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The Rule of Three

Anticipating the torpedoes that can sink a deal


By Norm Brodsky | Oct 1, 2009

Norm Brodsky

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My partner Sam has bought and sold more companies than I can count, and along the way he has come up with what I call the Rule of Three. In negotiating any acquisition or sale, he says, you will run into three potential

dealbreakers that have to be overcome if you're going to get the deal done. Any of those obstacles can prove insurmountable. You may never reach the second or third if you don't overcome the first. Then again, you're not out of the woods if you do. I realized my partners and I were creating the first big obstacle to the sale of our business by our majority shareholder, Allied Capital, when we insisted on receiving a larger share of the proceeds than we'd normally be entitled to. Most of our investment was in equity, after all, and in any liquidation, debt is paid off before equity. Though the sale proceeds would probably be enough to take care of the debt, there would be little, if any, left over to cover our equity stake. Fortunately for us, however, the company could not be sold without the landlord's approval, and we owned the land. So we had the leverage we needed to insist on better terms. I felt strongly that we were justified in using that leverage. Granted, if CitiStorage were bankrupt, it would make sense for equity holders to get nothing, but the company was far from bankrupt. On the contrary, it was very healthy and still had substantial value. Otherwise, Allied Capital wouldn't be able to sell it. Under the circumstances, it didn't seem fair for the creditors to get all their money back and the equity holders to get nothing. Sam called our contacts at Allied and explained our position. They understood and indicated we'd work something out once the bids were in. By then, the selling process was well under way. For me, it was a lesson in how business auctions have changed. Ten years ago, an investment banker representing a seller would create a deal book containing the relevant information that potential buyers could use to determine how much, if anything, they would offer for the business. Now, instead of a deal book, there's an online data room with the same information. After signing a nondisclosure agreement, interested parties receive a password allowing them to enter the room and search the data. It's convenient for the would-be acquirers and even better for the seller, which can track which parties go into

the room and how much time they spend there. That's valuable information when you're trying to gauge how serious the different prospects are. In our case, it soon became apparent that the most serious prospect was a company I'll call RecordsCo, which I understood was controlled by Goldman Sachs. Goldman had recruited a former executive of Iron Mountain, the giant of our industry, to be RecordsCo's CEO, presumably with the goal of doing more acquisitions and building a rival to his former employer. Frankly, I thought that getting acquired by RecordsCo was probably the best outcome for us. Though the CEO and I didn't know each other well, he had a terrific reputation in the industry, and as the selling process unfolded, I began to understand why. He was smart, affable, experienced, and capable, and he came across as a straight shooter. It also didn't hurt that CitiStorage was twice the size of RecordsCo and had more management depth. I figured the merger would open up opportunities for our employees that they might not have if we were acquired by someone else. So I was delighted when the bids came in and RecordsCo's was by far the strongest. With a number now on the table, it was time to sit down with Allied Capital. Sam and I flew to its headquarters in Washington, D.C., and met with Allied Capital's CEO and a member of the board. "Listen," I said, "I don't understand why you're selling this business now. Whatever price you get will be 20 or 30 percent less than it should be, which will all but wipe out our equity and yours as well. But we aren't going to stand in your way." Sam and I had already made clear what we wanted: $10 million of the $13 million we'd invested; continued use of the top two floors of our office building; and an understanding that we would be able to turn in our stock certificates, collect our money, and move on with no further financial commitments. The Allied people were very accommodating. We didn't get everything we asked for, but we came away with what we thought was a fair deal. At the time, we believed they were just being good partners. Only later did we realize they were being very smart business people as well.

What we didn't take in was that the troubled economy had presented Allied Capital with a golden opportunity -- one that it could use the sale proceeds to take advantage of. That opportunity grew out of the drop in the price of corporate bonds. Some of the bonds Allied Capital had issued were selling for as little as 37 cents on the dollar. It could buy them back, retire the debt, and make 63 cents on the dollar. (When a borrower retires debt for less money than it received at the time the loan was made, the difference is recorded as income.) Indeed, Allied Capital had done such a debt buyback in the second quarter of this year, as I discovered when I read its quarterly report. It mentioned that the company had recently paid $50.3 million to repurchase notes with a face value of $134.5 million. So let's say that Allied Capital cleared $60 million on the sale of CitiStorage. Then it could turn around and use the $60 million to buy back more of its corporate bonds. If it had an opportunity like the one I'd read about -- which it probably won't, given the recent rise in the price of its bonds -- it could retire another $160.4 million in debt, registering a gain of more than $100 million. No wonder Allied Capital had wanted to sell us in the first place and had then been so willing to accommodate our request. Having overcome obstacle No. 1 -- us -- Allied Capital was ready to move forward with the sale. A horde of accountants, attorneys, and analysts from RecordsCo and Goldman descended on our offices and began inspecting our records. To be sure, our people were used to the drill by now. They'd been through it twice before. But that didn't make it any less disruptive to our operations and morale, as people inevitably worried about what the future might hold. For the first time, my partners and I began to feel some animosity from a couple of senior staff members. I suppose they blamed us for putting them at risk. As president of CitiStorage, Louis Weiner orchestrated our end of the process, while Sam and I left with our wives for a long-planned trip to Russia. By the time we returned, the due diligence phase was winding down.

Both Louis and RecordsCo's CEO were confident the deal would go through, as was I. But Sam was waiting for obstacle No. 2. It arrived in the form of a letter from RecordsCo listing 32 items in the lease that it wanted changed. I was flabbergasted. The lease was in the data room, and so there had been plenty of time earlier in the process for RecordsCo to raise any concerns about it. I knew that at least one of Goldman's key people had read it months ago, based on a comment he'd made at the time. Why were these points being brought up now? Why wait until the two sides had spent almost a combined $1.5 million on due diligence? Was Goldman suddenly trying to get out of the deal? And if so, why? So there we were, up against the next potentially fatal roadblock to selling the business. We didn't know whether it was simply a negotiating stance on the part of RecordsCo/Goldman or the death knell of the deal. But we'd find out soon enough.

The Offer, Part Two

After spending decades building his businesses, our columnist managed to negotiate the offer of a lifetime--by refusing to negotiate.
By Norm Brodsky | Dec 1, 2006

Norm Brodsky

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In business, as in life, it's often what you don't do that makes all the difference. The story begins where I left off last month. Right around the time that Cintas (NASDAQ:CTAS) expressed an interest in buying our companies, I was approached by a venture capital firm that was trying to get into the records storage and secure document-shredding businesses. It had already bought the company of a guy I know in New England and was in serious negotiations with another friend of mine in Pennsylvania. The firm wanted

to talk about buying our businesses as well, but my partners and I weren't interested. For one thing, we had doubts about the buyer's financial staying power. That was important because if we ever do sell our businesses, we plan to hold on to the real estate and lease it back to the acquirer. So we certainly didn't want to sell them to people who might not have enough money to keep paying the rent. Soon thereafter, moreover, Cintas made its offer. We didn't think anybody could match what Cintas--because of its special circumstances--was willing to pay, least of all a group of VCs who were just starting out in the business. But, as you know, I decided not to do the Cintas deal. The main reason was that my partners were against it, though there was another factor as well. Cintas wanted only the box and the shredding businesses, leaving me with the delivery business, which I didn't want to keep if I sold the other two. It was profitable enough, but it was so intertwined with the others that I doubted I would ever be able to sell the delivery component as a standalone entity. Besides, my partners and I really didn't want to be in a tough, lowermargin business like delivery. We were still doing it only because some customers were willing to pay the higher prices we'd begun charging in recent years. Since I still expected to sell the box and shredding businesses at some point in the future, I knew I'd eventually have to decide the fate of the delivery business, but I figured I'd cross that bridge when I came to it. We had more urgent matters to focus on--for example, figuring out what to do when we run out of space in our warehouses next year. Given the outcome of the Cintas episode, selling the businesses clearly did not belong high on our agenda. I wasn't even thinking about it when I showed up at our annual industry conference last spring.
"You're in a bit of a spot, aren't you?" I said. "People don't feel like they have to talk to you. If you bought us, you could talk to anybody. You'd become a player over night."

But a funny thing happened at the conference. One of the VC partners I'd never met before was there, and we hit it off immediately. Let's call him

Greg. I found him to be a terrific guy and an astute businessperson. The concerns I'd had about selling to the firm melted away. Perhaps he sensed that. In any case, he said, "Okay, I think it's time for us to buy your business." I laughed. As I thought about it, however, I realized he was right. It was, in fact, the perfect time for him to buy our business--perfect for him, that is, not necessarily for us. "You're in a bit of a spot, aren't you?" I said. "What do you mean?" Greg replied. "Well, right now the three biggest players in the industry are Iron Mountain (NYSE:IRM), Recall, and ArchivesOne," I said. "You've bought a couple of small guys, but you don't have enough bulk to be a real player. People don't feel like they have to talk to you. If you bought us, you could talk to anybody. You'd become a player overnight." He laughed and smiled. "Okay, so what's it going to take to buy your company?" "Well, we'll do it as a multiple of EBITDA, but here's the thing," I said. "I won't negotiate. I'll give you the multiple"--I gave him one that was well above the industry norm--"but I won't discuss it. Also, you'll have to take all the companies, including the delivery company. It's a nice little business, and it's an adjunct to the others. So the multiple applies to all three. If you're interested in buying us out under those terms, I'll talk to you. If you're not, you'll still be my friend." Greg didn't blink. "Can you give me some financials?" he asked. "Of course," I said. "My partner Sam handles these things. Call him when you get back to New York. I'll tell him to give you whatever you want to look at. You'll just have to sign a confidentiality agreement." "No problem," he said.

