New Venture Lab: Equipping Christian Entrepreneurs

While it may not be statistically significant in terms of all the deals ever done, in my experience of negotiating with roughly 200 prospective sellers, signing approximately 40 letters of intent (LOIs) and acquiring about a dozen companies, I can confidently state that there were always negative surprises -- during due diligence and after closing -- in 100% of the deals.  Now I must admit that few of my sellers were Christians, so perhaps that explains this behavior pattern...

What I mean by "negative surprises" is that the companies were never as good as they were portrayed, their earnings were never as high as they were initially (usually verbally) presented, the customer relationships were never as solid as they had appeared at first, etc.

I currently have two deals under LOI and the same thing is happening all over again.  I just found out that one of the companies that had been presented as having $2.6 million in EBITDA really only has $1.3 million in EBITDA.  Of course the Seller is still expecting the same purchase price initially discussed when we thought the company had earnings of 2x the actual amount.  And that's another funny thing: the earnings shortfall has often been almost exactly half of what the sellers had bragged about upon our initial meeting.

I remember another prospective seller several years ago looking me straight in the eye and boasting of his $1 million in earnings and no debt whatsoever.  As I dug into the company's trailing twelve months (TTM) actual financials, it turns out that their earnings were only $550k and the company actually had $350k of debt on the Balance Sheet.  When I confronted the seller (in a nice way of course, not wanting to lose the deal, but trying to reshape it and re-price it based upon the new information) he acted in the typical fashion of blowing up at me, blaming me for taking too long on the due diligence and demanding a quick close at the original price.  His response was to try to bludgeon me into submission rather than deal with the fact that his company was nowhere near the company he had made it out to be.

So, the anatomy of a deal often goes like this:

1. Initial meeting with the prospective seller is all about him painting a glowing picture of his company and in his enthusiasm for his company and a potential cash-rich deal, he often exaggerates a few details such as revenue and earnings, or in terms of company or product maturity, he paints more vision than reality.
2. The buyer gets excited about the company (it sounds like such a terrific company!) and positions the value of the company based upon what he has heard and pegs the timing of the closing based upon the seller's promise to get the information right over to the buyer.  They have officially entered the honeymoon period.
3. The seller starts to pull his initial information together for the buyer, but is embarrassed to find a few significant shortfalls in what he had portrayed.  It is easier to stall on getting the information to the buyer than it is to admit or own up to the issue.
4. The buyer prods the seller into action, wanting to keep the seller on track to close on time (after all, it is going to be such a good deal), but the seller goes silent for a while.
5. The seller finally gets a bit edgy and comments that he has a business to run and can't get all the information as quickly and as completely as the buyer wanted.  The honeymoon period is not yet over, but the first big stress in a deal is almost always over the due diligence process itself.
6. The buyer backs down a little and tries to reset expectations in terms of the closing date, because he still doesn't have any information.
7. The seller finally delivers some information to the buyer just to get him off his back for a while and holds his breath because he knows it's not exactly what it should be.
8. The buyer gets handed his first big negative surprise and tries to figure out how to renegotiate the deal based on what he just found out.

And on the process goes with its ups and downs and negative surprises until a deal finally gets done (with lots of tweaks, a lower price and more contingencies) or the deal is called off because of unmet expectations.  I wish it were different, but it has been an enduring pattern.

Perhaps with Christian businesses and Christian entrepreneurs it can be different. 

That would be a refreshing change.