Buying a Business
A few business brokers, a retiring founder, a little due diligence. How tough could it be?
Dear Inc. , I'm close to buying a company after an often frustrating several months of searching. I have to believe that a fair number of your readers also want to buy a small company and -- like me -- have no idea of the emotional roller coaster that lies ahead. I've kept a very thorough log as I've gone through this arduous process, and I'd love to tell others about the experience my family and I went through. -- H.F.C.N.* * *
The Business Opportunities section of The Washington Post was spread out before me on the dining room table last March. I'd never looked at it before and was amazed at the dozens, no, hundreds of businesses for sale. Bars and restaurants. Print shops. Beauty parlors. Liquor stores. Car-repair shops. Dry cleaners. Quick-lube franchises.
Somewhere in this sea of tiny black type was The One. My wife, Judi, was playing with our two daughters in the family room so I could have a few quiet minutes ("Hush, dear, Daddy's trying to find a business to buy").
I began wading through the ads slowly, one by one.
ANSWERING/beeper srvc -- Growing bus. w/no real competition. Serving Warrenton/Culpepper. Asking $90K DP. Owner financing. 893-5511. Griffin-Fitzgerald & Assoc.
ANTIQUE RESTORATION -- Family bus. Silver Spring. Est. 30 yrs. Best clients, 4 empl., $175,000. Gross $218,000. Profit $100,000. 585-6490.
AUTO BODY/PAINT -- Prince William County. All new equip., large facility, long lease. Asking $375K w/terms. MVBB 823-0800.
And on and on. I had absolutely no idea what I was looking for -- but I'll know it when I see it. Certain names and/or phone numbers kept popping up. These must be the brokers or agents for the owners. I'd never spoken to a business broker, never known anyone who was a business broker; in fact, I didn't know anyone who knew anyone who was a business broker. What kind of world did they live in that I, a sophisticated, Ivy League-educated 37-year-old, had never encountered one? How did you talk to them? How did you get them to take you seriously?
I imagined thousands of people like me eagerly reading the Post, looking for exactly the same kind of business -- my business -- and hitting the telephone at 9:00:01 on Monday morning to try to take it away from me. Like hell they would.
With a yellow highlighter I noted all the names or phone numbers that appeared more than twice. I wrote up a little spiel and read it out loud a few times. I felt myself starting to get ready as if for a big game or a big meeting.
How had it come to this?
I had resigned from my job the first week in January 1989 and stayed on until March 1. If "resigned" suggests that it was entirely my doing, that's not a fair characterization. But at least the parting was civil. My severance pay ran through the end of September. If I couldn't find anything to do by then . . . well, that was inconceivable (remember I said that).
There wasn't a particular moment when I decided to buy a small business. I simply got more and more comfortable with the idea over a period of several months. I had started my first business (a regional magazine) along with my college roommate when I was 24 -- we ended up being taken over five years later. I started a magazine for someone else. I had run a public television organization. And I had been the CEO of an independent TV news company in Washington. This time I wanted to do it myself. No partners. No investors. Just me. When I started looking for a company, I decided that I'd be very clever and find one to buy before anyone knew it was on the market. I'd contact all the lawyers, accountants, and bankers in Annapolis. Surely they would have a client or friend who wanted to retire. I pictured a friendly man of around 65, getting tired, nobody to turn the company over to, wanting to take care of his longtime employees. Not greedy, doesn't want a lot of money down, a nice long-term payout. I'm his salvation (and the company's). A nice little business. Doing a couple million. Doesn't really matter what it is. No retail, of course, but maybe light manufacturing, or some kind of distributorship, or a niche service business. . . . How tough can it be to find something like this? I'll probably have several to pick from.
Nothing. A dry hole. Dead ends.
Friends and family kept asking me, "So why don't you start something of your own?" I'd done it before. I had no fear of going out to look for venture capital. I could do an outline for a business plan in my sleep. I knew how to put together a pro forma. I still had months of severance pay yet to go. So what was I waiting for?
Something was different. I was different. It wasn't just that I was a little older, or that I had perhaps lost my nerve. I fancied myself an entrepreneur, but I wasn't thinking like one. When I started the magazine, I was 24 and the concept of failure never entered my mind. Besides, it was a great idea. It was big. I had to do it. I was consumed by it. I wanted to control my own destiny, to make a major contribution to the world.
