On my birthday in 2002, I received a stomach-sickening phone call.  I was told by a person I didn’t know on the other end, that they have lied to me but everything should be okay.

Learn from my mistakes, and don’t lose big.

As you know, there is no investment without risk, and the old adage of “know before you buy” is forever true.  After I had sold my first business at the age of 36 and spent some precious time traveling with my wife and four young kids, I was looking for my next venture.

Unfortunately, that next venture ended up costing me over $250,000.  It was company that advertised in Fortune magazine for a certain type of medical rehabilitation facility, similar to a franchise.  Rarely would I pay attention to these types of ads but this one caught my attention so I ripped it out of the magazine and it sat on my desk for the next three weeks.

I finally got around to making a call and ended up talking to a person who, even though this business was based in Phoenix AZ, had grown up in Reno and belonged to the same country club my family did.

Wow, did this opportunity sound interesting.  They were already up and running with over 200 operations around the country, you could own multiple of them, the Reno area was open, and you could hire the medical people to run them as needed.  I made a time to fly down to Phoenix and listen to their presentation.

Coincidentally, my assistant’s daughter had worked for a very similar type of operation in Washington. She confirmed what they told me over the phone so I asked her to accompany me to the presentation as well.

We spent a day down there listening to the president, the medical doctor in charge, the real estate guy, and the CFO.  I was most interested in the CFO since he shared with us actual breakdowns of the numbers involved which were supposedly an average of the other facilities in operation.  They looked terrific.

We came back home and started our due diligence.  I met another person interested in the opportunity so we worked together on our due diligence for about three months.  We talked to multiple other owners around the country that continued to confirm their story.  I even traveled to Dallas to check out two existing facilities and visit with the owners.  They were opening a third and confirmed the numbers were correct and even conservative. I was convinced it was the direction I wanted to go.

Now I don’t have the time to take you through all the gory details but after I received that phone call on my birthday, I very quickly started to watch this opportunity unravel.  What appeared to be a business dream come true turned out to be a façade over a company trying to keep their doors open.  It was my worst business nightmare becoming a reality.

Like always, hindsight helps you to clarify what happened and learn from your mistakes.  There were multiple red flags that were apparent at the time, but that we chose to ignore.  Never again!

First, and most apparent after the fact was they would not release the contact information to all the operators due to what they called “privacy issues.”  Earlier I said this was similar to a franchise for an easy description, but it was actually a licensing deal.  I paid them to assist me in setting up my facilities.  There weren’t any privacy issues.  Once we got a hold of other operators, after already giving them my money, we found almost all of them were having huge problems.

One operator in Roseville, CA called me and said, “I will give you my facility if you will just take over my lease, otherwise I have to go bankrupt.”  He had already lost $700,000 on the deal. I painfully learned later that the four existing operators I had spoke to around the country, including the ones I visited with face-to-face in Dallas, were real owners with failing businesses and were acting as paid shills.

That was a tough pill to swallow since I believed they were my peers sharing their experiences with me.  Needless to say, not being able to pick and choose by random who to talk to was a huge red flag.  I knew it was there, but I chose to get past it.  Never again!

There is much more to the story as you can imagine, but the end result was all four of the owners spent time in prison.  Not for long enough, if you ask me.  I put together a very extensive timeline of all the events that took place and sent it to Arizona’s Attorney General’s office, but they never did anything. The case was federally prosecuted, though, and I testified twice over about an eight-year period.  To date, I have probably received less than $10,000 in restitution.

From that experience I learned two important and valuable lessons that I now apply to everything I do before making an investment and can also be used for alternative investments. 

Number one is always get to know who you are dealing with.  Nothing can make an investment go bad faster than people on the other side that are not of the highest integrity.  Like with any relationship, business or personal, without trust you have nothing.  I have become increasingly better at trusting my gut about others, and paying attention to the patterns I see in peoples’ actions.

Number two is don’t ignore the red flags.  If I would have simply stuck to my request to talk to others, which I am assuming would have never been granted, then I would have walked away with enough money left over to buy my wife and I his-and-her used Lamborghinis.  Not that we need them, but at least that would have been a lot more fun.

I know you know all this stuff already, but it never hurts to be reminded of it so you aren’t the next one to get scammed out of $250,000.  Know when to run away!

 
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