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Here’s the program.
Hey, everyone, it’s Andrew Warner, founder of Mixergy.com, home of the ambitious upstart. And today’s guest is gonna tell us how to take an idea to business to sale. I’m not thrilled about starting a business just to sell it, but you guys know I’m insanely curious and I want to learn about business from as many different angles as I can. That’s why I invited Jack Garson to Mixergy. He is the author of How To Build a Business and Sell It For Millions, and he’s the founder of Garson Claxton, LLC, a law firm whose business group he heads.
Jack, you and I talked before the interview. I said I wanted to start off by expressing some healthy skepticism because with a book like How To Build a Business and Sell It For Millions, I think it’s important to get that out of the way. And you said, Andrew, hit me with skepticism. So thanks for that and thanks for doing this interview.
Interviewee: My pleasure, glad to be here.
Andrew: All right, so my first question is how many companies have you created and sold for millions?
Interviewee: I have worked with dozens if not hundreds of companies that we have done that very process.
Andrew: So why not, if you’ve got the format down, why not create your own business and sell that for millions?
Interviewee: That’s a great question, but for me I get a lot of personal fulfillment from helping other people and I have a very varied life. I work with the Air Force Authority, I’ve written a book, I write a column, I’ve run the firm, I founded the firm, and everyday I’m helping people solve problems. So that’s plenty for me.
Andrew: And I promise this whole thing won’t be me hitting you with skeptical question after skeptical question, but as I said, it’s important to get this out of the way, and once we do I wanna learn as much as possible. But here’s another thing that I noticed, I read your book here on my Kindle. And in the intro you’re talking about Bob, who sold his company, Bobby netted $60 million and it wasn’t brain surgery or rocket science. In fact, it’s all here in this book. Isn’t that over simplifying the process of building a company?
Interviewee: Well, let’s take that real life example. He had a great formula for taking contaminated soil and putting it into a state that the government would allow it to be deposited. So when somebody goes ahead and renovates a gas station, and the gasoline has contaminated the soil, that has to be taken and put in a special place unless you can clean the soil.
He had a process which was very much of a trade secret, that he could take the soil, add certain chemicals to it, and in effect purify it, then it could be used at foundations of highways, etc., foundations of buildings, etc., and it was cheaper than all the competing methods.
His company was very much the Bob show in that it was built all around him. There was no senior management. There was Bob and a bunch of guys with trucks. And he was very resistant to bringing in an executive team and bringing in a sophisticated accounting system.
So I worked with an investment banker. I was on his advisory board. We all encouraged him to beef up the executive team, beef up the accounting system, beef up his contracts, etc. He didn’t do it.
We went to our first sale, a very good buyer came in, did a few months of due diligence, and said hey, we can’t buy this company. There’s nothing here but the Bob show. Well, that was a very valuable lesson for Bob. Bob then went ahead after that failure and brought aboard a President who’d been with a Fortune 100 company. He brought a CFO who’d been with what was then one of the big six accounting firms, who put in a new accounting system, and they started documenting everything.
A year or two later, he brought the investment banker back…
Interviewee: …everything. A year or two later, we brought the investment banker back, and we in effect had an auction. Now the details
which we don’t always get to in the book.
. Bob ended up selling, just over 80% of the company in that first round, and netting quite a bit of money. Then, 3 to 5 years later, the buyers who had bought him, sold the entire company, and with the 18.7 percent left he had in the company, he was able to go ahead and net another tremendous amount of money, totaling the amount of money I mentioned in the book.
Andrew: I see, alright. And, you just talked about the Bob show. And, you say in the book that that’s a big problem for entrepreneurs. That it becomes the entrepreneur show. Everything revolves…
Interviewee: Yes.
Andrew: … around the entrepreneur. Everything can’t, everything has to have him or her involved in order to run. How do you avoid that early on?
Interviewee: Well, it, there’s dilemma. The folks I work with in this, company advisor industry, are very familiar with phenomena of the founders dilemma. And the founder’s dilemma is that the people that make the best founders, often make the worst people to grow from a small size company to a medium size company. Specifically, the founder type is the one that has the drive, the idea, the intensity, the perfectionism. They’re there for their clients, 24/365. And they find it very hard as they start to achieve success to let go. They don’t want to delegate. They don’t think anybody else can do a good job. And even if they do a good job, they’re threatened by it, because their whole identity is so tied up in their business that if someone else is in the conference room, getting “atta boy” they’ll feel diminished. So, that’s the typical founder’s dilemma. You have to start chipping away at that. You have to turn them, from getting their sense of satisfaction, being the star player, as Michael Jordan, to being, a sense of satisfaction for being the star coach, Phil Jackson. And that transition, away from the super star that’s achieving everything for the company, to the super coach, is the journey that we have to encourage people to take to go from small to medium size companies.
Andrew: How big have you seen companies get without that transition?
