The numbers were real. The company was not what they described.
Six months in, and you are starting to use the word mistake, at least privately.
A working conversation, not a sales call
What is actually happening
Financial diligence is thorough and it reads the past. It will tell you what was earned, owed, contracted and depreciated. It cannot tell you the one thing that determines whether the business works next year.
What you actually bought is a network of people who make and keep promises to each other. If that network is healthy, mediocre numbers recover. If it is broken, excellent numbers decay no matter what you do, and they decay in ways that look like operational problems. The ops manager who agrees in meetings and does nothing. The customer relationships that turn out to be one departing person's relationships. The two departments that have not genuinely spoken in four years. None of this is visible in a data room and all of it is knowable now.
There are no lemon businesses. There are networks of conversations nobody has read yet, and the reading can still be done after close.
What becomes possible
The aim is to replace a verdict with a diagnosis, because a verdict leaves you nothing to do and a diagnosis has moves in it.
Sometimes what emerges is that the business is sound and three specific relationships are broken, in which case you have a repair job of a few months rather than a disaster. Sometimes it emerges that a person you were counting on is the constraint, and you can act on that with evidence instead of suspicion.
And sometimes the honest answer is that it is worse than you thought, in which case you want to know now, precisely, with the case documented, rather than after another two years of your own capital and attention.
One story
A composite, braided from several engagements. Details are changed.
Manufacturing, eleven million, bought fourteen months earlier by someone who had spent a career in a much larger company. Revenue had slipped nine percent since close and the previous owner had been unreachable for months.
His account was that the culture was rotten and he would need to replace most of the management. That is a two year project with a very uncertain end.
What the reading found was narrower. The general manager, who had been there nineteen years, had been promised by the previous owner that he would be given the chance to buy the business. That promise had gone nowhere and had never been acknowledged by anybody. He was not sabotaging anything. He had simply stopped making commitments he cared about, which in a company that size is close to indistinguishable from sabotage.
That conversation happened in the fourth week and it was not comfortable. The general manager stayed. Revenue recovered over the following three quarters. The buyer's view now is that he came within about a month of firing the person who actually held the company together.
A company they can run, or a clear eyed decision about the knife.
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