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Mexican Standoff
Buying a Tijuana factory looked like a bargain route to expansion--until our small company got deeply into it.
By Kevin Kelly

(FORTUNE Small Business) – Finally, I thought to myself, I've made my first acquisition. I could begin to relax that Monday evening as I flipped through the legal documents that spelled out the deal. Page one listed the price ($410,000) and the assets I'd get, including a dozen plastic-bag-making machines and other equipment in a factory in Tijuana, Mexico. The rest of the 16-page offer sheet detailed who was liable for what, the status of the building lease, and so on. All that remained was to sign the contract--which, I imagined, marked the first in a string of deals to expand my family's California-based plastic-bag company. With that grandiose thought, I switched off the lights in my office and headed home.

The next morning I awoke to find an ominous cellphone message from my attorney. The deal was in trouble. Suddenly the family who owned the business insisted that I buy all the stock in the Mexico factory, whose shares were owned by the sons, while the equipment belonged to the father. That was a move no good lawyer would let a client make, because it would expose the purchaser to the seller's liabilities. My attorney feared that if I bought the stock, creditors might come after me if the Tijuana company had past-due invoices. Eventually the father agreed to talk with me some more about working out a new deal. But his family backed out ten minutes before our scheduled conference call. I sat in my attorney's office, stunned. "Some dealmaker I am," I said.

There were good reasons for my self-doubt. I had botched two previous acquisition attempts. The first, roughly seven years ago, died when the creditors could not tell which lenders owned what equipment. The owner, with whom we had been negotiating, had used the same equipment as collateral for several different loans. On another occasion my chosen target went bankrupt after weeks of tough negotiating. In both instances I was left feeling that I had wasted my time.

The Tijuana deal bore several of the hallmarks of my previous misadventures. Our target had fallen on hard times. Sales were plummeting, and machinery was in disrepair. Our negotiations stalled when the seller demanded far more money than I was willing to pay. Still, I thought, our goals were compatible. I wanted his customer list and factory, which I hoped to make into a low-cost manufacturing site for my company. The patriarch wanted to get out before creditors ruined his retirement plans.

Both of us had had our confidence rattled by small surprises. During the late summer the father decided, without notifying us, to stop taking new orders--essentially announcing to customers that he was closing his doors. I had counted on his $5 million in annual sales to help make the deal work. On my side, I was so distracted by the day-to-day demands of running my family's business that I often went weeks between talks with him.

Those communication issues doomed the deal. The family often switched positions and took actions that undermined the draft agreement. The sudden insistence that we buy the Tijuana company's stock contradicted an arrangement we had reached just a week before. And during the final days I failed to communicate the degree to which I had involved my attorney--an expense the sellers had avoided to cut costs. When the sellers received our formal legal documents, they panicked.

By Sunday evening after the deal's demise, I had gained some valuable insight. "I'm never going to try to buy a dying company again," I told my wife, who nodded, half-listening. Such companies sometimes seem to offer great value, but they present too many problems for a small outfit like mine to parse. I'm also determined that next time I'll keep in touch with the seller at every stage. I'll have a chance to put those lessons into practice soon. Two companies have contacted me about buying them.

Kevin Kelly left full-time journalism eight years ago to run his family's company, Emerald Packaging.