Case Study #9: Fishing Trips

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fishing tripJohn Bowen was the CEO of Reinhardt Werba Bowen (RWB), a financial services company that was acquired by Assante Capital in 1998 for $25M.

While the exit was ultimately a happy one, it started inauspiciously. Why? Because John was the object of a “fishing trip” from a competitor.

What’s a “fishing trip”?

Sometimes a firm that’s in the same space or looking to come into your space will put together a Letter of Intent to start the diligence process. The goal is to get a better sense of your business and your direction.

While there’s an outside chance of a sale actually closing, most times that’s definitely not the goal. The goal is to fish for valuable insider information.

Why did John’s firm want to sell in the first place?

John and the other two partners (they each had ⅓ of the firm) didn’t have the expertise or capital to scale up their growth. As they went out into the private equity sector to raise funds, they found that most weren’t interested in this expansion of theirs. Instead, they wanted to buy the entire firm outright.

At one point, a global bank offered a terms sheet with the number $37M at the top. Given that the EBITDA of the firm was $1.6M (not normalized for owner compensation), this seemed too good of an opportunity to pass up.

What were the warning signs?

The biggest warning sign was the slow walk from the acquirer. We’ve said over and over that time kills deals, and this buyer was very slow in its due diligence. What else?

  • RWB was based in Silicon Valley. The acquirer was based in New York and they would never send anyone very senior to California, but always demanded that all the principals come to New York.
  • RWB had quickly built a practice around Silicon Valley entrepreneurs and this firm had almost no experience in that space, AND
  • They were almost entirely focused on strategic questions. They wanted to know how the business ran, what kind of software was being used, the differentiators RWB was using, etc. And they had almost no questions on financial modeling or the P&Ls (the classic due diligence questions).

“Never gonna happen”

John finally got wise to the strategy of the acquirer. This happened when a trusted advisor looked over the terms sheet and was briefed on the process so far. “If you don’t have the agenda, they do.”  John ended the process with the big bank. Next, he went back to the drawing board and focused on what the company was worth and why.

It was now known that RWB was for sale and some firms presented themselves as interested. They got an unsolicited term sheet from a firm that eventually ended up closing the deal. John noted that the entire process was so different.  “They said they wanted to put this together in 6 weeks, and we did.”  The momentum and intent was obvious.

Of the $25M exit, $15M was upfront and another $10M was in an earnout. John managed to escape being the victim of a fishing trip, close out a sale, and share his lessons with all of us.  

Know Your Broker: Jay Kvasnicka

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In this occasional series we will share profiles of our team here at Apex so you can get to know the men and women that make us best qualified to help you buy or sell a business.

Jay has been in the industry for just about a decade. He has owned both a promotional products franchise as well as a ground shipping and transportation business. These experiences have helped him close deals in the latter space, but also means he brings the understanding of what it’s like to be an entrepreneur to each of his transactions.

Born in Manhattan, Kansas, Jay comes from an entrepreneurial family. His father built and sold two companies. It was actually from watching his father’s two sales that Jay learned how important it was for someone to have a “why” apart from running a business.

When his dad sold his last company, he was bored for quite awhile. It took him some time to wrap himself around a “why” and Jay notes there’s no need to wait until you’ve sold a company to do that.

Unsurprisingly, Jay caught the entrepreneurial bug himself and he loves business brokering because it provides an almost endless variety of people to meet and work with. He also gets satisfaction from delivering win-wins, which is what he tries to do in every transaction he’s part of.

“People trust me, I like to think, in part because I’m a good listener. I listen more than I talk, and I want to hear everyone’s goals. I also try to get everyone to buy into ‘trust but verify’ from day one as a guiding principle.”  

Jay likes to think of the transaction as a home built on a sturdy foundation. If you spend a lot of time early on and front load your work, with full disclosure, making sure there are no surprises, the later stages of the transaction will be much easier.

Jay’s also tolerant and flexible. The proof of that is the fact that he has a son at KU when he and his family are deep purple K-Staters!

Jay was the top producing broker at Apex in 2016.

Click here to visit Jay’s LinkedIn profile.

Book Club #8: Anything you Want, by Derek Sivers

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Derek Sivers sold his company, CD Baby, for $22M. For years he’d made tens of millions of dollars for independent musicians by giving them a platform by which they could sell to their fans.

Some time after, he wrote a very short book about the experience, Anything You Want, which is packed with lessons and maxims. We can’t share all of them in this article, so we’ve picked a few for you to consider.

Not another boring order confirmation email

Derek took a lot of pride in serving both artists and their fans. He always wanted the experience to be something that would keep people coming back. He says in the book  “…it’s often the tiny details that really thrill people enough to make them tell all their friends about you.”

cdsThe order confirmation email he and his team composed became viral:

Thanks for your order with CD Baby!