But that wasn't how I was thinking this time around. I was thinking about what I didn't want. I didn't want to risk everything; I didn't want to spend six or nine months or a year and have something not work; I didn't want the emotional commitment a new business demands; I didn't want something that would take me away from my family ("Sorry, dear, Daddy's sleeping at the office -- again").
My wife was seven months pregnant with our third child. She wasn't going to be in a position to bring in a lot of money anytime soon. Besides, I didn't have the "big" idea. No fire in the belly. And on top of that, I definitely didn't want a board or a group of investors looking over my shoulder. I've already read that book, thank you very much. Give me a nice little business that needs some marketing savvy or maybe just some new energy. Nothing wrong with it, of course. Affordable. Maybe even located in town so I can walk to work and come home for lunch. I don't need to build an empire with it (at least not until the kids are a little older), just take out a reasonable salary. Am I asking so much?
The time had come to take on the business brokers. I called the first one and told the secretary: "Hello, my name is Hendrix Niemann. I recently left a job as president of a company in Washington, and I'm now looking for a company to purchase. I would like to speak to someone about my specifications and, in turn, find out what you might have available in your portfolio." (Take that, Donald Trump!)
The broker picked up the phone. He asked a little bit about my background. Then he asked, "Well, Mr. Niemann, what kind of company are you specifically looking for?" I laughed nervously. "I'm not exactly sure. I guess I feel a little like the late Justice Stewart felt about pornography: I can't precisely describe it but I'll know it when I see it." (Did I impress him with my erudition? Or does he think I'm a flake?)
"Uh . . . yes . . . well, what size company did you have in mind?" (I hadn't even thought about this.) "Umm . . . well, I suppose sales between $1 million on the low side to $5 million on the high side." "Those would be pretty good-size businesses. How much money do you have to invest?" (Uh-oh. What do I say now?) "Well, that would depend, of course." (Brilliant answer!) A pause on the other end. "Most deals require from one-third to one-half down. Do you have that kind of capital?" (I wasn't exactly sure what I could afford or how to figure out what I could afford. I wanted to get as broad a range of options as possible and then figure out how to finance the one I wanted.)
"Well, I don't want to suggest that I have a net worth of $1 million or anything like that. But I've done a lot of deals [only a slight exaggeration] and I know how to secure capital when I need to. So I would very much like to find out what you have." (The best defense is a good offense, right?)
"Hold on a minute, would you, Mr. Niemann?" He was back in a few seconds. "It happens, Mr. Niemann, that I do have a couple of things you might be interested in." (I'd made the first cut!) He had three possibles. I was interested in one. It was a company that provided transcription service to hospitals for the records doctors have to keep of surgical procedures. We made an appointment for the following week. A successful start.
The next broker was a man with a very thick accent. I told him who I was, and so on. "I got one I think you might like. It's a company that makes sandwiches, you know, for vending machines." I asked about revenues. What are the owners taking out in terms of salary, profit, etc.? "I don't have all the information right in front of me, but let me tell you, 15,000 is a helluva lot of sandwiches, my friend. That's how many sandwiches these guys make a week. These guys do very well."
The last broker I talked to that day took the hard-ass approach. He wasn't buying my act at all. After my by-now standard line, "I'll know it when I see it," he replied, "Listen, Mr. Niemann, how the hell am I supposed to find you something if you don't know what you're looking for?" Taken aback, I suggested that I was sure a man in his profession faced this situation every day. "Well, what have you done, anyway?" After I described my background, he said, "So, you're a media guy, huh? Why don't you buy a newspaper or a magazine or something like that? How much money have you got, anyway?" I gave him a "couple hundred thou" range. (I'd refined my pitch during the course of the day and was trying out different selling prices, down payments, and what I wanted to take out.) He grunted. Then: "How much you need to live on?" Around a hundred, I said. He snorted. "Listen, pal, if you can find a business that's going to pay you a hundred after debt service, and you can get away with putting only a hundred or two down . . . well, good luck." I suggested that the other brokers I'd spoken to had not dismissed my "strategy" so readily. "Yeah, well, they don't know shit. I do. I'm about to turn the business broker industry in this town on its head. I'm going to have all the best listings. You just wait."
