Case Studies

  • Grinch560
  • The Grinch that Stole Business

  • After years of growing a profitable business in the northern suburbs, Marvin woke up one morning and knew that it was time to get out. Now, it just might’ve had something to do with a very cold temperature and continued frozen forecast. But for whatever reason, Marvin’s brain flipped a switch and retiring and moving south were all he thought about.

 

Well, as luck would have it, a fellow Rotary member named Alan, expressed an interest. They sketched out an agreement then had Al’s lawyer put it in legalese. Inside of thirty days, Marvin had put his house on the market and moved to Florida.

 

It was everything Marvin had dreamed about: moderate temperatures, relaxed schedule, and the beginnings of a social life.

Three months into retirement all was going well. His Minnesota house had sold. Alan’s business purchase payments were coming in steadily. 

Six months into retirement he couldn’t believe he hadn’t done this sooner. But Alan’s payments were starting to be late...

 

****************

Twelve months into retirement something was rotten in Denmark. Alan’s excuses were not ringing true so Marvin made a few phone calls to contacts he still had back in Minnesota. Marvin’s friends told a different story. Alan was lying to him.

 

It took six months of expensive lawyering to win back the keys to his now badly damaged business. Three million dollars of inventory had evaporated and he would never see a penny for it.

 

What did Marvin do wrong? Just about everything.

 

Didn’t use a professional in transitioning the business

The deal he struck with Alan seemed fair. However, it was never tested in the marketplace. Some investment in candidate exploration would have given him qualified proposals to compare.

 

Didn’t use a professional in transacting the deal

A lawyer only has one client at a time. Alan’s lawyer wrote up a nice contact.. for Alan. Always have your own interests separately represented. Preferably by lawyer experienced in deal making.

 

Didn’t monitor and verify the progress of the buy-out

When a business is essentially buying itself (little or no skin in the game from the buyer), proper documentation and systems are critical.

 

 

What did Marvin do right? Well, he did take action to correct the situation, even if it was late in the game.

 

And how did Marvin make out?

 

He moved back to Minnesota (in the winter too dang it) but retained his Florida home. After five years of rebuilding, he engaged the Packard Group and sold his business (again). This time he had several suitors and was able to choose among them for the best long-term deal. He also had professional representation in the crafting of the contact.

I’d like to tell you that he recouped all of his losses, but that’s just not true and five years was not enough time to replace that much value. He did, however, get back down to his place in Florida. Five years older but infinitely wiser and lived out his remaining years contented and happy.

 

The morale of this story: retain and pay for professional help. You might want to think that business transition advisors siphon off some of the  profits you could be realizing, but most transactions completed by professionals stay sold. This is not true of handshakes, napkin sketches, and one-sided lawyering.

 

 

Value is in the eye of the beholder

MoneyBlackHole

 

Value (not beauty) is in the eye of the beholder

 

Charlie (not his real name) was excited.

 

He had worked hard, taken risks, and been rewarded. Charlie had built a $40MM manufacturing business over the years through organic growth and acquisition. 

 

That was how I met Charlie. He became a candidate to acquire a client of mine, a niche manufacturing business that Charlie successfully integrated with his two other channels about a decade ago.

 

Charlie, and his wife, were ready for the next chapter. Some travel, some grandparenting, and definitely, some relaxing. At the helm, Charlie put his son, Tom, who had recently completed his MBA in business management. The next few years flew by with Charlie getting quarterly updates from Tom on his plans to expand and grow the business. They were traveling when the call came. It was time to go home and take care of some business.

 

*****************************

 

Things had gone poorly. That’s a very generous term. Disastrous is more complete a description. Since Charlie’s departure, revenues had fallen almost as fast as expenses had skyrocketed. Some key accounts had left after issues with prices and lead-times.

 

I would like to say that Charlie fought the good fight and persevered. When I got wind that there was trouble, I contacted Charlie and pleaded with him to let me re-home the division that he’d acquired through me. I knew that the right buyer would see the value and far exceed the auction returns. But the turnaround group that came in did what most turnaround groups do.

