It's All About Trust
Confronted with the offer of a lifetime, our columnist concludes it's time to sell. Part 5 of a series.
Norm Brodsky is a veteran entrepreneur.
Travis Ruse
The time had come to make up my mind, and I wanted Chris Debbas to be one of the first to know my decision. Chris is the managing partner of CD Ventures in Berwyn, Pennsylvania. (You know him as Greg, which is the pseudonym I gave him when I started writing this series. We've agreed that it's time for him to go public.) He had put this deal together, taking the chance that someone as ambivalent as I was would actually go through with the sale. I figured he had a right to know whether his gamble had paid off.
So when he came to see me in January, I told him that--assuming we could reach agreement on the few remaining issues--I would indeed go through with it.
He was unimpressed. "Yeah, okay," he said. "We'll see what happens. I never know what's going on inside that bald head of yours."
"No, really," I said. "About 10 days ago, I made up my mind."
"Well, I wish you'd keep it to yourself," he said, still unconvinced. "You've made my life hard enough as it is, with all these articles you've been writing. To get this deal done, I have to put a rope around 70 different people and get them to jump off a cliff together. The last thing I need is another wild card." He was afraid that one of his cohorts might think that, now that I'd committed, they might be able to turn the screws a bit.
Chris's wishes for privacy notwithstanding, I'd like to explain the thought process that led me to this decision. In the end, it was surprisingly clear-cut. Once I put my emotions aside, I realized that it was now or never. The decision wasn't about selling to this particular group or even about getting the right price. Rather, it came down to whether I was ever going to sell.
Why? Because if I don't sell the records storage business now, I will have to build a new facility. My warehouses will be full by the end of this year. The best time to sell a business like mine is when your storage facility is nearing capacity, your EBITDA (earnings before interest, taxes, depreciation, and amortization) is at its peak, and you haven't yet had to invest a ton of cash in a new building that will take three to six years to fill up. In my case, the investment would be larger than usual because this time I wouldn't be building on property that I already owned. The new warehouse would have to be in another location, nowhere near my current facility. We'd become a multilocation business, which is a significant change with ramifications that I'd have to think through. So by going forward with construction, I would, in effect, be making a long-term, open-ended commitment to the future of the company, and I would have to start thinking about that future in different ways.
You might ask why I wouldn't just plan to sell in three to six years, when I'd presumably be back in this situation, with the new warehouse nearing capacity. Let's leave aside the fact that three to six years is a long time and that a lot can happen. There are two other cycles--one in the industry, the other in the financial markets--that have converged right now, and it's extremely unlikely that they will converge again right when I might want to sell.
This industry cycle is evident in the buying frenzy that's going on right now. We had a similar frenzy in the early to mid-1990s, but it had dissipated by 2000. You could still sell your business if you wanted out, but the buyers weren't aggressive. They'd say, "Okay, here's what we'll offer. Take it or leave it." Then, about a year and a half ago, another frenzy began, and it became a seller's market. We're in the middle of it now, and there's no telling how long it will last.
Meanwhile, there's a glut of private equity looking for places to go and having trouble finding them. Consequently, investors are in a frenzy of their own. You've probably read about it. By the time the mass media start carrying those stories, you can assume that the cycle is closer to the end than the beginning. But for now, at least, it's pretty easy to raise capital if you can promise the kind of returns that investors want.
Here I am, at the high point of three cycles that determine how much I can sell my businesses for. If I'm ever going to sell them, now is the time. Why would I work for another six years and run the risk of having to sell them for less than I'm being offered today? As for whom I should sell to, I have two issues: I want to get the right price, and I want my people to be treated well after the sale. From that standpoint, I doubt that I will ever find a buyer better than the one I've been talking with the past few months.
But despite my insistence that I intend to go through with the sale, Chris said he was still concerned that I might back out at the last moment--and so were all the other players in the deal, at least those who'd read my columns. He said, "People keep asking me, 'Is this guy selling his business or not?" Nobody wanted to waste their time.
I told him that some people--including Jack Stack, the open-book management guru and CEO of SRC Holdings--thought I was trying to kill the deal by writing about it as it was unfolding. "I agree," Chris said. "This has been like a reality TV show. Doing a transaction with thousands of people looking over your shoulder and having it narrated in a magazine with a mass circulation doesn't happen every day. As a matter of fact, I'm not sure it's ever happened. And it didn't help that you sometimes made it look as though I wasn't very smart. People who read the columns tell me, 'You're just being snookered. They're playing you for a fool."
I could see his point. If I had been a potential investor, I would have had the same reaction. I would have said, "Why are we dealing with this guy?" So maybe subconsciously I was trying to sabotage the deal, as my friend Jack suggested. Not that I haven't benefited from writing these columns. They have been a great outlet for my emotions--this column has always played that role--and the tremendous reader response has given me objective feedback from people who have no stake in the outcome. But my willingness to chronicle the deal in real time probably did reflect my ambivalence about selling. Although I no longer feel that ambivalence, it's not unreasonable for Chris to remain cautious.