During the next week came my first face-to-face meetings with the brokers. I started with the one offering the hospital transcription service. Like many business brokers, he was a realtor who had kind of backed into selling businesses. He had no formal business or accounting background. He came to our appointment armed with a confidentiality agreement and four typed sheets of paper about the transcription company. The first three showed revenues and expenses for 1986, '87, and '88. The fourth sheet was a projection for 1989. There was no balance sheet. No customer list. No promotional literature. No written summary of the business and its history. He said none of that existed, that he had spent "days" just pulling together what I held in my hand. "You're lucky there's this much," he chuckled. He meant it.
On to the next -- the hard ass. He was located in a tiny, rundown building on a major thoroughfare in Bethesda, Md. He, too, was a realtor. I showed him my bio and my net worth statement. He was unimpressed. Then he noticed that I'd done some consulting and had started a business. "Where'd you get the money to do that?" he wanted to know. I told him my partner and I had raised it. "I need some venture capital," he said. "I happen to be a small investor in a company that's going to make a computer screen that will revolutionize the industry." He told me all about it. For an hour and a half. I asked him if he had any companies for sale that I might be interested in. "Not right now. I'll call you."
And so it went.
The first company I got really excited about was a sailboat dealership in Annapolis. Talk about playing while you make a living! I conjured up an image of going to work each day in khakis, a polo shirt, and Top-Siders, of spending hours each week on the Chesapeake Bay giving demos to prospective customers, of hanging out with the sailing crowd after work. The fact that I knew very little about sailing wasn't a problem, right? And so what if the owners were taking out only $43,000 a year? I could build it up in no time. What I didn't know about sailing I more than compensated for in marketing skills.
Eventually, cooler heads prevailed. The sailboat industry had been in a slump for several years; you started out each fiscal year from scratch (there was absolutely no ongoing cash flow); and I was not exactly an expert in the field. But what really turned the tide was this question from my wife: did I really want to spend my days with the kind of people whose lives revolved around a $250,000 boat? Still, the dream died hard. It was several weeks after deciding not to go any further before I could bring myself to tell the business broker.
As the weeks went by, I was getting discouraged. And I don't care how enlightened we have become as a society -- there is still something very uncomfortable about being a man at home during the week. Everyone in the neighborhood knows you're not working. Your friends know you're not working. People don't quite know what to say to you. It's like you're dying of cancer -- people don't know whether to say they're sorry or pretend the problem doesn't exist.
And then there are the days when the phone doesn't ring once. And nobody you've called is in. And you know you should be doing something, but you've crossed everything off your To Do list. Certainly people who are out of work go through self-doubt and anger and frustration and despair. I'd been through it before, and I remember it all too well. But for me, there was added pressure this time, because I wasn't spending time looking for work -- I was looking for a company to buy. And as each day passed without the perfect company surfacing, I had to ask myself, is this what you should be doing? Your family is counting on you, and you have done absolutely nothing today (or this week or this month) to protect them from the very real possibility that your severance is going to run out and you will have nothing to show for your efforts.
And what if you find something and go ahead and buy it -- what then? You may not even like the business. What if the key employees walk out the door when the owner leaves? What about the big accounts? What if you're being lied to? What if you pay too much? If you lose a job, that's all you've lost. But you're going to have to put up the house, the stocks and bonds, the college money, everything to buy a business. And if you screw up, you're starting over. Not at 24, with your whole life in front of you and no debts and literally nothing to lose. No, you're 37, and you have two kids, another on the way, and two houses and some savings and a lot to lose.
But balancing out the days of anguish was the unequivocal support of my wife -- and the time I got to spend with my daughters. At ages three and a half and one and a half, it didn't matter that their father was a bum -- I was around. They got to see me doing much of the cooking (particularly after daughter number three was born in mid-May) and the grocery shopping. We went out to breakfast together; we played hide-and-go-seek while the rest of the world worked; I got invited to their tea parties; and I would take one or the other on the bicycle to the post office or the bank or just to ride around the Naval Academy.