Interviewee: Gosh, you know, when you don’t do that transition, what you’re doing is leveraging the talents of the founder, or the founding group. All you have is a bunch of assistants. And every now and then, in a very, paper work intensive, volume kind of business, like maybe mortgage brokering before the whole thing fell apart. You could have a few super star mortgage brokers, and each of them could have a team of five assistants and they may be able to go ahead and do a billion a year in loans. I had one client who was doing that. Where they had 3 partners, who were the founders, who didn’t really build an executive team, with a few minor exceptions, and they leveraged that into, a billion in loan volume, not a billion in revenues, but a billion in loan volume. But, by and large, that Bob show scenario works up to, 10 million in gross revenues, maybe 20 million in gross revenues, just gross we’re not talking about net. And that’s about as far as that vehicle usually goes.
Andrew: And it seems that part of the problem of breaking free of the Bob show is that you get positive reinforcement as you continue to grow the Bob show. That, the sales keep growing, that the business keeps doing better and better and so there isn’t anything there that’s telling you no. If it aint broke, why fix it?
Interviewee: Well what you often have happen, is that the quality of life of the Bob show type founder, diminishes. They’re being pulled in a million directions, and they say, you know, I’m making enough money right now, let me bring some advisors on board. There not as threatening. They’re not on the team, they’re around the team. The advisors come on board and say, “Listen, you need a CFO. You need this accounting system. You might need a Chief Sales Officer, etc.” And they start encouraging them. And it’s a real tug of war they don’t want to spend the money on the right people, they don’t want to recruit the right way. But they’re pushed in that direction, and if it’s done right, and they get really good quality people who take problems off their plate, and improve their profitability. You know some guys don’t even want to go a year to find out if something’s gonna work. They want instantaneous results, or they feel it’s doomed. But if, if you can show them progress quickly enough, then, they start slowly but steadily doing it. I’ve worked with a number of companies, that over 5 years, completely transformed themselves. I’ve got one buddy right now, he used to work from 8 in the morning to 11 at night, with a very minimal executive team, now he works from 9 to 3, and he’s CEO and has.
END
Interviewee: He is CEO and has a president that runs the company day to day, they`re up well over a hundred billion in gross revenues.
Andrew: If we`re just starting out, what do we need to know? I want to go from in this conversation to throughout the life of the business from idea to sale, when it`s just idea what are the first steps that you need to take?
Interviewee: So I passed the skepticism test?
Andrew: You passed it a long time ago.
Interviewee: Ok, now.. there are, in the book, the first 20 chapters are all about how to start build your business. But the first four key things to starting a business are: profitability, competitive edge, sustainability, and scale ability. Would you like to discuss any of those?
Andrew: Yeah, how about all four of them? Do we have time? We`ll do a little bit of each of the four, I know you got a chapter on each one so we won`t get as deep as you did in the book, but as deep as you feel comfortable.
Interviewee: Surprisingly, a lot of people don`t realize how important profitability is. I know that should be self obvious right? People come up to me and I say listen, if you do everything you`re suppose to do according to your business plan, will you be profitable and they look at me and tears practically well in their eyes because they never thought about that. So it is critical that you consistently generate profits from the sale of virtually every time you sell your goods and services and so many people don`t have that. That`s why you see businesses like restaurants and construction companies fail, because they have not been rigorous in their cost and revenue analysis. They don`t really know if they`re going to be profitable, they just have a gut instinct that this is going to work. So, those folks if they think they have a good idea they need to have a business plan where they have a revenue budget and expense budget and I detail all this in the book. They go through and show their entire game plan potentially about 2 to 3 years and confirm they are going to be profitable. Now show that business plan to really tough mentors, advisors, their banker, other people that they know and have them challenge their business plan because what they might find is that they`ve left out certain expenses, they havn`t even considered certain expenses. That`s the profitability component. Now, if you are profitable, the next stage is..
Andrew: The connection broke, actually as long as the connection broke let me ask you a question about profitability. 2 to 3 years down the road, can an entrepreneur running a business that hasn`t even launched be able to predict that far into the future?
Interviewee: I have had folks go ahead and do a very good test to see that very point. I had two clients try to figure out, in two different parts of the country, try to figure out if home computer repair based businesses would work. In one, D.C based, went ahead and hired a few employees, did some minimal advertising, and actually went out into the field to see if the residential customer would pay for computer repair services. Another one in North Carolina, and in both cases they realized the consumer market was not ready for it and they weren`t going to make money and both of them saved money because they didn`t spend a lot of money before realizing it wasn`t profitable. You sometimes can predict and you sometimes can`t predict, depends on the industry.
Andrew: Okay, and I think the next one you were going to talk about.. competitive edge?
Interviewee: Yeah, lets talk about competitive edge. Once you`re profitable, you`re going to attract competition, so you need some type of barrier between you and what`s coming next. I had a client in the 80s, he had six bagel stores and I told him to sell and he didn`t sell.. he thought he was set and what ended up happening was that Einstein`s bagels came into the market, under sold him and slowly over the course of 10-15 years he went bankrupt or had to sell his stores and suffered great losses.
Amdrew: And part of the issue with that, the Atkins diet was catching on.
Interviewee: That was a bit later. He just faced straight out competition from people who were better funded and could come in at lower costs.
Andrew: Ah, I see. What else do we need to know when getting started, what were the other two?
