For Sale: The American Dream
So, you quit your job and started your own company. Maybe -- a big maybe -- you'll be able to sell the business when it comes time to cash out.
Cal Brown is a salesman to the core of his New England bones. As a Sears employee for 21 years, he sold power tools, batteries, and fences. At Sears in 1981 he ranked among the top industrial-products salespeople in the whole United States. Brown, who is 55 years old, has a husky voice, a genial manner, and earnest blue eyes. His stock of wry stories is as much a part of his persona as his metal-frame glasses, which he tends to perch midway down the bridge of his nose. One of his stories is about a former coworker at Sears who hung a quotation on his office wall. "If you can't dazzle them with your brilliance," the quotation read, "baffle them with your bullshit."
During the 1980s, changes at Sears turned Brown (his given name is Calvin, but everyone calls him Cal) into an entrepreneur. In 1984, Sears halted the commercial sale of two of Brown's bread-and-butter products, batteries and fences, and his commission-based income plummeted. To moonlight for extra money, Brown started his own fence-installation business, the C&G Fence Co. He left Sears six years later to run C&G full-time -- and to pursue his own version of the entrepreneur's proverbial dream. He looked forward to earning more income on his own while creating equity in his business and being his own boss. "Just a happier life," he says, recalling his aspirations, "and I'd be more in charge of my own destiny."
As part of the evolution from employee to owner, Brown built an office next to his white Cape-style house in rural Litchfield, Maine. Within a decade C&G was selling $1.4 million worth of wooden, chain-link, and other kinds of fences annually, and Brown had eight people on the payroll year-round, plus a dozen reinforcements during the hectic summer season. But the more he thought about his company and his life -- the grueling 12-hour workdays in the summer, the strain of managing a growing business, and the cancer scares that both he and his wife had experienced within a few months of each other -- the more he wanted out.
"I'm not a businessperson," he says bluntly. "I'm a salesman. I don't like the day-to-day business operation."
His ticket out suddenly seemed at hand one day in December 1999, when another salesman, Brian Granger, called on Brown in Litchfield. Granger, who lives in upstate New York, was representing a Dallas-based company, Great Western Business Services Inc. "Very smooth, very credible," Brown would later say about Granger, who reminded Brown of John Travolta.
TICKET OUT: Eager to sell his fence-installation company, Cal Brown signed up with Great Western Business Services.
Great Western, as Granger explained, was not a business broker but a marketing service. To aid sellers of small businesses, it placed generic ads seeking buyers. Granger showed Brown some sample classified ads with this header: "OVER THREE BILLION $ WORTH OF BUSINESSES FOR SALE BY OWNERS." Great Western could match Brown with buyers that were hunting particularly for a business like C&G, Granger said.
Of course, before putting C&G on the market, Brown would want to know how much to ask for it. Granger offered to estimate C&G's market value on the spot. In addition, if Brown purchased Great Western's services, the company would perform a comprehensive evaluation of C&G as part of the deal. Never having sold a company or, for that matter, bought one, and not sure how much to ask for C&G, Brown was intrigued.
Granger did some quick calculations, plugging some financial data supplied by Brown into a series of Great Western formulas. C&G might fetch almost $1,175,000, Granger said. Looking back at the moment when the fullness of that figure dawned on him, Brown remembers having one thought. "I was thinking of getting rich quick," he recalls with a lopsided grin.
Despite the flush of excitement, Brown didn't pay the $8,975 fee Granger sought that day. When Granger returned to Litchfield in May of last year, however, Brown signed a Great Western contract and did write a check for that amount. Taking a deep breath, he set the asking price for C&G at $1,250,000.
As it turned out, though, Brown didn't get rich quick. Instead, he was greatly disappointed by what Great Western did -- or didn't do -- in return for his $8,975. Great Western supplied him with the names of four prospects, but Brown says he could reach only three of the prospects, and none was "remotely" interested in buying his business. Great Western also sent him a 28-page evaluation of C&G, which he found to be of little value.