 

Convinced by his advisors that the best solution to his painful problems was a quick liquidation, millions of dollars in equipment were sold in a weak marketplace for pennies on the dollar. Charlie not only didn’t get a fair return on his life’s work, he lost his lake home, cars, and lifestyle that he’d spend decades building.

 

Add to that the pain and problems for his employees and their families – many had been with Charlie for 20+ years.  An orderly sale or partnering agreement with an ongoing business could have salvaged much. But most turnaround guys have a hammer and all they see is a nail.

 

From the sidelines, I’ve watched too many companies that could have found a new home or strategic partner and could have kept employees and customers in place with creditors far more satisfied than the quick answers provided by liquidation. The added value to all concerned is exponential.

 

The old saying goes... "Something is only worth what someone will pay for it"
So find that someone that sees the value.

 

The Inventor's Dilemma

Sam’s journey has been an interesting one. He shared this with me over a conference call recently.

 

From an early age, Sam saw possibilities – and growing up in an entrepreneurial environment, he was encouraged to act on them. Soon he was ‘inventing’ little mechanisms and gadgets. Following his primary school years, he pursued and achieved a degree in engineering and worked, successfully, for a couple of companies. That’s where we pick up his story…

 

“I had attained a modicum of success by my mid-thirties and was sitting on my patio with Tim, my friend and neighbor, who worked in finance. He asked what I was tinkering with now and I gave him a quick sketch of the high-tech patent I was finalizing. I shared that I had just been offered a seven-figure deal and was conflicted about ‘selling my baby’. Tim opined that a seven-figure deal for a patent pointed to a strong potential for eight-and nine-figure success. Coupling that with being able to guide the growth and development of ‘my baby’ – Tim convinced me to pass on the offer and really sink my teeth into this project.

 

Several personal guarantees later, some shiny equipment populated some office/warehouse space and I was on my way. Knowing that I needed people with different skill-sets, I brought in some leadership and financial experts (tapping my friend Tim as the CFO).

 

We attracted some seed money from our network of family, friends, and business aquaintances and that’s when things started picking up speed.

 

For awhile, everything went right: products were developed, tested, and presentations were made into several industries that we thought the most applicable. The President made the case that we needed a few more pieces of the puzzle to really hit this out of the park so he brought in a rainmaker and some investment bankers so we could secure the money we needed to become fully operational.

 

My proudest day when a little sideline, consumer application started selling. It wasn’t big numbers, but it was actual income and we finally had some black ink on our books!

 

And that’s when it all went wrong.

 

The President and CFO thought that the consumer sideline product was de-positioning us in their efforts at enterprise-wide solutions – so leadership voted to shut it down. My vote being the only dissenting one but I was told that I needed to let these people do their work.

 

The rainmaker was opening doors and starting big conversations. But when I met with the enterprise-wide potential clients, things felt ‘off’ and I felt like I was getting looked at sideways.

 

The Marketing Manager pulled me aside one afternoon and told me that the rainmaker was making a mess of our company’s efforts and reputation by mis-stating products, over-promising on price and deliverability, and not painting a very nice picture of me personally.

 

I went to the President and told him my thoughts of what was going on and that I thought the rainmaker should be let go. He told me that he couldn’t let him go because he and Tim had signed a contract with him that included incredible guarantees. We couldn’t afford to fire him!

 

Now the company was really struggling. Our culture, which I was once proud of, had become divisive and territorial. Our enterprise-wide prospects weren’t signing and I was told personally by one of them that when my company gets its act together to call them again.

 

The final scene started out quietly. At a quarterly board meeting, we were reviewing product development and sales efforts when the President announced that he had a plan that would fix things, right the ship, and get us unstuck. The plan was quite simple. Reform the company leaving the debt on the machines in the old one and start fresh. I read the plan and discovered that I would have zero ownership in the new entity. I voted no – the rest of the board, my friend Tim included – voted yes.”

