Sam and Me
I often introduce my partner Sam Kaplan as the man who made me a millionaire. That's because until he came along in the mid-1980s with a deal I couldn't resist, I had been a multi-millionaire. The deal involved acquiring one of my competitors and doubling the size of my messenger business. I did the acquisition, and it turned out to be the first of a series of mistakes that led the business straight into bankruptcy. (See "Groundhog Day," July 2001.) By the time we emerged from Chapter 11, my net worth was a fraction of what it had been before the deal.
So you might wonder how Sam ever became my partner, especially given my bias against partnerships. I would never have considered having one when I was starting my first company, the messenger service. I didn't think partnerships worked, and in any case I had no interest in sharing ownership or control. But the ups and downs of business can change your perspective in unexpected ways. Fairly soon after I started my second company, a records storage business, I realized that I needed the kind of help I couldn't get from an employee.
It was 1992, and although CitiStorage was still in its infancy, with just over $1 million in sales, I could already see that it had everything I wanted in a business: great gross margins, high barriers to entry, a steady stream of recurring revenue, and low customer turnover. On top of that, there was a huge opening in the market. The giant records storage companies, which offered state-of-the-art service, had built their warehouses 30 or 40 miles out of town. That was too far away for customers who needed quick and easy access to their stored material. Instead, they kept their records in town, at old-time moving and storage companies, whose service was far inferior. I figured we could make a fortune by having warehouses near the city and offering a level of service that the moving and storage people couldn't match.
The opportunity seemed too good to be true--which made me nervous. Going through Chapter 11 had taught me some painful lessons, including one about the tendency of entrepreneurs like me to be overly optimistic. Now I was on the threshold of making a critical decision, namely, to phase out what remained of my delivery business and focus my time and energy on building the storage company. I wanted to be sure that I wasn't missing something important and chasing a fantasy.
Like many entrepreneurs, I think fast, sometimes too fast. Sam is the opposite. He takes his time.
And Sam was the guy I most trusted to do such an assessment--despite the ill-fated acquisition, which was, of course, my fault and not his. I'd known him for 15 years at that point. We'd been introduced by the owner of a messenger company I'd worked for before starting my own. Over the years, I'd developed tremendous respect for Sam's business acumen, even with his Harvard M.B.A. He had bought and sold six companies and was a master of finance, constantly educating himself about the latest techniques. I called him at his home in Maryland, just outside Washington, D.C., where he had a business. "Man, you have to come here and look at this box thing I'm into," I said. "I can't believe the future that this company has."
Sam said he'd be happy to help. He visited me in New York City, and I gave him all the facts and figures he needed to evaluate the opportunity. After doing his analysis, he said, "Yeah, you're right. This could be an amazing business."
"Why don't you come and join me in it," I said, thinking he could be of great help as a consultant or a part-time executive.
He said he had his own business and didn't want to commute to New York but would give me any assistance I needed pro bono. As time went along, my need for his services just kept growing, mainly because of the complex financing questions we faced. I could see that when we ran out of space we would have to begin buying land and building warehouses, making us a cross between a real estate operation and a service business. The problem was, real estate companies are highly leveraged by nature, whereas banks won't allow their business customers to have more than two or three times as much debt as equity. That meant we would have to bring in other funding sources if we were going to grow. No one I knew was as capable of handling such challenges as Sam. I begged him to join the company. He finally agreed to come onboard as soon as he wrapped up his other venture, which he was planning to sell. "But understand, I'm not looking for a job," he said. We worked out an arrangement whereby he'd get paid regularly and be free to search for other business opportunities. (See "Hiring the Best," February 1999.)
Sam's arrival had an immediate impact. To begin with, he took over the management of our finances, which I had been overseeing. That was a great relief to me because I could put the accounting stuff out of my mind and focus on the parts of the business I enjoyed most--sales and operations. At the same time, he introduced systems and practices that were rare in a company of our size, including some that I questioned the need for. "What do you mean, we have to have audited financial statements?" I demanded. "We're a $4 million business. It's crazy for us to spend $30,000 or $40,000 a year on that."
"You'll be sorry three years from now if you don't do it," Sam said. "The banks will insist on audited statements, and it will be much more expensive to do them retrospectively, assuming you can get them done at all. A lot of accounting firms won't do it."
So we started having audited annual statements, as well as regular monthly statements, which I hadn't insisted on before. I have my own key numbers that I track and that I thought were giving me a good sense of our financial situation. Yet I found that the monthly statements let me see things I might have missed otherwise. If a number didn't make sense to me, I'd ask for an explanation. Soon the accounting people began anticipating my questions and answering them before I asked. In the process, Sam elevated the entire business. It's easy for small companies to ignore accounting, unlike sales or operations. If you ignore either of those, you'll feel the pain immediately. But you can always tell yourself that you'll deal with accounting issues later. And then, by the time the problems become urgent, you're in serious trouble. Sam made sure that our accounting issues never became urgent.
I might be right six or seven times out of ten. With Sam, I can be right nine times out of ten. That's a big advantage.
Sam gave me both peace of mind and flexibility. We have done some unusually complicated and sophisticated financing for a company our size. Among other things, that has allowed me to hold on to the business. A few years ago, I set some financial goals that I thought would require me to sell out to one of the giants. Instead, Sam came up with various ways for us to take all the cash we needed out of the company without giving up ownership.
Beyond his contributions as our finance guy, he has played four other roles of particular importance to me. First, he has been one of my reality checks. I don't make any major decision at the company without discussing it with Sam. Those discussions can be difficult because when it comes to numbers, we speak different languages. We do the math in different ways. To help us communicate, Sam set up a flip chart in his office. If we write the numbers down, each of us can see how the other arrives at his conclusions. We can then figure out whether we agree.
Second, he is a stabilizer. Like many entrepreneurs, I think fast, sometimes too fast. Sam is the opposite. He takes his time. He analyzes and deliberates. I believe my instincts are pretty good. Alone I might be right six or seven times out of ten. With Sam, I can be right nine times out of ten. That's a big advantage.
Third, he is a confidant. I know I can always walk into his office, close the door, and talk to him in complete honesty without being judged. In that way, he helps me deal with one of the most difficult aspects of the entrepreneurial life: being alone.
Finally, Sam serves as a counterweight. He is the only person other than my wife who can make me change my mind after I've decided what I think about something. If we have a disagreement, he'll wait until I've finished screaming and say, "Well, I don't think you're right, and you should think about it." I'll tell him that the decision is final and I don't want him to bring it up again. He'll bide his time and then, at the last moment, say, "Did you think about it last night? Are you sure you don't want to reconsider?" If he is that adamant, I usually conclude that I should, in fact, take another look at the decision. Often I'll wind up changing my mind.
Given all that, I knew what I had to do when he came to me one day and said, "Okay. I've decided that I'm staying here for the rest of my life." He was telling me that it was time to make him an owner. Maybe that thought should have occurred to me earlier, but it hadn't, probably because of bad experiences I'd had with partners in the past. I knew that I'd never have those problems with Sam, and I realized that he deserved an equity stake. In 1999, he became a partner in CitiStorage.
I'm happy about that, even though I remain skeptical about partnerships in general. It takes many years of working together before you know someone well enough to have him or her as a partner. But while I still think it's a bad idea to start a business with one, I've come to realize that ending with a partner is another matter--especially if the other person is someone like Sam.
Norm Brodsky (firstname.lastname@example.org) is a veteran entrepreneur whose six businesses include a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham.
NORM BRODSKY | Columnist
Street Smarts columnist and senior contributing editor Norm Brodsky is a veteran entrepreneur who has founded and expanded six businesses.