Suddenly we were back in play. Greg contacted Sam, who gave him some basic financial information about the three businesses. Shortly thereafter, he called Sam with an offer. He had looked at our EBITDA and calculated a price based on the multiple I had given him. He said his firm would buy all three businesses for an amount that was several million dollars less than that price. "What do you want me to do?" Sam asked me. "Nothing," I said. "Do nothing. Don't call him back." "What are you talking about?" Sam said. "I told him there would be no negotiations," I said. "We're not negotiating." We didn't hear anything for the next week or so. Then I got a call from my friend in New England who had sold his business to the VC firm. I'll call him Mitch. He was now on the board of the company that the firm had formed out of its various acquisitions. "I've been talking to Greg," he said. "He was surprised we haven't heard back from you about his offer." "Listen, Mitch, here's the deal," I said. "I told Greg there would be no negotiations. He's a terrific guy, but I'm not negotiating with him. I don't care if I sell the business or not." Two days later, Greg called me. "We just wanted to put something on the table," he said. "Greg, I love you, but I told you: There's no negotiating. If you don't want to do it under those conditions, it's fine."
I don't care if I sell the business or not. And therein lies a paradox. The less interest you have in doing a deal, the more likely you are to get one you'll find difficult to refuse.

"No, no, no," he said. "We'll pay you what you want." "Okay," I said. "Call Sam back, and we'll get things moving."

And move they did. Shortly thereafter, Greg and his people indicated that they would be sending us a letter of interest as soon as they finished analyzing our balance sheets. We asked them to hold off until we completed work on a refinancing agreement that would allow us to get out from under our personal guarantees. Within a few weeks of closing that deal, we had received and signed the letter of interest stating that--subject to due diligence and the signing of a formal agreement--Greg's firm would buy our records storage, document-shredding, and delivery businesses for a lot more money than we had ever been offered before. This was not a foolish offer on the firm's part. From a business standpoint, I think it makes sense for Greg and his colleagues to pay that much to acquire us. They need to get themselves on the map if they're going to meet their investors' financial goals. We can put them on the map in one fell swoop. The deal would kick-start their business, especially since my company is still growing at a rapid rate. For me, on the other hand, it's an opportunity that won't last forever. Greg and his partners retain the right to change their minds about the deal (as do I), and I can't imagine that anyone else is going to offer as much. We're worth a lot more to an up-and-coming company than we would be to an established business. Then, too, rising interest rates could reduce the buyers' projected multiples by making money more expensive, in which case the buyers would have to offer less in order to get the returns they're seeking. So there's one thing I can be pretty sure of: I will never get a deal like this again. Not that I needed any great negotiating skills to land it. If you've ever negotiated to buy or sell something, you know that you're much more likely to get a good deal if you're willing to walk away empty-handed. Indeed, you're probably in the strongest negotiating position when you really don't care very much whether the deal goes through. And therein lies a paradox: The less interest you have in doing a deal, the more likely you are to get one you'll find difficult to refuse.

That's exactly the spot I find myself in at the moment. Assuming the due diligence goes smoothly--as I expect it will--I will soon face one of the biggest decisions of my business career. I really don't know what I'll decide. I'll tell you more about my mixed feelings in next month's column. In the meantime, I'd like to hear your opinion about what I should do. We've set up a special e-mail address for comments and advice from readers. It's shouldnormsell@inc.com. Please let me know what you think.

The Offer, Part Three


I can sell my businesses for more money than I ever thought possible. But then who will I be?
By Norm Brodsky | Jan 1, 2007

Norm Brodsky

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It's odd what happens when you've been in business as long as I have. The company becomes a part of your identity, even your personality. You're no longer quite sure where the business ends and you begin. I'm talking about you the individual, the person your mother gave birth to, the human being that exists apart from what you do. You don't know where the boundary lies between that individual and the business you've created. In

fact, you're not even sure there is a boundary. You start to wonder, is the business me or am I my own person? Such thoughts have been on my mind lately as I contemplate the possibility of selling my three businesses. I was 36 years old when I started the delivery business in 1979 and 47 when I launched the records storage business in 1990. I began that one with a single truck and 27 boxes that a customer had asked me to store for him. Today we have a fleet of almost 100 trucks, and we store more than three million boxes in seven warehouses on the Brooklyn waterfront. When people come to see us for the first time, they can't believe their eyes. They are overwhelmed by the sight of the boxes stacked up, row upon row, all the way to the ceiling almost 60 feet off the ground. "You built all of this from scratch?" they ask, and I'm reminded of what it took to get there. There are a lot of stories behind those boxes, and when I look back, I feel a certain anxiety at the thought of separating from the business. What will be left of me if I no longer own it? You may find all of this a little surprising if you know me only through these columns. After all, I do have an identity outside the business. In some ways, it may be stronger than my identity inside the business. In fact, I often run into readers who have no idea what business I'm in. Some don't even know that I'm in business. They think I'm a writer. "I read your stuff all the time," they say. They're amazed when they drop by my place and discover I have a substantial company that takes up most of my time. But for me, the column is an enjoyable sideline. It's not who I am. Losing it would not give me an identity crisis. Losing the business would be another matter. Part of the problem is not knowing what I'll do if I do sell the business. I certainly won't retire. I would be miserable if I did. I don't play golf, and I already do all the fishing, skiing, and traveling I want to do. I'll continue my pro bono work, advising people who are trying to start or build businesses, and I might get involved financially in a venture or two, but I will never call myself a "consultant" or an "investor" as a lot of retirees do when they stop working. They're asked, "What do you do now?" and they don't want to tell

the truth--that they do nothing. Me? I'd rather say, "I do nothing." You will never see the words consultant or investor next to my name. Not that I intend to do nothing. It's just that I don't know what the something will be, and that's a little unnerving. In the short term, I'll no doubt keep working at the company. The people who buy it would want me to stick around for a couple of years after the sale, and I'm willing to give it a try. But, beyond that, I'm just not sure what I'll do. I could imagine myself starting another business. Or I might develop one of the ideas we've had in the past--like setting up a real estate investment trust made up of properties like mine. Meanwhile, I have a book in the works with my co-author, Bo Burlingham. I'd like to keep writing this column and doing some public speaking, but how much credibility will I have if I'm not running a business anymore? I wonder about that. Given all these concerns, some people will ask, "So why not just keep the business?" It's not as if I have to sell it. I'm in good health. I love what I do. I enjoy my life as it is. I work with great people. I have the time and the resources to do whatever I feel like doing. I have spent a lifetime getting to this point. Why throw it away? That's a good question. Is it just about the money? I don't think so. I already have all the money I'll need for the rest of my life and then some. This decision would actually be easier if I did need the money. Years ago, when I first began contemplating the possibility of selling the business, I came up with a number that I thought would give me and my family absolute financial security. I've already put that amount in the bank. If the deal goes through, I'll wind up with much more money than I'll ever be able to spend on myself and my loved ones. So, for the first time in my life, I'll have to make a major decision in which money is not the principal consideration. That's very disorienting. With money as the yardstick, you can measure how you're doing. Dealing with identity is much trickier. I find myself spending a good deal of time daydreaming--thinking about how it would feel not to have the business anymore.

I'll give you an example. A couple of months ago, my wife, Elaine, and I went to a Frankie Valli concert sponsored by my friend Marty Markowitz, the Brooklyn borough president. He seated us in the third row, right behind the Brooklyn police chief and his wife. We greeted one another warmly. The chief and I are friends. He attends the party I give every Fourth of July, which winds up with the spectacular fireworks display that Macy's puts on right across the East River from my property. As I sat there behind him at the concert, I couldn't help thinking that his life may change after he retires. I mean, he's a really great guy, and everybody likes him. Although people in his position don't make a huge amount of money, they have a lot of power and command a lot of respect. But when he's no longer the chief, he may not get the same treatment. He may not be seated in the second row anymore. And then I thought, "Oh, man, is that what's going to happen to me when I sell my business?" That's the frightening part: going from a somebody to a former somebody. I guess it has to do with the prestige you have and the respect you get when you're the guy in charge. Anybody who knows me will tell you, I have to be in charge. How would it feel if I weren't? When I'm in that frame of mind, I say to myself, "Omigod, look what I'd give up!" And yet, I have to admit I'm considering the current offer much more seriously than I did any of the previous ones. Why? I can come up with a number of solid, rational reasons. To begin with, the buyers are good people who would keep the culture we've created; in fact, they say they want to import our culture into the rest of their company. They would also be buying all three companies, which solves the problem of what to do with the delivery business. The money is at the high end of the range of possible prices. The timing seems pretty good from a number of different perspectives. Elaine's feelings are a factor as well. She really hopes the sale will go through because she has other things she wants to do in life, though she recognizes that the decision has to be mine. If selling the business makes me miserable, her life will be miserable as well. But I actually feel okay about the future when I'm not focusing on what I'd lose by doing the deal. Like most entrepreneurs, I'm an optimist. I think

things generally turn out for the better. Although it sometimes takes a while to get there, I know from experience that even bad things can lead to good long-term consequences if you're willing to persevere. So I'm really not frightened by the unknown. I tend to see it as an adventure. Granted, it's easier to take that view when you're financially secure. Then again, even when you have money, there's always change to contend with, and change is inherently scary. It creates problems. It disrupts lives and businesses. Yet change is also inevitable. You can't avoid it, no matter how much you might want to. Indeed, by trying to avoid it, or by ignoring it, you leave yourself vulnerable to the worst possible outcomes. You're much better off trying to anticipate it, and then embracing it. I'm at a stage in my life where I can see some big changes approaching. I also know that my business is nearing a major crossroads as well. If I don't sell it, I'll have to figure out very soon what to do when we run out of space in our warehouses late next year. In addition, I'll have to deal with the city's plan to turn my land into a park at some point. It could happen next week, or it could happen 20 years from now, but I know it will happen eventually, and-when it does--whoever owns the business will be responsible for moving it to another location, which will call for creating a whole new business, a moving business. I'd prefer that to be someone else's problem instead of mine. So, in a way I really want to do the sale, and in a way I really don't. I'm about as conflicted as a person can be. Of course, the issue may yet resolve itself if the would-be buyers change their minds, or if they can't raise the money they would need to complete the deal. For now at least, I'm inclined to stand back and let events take their course, waiting to see if the moment arrives when I have to make a decision. What will it be? I have no idea. What would you do? You can give your opinion by writing to shouldNormsell@inc.com.

