Steve Adams is smart, self-confident, and pays great attention to detail. After graduating from the University of Rhode Island with a degree in computer science, he began a 20-year career in software engineering and project management.
His professional success was a result of his strong work ethic and a personal optimism that stems from his inherent ability to “figure things out.”
As his corporate career progressed, Steve grew tired of the politics and long hours. He received excellent compensation but also knew he was one ‘re-org’ away from being unemployed.
Steve started paying more attention to family and friends who owned their own businesses and began dreaming of building equity and living a better life.
The Search Begins
Steve didn’t possess what some people refer to as an “entrepreneurial spirit,” and while his desire for independence was growing strong, he didn’t have a constant flow of new ideas that could be turned into growing businesses.
Nevertheless, he bookmarked bizbuysell.com and began looking at businesses for sale under the $5 million loan limit of the Small Business Administration’s 7a program.
He wasn’t looking for any particular type of business, but was surprised to see so many small manufacturing businesses for sale in the Dallas/Fort Worth metropolitan area.
With his engineering mind, Steve believed building things would be interesting and a good fit for his skill set. He also felt he could lean on his technology project management background to improve operations.
Buying a Business Without Buyer Representation Is Dangerous
During his narrowed search for a manufacturing business, the qualities that benefited Steve during his corporate career began to emerge as liabilities.
Despite entering the uncharted territory of acquiring a business, he decided to keep his transaction costs down by not engaging with buyer representation.
Once his target company, a large-scale iron and metal fabrication business, was identified, this do-it-yourself approach resulted in a flawed, less-than-thorough due diligence.
Steve did notice a few things that should have raised red flags, like incomplete financial statements, high employee turnover on the shop floor, and vague answers to some of his questions by the current owners (a married couple).
However, after months of trying to identify a suitable acquisition and making a 10% non-refundable down payment, he was invested, emotionally and financially, in getting this deal done.
Where Steve Went Wrong
If Steve had the outside viewpoint of an experienced buyer representative, the emotional and cognitive biases he was exhibiting (Overconfidence Bias, Sunk Cost Fallacy, and Illusion of Infallibility) would have been neutralized, and the transaction either abandoned or negotiated under better terms.
Relying on his ability to “figure things out,” Steve was able to push this deal across the finish line. He invested $500,000 of his own money into ABC Metalworks (50% of his financial net worth) and took out a $2,000,000 SBA 7a loan to complete the purchase.
Steve Adams became a business owner.
His celebration party music had barely died down before his situation began to deteriorate.
He had made a bad deal.
One of the professionals Steve could have benefited from having in his corner prior to this business acquisition is a financial advisor from Sandene Strategies.
Steve’s Fundamental Mistake
Steve’s fundamental mistake was not to seek a third-party, “outside” viewpoint.
That’s because We Get Entrepreneurs! Our financial planning process includes the unique 360° Asset Strategy™.
We would have counseled him on this investment, and at the very least, introduced him to an experienced M&A advisor as his buyer representative.
Next week, in part two of this story, we’ll learn about the troubles Steve encountered and why he’s stuck with this business for a while.
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If you’re looking to buy a business, don’t be like Steve—get an experienced buyer representative who will ensure your deal is a great one.
Contact us today to discuss what you’re looking for and how we can help.
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