Drix Niemann describes the dark side of buying his own business. (Follow-up article to original story in Feb. 90.)
In the February 1990 issue of Inc., Drix Niemann recounted his family's search for the ideal business. Here, nearly two years later, he describes the dark side of his American dream
Author's note: In March 1989 I began a seven-month odyssey, searching for just the right business to buy. [See Inc., February 1990, " Buying a Business."] I was 37 and not a novice: I had previously cofounded and run a regional magazine, started another magazine, run a public-television network, and, most recently, been chief executive of an independent TV-news company. I specifically made the decision to buy, not start, a business. I felt I was not in a position to risk everything at this stage of my life. I didn't want to spend a year at something and have it not work. I didn't want to make the emotional commitment I knew a start-up entailed. I didn't want something that would take tremendous time away from my wife and three young daughters. And, most important, I didn't have a Big Idea for a new business, anyway.
At the end of May -- several lawyers, accountants, and bankers; 17 business brokers; dozens of blind box ads; and numerous dead ends later -- I met with a broker and the owner of a 26-year-old security/access-control company, Automatic Door Specialists Corp., in Laurel, Md. It felt right. Sales were near $2 million, cash flow was pretty good, the owner -- Peter Klosky -- was retiring, and the company was highly leverageable.
We signed a letter of intent in July, at which point I decided to devote all my time and energy to closing the deal. Over the course of the next two months, I undertook extensive due diligence, including in-depth discussions with the senior employees; a thorough review of three years of financials, the checkbooks, and the payables and receivables files; a two-day visit by my accountant; and a grueling physical inventory that lasted another two days. The company's warts turned up faster than I could count them. For one thing, I learned that once Klosky had finally made the decision to sell -- the company had been on and off the market several times over the previous five years -- the business had gone into a tailspin. Sales had fallen by more than 50%, to less than $1 million. Several key employees had left, and those remaining were demoralized. The company was losing money.
On the other hand, there was still a good possibility that the company could rise again. Several remaining employees were extremely talented and well-thought-of. The customer list, although it had suffered some attrition, still included numerous large and prestigious companies and federal government agencies. Better yet, the company was on a lot of Rolodexes and was constantly getting calls to bid on jobs. There were still some decent product lines, at least enough with which to start the rebuilding effort. In the end my wife, Judi, and I decided to go ahead and buy the company after getting Peter Klosky to cut the asking price in half. We felt confident that we knew everything it was humanly possible to know about the business; there would be few surprises, which would likely not be the case with another company. We closed the deal in October 1989. This is the rest of the story.* * *
Never, but never, I thought, had an owner known so little about his business. Or been so totally at the mercy of his employees. Here I was, having owned my company for six months, and I still had only the most rudimentary understanding of automatic doors and gates, parking equipment, electric locks, card readers, and other security/access-control equipment.
The staff knew it. Sometimes they would draw a problem on the blackboard for me. "See, Drix, we've got a master-slave gate here, and the slave gate isn't closing. When I pushed in the contactor with my finger, the slave gate closed, so the problem had to be that the contactor coil wasn't pulling in. I traced the wire and found that the slide-on connector had come off and the coil wasn't getting any power. You understand?" Sure.
By far the most humbling event of the day occurred when there was a service or installation problem and one of the techs would call to get advice from Howard Ballenger, our director of operations. If I happened to answer the phone and Howard was not in, the techs knew I couldn't help them. I'd ask what was wrong; there would be a moment's hesitation. I knew they were thinking, Drix knows nothing, but he does own the place, so I suppose I should at least tell him the problem.
They'd describe the situation. My response? "Try to beep Howard or Darvin." (Darvin Brothers is our field supervisor.) "Otherwise, I'll have Howard call you when he gets back."
What's more, I barely even knew what business we were in. I had thought we were in the security/access-control industry. It turned out we were kind of a subset of the construction industry. I had never had any desire to be in construction or anything remotely resembling construction. Yet, as often as not, we were not dealing directly with the ultimate customer. We were dealing with a general contractor or an electrical contractor or a security consultant or an architect. And that person usually would determine which subcontractors to use based on one thing and one thing only: price.
That was doubly true of government work. A government agency that wanted, say, a new automatic sliding gate simply went out and got three price quotes. The lowest bidder got the job. There was no selling, no trying to convince someone of the merits of your product or your company. So either you lowballed your bids to get the work or you didn't work. Guys who worked out of their cars or basements ("trunk slammers," as they are called in our industry) and who subcontracted everything out beat us regularly on price.
One of the things I thought I was bringing to the company was marketing and sales expertise (as well as a total commitment to customer satisfaction, and an ironclad guarantee that we would stand behind our work). I hadn't known enough to delve into the intricacies of the bidding and decision-making process on jobs. And everyone from the former owner on down had said that what the com-pany needed in a new owner was a knock-'em-dead salesperson/marketer. Wrong. What the company really needed was someone who knew enough about the industry to figure out how to shave that last 4% or 5% off the bids, which had been Peter Klosky's long suit. To my chagrin, I realized that as far as most customers were concerned, we were selling a commodity, not a service. But I couldn't, or wouldn't, do business that way.
