How not to buy a business.
It’s a bit of a drug I suppose. Technology just seems to suck you in, you resist from time to time but eventually it gets you and you end up with that gadget or thing or new faster gismo, or cool software ‘cos all your mates told you that you REALLY did need it. Only to find that it’s not really helped you or given you a better quality of life. In fact, it’s just made it harder because now you have to keep feeding the beast to keep up with the ‘upgrades’.
Well I think I took that one step further and not only bought the gadget, I bought the company. And I REALLY DIDN’T need it! This is not a story of how technology helped or hurt me in my business, this is a story of the business of technology and how it can get you all tangled up if you’re not careful.
It was early 2000, I was running a great little franchise consulting business that we’d had for over a decade, a business that had kept us fed comfortably for years. I had a financial interest in a Playground hire company, had some investment property that we were renovating on the side, and was right in the middle of a divorce. So, that seemed like a perfect time to go buy a technology company that was losing $60k a month!… sure, great idea, fantastic, let’s do it!
What was I thinkin’!
On the surface it seemed like a good deal. We were going to steal the company from the hands of the receiver for a song. And not only for a song but on an ‘earn out’ to boot so we didn’t have to put much cash into it to do the deal. Clever huh? Oh you ain’t seen nothing yet! The company had developed a pretty cool content management product, it seemed to have good staff, a great sales team, a bunch of solid clients earning recurring revenue from the ISP that was attached to it, and as we saw it, it seemed solid in a market that was going nuts. Perfect positioning for us to turn it around and flip it.
So very entrepreneurial of us.
….. And here’s where it all went pear shaped.
Day one. We settled on the business and within about an hour we had a call from Microsoft asking when we would like to pay the $250,000+ in licensing fees for the unlicensed software we were running the ISP and the web development business on. ‘What do you mean?’ I asked. ‘We have warranties in the contract that it is all licensed’…the sheepish voice came down the phone from the other end, ”arh….nup… sorry!… and you’re still using it. So… pony up boys!’ To their credit they did give us 12 months to pay the fees. And so they should have really, after all they did wait till AFTER settlement to make the call.
Week one. I call in the sales team for our first chat as I was not able to talk to them during due diligence (given due diligence only went for a few short days), ’so guys how often do we call the 4,500 customers we have on our data base?’…. the silence told me not often, and in fact when pushed, ‘not often’ turned into NEVER.
Excellent! So one week into the game and Microsoft want to sue us and our customers don’t know us.
Month one. Another call from our 3rd party uplink internet supplier, you know the guys, they’re the ones that keep your ISP connected to the Internet. ‘So boys, when are you going to fix that old payment up, you know the one for $65,000 that you owe us?’ ‘But we don’t owe you that, you see we bought the asset, NOT the company, that’s not our debt’, I replied. ‘Oh well then, we’ll just have to stop supply’. Click. Fortunately for us we ended up winning the court action and did not have to pay the back debt, but we did have to scramble and change suppliers overnight to keep the ISP up and running.
Month 2. On separate occasions, three of our staff approached us to ask for a pay rise. It was not that they deserved it, they just knew we had no idea how to run an ISP, or a software company, after all, we were entrepreneurs. Checkmate.
Year 1. I’ve never worked so hard in my life! 4am till early afternoon I would work in my core consulting business and then slip across town to the Internet business to run the sales team and develop marketing strategy. Lucky for us, a simple call to the 4,500 customers on our data base had us back in the black quite quickly. But it was a struggle. Sales in my consulting business dropped 40% as a result of me taking my eye off that ball. And it was a constant balance and battle to keep all the businesses running, growing and profitable.
So, what were our key lessons in this process?
1. It’s one thing to invest in technology and another to invest in the knowledge of technology.
2. The licensor is the only person you trust when it comes to warranties on software. Go to the source!
3. Software is always just the ‘widget’, the money is always in the customer relationships and brand.
4. There is no such thing as a ’steal’ when buying a business. You always get what you pay for, or don’t pay for. It’s how resilient or clever you are to enforce change that creates the opportunity for generating value.
5. Don’t make one child sick to save another. When sales started to drop in my consulting business, I should have spent the time there to ensure its safety, after all, prior to buying the technology business it was a great little bread winner. We came dangerously close to having ALL businesses in trouble because I was stretched too thin.
At the end of the day I am glad to have had a technology business adventure. And I am also glad to be out of it!
It was a great lesson in how NOT to buy a business.