There was one sparkling, chilly spring day when I announced to my older daughter that we were going on a picnic. I packed lunch for us and off we went on the bike. We ate lunch next to the water, talking about this and that, just chatting away. At one point, I glanced down at her and she gave me a look that parents die for -- a look that said, "I-love-you-so-much-and-this-is-just-the-neatest-thing-I-can-imagine." That took care of me for a week.
One day in late spring I answered a blind box ad in The Wall Street Journal. It was for a food-service distribution company whose location was listed only as "mid-Atlantic." I had answered several of these vague-location ads and discovered that mid-Atlantic meant anywhere between Richmond and Philadelphia. It turned out that the ad had been placed by a broker and that the company in question was located in New Jersey. However, the broker sent along capsule descriptions of four Washington-area businesses for sale. One was an access control/security company. Sales were near $2 million; pretty good cash flow; the owner was retiring; it was selling for slightly above book value; it was "highly leverageable." I told the broker, Lauren Finberg, I was interested. On Wednesday, May 24, I met her in a Denny's restaurant near the company's offices. The owner would join us in a little while, but Lauren first wanted to size me up and give me a chance to go over the information package on the company. The narrative section was a little weak, but there were two years of financials from the accountant (not a bunch of numbers taken apart and put back together by a business broker, as was usually the case). We chatted about the owner, Peter Klosky, and it was obvious that Lauren genuinely liked the man. I liked Lauren and appreciated her intelligence, something I had not found in abundance in her industry.
Peter Klosky joined us at the table. He was a grandfatherly type with a mass of unruly white hair, a big smile, and a gentle manner. He looked all of his 65 years. I had no trouble believing that he was ready to retire. He told me that there was nothing wrong with the company that a little salesmanship and marketing muscle couldn't cure, that he'd gotten a little lazy about all that the past couple of years. Peter believed his people would stick around if he asked them to do so. He said the business was fun because there was something new every day. He said he'd tell me anything I wanted to know.
I asked Peter when I might see the company. He was nervous about that and said he really preferred that it be a Saturday and that I should pretend to be a neighbor coming over for a visit. I suggested that I bring along my wife and our two-week-old baby. Who would ever believe that this was a potential buyer coming to scope out the place?
It was a rainy, muggy Saturday when Judi, the baby, and I pulled up in front of the offices of Automatic Door Specialists. The building was too ugly to qualify as nondescript. It was a one-story structure painted industrial tan that had obviously been a retail establishment in a former life -- it had plywood where a couple of storefront windows used to be. I thought it looked like a dry-cleaning business. My wife shot me a look that said, "You've got to be kidding."
The one remaining window hadn't been exposed to Windex in years. But this was definitely the place. Peter Klosky answered the door and led us inside. I had never been in such a dirty building. The reception area was lined with filing cabinets circa the 1930s or 1940s. The walls were filthy and obviously had not been painted in a decade or more. As Peter Klosky led us into one work area with three desks, I noticed the metal ashtrays left overflowing, the coffee cups, the papers scattered haphazardly around, the desks piled high with parts, files, and notebooks. Judi looked around desperately for a spot to put our daughter's car seat. From the look on her face, I could tell she was terrified to let anything close to the baby touch any surface.
This is a mistake, I thought. Any positive feelings I had about the company vanished instantly. I knew I couldn't work in a place like this. As Peter gave Judi some background about the company, I tuned out and began thinking about other companies I had seen and where each potential deal stood. When Judi announced she had to nurse the baby, Peter took me on a tour of the shop. It was horrifying. Piles of steel, aluminum, and wood scattered about. Some benches with tools. Shelves stacked with pieces of equipment with yellowing tags that said "bad" or "rebuilt" (when? I wondered) or "tested/OK." Boxes of old files. Parking gates that had been crunched by trucks. Bags of cement. Pieces of broken glass. Overhead were steel supports (the kind that hold up a dropped ceiling) piled high with aluminum, pipes of every shape and size, old carpet. The parts section consisted of hundreds of cubbyholes stuffed with widgets, gizmos, screws, bolts, wire, gears, and things that had been stashed there temporarily -- 20 years before. Yes, this was definitely a mistake.
