In last week’s story, Steve Adams left the comfort of his corporate career to become a business owner.
He identified and acquired an iron and metal fabrication business, ABC Metalworks, without engaging a financial advisor or an experienced M&A (buy-side) professional.
As a result, he missed or overlooked issues with the business that he would come to regret as the owner.
Hidden Dangers of Buying a Business
Steve’s problems began soon after taking over the business.
The prior owners spent an acceptable amount of time, during the week after the sale closed, acquainting Steve with their enterprise software; introducing him to the company’s managers, administrative staff and shop-floor employees; and generally showing him around the operations.
Everyone at ABC Metalworks was on their best behavior during that first week…
A Secret Toxic Culture of Distrust
The following week, while the prior owners were vacationing in Europe, Steve’s situation changed dramatically.
He realized that decision-making authority had not been adequately delegated, as he was asked to approve basic operational and production matters.
He also discovered that the prior owners had inflated the probability of closure for many of the prospects in their sales forecast, had a skilled welder leave the company for a 15% pay raise, and learned that his office manager was having a not-so-secret extramarital affair with the shop foreman.
When the prior owners returned from Europe, they were unresponsive to Steve’s telephone calls and e-mails asking for guidance and information.
He was being “ghosted,” and had very little recourse. The deal they struck was all-cash with no holdbacks for contingencies and no enforceable clause requiring the prior owners to be available post-sale.
This hidden toxic culture was destroying his purchase.
Without the Right Contract in Place, a Bad Sale Boils Down to “Buyer Beware”
Steve was experiencing the loneliness of being a business owner, of being left to figure things out on his own.
By Friday evening of his third week, he was left alone and overwhelmed, on the vacant shop floor, sobbing and praying for divine guidance on how to fix the mess he’d gotten into.
He wasn’t sure about everything that needed to be done, but he did know ABC Metalworks’ culture of distrust was toxic. Before making changes to the way things were done, he needed to earn the trust of his employees.
Steve decided to begin that process by holding an all-hands meeting on Monday afternoon. He’d outline his talk over the weekend, along with developing ideas to improve the company’s weak sales pipeline.
While Steve thought he was buying a business that could run without him, what he’d really run into was an even deeper hidden issue:
Owner dependency.
A Classic Example of Owner Dependency
ABC Metalworks is a classic example of owner dependency: a business that cannot run by itself (which, in this case, was being portrayed dishonestly).
It will be a long time, and require substantial effort, for Steve to turn this business into one that can run without his daily involvement.
Next week, in part three of this story, we’ll find out how Steve began the long process of getting his business moving in the right direction.
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