The Offer, Part Four


We interrupt these negotiations while a bunch of outsiders critique my very existence.
By Norm Brodsky | Feb 1, 2007

Norm Brodsky

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What would you think about having a team of outside accountants, lawyers, and operations people descend on your business to go through your records, question your employees, dissect everything you do, and judge how good your company really is and how truthful you really are? That's what happens in due diligence, and I'm sure most people would feel at least a twinge of anxiety about it. I know I did. But then "Greg"--the venture capitalist whose firm wants to acquire my three main businesses--sent in his crew to check us out late last year, and due diligence turned out to be one of the easiest parts of this whole process. The truth is, we were ready. For the past eight years, we have had an outside accounting firm do annual audits of our financial statements and certify their accuracy. We began the practice in 1998, when we were doing only

about $4 million in sales. Back then, the cost of an audit was $30,000 or $40,000--today it's well into six figures--and I questioned whether it was really necessary for a company our size to spend money on that, but my partner Sam convinced me that we would need audited financials to get the bank financing we'd be looking for in the future, and it was much cheaper to do the audits annually than to have an accounting firm do them retrospectively. The audited statements made the financial part of the due diligence process a walk in the park. The accountants also wanted to review all of our customer contracts. "You can see whatever you want," I said, "but we have thousands. You'll be here a month." They insisted, and we gave them everything. Overwhelmed, they quickly decided it would be enough to review the 20 percent of the contracts that account for more than 80 percent of our business. The rest they would spot-check. We'd made a point of keeping them up-to-date and well organized, so this went smoothly as well. All along, we followed Sam's warts-and-all disclosure policy. People selling a business often make the mistake of trying to hide anything they think might discourage the buyer. Of course, most owners are salespeople, who by nature tend to paint the rosiest picture of whatever they're selling--not because they're trying to fool anybody but because they believe it. You have to believe it, or you can't sell. I have the same inclination. But Sam has shown me that, in this kind of transaction, you should take the opposite approach, telling the people on the other side everything that is bad, that might be bad, or that has a one-in-a-million chance of going bad. Not only should you tell them, you should put it in writing. Why? First, because candor builds trust. The people you're dealing with will feel a lot more comfortable if they see that you're not trying to hide anything. In the sale of a business, moreover, a significant chunk of the money--5 to 10 percent--is put into escrow to protect the buyer in case problems come to light after the sale. If you're the seller, you want to make sure that you get all of that money. The best way to do that is to anticipate everything that could

go wrong--every customer the company might lose, every additional expense it might have to pay. Then, if something does go wrong, you can say to the buyer, "Look at our statement of October 29th, page 3, line 14. We warned you about that possibility, and you chose to buy the business anyway." The accountants finished their work in a week or so--faster than they had expected. And the operations people took just a few days. There were four of them, all managers at the records storage company we will merge with if the deal goes through, and their job was to review our systems and our staffing. But it quickly became apparent that our senior managers weren't happy with the process. I had briefed them about the possible sale. I'd told them that I hadn't made up my mind but that if I did sell they would receive the amount of money I had promised them when we were considering a previous bid (see "The Offer, Part One," November 2006). In the meantime, I wanted them to cooperate fully with the people who'd be reviewing our operations. Now they seemed depressed, and it dawned on me that they thought the people they were talking to might soon be their bosses. I immediately called a meeting. "You have nothing to fear from these people," I said. "It's highly unlikely that you'll ever report to them. They may wind up reporting to you. Our company is bigger than theirs. They're here to observe and to find out what we're doing." Thereafter, the mood of our managers seemed to improve, and the buyer's operations people seemed to like what they saw. The next step was to settle on a final number for EBITDA (earnings before interest, taxes, depreciation, and amortization). During due diligence, both the buyer and the seller examine the sale company with an eye toward figuring out how the financials will look if the business is sold. Accordingly, you and the buyer go through your income statement, trying to determine whether items are recurring or nonrecurring--that is, whether the buyer will continue to get the revenue or pay the expense after the sale. The buyer's accountants are looking for any items that could have been deducted as expenses or taken as revenue but instead were depreciated or amortized over a period of years. You're doing the opposite--looking for items that were deducted from EBITDA but could have been depreciated or amortized.

Remember, the price of the business is a multiple of EBITDA. If you and the buyer have agreed on a multiple of, say, eight, then every $100,000 that's added into EBITDA could be an additional $800,000 in your pocket. Inevitably, there's give-and-take, and trust plays a role. For example, we spend about $600,000 a year on bonuses and on company contributions to our employees' 401(k) accounts. I wanted to know whether Greg and his people intended to continue these practices. They wanted to know why I was asking. "Because if you weren't going to keep doing them," I said, "I'd add the $600,000 back into EBITDA and then distribute that portion of the purchase price to our employees." They said that they fully intended to keep all of our benefits and bonuses; in fact, they wanted the rest of their company to have a culture like ours. I trust them and thus didn't insist that the $600,000 be treated as a nonrecurring item in calculating EBITDA. Nevertheless, if I sell, I'll insist that the programs be written into the final contract. You know: Trust but verify. In the end, they came up with an EBITDA figure that was about $600,000 less than ours. Although the gap wasn't huge for a business of our size, it looked a lot bigger when you took into account the multiple we'd settled on. In any case, we had to resolve our differences. One of the conditions I had set early on was that all disputes would be handled one-on-one by Greg and me. I realized that he had partners and would have to clear with them whatever we agreed to, but I wanted to make sure there would be no negotiating between anyone else on either side. That way, if the deal fell through, it would not be because of fights between accountants, lawyers, or others. It would happen only because Greg and I couldn't come to terms. When we got together to discuss our different EBITDA numbers, I told Greg that he should just accept mine. He pointed out some items that his accountants thought should be handled differently. I mentioned several other items that, if handled differently, would make our reconstructed EBITDA even higher. "For every dollar your accountants find," I said, "I'm

going to find a dollar fifty the other way. You might as well just go with our number." We eventually came up with a number we could both live with. Meanwhile, I went to bat for Greg. He had already started to raise the money his firm would need to complete the purchase. I agreed to meet with three or four groups of potential investors, answer any questions they might have, and explain how the deal would change the competitive landscape to the buyer's advantage. That wasn't just a sales pitch. I believe it so strongly that I've told Greg I would be willing to accept a portion of my proceeds in the form of stock. He can use that fact to reassure anyone who thinks he might be paying too much. In addition, I met with the board of the records storage company that we'd be merging with. Most of the board members represent earlier investors in the business. They came with a lot of questions, but they left solidly behind the deal. Now, as I write, we are working on a draft of the ultimate contract. We're close enough to a decision that I've begun talking about the possible sale with more employees. I held off at first because I didn't want to make people anxious about something that might never happen. I probably waited a little too long. There were rumors floating around by the time I filled in the supervisors and front-line managers. I told them that they would all participate in the sale: "I can't say how much you'll get, but I think you'll find it a very nice surprise." When we started this process, I could imagine a hundred ways that the sale could fall apart. We're down to four. First, we might have a disagreement we can't resolve about some clause in the contract. Given how far we've come, I doubt that will happen. Second, Greg might not be able to get the financing he needs. He tells me that he already has commitments and just has to work out the details. Third, Greg and his partners might change their minds and pull out. That would be very surprising considering how much time and money they've already invested. Last, but not least, I might get cold feet. One way or another, I'll probably have to make a decision in the next three or four weeks. I hope to tell you what it is in my March column.

Should Norm Sell? The Readers Have Spoken


By better than a five-to-one ratio, readers who wrote in think Norm should sell. Here's what some of them had to say:
By Norm Brodsky | Feb 1, 2007

Norm Brodsky

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Business is fun again! I sold my business in January 2006. I have been told by friends that I look 10 years younger. My wonderful bride of 28 years did not want to sell and was depressed when we did. Now she is having the time of her life. We bought a 40-foot RV and travel whenever we want to. I am on my third startup in the environmental industry, and I'm having a ball. Business is fun again! My vote is: SELL! Bill Haile American Ecotech Deer Park, New York Know when to fold 'em

Business is a lot like poker. The most important thing is knowing the right time to walk away. If you've hit a number you're happy with, take your winnings, stash some money, and look for another exciting game to play. Bill Corrigan San Antonio Can you really walk away? I've been reading your articles for years, and these companies seem a part of you. I find it hard to believe you could let them go. From my experience, a company is never the same when it leaves the hands of the original owner. The warmth and loyalty are gone. The original owners of a company I worked for sold to an investment firm, which got rid of half the employees. The new owners made us go back to how we'd done things 10 years earlier. If you sell, your company will probably never be run as well as when you owned it. You have to be okay with that. Voula Michos Broomall, Pennsylvania If I had the money SELL! Smell the roses. Treat every day as if it's your last. One day you will be correct. Do you want to do have a heart attack driving on the BQE? I pound the pavement every day selling hospital supplies. If I had the money, I would damn sure stop and watch all of my grandkids' games. Matt Goodwin Hoboken, New Jersey Giving up the life What would you do if you sold the business? Making a ton of money is nice, but it's hard to replace the awesome life that you've created for yourself, right?

