I haven’t written A blog post in over a year it would seem. This is for a number of reasons but mostly because I’ve been running businesses. This is a fascinating hobby. It is also a huge challenge. I used to preach that one needs to take a step back when buying businesses. When you hand pick a manager or by a company with an effective president, you should not need to insert yourself into the mix. Hands off management can be the best thing, sit back and enjoy.
Yet, hands off management is what private equity does. They hire, they fire and they order management around, and investors invest, they do not run companies. They have plenty of capital and can run out and buy other companies. In my many deals I have always subscribed to that theory, very rarely getting involved in management. I was content to sit back and collect the money and watch things happen.
At the same time I would go out and find new deals. This took all my time and it wasn’t always time well spent. I would be out there beating the bushes for deals that would be very easy to buy – which took time. I would also look for deals that were in different industries so as to diversify my industry base. Now I must say it is fun going out to visit companies, to learn about them to shake hands with other CEOs, but there is always the fun part and there always is the difficult part.
What invariably happens is that you get to a certain point in the deal and you have to put up or shut up. Usually this is at the point after which you have signed a letter of intent. I have signed letters of intent of deals where it was a piece of cake to buy. But the reason I didn’t buy it was because the target company would have been a nuisance to manage. Sometimes deals that are are just too small to be bothered with, or they don’t have a critical mass(volume). Yet for the first time buyer, the small deal would be perfect and he wouldn’t mind jumping in to help run the company, even if the extra layer of management is not there.
However that’s not the only problem with buyouts. The deal can be too big, too complex, too vulnerable to problems. All sorts of hurdles can arise in your due diligence. The deal may be too hard to finance, the owner too hard to work with, and the deal too hard to close. There are just so many things that can go wrong along the way that it is easy to back out of a deal. This is something I’ve said many times before. Buyers get cold feet. Sellers also get cold feet but that’s to be expected.
So to be quite honest it is often a better idea to run the business that you already own than it is to let the prospect of more deals consume your life. This isn’t to suggest that you jettison your hopes of starting a great big empire of businesses, but if you were just bootstrapping deals you’ll probably do one at a time until you get hold of real capital. Trust me nobody, even rich people, would like to part with their capital, so you will need to raise money when you do deals. You can do lots of deals at a time if you go out and raise lots of capital. But don’t think you will freely toss your hard earned investment capital at any deal that comes along.
So in the next few blog posts I am going to walk you through what happens when you actually buy a business and actually run it. Because you can either sit back and watch or you can jump in and run the company. I have done both and while ignorance is bliss, sometimes you just have to get in there and roll up your sleeves.