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  September 28, 2012
How Do You Boil a Frog...

 


There is an age-old question:  How do you boil a frog?

The answer:  You can’t just put the frog into boiling water because the frog will just jump out, so you put the frog in cold water and continue to turn up the temperature one degree at a time until the water is boiling and your frog is cooked.

My friend Julie was recently in negotiations to sell her medium-sized plumbing business to a much larger company.  She has been in business now for about 30 years and has seen her company grow substantially over the years.  She had grown tired of the plumbing business and wants to branch out into other areas.

Her business has several employees and it makes Julie a comfortable living each year, although she doesn’t put in the hours or the energy she once did.

The concern trying to buy her company is a much larger company based on the east coast who is looking to break into the west coast market.  The larger company is professionally managed and has made several acquisitions in the past.

The bigger company has a great reputation in the industry for treating employees well and prides itself on the quality of its customer service and customer satisfaction.

Through the help of a local investment banker, the two sides quickly settled upon a fair price for the business.  The deal was structured to where 65% of the purchase price was to be paid up front with the remaining 35% paid over a three-year period based on the future performance of the company. 

By structuring the pay-out in this way, the acquiring company could mitigate some of the inherent risk by forcing the seller to continue operating the business in a profitable manner.  This way, an orderly transition from one owner to another could be made.  If the customers were to go away, so did a substantial portion of the sales price.

Once the deal was initially agreed upon, the purchasing company began their due-diligence process.  This is a period of time when the acquiring company reviews the books, records, contracts, financials and other key pieces of information related to the company that they are acquiring.  This is standard practice in most mergers and acquistions.

Although Julie gave them most of pertinent information upfront, the new company wanted to perform their own audit of the company.  The aquiring company sent in their team of forensic accountants to review all of the records and to meet with key personnel.

After a few days, the investment banker called Julie.  The acquiring company had found several things during their initial due-diligence that concerned them.  These items were not major problems but they were issues concerning the concentration of accounts. 

Julie’s company performed a lot of work for one really larger property management company and that this customer represented about 30% of all of Julie’s company’s revenues.  This was a concern for the new company in that if this customer went away, so would 30% of their revenue.

Due to this "issue", the acquiring company proposed that only 55% of the purchase price be paid upfront and 45% would be earned over the next three-years but overall the price would remain the same. 

Julie understood their concerns but felt confident that their key customer would remain with the company, so she agreed to this new change in terms.

A few days later, the due-diligence team found another possible issue.  This time it concerned the company’s insurance rates which were much lower than the industry average. 

Julie explained that the insurance rates were low due to her conscientious employees who rarely had accidents on the job.  Since the front-line employees were staying with the company, she sensed that her lower rates would remain the same. 

The acquiring company explained that this was really an aberration and that rates would surely go up in the near future, therefore the company’s future earnings would be affected and therefore a slightly lower purchase price would need to be negotiated.

Once again Julie, who really wanted the deal to go through, accepted the new terms.

A few days later the due-diligence team found yet another problem... and the terms were renegotiated... and then again another problem... and the terms were renegotiated... and so forth.

Soon the deal hardly reflected the deal that they had first struck only a few months ago.  However, by this time, Julie had already spent several tens of thousands of dollars in legal and accounting fees.  The acquiring company had also spent a great deal of money doing all of their legal and account investigations.

Julie had agreed to all the little changes in terms but the deal was now substantially different than the original deal.

After some deep soul-searching and counsel from some of her good friends, she realized that she couldn’t sell her company under the terms and conditions that were now on the table.

She mustered up the courage to call the acquiring company and told them that she wasn’t able to sell under these terms and conditions and needed to just walk away from the table.  There were threats of legal action and recourse but in the end the deal just died and ultimately both parties went their own ways.

Julie’s story isn’t atypical.  How many times in our own lives do we continue down a path seemingly longer than we should even though we know in our hearts that it is the wrong path?

We continue to stay in a bad relationship... we stay at a bad job... we let ourselves be bullied or taken advantage of by relatives, friends, bosses and/or colleagues...

Maybe we allow this to happen to us because we give ourselves excuses... we have kids... because we feel fortunate just to have a job in this economy... because we we’re afraid... or maybe because we just don’t know any better...

We rationalize our situation by saying to ourselves, "Better to live unhappily than to live alone or to live poor"... (I’m told that to "rationalize" is nothing more than telling ourselves "rational lies")

The sad part is that we aren’t even aware of what is happening to us until many times it’s too late... we started in cold water... but the temperature has been increasing over time... and now it’s boiling... but we’re too afraid to jump out of the pot.

Changing our lives takes courage and determination... but we can do it... we need to just take that leap upwards and forward... to a place outside the boiling water...

Thank you for your support of OptiFuse, where the water is always the right temperature for your comfort. 

 

Jim Kalb
President
jimk@optifuse.com
www.optifuse.com

www.optifuse.blogspot.com (blog archive)


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