Interviewee: Sustainability. Now sustainability is a number of things, but it`s your ability to be able to stay in business for long time periods, at least until you`re consistently profitable. And here, most people don`t start with enough capital. I would say, based on statistics I`ve read, 1 out of 3 businesses will fail in three years because they don`t put enough capital. So that`s a very important ingredient, but for your company it might be having the right insurance, it might be having back up computers, it might be having a steady supply of qualified employees. What will it take for you to get through the tough times.
Andrew: Okay. By the way, you`re so passed the skepticism question that I see in the audience linked over to your book..
15 – 20
Andrew: So people can buy it and then I see Dan Blank apparently follow the link over to Amazon to see that there are only four books left in stock. So
Interviewee: Order more?
Andrew: Okay, sustainability, profitability, competitive edge and
Interviewee: Scalability. Scalability is probably the term that a young entrepreneur is most unfamiliar with. Scalability is your ability to grow your business bigger and that means if a buyer comes in and pays 10 million dollars for your business, the buyer wants to know that can grow to be a 20 million dollar business or more, otherwise why would they buy your business. The simple fact is if it going to stay 10 million dollars they are going to invest in bonds. So they want to know that if they buy the business from you, you can make the business bigger and that may be any number of things. Take the example of a business without scalability, a successful art gallery that relies on a few key artists but they only paint once every three months. Well, if all of a sudden you get a flood of customers and you don’t have the art to sell them, you are not scalable. Companies that buy a phone system or computer system where after 10 employees they need a new system they haven’t thought scalable. You need to build scalability in all your decisions in order to create an attractive acquisition target and it can even go to more intangible things like the kind of people that you hire, I talk in the book about hiring the type of people that can grow with the company so as you are grooming people that will be valuable members of either the executive team or middle management.
Andrew: How do you hire right early on when you are just getting going and it’s not much more than an idea?
Interviewee: That’s true. That is a very tough thing. Certainly you want to hire people that fit within your value system and your culture because otherwise you are going to have a tremendous amount of conflict in your business. And you have to be careful about giving away stock and stock options and warrants too much. Too many people I know set up a business and it is like they huddle in the middle of the street in a game of football and say okay, you are going to get 5%, you are going to get 10%, you are going to get 20%, and then later on they regretting it because the company has grown so much that they have outgrown those skills and yet they have 5, 10 and 20% of the stock in the company. So one thing you need to do is be prepared to start small and get good people that will fit within the business, make sure that you are well capitalized as you move along, and hire people that fit within those constraints. It is not a miracle although I do recommend, lot of people say this, hire slow, fire fast, make sure you get people that fit well within and this is the thing that comes up with the founders dilemma. The really strong founders are sometimes intimidated by good players. They don’t want people as good or better than they are and so if you have that personality, recognize it and find it and try and get people that can replace and supplement you.
Andrew: Actually that is a bit of a problem. You hire somebody who you know is good in a young company, he is going to look around and say, I think I could run this myself, why do I need the boss? How to prevent that?
Interviewee: Well, I am glad you brought that up because I have some things called the hard way rules, and these rules that most people learn, the hard way, but if you read the book hopefully you can at least minimize the damage and prevent some of these. And one of them is you don’t want to become a competition factory. If you are going to bring people aboard, you owe to them a lot, you owe them good training, you owe them respect, you owe them a good healthy company culture and values but you don’t owe them the keys to your business and where it is legal and there are a few jurisdictions such as California where it is not legal, but where it is legal you should have non-competition agreements with your employee so they can’t take the business, learn what you have and take it across the street. Most people don’t do this right away, they think it will never happen to them, usually takes by my experience of getting burnt three times before the owner of the company finally comes to me and says okay I am ready for those non-compete agreements. And there are a number of other things you can do to protect your company. One thing that’s important to do is build a strong brand in your company so customers identify with your company and not necessarily particular individuals. Furthermore, you want to institutionalize your business. It is very good to have your customers work with teams of employees, not just one employee that’s the only person they ever deal with so if that employee leaves, even to compete with you or not to compete with you, but in any event, you don’t want that disrupt the relationship. If they are used to dealing with the team of your employees, then one employee’s departure won’t hurt you this much. So these are all techniques that you can use
Jack Garson : Those are all techniques that you can use to prevent people from taking the great thing you have built and duplicating it across the street.
Andrew Warner : How enforceable are Non Competes even outside of California?
Jack Garson : well in California, not only are they are unenforcable , but they are also illegal. It is a crime to make anyone sign one.I believe it is All State.Inadvertently or not,I had some folks,sign some non competes a few years ago and gotten into quite a lot of trouble. But outside of California, Non competes have become less and less enforceable over time.so you need to be very narrow when you draft them, or you will not be able to enforce them at all, whereas you used to be able to restrict someone for 4-5 years,But now, try even for one year and you will only get six months.So remember to put in other protections that are highly enforceable such as they cannot use your information, they cannot take your customer lists, they cannot take your forms, cannot take your ideas, and they also cannot take your other employees.They should agree not to solicit your existing employees, because thats where really the real damage exists, Because in some cases is ,one person leaves,and joins a new company and says, all in here are income free, so the other employees,go and leave with them. So a non- solicitation is enforceable and is a good component.