David Mammano Publisher, Next Step Magazine Rochester, New York Life is too short I had an opportunity to sell my business about three years ago. After much reflection, I realized that this was my chance to do something new and exciting. I had been dabbling in commercial real estate and used the proceeds to buy more buildings, which now generate plenty of income, allowing me to pursue a new business venture. Life is too short to do one thing for too long. J.B. Roberts Jr. Managing partner, Pike Properties Madison, Wisconsin What about your employees? Your employees should be the deciding factor. If your employees will be taken care of, I would say sell. If not, you owe it to them to remain in business and grow. Scott Siegal President, Maggio Roofing Co. Bethesda, Maryland It's already over Several years ago I joined a start-up that was one of those special places where everyone believed in the mission, worked hard, and formed great, lasting relationships. It was also a roller coaster ride. Many times my wife and I discussed whether, for sanity's sake, I should move on. I always wound up saying, "I just have to see how it ends." In time, the company was acquired by a firm with a drastically different culture. Many people were let go. Those of us who stayed on were miserable. But I kept telling my wife, "I

just have to see how it ends." Finally one day she shot back, "It's ended. You've already seen how. Now it's time for the next thing." She was right. I left, started my own business, and never looked back. It seems to me your current story is ending, too. You just haven't realized it yet. Steve Yaeger Partner, Aspyrion South St. Paul, Minnesota Is the thrill gone? Being in love with a business is like being in love with a beautiful woman. You tend to put on blinders and overlook the things about her that annoy you. I find that I overlook annoying things about my business because I love it so much. If you still have blinders on at CitiStorage, don't sell. If the blinders are off and the little things now annoy you, take the money and run! Pete Kadens CEO, Acquirent Chicago Now I invest in people For almost two decades, I worked to build a retail company from a local twostore chain into a national powerhouse. Though I didn't own the company, I earned my way into the presidency and eventually owned a large part of the stock. We built four other companies, with sales ranging up to $300 million. Then I sold my interest and changed my life. I formed four small companies. Although I missed the massive paychecks, I didn't need them. Like you, I had accumulated enough. Now I invest in people and help them achieve success. My wife says I work more now than I did before I "retired." I can't tell you how much I enjoy getting back into entrepreneurial endeavors. Before, my yardstick was money. Now I measure my success by how I feel, whom I help, what I change. It's a new adventure each day. Don't be anxious about taking on something new.

T.F. Columbus, Ohio

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. By Norm Brodsky | Mar 1, 2007 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 (brodsky13@aol.com) 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.

The Offer, Part Six


The paranoia moment. Are they stalling? Is this deal about to fall apart?
By Norm Brodsky | Apr 1, 2007

Norm Brodsky

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Over the years, I've discovered that at a certain point in every deal, time becomes your enemy. It happens after the big issues have been settled. You've agreed on the price. You've agreed on most of the terms, including all the major ones. You've resolved whatever doubts you may have had about moving forward. Then the lawyers come in, and the haggling begins over the few remaining questions, a couple of which may turn out to be important but which drag out the process and prolong the agony. That's where I am at the moment. I had set a deadline of February 28 to close the sale of my businesses. We've obviously passed it. I guess that, in my heart, I knew we would. If I'd really believed we were going to make it, I probably wouldn't have waited until the last day of February to return from my vacation in Telluride, Colorado. Then again, I never told Chris Debbas,

the person who put this deal together, precisely when I was coming back. I said February 28 was a "strict" deadline. At the very least, I wanted to have an agreement in writing by then, and I knew I would get it only if the other side believed the deal might collapse without one. But I never said I wouldn't grant an extension, which has to do with a basic rule of negotiating: Don't paint yourself into a corner. If you give people an absolute, unconditional no and then back off from it, they will conclude-correctly--that your no doesn't necessarily mean NO. You should reserve no for when you really intend it to be the last word. In all other situations, leave yourself a way out. And here's a second rule of negotiating: Don't take anything personally. That's how we ultimately resolved the problem I mentioned at the end of last month's column--when I refused to change a contract term we'd already agreed upon and the CEO of the company we'd be merging with got up and left. He eventually called me to apologize for walking out on me, and I apologized for provoking him. From then on, we had no problems. I later met with him and the board of his company, Nova Records Management, to deal with the last seven items we hadn't yet agreed on. At the end of the meeting, I told the Nova guys I was leaving for Telluride later that week. They said they would have their lawyers write up what we'd worked out and send it to my partner Sam in a few days. When I called Sam from Colorado the following week, he said he hadn't received the new draft of the contract but he'd been told it would arrive by the weekend and we'd probably have something to sign shortly thereafter. I said I'd fly back to New York on Saturday in hopes of wrapping up the contract--if not the actual sale--the following week. I'd then return to Telluride. But, soon after my return, it became clear that my week in New York would not go as planned. On Sunday, Sam told me that he had still not received the new contract, and there was no sign of it on Monday either. Then on Tuesday, Chris came by and said, "I have bad news that's really good news."

"I know a sales pitch when I hear one," I said. "What is it?" "The equity guys have backed out," he said, referring to the private equity firm that was putting up the equity portion of the financing. As I later learned, one of the firm's partners had sold the others on the deal by touting the involvement of Peter Pierce, former CEO of Pierce Leahy, a records storage giant that had merged with Iron Mountain (NYSE:IRM) in 2000. Pierce's noncompete clause had recently expired, and he wanted to get back into the industry. He'd brought our deal to the private equity firm, in which he was an investor, saying that he planned to invest on his own in any event. Since then, however, he'd had a change of heart and was courting another company. The partner who'd touted Pierce now told his colleagues that Pierce's involvement wasn't important and that his emergence as a possible competitor was no big deal. The flip-flop was too much for the other partners, who opted to withdraw. "So now what?" I asked. "We go to Plan B, which is actually better than Plan A," Chris said. "Goldman Sachs (NYSE:GS) wants to do the equity as well as the debt. So that's one less group of people I have to rope together to get the deal done." That was better. Goldman Sachs had indicated all along that it would like to handle all of the financing. Why Chris hadn't accepted that offer, I have no idea. Unfortunately, making the change now would mean putting off the closing at least a couple more weeks. Goldman Sachs would need time to do more due diligence, looking at the deal from the point of view of an equity investor and not just as a lender. But I was more concerned about Nova now. I hadn't heard a word from anyone there since returning from Colorado. I couldn't even get people to return my phone calls. And so I came to another predictable stage of a deal: the paranoia moment. I began wondering whether the Nova people really wanted to go through with the sale after all. They seemed to be stalling. It had been two weeks since the

meeting at which we'd resolved the last issues. At least I thought we'd resolved them. Was Nova having second thoughts? Why couldn't I get through to anyone on the board? Fortunately, I've been involved in enough deals to know that the paranoia moment is a normal part of the process--which is not to say that the paranoia is always unjustified. Sometimes it is, and sometimes it isn't. When the moment comes, your best course is to get a better read on the situation as quickly as possible. And that's what I did. On Wednesday morning, I told Chris that I wanted a conference call with the Nova board that afternoon, or I would draw the only reasonable conclusion--that the deal was dead--and take the next plane back to Denver on Thursday. The call was quickly arranged. We wound up talking for about an hour or so. By the end of it, I felt I had a better idea of where things stood. First, I could see that the Nova board really did want to do the deal. The company's lawyers were responsible for the delay. Second, I learned that the Nova people still had two outstanding issues they wanted to resolve. That didn't upset me very much: Two issues were fewer than seven. But there was a third revelation, and it was much more serious. I realized that a potential deal breaker was looming, and I'd soon have to decide how to handle it. The problem concerned some changes that the Nova board wants in the lease agreement between the entity that owns the three businesses we'd be selling and the real estate company we set up when we separated the ownership of the land from the ownership of the operating businesses. I don't mind the changes themselves. What bothers me is the time required to make them. We have what is known as a securitized mortgage on the real estate that isn't being sold. With that kind of mortgage, we need the approval of several outside parties, including the bond rating agencies, to change the lease. I feel confident we can get their approval, but it will take three months at least. The Nova board wants the changes made before we do the deal. I won't wait that long.

