I Bought a Company I Had Stopped Believing In

What my mentor said in week six of due diligence, and why I still repeat it.

Six weeks into due diligence I had a list, and the list was bad.

No product management to speak of. An org chart that made no sense when you followed it from the top down. Nobody inside the company could tell me what their marketing spend was buying them. Almost nothing was automated. Every week of diligence produced another item, and none of the items were small.

I was buying this business for $2.5 Million. The money was mine, from an exit a few years earlier, and it was all of it. Every dollar of liquidity I had, going into one thing, with an SBA loan on top. At home, there were my wife and three children; seven, five and one.

So I sat with the list and I did what anybody with my training would do. I looked for the number that would tell me whether to proceed.

There isn’t one. I know that now. At the time I was certain it was there and I had simply not gotten to it yet.

How I got there

A couple of months earlier, a friend of mine, an analyst at a boutique investment bank, mentioned the company in passing. We had been talking about where my career was going. I had spent twelve years moving up through various IT leadership roles and had done well, and I’d told him that I was interested in buying something in IT education and certification. Not because it was a good sector on paper. Because I had watched people spend years and enormous amounts of money acquiring skills that could be taught faster and cheaper, and I wanted to be in that.

I looked at the high-level financials, and I submitted a letter of intent at an enterprise value of $2.5M.

I want to be honest about what I was thinking, because it’s not flattering. My reasoning was that it was only an LOI. If diligence turned up something ugly, I could simply walk away, no harm done. That is a real thing people tell themselves, and it works right up until the moment you’ve spent six weeks and a lot of money and you have started to picture yourself running the thing.

There was also something I was running from, and it deserves saying plainly. I wasn’t going to spend another year in a job giving three status updates a day to a boss in a culture I didn’t belong in. I had made that decision well before I knew what I was going to do instead.

And I didn’t want to start from scratch again. My first company, I built it from nothing and grew it to a couple of million in sales, and I’ve described it since as an A to Z apprenticeship in launching and growing something small. What it didn’t teach me was how to scale, or build a world-class team, or develop a world-class product, because it never got big enough to require any of that. I wanted to take something that already existed and make it go global, or at least national. I believed that was the thing I was for.

What the list did to me

By week six that belief was gone.

It was not only the state of the business. It was that the holes in the business lined up almost exactly with the things I had never done. No product management, and I’d never built a product organization. A broken org chart, and I’d never restructured one. No understanding of what marketing was returning, and I’d run a company small enough that marketing was me.

So the list was not just a list of problems. It was a list of my own gaps, printed out by somebody else, and I couldn’t tell whether I was looking at an opportunity or at evidence that I had badly overreached.

I am a reserved person. I don’t talk about this. But I had gone from certain to square one in six weeks, and I felt like a failure before I had done anything at all.

David

Then there was David, which is not his name.

He was twenty years older than me and had built real success of his own. Over my first years as a founder we had become close, and by this point he was the person I brought things to when I couldn’t think straight about them.

He sat me down. He didn’t ask me any questions and he didn’t ask me for anything. He said something close to this, and I’ve repeated it to founders ever since.

I know you’ve seen things in diligence that are making you uncomfortable, and I know the fear is setting in. There is no such thing as a perfect business. Most of your decisions as an entrepreneur will be between the lines. They’ll be toss-ups. That is why you have to rely on your intuition more than you ever have before. Don’t abandon the numbers. Just don’t lean on them too hard, because if you do, you will never start.

Then he said he would co-sign the SBA loan. Not so that I would have more money. So that I would not be carrying the whole weight of it on the day I walked in.

That was all I needed.

What he was actually telling me

It took me years to understand what he had done in that conversation, and it was not encouragement.

I’d been treating the decision as a problem with a right answer that I hadn’t located yet. Twelve years of corporate work had taught me that good decisions come with a case attached, and I was trying to build one. What David told me is that this class of decision doesn’t have that shape. Not because I’d been sloppy. Because the information required to settle it doesn’t exist and never will, and waiting for it is just a slower way of saying no.

Note the part that gets left out when people quote this sort of advice. He didn’t say ignore the numbers. He said don’t lean on them too hard. The list was real. Every item on it turned out to be true, and I spent the next several years fixing every one. The numbers told me accurately what I was buying. What they couldn’t tell me, and were never going to tell me, was whether to buy it.

That second question was mine, and the instrument for it was judgement, built out of the same twelve years that had also taught me to distrust it.

The afternoon

We closed a few months later.

It was a warm afternoon in June. Two hours after closing I got back to the house with my wife and with David. I am not a demonstrative person and I’ve never been comfortable with displays of feeling. I hugged him and I cried, and I couldn’t have told you at the time exactly which part of it I was crying about.

I know now. It wasn’t relief that the deal had closed. It was that a few months earlier I’d been ready to walk away from the thing I’d spent a decade preparing for, on the grounds that the case for it would not close, and somebody who had been where I was told me that the case was never going to close and that this was normal.

If you are in week six

You won’t get the signal. Not from the model, not from the data room, and not from one more week of diligence. The list will keep getting longer, because every business has a list and you’re seeing this one’s for the first time with the lights on.

Do the work. Know exactly what is broken, and price it. Then understand that when you’ve done all of that, you’ll still be standing at the same line David described, where the numbers stop and the toss-up starts, and the only thing left to decide with is your own judgement.

That is not recklessness. It is the job.

Until next time,

George