The Dangers of Listening to the Wrong People

I once knew a plumbing contractor who had overseen a thriving business since the early 1960s. His company serviced both residential and commercial properties including many of the HVAC projects among New York’s three major area airports.

But along the way, he placed far too much trust in his office manager who for years and unbeknownst to him, had miscalculated the payroll tax deductions and a resulting audit revealed the company was in arrears for six figures.

So, despite his family’s urging to go see a well-known local tax attorney who specialized in such matters, he foolishly entrusted a lawyer friend to oversee the matter whose solution was to have the company declare bankruptcy.

It was all downhill from there. His family went from a comfortable suburban sprawl to a box-sized condo with a lot of collections notices piling up in the mailbox.

After decades of hard work, he and his wife were relegated to subsisting on their Social Security payments as retirement income.

Had he not listened to an unqualified hack, things might have been very different.

Fast forward several years and much closer to home.

We currently have a client who is being courted seriously by a trio of Top 100 firms. Each has tendered preliminary proposals to the seller on how they envision an affiliation moving forward both financially and philosophically.

Naturally there were questions on each, so they came directly to us for guidance, right? After all, we’ve facilitated over 900 mergers and have witnessed virtually every scenario at least three times.

Nope. They went straight to some of their clients on Wall Street whose knowledge of the M&A arena among CPA firms was, to be kind, rather limited. The lens of Wall Street by nature tends to view M&A as a straight asset sale, when even a first-year rookie knows that CPA firm mergers are 99 percent predicated on client retention as opposed to a straight sale and handing over the keys to the front door.

That was mistake No. 1.

They advised them to ask for an absurd valuation of nearly 6 times revenue – accounting for intangibles like future growth and intellectual property. Whereas valuations among accounting firms have been dropping steadily for years and someone even in a major region like New York is lucky to walk away with a multiple of 1.25.

Alas, mistake No. 2.

Lastly CPA firms aren’t going to value a company on potential future earnings only what has been generated currently.

Mistake No. 3.

I had a long talk with the principals explaining to them that the best course of action going forward would be to allow us to do what we do best or else risk hearing “have a nice day” from all three firms. After all, we don’t make investment recommendations for them – hopefully they let their Wall Street clients do that.

Time will tell if what could turn out to be a painful lesson sinks in.