Later, over lunch, Judi and I had second thoughts about just walking away. "You know, it's nothing that a good cleaning and a coat of paint couldn't fix -- well, sort of," she said. We talked about Peter -- we both liked him. The business could be interesting: the company had installed the famous security system at Oliver North's house, had put in the antiterrorist barricades at the Vice President's official residence, had done a lot of work for embassies and major corporations. We could afford it. Besides, as we went through our mental list of everything else that was cooking, there just wasn't anything any better. And time was running out.
I spoke to Lauren Finberg the following week and said I wanted to take the next step. She needed to supply year-to-date figures (the company was more than six months into its fiscal year), and I wanted three full years of financials. I also wanted her to give some thought to the structure of the deal. She had already been doing so. In fact, the asking price was going to come down $150,000 because, having talked to Peter about the results so far for FY '89, it was obvious that the company was going to have a down year. How did that sound to me? I didn't like the "down year" part, but I appreciated the voluntary price reduction.
Several weeks later, I received all the information I had requested. Of greatest importance to me was a two-pager showing how I could purchase the company with 100% financing, get the owner his purchase price (over time), service the debt, and still take out 75% of what I had been earning before. There it was, in black and white. I met with my accountant. He said the numbers looked better than any of the others I had passed along for his review. He thought it was tight, but the business broker's proposed deal could work. He warned me that, once a letter of agreement was drafted and accepted, I was about to start racking up some serious accounting and legal fees. Did I really want to go ahead? I did. After 17 business brokers, dozens of blind ads, and four months, this seemed like the best shot.
I met Peter Klosky and Lauren Finberg in an Italian restaurant a few miles from the company offices. It was a steamy July day. I arrived just minutes after a paving contractor had somehow cut the power lines to the restaurant. There were no lights and no air-conditioning. We sat near a fire-exit door that had been propped open to let in some not-so-fresh air and some light. We discussed the two-and-a-half-page letter of agreement. It was very loose and not legally binding. It was loaded with contingencies. Nevertheless, to me, it was a de facto point of no return. Once it was signed, I was going to stop working on everything and anything else. I was going to spend the next two months or so getting this deal wrapped up. If it all blew up, I would be starting over again with a few weeks of severance pay left, not months. But nothing was going to go wrong. We signed. We shook hands. I made arrangements to meet with the employees and to have my accountant come in to go over the books. I got in my car and said a silent prayer of thanks. I had a company.
When you buy a house, the purchase is usually contingent on a termite inspection or a test for radon gas or a structural inspection. The business equivalent of a termite inspection is the due diligence process. I knew I had to do it, but there was a large part of me that suspected I was wasting a lot of time, money, and energy looking for termites that weren't there.
The first funny smells came out of my initial meetings with Automatic Door's three key long-term employees. Among them they had 57 years with the company. And it was obvious that while they had great affection for Peter Klosky, they neither feared him nor did they have a lot of respect for him as a businessman. During my separate in-dividual meetings with them, all of which were attended by Klosky, they were astonishingly candid about the condition of the business and about him.
The company had gone downhill, they said. Mr. Klosky had let it happen. They were all displeased with the sales manager (who was married to Klosky's niece) and felt he was doing nothing to bring in business. Other employees were looking for jobs. (I could scarcely imagine what I would hear when Peter Klosky wasn't around.)
OK, so the foundation was a little shaky, but no termites yet.
The sales manager returned from vacation the following week, and while my accountant and a member of his staff looked over the books, I took him out for a three-hour heart-to-heart talk. He admitted to not doing a great job, but claimed that he didn't get any support from Klosky, that the company's prices had become uncompetitive, that several exclusive lines had been grabbed by competitors. He informed me that he had received no sales commissions for months because Klosky and he could not agree on what was owed to him. Perhaps most alarming, he told me that a large project I had been told was in the bag was not firm.
