There were no loading docks, no forklifts, and just one computer, used for accounting but not inventory. Downstairs, workers were rebuilding starters and alternators; upstairs, they were rebuilding engines. There were no supervisors on either floor. How many starters and alternators do you expect the mechanics to rebuild every day? Carmell asked. Taich didn't know.
At the retail counter, salesmen used phones without hold buttons. After taking a call, they'd place the phone on the countertop and madly rifle through several catalogs, none arranged alphabetically.
What a total mess, Carmell thought. Inefficient, underutilized, mismanaged. He couldn't believe what he was seeing.
It was perfect. Carmell didn't need to buy an efficient company; he was confident he could build one himself. What he needed were the materials. And Consumers offered just the right building blocks.
He saw, for instance, a blue-chip list of customers, including bus companies and car-rental agencies. And the Taiches had built up a loyal cadre of suppliers who offered them generous terms on everything from paint to sweeping compound. Then there were considerable assets: around 25 vehicles; expensive machinery; and more than $1.5 million worth of inventory.
But perhaps the most enticing asset of all was the two acres on which Albert Taich had launched Consumers so many years before. Lately, developers had begun to refurbish the area's brownstones. Says Carmell, "I figured I could practically pay off any debt by selling the real estate."
Some of the wastefulness wasn't tough to spot. Eight family members were divvying up about $500,000 in annual salaries, plus company cars, club memberships -- even toilet paper. They must have gotten a great deal on that last item, because they stored 30 cases of it in the basement for their personal use.
Still, Consumers was posting a profit of about $300,000 a year on sales of as high as $12 million in the early '80s, Taich claimed. The numbers sounded fishy, Carmell thought, but he couldn't dispute that the building blocks existed. Helped by his lawyer, David Fischer, Carmell had little trouble recruiting a bank to finance the deal, which was highly leveraged, at a debt-to-equity ratio of about 5:1.
Carmell moved fast. "On a deal this size," he says, "you just can't spend $200,000 on due diligence." He wasn't about to retrace the path of every invoice Consumers had received in the past three years. The bank tested a handful of receivables and payables. Since only some of the financial and none of the inventory records were computerized, it was hard to tell if, say, proper credit had been issued for a returned part. But Carmell hired an accountant to comb through tax returns, income statements, and balance sheets from the previous three years. He later brought in experts to assess the value of the inventory.
Soon, Carmell and Freddy were haggling over a price. Around October, just when they were nearing an accord, Carmell got a call from his mother-in-law. Have you seen the papers? she asked. He hadn't. She began reading a news story aloud. The article concerned a special investigation that the FBI was conducting into a U.S. Department of Housing official accused of misusing government money. Some invoices had been found, including a few from Consumers Tire. The company, it appeared, had repaired some transmissions. Carmell thanked her and called Fischer. He repeated the story.
Carmell and Fischer knew something was wrong. Consumers didn't repair transmissions.
The next day, the two of them confronted Taich. A harmless bribe, he called it, necessary to get the city to pay its bill to Consumers.
But Carmell complained that he "didn't feel comfortable" doing the deal anymore. What if this is a smoking gun? he asked Fischer. What if Taich is bribing every customer? We've got to call it off.
Disappointed, Carmell spent two days stewing. He was especially angry about the money he had spent on due diligence. "It's hard to spend $50,000 and then not have anything to show for it," he says.
Over the next few months, Carmell urged Fischer to look into suing the Taiches to recover that money. During a talk with their lawyer, Fischer asked whether the Taiches were interested in reviving the deal at a lower price. They were. By this time, nearly three months had passed since negotiations had collapsed, and Carmell had cooled down enough to listen.
These negotiations proceeded in slow motion. The Taiches agreed to lower the asking price. In addition, almost 25% of the final price would be held in escrow in case the feds discovered any more graft. Carmell formed a company to purchase selected assets rather than buying the company's stock outright. That way, he didn't inherit any legal liabilities.
An air of suspicion hung over their haggling. Not surprisingly, their hottest debates surrounded Carmell's insistence on a tight "morals clause," defining exactly what kinds of gifts and payments would cause the price to be lowered. Will it be a violation if we put a customer's tires on at cost? Freddy asked. What if I let my mechanic work on a friend's car for free?
But on April 6, 1986, Freddy Taich gathered all his employees. He reminisced about the company that had been in the Taich family for 58 years. Then he told his workers what many suspected: he'd sold the company.