Andrew Warner : One of the cases,wherein I have had to enforce a non compete and there is a danger of the other people in the company seeing you as a jerk
for enforcing this and future employees will see you as a jerk and a potential threat to them, because they see you as the big company with all the money
and the lawyers and the employees are left, he is someone who is just starting ,trying to make a living, How do you soften that blow?
Jack Garson : Well, the way I soften that blow is by explaining, that I am protecting everyone’s job and all the work they had done for the company
because if other people could come in cherry pick what they want, other people at our company could lose their job,and so this is a way of protecting
the whole family and if you also explain that all non competes are reasonable, that we are not saying to people that they are locked up for years.
It is a relatively modest time period and they can work for people in other industries,( POOR AUDIO 21. 57)and they are like, listen our customers are
located very close to us and (POOR AUDIO 22.24) and it is a balancing .and it is not for preventing them from working.We are just prohibiting them
from stealing.
Andrew Warner : Ok , we lost a little bit of connection there,but I got that point,I like the way that you put that. Part of the reason that I like your
book and I am enjoying this interview is you are a great communicator, and you are able to get your ideas out there well. How important is that for
entrepreneurs?
Jack Garson : Well communication is very important , you see so many issues, even BP right now with the possible oil leak in the Gulf of Mexico has had some
failings, and has said in some of their communications that might hurt their reputation in the community.So,I see communication as inherently important,from
everything to everyway you treat your customer, to your branding,to your marketing. (POOR AUDIO) I Have talked about part of it in the book.(POOR AUDIO) I think there is an important part to every contract and every business initiation with communication. You know I have been doing my legal practice,which is part of what I do for customers for 25 years.And in my early days, when I did not know any better, my negotiations were like two people at loggerheads. And now, I focus much more on where the common ground is,where are seperate needs are and why the needs of each of the separate parties are important . If you communicate it that way you are much more likely for the other side to give and understand what you are giving to the other side
Andrew Warner : You have seen entrepenuers now, by the dozens if not by the hundreds,the one’s who communicate well , who communicate their visions well
and get people to line up behind them and charge ahead, what do they do right? What do they do differently,from those who dont?
Jack Garson : That’s a great point, you know, you can have a business,that has all the key ingredients that I talked about to be very successful.But when you have a true visionary, you can do new amazing things and you can inspire your employees to even greater levels of effort, So I do talk in the book about those special entrepeneurs who have a vision and that is they can see some greater place that their company can go,They also see all the steps that they need to achieve to get there. So that they can communicate not just the goal but how you can reach it and when you do that, and when you manage that process with effective communication, you can inspire tremendous achievement, It is really leading people to put that person on the moon, if you will.
Andrew Warner : Mike B in the audience is liking it too because he says mI love this guy and then he is talking about different points in the audience.Guys, if there is a point that you have heard , that you want me to dig in deeper on.or if there is one you haven’t heard, just put it in an message in the chat room in the way Mike B has.
Andrew: Guys, if there’s a point that you heard that you want me to dig in deeper on. Or if there’s one that you haven’t heard that you want me to bring up. Just put it in the, in the chat room, the way Mike B has.
Culture and values. I tend to think culture and values comes later on. When you’re starting a company, you wanna just fight for profitability. Fight to stay alive. Fight to plant your flag. I did an interview with Tony Shea of Zappos. He said one of his biggest mistakes and the reason that he left one of his previous companies is that he just didn’t like the culture. So, how important is it to set up culture early on when you have all those other goals in mind? And how do you do it with all those other constraints on your time?
Interviewee: Well, I’m such a strong believer that I think we should be establishing the right culture and values the first time we get a newspaper route. And the first time a parent drops her kid off to kindergarten. Values are merely the rules somebody lives by.Culture is the environment that you create when you live by those values. Most companies say they have certain values and say they have a certain culture. But that’s their stated value
and their stated culture. The real values and cultures are what you see in effect, what’s going on.
You know, when an employee gets sick and they lose their health insurance and their job. That’s a terrible values system. That’s a terrible culture. And I very much am a believer, that employees determine.. You see everybody’s pretty bright and they can see early on if they’re being treated fairly. And they size their effort. They measure their effort by the level of compensation and benefits and respect that they believe they’re receiving.So if you have a healthy values and culture, you get the most out of people. If you don’t, people are sabotaging the company, whether they’re stealing out the back door or just not giving it their all. So actually, by having a good values system and good culture, you’re going ahead and creating a very profitable company.
I have heard Chief Sales Officers say, no salesperson’s ever gonna make more money than me. And I have heard that many times. Now what does that say? That says, if you’re really good, you don’t belong in that company. Okay? Because if you’re really good, you’re not gonna be paid for what you do there. And so that’s a classic example of a values system that creates a culture of non-performance. I’ve seen companies fill ahead and cap all the compensation of a certain level of performer at a certain dollar amount. What does that mean? Now what you’ve said is, anybody who could make more should leave, and anybody who has poor skills should stay because they’re gonna do fine. But the real high achievers aren’t gonna be fairly treated, they should leave. That’s when bad values systems and bad culture give incompetence.
Andrew: Give an example of a somebody who did it well?
Interviewee: Or do you need an example of somebody who did it terribly?
Andrew: Mm-hmm.
