“We have a new leader on the idiot list” is what I wrote an associate. When we later spoke, he said he can’t read my messages when drinking espresso or water because he laughs so much he’s afraid he’ll spray all over.
What led to my statement was a (supposed) sophisticated business buyer (PE firm, but someone new) tell me they value the business we’re working with at 3 times the increase in cash from operations on the Statement of Cash Flows. He ignored the income from operations (profit) which is much more and the fact there was about $2 million of owner distributions.
Now this person had some good competition on the idiot list, which included:
- A PE firm making an offer without talking to anybody or seeing financial statements. Their offer was basically “keep your cash and AR plus an earnout.” The company will make over $3 million this year.
- A buyer who told me if a seller needs cash at closing it means they have a distressed business. The owner of a good business doesn’t need cash and will take a note and an earnout.
- Another good example is a buyer who wanted to quadruple the business in five years (good goal) but didn’t want to invest in marketing, more people, more equipment, etc. All cash flow would to paying off debt early and to him. I doubt he’ll ever buy a company.
Some fun things here from the “you can’t make this stuff up” list. Most buyers are pretty good, reasonable, and serious. In my first year in this business, I read an article in which the title and the main premise was, “Buyers are liars.” It’s ones like the above who caused the author to write what he did.
“Education should not be intended to make people comfortable. It is meant to make them think.” (Historian) Hanna Holborn Gray