That a veteran salesman like Brown would pay an up-front fee for the services that Great Western promised to provide is understandable, particularly considering the business-brokerage alternative. Five years ago up-front fees were virtually unknown in the realm of small-business brokerage, according to Tom West, author of The Business Reference Guide, which is published by the Business Brokerage Press, based in Concord, Mass. But in a survey this year of business brokers nationwide, West found that 35% were collecting such fees from their customers.
Advance fees have long been a fixture on Wall Street, at least at the top-of-the-line tier of the mergers-and-acquisitions world. The Wall Street deals, which produce the big headlines, are engineered by the likes of Morgan Stanley and Goldman Sachs and typically provide sellers with a menu of prospective buyers. Those deals totaled a mere 2,245 last year, according to Mergerstat, an M&A research company based in Los Angeles.
AGGRIEVED: Cal Brown demanded the refund of his $8,975 payment.
In contrast, 1.57 million small companies were offered for sale in 2000, according to West. Of those, 250,000 actually got sold. About a third of those sales were handled by business brokers, a mostly unregulated group with varying levels of sophistication and competence. And the remaining 1.32 million companies? They were probably turned over to family members, says West, or they just closed their doors. Given those odds, small-business owners who are looking to sell crave any kind of assistance and are vulnerable to any offer that has an air of legitimacy and a seemingly reasonable promise of success. Most owners, like Brown, have no previous experience selling a company and have little idea where to begin.
Great Western is one of a handful of so-called co-op advertising companies, which rank below business brokers in the business-matchmaking hierarchy and act as a kind of dating service for buyers and sellers of small and midsize businesses. By its own reckoning, Great Western is the largest such company (with the possible exception of Internet-based competitors), having signed up about 3,000 small-business sellers last year and garnered $15 million in revenues. Like business brokers, the matchmakers are unregulated or, at most, loosely regulated. In at least three states (California, Minnesota, and South Dakota), for example, regulatory boards have ruled that Great Western must have a real estate license to do business, although the Dallas-based company has continued to operate in all three states without one. (Great Western is now disputing the ruling in California, filing for "appropriate documentation" in Minnesota, and reviewing its options in South Dakota, according to the company.)
When Cal Brown was sizing up Granger and Great Western, he wasn't thinking about the niceties of regulations. What struck him at the time of Granger's visit was the sales representative's response -- or nonresponse -- to a question. "I asked, clearly, 'What percentage of people who sign the contract actually sell their business?' " Brown remembers. Granger never answered him directly, according to Brown, which troubled him.
Looking back, Brown realizes that he knew little about Great Western except what Granger had told him. "It could have been located in a phone booth," Brown says.
The Company "Fills a Niche"
Great Western's headquarters is located in a sleek, 10 story high-rise overlooking the busy Dallas North Tollway. Flanked by a recently vacated Mitsubishi auto dealership on one side and a prime-rib restaurant on the other, the building has a spacious, marbled lobby with a geyser-style fountain. Great Western's suite of green-carpeted offices on the sixth floor exudes the bland respectability of, say, an insurance agency. As it happens, insurance -- specifically, health insurance for small businesses -- is what company founder Stan Hazlewood sold before he created Great Western, in the early 1980s.
Today its owner and president is John H. Binkley Jr., who joined Great Western as a salesman in 1984 and, within four years, bought Hazlewood out. When I called Binkley before visiting Great Western in May, he told me that he was mourning the death of his 35-year-old son, Hal -- who'd been killed in a traffic accident in January -- and that he would not be available for an interview. Hal Binkley had been Great Western's vice-president of operations, his father said, and had been "basically running the business."
When I arrived at Great Western, the person who received me was the company's former lawyer, David McCreary, whom Binkley had named chief operating officer the week before. McCreary, wearing a red tie and a charcoal, chalk-striped suit, was clean-cut, with a choirboy face that belied his 33 years. Growing up in Plano, Tex., McCreary had been John Binkley's neighbor and a chum of his younger son, Ryan. Great Western is a family business, McCreary told me right away. Its 20-person home-office staff includes two of John Binkley's brothers, Hulon and Daniel.