Interviewee: Circuit City. Circuit City, not too long before they ran into bankruptcy, got rid of all their skilled salespeople, the ones who really know how to work the TV and all the stereos and all the gadgets. And said we’re getting rid of all these people who we’re paying 10 to 15 dollars an hour. And we’re gonna replace all our salespeople with people that are making minimum wage or just a little bit above minimum wage. So now you walk into a Circuit City store and nobody could explain how to use these contraptions. I certainly don’t know how to use them. Well, within a year, Circuit City was filing for bankruptcy. So, that’s a perfect example of that type of decision-making hurting a company.
Andrew: I remember that. How about somebody doing something well?
Interviewee: Well, frankly, I think when Starbucks.. not so much in the past couple of years. But the Starbucks of 5 to 10 years ago, I really felt like they had a great values system and a great culture. I remember them, learning that when the coffee got 20 minutes old, they threw it out because they wanted you to make sure you got a fresh cup of coffee. I remember them being very concerned about sharing the tips throughout the whole store, so everybody shared in that benefit. I remember them, and i’m not positive that they provided health benefits, but I remember them being very concerned about the benefits. And here they were, saying, we’re gonna treat our people really well, and we want to sell an excellent product that you can be proud of. And I think that.. really..
They hit the terrible Great Recession and every financial writer in the country started saying, the way to financial survival is cut your coffee up. So, so I think they hit a roadblock there that hurt them quite a bit. But I think their value and culture was wonderful.
Andrew: I get a lot of questions, skipping towards later on in a company’s growth…
Interviewee: Mm-hmm.
Andrew: About how do you find those initial buyers for the business. If you’re looking to sell, if you’re considering it, and you’re ready to put your company on the block, but you’re not big enough to hire an investment bank. How do you get those original offers?
Interviewee: Well, the truth is, the number one most important thing for the owner of a company, in selling a company, is build a good company. Don’t worry so much about selling it. Just build a really good company. People will find their way to you. Now, if you’re in the 5-10 million dollar sales price range, you’re right at that range where a business broker could help you or an investment banker could help you. Once you’re at 10 million or above, you’re solidly into the low end of the investment bankers and they’ll be interested in helping you sell. 5 million and below, you’re solidly into business brokers and what you should do is get recommendations as to skilled business brokers, if you’re at that range, or investment bankers if you’re at the higher range, and those are the folks along with your financial and legal advisors that are going to go ahead and help you with the sales process. Your job is not to be good at selling the company. In fact, it’s very dangerous to think you can be good at it because in most cases, you’re selling your business once. Maybe you’ve sold the business before. The people you’re up against regularly buy businesses. You need a team of people that regularly sell businesses to be a match for them. Because there’s a lot of simple mistakes that you could make that would hurt you tremendously.
Andrew: Give a couple of examples of mistakes that hurt entrepreneurs.
Interviewee: Here’s a classic one.
Andrew: Um-hum.
Interviewee: The seller asks you for forecasts of your sales over the remaining year. You say, “Well I’m going to be selling this business in the next couple of months. Let me estimate high.” The seller goes ahead — I’m sorry. The buyer goes ahead, drags the deal out for 6 to 9 months, very typically to see how those numbers pan out. And when they don’t pan out, they retrade — which is a term for renegotiate the deal — because you made the amateur mistake of estimating too high on what your sales figures would be for the balance of the year. I always caution sellers to go ahead and estimate the sales for the ensuing year slightly conservatively. I’d rather you be a little bit of a hero, don’t — don’t really low-ball your numbers because it’ll show you have very little on your standing of your sales figures. Don’t estimate high. Not too low. But estimate just a touch low. That’s an experienced person’s advice on selling. Another mistake, classic mistake, that sellers make when their going to sell their company is what I call taking their eye off the ball. They take all the most important people in the company involved in the sale of the business and put them on the deal team that makes the dog and pony show presentations to the prospective buyers and they leave all the assistants behind running the company. Well, that’s not good. All the critical operations are suffering. Sales are suffering. Customer service is suffering. All types of contract negotiations are suffering. And sales decline. And if the seller even remains interested, they want to renegotiate the deal. No, the important thing to do is make sure you do not disturb your critical people in the sales process. It’s much better for you to get some folks like from your marketing department that are good communicators to work on the deal team. Or the assistants to the various vice presidents go on the deal team along with your investment banker and your legal and your financial advisors, because you do not want to disturb the business operations of the company. But those are two of the classic ones. And there’s plenty more.
Andrew: How about one more and I’ll read this from IanPK. Actually IanPK is writing these short messages. Just saying, “This is really helpful. I want this book.” And I think he’s capturing what other people in the audience are feeling. Dano Manion, “Great advice.” Thanks guys. So how about one more and then I’ll ask a couple of questions about investment bankers.
Interviewee: Ok, now you’ve got a company that’s interested in buying your business. You do not want to commit to exclusive negotiations with them too soon. First, it will interfere with your ability to have an auction of your company. You want multiple people bidding on your business. But in your dealings with any one potential buyer you want a very detailed letter of intent that describes the terms of the deal in great — in great detail because as soon as you sign that, you’re going to go into an exclusive negotiating period. And the longer that negotiating period is, and the less detailed the letter of intent is, the more room there is for mischief. Where you end up with a really bad deal, but you are unable to negotiate with other people because you agreed to exclusive negotiations and the other suitors who are interested in your business have moved on. So make sure that you don’t commit to exclusive negotiations until you’ve tackled all the tough issues with the prospective purchaser.
