Built to Sell

The next few months at the Stapleton Agency progressed according to Alex’s plan. The new salespeople thrived under Angie’s leadership. Rhina’s attention to detail made her an excellent manager. Chris hired a third designer and continued to improve the efficiency of the Five-Step Logo Design Process. According to Harry, the financial results for the first six months of the year were equally impressive:

Revenue: $1,280,000
Expenses: $995,000
Pretax Profit: $285,000

Mary Pradham asked to meet Alex over lunch, which was strange. He’d not heard from Mary for six months; his accounts were in good standing; and he usually met her at her office at the downtown branch of MNY Bank, not over lunch at one of the city’s best restaurants.

The waiter arrived and Mary ordered sparkling water for the table. They worked through a painful few minutes of small talk. Mary had never asked Alex about his personal life, so she didn’t have much of a foundation to work from. She resorted to weather and sports. She was stretching, and it showed.

“I like to meet with all of my clients face-to-face a few times a year,” Mary exaggerated. “It’s been a while since I’ve seen you, and judging by your account activity, you guys have been busy.”

Alex decided to put Mary out of her misery early and took her question as a springboard to describe their new focus on logos, charging up front, the sales engine, and the building of his team.

“As of this morning, you have $230,000 in your account, and judging by the pattern of your deposits, you’re not going to need that money in the foreseeable future. Have you ever thought about high-yield CDs?”

After an exhaustive summary of the many features of MNY Bank’s deposit products, Mary launched into her next pitch. “If you ever want to expand, we’d be there to support you.”

“We have very good rates on credit lines. You have a $150,000 line of credit now, but I’m sure I could get the credit group to up that to $300,000, maybe more . . .”

Alex couldn’t believe his ears. In the space of six months, Mary had gone from hounding him like a loan shark to offering a credit line increase over lunch at one of the better restaurants in town. The irony was breathtaking. He thought about calling Mary on her change of tune, but instead just smiled, sat back, and relished being courted by MNY Bank.

The second half of the year progressed well. Angie’s team was consistently selling one logo per week. Rhina had taken the instruction manual for the Five-Step Logo Design Process to an entirely new level of detail that Alex was convinced would rival a lunar landing briefing. Chris was busy and enjoyed mentoring his growing team of young designers. With five weeks left to go, Harry projected the year would end as follows:

Revenue: $2,715,000
Expenses: $2,225,000
Pretax Profit: $490,000

It rained all day at the beach house. Alex marveled at the power of the ocean and the beauty of watching the storm from Ted’s retreat. Given the weather, he spent an uninterrupted day planning.

The past year had been full of milestones: Angie and her team had more than doubled sales. Chris’s designers had created more than 250 logos, and judging by the number of clients who were coming back to see Rhina for new product and division launches, she had cultivated a happy group of repeat customers.

Alex had built a foundation on which he could grow. He decided to set his annual target at $5 million in revenue with a 20 percent pretax profit margin. That night, he drafted an e-mail to update Ted on his progress:

Ted:

Thanks for letting me use your beach house for my annual planning again this year. I’m going to shoot for $5,000,000 in revenue and $1,000,000 in pretax profit! I’ll give you the details when I see you on Tuesday.

Alex

Alex started their Tuesday meeting with a quick update of the numbers. Ted listened and smiled at Alex’s progress. He got up from his chair and walked over to the window, then turned to face Alex.

“When we first started our work together, the Stapleton Agency was a miserable business to own. Your team was being asked to do work they were not qualified to do; you were doing all of the sales and account management; your cash flow was tight; and you hadn’t had a vacation in a while.”

“I thought you might be, which is why I want to revisit your decision to sell your company. If this year goes as planned, you’re on track to generate $1 million in pretax profit. Your business is not as stressful as it used to be. You’re not in a capital-intensive business, and with your positive cash flow cycle, you could probably declare a big bonus this year and keep growing the company as you have been doing.”

Alex sat silently absorbing Ted comments. He’d been on a onetrack journey to sell the business for more than a year and hadn’t indulged himself in thoughts of a different strategy.

Ted asked Alex to join him at his desk so they could both look at his computer monitor. Ted had created a spreadsheet with two columns on it. The first column was labeled with the date one year from today. The second column was dated six years from today. Ted had plugged in some numbers in rows labeled Revenue, EBITDA, and Multiple.

“Alex, if you achieve a pretax bottom line of $1 million this year, you may be able to sell your business for $5 million, which was the goal you had when we met more than a year ago.”