Great Western, McCreary said, "fills a market niche for individuals who desire to sell their businesses themselves," which, for better or worse, is the route most small-company owners take. Great Western's service, he said, benefits sellers of companies whose small size or remote location results in their being "overlooked" by business brokers. Great Western, he continued, offers those sellers the means to market their business confidentially and nationally, even internationally. "We reach out to those small sellers," he said, "and provide them with the ability to reach out to a broader audience than Main Street, USA."
To reach sellers, the company sends out millions of pieces of direct mail a year. "CONFIDENTIAL. FREE FOR THE ASKING: Find Out What Your Business Is Worth NOW!" one such letter begins. To maintain its pool of 25,000 buyers, Great Western advertises by direct mail, in many newspapers and magazines (including Inc), and on the Internet. If a prospective seller responds, one of the company's 50-odd sales representatives (known as "field consultants") is likely to call the seller to make an appointment.
A field consultant who comes calling is ready to make a free estimate of a company's value, as Brian Granger did for Cal Brown. Great Western's field consultants must have at least five years of sales experience, but no business-valuation experience is required of them other than what's taught in a four-day training course, which emphasizes mastery of the company's sales presentation. For field consultants, it's do or die: they won't last long unless they make sales. Their commissions are based entirely on the contracts they sell, and they must cover traveling expenses.
In training they learn about the company's "trump card," as former Great Western senior executive vice-president Bob Elliott once told a class of trainees. He was referring to the business evaluation that Great Western offers to sellers who purchase its matchmaking service. If a business owner buys an equivalent evaluation elsewhere, it "can cost as much as $5,000 or more up front depending on the type of business," says the company's presentation guide for field consultants. In the late 1980s, after John Binkley instituted evaluations as a sweetener to the Great Western advertising contract, the company's sales shot up, according to Elliott. And why not? Few owners know the market value of their companies, and most would relish a professional valuation.
Like others who sign a Great Western advertising contract, Cal Brown initialed an eight-point statement in which he acknowledged that "there can be no accurate projection" regarding when Great Western would locate a buyer, "if ever." The Great Western fee structure nonetheless pointed to the possibility of a sale. The up-front fee was a "deposit." If a Great Western lead resulted in a sale, Brown learned, the seller would owe a larger fee, based on a sliding scale that varied with the asking price. In his own case Brown would have owed Great Western a balance of $26,525, in addition to his $8,975 deposit, if he had sold C&G to a buyer unearthed by Great Western.
"How often does Great Western receive full payment in the wake of a sale?" I asked McCreary. "We rely on the seller's voluntary compliance with his or her contractual obligation to notify us at the time of the sale," he said. "Do we get notifications? Sure. We get them every month. Do we get as many as we would like? No, because not everyone complies with their responsibility."
"How many notifications do you get a year?" I asked.
"We don't audit those," McCreary said. "We put them in a general fund." In other words, Great Western does not track the number of sales for which the company collects a full fee.
A Seller in Kentucky Complains
If the thrust of Cal Brown's grievance is against Great Western's modus operandi, which he contends misled him, Dewayne Hutchens's anger is more personal. Much of his ire is focused on the salesmanship of Great Western field consultant John Persaud, which, Hutchens says, took advantage of his own trusting nature. "My style of doing business is everything open and honest, and you lay everything on the table," says the 30-year-old Hutchens, who's a self-taught businessman and a volunteer firefighter in the Louisville suburb of Fern Creek, Ky.
In many ways Hutchens's and Brown's stories are similar. When Persaud visited him in July 2000, Hutchens was eager to sell the storage facility that he and a business partner, Joe Jarles, had bought for $1.5 million in January 2000. Before meeting Persaud, Hutchens and Jarles had in mind an asking price of $1.9 million for the 269-unit Fern Creek Mini Storage. They had enhanced its value, they reckoned, by adding a U-Haul dealership and improving rent collection.
Persaud made his own calculations based on Great Western's formula and stated his estimate: $2.4 million. "I said, 'Wow, that's pretty good,' " Hutchens recalls.