Andrew: Ok, investment bankers. For many — for many business people the first time that they deal with them is when they’re selling their business. What do they need to know?
Interviewee: Well, understand that investment bankers could sell sand at the beach.
Interviewee: “Investment bankers could sell sand at the beach. They’re really good at selling. That’s gonna help you once they’re working for you. But also understand you need to negotiate your deal with them. And that’s where a good legal advisor who does this quite a bit can help you find the right investment banker and also make sure that your deal with the investment banker is a healthy deal. I have every respect for the investment banking community–I think they earn the tremendous sums of money they make when they go to sell businesses. But, there are key things in their deals that you need to protect against. Not the least of which is if you do terminate and investment banker they have a protection period where if you sell to somebody that they talked to while they were on your payroll so to speak, you still need to pay them that commission. That protection period, called a tail period, shouldn’t be too long. That’s one of the details. There are other details as to what their fees are. Often they’ll ask for a monthly consulting fee, plus a very large success fee. All of that can be negotiated.”
Andrew: “Okay. And who do we get on our side to help negotiate with them? Is it a lawyer who’s worked with investment bankers before?”
Interviewee: “Yes. That’s exactly correct. I do that. Right now I’m working on a sale where I’m presenting three different investment bankers to my client, and I have pre-interviewed each of the investment bankers, and then I present them to the client. The client will make the selection, and before it’s finalized we’ll negotiate the agreement with the investment banker.”
Andrew: “I had a friend who worked doing M&A for Fox. And essentially what I learned from talking to him was that often they would do research on a company by pretending to buy them out or by expressing interest in buying them out.”
Interviewee: “Mmm-hmm.”
Andrew: “And I don’t know if this was part of Fox’s strategy or part of this friend’s strategy, but that’s what I’ve heard. How often is that the case? What do we need to look for?”
Interviewee: “I am so glad you brought that up. About one out of ten times, I’m dealing with someone who says they’re interested in buying my client’s business, and they’re not at all interested. They’re interested in learning my client’s secrets, and they’re interested in going into the business without buying them. There was one professional sports lead recently that had looked at my client’s business and they said that they wanted to go ahead and enter into negotiations to purchase the business. But it just didn’t feel right—they weren’t giving off the right vibe. So we did some research and looked at their ancillary businesses that they had gone into in the past few years. All the ancillary businesses they had gone into had been organic, self created. They hadn’t purchased any of them. So their M.O. their modus of operandi was to go ahead, do the due diligence, do their research and set up their own businesses. We just discontinued negotiations. It was a perfect way to figure it out. And I’ve had that time and again. Sometimes you can tell just by the information they ask for. Because a normal purchaser will start more with, “What are your financials? What are your contracts? What is the stability and growth of your earnings? How can we make this more efficient if we buy you?” But some people who come in want to talk more about your processes and what makes you unique and how you’re different from your competitors. Some of them are much more focused on stealing your business ideas.”
Andrew: “So what do you do when you’re in that in-between spot, where they’re not just out there only to copy ideas, they sometimes buy companies, they’re not necessarily so gung-ho about your business that it’s a done deal from the day you start; somewhere in-between: if it doesn’t work out, then they’re gonna go out and take your ideas and build their business. If it does work out, then great. What do you do with a company like that, which I think is more common?
Interviewee: “I would deal with them as a last resort. If I could go ahead and get the investment bankers involved, and have ten companies initially interested, and have five of them submit offers, and we then do due diligence on those folks, I would only deal with the three that don’t present those issues. I wouldn’t deal with the ones that might just be stealing our information.”
Andrew: “Okay and actually, I wanna take back “Fox”. I’m not sure what the company was and I don’t wanna say unless I know 100% that it was them.”
Interviewee: “Sure.”
Andrew: “You know what I’ve noticed too? When you’re hiring employees, when your going in and when you’re talking to potential hires, they’ll often tell you the secrets that—they’ll tell you the company’s secrets that they’re working for. I’ve always thought, well, wouldn’t it be interesting to set up a potential hire just to learn about my competitors and what they’re doing. Is that legal if I say I’ve got a new sales job just to bring in all the local sales people from my competitors to find out how they’re doing business?”
Interviewee: “There are plenty of people that are doing that. And it can be illegal where the employee has an agreement that prohibits disclosure of that information, and you know that agreement exists or you should know that agreement exists.
40 to 45
Interviewee: Exist, because what you are then doing is encouraging them to break their confidentiality agreement with their employer and that’s interference with another party’s contract. So that is illegal.
Andrew: Okay, so then if we have employees we have got to let them know that they have got this confidentiality agreement, let them be clear with them that they can’t reveal information and do that early on because you never know when someone is going to go looking for another job.
Interviewee: Certainly, and respectable companies that are doing that will ask an employee right off the bat what agreements are you bound by, how are you limited, I don’t want any information that you are not allowed to give me because if you do give it to me I may be buying a loss down the road, I may not even want your ideas but if I go ahead and invent something they may think I got the information from you.
