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CEO's Regret #1: Being Distracted by a Buyout Proposal

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Behind every successful CEO probably lurks at least one major regret. The best, or the luckiest, CEOs learn from their mistakes and get an opportunity to rectify them. But as we learned from the stories that company founders shared with us, even the ones who get a second chance can still feel the repercussions from their moves for years afterward. And the lessons they gleaned stay with them and influence their business decisions in sometimes surprising ways.

Regret 1: Being distracted by a buyout proposal

Company: SmartDM (#127 on the 2000 Inc. 500), in Nashville
Business: Direct marketing on- and offline
CEO: Richard Maradik

"It was a classic story," says Richard Maradik. "It was a great offer. We were strapped for cash." In 1997 the direct marketing company that Maradik and his partner, Jay Graves, had started was only two years old. It had just $1.8 million in sales and 10 employees, but already a large multinational company had come along, eager to take a large equity stake in the young business. The suitors promised growth capital, a guarantee of a working line of credit at the bank, and other much needed financial support.

The partners, exhausted after two years of 15-hour days and an uncertain future, were ecstatic. "I think every entrepreneur is lying if they say they're not working toward an exit," says Maradik. "We jumped at the term sheet." That's also when they began taking their eyes off the ball, he adds.

Caught up in the impending merger, "we began to assume we were part of them," recalls Maradik. He and Graves attended corporate meetings and began to ready their systems for integration with those of the acquirer. They also went over the financials with the suitor's executives. "We spent a lot of time looking at the books," says Maradik, "but not at the business."

As the merger talks dragged on, the partners began to neglect their core business. "We ignored sales, we ignored margin, we ignored cash flow -- because we assumed the deal would go through," says Maradik. "We spent too much time working on the deal we thought was going to happen. It almost killed us."

Before the partners knew it, they were in the hole for almost $200,000 and were having difficulty making payroll. At the 11th hour, when Maradik and Graves thought they were about to sign on the dotted line, the suitor changed the terms of the agreement. Suddenly, Maradik says, "they wanted to buy us out entirely. We'd be just employees. We were in a weakened position. They knew it. We knew it. We had two choices -- we could fight or we could cave."

The two men took a deep breath, rejected the offer, and went back to the drawing board. They tapped their already drawn-down savings accounts and took no salaries for six months. This time around they were determined to do things right. "Exercising all my humility," Maradik says, "I'll admit we were running the business wrong," even before the brush with the acquirer. He was 25 when he started the company; his partner was 23. "We didn't really know anything about P& Ls, cash management, balance sheets," says Maradik. "We didn't know how a valuation was done."

After their near-death experience, "we gained a healthy respect for the numbers," he says. "We put in internal controls and clearer goals to profitability. We're always monitoring our numbers to spot trouble."

Clearly, the partners are doing something right now. This year the company, which has branch offices in Atlanta and Las Vegas and employs some 40 people, will have revenues of more than $9 million. And Maradik and Graves have raised $5 million in venture capital and are on the cusp of a second round of financing.

"We really learned what drives the value of the company," says Maradik. "It was a bittersweet lesson."

Copyright © 2000 G+J USA Publishing


More regrets from this year's Inc. 500 CEOs:

CEO's Regret #2: Not Seeking Financing Sooner
CEO's Regret #3: Not Trying to Go Public Sooner
CEO's Regret #4: Not Going to College
CEO's Regret #5: Hiring the Wrong Executive
CEO's Regret #6: Not Hiring an In-House Recruiter
CEO's Regret #7: Charging Too Little for Too Long




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