Saturday, March 6, 2010

Day 53 - Job Search Reflections: The Heart of the Deal

          The job boards were discouraging this morning. There were only five jobs even remotely applicable on Indeed. None of them were a good fit for me, nor I for them. I fear that my profession has passed me by. While I’ve been toiling away trying to make the companies I’ve worked for succeed, I’ve not paid enough attention to bolstering my own credentials and skills. Now that the job market favors employers, and so many desperate souls are searching for meaningful work, the experience I bring to the table seems woefully underwhelming.
In addition the economy is seriously skittish. The news seems a little bleaker each evening. Now that the housing bust has exposed the cancer at the heart of our financial systems, hundreds of billions of dollars of debt on the brink of default, we seem to be spiraling into some final cataclysmic adjustment. We’ll have to wait to see just how bad it really is.
My wife is tired of listening to it. She doesn’t care much for the news anyway, so I generally let her have the remote. I tell all our friends, anyone who will listen really, that I am not authorized to operate the remote controls or the thermostat in our house. My wife doesn’t think this is very funny, but that doesn’t mean there’s not a grain of truth in it.
          I’m not used to having to look for work. I was at the same CPA firm for thirteen years after I graduated college. Then I owned my own business for a year. Then I went to work for Henry who had been one of my clients at the CPA firm. There was no job search, no resume, and no interview. I knew Henry and he knew me. I went by to see him. He told me he was looking for someone to get his bookkeeper caught up. I told him I could help him out. I started the next day. It didn’t take me long to realize Henry’s problems were way deeper than he imagined. We came to terms, and I stayed with him for 8 years. When we sold the company I stayed with the company that bought us out for another 2 years. Then I got recruited to an Alabama company. I was there for 6 years. That is 30 years of work without ever having to go beat the street for a job. I ought to be able to retire, but I can’t. I’ve had thirty years of managing other people’s money like it was my own while I managed my own money like I was the federal government.
*****
          I thought I had everything figured out when Henry sold his business to a company that traded on the NASDAQ exchange. I thought all my little personal financial transgressions would be fixed by a momentous bit of serendipity. The buyer came to us. One of their customers had recommended that they give us a look because the customer thought we knew what we were doing. We didn’t know what we were doing, but I guess it looked as though we did to someone.
Our sales were flat. We were having quality issues with a new design, and rework and warranty claims were costing us a fortune. Henry had already tried to shop the company around, but he had tried to do it without disclosing what kind of financial shape we were in. He was shopping us to another publicly traded group that was also one of our direct competitors. When I pointed out to him that, even if he did manage to generate some interest, they were going to expect to see his financials and to be able to come in and do due diligence on our books and records before they would settle any largess on him.
Henry knew that there would be two things that would happen if a competitor started nosing around our books. One, they would lose interest in buying us, and, two, before they had got very far they would know enough about our business to make it difficult for us to sell any more competing product. Sure they would sign a letter of intent with a non-disclosure clause, but that wouldn’t stop them from dropping a hint here or making a disparaging comment there when the heat was on in a potential sales deal. Henry would do it, and so would just about everyone else in our business. Henry backed off.
          Then one day comes this new company—also a competitor in one of it’s divisions—and its CEO. Let’s call him Ivan. They were a trucking company. They had already bought one boat company in Florida and wanted to diversify their product line. They thought we had a line that complemented their own products and would allow them to compete over a broader range of price points. They thought we were a good manageable size and that we had good potential for growth. Henry told them that he wanted $6 million for the company. They said they were interested at that price. They did their own due diligence. A lot of firms use consultants to do their due diligence, but consultants cost a lot of money and they sometimes tell you things you don’t want to hear. I believe that Ivan had already made up his mind that he was going to buy us and that he didn’t want any $1,200 dollar suits charging him a couple of hundred thousand dollars to tell him it was a bad idea. Ivan and Henry were cut from the same cloth.
          Henry was very excited. He thought he was going to cash out, have himself some real net worth for a change, and be able to pursue some other investment interests. He came to my office bubbling over with goodwill. The VP, Mike, was there. Henry sat down and started rhapsodizing about how he figured he’d finally made something out of all his scrabbling and worrying. He felt like Mike and I had been a big part of his success and he promised to give us a little something for our trouble when he finally had his money. “I’ll make it worth your while, if you know what I mean,” he said.
          Mike and I looked at one another. We knew exactly what he meant. He meant he needed us to help him do the deal and if he succeeded Mike and I were going to get the ‘bidness’. We’d both been there before. I decided I didn’t want to go there again. If Ivan was going to give Henry $6 million for a business upon which Henry had committed ‘bidness’, Mike and I deserved a fair share of the meringue without having to depend on Henry’s ethical sensibilities.
          I made a modest and logical proposal to Henry. I gave him the following facts:
1.     Since he had no remaining basis in the company, any cash he managed to get out of the deal was going to be taxable income to him.