When Persaud described Great Western's services -- particularly, how Fern Creek might in effect tap into its database of thousands of qualified buyers, including many from countries outside the United States -- the scenario also sounded good to Hutchens. "He was saying [Great Western] had a special group of buyers, basically a group of international buyers who wanted citizenship in the United States," which they could obtain by acquiring a business in this country, Hutchens says. "It was one of those I-can't-say-as-the-official-record type thing, but, hey, we've got the people who'll come in here and grab it in a week."
Most of all, Hutchens liked what Persaud told him about the comprehensive evaluation that Great Western could provide. A $10,205 fee would buy an evaluation that would be "within a couple of percent" of the preliminary $2.4-million estimate, Hutchens quotes the sales rep as saying. What's more, Hutchens recalls Persaud's saying that an unspecified "large, independent accounting" firm would perform the evaluation. Hutchens figured that an authoritative document of that kind would serve as an important tool in selling his business.
"We provide small sellers with the ability to reach out to a broader audience than Main Street, USA."
Persaud says that he quit Great Western in April, after 14 months as a sales rep for the company. He says he had become disenchanted with the company. What Persaud told his customers, he says, coincided with what he had learned in Great Western's training course, including a claim that "one-third of [the company's] buyers are located outside of the country." Persaud, however, denies Hutchens's allegations that he indicated Great Western would find a buyer for Hutchens within a week, that the formal evaluation would be within a couple of percentage points of the preliminary estimate, and that a large accounting firm would handle the evaluation.
On July 10, 2000, Hutchens and Jarles signed a Great Western contract, paying Persaud $10,205. "A very personable guy," Hutchens says of Persaud, remembering his first impression of the field consultant.
When Great Western's evaluation arrived in the mail, Hutchens didn't think it looked much better than the one Persaud had completed in short order, even though the second one valued Hutchens's company at $2,514,000, almost 5% higher than the first estimate. "Our banker looked at it," Hutchens recalls, "and it's like, 'What is this?' " In December, Hutchens filed a complaint with the Better Business Bureau of Metropolitan Dallas, terming the evaluation "worthless" and objecting to the "pitiful total" of four referrals that he had received by then from Great Western. When he tried to contact the prospective buyers, he discovered that two of their telephone numbers had been disconnected, and another two "had no interest," according to him. He demanded a refund.
"There must be some misunderstanding regarding our contractual obligations," John Binkley responded in a letter to the bureau. The letter defended the methodology followed by Great Western's "independent valuation companies." By initialing the eight-point disclaimer, Binkley's letter said, Hutchens had indicated that he understood the "scope of our services." No refund, the letter stated, would be forthcoming.
Great Western had the same answer for Cal Brown when, in April, he demanded a refund of his deposit. In an E-mail that he sent to Great Western, Brown cited, among other arguments, the paucity of leads that he had received, and he questioned whether the entity that performed his evaluation, the Fisher Business Group, functioned independently of Great Western. "We have fully and diligently complied with our contract," the company responded by letter. The letter didn't respond directly to Brown's question about the Fisher Business Group but said an accounting firm that performed an evaluation like the one done for him would "typically charge $3,000 or more." Even if Brown had taken his dispute to court -- which he decided not to do -- he concedes that the papers he signed or initialed might have doomed his chances of winning.
Due Diligence Hits Snags
Why did Brown and Hutchens sign up with Great Western without knowing who would perform their business evaluation or what odds they faced in finding a buyer through Great Western? Both sellers say that the sales reps with whom they dealt had skillfully gained their confidence. As for the papers they signed or initialed, Brown and Hutchens say they didn't read every word. "It's kind of like a house closing," Hutchens says. "Do you read over every document you sign? If so, you're going to be there two or three weeks." Sure, Brown and Hutchens admit, they should have read their contracts more carefully -- or had lawyers do it for them.
And what about due diligence? Before signing a contract, Brown and Hutchens asked Great Western for references to satisfied customers. The answer they say they received seemed plausible enough. Just as Great Western would keep Hutchens's and Brown's names confidential, so too did it have to respect the confidentiality of its other customers. Lamentably, it wasn't possible to supply references.
