Just Know I Passed On That Deal…Twice

When we first got into the small business acquisitions space, I couldn’t believe how many deals we got to look at. It was easy — contact an intermediary, tell them what you were looking for, they’d put you on a list, and you’d start seeing deals. Lots and lots of opportunities. In fact, I used to tell people how many deals we’d look at a year as a metric of success.

Then one day, I talked with an intermediary and he mentioned that they’d recently sold a company in an industry we were interested in. I was shocked. We hadn’t seen the deal and we would have loved to buy the company. I asked why we hadn’t seen it. He said, “Well, that one didn’t hit our list. We did a small matchmaking process with a couple buyers we knew well.”

The only deals we were seeing were the ones that the high-quality buyers had passed on. The realization that we only saw leftovers hit me hard. The SMB market is rife with businesses that shouldn’t be sold, but if you remove the highest quality opportunities from the mix, you’re basically playing a highly handicapped game or potentially an un-winnable one.

About two weeks later I was on the phone with a friend from Texas asking him about a deal we had gotten fairly serious about. It was in the oil and gas space, where we had self-admittedly little expertise. He ran an investment firm not too dissimilar from Permanent Equity, but we had a great relationship and he graciously offered to coach me up on some O&G nuances. As soon as we got on the phone he laughed about the deal and said, “I can definitely give you a rundown on the deal because I’ve passed on it twice.” My stomach dropped. He went on to say, “And not to be cavalier about it, but if you see any O&G deal come out of Texas, you should assume I’ve passed on it twice. I know all the bankers who have the best deals and I see all of them early.”

That phrase has never left me — just know I passed on it…twice.

Said differently, always ask yourself why you’re the lucky one. Of all the people who could have seen this investment, why are you the one who was given the opportunity? If you can’t clearly articulate the reason, get concerned. That doesn’t mean that seemingly random opportunities can’t turn out great. They can. But, odds are there’s something you can’t see yet that prevented others from investing, especially if it’s outside of your core area of expertise.

This applies far beyond SMB investments. If there’s a job candidate who looks incredible and has an almost too-good-to-be-true resume, get the story. If you’re a dentist and a local land developer wants to give you “free money” for your co-signature on a big deal, get the story. If you’re an insurance agent and you get an opportunity to invest in a fast-growing video game company out of South America by a friend you just met, get the story.

These are all examples I’ve seen play out first-hand, unfortunately. Caveat emptor. Buyer beware.