based company where he is employed has made several recent acquisitions, and he has been actively involved in the due diligence process.
He learned about one of my engagements through his uncle who knows my client. So before I even had a chance to meet Randy, he had already spoken with my client. In other words, I met Randy through my client, which is usually the reverse of how these things work. In any event, my client liked Randy and considered him a very real potential buyer.
Once I connected with Randy, I understood why my client was excited that he might be the right buyer. Randy knew the right questions to ask and had a level of confidence that made me think he knew exactly what he was doing.
After he signed the NDA, I sent Randy the data he requested, and we scheduled a follow-up call. Suffice it to say, the air was out of the balloon by the second call. Though the business is strong, and the valuation is reasonable (if not, in fact, low), Randy said he couldn’t buy the business because it didn’t generate the cash flow to support his current salary and cover the debt service required to do the deal.
I wasn’t surprised.
Having been involved in the buying and selling of businesses for more than 25 years, I have seen my fair share of enthusiastic, talk-a-good-game potential buyers. While I won’t disparage Randy’s motives or integrity, I will challenge his acumen. Here’s a guy who thinks he can buy a good business with little to no equity, and still keep his current salary intact. In other words, he says he wants to create long-term value, but he is not willing to sacrifice anything in the short term to get there.
While there are exceptions to every rule, let me put a rule out there for your consideration: you cannot create long-term value without taking short-term risk. When I resigned from my VP position with Disney Development Company to buy a radio business, I invested every penny I had in savings, AND mortgaged my house, AND took a 90% cut in compensation. Yes, even today almost 30 years later, my wife still thinks it was crazy. While it all worked out well, there were a couple of years the plan was touch and go. But I was committed to the long term and willing to make painful short-term sacrifices.
In his book, “Take the Stairs,” my brilliant friend Rory Vaden* says it this way, “Do it scared.” I meet very few corporate types who understand that premise when it comes to buying a business. I’m not advocating reckless risk, but when buying a business, there are going to be risks, big risks. Keep your day job unless you are prepared to do it scared.
Entrepreneurs really do say the darnedest things.
*To learn more about Rory and his work, check out www.BrandBuildersGroup.com.
Tennessee Valley Group
Latest posts by Tennessee Valley Group (see all)
- Valuation Math - May 29, 2023
