I started work for a small financial consultancy about 100 years ago. It was my first job out of college.
I turned down two investment banking offers to go work there. It was a great decision (for me, at least), but that’s another story.
It was a pretty cool firm. I liked the people, and the founders were good to work for. They were mostly in their 30’s and had already made a mint. Notch one for entrepreneurship.
We worked a lot with lawyers, doing lots of incredibly fascinating consulting stuff (it wasn’t really – shhhhh).
But then, things got slow. Slow times in consulting are no fun for anyone. You’re not able to bill hours and make money for the firm. You start to see your “utilization” – hours billed versus total hours – drop precipitously. You start to worry about any year-end bonus, and there’s even the specter of layoffs.
Normally, you’d expect the partners of the firm to just beat the pavement and drum up more business – problem solved.
But these guys had a different idea. Did I mention they had made a mint? Well they had, and they had all of this money sitting around burning holes in their pockets.
They wanted to be deal guys and buy stuff. They wanted to raise some private equity money (to top off the money burning a hole in their pockets) and buy a business. They even hired a dude who was a bit of an investment banker wannabe to help them out.
But they knew they’d need to put together an offering memorandum and do all sorts of investment banking-esque work to raise money from their friends and find a target and close the deal, and that was more than a one-man job.
“Opportunistic” Sometimes Means “Stupid”
But wait a minute! They had a lot of smart financial consultants sitting around doing nothing, and they could use them to do all of that grunt work. Problem solved – and little Paul would get some investment banking experience after all. Yay!
Suddenly, not having a target business was a big problem – they needed to buy something, stat, or else all of the underutilized consultants might get busy again doing, you know, the consulting work we were supposed to be doing all along.
The great news is that if you have money burning a hole in your pocket, everything’s a winner. Sure enough, they quickly found a company, and it was a real gem.
As I did diligence on the company and industry, I started scratching my head. As an investment, I think its main qualities were: 1) it was indeed a company and 2) it was for sale. It was in a crowded, old, uninspiring, commodity-like industry. The valuation seemed a lot less than the purchase price. I raised my concerns, but the concerns of little Paul were nothing in the face of deal fever, and models are easy to tweak. Plus the company had “Tech” in its name, which made it sound cool.
The Birth of the “7-11 Test”
We worked some really long hours on this deal. Hundreds of hours for me and some of my lucky colleagues. Hours which normally could be billed out at hundreds of dollars per hour. All to support a dog of a transaction.
On one of many a late night, I confided with one of my buddies that a far better investment would be for all of the consultants to go work at 7-11 and give those wages back to the firm until things got busy again. We laughed at that for a while, ‘cause it was silly. Then we stopped laughing, ‘cause I was right. We were killing ourselves for a money-losing deal, and as wild as it sounded, loaning us out to 7-11 (and putting the purchase price funds in a mattress) would have made far better financial sense.
And thus was born the “7-11 Test”. If you’re engaged in any financial-related activity, you should be earning at least minimum wage with your efforts. It seems pretty obvious, but I’ll wager we’ve all seen and even done things that fail this test. Some of my own failings include:
- Spending hours and hours of research on a stock when I know I’m just going to buy a small position. I should buy an index fund and watch some TV instead.
- Compulsively shopping for days over a “big” purchase ($50-100), spending who knows how many hours comparing different models and retailers, and celebrating a huge victory when I convince myself I’ve saved $10 or something (I’ll ignore the entertainment value this provides me)
- Writing a blog for hundreds of hours… (wait, nevermind)
And just to be clear, none of this is meant to disparage working at 7-11. People who work at 7-11 actually add value to the world, which is more than what I was doing. You can call it the minimum wage test, or the burger flipping test, or whatever. But I like a more evocative term and fancy the 7-11 Test, and it’s headed into my glossary right now.
And that’s a wrap. But in case I have you at the edge of your seat, I’m happy to share how this investment turned out. Any guesses?
The Simple Cure for Deal Fever: Losing Your Money
As the deal was nearing close, one of the founders came up to me and asked me, point-blank, my opinion (imagine that – I had supported all of the due diligence…). A brutally honest answer would have been, “This investment sucks and you guys should just stick with the consulting gig. P.S. Your investment banker wannabee is an idiot.”
But even young Paul was more diplomatic than that. I was a bit resigned since all my concerns had been ignored to date, but this was a last chance, talking directly to one of the big dogs, to right the ship.
I winced a little and, with a pained look on my face, said the deal might be OK but then again it might not (clearly, I’m a natural for this banking stuff). As we talked, I squarely hit the mark, because he got really concerned and said, “It sounds like you’re describing a date with your sister!” (My witty rejoinder: “Well, I am from Texas…”) I poured an ice cold bucket of water on his deal fever, saved everyone a ton of money, and was hailed as a hero!
Wait, that’s not what happened. I did cool his deal fever a notch, but a quick chat with the banker wannabee got him smokin’ hot again (and earned me lots of love). The deal closed, and while I wasn’t around to enjoy the full aftermath (happily I left this firm for greener pastures), the most common refrain I heard was they lost their shirts. Or, as investment bankers would say, “Whoops”.
This little vignette taught me a lot: how having money doesn’t automatically make you smarter, how success doesn’t always transfer venues, and how deal fever can infect even clever people. Listening to the little guys in the trenches (and never shooting the messenger!) can save you from being blindsided – in investments and in life. And when you, or your consulting workforce, is better off working at 7-11 than doing what they’re doing, you may have a problem you need to fix.
Have you ever failed the 7-11 Test? How low did you go? Would love to hear any colorful, entertaining, and/or maddening examples you might have.