War Story: Trust Your Instincts!

Early on in my career, I learned a lot from a specific deal. A seller wasn’t being straight with me, and I caught on pretty fast.

I was looking into buying a $500,000 SDE company in the security industry that provided control access doors and video cameras for major companies across the nation. They were based in Texas and had a few primary contracts with major chain stores. Think The Home Depot size. I got to the diligence phase of the deal.

Often, when you first receive the Confidential Information Memorandum and the financials from the seller, they're less than ideal. In this case, I should say terrible. I needed to analyze the data incrementally to make a decision on whether the deal was worth my time. After I reviewed the information, I still felt good about it. I spoke with the seller over the phone a couple of times. Things were good. I sent him a Letter of Intent.

We negotiated, and the seller said, “I'll sign it, but I need you to come to visit me first.” I agreed, but I requested some updated financials in turn. The business had changed greatly in the 12 months prior to this deal, and I wanted to understand the current state of the company. The seller seemed happy to oblige. He said he would bring his accountant to our meeting. They planned to pull up Quickbooks so I could take a look. That worked for me.

I flew to Dallas and met the seller at a Starbucks. The first thing he said when I walked in was, “Elliott, you won’t believe this. My Quickbooks is down!” He said that it had been down all morning. They had contacted Intuit, and their bookkeeper was looking into the problem. My heart sank. I remembered him mentioning they use the cloud-based version of Quickbooks. The uptime on software like Quickbooks is around 99.9%! Being down for half a day is basically unheard of. What are the chances that the software would be down the day I came to visit?

Half of me wanted to head back to the airport immediately, but I decided to follow through with the trip. I spent that day and the following day with the seller. I wanted to see how far he was willing to take this lie. The experience was worth my time. I knew this wouldn’t be the last time someone would try to misrepresent the truth in a deal.

He had all of his salespeople, bookkeeper, and accountant in on the lie. Essentially, he had bought a business—that he couldn’t run—with an SBA loan. The numbers were going down. He was hoping I would believe the QuickBooks story and buy a company that was on the way out of business.

I tell this story because it’s such a good example of how a seller will bend over backward to force a deal through. Be careful in your deals and stay skeptical. Lean on due diligence. It can save you from making a big mistake.

To learn more about how due diligence and a Quality of Earnings report can benefit your acquisition deal, check out my sample Due Diligence Report. You’ll be able to see all the details that will help you negotiate and make smart decisions in your deal.