I was discussing an interesting acquisition situation the other day with a long-time business friend of mine. She was looking at acquiring small a privately-held company in the specialty logistics space as a launching pad for a roll-up strategy. Her target was a company with an amazing customer list and a stellar 40-year reputation. It was underperforming operationally, which offered rich efficiency upside. The owner (age 70+) was interested in retiring.
Sound fabulous? Dig deeper.
If you are involved in executing a roll-up strategy, sooner or later you will come upon a potential target where the owner is the founder and long-time “face” of the business. In such a case, The Merger Verger has three words for you:
Approach with caution.
All too often in longer-lived private companies, there is no crisp line between where the owner/founder “ends” and the company he or she founded “begins.” In my friend’s case, this situation was exacerbated by the owner’s narcissism, a condition that rendered several levels of due diligence wholly useless.
Narcissistic owners – those given to unbounded self-admiration – can cause (and in my friend’s case did cause) a host of barely detectable problems:
- They are not team players. They will not cede any real authority or control of the business if doing so diminishes their spotlight. This leaves subordinates untrained and under-prepared for setting strategy or making independent decisions.
- They will not give credit for the sound ideas of others, resulting in a lack of initiative, inventiveness or risk taking.
- As a corollary, they will almost never accept responsibility for mistakes on their part, which breeds low morale, individual defensiveness and high employee turnover.
- They will not relinquish key customer relationships to subordinates as this carries too high a risk of someone else attaining “star” status.
- To make all of that worse, the true narcissist will not admit to the foregoing failures (and the business-savvy narcissist will have sense enough to deny them).
Result? A target with great surfaces and little real foundation, with no depth and significant ongoing performance risk once the ownership changes. Like I said: approach with caution.
Next time we’ll look at some tactics for dealing with narcissistic owners and for penetrating their protective shields in due diligence.