Why not? Because nothing good can come from delaying the closing. The longer we wait, the more likely it is that something will happen to upset the apple cart. There are, after all, only so many ways that things can go from here. The company could experience setbacks--losing major accounts, for example, or having key salespeople leave--that might give the buyers cold feet. Alternatively, the company could do much better than anyone expects, raising questions about whether we're getting a good enough deal. As it happens, the latter has become a very real possibility. I realized this when I got the results from the first five months of our fiscal year, which runs from July 1 to June 30. We blew away all our growth targets. Then December's numbers came in even better than November's, and January's were better than December's. I now believe that our EBITDA will increase by more than 20 percent this year. The thing is, we based the sales price on last year's EBITDA. So what started out as a great deal for me--the deal of a lifetime--has now become a great deal for the Nova people. I guess that means they were smarter than I was after all. Granted, it's still a pretty good deal for me, but I could probably get the same price from a lot of other buyers. I can live with that. Price aside, Nova is still the company I feel best about having my employees work for in the future. Moreover, we've invested a lot of time and money to get this far. I don't relish the prospect of starting over. By May or June, however, we'll be so close to the end of our fiscal year that I might feel compelled to revisit the question. It would be very tough to sell my businesses for substantially less than they are worth. While I obviously don't want to be in that situation, a long delay in the closing could make it unavoidable. I had very much hoped that this would be a done deal by now, but as we went to press with this magazine, the issue of how we'll handle the proposed lease remained unresolved. My partner Sam taught me long ago that three obstacles always crop up near the end of a deal, any one of which can kill it. His Rule of Three has proved correct in almost every deal we've done. My guess is that the timing of the

lease changes will turn out to be the first of the three obstacles to the completion of this deal. I can't wait to find out what the other two are. Norm Brodsky (brodsky13@aol.com) is a veteran entrepreneur whose six businesses include a three-time Inc. 500 company. His co-author is editorat-large Bo Burlingham.

Management Advice from Entrepreneur Norm Brodsky


Veteran entrepreneur Norm Brodsky answers readers questions about retirement, selling a business, and more.
By Norm Brodsky | Jul 1, 2009

Norm Brodsky

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It has been a long time since I've devoted a column to answering your questions, but that hasn't stopped readers from sending me really interesting ones. I figure it's high time I caught up with some of them. So here goes: Dear Norm: My business partner and I started our company in 2001 and have now begun to do some transition planning. We doubt that the company will be acquired, and we don't know if an ESOP is right for us. The most appealing option would be to hire our replacements and eventually move into a consulting and oversight role. We hope to do that over the next 10 years or so. Basically, we're thinking of creating "retirement jobs" for

ourselves that will let us dramatically reduce the number of hours we work but retain the ownership of the company. Does this have any chance of succeeding? You described how your five-year life plan took 15 years to achieve. How should we adjust our thinking -- and behavior -- to make this work? -- Timm Moyer Dear Timm: If you and your partner are hoping to hire people like yourselves, I wouldn't waste a lot of time looking for them. A. They probably don't exist. B. If they do, you probably wouldn't want to hire them. Entrepreneurs don't make good employees. What's more, they are often crummy managers, and what you really need is a strong management team. If my experience is any guide, it will take you years to build one, but that shouldn't discourage you. A good management team will make your life easier and your company more valuable. In any case, strong managers will let you lead the kind of life you're looking for. Ten years should be enough time, although that will depend somewhat on your definition of a "retirement job." -- Norm Dear Norm: I am 17 years old and recently sold a website for $100,000. It took me and my partners eight months to build, and we had to overcome many obstacles. And yet, when we finally sold it, I didn't feel excited or elated. Rather, I've been really depressed. I went to a dance with a date last Friday and had a horrible time. It reminded me how out of touch I've been. As I was building the business, I kept thinking, What are you willing to give up to get what you want? I gave up everything. I haven't watched TV in months, and so now I can't talk with friends about the shows they've seen. I gave up piano. I haven't read a good book of fiction in a while. I haven't done sports such as swimming, and I used to be one of the fastest swimmers in the club at my school.

So even though I reached my goal, I am not a happy kid. I've decided I need to quit business -- or at least take a break for a while. I'm planning to study hard and go through school as normal people do. Do you think I'm making the right decision? -- Hanson So Dear Hanson: The question is whether you feel you're making the right decision. I'd guess the answer is a yes. I know what it's like to be consumed by business. You miss out on all the other stuff that makes life worth living. Fortunately, you've learned that lesson at a young age. I was in my mid-40s when I learned it, and by then I'd already missed the childhood of my eldest daughter. So consider yourself lucky. And since, like me, you're obviously very goal oriented, I'd suggest you develop a life plan detailing what you want to be doing in five or 10 years. Think about the kind of life that will make you really happy. Business should help create a happy life, not be a substitute for it. -- Norm Dear Norm: I own an IT consulting business that has been quite successful. Our revenue last year was about $7 million, with net profit of about $750,000. I have been approached by business brokers asking me if I'm willing to sell my company, and a couple of them say they have buyers. They both are asking an upfront fee of about $30,000 to $50,000 to start the process. I do not want to pay that kind of money in advance without knowing where this is heading. What is the best approach to take? Is this the right time to sell, given the state of the economy? I am in no hurry. The company is doing well, with no major problems. -Gary Sennett Dear Gary: I wouldn't get too excited about these calls. The business brokers are just trolling for business. I used to get calls from brokers who said they had a

buyer for a company of mine that had been defunct for 10 years! I'd be very skeptical of any broker who says he or she already has a buyer lined up, and I certainly wouldn't pay an upfront fee. If you want to sell your company, talk to people who've already sold similar businesses and find out whom they used. But no, this isn't a great time to sell. Valuations peaked in August 2007 and have been going down ever since, although I think they may have bottomed out in March. So I would advise you to wait if you can. -- Norm Dear Norm: I have a wonderful opportunity to start a business in New York City. I have the financial aspect under control, but I'll need a couple of people I can rely on. I'd want them to stay as long as possible and share in whatever success we have. I'm thinking about letting them invest with sweat equity. I'd have a one-year waiting period and five-year vesting. At the end of six years, they would own 5 percent of the business. I am also planning to offer above-market salaries, provide health insurance, and match 401(k) contributions. The employees will not have to put up any capital. What would be a fair arrangement, considering that I'm taking the risk? I've been discussing this with a lawyer. What I thought was a simple gesture to inspire two people is turning into something very complicated. What do you advise? -- Eliot Poole Dear Eliot: It's a bad idea to offer ownership in a new business to people who are making no investment but their time. You won't really know them until you've worked with them for several years. Of course, the picture changes when people have proved themselves. But even then, remember that it's easy to give away part of your company but really hard to get it back. An abovemarket salary, health insurance, and 401(k) match should be enough to get someone on board. If not, you might question whether you've found the right person. As for your lawyer, I'm sure he or she is just trying to protect you. That's a lawyer's job, and it often involves making things complicated. If

you take out the equity piece, everything will be simpler and go faster. -Norm Dear Norm: I live in Singapore and just completed my freshman year of college. I am hoping to open an infant-care-services business this summer with my family. The other members of my family feel strongly that we should also do kindergarten, even though there is already very strong competition in that business. My family's strategy would be to copy what the established players do but at a cheaper price. My instinct is to focus on infant care. Kindergarten is not our forte, and the Singapore market is small. I see little point in copying other people. What do you think? -- Sharon Lourdes Paul Dear Sharon: I have one overriding rule for everybody who seeks my advice: Always follow your gut instinct about what to do, even if it's different from what I've told you. If you don't and then you fail, you won't take responsibility for the failure, which means it won't provide you with the lessons you need to learn. As for your family's strategy of getting sales by charging less, I think that's a terrible idea. I would never go that route unless I'd figured out a different business model that allowed me to have substantially lower costs. Charging less probably won't work, particularly in child care; that is, it won't work if you're lucky. If you're unlucky, it will work, and you'll be trapped in a lowmargin, commodity-type business. -- Norm Dear Norm: My partner and I have a four-year-old, eco-friendly home accessories company that manufactures organic cotton bedding, pillows, wall art, baby blankets, and the like. As designers running a business, we've had to learn a lot of lessons the hard way. Nevertheless, we've had success in building our brand. In

the process, we have put all our own capital into the company, as well as a lot of heart and soul and guts. But we are feeling the full impact of the bad economy and are not able to predict one month to the next. How do you actually know whether or not your business is viable? -- Kristina de Corpo Dear Kristina: Your business is viable -- by definition -- if it's able to support itself on its own internally generated cash flow. In times like these, it is natural to worry about survival. But you need to remember that recessions don't last forever. I'm already seeing early signs of a recovery. Just try to avoid making the usual mistakes. Now is not the time to cut back on your marketing or new product development. If possible, I'd increase both. Whatever you do, don't fall into the trap of cutting prices. Offer additional services instead. Your niche will only get stronger as time goes by. Hang in there. -- Norm Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, was published by Portfolio last fall.

The Offer, Part Seven


I've just about had it. Are we going to make this deal happen, or not?
By Norm Brodsky | May 1, 2007

Norm Brodsky

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There's an important stage that every deal has to reach sooner or later-every good deal, that is. The moment has to come when the parties stop acting like adversaries and start working together like collaborators. If you never reach that stage, it's because one side continues to harbor reservations about going forward. The deal might happen anyway for one reason or another, but somebody is going to walk away unhappy. I knew I was ready for the collaboration stage by early March. I wasn't so sure about the people from Nova, the company that would be acquiring my business. My first deadline had passed, and--although I'd granted an extension--things seemed to be moving very slowly. Of course, everything slows down when the lawyers take over. That's okay. In fact, it's necessary. But the process can take forever unless someone injects a note of urgency. In

this case, it seemed as though I was the only one who felt any urgency at all, which made me wonder whether the Nova board might still have some reservations. There were several issues to resolve, any one of which could turn into a deal breaker unless we approached them as collaborators rather than as adversaries. My question was, were the Nova people ready to collaborate? So I called a meeting. We gathered in the offices of Nova's attorneys--my partner Sam and I, the Nova CEO, two members of his board, and the lawyers for both sides. "The purpose of this meeting is to get any outstanding issues on the table," I said. "We need to close them and then set up a schedule of dates that will be strictly adhered to. After today, I'm not discussing anything new." There was a pregnant pause. "Is this going to be written up in the magazine?" asked a board member named Frank. "You haven't made things easier by putting everything we say out for public consumption." "Well, I guess you have to watch what you say," I said. "But by the way, Frank, you're going to love the next column." I was talking about the one that ran in April. "Can I see it?" he asked. "No," I said. "You'll have to buy the magazine like everyone else. We need the circulation." There were groans and chuckles around the room. "But I can give you a taste." I read them a couple of excerpts, including the sentence in which I said it turned out they'd been smarter than me about the price. Everybody laughed. "That's really good," Frank said. "Well, not necessarily," I said. "Why not?" he asked.

