War Story: Buying Into a Tanking Industry

Last month, I discussed the four main reasons owners sell their companies: divorce, retirement, the industry is hot, or being burnt out. Another reason owners opt to sell is if they know their industry or business is about to tank. For the seller, this is a great opportunity to sell the business to a less-informed party. These sellers will negotiate as reasonable, friendly people, but in reality, they're trying to convince you to buy up all of their risk.

My partner and I took a run at a durable medical equipment business in Arkansas. They provided CPAP machines, wheelchairs, and other at-home medical supplies. I found the business, and it seemed like a reasonable deal. It had about $500,000 in EBITDA. The seller negotiated very fairly, and I got along with him very well. I met his family. We had a barbecue together. Everything about the deal felt really good.

Three or four weeks before we were supposed to close, we went on a retreat. It was right around the election in 2016. We were having a couple of drinks, and we were sharing more. I said, “Hey, why are you really selling? Don't give us the textbook answer. Why are you really selling?” He didn’t tell us that night, but we found out later.

The 2016 election went differently than many people predicted. Afterward, the seller ended up rescinding the deal. He expected the Democrats to win, and to him, that meant more constraints on his business that would make it harder to operate. He thought he was going to lose money in a big way. When that didn’t happen, he pulled back and didn’t sell. He wasted so much money and so much time.

All along, his plan was to sell us a tanking business. That was a hard pill to swallow from someone I enjoyed getting to know, but it turned out to be a great lesson. We are making million-dollar bets in this industry. Keep in mind the nasty reason somebody might be selling. They know their business better than you. They can see future developments that would be bad news for you as the buyer. Stay vigilant, know the industry, and always get to the bottom of why a seller is selling.

How Deals are Executed

If you’re new to entrepreneurship through acquisition, you might be wondering about the general timeline of a deal. My white paper takes you through each step of the process with tips along the way. Check it out here.