With this declaration, Ted pointed to a field on his spreadsheet labeled Sale Proceeds and the number $5,000,000 filled the cell. Alex couldn’t help but crack a smile at the thought.

“However, you could choose to keep your business. You would need to shoulder all of the risk, and there would be tough patches. But if you kept the business for five more years and grew it at 20 percent per year—which is conservative given the pace you have been growing recently—your business could be worth $12 million or more.”

Ted pointed to the spreadsheet. “Selling your business is a big decision. The process will be stressful and will take a toll on you and your family. Once you sell, there is no going back. I’d like you to spend the week thinking about whether you’ve made the right decision. When you come back next week, if you still want to sell your company, we’ll get started with the final steps in the process.”

Alex needed to think and had to be away from the office. He found a Starbucks near Ted’s office, ordered a Grande Bold, and sat in a quiet corner. He opened his notebook to an empty page and did what his mother had always taught him to do when he faced a big decision: He drew a line vertically down the center of the page and wrote the Pros on the left and Cons on the right. He started to scribble.

Alex looked at the list and kept recalling the numbers Ted had calculated in their meeting. Five million dollars symbolized financial freedom. A financial planner had once told him that he could live on 4 percent of his investments in perpetuity. That meant that, after he paid tax on the sale of his business, he’d still have enough to draw a six-figure income each year from his nest egg for the rest of his life and never have to touch the principal. Jenny and Max would not be able to attend private school, but they’d have their dad around, and Pam would be happy that the bank would take the guarantee off their home and their financial affairs would finally be secure.

Then Alex contemplated $12 million. With that much money, he’d have more than enough money to pay off his mortgage and travel. Then his imagination failed him. Alex could not think of any toys that were worth the risk. The marginal value of the extra $7 million was limited and the risks were considerable. If he kept the business another five years, the economy could turn, or a competitor could decide to specialize in logos. Angie could set up a competitive shop, he could be sued . . . Alex let his mind get carried away with doomsday scenarios.

He would rather have $5 million today than a chance for $12 million in five years. Perhaps that made him weak. Maybe Ted would think he was not a real businessman. It didn’t matter—he’d made his decision to sell.

“It is, and I feel more confident than ever with my decision to sell my firm. At the end of the day, I’m a simple guy. I don’t need a vacation home in Aspen or a private plane. I want to experience true financial freedom, and $5 million would be enough.”

“I’m glad you thought it through again and I’m happy to help you through the process. I want you to prepare yourself for a tough road. These last few steps will likely take six to eight months and it will be a bit of a roller coaster.”

“Brokers come in all shapes and sizes. The ideal is to find a broker for whom you will be a meaningful account. The term business broker is usually used for individuals who do smaller deals where the total value of the transaction is well under $5 million. You’re really looking for a boutique mergers and acquisitions firm. The firm you select needs to be large enough to be respected by a potential buyer, yet small enough that your deal will be important to them. Ideally they will have also done some deals in your industry.”

TED’S TIP # 13

Find an adviser for whom you will be neither their largest nor their smallest client. Make sure they know your industry.

“I’d recommend you speak with Mark Travers. He’s with Travers Capital Partners; Cindy can give you his number. Also speak with Peggy Moyles. Peggy is a partner with EMG Capital Partners.”

The office of Travers Capital Partners was downtown. The receptionist looked bemused as Alex approached. She greeted him coolly and assured him that Mr. Travers would be down to greet him shortly. After ten minutes, a woman walked through a set of doors and introduced herself as Amanda, Mark Travers’s assistant. She instructed Alex to follow her up a spiral staircase that connected the two floors of Travers Capital Partners.

Amanda ushered Alex into a boardroom looking out over the city. Alex counted twelve Aeron chairs situated around a large glass boardroom table. He felt a little self-conscious sitting at such an oversized table, so he situated himself on one end near the door. Amanda returned and produced a large bottle of Perrier. There was a tall glass with ice and three neatly cut limes on the edge of a silver serving plate. Alex passed the time looking at a muted flatscreen television with CNBC rolling through stock quotes as if the capital markets were some sort of spectator sport. Finally, Mark Travers appeared, offering a firm handshake and a toothy smile.

“We represented the buyer of Ted’s consulting business. He’s a smart guy and a tough negotiator. Tell me a little bit about your agency.”