2.     Absent any compelling business reason for his giving Mike and me any money, those payments were likely to be construed as non deductible gifts.
3.     Ivan’s company was surely going to want to structure the deal as a tax free exchange of stock, and to put some restrictions on Henry’s ability to sell the shares he got to avoid diluting the value of the shares they already had outstanding.
4.     The only way to make sure that Mike and I got the reward he was so generously offering was to give us a share of his valueless company now, before the sale, so that our distribution would come directly from the deal and not be dependent on Henry’s personal tax circumstances.
Henry bought it. I’m sure he didn’t want to, but he really had no choice. To balk would have been to admit that he really meant to stiff Mike and me when it came time to divvy up. He needed us to get the deal done. For the first time in my association with Henry—Mike’s too—I had him penned up and unable to cheat me out of what he had promised. Too bad I couldn’t have penned Ivan up at the same time, because he turned out to be every bit as slippery and duplicitous as Henry.
          Before Henry could change his mind I drew up all the necessary documents. We had a board meeting and a stockholders’ meeting, executed the appropriate notices and minutes, and signed, issued, and recorded stock certificates to Mike and me representing one twelfth of the company each. In an hour or so we had locked in a share of the deal, however it turned out, that Henry could not undo. There would be no ‘bidness’ as usual at the end of the road, not from Henry anyway.
          The rest of the deal was not nearly so easy as Henry had been. There was more back and forth than I imagined possible. Ivan’s people finished their due diligence in pretty short order. Everyone they sent to look us over had other things to do that they were anxious to get back to. Although they asked some hard questions and acted properly skeptical, for the most part it was a lick and a promise. They all knew the result Ivan expected and they weren’t about to deliver anything short of that. It was the negotiations over price and structure that got dicey.
          As soon as Henry understood that Ivan and his board were willing to give us $6 million, he decided that he hadn’t asked for enough money. Henry had thought they would give him $3 million. That’s why he asked for six. When they rolled over on six he decided that was too easy. He must have left money on the table.
          “Call Ivan and tell him we need twelve million,” he said to me.
That he’d already said he wanted six didn’t bother him a bit. It bothered Ivan of course. He thought we’d taken complete leave of our senses. Ivan told me to forget it then. “It was a stretch at six,” he said. It was a stretch at one, I thought; but then I didn’t know that we were going to be paid with smoke and mirrors.
We went through a lot of other machinations and maneuverings. I hired a law firm and a CPA to make sure we structured the sale to get the tax result we wanted and to make sure our private lender was protected. Our lawyers kept throwing their weight around at inopportune times. I think they were trying to justify their fees. They almost killed the deal several times by acting intractable on points that really mattered very little to us. I finally had to rein them in—one of them anyway—by yelling at him in a conference call with all the players in the deal.
I’m not used to having to do stuff like that. I hate yelling almost as much as I hate being yelled at. I am not a loud and assertive person by nature. I don’t think I should have to be. I’m a smart guy. People should pay attention to me because I have good sense and good ideas. I shouldn’t have to act like a jackass to get their attention, although sometimes I think that if I did I would make more money.
We finally got over all the hurdles. The deal died several times along the way, but whenever it did I resurrected it with sweet talk and the grace of good sense. When Henry went off on a jag, I placated him. When Ivan came up with a new twist to screw us, I found a compromise to make it palatable. I was motivated by my one twelfth share. I figured it was worth $500,000 to me. It should have been, but I had no notion of Ivan’s capacity to devalue it. I was just building castles in the air.
We were going to do a stock swap just as I had suspected. Ivan’s company would give us a number of shares equal to $6 million at the market bid price at the close of business the day before closing. At the last minute they wanted to make the whole distribution subject to an earn-out. This was not unexpected, but it wasn’t something we wanted to deal with. An earn-out meant the company would have to post profits for a period of time before the stock would be distributed to us.
We had never posted profits, but we had always thought that we could if we only had sufficient cash. I reasoned that, with Ivan’s executive team effectively taking over management, Henry wasn’t going to be able to tie up our cash flow anymore with his whacked out deposit deals. Besides Ivan’s Florida division, because it operated at a higher echelon of the market than we did, would give us access to markets we hadn’t been able to tap before. For this reason it also seemed reasonable that they would invest in improvements to our manufacturing efficiency and to our products.
We had already talked with them about these issues, and they were excited about the prospects for substantial profits under their guidance. We needed the deal so we took the earn-out. We might as well have walked away at that point. The end result was the same, and we wouldn’t have had to endure nearly so much heartache and abuse.

2 comments:

  1. I love this line "I’ve had thirty years of managing other people’s money like it was my own while I managed my own money like I was the federal government."

    Bad for you but the image is priceless...

    ReplyDelete
  2. I like that line too. It resonates, although it was, as you say, bad for me. Thanks for the read and the comment. I read your profile. Seems we share some common attitudes.

    ReplyDelete

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