Andrew: Well, I hadn’t thought of that. What about this, a dead deal. I have talked to entrepreneurs who have gone through the process. Frankly, I have been there myself, you think the deal is going to go through, you think you are ready to go and celebrate on a beach somewhere, and the deal just gets yanked out, beyond the legal issues there, how do you pick yourself up or how do you Jack pick up an entrepreneur who has gone through that?
Interviewee: Well, it happens unfortunately with some regularity. If you can manage and to deal well as you go along it is less likely will occur. It occurs more in the situations where folks are in denial, where there are issues. I was involved in one deal where I was the legal adviser for the deal and I told the entire executive team, we have a significant regulatory issue, the prospective purchaser is very conservative, they are not going to want to buy this business once they get to this regulatory issue. The financial folks and the sales folks didn’t really want to hear it, they raced ahead because the numbers were good, the sales were good and they went 90% the way through the deal until they finally got around to the regulatory issues. The purchaser sent in a special regulatory counsel who met with me, I laid out all the regulatory issues, and sure enough within a day they killed the deal because they said we are just not going to take that risk on, it was in the financial services area which is an extremely highly regulated industry. So I would caution you if you know you have potential issues, get them out there upfront. Certainly you want to entice people so they spend some time on you, but don’t waste a lot of time when you know finding out that somebody’s level of risk is different from your level of risk. But once you got that dead deal, the most important thing that you can do as an adviser to that company or the participant at that company is to learn from him. When we had the Bob Show anecdote that I mentioned to you, we did a healthy thing. We said what went wrong. Well we didn’t have a strong executive team, it was just all of the Bob Show, and we didn’t have good accounting systems, and so the owner of the company having faced that failure said, okay I will invest in it, and he went ahead, learnt from this experience, he made the business better and that was a tremendous sale after that. We actually had an auction where people were competing to buy the company. So learn from your mistakes when you have a dead deal.
Andrew: On a personal level I found that entrepreneurs, CEOs are much more open with then lawyers often, not always, more open with their lawyers on the personal side of business than they would be with their fathers, with their spouses, with their employees, because there is a level of protection that you get from a lawyer that you don’t get from anyone else and as long as you are opening up about business it is easy to also sit back and say well what else is going on that I can’t admit to others, what do you see entrepreneurs go through that they may not talk about in public?
Interviewee: Well, it is a great question. It can be all different types of things, but one of the biggest things is a lot of entrepreneurs don’t really know what they are going to do with the rest of life. They are really lost without their business and sometimes what holds them back is that fear of the unknown, that uncertainty because they have been running this business, five, ten, twenty, thirty years sometimes and there is nothing else. The business is their life and there are some people who are afraid to sign a will because they think they’ll die the day they sign their will. That’s almost the way they feel about selling their business. It is the end of their life. And so I work with them on and I talk in the book about this as well, about building up their life, building up their identity outside the business, reconnecting with their spouses and friends. That’s an important part of the process because otherwise they feel like selling the business is committing suicide and do so much more to life and so much greater freedom in many sales you keep an interest in the business and they want you to work there for a while and in other case like once I am working on right now the gentleman I am working with wants nothing more than to begin chapter 2 of his life, he is in his late 50s.
Andrew: …He’s in his late fifties and he’s got one more business he wants to do. So having a positive outlook is very important for the folks that are very afraid of letting go. That’s one of the unique things that I do get out of those discussions.
Interviewee: When an entrepeneur, when a CEO, is in the doldrums, how do you help them get back up? Are you in a position where you need to do that, Jack? Do they come to you or am I just imagining that everyone talks with their lawyers the way I might with mine?
Andrew: The closer the relationship, certainly that occurs and many times I will get together with someone who is really in the doldrums and I think to an extent some of it is talking logically through the issues. Some of it is sharing the fact that they’re not alone, that this is a very common business experience and without sharing confidences of other businesses, what they’re dealing with is rampant. And then, third, some people really just do need the help of a professional psychologist that they can talk to and work through some issues. The truth of the matter is everybody carries a certain number of issues around with them and for many of us you need help in working through those issues. and i have found several companies that I have gotten involved in getting counseling to the senior people at the company its become a tremendous benefit to the entire executive team. Other people start participating in it. And I’ve been at companies where they’ll bring in psychologists just to help with interpersonal skills where the execs aren’t communicating effectively not getting along and they want to break down those barriers. You see companies and you see people refer to these silos within companies where you’ve got a vp that runs a department and you’ve got another vp that runs a dept and they don’t work together. well, a lot of that is mistrust, competition, fear, anger and if you can bring in competent psychological help for these folks you’re going to get everybody rolling in the right direction. And I’m a very strong advocate of that.
Andrew: Um, here’s a comment from Mickey D in the audience. He’s saying I never thought some of the most inspirational advice on Mixergy would come from a lawyer (and the founder of AppRabbit is saying the same thing. He agrees.) So how about two inspirational stories? One that’s a turnaround that you might tell to an entrepeneur who’s facing a big setback to help open his eyes to what could be and then the next one we’ll get to afterward. So do you have a story of an entrepenur that you work with or a business that you work with that was really struggling and then turned things around?
