When David Carmell bought Consumers Tire, the company's biggest liability was one that never showed up in the financials
No greater fear hath any company buyer than the fear of skeletons lurking in unseen closets. Lawsuits that haven't yet been filed. Hazardous wastes that haven't yet been found. David Carmell thought he'd checked out Consumers Tire pretty thoroughly before he bought it, but there were some company secrets he didn't find out -- until it was almost too late. -- J. H.* * *
You couldn't escape the tires. They were everywhere. Musty, dirty tires, stacked half a dozen high in the hallway outside the chief executive's office. New, smelly tires lining the corridors, piled up in corner rooms upstairs, crammed into dank basement space below. If the sight didn't stay with you, the stench of new rubber did.
"We had to fumigate our clothes," says Ellen Carmell. "That company was the filthiest, most disgusting place you've ever seen."
Not that her husband appeared to mind. David Carmell was standing knee-deep in tires, but he was seeing resources -- granted, malodorous ones -- that needed "to be efficiently consolidated." Dressed in his uniform of gray pants and a white shirt, Carmell was an efficiency nut on a challenging mission. At 29, he had bought Consumers Tire & Supply Co., based in Chicago. As of this day, April 7, 1986, Carmell was running a $6-million company. It was only the second company he'd worked for since graduating from law school.
Since his college days, Carmell had always considered himself "a good conceptualizer, not a real stickler for details." So he wasn't about to let a few stray tires obstruct his view of the company's future. He planned to catapult the 60-year-old company into the modern age, installing computers and retraining workers. Then he would roll through the fleet-maintenance industry like an 18-wheeler, flattening the regional companies and creating a national powerhouse.
That's what he had assured his investors and his banker. That's the vision that helped sustain him during those first few weeks, when, from 6:00 a.m. to 8:00 p.m., he lugged tires around the building. "I learned from the start that this is not a coat-and-tie kind of business," he says.
But soon enough, he did have some other hallmarks of a chief executive. He cleared a space for his office and put a desk inside. On the desk he placed a picture of his wife and daughter. Leaning back in his chair, Carmell soon began to feel like a real CEO.
One afternoon, Carmell picked up the phone to hear a manager's voice on the other end. Is there a problem? he asked.
Well, said Haywood Foster, there are a couple of guys down here who say they need to talk to you. He hesitated for a second; he knew there was no way to prepare his boss for what was coming.
David, he added, they're from the FBI.* * *
"Whenever you buy a company," says David Carmell, "you never know exactly how the previous owners ran the business. You can miss a lot."
Not that Carmell was -- or is -- an expert at buying companies. He ended up in business purely by accident. In 1981, Carmell was in his third year of law school when he happened to meet Robert Cohn, chairman of CFS Continental Inc., a $2-billion food-services distributor. Cohn hired Carmell as his assistant.
When CFS Continental was acquired in 1985, Carmell decided to strike out on his own. After cashing in his stock options, he lined up eight investors, most of whom he knew from a local club. Carmell visited many distribution businesses, everything from glass to baseball gloves.
He first saw Consumers in 1985. From the start, owner Freddy Taich struck him as the sort of fellow you wouldn't mind having for a neighbor. Though his family had always owned Consumers, Taich dressed in the standard brown smock, with his name stitched over the breast pocket.
As the two of them toured Consumers' five buildings, Taich recounted how his father had founded the business back in 1928. Albert Taich began by selling tires to local truckers who were dropping off goods at nearby meat and fruit markets. Later, he added a parts division.
Taich had been running the company since the early 1980s. He had grown the business, he told Carmell, by bidding for more contracts with the city, servicing police cruisers, buses, and garbage trucks, among others. Now, nearly 60, he found himself with no choice but to sell out. Neither his children nor his brother's were "capable of succeeding me," he said. He wanted to get his money out rather than watch them run it into the ground.
That wasn't Taich's only source of disillusionment. He had also decided that competing for city business just wasn't worth it. We're having to wait as long as nine months to get paid, he complained. Taich decided to cut out that business and sacrifice $6 million, about half the annual sales. "It sounded strange," says Carmell. "I figured maybe there was some politics going on."
Still, Taich assured Carmell that Consumers could remain healthy by servicing the private sector. Carmell remembers Taich's exact phrase. "This business," he said, "has been very good to me."
From what Carmell could see, Taich had not been very good to the business. The company looked like a subway station at rush hour: harried people running every which way. The tires and parts businesses were run separately, with different warehouses, showrooms, and trucks. Why not combine the two? Carmell asked. Taich shrugged. The separation, Carmell later learned, resulted from tensions between Taich and his father. That contained more logic than the Taiches' approach to warehousing. They used storage space on three floors, so employees were constantly bounding up and down the steps. On the shelves, different manufacturers' lines were intermingled and parts were duplicated. Carmell didn't know much about cars, but he noticed that oil filters were kept upstairs in the back. Why keep such fast-movers in such an inconvenient place? Always have, replied Taich.
