Some thoughts…
Many years ago I worked at a small company of about 100 employees.
One day my boss informed me that the investors of the company were looking to sell because the company was over leveraged.
What’s that?
Being over leveraged meant that the current owners had taken a big loan to buy the company. Even though the company was profitable, it would never be profitable enough to pay back the loan plus the interest.
It didn’t matter that we were profitable. We weren’t profitable enough.
How did we get into this situation?
When you buy a company there is the “due diligence” phase where the company being acquired opens their financial books to the perspective acquirer. This way the seller’s financial claims can be verified. The financial statements our investors saw made the company look just great.
However, as part of the acquisition the investors weren’t allowed to talk to any customers. They had signed an NDA agreeing not to talk to any customers because it would give away that the company was in the process of being sold, which neither side wanted to be public.
Well, once the new owners actually owned the company, they discovered that the customers were disappearing. It wasn’t that they were unhappy… in fact they loved the service. The problem was that things were changing in the telecom world and our service just wasn’t needed as much any more. (Short version: We were an intermediary and companies were moving to a more direct model… cutting out the middlemen.)
Only a fool would have bought the company if they had known.
What to do? The plan was simple:
- Step 1. Find “a greater fool” to buy the company.
- Step 2. There was no step 2.
To quote Wikipedia, the greater fool theory is when one “fool” might pay for an overpriced asset, hoping that he can sell it to an even “greater fool” and make a profit.".
For the next year we ran the company as inexpensively as possible. This way the new buyer would put the company in the best light.
We also replaced the CEO. The new CEO was more shrewd and had experience ruthlessly finding a greater fool. We lucked out because the person we found had a very restrained sense of ethics, which turns out to be a big benefit in this kind of situation.
I left the company about that time.
However, the story does have a happy ending. The new CEO found a greater fool!
Who was the new fool? The company’s biggest competitor! They wanted to eliminate the competition.
We didn’t care. Anyone that kept their options got paid pretty well. I’m sure the (previous) owners and executives made a great profit too. They all immediately left. (I was already gone by the time this happened.)
This makes me think…
I wonder what the maximum chain length of a “great fool” scenario has been achieved. Has a company ever been sold to a fool, a greater fool, an even greater greater fool, and even greater greater greater fool? Google searches fail me.
