Case study - Buyer beware

Am I going to mind sweeping the floors? After 13 years as a middle-level executive at a large mid-western manufacturer, Susan Taylor was making $60,000 a year and was bored with corporate life. It was time to have her own business. But she didn't want to start one. "I was 35, not 25, and I didn't have a burning desire to start from scratch," she says. In February 1990 Taylor quit her job (her husband kept his) and began a methodical search for her dream company. She had about $200,000 in savings, and figured that with seller and bank financing she could leverage that to buy a business with between $500,000 and $3 million in revenues. Taylor wanted to buy a company in an industry she thought had good long-term potential, such as health care or building products. Using chamber of commerce directories and online databases like Dun & Bradstreet's at a local university library, she built a database of companies within a 50-mile radius. Then she screened her list for companies with sales within her parameters, and preferably with owners who were 55 or older and might be ready to retire. Armed with names of about 80 companies, she hired a local business broker to cold-call the owners to feel them out about selling. Brokers usually represent the seller. But since Taylor was looking for businesses that weren't already on the market, she hired a broker to aid in her search. By July she had "kicked the tires" on 20 businesses that might be for sale and narrowed her list to one. It was a $1.6 million (revenues) distributor of high-tech equipment to hospitals and clinics that was running in the red. For the next four months, Taylor met weekly with the owner of the businesswe'll call him Mr. Jonesto learn the business while her broker negotiated the price. Her lawyer and accountant examined the company and pronounced it basically sound. By November Taylor and Jones had a deal. She would pay $80,000 up front and another $320,000 over the next several years. As part of the deal, Jones got a five-year contract to stay on as Sales Manager. Two weeks after the deal closed, Taylor got the call from her banker about the third account. When she asked Jones about it, he hemmed and hawed and said it was personal. Since it only contained a few thousand dollars, Taylor let the matter pass. "I was going to pick my battles carefully," she explains, "so I let it go." Then, just before the end of the year, the Office Manager made a casual comment about the company's inflated inventory. It seems that Jones' policy had been to write up the value of the company's inventory every time a supplier raised prices, then flow the gain into the third account. Taylor had been ripping through the company's records. Over the next few months, she pieced together a paper trail that showed how Jones had siphoned off as much as $100,000 into the third bank account. It got worse. On closer inspection, she found that much of the company's inventory was obsolete. Her panic increased when she realised that she not only had bought a warehouse full of overvalued inventory, but was also potentially liable for the back taxes on several years' worth of skimmed cash. Clearly her accountant hadn't done a decent job of vetting the deal, and neither had her lawyer. Worse, the business was flagging. A new product line wasn't selling well, but Jones insisted on devoting one of the company's four salesmen to it. Taylor later learned that Jones owned a stake in the line's manufacture. Taylor's lawyer counselled her to sell the business back to Mr. Jones for whatever he would give her. Growing wiser by the minute, Taylor fired that lawyer and hired another to go after Jones. Six months of acrimonious litigation followed. Legal feesthey would reach $50,000 before it was all overwere eating her up, and there was no end in sight. She was getting discouraged, but a year after buying the company, it hit her. Jones' lawyer was a partner in the same firm that handled her family's estate planning. Taylor thought he must have known exactly how long she could afford to keep fighting. She threatened the law firm with conflict of interest charges. Suddenly, Jones offered to settle. In January 1992 Jones took the business back, releasing Taylor from her contract and returning her $80,000 down payment. But her lossher time, legal and broker's fees and damaged egowas considerable. She says that she still fears for her physical safetyJones, she says, has an explosive temper and once told her he kept a gun in his officewhich is why she asked FORBES not to reveal her identity. Taylor has been doingsome consulting and says she's thinking about buying another business. Only next time she vows to be less trusting and go in with a partner. "If I'm lying awake all night," she says, "I want someone else lying awake, too." So, here was a case where a buyer had thought she had covered all the bases, only to discover that she hadn't covered them with competent people.

Question: What were the key mistakes (if any) made by Susan Taylor during the purchase process of her business and what lessons does it provide that she should remember then next time she purchases a business?