Indeed, all five factors were wild cards to some degree, and they promised to make the next month or so interesting. And stressful. We could hope only that, when it was over, we'd have a new owner we liked—unless, that is, we wound up owning the magazine ourselves.
Do It Yourself
That thought had occurred to several people in the company, including me. I was worried about what was going to happen to Inc.—that is, the Inc. first imagined by Bernie Goldhirsh in 1979 and then shaped, honed, and nurtured by all of us who had worked there over the next 26 years. I doubted that the magazine I knew and loved could survive another upheaval like the one we'd experienced following the sale to G+J. At the same time, I thought it would be incredibly exciting and rewarding if we had the opportunity to build an entrepreneurial company resembling the best of those we write about—and maybe even do it in partnership with some of the entrepreneurs we most admire. Accordingly, my first calls were to Jack Stack, CEO of SRC Holdings, with whom I've written two books, and Norm Brodsky, CEO of CitiStorage, with whom I write the Street Smarts column in Inc. I also sought advice from Staples co-founder Tom Stemberg, who is now a partner in a venture capital firm.
Koten was thinking along the same lines. He was already trying to contact Intuit founder Scott Cook and Oracle founder Larry Ellison, both former Inc. 500 CEOs. He told me he was passionate about Inc. and wanted to buy it. (That took me by surprise. He hadn't been passionate about it when he'd first arrived in 2002. At the time, I didn't think he even understood Inc. and its market. Most journalists don't, especially if they come from other business publications, as Koten had. He had recently admitted as much, but said that, in the intervening years, he'd come to appreciate the potential of Inc. to transform the way people think about business.) I said that if he was that interested in buying it, we might want to meet first with Brodsky and his partner, Sam Kaplan. He readily agreed.
We arrived at Brodsky's office on the Brooklyn side of the East River at about 11:30 a.m. on May 25, scarcely 24 hours after the official announcement of the sale. It was a gorgeous day, and the view from Brodsky's window of the boats on the river and Manhattan beyond was stunning. For the next two hours or so, the four of us talked about buying Inc. I should say Koten, Brodsky, and Kaplan talked about it. I mostly listened. Pretty soon, certain things became clear.
To begin with, we realized that we would not be able to do a leveraged buyout. Buying a business through an LBO is like buying a house: You come up with a down payment and borrow the rest. As you pay down the debt, using the company's cash flow, the value of your equity increases, often dramatically. That's how a lot of people got rich in the 1980s. But it's all contingent upon your ability to borrow the money in the first place. In this case, Koten estimated that the magazine would go for about $30 million. Inc. simply didn't have enough physical assets or cash flow to support the amount of debt that an LBO would require. At the time, its EBITDA (earnings before interest, taxes, depreciation, and amortization) was negative if you included G+J USA's corporate allocations and $3.4 million if you didn't.
So if management intended to bid, it would have to ally itself with an individual or a private equity firm willing to put up the capital, which was a different ball game. For one thing, the managers' stake in the outcome would be small—perhaps as little as 10% of the company's eventual market value, and much less if they weren't able to build the business fast enough to meet the investor's minimum requirements for return on investment. Even if they did pull it off, they would simply be postponing the sale of the magazine, since the investor would likely want to cash out in a few years. Most investors want to make money, after all, not run magazines.
Brodsky and Kaplan took all this in and recognized that Koten might have better options. They encouraged him to consider all the proposals that came his way. He was in a strong position, they noted, because Inc. was stable and profitable on an operating basis. Accordingly, most potential buyers would want him to stay. Brodsky urged him to keep an open mind. "That was a very important message," Koten said a few weeks later. "I realized that you couldn't predict how things would go, so you shouldn't make a rigid commitment to one particular idea about how things ought to work out. You can't control a process like this, but you can be a part of it."
