A 'Cautionary Tale'

[Crazy Dazz]

The following is a true story, from my days as a Professional Accountant in Public Practice. Many moons ago now, but still I believe elucidatory.

We had a long-standing client who owned operated his own very profitable business. Without giving away any detail, I'll just say it was a "specialised manufacturing" business. He had built it up over a couple of decades to the point where he was debt free, and living a very comfortable lifestyle. Nice big house, nice cars, kids in posh schools, etc, etc. I'd say that even back then both he and his wife were pulling out 6 figures.

Now at roughly this point in time we'd done a valuation on his business, at around $1.2M.

He was approached by investors. They wanted to buy half his business, and then use their expertise, contacts, and established distribution networks to expand his sales. Amongst other things they promised to get his products onto the shelves of several major retailers. Naturally he would need to expand the manufacturing side to fill those increased sales.
He was chuffed when they offered him $1M for half his business, even after we tried to explain that the offer wasn't as good as it appeared. At our insistence they upped their "offer" to $1.2M, and he was over the moon, even though we tried to explain that they weren't actually offering him a profit. The initial offer was to inject $1M over 5 years. This was then upped to $1.2M over 6 years.

Thereinafter, every month he would draw 4 cheques, in equal amounts for him, his wife, and his two new partners (since they now owned 50% of the business.) The new investors would then oblige by making their investment instalment. You can probably see where this is headed, but he couldn't.
This arrangement continued for a few years. A few new contracts were negotiated, but nothing major. (And in hindsight, nothing he couldn't have done himself)

After about 3~4 years, he was fed up. They had taken on the burden of sales and marketing, and done a passable job of keeping things going, but none of their big promises had amounted to anything. After several disagreements, they all agreed to part company. Valuations were done, ours was around the $1.4M mark (confirming that the business had really only grown organically) their's was understandably higher at around $1.6M and the average was used.
Up to this point they had "contributed" $750k of the promised $1.2M, and under the terms of the agreement they were required to pay the extra $450k into the business. This increased the value of the business to $1.95M, so he had to find almost $1M (~$975k) to buy them out. Obviously he had that final $450k (which was only ever paid with a "dummy" cheque) and there was other cash in the bank, but you can imagine how utterly gob-smacked he was to be told he had to borrow $0.5M to buy back his own business. Like a HP victim first confronted with the reality of compound interest, he could not get his head around it. After much anguish, we explained it to him thus:
We worked out that over the intervening years, they had drawn ~$700k as their share of the "profit" so in fact they had only ever actually contributed around $50k in cash.
Basically, for the past almost 4 years, you have effectively paid these guys $700k to do SFA. Had they done as promised and doubled the size of your business, it might just have been money well spent. But they didn't, it was money down the train, and that is what you're now paying for.

There's a couple of general cautions in this:

• Don't get into business with sharks..
• Be aware of the difference between somebody buying a share of your business, and investing in your business.
• If you are working your butt off to earn your share of the profit, make sure your partners are doing the same
• Half of 2 is often a lot less than 1.
• A bird in the hand is worth a lot more than 2 in the bush

There's also a much bigger lesson in all this.

I worked on a project where the Chinese company agreed to "invest" $6B in "Australia." Have a guess where more than $5B went straight back to.

I worked on another project where a Chinese Steel company earnt 85% of the project by supplying all the plant, including all the cruddy low-quality steel that should have been made in Australia.

The Liberal party believes that the world economy is a fairyland of magically fair swings and roundabouts. It isn't.
We are steadily selling off large parts of our country and infrastructure, in exchange for a supply of cheap consumables (that we should be making ourselves anyway) and we won't get it back.
The next mining boom won't do us much good if all our mines are owned by China

[nuthin' fancy]

It was a marginally intersting story until the end, when it became political.