Should I buy old business partner’s failing company?
Straight-talking, common sense from the front line of management
Q A former business partner who betrayed me by starting a rival company and poaching my best clients is now in trouble. Despite his actions, my business has thrived over the years and I am in a position where I could buy his firm.
There are definite upsides to a deal and I’m in a great bargaining position, but I must admit I’m mostly motivated by revenge, and a part of me wants to see him fail. It would be my first takeover too – what should I do?
A Leaving your emotions on one side, this looks like a dream deal. You would be buying a business that has been doing badly, which in my book is the first bit of brilliant news.
If a successful business comes up for sale it is usually best avoided – you would have to pay a premium price for a company with a limited scope for improvement. Poor performers are a much better bet, with the chance to pay a rock bottom price and, if you know what you are doing, plenty of room to improve profitability. You are in the best position to take advantage of the opportunity – you know the business and by putting the two businesses together can cut out lots of overheads. What can go wrong?
You could be tempted to get your revenge by ignoring the chance of making an offer, leave him alone and let his business go bust. But I urge you to throw thoughts of revenge from your mind. Don’t allow the chance of a personal vendetta to get in the way of a great acquisition. I would be more worried about the motives of your former business partner, who may be tempted to sell to anyone but you. It’s time to bury your hatchet and go on a charm offensive – at least until you have sealed the deal.
If you are thinking of hiring a lawyer, accountant or merchant banker to negotiate on your behalf, think again. No one knows your business (and probably your competitor’s business) better than you do. And, despite your differences, you also know your former colleague. No one else is in a better position to gauge his mood and judge the lowest price that he will accept.
A professional will work out the price with reference to the earnings, net assets and an appropriate price/ earnings ratio. These statistics may calculate one version of value, but what really matters is how much the business is worth to you. Your instinctive judgment is the one that matters.
If at all possible do the deal with your ex-partner face to face, shake hands, and agree the heads of terms. From then on the lawyers will take over, but watch them carefully. Even when deals are done amicably, lawyers can make enemies out of the best of friends by introducing intimidating indemnities and warranties.
It is wise to keep a direct line open with your opposite number to iron out any contentious issues that creep into the contract. Angry disputes can be resolved with a simple phone call such as “Did you ask your team to add the five new indemnities?” which is likely to get the response “I don’t know what you are talking about!”
Before lawyers and accountants start filling in timesheets, do some due diligence yourself and put a cap on the cost of the deal by agreeing a fixed fee. It will focus their minds, keep them to the point and, almost certainly, save lots of money. And, right from the start, set a deadline. Find a fixed point that seems set in stone, like your holiday, Christmas Eve or the end of your financial year. But whatever date you choose it will still be almost impossible to stop the deal being completed in the middle of the night.
When all the contracts have been signed and you have paid for a couple of bottles of champagne, you can devote your time to getting your business back on track and making the first moves to integrate the acquisition. However, despite the logic behind your move and the existence of a clear strategy, don’t expect things to go according to plan.
For the first few weeks, most companies that we acquire experience a fall in sales and a drop in morale. Employees don’t like change and are suspicious when new owners take over. It takes time to gain respect by getting to know individual colleagues and showing you know what you are doing.
But what should you do about your old business partner? You don’t want to be saddled with his salary and he wasn’t so good at running the business, so make his resignation part of the deal and, as he betrayed you, insist on a non-compete clause so he can’t do it again.