Before Brown signed his agreement, his wife, Gale, had called the Better Business Bureau of Metropolitan Dallas to check into Great Western's record. The bureau's recorded telephone report on the company, however, didn't allude to Great Western's 1997 expulsion from membership owing to complaints of misleading sales practices and slowness in resolving complaints. What Gale Brown did hear was an evenhanded message stating that the bureau had fielded a "pattern" of complaints concerning Great Western but that the company had responded to them "by explaining that it has met the terms of its written contract or by offering adjustments, where appropriate." Then, speaking with a bureau staff member, Gale "got, basically, a reiteration of the recorded message," she recalls. She was reassured, and her husband went ahead with the Great Western contract.
But the information Gale had obtained from the Better Business Bureau only hinted, at best, at the number of complaints that had been brought directly by customers to the company. When I asked McCreary for that number, he said, "I want to be very candid with you. Our tracking system for complaints was not in the past what it is today."
Evaluators Work at Home
For all their discontent with Great Western, Brown and Hutchens were pleased with the initial, on-the-spot estimates of their companies' value. After all, Brown and Hutchens hoped to cite the flattering numbers to potential buyers if the later, comprehensive evaluations indicated approximately the same values (as indeed they did).
Such alluring numbers apparently play an important role in Great Western's sales strategy. "In most cases you'll find that when you go out and perform a business evaluation, that the value of the business is substantially higher than what the owner originally indicated he was willing to take," Great Western sales manager Randy Kamin says in a training audiotape for the company's field consultants. "And that's why," Kamin goes on to advise, "it's so important for you to find out right up front, even over the phone, how much this owner is wanting, minimally, for this business. Because if you get him committed, and now you perform this evaluation that shows the value is truly higher, it would be a lot easier to justify the deposit."
Small-business owners, such as Brown and Hutchens, are actually inclined to overestimate the value of their companies, industry experts say. "Ninety-nine percent of the sellers feel that their business is so good that it warrants a very high price," says West, author of The Business Reference Guide. He adds, "It is very seldom supportable."
Brown and Hutchens finally did become concerned when they received their blue-jacketed, bound evaluation reports from Great Western. Two people, James Fisher and Richard Bivins, perform the lion's share of what the company calls "comprehensive" evaluations. On the day of my visit to Great Western's headquarters, McCreary called Fisher and Bivins and listened in on his speakerphone while I interviewed them. Using the same software-based procedure specified by Great Western, each man works out of a home office -- Bivins in Grapevine, Tex., and Fisher in Forth Worth. Bivins operates under the name of MidAmerica Business Services. Fisher's corporate moniker is Fisher Business Group Inc.
"It's kind of like a house closing. Do you read over every document you sign? If so, you're going to be there two or three weeks."
Bivins and Fisher say they had no experience as business evaluators before Great Western hired them. Bivins, who has a law degree from Western State in Fullerton, Calif., has been doing Great Western evaluations for almost four years. Fisher, a Carleton College graduate, has worked, among other jobs, as a real estate manager and as a mineral-rights negotiator on behalf of oil companies. Bivins says he "easily" knocks off 20 evaluations a week. Fisher, who has been at it since 1989, says he does 16 to 18 in his four-day workweek.
The day after I visited with McCreary, I drove to Fisher's Spanish-style, buff-toned brick house in a Fort Worth subdivision. A soft-spoken man with thinning white hair, Fisher escorted me to his compact office, which looked out on an oak-shaded backyard swimming pool. On a desk sat his workhorse: a Solera personal computer. The software that he used in his work for Great Western, Fisher explained, was "Aardvark's Business Valuation with Graphics, Version 2.0." Fisher said he bought the software in 1988 -- the last year it was available for sale, I learned later.
Fisher turned on the computer and demonstrated how he enters figures from balance sheets and income statements into spreadsheets that pop onto the screen. For other information that he needs, Fisher said that he consults a book of Standard Industrial Classification codes and a Dun & Bradstreet compendium of key business ratios. Fisher said he can handle one evaluation an hour, on average. When he started doing evaluations for Great Western, 12 years ago, the pay was $150 each, he said. The company cut the rate back to $75 a few years later, according to Fisher. When he agreed to add color charts to his reports, he said, Great Western hiked the rate to $100.
