Don't Make an Acquisition Until You Read This.
There are a lot of wounded companies out there looking for a way out. But buying a bad company won't make it better and may make yours worse.
BY HOWARD TULLMAN, GENERAL MANAGING PARTNER, G2T3V AND CHICAGO HIGH TECH INVESTORS@TULLMAN
These are anxious and uncertain times for
every entrepreneur. Coming out of the long, COVID-19-enforced and unhappy
limbo, entrepreneurs with their built-in bias toward action, and caught in the
intoxicating euphoria of sheer survival, are now especially at risk of
intemperate efforts to jump back into the game quickly. Much too quickly.
There's a growing pressure to relieve all that accumulated anxiety and to
release and redirect all that pent-up energy by doing something,
even if it's just to keep busy. It's the triumph of busy-ness over business and
that's a certain prescription for pain and unforced errors.
I've seen this cyclical mindset several times
as the economy has emerged from especially tough times. It manifests itself in
different ways, but the area where the most costly mistakes are made is one
where high hopes and wishful thinking, the best of intentions, and a sincere
desire to help fellow entrepreneurs out of the ditch combine to justify
mergers, fold-ins, and acquisitions of struggling entities that would never
withstand even reasonable scrutiny under more normal circumstances. I
appreciate that charity and kindness are true virtues, and that such deals can
make us feel good even when they're premised on shaky beliefs about synergy and
a deluded and intentional avoidance of some hard realities. But you need to
resist them.
In the real world, businesses fail for a
reason. And while there may even be noble failures, it's generally not a good
idea, or your obligation, to try to rescue them from the consequences of their
own choices and mistakes or attempt to prolong their lives until some other savior
happens along. And frankly, the same warning goes
for most of the people involved.
Whatever you may think as you gaze from the
outside, once you "own" the business you've bought (regardless of the
price), you end up with a parade of problems that you don't need, don't have
time to deal with, can't afford and shouldn't have taken on in the first place.
These include too many people doing too little, people with fake and inflated
titles who are living examples of the Peter Principle, and people who are
angry and unhappy through no fault of yours. Add to that all manner of petty
politics, inherited and antiquated programs and systems, and software that no
one had the guts or good sense to kill before the company hit the skids.
Let me tell you from a wealth of experience
and close-up observation that when you look back on one of these messes, you'll
quickly come to understand that the only thing worse than going it alone in
these tough times is wishing that you were. Misery may love company and you may
think that you're doing a good deed and at the same time adding critical mass
to your team and your business, but too many times all you're doing is
inheriting problems, diluting your focus and attention and precluding yourself
from pursuing other real opportunities. In these cases, just say
"No".
Here are four easy rules to help you through
these trying times and get you safely to the other side.
(1) Always partner up, not
down.
If there aren't clear, obvious and immediate
reasons and benefits that aid, advance, and accelerate your current business,
walk away. Right now's not really the
time to talk yourself into taking on new adventures, additional lines of
business, or anything else that takes time, attention and resources away from
rebuilding the core. Remember that assets are always debatable, but costs
and liabilities are 100% dead weight from Day One. And, in terms of people,
remember that A players hire other A's, while B players hire C's. Don't settle
for second best even if it seems like a bargain.
(2) Build on your
strengths and prospects; don't do a deal to try to shore up your weaknesses.
There are no quick fixes or miracle cures for
basic deficiencies in your business. You need to face them and fix them. Many
entrepreneurs found themselves looking directly into the abyss over the last
two years and it's comforting to think you can fold in some additional folks
who've also been there, so you won't feel so alone, and they'll be grateful (at
least for a little while) to boot. You want to always be driven by fortune and
not fear. But the fundamental failings in the base business won't get better by
themselves and adding more bodies along with the complexities and confusion
always inherent in integrating any new operation into your ongoing business
(which is undoubtedly undergoing some radical changes of its own) is a really
bad bet. It's just a variation of Brook's Law which states
that adding more manpower to an already late software project simply makes it
later.
(3) It's not what you
pay for something, it's what it ends up costing you.
Even free isn't much of a deal if it comes
with a bunch of hair and hidden costs like
crappy code and other problems. By definition, any implementation is
going to take at least twice as long as you expected and cost a great deal more
in time and dollars than you projected. But even apart from any "tech
debt," which requires reworking, rewriting and often replacement, the
other costs and complications around products, personnel and politics are
another serious time sink and distraction. When the inbound folks start to
realize that the grass isn't that much greener and they have new bosses, less
autonomy and fewer resources, the sellers' remorse, pity parties and general
ennui can weigh down your whole operation.
(4) Two lukewarm cups of coffee
don't make a hot drink.
The truth may well be that your own business
isn't such a shining light itself. You may just be in an incrementally better
position to act in the moment. When all the activity and promotion around the
transaction lessens, everyone on both sides may sadly discover that 2 + 2
equals 3 rather than 5. This isn't likely to be good news for anyone and
especially for the people paying the bills for the lawyers and accountants who
were happy to put the deal together. This is just another reason to take some
time, take a very careful look around, and then - if you decide to leap - make
sure that you've done everything you can to manage and moderate the
expectations of all concerned.
Always remember that if they were swans, they
probably wouldn't be for sale. Which means they're much more likely to be ugly
ducklings.
NOV 9, 2021