Andrew: Let me think a second here…yes. Yes. I remember client was working in an area where there was heavily regulated and the govt was coming down on their services considerably. and yet they had certain products in development and we had the whole boardroom together and they were sort of stuck and I said folks what we need to do here is very simple – I tend to think visually – what we have here is an h. In one bar is the current business that’s beleaguered but still generating a lot of revenue. The other bar is the future and that future is a lot of good, new products, but they aren’t producing new revenue yet. They’re in development. What we need is a bridge to the future and that’s where the bar in the h came into effect. And so I said you need to drain as much revenue from the first bar so you can sustain and develop the future. And the bridge to the future is going to be that bar in the middle, is going to be reducing your staff in a humane way to cut your overhead, reducing the legal disputes and settling the legal disputes with the regulatory authorities as efficiently as possible, managing your cash as best you that can so you can cross over to that new line of products. That was about 4 years ago and it worked. They’re thriving now. They’re doing wonderfully. They shifted from an area of financial services that the U.S Senate and other areas was attacking fairly consistently to a new area where in fact they went and lobbied a number of different states to pass laws that enabled them to clearly be able to do the business and it worked very well. I’m friends with the owner, just met with him and he can’t see a brighter future.
Interviewer: Okay, the second inspirational story that I’m going to ask for is – what happens afterwards? What happens after the sale? We’re working so hard to launch a business, dealing with so many complications along the way…we talked about the feeling of loss that an entrepenur might have after he’s sold, but there’s also a good life that comes at the end of it. can you tell us the story of
somebody who went through all that and then ended up at,..well, you tell us where. What was it like?
Interviewee: … and people are, very honestly, people are dealing with them with varying degrees of success. I’ve got one guy, who sold probably a little too early, ok? And he netted what he thought would be enough money to survive, and in fact, it wasn’t enough. And he also misses all the creativity and control and fulfillment he got on a day to day basis. So he’s ready to dive back in. It didn’t work. He got just the bare minimum amount of money that he would need, and in my opinion, should have waited two more years. Two more years of ramping up revenues, attached the right multiple to that [unintelligible], and he would have gotten a much better sales price, but he was eager to get out. He wanted to hit the market at a certain time. I’ve got another gentleman… he went ahead, and I would say, he prepared for a number of years before the sale with a very strong relationship. He worked with his wife, a husband and wife team. He’s got a large family. He has a lot of interests… hunting, boating. He had built his own house, and he’s one of those guys who has found peace being with his family, enjoying the growth of his kids, traveling the world. I’m trying to think… there was another story that flashed into my mind. Ahh yes! This was a very successful business. This business, the owner of the company sold his company for a little over 150 million dollars. He gave 40 million dollars to his employees, pursuant to a unit appreciation rights program, where based on their performance and longevity with the company, they got various types of bonuses. They went from about 10,000 dollars up to 5 million dollars for a guy who had been with him since he was in a little warehouse 20 years earlier. Now this gentleman, I helped him with a number of investments once he sold the company, and he’s actually in Mexico right now working with various charitable organizations and helping them with farming and agriculture and building schools and building medical centers. And, because he can’t get the urge out of his system, he’s also started some for-profit businesses down there as well. I think he’s going to be exporting certain meat and furs up to the U.S., so he’s doing it all. So there’s your three examples. I think it’s very important that success not be merely measured in dollars… that people really have to think as they’re approaching the sale of their company where they’re going to find fulfillment.
Andrew: Alright, finally, entrepreneurs are listening to this right now. I don’t know what they’re doing… running, cycling, taking a drive cross country, on a flight… is there one bit of advice that you can leave them with? One thing that in all your experience you wish you could pass on to people in business?
Interviewee: Absolutely. When you’re running a business, especially your first business, you’re gonna make mistakes and there’s things you don’t know. And that’s why I wrote the book, because you can learn from the successes and failures of others. This book, “How to Build a Business and Sell for Millions,” it’s like a time machine. It’s how you can change your future. It’s all about saying, “this is what other companies did right, this is what other companies did wrong, and I can avoid a lot of heartache and achieve a lot of success if I follow this.” It was written from the trenches. I was in the room when people made decisions that led to success or led to failure, and I made notes and it became the book. And there’s other great books out there as well, but the essential point is you don’t have to make every decision with the limited set of knowledge you have. You can reach further.
Andrew: Alright, and you very generously have given us three copies of the book. I know Jang [sp?] is giving one away to somebody who tweets about you and this interview on Twitter and another one to somebody who’s coming to a live event and she might end up holding onto the third one because she liked the book so much and I don’t think I could get it away from her.
[Laughter]
Andrew: So thank you for being so generous with the books. Thank you for being so generous with the time, and for sticking with me in the beginning when I was pushing on skepticism. I especially appreciate the response you gave me before the interview when I said, “I’m gonna ask some skeptical questions.” You said, “Alright, he’s going for it.”
Interviewee: That’s great. No, it’s my pleasure. I’d love to be back, and if you need more books, let me know.
Andrew: Absolutely. Thank you. You’ve already been very generous and I’d love to have you back on.
Interviewee: Great.
Andrew: Alright and thank you guys all for watching. I’m Andrew. I’ll see you in the comments.