We had several strikes against us in a commodity-like market. Unlike the trunk slammers, we were committed to having a full service department and a full installation staff, which are expensive. Our product lines were good quality and therefore not the least expensive.
And even our greatest strength -- the company's versatility -- turned out to be a weakness. Automatic Door Specialists was into so many things that it had never been able to dominate any one segment of the security/access-control market. Competing companies that specialized in one area -- say parking-control equipment -- were able to focus their marketing efforts and get more efficient in that one area. We were all over the place.
There was also the matter of the bidding. Howard, with Darvin to back him up, instinctively wanted to add an extra day or two to every project to make sure it was done right, and for the first year I didn't know enough to question their assumptions. To their credit, they did not believe in throwing wires into the ground without conduit or in leaving a job site a mess at the end of the day. They would not sell or install junk equipment. But that kind of commitment to quality can succeed only if someone's willing to pay for it; and that was decidedly not the perspective of most of our potential customers. And it certainly wasn't profitable.* * *
What a massive challenge it is to try to change a corporate culture. Doesn't enlightened management work everywhere, with any group of people? I don't think so any longer. In my very first staff meeting, in October 1989, I had talked about teamwork, about mutual trust and respect, about doing the right thing, about honesty, about customer service, about sharing in the profits and ownership of the company. I mouthed all the wonderful platitudes from In Search of Excellence and Inc. magazine and management seminars. The staff nodded, smiled, asked a few questions -- and then proceeded to ignore everything I had said and go about their business. They either didn't believe me, didn't care, didn't know how to change, or didn't think that changing would make any difference anyway.
I tried to show my commitment by adding benefits such as paid personal days, health insurance for their families, regular performance reviews, and the prospect of companywide profit sharing and stock ownership. But what they wanted -- big raises, new tools, a warehouse well-stocked with parts, air-conditioning for their vans -- was not what I was able to deliver. I talked about building a great company; they talked about work-rule changes and sick-pay accruals. There was never a meeting of the minds. Instead of motivating the employees, my actions led them to believe I was a naive chump.
The three senior employees I had inherited from Peter -- my managers -- had among them almost 60 years with the company. Darvin had been there almost since its founding, in 1963. Howard had 19 years under his belt, and Dorothy Chatham, the bookkeeper, almost 13 years. I had no clue from our long conversations before buying the company that rather than working together, they would be much more comfortable criticizing each other and slamming all the other employees. Howard and Dorothy, in particular, couldn't stand each other.
Early on I had one morning-long, let-your-hair-down meeting with the three of them. I said it was not necessary that they like each other, just that they set an example and act professionally. They tried for a while, really tried. But there was just too much baggage. Howard said black; Dottie said white; Darvin just grumbled.
Dottie resigned in May 1990, two weeks shy of her 13th anniversary with the company. Whatever my problems with her -- and hers with me -- it stung. She was one of the main people for whom I had wanted the company to have a rebirth. She had been so helpful and encouraging during the acquisition process, and she wanted so desperately for Automatic Door Specialists to make it. I felt I had let her down -- and, by implication, the others as well.* * *
There was never any money in the bank. We made payroll with $37 to spare one week, with $95 left another week. We just couldn't seem to develop any momentum.
My personal financial situation was as bad or worse. We hadn't lived on so little income in a decade. What made me think I could take a $25,000 cut in pay and hardly feel it? I divided all our household bills into two groups. Each group got paid every other month. That was all the money there was.
Far worse was the toll the struggling company was taking on me and on the family. The children did not understand the new schedule at all. Mornings had been Daddy's time with them, but now I was leaving for work at 6:45, before they were up. Try as I might, I rarely got home before 7 or 7:30 at night, just in time to spend an hour or so with the girls before putting them to bed. Wesley, who at age four was old enough to verbalize her anger, took to calling the business "stupid old work" (as in, "Daddy's at stupid old work").
Cory, the baby, hardly knew me. I was gone before she woke up in the morning and often home after she was asleep, and it was not unusual for me to go two days without making contact with her. That was really killing me. One night Judi was out, and I was putting the kids to bed. Wesley and Dale went right to sleep, but Cory was fussy. I went into her room to sing some songs and quiet her down. I started singing "Waltzing Matilda" to her. As I looked down at her in her crib, the anger and frustration of the past year welled up uncontrollably, and I began crying. "I'm sorry, Cory. I'm really very sorry I'm not around more. Daddy loves you very, very much. I'll do better, I promise. You'll see." My tears fell on her pajamas. She smiled up at me. I swore to myself that things were going to change.
Before I bought the business I never really, truly assembled enough information to tell if I was actually going to like what I was doing. In hindsight (always an exact science), I got so caught up in the details of negotiating the deal and in checking out all the facts that I didn't take enough time to figure out if I would be happy. It took a year for me to admit (to myself) that I didn't like the industry I had joined or what I had to do to be successful in it. And here I was, not having any fun, in fact hating a lot of what I was doing, with every personal asset on the line, and unable to get out. That is as trapped as you can get.
