A few months ago the Wall Street Journal’s Business section’s headline was, “China Conglomerate Gets Lifeline.” The sub-headline was, “Government is helping HNA Group right itself after acquisition spree loaded it with debt.”
The lesson here is simple, don’t over-leverage yourself. It’s good advice for us personally and in business.
But notice how they got in trouble; an acquisition spree. I’m a big fan of growth by acquisition, when it’s done right and for the right reasons. Heck, it’s why in my book, Company Growth By Acquisition Makes Dollars & Sense, I cover 19 reasons to consider this strategy.
Here’s a big tip – if the deal only makes sense if the acquired company grows, it’s a bad deal.
There’s a lot of money out there, especially in the private equity and family office world. In my world, where bank financing is the primary source of funds we have my favorite two sanity checks:
- It’s the buyer’s money (not a fund).
- The banks have debt coverage ratios and good bankers want the debt coverage to be well above the minimum requirement.
My tip doesn’t only apply to company acquisitions. It applies to other things as well. If you get a new customer at a discounted price hoping to show them your quality and then raise prices, you’ll (usually) be disappointed. If you hire someone who isn’t qualified hoping they’ll improve, you’ll be disappointed.
Optimism is necessary and important. Optimism without common sense gets us into trouble.
“No matter how cynical you become, it’s never enough to keep up.” Lily Tomlin