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.
As he looked around the room, tears rolled down his cheeks. "That was a sad day for this company," says shop manager Jack Brownlow. "A very, very sad day."* * *
Two days later, Carmell stood in almost exactly the same spot. Taich had agreed to stay on for three months to ease the transition.
Carmell talked a bit about his goals for making the company more efficient. We're too bogged down by paperwork, he told them; we need computers. He also introduced David Borovsky, Consumers' new vice-president. Borovsky, Carmell's 24-year-old brother-in-law, had been an associate consultant at the firm of Bain & Co.
Carmell also issued a warning that "bribery of any kind will not be tolerated." He followed that up by indulging in a bit of symbolism. He drove his wife's car in for a set of new tires. How should we handle this? asked the counter salesman. I'll pay for it with my Visa card, declared Carmell, and bill me at the full retail price.
Making his way through Consumers, Carmell hacked away at waste. Aside from rearranging the inventory and consolidating the showrooms, Carmell focused on personnel as the fastest way to cut costs. The day before buying the company, he laid off 27 people. In a little more than a year, he reduced the work force from 58 to 20.
He worked hard to root out inefficiencies. He asked all 15 drivers, for instance, to list their stops for a day. To his dismay, he found that some of them were stopping at the same place as many as seven times a day. Customers would watch in amazement as two different Consumers trucks -- one from tires, the other from parts -- pulled into the parking lot within minutes.
Carmell cringed; it cost about $50 to process every purchase order, not to mention the labor and truck-maintenance costs. So he made up a schedule for each driver and drove the routes himself to prove they were doable. That enabled him to whittle down the number of drivers from 15 to 7, and eventually to 3. He shrunk Consumers' fleet from about 25 vehicles to 8, saving at least $50,000 a year. But Carmell couldn't escape reminders of the previous ownership.
He could hear Taich on the phone, talking to customers. "Don't worry," he'd assure them. "Consumers will do business exactly the way we did before." That bothered Carmell. Then there were Freddy's suggestions after the two of them had visited a customer. If I were you, he'd tell Carmell, I'd send a box of steaks to this guy.
Carmell ignored Taich's comments. After three weeks, Taich asked if he could be let out of his contract. I don't feel comfortable around here anymore, he complained. He would have felt even less comfortable had he stayed around a few weeks to greet those visitors from the FBI.
When Carmell heard they were downstairs, he drew a deep breath. Luckily, he knew what to expect; his father, a labor-union lawyer, had dealt with the FBI often over the years. Just answer their questions, he told himself.
The two agents followed Carmell back up to his office. We want to make it clear, one said, that you are not personally under investigation. Their probe into city purchasing practices was continuing. Had he found anything unusual in the records? Had employees told him anything suspicious?
In June 1986, two months after taking over, Carmell received a subpoena for certain company records. "I started thinking, 'This thing -- whatever it is -- could break wide open,' " he says. "I wanted to get this place turned around, so if the you-know-what hit the fan, we'd be prepared for it."
Carmell worked fast. He lopped off unprofitable business segments, such as recapping and wholesaling tires. But he wasn't just Conan the Destroyer. He had Borovsky replace the company's arcane leased phone system with a modern $20,000 system. Carmell inaugurated an employee-retraining program so, say, a paint-mixer learned to change tires. He also visited as many as 40 customers a week, asking: How can we serve you better?
But with every layer of the company he peeled away, he seemed to uncover another soft spot of rot.
While investigating the sales staff, for example, Carmell was told that a salesman who was earning about $60,000 a year was offering "5% spiffs," or kickbacks. Just then, that salesman entered the hospital with a heart ailment that he blamed on Carmell. He recovered but left Consumers soon after. Carmell didn't find evidence against any other salesman.
Some corrupt employees got caught red-handed. One afternoon, a supervisor was rummaging through some trash hunting for a document he had misplaced. He spotted a pile of official-looking forms that had been ripped into pieces. It turned out an employee had been tearing up bids and was also feeding information about Consumers' sourcing and pricing to a rival. Carmell had the employee fired the next morning.
Carmell uncovered some other damaging documents. One day, he was sifting through old invoices when he stumbled upon an unfamiliar folder. Here were purchase orders, with notes attached to them: "35mm camera," one said. Another had "VCR" scrawled on it. There were notes regarding coffeepots, gift certificates, turkeys, and booze. Perhaps the Taiches had bought some of these items at cost and given their customers a break. Not likely, but Carmell looked for corresponding checks. He found none.