“We’re not really an agency anymore. We specialize in producing logos. We do a lot of logos for companies launching new divisions or new products.”

“His name is Chris Sawchuk and I doubt you know him. We don’t consider ourselves a marketing agency per se. Our Five-Step Logo Design Process is all we do. We’ve become very efficient at creating logos.”

Mark started to wave his hands, which Alex took to mean he had received some sort of flash of brilliance from above. Alex stopped to let Mark say whatever had gotten him so animated.

Alex was surprised to hear that Mark already had an idea of who would buy the Stapleton Agency after just a few minutes of discussion. Intrigued, he asked Mark to elaborate.

Alex recognized Multicom as the largest agency holding company in the world, with more than $1 billion in annual revenue and operations around the world.

“The Stapleton Agency is just the kind of tuck-in acquisition Multicom would love,” Mark continued. “I’d be happy to arrange a meeting with their North American business development executive.”

Mark went on to explain that they charged 5 percent of the deal but typically worked with much larger companies. He said under normal circumstances he would not take on a firm as small as the Stapleton Agency, but since Ted had referred Alex and he already had a good relationship with Multicom, he’d represent Alex as a favor to Ted.

Alex left Travers Capital Partners with mixed feelings. On one hand, he thought Mark was successful and certainly well connected to Multicom. On the other hand, something didn’t seem quite right. It all sounded a little too easy.

Alex’s next meeting was with Peggy Moyles at EMG Capital Partners. She greeted Alex and ushered him into her office. Peggy asked him to describe his business, and Alex proceeded to outline the work they had done to remake the Stapleton Agency into a company with a single offering.

“Alex, you’ve done something most business owners never do, which is to extract yourself from the epicenter of your operations. You have a predictable sales engine with a good pipeline of recurring revenue. Your positive cash flow will be attractive to buyers, your capital structure is simple, and the management team seems to be engaged for the long term. You’ve built an excellent business.”

“Thanks, Peggy. I had an exploratory meeting yesterday with Mark Travers over at Travers Capital Partners and he thought we would be a good fit for Multicom. What are your thoughts on Multicom as a potential buyer?”

“They would not have been my first choice. Big agencies have a standard formula by which they buy companies, and it typically involves a three- to five-year earn-out. In addition, big agencies think all companies want to be like them. I don’t think they would value or appreciate all the work you’ve done to specialize in a single process.”

Alex was impressed with Peggy’s appreciation of the work he had done to move away from the agency model. He pressed her for some names of possible buyers.

“I’d like to have the opportunity to think about it some more,” said Peggy, “but off the top of my head, I could see one of the technology firms with a big investment in color printing hardware, or maybe a large printing company might be interested. You could act as a Trojan horse for a company that wants the printing contracts of the companies you create logos for.”

She went on to describe how her firm worked. They charged 5 percent of the deal but also wanted a retainer of $7,000 per month over the next six months. Alex asked Peggy if she would waive the retainer and her response was crisp.

“We need to charge a retainer to ensure that you’re serious about selling your business. If we took on assignments without a retainer, we’d spin our wheels generating offers for owners who were not serious about selling their firms.”

“I’m not sure. I like that Mark knows the Multicom guys. He seemed to think it would be possible to get an offer from Multicom in the next few weeks.”

“I understand, Alex, but if you want my advice, I’d avoid using Mark. It sounds like he wants to deliver a gift to Multicom in an effort to ingratiate his firm. Mark makes a lot of his money from representing buyers, and Multicom is a big client of his. It sounds like he would try to deliver you to Multicom without creating any competitive tension. Without that competition, you might be disappointed by Multicom’s offer and you would have wasted a lot of time.”

“I never considered that, but is there anything wrong with going with Mark to see if he can get a good offer from Multicom? Since he’s not charging a retainer, I don’t see what I have to lose.”

“Once you engage an M&A firm, the chances others will find out you are interested in selling will go up. Mark will agree to keep things confidential, but the more people know of your intentions, the higher the chances are it will get back to your staff or customers.”

“That’s not necessarily a bad thing. She’s going to act for you exclusively and she will still be motivated because most of her compensation will come from getting you a deal. She’s a professional and needs some way of making sure you’re serious. Plus, Peggy appreciates the fact that you’re not just another marketing agency.”

TED’S TIP # 14

Avoid an adviser who offers to broker a discussion with a single client. You want to ensure there is competition for your business and avoid being used as a pawn for your adviser to curry favor with his or her best client.