Beware of Those Bearing Stock
I was setting up my trade-show booth when the exhibitor beside me—a young guy about my age at the time—started a conversation with me. Seeing me wrestle with the various poles and staging needed to erect my booth, he came over to help. Small talk aside, he started quizzing me about my little marketing company. At the time (close to 15 years ago now), I probably had two or three employees and maybe $300,000 in revenue, so I was surprised by his degree of interest. He seemed overly complimentary about the modest portfolio of work we had created.
It turned out he too had a marketing agency, but as he soon revealed, he didn't spend much time creating brochures or wooing clients. Instead, he focused on buying small companies like mine.
At the end of the first day exhibiting, my newfound friend turned to me and offered to buy my company. I couldn't believe my ears. After all, we had met only a few hours earlier. What would this guy want with our three-person shop? How could he offer to buy my company without any financial information? And how would a 20-something guy, just a few years out of school, get the money to buy my business?
I asked him what exactly he had in mind. He went on to explain that he wouldn't actually be buying my company for cash; instead he was offering to give me some shares in his company in return for my business.
When I probed into what his company actually did, he wasn't able to show me much of a vision beyond his idea of buying lots of smaller advertising agencies so that he could own one large one.
Using his company stock instead of real cash, he was targeting anyone with a pulse—after all, he didn't have much to lose other than his company, which, given that it didn't actually do anything or serve any real customers, was pretty much worthless.
I passed on his offer but ever since then have been skeptical of financiers who make their money solely from the labor of others. My guess is that, as a business owner, you too have been approached by these opportunists who claim a big vision for creating a large company. Their favorite come-on line is "Would you rather own all of a small pie or a slice of a much larger pie?" And their so-called business strategy is really just a merger and acquisition ploy.
Their pitch may sound good in theory until you realize the currency these vultures use to buy your company is their stock. Admittedly, it has the potential to work if you're in an industry in which size trumps all else, but in all too many cases, each new acquisition these "buyers" make further dilutes your slice of the pie and your control over decision making. Pretty soon, if Mr. Moneybags does nothing meaningful beyond jamming together unrelated businesses, then all you are is an employee with an illiquid slice of a rapidly deteriorating stock.
Since that day at the trade show, I haven't paid much attention to people who want to use stock as a currency to buy a company. If they have the cash—and that's a good acid test to determine if they are serious—then they should use it.
John Warrillow is the author of Built To Sell: Creating a Business That Can Thrive Without You, which will be released by Portfolio/Penguin on April 28, 2011.
JOHN WARRILLOW | Columnist | Sellability
John Warrillow is the author of Built to Sell: Creating a Business That Can Thrive Without You and the founder of The Sellability Score, a cloud-based software company that helps business owners improve the value of their company.