"Think about it," I said. "I've taken away your last excuse. You can't ever say you didn't do it because it was too expensive." Frank and his colleagues looked at one another. I could see him absorbing the point. "Well, then," he said, "let's get on with it." At that moment, I began to sense we were ready to collaborate. There were four issues I cared most about. One concerned our 401(k) program, which has a 150 percent match--that is, we put in $1.50 for every $1 the employee invests. I had insisted that the program continue for at least five years. The Nova people said they didn't mind giving the money to my employees, but under ERISA Nova couldn't continue the program for more than two years without offering the same benefit to everyone at Nova. "We're probably not going to do a 150 percent match for everybody," they said. "But I want my employees to get that money." "What if we just increased their salaries?" they asked. I thought about it. "No," I said, "that won't work." Either they'd get a raise on top of their annual raise, which wouldn't be fair to the other people, or they'd get this raise instead of their annual raise, which wouldn't be fair to them. "But you could give it to them directly, outside the 401(k)." "We can do that," they said. We were collaborating. The second issue had to do with the three-year no-cut contracts I had demanded for our five senior managers. "As it stands, we can fire them only for the specific causes we list here," the Nova people said. I'd agreed that the managers could be terminated if, for example, they did something illegal, but for almost no other reasons. "What if they come to the office and don't do any work?" They had a point. "But I need them here," I said. "I've still got money in escrow, not to mention equity. I want to make sure that my business keeps

running the way it's been running up to now. Maybe I can be the arbiter of whether they're working." "We have no problem with that," they said, "but there could be tax consequences if you're making the decision." Apparently, the rules covering golden parachutes could make the managers subject to a 20 percent excise tax if the payments were deemed to be golden parachutes in disguise, as might well happen if I controlled the purse strings. We discussed other solutions. Finally I said, "What if we say they can get fired after the first year for nonperformance, but then instead of getting paid for the next two years and having a noncompete for a year after their last paycheck, we'd pay them for the two years over four years. And the noncompete runs out when they get the last check. That'll punish them for not performing their duties, but they still get the money." "Okay, fine," they said. "We can live with that." The third issue involved the company's potential liability should it be sued over environmental issues. The Nova people wanted to shift the entire liability to me. So if Nova lost a suit and was ordered to pay a lot of money in damages and fines, I'd be on the hook for the whole amount. Although I thought that, as the tenant, Nova's potential liability would be close to zero, I wasn't about to take it on with no limits of amount or time. When I first heard that the Nova people were insisting on that, I thought the issue might be one of the three deal breakers that Sam likes to say will arise in any major negotiation. In our new spirit of collaboration, however, we were able to resolve the matter quickly and amicably. I agreed to put a few million dollars in escrow for nine years, provided that I could control how the money would be invested and that the proceeds would come to me. We came up with other provisions that would take effect if a judgment against Nova were to exceed the escrow amount, but the chances of that happening are minuscule.

Similarly, we reached a compromise on the fourth issue: the fees associated with asking our mortgage holders for permission to change the terms of the lease. As I mentioned last month, we have a securitized mortgage, meaning that it has been bundled with a lot of other mortgages and chopped up into dozens of pieces with different risk-reward characteristics. The various pieces have been sold to investors. You need the permission of those investors to do anything that might affect the value of the mortgage--such as changing the lease. I didn't mind the changes that Nova wanted, but it would cost money to get them approved. The Nova people suggested we split the cost. "That's okay," I said, "but we need to cap our liability. We'll pay half of the total up to $150,000, or $75,000." "Okay," they said. "That's fair." That was typical. I didn't low-ball them, and they didn't try to negotiate a higher commitment from me. We weren't really negotiating anymore. We were just trying to be fair. "Now we have to talk about dates," I said, turning to Nova's attorneys. "When can you have this done?" They gave me an answer, and I asked my attorneys the same question. I made it clear I wanted it done as soon as possible: no extensions, no excuses. We settled on April 5 as the day we would sign the final contract. So, by the time you read this, my three businesses should have a new owner--on paper. Unfortunately, the deal won't be done because no money will have changed hands. The sale is contingent upon the approval of an important amendment to the mortgage that the main financial backer, Goldman Sachs (NYSE:GS), is insisting on. Goldman wants the option of taking over the lease and operating the business if Nova fails to make its payments. That option is valuable because, no matter what happens to Nova, the boxes we store will continue to generate income. Normally, if the tenant defaults, the mortgage

holder has the right to take over the lease and the income. Since the holders of our securitized mortgage would be ceding that right to Goldman, the change requires their approval. To get it, we have to go to the mortgage administrator, which in this case is a company called Capmark. The administrator in turn goes to rating agencies such as Moody's (NYSE:MCO) and Standard & Poor's (NYSE:MHP) to find out whether the change will affect the mortgage's rating and thus the value of the mortgage holders' investments. Capmark could then insist on conditions that may or may not be acceptable to Goldman. Our lawyers do not anticipate any problems, mainly because they see little possibility that the change will affect the rating of the mortgage. It certainly can't hurt, after all, to have one of the world's preeminent financial services companies serving as a backstop to protect the value of the mortgage holders' investments. Still, the process could take from two weeks to two months, I'm told, and there's no way we can influence, let alone control, the outcome. So just picture me sitting here in my office, twiddling my thumbs and struggling to contain my impatience. I figure I'll explode sometime around the middle of May--a year after Chris Debbas and I first met at an industry conference and talked about the possibility of doing a deal. I don't know whether I'm more amazed at how far we've come or how long it's taken. I just hope that the suspense is over soon and I can finally start focusing on the future.

The Offer, Part Nine


What I learned from my fiasco.
By Norm Brodsky | Jul 1, 2007

Norm Brodsky

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Most of what I know about business I've learned by making mistakes and then figuring out the lessons they contained. Clearly my education continues, and it hasn't been cheap. I've spent about $425,000 just on legal and accounting expenses in connection with the aborted sale of my records storage, document destruction, and trucking businesses to Nova Records Management. But you know what they say: A smart person learns from his or her mistakes. A wise person learns from other people's mistakes. I guess that makes me smart. I hope I can help you be wise. One lesson of this fiasco is obvious: In negotiating to sell your business, make sure you know how the buyer makes decisions and who the ultimate decision maker is. Ironically, I've long prided myself on my ability to identify that individual in any negotiation. I sure blew it this time. As I told you last

month, I thought Nova's board had the final say, but it actually belonged to one board member who had veto power over the board's decisions. I would have known that if I'd asked enough questions in the beginning. Shame on me for not doing it. I also allowed the process to drag on much too long. This negotiation didn't have to take seven months. I fell into the trap of thinking, whenever there was a delay, "Well, it's just another month, another week." I could have brought things to a head much earlier had I paid attention to the signs of trouble--specifically the signs that my understanding of the word agreement was different from Nova's. More than once, we agreed to change something, and then I got a draft contract from Nova's lawyers with the old wording intact. My wife, Elaine, saw the handwriting on the wall before I did. "If they're doing this to you now, how are they going to treat our employees after the sale?" she asked. It was a good question, but I didn't give it enough thought. I suppose that's because, like most entrepreneurs, I'm extremely goal-oriented. When I start something, I want to see it through. Long ago, I learned that when I invest in businesses I need to set a dollar limit in advance that will tell me when to stop investing. (See "Learning From Mistakes," June 2003.) I've now learned that in negotiations like this one I also need to set time limits. That said, I can point to a few things that I did right, or rather that we did right. First and foremost, we did not let the deal interfere with the business. True, we did put off the decision about what to do when we run out of space in our warehouses. In fact, I decided to sell partly because I wanted to avoid having to deal with that issue. But that had no effect on our operations, which continued to thrive while my partner Sam and I focused on the deal. Maybe we should have gotten out of the way sooner. The business grew faster during those seven months than it had during any seven-month period in years. I give full credit for that to our management team, led by Louis Weiner, the company's president. It was that performance that allowed us the option of walking away from the deal in the end.