Among others who performed Great Western evaluations in recent years were owner John Binkley's son Hal and brother Daniel. In February 2001, Daniel Binkley became Great Western's vice-president of customer relations, a full-time position. Before that he had done the evaluations part-time while working in western Oklahoma, where he sold house siding, windows, and kitchen cabinets for Sears, according to his former supervisor, Cubby McMenamy. Fisher says that he "vehemently" objected to the two Binkleys' doing evaluations because "it destroys the credibility of third-party independence." Daniel ceased doing evaluations when he joined Great Western full-time, according to the company.
The method employed by Fisher and Bivins for Great Western differs from the standard business valuation in that they don't visit the company in question, usually don't talk with the owner, and don't research the local market and industry. I asked Glen Cooper, an experienced business broker in Portland, Maine, to look at the evaluation of C&G Fence Co. The Great Western approach "is not in accordance with anyone's accepted method of valuation," notes Cooper, who heads Maine Business Brokers' Network. For a full-fledged valuation, Cooper says, he charges between $5,000 and $10,000. McCreary, however, responds that Great Western clearly explains to its customers what they are getting for their money. "We believe 99.9% of our customers are happy with our service," he says.
Besides taking issue with Great Western's evaluations, Brown and Hutchens object to the number and quality of the leads for prospective buyers that the Great Western dragnet turned up for them. Instead of leads to prospects in foreign countries, as he expected, Hutchens received an eventual total of five referrals to buyers in Pennsylvania, Nebraska, Ohio, Illinois, and Iowa. Great Western makes much of its potential to generate referrals of interested buyers who live overseas; an application form for prospective buyers is even printed in Chinese. Yet a review by Inc of 98 leads referred to 10 Great Western sellers in recent years showed that only one prospective buyer was from outside the United States. That buyer was from Riyadh (which in the referral was misspelled Rujadh), Saudi Arabia.
So what, after all, is Great Western's record on businesses sold? Given that last year the company had about 3,000 customers and $15 million in revenues, and given that it collects a $5,000 deposit on average from each customer who signs on, simple arithmetic suggests an answer. Based on Great Western's own numbers, it appears that the company derived its $15 million in revenues entirely from deposits -- and none from sales. The company did not respond to a request for comment on that line of reasoning.
McCreary says that 90% of the sellers who enlist with the company for two years or more receive at least one referral to a prospective buyer. When pressed to say how many referrals lead to sales, McCreary recalls a conversation he says that he once had with Hal Binkley about a survey of Great Western's customers. The survey showed that "20% to 40%" of them succeeded in selling their businesses as a result of Great Western's matches, McCreary recalls Binkley saying. However, McCreary had no further details about the survey. When Hal Binkley died, in January, the company apparently lost its only possibility of documenting the survey results.
Brown, who still has C&G Fence Co. on the market, hired an operations manager last year when it became apparent that his company wasn't going to sell quickly. The change has allowed Brown to hit the road three days a week as a salesman. "I'm getting a good percentage of the jobs I quote," he says. Brown took time off around the Fourth of July to be with five of his eight grandchildren at Rangeley Lake in western Maine -- the first weeklong summer vacation he has granted himself since he started C&G.
Disenchanted with Great Western, Dewayne Hutchens and Joe Jarles tried to sell Fern Creek Mini Storage themselves by contacting several ministorage chains. "They didn't think we were serious," Hutchens says. So he and Jarles listed their company with a business broker that specializes in marketing ministorage companies. That led to a deal in June, with a buyer agreeing to pay $1.75 million for the company. After Inc inquired about Hutchens's complaint, Great Western refunded Fern Creek's $10,205 fee.
Great Western has recently adopted a different kind of business-valuation software and is offering a new contract. Now customers pay an initial fee when they sign a contract but owe nothing more unless they're "100% satisfied" with the company's services, says McCreary. As for McCreary, his time as Great Western's chief operating officer lasted less than five months, and he has returned to his law practice, still representing the company. On August 27, McCreary's last day at Great Western, John Binkley brought his 33-year-old son, Ryan, aboard as senior vice-president.
Joseph Rosenbloom is a senior editor at Inc.
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