Taxi Blog

Trust is a Wonderful Thing

2008 was a year filled with scandal. Idols were exposed, heroes turned out to have ordinary frailties, and financial advisors were exposed as frauds. It was a tough year to have faith in anyone in the public eye, whether they were teen idols such as Miley Cyrus posing in racy photos, football heroes with sweat pants issues, or governors selling senate seats I think we would all agree that it has been a disappointing year for idols, albeit a great year for comedians. Maybe the bottom line is that we will all be more wary going forward before putting our faith and trust in anyone.

I have found that people generally assume that others have the same level of honesty as they do. Those who would swindle their own grandmother out of her last pair of underpants tend to assume that others think and act the same way as they do. In negotiations they look for every possible way that the other party might try to take advantage of them, and they write onerous contracts which try to presage every possibility. But that’s what contracts are for right?

Well, actually, no. The purpose of a contract is to delineate the basic terms of a deal. A good contract will also point out possible breaches of those terms, and will provide methodology for correcting those breaches, and penalties for failure to correct. No matter how good a contract is, however, it is only as effective as the intentions of those signing it. Even the best of documents cannot mandate honesty or good faith, and if you find yourself lying in bed at night staring at the ceiling thinking of ways that your new partner might put one over on you, then perhaps the question you should be asking yourself is not, “How can I use the contract to protect myself?”, but rather, “Why am I entering into a contract with someone that I am sure is trying to screw me?”

Assume that you go forward with a proposed deal and you think you have covered every base in your contract, including a noncompete clause. Now your new acquisition is yours, and four months later the guy you bought the company from starts up a new company doing the same thing in relatively the same neighborhood as you. Are you going to be able to sue him? Is it going to be worth it? At the end of the day if you spend $100,000.00 in legal fees and you get him to stop, can you prevent him from serruptitiously working with your competition anyway, and then moving in full time when his noncompete is up? Many states don’t even recognize noncompete clauses, or they offer very limited protection for them.

Assume the same deal, and the company you are buying is purported to have seventy five vehicles in operation, and they are answering one thousand five hundred calls per day. Given that the former owner was probably not reporting all of his income can you have any certainty that the cash flows he professed to have were at all realistic? Can you afford to pay him at all based on anything not on the books? Due diligence is notoriously inaccurate in this business because very few companies have certified or even audited records, and unless you already know the neighborhood you are buying in very well it is difficult to estimate earnings per vehicle. Add to that the fact that some companies are still on commission, and estimates get even more murky. So the deal is now done, you have kept $100,000.00 in escrow to guarantee earnings for the first year, and it turns out that earnings are $50,000.00 less than your contract guarantee. The seller assumed he was getting none of the escrow, so he has nothing to lose. He sues to get the money, you lose $15,000.00 defending, and he winds up with half the escrow anyway.

We live in interesting times. If you have cash on hand there are many deals to be made, companies to buy, cash flows to add. Take the time to research not only the company you are looking to buy, but the person you are buying from. Talk to some of the drivers and staff. Ask them about calls, accounts, and the boss. Anyone who will not let you speak to at least the key staff, to see if they will stay on, is probably hiding a thing or two. Ask for lists of accounts, and go with the owner to meet the contacts to make sure things are going smoothly, and that they are comfortable with new ownership going forward. Speak to the bank that the company does business with. Bankers will know cash flows better than anyone else. Most importantly, how do you feel about the seller when you sit with him? If you don’t get a good feeling from him then maybe you shouldn’t be at the table. If it turns out that the deal is not the right one don’t be afraid to cut the anchor loose and move on. There’s always another deal. Especially right now.

Happy New Year.