Thursday, April 28, 2011

Royal Little: the $1 million net worth mistake

Another story from Textron founder Royal Little (1896-1989), author of "How to Lose $100,000,000 and Other Valuable Advice." In spite of his wealth of mistake stories, Little was one of the most successful US businessmen of the mid-1900s.



CAMCAR

Camcar Screw and Manufacturing Corporation was privately owned by Bob Campbell, Ray Carlson, and Bob's brother, who was head of sales. Their principal operations were in Rockford, Illinois, and the company had been very successful in supplying small metal fasteners of various types to the automobile and aircraft industries and to other users of such parts. They showed me their balance sheet whith a complete disclosure of net worth as they had computed it in the past, and, of course, we had their sales and earnings for many years to determine the steadiness of their past earnings record. We bought Camcar on October 1, 1955.

The contract was drawn by the lawyers, without our auditors being present, on the basis of determining the net worth under sound accounting principles, but when the joint audit was made at closing both their auditors and ours added $1 million to the net worth figures that had been shown to me. They claimed that the company had been incorrect in the past in writing off over $1 million worth of dies and tools, which both auditors claimed should have been capitalized. While we had assumed the net worth would be as shown to us during negotiations, Textron had to put up $1 million more than we had anticipated.

In spite of this mistake on my part, Camcar has been an excellent acquisition for Textron.

ADVICE: Never let your lawyers prepare a purchase and sales agreement for an acquisition without having auditors representing both sides present to prevent a misunderstanding of this sort.

[pp. 152-153]

Excerpted from How to Lose $100,000,000 and Other Valuable Advice, by Royal Little, (c) 1979 by Royal Little and the Harvard University Graduate School of Business Administration.

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