If yous're thinking nigh ownership a concern merely are spooked well-nigh the skeletons you lot might discover in the closet later on the deal is completed, you lot may desire to infringe a folio from Morrie K. Abramson's book. In recent years, Abramson, CEO of Kent Electronics Corp., in Houston, has developed a technique for protecting himself from those sorts of horrors. Instead of making a conclusion to buy a company in a compressed period of fourth dimension, he negotiates provisional purchases that don't close for several months. The time lag permits him and his managers to put the potential acquisition through the paces to learn whether the purchase makes sense. Merely when they're satisfied that the deal will bear fruit do they go forward.

Abramson began looking for alternatives to the customary arroyo to due diligence back in 1989, when the then $36-meg electronics benefactor was gearing upwards to buy small distributorships in other regions. Under what he calls his "choice strategy," he and his managers asked prospective sellers all the questions they wanted and scrutinized the operations before the transactions airtight.

Then far, Kent (whose revenues for its about recent fiscal yr were $95 meg) has done two acquisitions that way (and walked abroad from two others). Hither'south how it works:

* Negotiating the terms. When Abramson finds a company he likes that'due south for sale, he and his managers do some initial assay to decide its operating status and its potential. If things look promising and the owners are willing to sell, they negotiate an selection agreement containing the bones terms and conditions (including the price) of the proposed transaction. "Nosotros e'er spell out some strategic objectives," notes Abramson, "and we ask the seller to make a commitment so we're not wasting our time." The option period for Kent'due south first acquisition was 14 months; for the 2nd bargain, it was 12 months.

* Putting the business under the microscope. During the selection period, Kent's managers are more than bystanders. They spend a lot of time on-site operating every bit quasi consultants in areas including marketing, operations, and computers. Because the terms of the deal have already been worked out, both sides have an involvement in improving results. In one instance, Abramson says, Kent lent a prospective seller $ane meg for working capital, which was folded into the purchase price. (If the bargain hadn't gone through, the loan would have converted into a five-year note at ane% over the prime rate.)

* Making the terminal conclusion. Once Abramson and his people have studied and advised a business organization for several months, he believes they're in a much meliorate position to know what it needs to operate at its tiptop. He admits there may be higher forepart-stop costs when y'all accept into account the travel expenses and management fourth dimension associated with this approach versus normal due diligence. "Only we'd rather incur the actress expenses up forepart than have to bargain with surprises afterward," Abramson says. "The dazzler of our purchase options is that, equally the heir-apparent, we have the right to walk away."

-- Bruce Thousand. Posner