Why should we want to join CML Group and not someone larger and better known? the owners asked cautiously. "Because," Leighton launched into the familiar spiel, "most acquired companies don't have original owners -- but ours do. When larger corporations acquire companies, they say, this is the way we do it, and we want you to do it the same way. You say, damn it, I don't believe in your way; they say, sorry. So you lose the sense that it's your company."
Furthermore, Leighton's standard argument goes, much of a company's worth in the market is predicated on the reputation of its founder, and if he disappears, so might a good price. "With us," he persisted, "you can salt away some equity for your family, and retain the excitement of running the company, and the freedom and self-respect you get as founder. Besides," Leighton continued over the tuna, "it would give you a chance to take vacations once in awhile."
After he departed, the Paulses contacted other founder-sellers to see what they had to advise -- would they do it over again? Well, one subsidiary CEO reported, CML holds meetings four times a year in which all the presidents get together, and each explains the way he does things -- strategic planning, time management, selecting retail locations, employee benefits, directmail techniques. "But," the Paulses were told, "the important thing is, you don't have to do it that way."
Leighton and Tod had studied the Paulses' machine and its patents scrupulously, and toured the plant where it is made. It's a hallmark of CML, though -- and a potentially disastrous one -- that they don't comb the books with such scrutiny. "You can read more about a balance sheet and P&L by meeting the owners," Leighton says, as innocent as a saint. "We take it for granted that the rough numbers they've shown us are correct." Only well after a deal is signed and sealed does CML corporate go through the financials. The reason is so that "the employees don't get nervous over strangers coming in to count the typewriters." In fact, Leighton claims, no employee in any of its acquisitions has had any idea that the business was even on the block, and CML has yet to be stung by a seller's misrepresentation. True to form, Leighton apparently felt comfortable enough after meeting the Paulses that, waiving audit and due diligence, he called them back and said he'd like to make an offer.
The foundation of CML's acquisition program is laying out, before a company is bought, what is going to be done after it's bought. So when Leighton flew in for the next meeting, he brought three typewritten pages summing up the proposed transaction. One spelled out the operating relationships among the people, specifying what the corporate chemistry would be like "so there would be no surprises and we all understand what it says." Ed Pauls, for example, would stay on as executive officer, and an advisory board would be set up on which would serve the two Paulses, Leighton, Tod, and anyone else the owners recommended. The second page set out the components of CML's financial offer. The third contained the fiscal arrangements that the parties would make after the agreement was signed. NordicTrack would use CML's auditor, and even if it was almost impossible to fall off the contraption and break a leg, they would have to show enough liability insurance to protect CML's bank loans. Local accountants would have to be dismissed. If NordicTrack's controller proved unseasoned, they'd have to get a more sophisticated one. Along with all the other subsidiaries, NordicTrack would conform to CML's financial controls, which utilize a zero-cash-flow arrangement in which excess cash is swept from everybody's bank account at the end of each business day and placed in CML's, where it can be redirected as needed. Each subsidiary gives CML its cash uses daily, and its balance sheet and P&L monthly.
Little else in a CML arrangement is standardized: NordicTrack could keep its current benefits package, for instance. And if CML provides corporate staff assistance, there would be no charge back to the individual company. "There's nothing worse than after you join us we send someone out to help with your insurance, and all of a sudden you have to pay plane fare and salary," Leighton explained. Corporate, too, gains an advantage: by not charging the subsidiary, proffered assistance tends to get accepted more readily.
The Paulses owned the NordicTrack building; CML would agree to lease it, but wanted an option to buy later. Could they retain some space upstairs that the family used? Fine, until the space was needed for production.They had a company plane on the books. If you use it for business, you can keep it there. There was a son who was an engineer -- could he get an employment contract, too? "Well, it's wonderful to have the whole family wanting to continue on."
To spare the acquiree the bulk of the legal fees, CML has its own lawyers write up the paperwork. Leighton insists that they bend over backward to be fair. "Every time we write an agreement, we read it as if we were they. We don't tell them when they have to come to work, what their vacation time should be. They're successful people, and we understand where they're going, so we don't like legal agreements that demand if they sneeze, they get beaten." To that end, CML scraps contract boilerplate by the pound. "When someone joins us, for them it's the only time. They haven't read 55 purchase agreements like we have, and they don't know those phrases are standard language. They might find it offensive."
