It's All About Trust
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.
Given his doubts, you might wonder why he was willing to invest so much of his time and his firm's money in trying to make the deal happen. When I asked him about that, he said that the chemistry between us played a major role. "This deal got done on your balcony during that party," he said, referring to a dinner party my wife, Elaine, and I had given for Chris, his wife, and two other couples. He and I had broken away for about 45 minutes. "You know," he said, "when we talked about where we came from, who we are, how we relate to our families, that sort of thing, that was key. In my experience, you can't do a big deal like this one unless the principals have a relationship. There's kind of a line, and to get across that line there has to be trust. You have to find out early on whether you can relate to somebody closely enough to do a deal with them. On the balcony is when I found out we shared a lot of the same values."
But wasn't there also a compelling business reason to go forward? "Oh, sure," he said. "Just walk into your warehouse. I don't care how many warehouses you've seen. You go in there and look up and you think, 'Wow!' That sight will close the deal every time."
It's the boxes. With every one of them comes a revenue stream. "Each box has an average life of 18 years that it's going to generate revenue," Chris said, "and that's just for sitting on the shelf. If the customer wants to get the box off the shelf, there's a whole component of service revenue and then removal fees if the box is permanently taken out. And records storage is as close to a recessionproof business as you'll find. All the private equity guys are looking for that type of business right now because they're convinced the economy is going to turn sooner or later."
It wasn't just the boxes, of course. "Your readers should also know that having audited financials was a very big thing," Chris continued. "In the deals that we do, 5 percent of the companies have audited financials. It's just not something they do. Your company has them. Business owners need to understand that even though it costs a lot to have audited financials, the money spent creates tremendous value."
I asked Chris what else had been important to him. "You have a very mature business," he said. "The principals have replaced themselves in their roles. That creates value, too. If a business can't function when the owner isn't there, that isn't a good value proposition for the buyer. It's risk." So I guess he's happy to get the business as long as he doesn't have to keep me around.
Anything else? "Well, you're lucky you have your partner Sam [see "Sam and Me," June 2006]. I mean, the guy knows every detail about the business, and he can readily provide any financial information we need in a very sophisticated way. He knows exactly what's going on. That gives buyers great comfort."
I had to take a call at one point and left Chris alone with my co-author, Bo Burlingham. "There's another thing," Chris said when I was safely out of earshot. "The culture. I've seen transactions where we're not even allowed to set foot on the property during business hours until after the deal is done. None of the employees know a thing about what's going on. That speaks volumes about the relationship between the owner and the employees. Personally, I don't do those deals. A business with a culture of trust--where the people who own and operate the business have a great deal of interest in the welfare of their employees--has real financial value. It's just a much better business environment. Go look at his trucks. Look at how people treat things. Look at how they treat one another, how they deal with the customers. Look at the wear and tear on everything around here. People care. Every penny matters. It is an atmosphere of respect, a culture of respect. But I wouldn't tell Norm that. He's got a big enough ego as it is."
So there you have it, advice on how to get a great deal selling your company from someone who buys them. Unfortunately, we still have some work to do, as I was reminded when I was having dinner recently with some young guys from Goldman Sachs (NYSE:GS), which is handling the debt portion of the financing. I asked one of them how many deals he and his colleagues had worked on. He said they'd done about 35 in the past year. "One thing I've learned," he added, "is that it isn't done until it's done."
"That's right," said another member of the team. "Last week, we were eight hours from closing a deal, and we walked away from it."
More recently, I ran into a problem with the guy who runs the company that my company would merge with. He wanted to change one of the contract terms we'd already agreed to. I refused. After a heated discussion, he left my office in a huff.
I guess Chris is right. I still can't say for sure that my businesses are going to be sold, but I've made my decision--and it should be official very soon.
Norm Brodsky (firstname.lastname@example.org) has been writing about the possible sale of his businesses in his monthly Street Smarts column. His co-author is editor-at-large Bo Burlingham.
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