Past Performance is Not Indicative of Future Results

Sep 8, 2015

Janus Capital Group has a strong track record of providing excellent returns to the individuals & institutions that invest in their mutual funds. The company also conveys the message that “past performance is not indicative of future results” in all their marketing materials. This cautionary message is also regularly conveyed to potential buyers evaluating privately held companies represented by IBA for sale, as it succinctly states an important truism for all investments.

It is common practice when evaluating a business, publicly traded stock, real estate, or other investment opportunity to spend a considerable amount of time during due diligence reviewing historical information related to financial performance. This information is very beneficial for establishing the present value of the investment opportunity. The information is less beneficial for predicting the future performance of the investment due to the presence of a large number of variables that cannot be defined with certainty in projections.

The largest variable that cannot be defined when projecting the performance of a privately held company post sale is the impact a change in executive management will have on the company’s employees, customers, suppliers, business practices, and marketing efforts. A significant majority of the transactions facilitated by IBA involve privately held companies where the motivation for sale is retirement by the entrepreneur that has been serving as the chief executive officer or president of the company. This individual will commonly agree as part of the terms of sale to assist the party acquiring the business in facilitating a smooth transition of executive management over a defined time period, a negotiated transactional element that can help minimize investment risk for the buyer. Once the transitionary time period has elapsed, the executive leadership torch will be passed from the retiring owner to the buyer. It is at this time that the knowledge, experience, and business acumen of the individual taking over the position will be tested. The only thing that is known when this occurs is that the individual will be better or worse than their predecessor. They will not manage exactly the same. I have witnessed this transition hundreds of times in my 21 years as a mergers & acquisitions professional and have come to the conclusion that it is impossible to predict future success or failure when a transaction is completed. I have witnessed individuals with multiple degrees and many years of relevant experience make poor business decisions that resulted in declining performance of quality companies. I have also witnessed individuals with limited relevant experience and education have incredible success in new industries through hard work and instinctive business acumen. The bottom line is business is the ultimate competitive sport. Significant rewards are available for individuals willing to take the risk who have the ability to be successful. Significant risk of failure exists for individuals who lack the work ethic, knowledge, experience, and business acumen necessary to navigate the helm of a privately held company into the future.

The second most significant variable related to smoothly transitioning ownership of a privately held company relates to how customers will react to the sale when knowledge it has occurred becomes public. It has been my experience that if customer service & product quality remain consistent that the impact of this variable on future performance of the company will be minimal. Most customers are not looking to migrate their business relationships. They have selected vendors based on prior experience. It should be the goal of every business buyer to make the transition of ownership as seamless as possible for the customers of the company.

The next significant variable impacting a transition of ownership of a privately held company is how the employees react to the sale. There is no slavery in America. Retention of the team in place is in the best interest of the business buyer. It is recommended that no significant personnel changes be made by the business buyer when transitioning ownership prior to assessing the employees and the operations of the business from the inside. Similarly, employees should be encouraged by the selling owner to give the buyer sufficient time to get their feet underneath them, learn operations, and convey their management style and the corporate culture they wish to establish prior to making the decision to seek alternative employment opportunities.

The three variables associated with smoothly transitioning ownership of a privately held company identified above can be influenced or controlled by the party buying the business. Unfortunately, many variables exist that cannot be controlled or influenced ranging from the financial health of customers and/or suppliers to micro & macro economic trends and from the emergence or elimination of competition to new regulations or legislation that impact the business model. Quality due diligence prior to acquisition by a buyer will investigate all relevant factors that could influence the company to a point of satisfaction. Strong legal representation of the buyer and appropriate warranties & representations will insure that the seller discloses are relevant knowledge. Together these transactional processes should minimize post transaction risk associated with factors beyond the buyer’s control.

Entrepreneurship has significant risks and the potential for substantial rewards. Parties willing to venture into the water as entrepreneurs like Henry Ford, Elon Musk, Steve Jobs, and Bill Gates have the potential to become legendary figures in their industry and/or area through their innovation and financial success. However, even someone with as legendary success as Steve Jobs would be willing to attest that “past performance is not indicative to future success.”
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation in terms of successfully negotiating transactions that are “win-win” in an environment of full disclosure between the parties.