In the fall I started staying home one or two mornings a week to fix breakfast for all three girls and take Wesley and Dale to school. It was a small change, but psychologically very important.* * *
The company was used to winning enough government contracts each September to provide plenty of work through the fall and winter. That was not to be the case in 1990. As the economy continued its slide and a lot of private-sector projects disappeared or were put on hold, the competition for government jobs became brutal.
The market for new construction ground to a complete halt -- for the first time in more than a decade, developers in Washington, D.C., were having a hard time of it. Our company showed a loss of $53,000 for the fiscal year. Given that Peter Klosky had lost more than $200,000 during his last year as owner, I suppose I should have been grateful it wasn't more.
Things began getting worse in November and December. We had to hit the line of credit again and again. The balance crept up to $75,000. I was within $5,000 of being tapped out.
Even the mice came back. They had not been heard from in more than a year, but they announced their return very aggressively. They built a nest at the back of one of the drawers in my desk, using pieces of memos, forms, stationery, and business cards they had transported from every other drawer. They ate an entire roll of peppermint Lifesavers, plus several packets of catsup, sugar, salt, and pepper. They urinated on a payables report in the accounting department. Other mice/rats leave sinking ships; our mice, loyal to the end, came back instead.
In January I panicked. I personally took over the scheduling, not only for all the jobs but for every service call and minor errand. I pounced on the mail as soon as it arrived, to see how much money had come in. I removed all discretion from the accounting department in terms of what we paid and didn't pay. For the first time at any of the companies I have owned or run, I played the float with the employees' withholding taxes, conduct I had always derided and found inexcusable in others. I began second-guessing everything everyone else did. I didn't like it; it was the height of poor management. Yet I did it anyway. If I was going to go down, by God, it was going to be because of what I did.
In February our health insurance was canceled for several days for nonpayment of the premium. Our two Baltimore phone lines were cut off after we weren't able to pay the phone bill for four months. We came within 24 hours of having our water cut off. That's how we played the game. We strung people out until we got within inches of our lives; then we paid them. I hated doing business that way. At the end of every day, I felt as if I had been through a war. For the first time in 15 years of marriage, Judi looked at me and said, "You really look awful." She was right.
At the end of February, I let one technician go and instituted an across-the-board 10% pay cut for everyone else. But we were too far behind at that point for this action to make much difference. Among the many overdue payables was part of one quarterly payment due on my purchase note to Peter Klosky. In March he filed suit to collect the entire amount of the note.
In April we moved into new offices in an office-warehouse industrial park about five miles north of our former location. Because of the Washington real-estate market, we got a very good deal -- a couple hundred dollars a month more than we'd been paying for the dump down the road. It was a lift for everyone's spirits.
By June our situation with our suppliers had deteriorated to the point where we were all but paralyzed. We were placed on "credit hold" with practically everyone, which means either we paid up or anything we ordered was COD. We literally could not afford to do certain jobs, because the cash flow simply wasn't there. A few suppliers insisted that our customers sign direct-pay agreements -- when the jobs were completed, the customer would pay the suppliers, who would deduct their share before forwarding the balance to us. I started actively considering bankruptcy.
I held a staff meeting to let the employees know just how bad it was. Two quit; I let two others go. Word spread. I started getting calls from competitors, asking if there was "anything they could do." (The buzzards were circling.) The new bookkeeper, who had been on board for less than two months, said she couldn't take the pressure and would be leaving. (She was fielding 15 to 20 calls a day from creditors, so who could blame her?) Since our personal assets were securing the company's bank debt as well as the note to Peter Klosky, Judi and I began discussing personal bankruptcy as well. It was quite possible that everything, including our house, would be lost.
I've been asked one question in particular 100 times or more since purchasing Automatic Door Specialists: "Would you do it again?" My response is always "Define it." Buy a business? Buy this business? Run the company a certain way? Change industries? I will admit that buying a company that was losing money in an industry I knew nothing about, attempting to turn it around in a down economy, and trying all that with almost every personal asset I had in the world at stake, was perhaps not the smartest thing to do. But it was my best shot at the time and I took it.
Still, it is with grim irony that I look back on the reasons I decided to buy, not start, a company: I didn't want to risk everything at this stage of my life; I didn't want to take too much time away from my family; I didn't want the huge emotional commitment a start-up entails. Right. For all the apparent advantages of purchasing a business -- staff and product lines already in place, ongoing cash flow, reputation established -- there turned out to be concomitant disadvantages. To those who think (as I did) that buying must be easier than starting from scratch, I say, Think again. Or, more to the point, caveat emptor.* * *
(Editor's note: By late August Niemann had ruled out Chapter 7 bankruptcy but had not declared Chapter 11, either.)
Read Part One of Niemann's saga, " Buying a Business," from February 1990. In his first article for Inc., Hendrix Niemann chronicled the seven-month odyssey of searching for his "dream company." He'd already tried a start-up and thought it would be safer to buy a business: "I didn't want to risk everything . . . I didn't want something that would take me away from my family."
Read Part Three, " The End of the Story," from October 1997. "The signs could no longer be ignored. We were losing money every day we stayed open. It was time to close the business."