On the other hand, I give myself credit for having the discipline not to think too much about my future. I received many attractive job offers--including one from a professional dog poop cleaning service--but I told everyone I was making no plans because I didn't want to be disappointed if the sale didn't go through. As a result, I was able to pull out of the deal with minimal regrets. There are, I realize, people who think I made a lot more mistakes than I'm owning up to. One of them is a guy named Mike West, who has a mergers and acquisitions firm in Tennessee. He wrote a scathing criticism of me in his blog, accusing me of everything from hubris to outright fictionalizing. While some of his facts are shaky--suffice it to say his blog entry wouldn't survive the fact-checking process that each of my columns has to go through--he raises a couple of points worth discussing. West takes me to task for writing about the deal. "Confidentiality should be respected," he says. He goes on to contend that my columns were grossly unfair to Nova and suggests that the deal collapsed because its people got fed up with me and walked away. That's not true, of course. In fact, the buyers kept trying to resurrect the deal even after I made it clear that my decision was final. Nevertheless, it's legitimate to question the wisdom and propriety of my decision to chronicle the saga in a national magazine and in almost real time. I've come to realize that writing about the deal made life much more difficult for the people who tried to put it together. For that reason alone, I wouldn't do it again, although I doubt I'll have much choice. In the future, I expect, any confidentiality agreement I sign will explicitly forbid me to write about what happens. The truth is, I'm not sure I would have written about it this time if I'd thought in the beginning that I might actually sell the businesses. I figured we'd hit a roadblock much sooner than we did. It wasn't until very late in the game that I let go of my doubts and thought, "Hey, this is really going to

happen." By then, the column had taken on a life of its own. We'd talk about it in our meetings. Occasionally, somebody would say, "You didn't treat us fairly in the article." If I thought the point was valid, I'd try to correct the impression in the following installment. Now, someone might argue that writing the column violated the spirit of the confidentiality agreement, but the people on the other side never asked me to stop, and I took a great deal of satisfaction knowing that my readers were getting something out of the experience. West also criticizes me for talking about the deal with my employees. He is essentially advising owners to keep their employees in the dark about a major change that could have a huge impact on their lives. My company doesn't work like that. He further warns that if you talk to employees you take the risk that they'll tell the buyer about "hidden problems." But what happens after the sale when the buyer discovers the hidden problems and demands to be compensated out of the money the seller has put in escrow? It's an invitation to a lawsuit. My friend Chris Howard, one of the leading M&A people in this industry, had a different criticism. He thought I hurt my negotiating position by not having other buyers in the wings. Had I gone through a bidding process--or "shopped the deal," as they say--I would have gotten a much better sense of the market. Even if I had ultimately chosen to sell to Nova anyway, I would have had more negotiating leverage. You don't get "good behavior" from potential buyers, Chris noted, unless they realize you have other options. That's probably good advice. I certainly had many more options than I was aware of, as has become clear to me since the Nova deal fell through. I have been overwhelmed by the number of inquiries I've received from would-be buyers and investors. While I knew there was a lot of private equity around, I had no inkling of the level of interest in our industry. By sheer coincidence, my sale collapsed right about the time that the industry giant, Iron Mountain (NYSE:IRM), bought the third-largest company, ArchivesOne, for a multiple of EBITDA that I'm told far exceeds that of any previous acquisition in this

sector. That leaves my company, CitiStorage, as one of a handful of independents capable of serving as a platform on which someone could build another major records storage and document destruction business. As a result, it could be worth 20 percent more today than I would have received from Nova. So I have a lot of thinking to do. I intend to do most of it in Europe, where Elaine and I are going for a vacation. When I return, I will make my decision, which may be to do nothing. Whatever I decide, I won't be writing about it until the new deal--if there is one--is signed, sealed, and delivered. (Instead, I'll be writing the columns I've been putting off while this series played out.) Another thing I won't be doing is worrying about that warehouse problem. A week before I pulled out of the Nova deal, we got a call from someone at a location in Brooklyn that I'd always thought would be the ideal site for the new warehouse. It had never been available. Now the caller informed us that the space had opened up. Were we interested? Yes, we were--but we could say yes only because we hadn't yet made a commitment to another location, probably one in New Jersey. And we hadn't made a commitment only because we thought we had a deal to sell the companies. The funny thing is, I happily would have spent $425,000 in legal and accounting fees if I'd known it would buy me the opportunity to build my next warehouse in Brooklyn. So there you have it: A door closes, and a window opens.

Taking On Starbucks
How independents can hold their ground.
By Norm Brodsky | Aug 1, 2007

Norm Brodsky

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If you've been following the saga of the aborted sale of my businesses, you know that I called the deal off at 3 p.m. on April 5, when I met with my senior managers and informed them it was dead. What I haven't told you is that the managers held another meeting right after mine. The subject: how to keep me out of their hair. The company's president, Louis Weiner, said that he knew how much they'd all enjoyed my absence for seven months, and that if they wanted me to stay away, they would have to continue operating the company as they had during that record-setting period. They vowed to do just that. As a result, I now have even more time to spend outside the business. Among other things, I've been doing what I love, helping small entrepreneurs who come to me for advice. One is a former New York City

firefighter named Brian Kelly. He first approached me when he was thinking about getting into the secure document destruction business (see "A Few Good Competitors," August 2002). Aside from the shredding company, Brian also has a coffee shop business, City Beans, with two stores in northern New Jersey, both located in office buildings. He opened the first in Newark in 1996, and it immediately attracted a following, turning cash-flow positive and profitable within the first month. He later added soup and sandwiches to his menu and did even better. About a year ago, however, Brian received the kind of news that can strike terror in the heart of any independent coffee shop operator: Starbucks was coming. He learned the coffee giant was sniffing around when the manager of his shop called to say that two guys from Starbucks (NASDAQ:SBUX) had shown up with a tape measure and walked through City Beans taking measurements. At the time, Brian's lease was expiring, but he thought he had already come to terms on a new one. When the landlord told him that Starbucks was putting in a bid, Brian had the good sense to refuse to renegotiate. Apparently, however, Starbucks insisted on terms the landlord found less attractive, because Brian wound up getting the lease anyway, causing him to breathe a sigh of relief. Then he heard that Starbucks was moving into a large, empty retail space on the other side of the office building. At first, he felt a stab of panic and a flash of anger at the landlord, but he soon found out that Starbucks was coming at the invitation not of the building management but of a Hilton (NYSE:HLT) hotel located in the building. The shop would be in the hotel lobby. Brian had only recently begun to make money on his second coffee shop, in Jersey City, which was in a new office building. Barely 20 percent of the office space had been occupied when he'd opened the store, and it had struggled for a year or more. Along the way, Brian had taken on a considerable amount of debt. He could wind up in trouble if the Newark store went under, which to him suddenly seemed a real possibility. He'd heard all the horror stories about companies like his being crushed when

forced to go head-to-head with a national chain. Starbucks in particular had a reputation for aggressive marketing. "I'm not sure what I should do--if anything," he said. "Maybe I should just sit back and wait." Sitting back and waiting is what a lot of small companies do when a giant moves in. They hope for the best and then react when the giant starts squeezing their margins and taking away market share. By then, it's too late. The outcome can be different, however, if owners capitalize on the advantages small companies have when competing with a giant. For one thing, they can establish close, personal, one-on-one bonds with customers that large companies can't match. Small companies can also outmaneuver giants. That's especially important if they're competing against a retail chain with a cookie-cutter approach to managing its stores. The managers have a formula they have to follow, and they're not allowed to deviate from it. So you can do things that they won't be able to respond to for months, if ever. You can also prepare for their arrival by taking steps to emphasize what makes your store different--and special. That's what I suggested Brian do. "You need to be preemptive," I said. "When is this store supposed to open?" He said he'd heard it would be up and running in December, which gave him four months to make and execute a plan. "Let's talk about your strengths," I said. "What can you do that Starbucks can't do--aside from offering a reasonably priced cup of coffee?" Brian reminded me that City Beans was about to celebrate its 10th anniversary and had plans to do promotions thanking its customers. It already had a customer loyalty program--buy 11 cups, get one free--using magnetic cards that allowed it to track sales automatically and even offer electronic credits. To receive a card, customers gave City Beans some information about themselves, including their e-mail addresses. Brian thought that he and his partner, Jim Toscano, could expand the program and use the e-mail addresses to market directly to customers. Brian also noted that he used a local coffee roaster. The coffee City Beans served was roasted every Thursday morning and delivered within 24 hours.

As a result, he said, his coffee was fresher than Starbucks'. That would be worth promoting as well. At the same time, City Beans would be emphasizing its identity as a local business supporting other local businesses. I pointed out that I happened to own, and be storing, several hundred Fire Department of New York lunch boxes left over from an earlier ill-fated venture (see "Learning From Mistakes," June 2003). They were taking up space in one of my warehouses. What if I gave them to Brian? He could use them in a promotion that told the City Beans story. Brian had known Jim since kindergarten. They'd grown up together and dreamed of starting their own business. Brian had joined the fire department, and Jim had become a professional drummer, but they hadn't given up their dream of becoming partners in a business. When coffee got hot, they decided to open City Beans as 50-50 partners, with Jim working inside and handling operations while Brian functioned as the CEO but continued to work as a fireman. (He retired from the department in June.) Finding a way to tell the story, I noted, would make the connection with customers that much more personal. I had another suggestion. "No matter what you do," I told Brian, "Starbucks is going to take away a percentage of your business. It could be 5 percent, 10 percent, or 20 percent. Whatever it is, they're going to take it. So let's look for additional sources of income." "We do a little catering when people come and ask us to do it," Brian responded. "Maybe we could do more." "What are the gross margins like?" I asked. "They're good." "So that's a great idea. Why don't you put some real effort into signing up more catering customers. The extra money you make could help offset whatever you lose."