Your CD has been gently taken from our CD Baby shelves with sterilized contamination-free gloves and placed onto a satin pillow. A team of 50 employees inspected your CD and polished it to make sure it was in the best possible condition before mailing.

Our world-renowned packing specialist lit a local artisan candle and a hush fell over the crowd as he put your CD into the finest gold-lined box that money can buy.

We all had a wonderful celebration afterwards and the whole party marched down the street to the post office where the entire town of Portland waved “Bon Voyage!” to your package, on its way to you, in our private CD Baby jet on this day.

We hope you had a wonderful time shopping at CD Baby. In commemoration, we have placed your picture on our wall as “Customer of the Year.” We’re all exhausted but can’t wait for you to come back to CDBABY.COM!!

Thank you, thank you, thank you!

Sigh…

We miss you already. We’ll be right here at store.cdbaby.com patiently awaiting your return.

Was the product you received defective or damaged? Check out our Return Policy.

Don’t focus on growth

Sivers notes in the book that he never worried about growth. He wanted to focus on delighting customers and figured that the growth would come naturally. Here’s how he put it:

“None of your customers will ask you to turn your attention to expanding. They want you to keep your attention focused on them. It’s counterintuitive, but the way to grow your business is to focus entirely on your existing customers. Just thrill them, and they’ll tell everyone.”

It’s either “Hell Yes” or “No.”

Some time after the sale of his company Derek was being asked to speak in many different places. He often said “Yes,” because he saw all of them as opportunities. At one point he was scheduled to speak at three different conferences, one of them in Australia.

But he realized he wasn’t really interested or excited about any of them. However, he did have a project he was passionate about and wanted to get working on, something that was a “Hell Yes,” when he thought about it.  

To reconcile this dissonance, he created a new rule, which has been written about in hundreds of articles since, the “Hell Yes or No” rule. Sivers dedicates an entire chapter to this topic in the book, though you can find a short version of it on his personal site.  It’s quite simple: if you’re considering a project or commitment that is only a “Yes,” then it’s a “No.”  Give yourself time and bandwidth to take on the “Hell Yes” projects when they come along.

The book isn’t even 90 pages long, so it’s a quick and easy read. You’ll enjoy learning the history of CD Baby alongside the lessons that Derek learned from building it.

Case Study #8: What’s Your Sweat Equity Worth?

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Dr. Phil Carson (a different Dr. Phil than the one most people know) is the owner of Carson Natural Health. Before he began that business, he helped create a pharmacy business. He didn’t have anything to invest in that pharmacy business as he’d been wiped out in 2008-2009, so he earned his equity via sweat.

Why did the owner need Dr. Phil in the first place?

The owner had a medical supply company and was dealing with changes in the law that made it impossible for diabetic patients (which were his bread and butter) to buy from him. They had to buy from a pharmacist. So the owner needed to find a pharmacist in order to serve those clients who were leaving in droves at the time.

The early months

Sweat equityPhil had a regular 9-5 job at the time and worked nights and weekends to build a “closed door” pharmacy (one that wasn’t open to the public) that could fulfill the mail order clients.

After 6 months of this, he quit his day job and went full blast in the business and received a percent of shares in the company.

Growth

While the company had started with a focus on diabetics, they started to expand.

At the time of the sale they had five locations in all. That included retail locations to service local customers in addition to all the mail order business that had been built up.

It was clear to Phil that the expansion was a bit messy and that the company needed help. He reached out to someone he knew who consulted for businesses. Phil’s partner wasn’t only reluctant about the need for the analysis, but even made Phil pay for it.

When presented with the results, the partner simply decided to ignore the facts and refused to hire the consultant to implement any recommendations. At that point, confronted with such behavior, Phil began looking for an exit.

The sales process

Unsurprisingly, the owner didn’t take Phil seriously when Phil proposed a sale of his shares in the company. While Phil was frustrated enough at the situation that he would have happily walked away for $250,000, his business coach urged a professional valuation (so do we). When all the work with the numbers was done, the revenues indicated that Phil’s share was worth closer to $1.2M.  

As one can guess by now, the owner didn’t even offer half of what Phil would have settled for (Phil hadn’t told him he had done the due diligence already) and in response, Phil handed back the professional valuation and asked for $1.2M.

After a delay of a few more weeks while the owner double checked all the numbers, Phil got a check for the majority of that amount, and has been taking payments while doing some consulting work for the company and transitioning out.

Dr. Phil went on to build a company focused on holistic health. You can learn more about it here.