Carmell's finding helped explain a pattern he and Borovsky couldn't understand. Consumers' products and services had not changed one whit in the first few months. Nevertheless, many of the company's customers slipped away. "We made no conscious effort to weed out customers, yet a fairly large number of them disappeared," says Borovsky. Did Fred's leaving signal something to them? "I just couldn't get an explanation for it," Borovsky says.
Carmell's first Consumers Christmas fell short of merry. The bottom line was redder than Rudolph's nose; Carmell realized he might be staring at "a good-size six-figure loss" by the end of 1986. He had already cut the work force by more than half. But customers were starting to sound a common chord, and they weren't caroling. They'd start by reminiscing about the old days. Hey, they'd interject, am I going to get a TV this year? Boy, cracked another, I sure could use a new set of tires.
Carmell treated them as jokes. "They'd laugh," he says, "so I'd laugh with them." When all the chuckling stopped, though, they dropped their money elsewhere. A customer who spent $9,000 per month decided $1,500 would be enough. Some customers stopped ordering.
At the end of 1986, sales stood at about $5 million, down 25% from the year before. The company was "very unprofitable," says Carmell. "It was becoming painfully clear," adds Borovsky, "that the only reason a lot of people bought from Consumers was the gifts." What could Carmell do? "First, I was asking, 'Is it only one incident?' then 'Is it just city customers?' " he says. "Finally, I realized that only the former owners knew where the bodies were buried."
Still, Carmell and Borovsky plowed onward. Instinctively, perhaps, they were fortifying the company to survive the showdown with its ugly past.
In January 1987, Carmell hired an accountant to help generate accurate financial statements. Borovsky set about computerizing the business, using a new $100,000 system. In the fall, Carmell continued paring down the company, closing on Saturdays and cutting out truck repairs.
Then "everything suddenly started falling into place," Carmell recalls. The cost cutting was kicking in; he had saved a total of about $1 million, for instance, in payroll costs. "I now knew who my clean customers were," he says. And he worked hard to win more business from them.
Carmell continued talking to visitors from the FBI and checked in with the U.S. Attorney's office periodically. Remember, he would say, we're not tied to the past.
Maybe not, but the past was close behind. That October, David Carmell felt the first approaching footsteps. After a World Series game, a local TV station aired a report about the ongoing investigation. The reporter mentioned Consumers. Carmell heard the words "politically connected" and "clout-heavy." He heard no mention of a new management.
Carmell was furious. What if some of his investors had been watching? What would he tell them? What about his customers?
He picked up the phone and threatened the TV station with a libel suit. "You gave the impression that the company is still doing business that way," he shouted at the news director. "It was inexcusable, sloppy gutter journalism." He got a public apology.
Carmell started to feel strong. Though the TV broadcast cost it some business, Consumers came through fine; it was turning the corner toward its first profitable year under his management. Some big contracts were pending. "Our costs were in line," he says. I felt we could survive anything." The past couldn't touch him now.
Or so he thought.* * *
When the call came, Carmell was in the warehouse.
Mr. Carmell, the woman said, I'm from the U.S. Attorney's office. He braced himself. Tomorrow, she said, the government will go before a grand jury to ask for an indictment against Fred Taich. Anton R. Valukas, the U.S. attorney for the northern district of Illinois, will hold a press conference.
Carmell had just a few hours to prepare an offensive against whatever was coming. Months earlier, he had vetoed the costly idea of hiring a public-relations firm. So he ran for the phone and called the two local newspapers, the four major TV stations, and the news-radio station. I hear that the previous owners of Consumers Tire & Supply are likely to be indicted tomorrow, he said, and I want you to make it clear that the company is under new management. Carmell had kept major customers abreast of the FBI's inquiry. Now, he alerted as many as he could of the impending indictment.
That night, he assigned relatives to watch -- and videotape -- different news shows as well as scan newspapers. His aim: to make sure all accounts acknowledged that the company was under new management. Borovsky, for one, couldn't help but feel angry. "Here we were, a couple of young guys working our asses off," he says. "Just when we had it turned around, we were going to get slapped in the face."
The story broke fast. Valukas announced the indictments around noon. Along with 15 others, Fred Taich and his son, Arthur, were charged with federal bribery-related counts. Between 1982 and 1986, the indictment charged, they had received more than $2 million in city business by giving away more gifts than the average "Wheel of Fortune" broadcast: tires, auto repairs, radar scanners, water heaters, shop tools, sporting equipment, luggage, jewelry, vacations to Europe and the Bahamas -- gifts worth more than $85,000. One official received $62,500 over a year and a half. "The form of payment varied depending on the city official," says Pierre Talbert, an assistant U.S. attorney.
