No risk it, no biscuit?

by a searcher from University of Denver - Daniels College of Business

3 years ago

I'm close to submitting an LOI for a B2B service firm.  I've talked to some fellow searchers and CPAs, and frankly it seems like they could nitpick every deal, and due diligence themselves out of a turkey sandwich. 

At what point do you eventually acknowledge every deal has some risk and go for it versus waiting on the sideline??

I'd love to hear from searchers who have actually closed an acquisition. Were there major skeletons in the closet post close? What are the deal breakers for you pre LOI and in due diligence? Any searchers with major regret in their current business? 

In the words of coach Bruce Arians who won the super bowl this year, 'no risk it, no biscuit.'

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7 comments

searcher from Massachusetts Institute of Technology - MIT Sloan School of Management

Partially, it's the "secretary problem" (https://en.wikipedia.org/wiki/Secretary_problem). A searcher has to DD the first few interesting deals and reject them all, just to build up an understanding of the average quality of businesses. Now, I know I'll have to accept a business with some hair on it.

However, I do think there are searchers who are looking for the perfect business and a zero-risk deal. Those searchers are bound to be disappointed. I'm looking for a deal that's at least an 90% likelihood of success - say success means doubling the intrinsic value of the company in a couple years. And there's a 10% chance of failure - here, a total loss of investment. Maybe I'm unlucky in the first deal. So I save up and do another 90/10 success/failure deal a second time. Since each deal independently has a 1-in-10 chance of failure, the chance of BOTH deals failing is 1-in-100.**

You need guts to pull the trigger on a purchase but you don't need to be a gambler!

**P.S. I got this concept from Mohnish Pabrai's book The Dhando Investor. Put another way, it's "heads I win, tails I don't lose much." Here's a pretty good summary of the section on dhando and the motel-mogul Patel clan: https://www.gurufocus.com/news/862082/the-dhandho-investor-why-the-patels-owned-so-many-motels

2 years ago | like reply | 0 likes

searcher

Develop a relationship with the seller. If their actions and words align and you feel comfortable doing business with them, then move to the next stages of diligence. Form your own opinions - you will get different perspectives and its up to you to decide what information to process, and what to ignore.

2 years ago | like reply | 1 like

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