 

Epilogue

 

It took Sam years to pay off the machinery debt and make good on some family and friends that also got left behind. It took him longer to let go of the white-hot anger. He admits that it makes him smile that the new entity floundered about and has yet to make anything of themselves.

 

The moral of this story is twofold. 

 

#1 Money is not the answer. Sam would have been better off partnering with people/entities that had distribution, sales channels, complimentary products, etc rather than getting money.

 

#2 People are everything. The right ones can make anything work. The wrong ones can may anything fail.

   

Retirement = ((Current Value of Business) / Time) x Quality of Options

This is a tale of two business owners - both owned companies roughly the same size, in roughly the same industry, and both at the stage where they really thought hard about getting out.

 

Now some of you may have been aware of a market correction from 2008-2011 and this comparison is about the effect of time on your plans to harvest your business.



Both owners saw their revenue contract but they took difference approaches.

 

After two quarters of contraction, Owner A (aka "Mark") talked to his advisors and sounded out a plan for actively pursuing the harvesting of his company. He engaged an expert and conversations were started with a number of well-chosen/qualified buyers.

 

Owner B (aka "Tom") wavered between wanting to be out - but not giving up the sale price he had in his head. He decided to slog through this tough patch to get the full 4x ‘07 earnings.

 

Mark made a successful transition from the business and went on to engage in all of the things he liked and never had time for while running his business. While he had to mentally let go of significant lost earnings (a primary valuation factor), he retired from the business with some cash and a stream of revenue that let him fill his days with grandkids and the other things he enjoyed in life.

 

Tom saw earnings continue to contract and the further it fell the more determined he was to get back to ‘07 numbers.

 

I was told he tested the waters in ‘10 and all he found were bottom feeders looking to score a cheap deal that wasted allot of his time.



Tom is still working his company but I fear that his shot at an enjoyable retirement might have irrevocably slipped from his grasp. Time is now his scarcest resource.

 


 

 

What can we learn from this?

 

Time is your friend if your options are improving or earnings are increasing.

Otherwise, time is your enemy. Downturns affect earnings – and earnings are what multipliers multiply!

 

The second thing is that getting hung up on your own formulas and numbers can be a dangerous thing. 

 

Remember, a business is worth what someone will pay for it. Period.

 

 

 

 

What does the last nickel cost?

nickel560px

 

 

 

 

 

 

 

 

What does the last nickel cost?

 
An associate of mine relayed this story to me about his cousin.
 
Richard was part of the management team for a mid-sized, upper midwest manufacturer. The owner, we’ll call him Gary, had a stake in several companies and was always on the lookout for a deal. Somewhere along the way, Gary crossed paths with a company that manufactured electric motors. They were struggling and looking for an out. Gary made a deal to buy the company with the plan to crate and ship the $25MM in inventory to his main operation (where Richard worked) and shut down their operation.
 
Enter Richard. Richard was part of the crew that flew east on the due diligence team. The inventory checked out and Gary stood to make quite a handsome profit when he turned the inventory. Richard and the management team walked through the process of crating and shipping and the closing.
 
The management team then headed home to prep the building for the incoming five semi loads of motors.
 
And that's when things went awry...
 
What transpired next, Richard was not privy to, but the water-cooler conversations painted this picture: the employees of the soon to be defunct electric motor company asked that those with accumulated paid time off be given a little something. They were told no and Richard got the impression that it was a cold no.
 
Eleven days later the semi trucks arrived with the carefully crated electric motors and they began unloading the racking the inventory. Richard was called into the warehouse. He was taken to the racking and shown a pallet. All of the wiring had been cut. On all of the motors. 
 
Lets recap. Gary makes are really good deal on $25MM worth of inventory that will take him maybe 24 months to turn, realizing a substantial profit. Gary gives the cold shoulder to the soon to be unemployed folks and they snip the wiring. Gary is out the cost of the acquisition, the payment period while the employees crated the inventory, the costs of crating the heavy motors, and the shipping to move the inventory. The costs of disposal were probably washed out by the scrap metal value.
 
The lesson we can learn here is to know the dangers of trying to squeeze out the last nickel from a deal.
   

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