Fred Taich often bribed an official, then recovered the bribe by submitting false invoices. Usually, in fact, he recovered the bribe plus 45% to 100% more. To help finance the payoffs, Taich also skimmed around $25,000 a year off of cash receipts.
Now, Carmell and Borovsky understood how the Taiches made money despite the company's inefficiencies. "The only way they were able to keep Consumers running was by under-the-table relationships," says Borovsky. In fact, Fred Taich had not decided to pull out of city business, as he'd told Carmell in 1985. With federal investigators on his trail, the city had canceled all its contracts with Consumers. "Hearing this," says Carmell, "the Taiches did not become my favorite people."
But Carmell's mission wasn't to resurrect their reputation. He just couldn't let them drag his reputation down with them. At 30, he did not want any future prospects jeopardized. "Especially," he adds, "when we had done such a good job."
Within an hour of the press conference, "every camera crew in the city was crawling around here," Carmell says. The phones were ringing for him. I know you have a story to run, he would tell the reporters, just remember that the indictments have nothing to do with us.
Then he grabbed his blue blazer and ran downstairs to face the camera crews. Many of them focused their lenses on the building. "For heaven's sake," Carmell pleaded, "film the sign, not the building" -- beneath the sign, he had plastered a message: under new ownership since 1986. They ignored him. "Film the sign," he yelled, "or I'll sue you." No reaction. "Please," he begged, "our company's fate is at stake." Nothing.
Downstairs, the counter salesmen were taking phone calls from customers. Hey, what kind of cigarettes do you want me to bring you in prison? they'd ask. Walk-in business slowed to a crawl. "With the TV cameras, people did not want to come down here," says Foster.
Carmell called each of his investors. The heck with banners, some said, why don't you change the company name? But Carmell didn't want to; it would cost money and might look as if he were running scared.
The stigma didn't stop when he went home. "Even people who really knew us were calling to ask, 'You weren't involved with that, were you?' or 'That's not David's company, is it?' " recalls Ellen Carmell. She had been filling out an application to send their daughter to private school. Now, she dreaded going through with it. "I worried that they'd pick it up and say, 'Oh, them. They're crooks.' "
Borovsky, who just months earlier had dreamed of going public someday, couldn't stand going out in public now. "I dreaded telling people what I did," he says. "They would associate my name with corruption." One salesman refused to go on his calls. I'm embarrassed to be associated with Consumers, he said. That angered Carmell. "In adversity, you find out what people's true colors are," he says. The salesman soon quit.
Employees complained most about receiving visitors from the FBI. The agents would wait for them at night, or invite themselves in for coffee and questions.
By the end of the week, Consumers was about as busy as a breakdown lane. Foster started calling up some of the customers who came in regularly. "They'd say, 'Hey, I saw you guys on the news,' then they'd laugh and hang up," he recalls. He called some of the purchasing agents at big companies. Look, they'd say, we've decided to spread our business around. Click. Sorry, I've been told not to buy from Consumers anymore. Click. "After a while," says Foster, "all we could do was sit by and see what would happen."
What they saw was a 20% drop in business at the end of two weeks. Two big contracts, worth about $1 million, were suddenly on hold. Carmell was worried. "The smaller accounts wanted to get as far away from us as possible," he says. But he had gotten to many of the bigger customers before the news hit. In the weeks that followed, he prevailed upon them to increase their business. I've been honest with you, he pleaded. Let us supply your wiper blades, not just your belts and hoses.
Slowly, the numbers stabilized, then crept upward. Carmell won't reveal exact figures, but he says 1987 revenues were about $400,000 above the year before. Consumers was, he says, "pretty profitable" -- despite a sizable writedown on inventory.
In May, Fred Taich, who cooperated with federal investigators, was sentenced to two years in prison and ordered to pay $131,000 in restitution. His son received four months on a work-release program. Carmell was free to focus on the future.
For a month, anyway. In June, he got word of another indictment. A trucking-parts firm nearby. The press hauled out the photos, and reporters started talking about Consumers again. "It's as if every story about corruption has to include a mention of Consumers," Carmell grumbles.
With every subsequent indictment that results from the ongoing investigation, Consumers fields calls from about four big customers. They all ask one basic question: Were you involved in this? Competitors seize the day to try to steal customers, claiming that Consumers is still corrupt.
Sometimes, Carmell says, he wishes he had changed the company name. Or maybe he should have sued the Taiches for, say, fraud. "That would have been a long ordeal," he notes. "We'd drag the name through even more.
"People ask me, 'What kind of idiot gets involved in something like this?' " says Carmell. "But I think there's a lot of this stuff going on at companies. A lot of companies don't want to know about it.
"I know about it here now, and I have overcome it," he adds. "They still don't know when it will catch up to them. But it will. Sooner or later, it will."