If you encounter a situation where the current owner cannot or will not delegate authority and responsibility you may be facing a very serious problem if you actually acquire or invest in the business. If the current owner cannot manage the business with his current staff, it is highly unlikely that you will be able to.
You must remember that hiring additional staff will have a negative effect on profitability and be a burden on cash flow. Secondarily, in this type of scenario it may be extremely difficult to get the current owner to transfer his knowledge to you. Transferring knowledge and delegating responsibility and authority requires a similar overall persona.
One of the pitfalls to be very cautious of is investing in a capital starved business and making sure that your investment actually ends up in the company bank account.
I have experience with one situation where an investment group bought into a troubled company, theoretically in trouble due to a lack of capital. At a board meeting of the investment group I was told that they had invested $750K in the company a few months earlier and now the company’s management was asking for an additional cash infusion. On investigation I discovered that the alleged investment in the company was actually paid to the owner of the business in return for a percentage of his common shares. Hence, although the investment company showed a $750K investment in the company the funds never went into the company’s bank account they went into the bank account of the original owner.
If you are buying into (investing) a company the wisest investment method is to either buy treasure shares or provide the company with a convertible debt instrument. Treasure shares are shares issued by the company that do not belong to any specific individual or other entity. In other words you are buying new shares that are being created by the company that you are investing in. A debt instrument is a loan, by making it a convertible debt instrument you will have a greater benefit from the turnaround of the company, as the share value will generally increase far more than the value of the interest on the loan. Utilizing either one of these investment methods will ensure that the money that you invest in the business ends up in the company’s bank account rather than the current owner’s bank account.
There are many additional items to take into account when investing in a company that currently exists that is in financial trouble and for those interested in this type of investment I suggest you read the section on partnerships as it discusses other areas that relate to this topic.
This manual does not discuss or present turnaround strategies. If you do decide to invest in or acquire a company that needs to be “turned around” prepare yourself for some very sleepless nights.