War Story: Know the Real Story

Retirement, divorce, or a hot industry are the most common reasons businesses are sold. Sometimes, entrepreneurs are just tired. When you initially ask for the reason an owner is selling, they’ll have a standard, lofty story. It always sounds great, but it will usually follow one of those four themes.

When I was in the process of buying a roll-off container company in the Northwest, the story changed a few times. An owner-operator had the idea for the business and ran it while a family office was the financial backer. We were told that the owner felt held back by the family and wanted to sell so he could go in a different direction with his career. That was the first story.

We were in diligence for four or five weeks when asked the seller if he wanted to roll over any equity or seller financing. He confessed that he would still love to run the company, but the family office was forcing him to sell. That change in story eventually led us to update the LOI and give the seller some equity. We were excited about this revelation because we now had someone to run the business.

Negotiating the purchase agreement will be the moment of truth for a lot of you. This is when the reality starts to become clear. This is when parties have to start making promises, and there's recourse. You can't just tell a story anymore without it being backed up financially. You'll get more truth.

We started negotiating with the owner and the family office. During this process, we realized that the family office and the entrepreneur were not just not getting along; they were feuding like a husband and wife in divorce court! We weren’t dealing with rational people anymore. All of a sudden, the family office was not agreeing with what the owner was saying–even if it came down to us giving them more money. The equipment lists between the two parties had different numbers. Neither one wanted to reconcile. We could tell that they weren’t communicating with each other.

The seller told us that the family office was crazy, so we started looking at the balance sheets. This is where deep due diligence comes into play. We were looking at the monthly balance sheets; we needed to get that granular. We noticed ten loans of $150,000 from the family office to the entrepreneur in sporadic timing over the course of twelve months. For a person that owns a $10 million business, there aren't many valid reasons why they would need a $150,000 loan. It was weird. Why was he borrowing from the family office? We asked the broker about it, but we didn’t get a clear answer.

We were planning to finalize the purchase agreement on a Friday. We had one more thing to talk to the owner about on Thursday, but the guy went dark. I had his cell phone number. I’d been to his house. I'd been to his office. We knew where everything was, but we couldn't reach him. The family office didn’t know what was going on. The broker tried to cover it for about a week, but after that, the deal was essentially dead. The owner was a ghost for three weeks and then tried to come back to the table like nothing happened.

To me, this situation seemed a lot like an addiction problem. I can't promise that's what was happening, but I know that the next time I see $150,000 loans from business to employee, it will be a red flag. I’ll need to know what’s going on. Once the seller went dark, the deal was over. We had irreconcilable differences. We had an operator that we didn’t trust. The family lied to us. We had to go.

To get more advice about when to spot when a deal is headed south, download our white paper “7 Times You Know Your Deal Is Dead.”