A few years ago, I told the story of Terence Profughi, CEO of HiTecmetal Group Inc. (SBN October 1998).
Profughi mastered business acquisitions so cleverly that he developed a 74-page manual dedicated to the process. It detailed everything from how to target a potential acquisition to integrating separate janitorial services. One thing in particular struck me about Profughi’s experience — he understood how to walk away from a deal that didn’t make financial sense.
When analyzing a deal, it’s imperative to think with your head and not your heart. It’s easy to fall in love with a company and want to make the deal work. But if the numbers don’t jive, grit your teeth and walk away.
The reasoning is simple. Why invest in a business in which you have little or no chance of getting a return on your investment just because you like the company? It’s better to wash your hands of a bad deal than to step into a hole that’s only going to get deeper.
Recently, I faced a similar situation.
In April, my wife and I bought the house we have rented since late 1999. But the deal almost didn’t happen.
The landlord and I agreed upon numerous parts of the deal — sales price, part of our rent wrapped into the down payment, even how we would split the costs of repairing housing violations the point-of-sale inspection would uncover. It appeared, on the surface, that we had thought of everything. I was even eligible for additional financing from the city to help rehab the property.
But, as I’ve written in my column numerous times, an essential part of business is to always be prepared for the worst. And, like the myriad hitting and pitching instructors in baseball who teach skills to younger players but never could quite do it for themselves, I didn’t practice what I preached.
The point-of-sale inspection revealed several significant housing violations that, on top of the rehabilitation project, would have cost us more money than we would ever get out of the house later and more money than we truly could afford to ante up without going further into debt. In essence, it was a potential money pit. But, we wanted the house.
For several weeks, I worked with the mortgage lender. He could have lent us enough to make it work — but my wife and I continued to question how much money we were willing to invest. Was it worth stretching our finances to the limit or were we better off waiting to buy a different house?
Finally, I turned back to the seller and explained that unless he was willing to renegotiate the deal, we would walk. He acquiesced, and together we made the numbers work.
Today, we’re first-time homeowners and couldn’t be happier. It is an example, however, of how fragile a deal can be.
The lesson is easy: In life — as in business — when the numbers don’t work, walk away, even when your heart says otherwise. Dustin Klein ([email protected]) is editor of SBN Magazine.
