Buying a Business

Later, over lunch, Judi and I had second thoughts about just walking away. "You know, it's nothing that a good cleaning and a coat of paint couldn't fix -- well, sort of," she said. We talked about Peter -- we both liked him. The business could be interesting: the company had installed the famous security system at Oliver North's house, had put in the antiterrorist barricades at the Vice President's official residence, had done a lot of work for embassies and major corporations. We could afford it. Besides, as we went through our mental list of everything else that was cooking, there just wasn't anything any better. And time was running out.

I spoke to Lauren Finberg the following week and said I wanted to take the next step. She needed to supply year-to-date figures (the company was more than six months into its fiscal year), and I wanted three full years of financials. I also wanted her to give some thought to the structure of the deal. She had already been doing so. In fact, the asking price was going to come down $150,000 because, having talked to Peter about the results so far for FY '89, it was obvious that the company was going to have a down year. How did that sound to me? I didn't like the "down year" part, but I appreciated the voluntary price reduction.

Several weeks later, I received all the information I had requested. Of greatest importance to me was a two-pager showing how I could purchase the company with 100% financing, get the owner his purchase price (over time), service the debt, and still take out 75% of what I had been earning before. There it was, in black and white. I met with my accountant. He said the numbers looked better than any of the others I had passed along for his review. He thought it was tight, but the business broker's proposed deal could work. He warned me that, once a letter of agreement was drafted and accepted, I was about to start racking up some serious accounting and legal fees. Did I really want to go ahead? I did. After 17 business brokers, dozens of blind ads, and four months, this seemed like the best shot.

I met Peter Klosky and Lauren Finberg in an Italian restaurant a few miles from the company offices. It was a steamy July day. I arrived just minutes after a paving contractor had somehow cut the power lines to the restaurant. There were no lights and no air-conditioning. We sat near a fire-exit door that had been propped open to let in some not-so-fresh air and some light. We discussed the two-and-a-half-page letter of agreement. It was very loose and not legally binding. It was loaded with contingencies. Nevertheless, to me, it was a de facto point of no return. Once it was signed, I was going to stop working on everything and anything else. I was going to spend the next two months or so getting this deal wrapped up. If it all blew up, I would be starting over again with a few weeks of severance pay left, not months. But nothing was going to go wrong. We signed. We shook hands. I made arrangements to meet with the employees and to have my accountant come in to go over the books. I got in my car and said a silent prayer of thanks. I had a company.

When you buy a house, the purchase is usually contingent on a termite inspection or a test for radon gas or a structural inspection. The business equivalent of a termite inspection is the due diligence process. I knew I had to do it, but there was a large part of me that suspected I was wasting a lot of time, money, and energy looking for termites that weren't there.

Wrong.

The first funny smells came out of my initial meetings with Automatic Door's three key long-term employees. Among them they had 57 years with the company. And it was obvious that while they had great affection for Peter Klosky, they neither feared him nor did they have a lot of respect for him as a businessman. During my separate in-dividual meetings with them, all of which were attended by Klosky, they were astonishingly candid about the condition of the business and about him.

The company had gone downhill, they said. Mr. Klosky had let it happen. They were all displeased with the sales manager (who was married to Klosky's niece) and felt he was doing nothing to bring in business. Other employees were looking for jobs. (I could scarcely imagine what I would hear when Peter Klosky wasn't around.)

OK, so the foundation was a little shaky, but no termites yet.

The sales manager returned from vacation the following week, and while my accountant and a member of his staff looked over the books, I took him out for a three-hour heart-to-heart talk. He admitted to not doing a great job, but claimed that he didn't get any support from Klosky, that the company's prices had become uncompetitive, that several exclusive lines had been grabbed by competitors. He informed me that he had received no sales commissions for months because Klosky and he could not agree on what was owed to him. Perhaps most alarming, he told me that a large project I had been told was in the bag was not firm.

I was already nervous when my accountant and I sat down to go over his report. Each of his findings was another punch in the stomach. The company was losing money -- potentially a lot of money. We already knew about a $36,000 loss for the first half of the fiscal year, but had been assured by Klosky that was because he'd been occupied with selling the company and therefore had been late getting some bills out. There were a lot of bad receivables on the books. Close to half were more than 90 days old, and the majority of that dated from 1988. The inventory had been overstated; it was likely that the true loss year-to-date was close to $80,000. Half the net worth of the company was gone. Sales for the fiscal year were down more than 50%.

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