I was already nervous when my accountant and I sat down to go over his report. Each of his findings was another punch in the stomach. The company was losing money -- potentially a lot of money. We already knew about a $36,000 loss for the first half of the fiscal year, but had been assured by Klosky that was because he'd been occupied with selling the company and therefore had been late getting some bills out. There were a lot of bad receivables on the books. Close to half were more than 90 days old, and the majority of that dated from 1988. The inventory had been overstated; it was likely that the true loss year-to-date was close to $80,000. Half the net worth of the company was gone. Sales for the fiscal year were down more than 50%.
Then came the crusher: once the debt from the acquisition was added on, at the current level of sales there was no money for me to take any salary. None. Even assuming I could get the sales back up to the average of the past three years, I could still take out only half of what my family and I were used to.
I was despondent. And furious. And scared. I was glad I'd found all this out; but I also didn't want to hear any of it. Could I really just walk away from the deal at this point? What about all the time and money, not to mention the emotional energy, I'd already expended? Did I really have to start over again from scratch? My worst fears had materialized. My severance pay had only another five or six weeks to go. After that, we were out of time. My heart and my head were waging war with each other. I'll start over. . . . No way, there's no time. . . . Maybe I can find a job. . . . Good luck, turkey. Better tough it out with this company. . . . But there's nothing there. . . . I wonder if any of the other companies I was interested in are still on the market. . . . I was beside myself.
I sat down to write a letter to Lauren Finberg. I was seething, but I tried to keep it as unemotional as possible. This was a far different company today from what it was a year ago, I wrote. Peter Klosky was going to have to eat all the '88 receivables and any from '89 that turned out to be bad as well. The inventory looked way high; there were some payables that hadn't hit the books that we needed to put in; Peter had to work out his compensation differences with the sales manager and another employee as well. Based on everything I had learned, the purchase price had to come down -- a lot. As I wrote the letter, I wasn't sure if I wanted my new offer to be accepted or not. But a few phone calls and some minor changes later, the word came back: the adjustments were acceptable. We still had a deal.
Then Peter Klosky called me at home one evening to tell me that the sales manager was "considering" quitting and maybe I should talk to him. Klosky mumbled something about "commissions" being the problem. I called the sales manager at home and arranged to meet him at a Dunkin' Donuts shop a few miles from the office. He said he wasn't considering quitting -- he had quit, given notice in writing, packed up, left. Why? I asked. Because he felt he was never going to see the $5,000 in commissions he was owed if he didn't apply some pressure now when Klosky was vulnerable. We talked for several hours. I asked if he would accept binding arbitration if I could talk Klosky into doing the same. He said he would. Would he come back to work in the meantime? He wanted to think about it, but the answer was probably yes.
That weekend was the company picnic. I had gone back and forth about attending because I thought it would be inappropriate if the deal was going to fall apart. On the other hand, it was a good opportunity for Judi to meet everyone and for the employees to get to know me as a husband and father, not as the boss. We decided to go late and leave early.
Toward the end of the afternoon, I had my first chance to have a private conversation with Darvin Brothers, the company's senior employee and senior installer. He was a soft-spoken man in his late forties. In our brief first meeting with Peter Klosky, he'd struck me as one of those rare individuals who was genetically incapable of avarice, malfeasance, or lying. I had been told by other employees that Darvin was the greatest single asset I was purchasing, that his knowledge, reputation, and experience were invaluable and irreplaceable. I needed him. I could believe him. And what he told me gave me chills.
Darvin was not a happy man. He had almost quit in January. He said there was a lot of junk in the shop that Peter Klosky would try to get me to pay for. Once upon a time, Darvin said, Peter had given him some stock for his many years of service. Darvin sold it back to him for less than its full value, and Peter had suggested that he would be compensated for the difference in the future. It never happened. And Darvin would get nothing out of this impending sale. Why had he stayed? I asked. He looked me in the eye. There was a lot of pain behind his answer. "I've spent 25 years helping to build this company. Stock or no, it's mine as much as his. I couldn't just walk away." I asked if he would stay at least for a while and give me a chance. He looked at me again. After a moment, he said he would.
On Monday, the sales manager did not return to work. I called him at home. Had he talked to Peter? Did he know Peter had agreed to binding arbitration? It didn't matter. He wasn't coming back. He couldn't work for another single day with or for Peter Klosky, even if the company was going to change hands soon. He would come back and work for me after I bought it, but not for Peter Klosky no