My Own Private Buyout
One manager's first-person account of what it was like to buy the company he worked for -- his dad's
My father founded his business in 1976 as an advertising agency for technology companies. I joined the company when I was just out of college, in 1982. In 1996 a coworker named Rick Roelofs and I went to my father and said, "We have a completely different management philosophy in terms of the way we want to fund and capitalize the business and grow it." At that point we proposed a buyout. My father had wanted to keep his costs low, his overhead low, and his management requirements low. He often would say that he didn't want to have more than seven people on staff at the same time. I wanted to build services around each client -- PR services, consulting services, eventually Internet services -- so that for every client we had, we would bring in more income.
My father really didn't want to sell the company. Our discussions probably took a full year. He asked us questions like, Well, what would you do with the company if you had it? How would you fund it? Why in the world would I turn this business over to you? We were proposing a time-based buyout, so there were additional considerations about our ability to run the business effectively and to cash my father out of the business with future earnings. Also, my dad was like any other entrepreneur. He's got a lot of pride, and he had built something really great. So it was difficult for him to let go of that.
The hardest thing to get through was comparing his valuation of the firm with our valuation. For us, it wasn't an emotional issue. It was "What would it cost us to start this thing up ourselves?" compared with "What are the assets here that we can leverage in terms of brand awareness and history and customer base?" As a founder, my father had a lot of blood, sweat, and tears in the agency. He felt that the market price should be much more -- at least 100% more -- than what we thought it should be.
We went on a retreat at a nearby resort and literally locked ourselves in a room for a day and kind of beat one another up until we came up with something that we all felt good about. I owned some shares in the company. It came down to my saying: "I want out of the company. I want to sell my shares back to you for the price you want me to buy your shares for." And once my father said, "There's no way in the world I would pay you that for your shares," we were able to come back with, "What would you pay me, and wouldn't that be a good price for me to pay you?"
My dad needed to feel comfortable that we would be able to pay the money out. So there was an escrow period of two years when, even though we had purchased the agency, we weren't in full autonomous control of everything that happened in it. My father became chief financial officer. During that period he got an opportunity to watch us change the way the company was managed, but he was still in full control of the money. It really became a team effort to make sure that the transition was working.
Now he's no longer part of the day-to-day finances. He acts as a high-level account-management person with our technology clients. It's really worked out amazingly well. But in 1996 I think our relationship was probably the worst that it's ever been. That year almost destroyed our relationship.
If I were going to do it all over again, I would hire an investment banker from day one. If I had done that, it would have helped take some of the emotion out of the process. It also would have popped some cash into the business right after the deal was done, by getting a venture capitalist or an angel to come in and take a percentage of the business. What's more, I wouldn't have made the overture to my dad in the way that I did. I would have had a third party go in and find out as much as I could about where my father stood before I introduced myself as the potential purchaser. I think I would have had a lot more credibility. And I think the deal would have gone a lot faster.
Brian Schraff is president and CEO of Schraff Group Inc., a $5-million advertising, public-relations, and Internet- consulting company based in Newport Beach, Calif. He told his story to senior staff writer Emily Barker.
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