I was at a party just a few days before writing this chapter, and a young woman was telling me a story about how her father had been bilked out of $3 million by a con man who claimed that he could get investors a 30 percent per year return by holding inventory for a major department store until the store could use it. The con man—who had a criminal record a mile long—allegedly bilked intelligent, wealthy people out of tens of millions of dollars before he skipped town. Similarly, one of the people I interviewed for this book had just lost $300,000 in a Ponzi scheme of a like nature. I am surprised at how many sharp people fall for schemes that are obviously too good to be true. Despite their intelligence, they have failed to distinguish between real and false opportunity.
During the course of a career, you will be presented with many "opportunities" that are fronts for disaster. You must be able to ferret out false opportunity and stay away from it. Here are a few pointers for discerning the authentic opportunities from the false ones. We'll use the example of buying a business as a metaphor for all professional opportunities.
First, be skeptical of the hard sell. Most opportunities are found through research and study, not offered up to you on a silver platter. "Success lies upstream," as Dave Ruf, CEO of Burns & McDonnell, put it. "You do not drift into it." Because amazing opportunities are snapped up fast, they are few and far between. According to an acquaintance of mine who is a midsized-business broker, "If someone, for example, offers to sell his or her business to you with glowing promises, always ask if the business has already been offered to someone else. Nine times out of ten it has, and the deal did not go through—for a very good reason."
Second, research not only the business you are acquiring, but also the people with whom you are negotiating. Determine whether they have ever declared personal bankruptcy or whether a previous business that they ran failed. Do a background check to ensure that they have no criminal record. Find out if they have ever been in trouble with consumer organizations or regulatory agencies. Do LexisNexis searches to determine if they get a lot of bad press or file lawsuits at the drop of a hat. Know not only the business, but also the people who make up the business. Often shady people associate themselves with reputable businesses to gain an aura of respectability.
Third, as Walter Metcalfe, the successful corporate lawyer mentioned in the introduction to this book, once told me, "streamline the opportunity." Determine the positives and the negatives of the project. If the positives outweigh the negatives, pursue the deal. However, do not do the deal unless you can still eliminate some of the negatives. That process builds in a "risk pad" in case your original assessment of the pros and cons turns out to be incorrect. If, for example, a company approaches you about a merger, it is usually because the company has determined that it cannot survive on its own. Even if you think you can turn it around, cut out some of the risks before you start trying. Transform the opportunity that you are being offered by leaving some of the downsides on the cutting room floor. Maybe you do not take the whole company; maybe you do not take all of the people; maybe you demand that the offering company insure its more shaky receivables. Even when a transaction looks pretty good, you need to take a couple of steps to streamline the deal such that you tilt the odds even more toward success from your standpoint. You do this by putting some risk pads or downside backstops into the deal.
Fourth, do not become giddy and careless when a real opportunity presents itself. Often in the excitement of getting a good deal done, people become sloppy and convert the opportunity into a problem. They do not want to address potential negative developments for fear of throwing a wet blanket on the opportunity that has presented itself. For example, I know a man who sold his business to a Fortune 500 company in exchange for a 20 percent interest in a partnership through which the big company would run his business. The big company sneaked into the purchase contract a buyout provision that gave the big company the "sole discretion" to value and purchase my acquaintance's 20 percent interest at any time. Within a year, the company announced that it had valued his interest at less than $100,000 and tried to buy him out. An independent expert valued his interest at over $20 million. My acquaintance had to go through a big lawsuit to get a fair settlement, and even then the sum he got was below the market value of the company. He had been so swept up with the idea of being bought out by a big conglomerate—which was in fact the opportunity of a lifetime—that he became careless with the details.
The concept of taking specific measures that reduce downside risk is essential to the process of taking advantage of fortuitous professional developments. For example, top executive recruiters always insist that their clients get predetermined, written severance packages before taking new jobs, even where the previous holders of the jobs did not have such contracts. This is just another form of "downside backstop."
When the positives outweigh the negatives, you have an opportunity. But do not take the opportunity until you can whittle away a few more of the negatives. Then do not get so giddy that you become careless in documenting the transaction.