In the end, Brian and Jim decided to do all of the above. They would run a series of promotions to celebrate the 10th anniversary of City Beans, introducing a new one every few weeks. They would run specials on soupand-sandwich combinations and generate a list of customers who wanted to receive daily e-mail announcements on the special of the day. They would expand the customer loyalty program and sign up as many new members as possible. When a new company moved into the office building, they would offer loyalty cards to all its employees, with a credit they could use to try City Beans for the first time. They also gave credits to existing members of the loyalty program in appreciation of their ongoing patronage. At Christmas, they sold the lunch boxes for the price of the sandwich inside and included a one-page history of the company. Meanwhile, they ramped up the catering business, taking advantage of contacts they already had at major corporations and big law firms throughout northern Jersey. As it turned out, the Starbucks opening was delayed several months. When it did open, Brian saw a drop in sales. But many of his customers came back, and Brian talked to them about their experience at Starbucks. Some told him they'd been disappointed. The store had offered free iced coffee for a day, but the employees weren't as knowledgeable or as friendly as those at other Starbucks shops. Whatever anxiety Brian felt had melted away by the time he came to see me after competing directly with Starbucks for a couple of months. "You don't seem too worried," I said. "I'm not," Brian said. "Our sales in the shop haven't dropped as much as I expected, and the additional catering business has made up the difference. I guess it also helps that it isn't a real Starbucks." "What do you mean?" I asked. "Well, it looks like a regular Starbucks, but I think it's actually a licensed operation. The people all wear Hilton name badges, and the service isn't up to Starbucks standards."

"That sounds like a bad move by Starbucks," I said. "They're cheapening the brand." In any case, Brian isn't relaxing his guard. He and Jim are working on new signage for City Beans and looking for more effective ways to market their catering services. I wouldn't be surprised if the business picked up market share in the next year. It's almost enough to make you feel a little sorry for Starbucks. Well, not quite.

Proof That Good Entrepreneurs Can Make Bad Investors


Or how I figured out how to handle my own money.
By Norm Brodsky | Oct 1, 2007

Norm Brodsky

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It always bothers me when I hear a news broadcast that begins, "In business today..." and proceeds to report on developments in the investment world. In fact, business and investing are by no means the same. Business, to me, involves bringing various resources together to create value. Investing is about using money to make more money by attempting to predict the future value of whatever you happen to invest in. The two endeavors call for very different skills. So it's little wonder that good investors often make bad businesspeople, and good businesspeople are often bad investors. I have to admit that I knew almost nothing about personal investing until I was well past my 50th birthday. Of course, that was partly because I didn't really have any money to invest. Whatever I took out of the business I had to be prepared to put right back in if the company needed it. In addition, I had

personal guarantees on my bank loans, which meant I could lose everything if the business went under (see "Free At Last"). My entire net worth was effectively tied up in a single investment, the riskiest type of all, namely, a young growing company. When I did take money out, I would keep it in CDs and bank accounts, so as to be sure I could get it whenever I wanted to. In retrospect, that was silly. You should always have a balanced portfolio. But I didn't know any better at the time. It was my wife, Elaine, who convinced me we should start paying more attention to our personal finances. Her friends all had investment advisers and accounts with stockbrokers and were heavily into financial planning. "Shouldn't we be doing something?" she asked. "Our money is just sitting in the bank." "I don't know," I said. "That money isn't really ours." I explained that if the business was unable to repay its loans for any reason, the banks could come after our personal assets. She was not pleased. "That's all the more reason to get help," she said. "We need to protect ourselves, and we don't know what we're doing." I agreed. And so began our education in what turned out to be the most difficult part of developing a personal investment strategy: finding advisers and money managers who will listen to what you want, do what they say, and put your interests ahead of theirs. In the beginning, we didn't know exactly what we wanted--a broker, an investment adviser, or a financial planner. We interviewed 12 people over the course of a year, settling on a married couple in New York City who had appeared as experts on CNN and repeatedly made the best-adviser and bestmoney-manager lists of Money, Worth, and other such publications. We visited them in their Park Avenue offices. After interviewing us for an hour or so, they said they wanted to develop a plan for us and asked for $2,500, which would go toward their fees if we hired them. That seemed reasonable. We gave them a check, and they said they'd have our plan in a week.

Two months went by without a word. When I finally called to find out what was going on, they said the plan was complicated, but they'd have it in a week. After hearing nothing for two weeks, I called again. It was almost finished, they said. We'd have it on Monday. But Monday and Tuesday came and went. By Wednesday, I'd had enough. I called again. "This is ridiculous," I said. "I don't know what your problem is, but you obviously can't keep a commitment. I'd like my money back." They insisted the plan was almost ready. They'd call back that afternoon. They didn't. The next morning, they agreed to return my money but said I'd have to wait until the end of the quarter, when they were paid their fees. "Pay someone else back at the end of the quarter," I said. "I want my check tomorrow or I'm going to report you to the attorney general." They became indignant and reminded me of their prominent position in the investing community. "You ain't that prominent," I said. "I'll see you tomorrow." The check was waiting for me the next day. As I walked away with it, I couldn't help feeling stupid. We'd spent a whole year doing research and ended up where we'd started. So we tried another gambit: getting recommendations from friends. One of them swore by two brokers from Prudential and insisted they'd be perfect for us. We met with them. "Let me tell you what I'm looking for," I said. "Most of my money is in my business, which is a big risk. The money I'm giving you is not risk money." "What do you expect?" one of the brokers asked. "I'd like to average between 9 and 10 percent annually over 10 years," I said. We were in the middle of the great bull market of the 1990s. "I'm not looking for 15 or 20 percent returns like everybody else these days. I want you to invest very conservatively." They seemed to get the idea. I opened an account with Prudential and put in about half the money I had outside the business. They would invest the money as they felt necessary to achieve my goals, earning a commission on the trades.

Within days, we began receiving a flood of slips recording purchases and sales of securities. I'm talking about stacks and stacks of slips--50 shares of this, 200 shares of that, 150 shares of something else, and on and on. I called the lead broker, who said, "Don't worry. We're establishing our positions." "Okay," I said and waited for the flood to let up. It didn't. I couldn't imagine how these guys could square their aggressive trading with my desire to invest conservatively. When we sat down to review the account after six months, I asked what was going on. "We're doing well," the lead man said. "We're tracking 18 percent [after commissions] for the year." "No, no, I mean what's with all this trading you're doing?" "We're momentum players," he said. "Momentum players? You didn't tell me that when I interviewed you," I said. I had no idea what he was talking about, but it didn't sound like anything I wanted to be involved with. "Look at the returns we're getting," he said. "The market is going crazy," I said. "A blind monkey could get these returns. I'm concerned about what happens when the market goes down. You're putting my money at greater risk than I'm comfortable with. This is not what I asked for." I closed the account--and found myself back at square one. Well, almost at square one. I had learned a few lessons. For one, I'd decided that I never wanted to place all my money with one firm. Ideally, I'd have a main manager and a backup, someone who could step in if the lead guy didn't work out, or retired, or whatever. With that in mind, I'd recently invested some money through a friend, Harvey Wolf, then a financial adviser at Morgan Stanley and now at UBS. I'd laid out the same objectives I'd given to the Prudential guys. Then I waited and watched.

It soon became apparent that Harvey had listened. He invested the money exactly as I wanted, placing it with professional money managers on whom he had done research and who had no affiliation with his firm, thus precluding a conflict of interest. Each was a specialist in a different type of investment. Harvey monitored their performance and made sure that my investments were properly diversified based on risk, liquidity, tax considerations, and so on. I paid a quarterly fee--between 1 and 2 percent of the assets under management--out of which the various parties were compensated. For the first time, I felt confident about the way my money was being handled. So I made Harvey my lead manager and began to search for a backup. I'm still searching. I thought I'd found the right person, a broker at Merrill Lynch. He listened to my speech, said he understood what I wanted--and then proceeded to put almost 40 percent of the money I gave him into two Merrill Lynch funds of hedge funds. Although I wasn't happy about that, I figured I had to let him use the tools he felt he needed to achieve my objectives. My concern increased, however, when I saw the hefty fees that the funds were charging and watched their value rise 6 percent while the S&P 500 was going up 12 percent. I became really unhappy when I decided to cash out of the hedge funds and found that it would take six months to get my money. I was eventually paid in full with a modest return, but I no longer trusted the broker. I closed that account and gave the money to Harvey to invest. And yet, through all these bad experiences, I think I became a fairly savvy investor. I realized that I needed to make my own decisions--at least the big ones--about what to do with my money. I've always put about 10 percent of my money aside for angel investing. I figured out what percentage of my assets to invest in real estate outside the business, and what percentage in government bonds, corporate bonds, and stocks. Then I worked with Harvey to make sure my portfolio reflected my decisions.

I still go through that process each year. All in all, I'm feeling pretty secure these days, although I'd feel more secure if I had someone good to back up Harvey. But if you happen to be a financial adviser or money manager, please don't take this as an invitation to send me your brochures. I won't read them, and they will provide tangible proof that you aren't the kind of investment person I'm looking for--that is, someone who understands that no means no. Then again, if you're an entrepreneur like me and happen to use someone who sounds like Harvey, I'd love to hear from you.

What Are You, a Bank?


You probably lend your customers more money than you realize. Have you checked lately?
By Norm Brodsky | Nov 1, 2007

Norm Brodsky

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So at last we know why people were able to get "subprime" mortgages on ridiculously easy terms for all those years. We were in the middle of a credit bubble, which finally burst this past summer. Suddenly, it has become a lot more difficult to get a loan than it was just a few months ago. I have no idea how long the crunch will last, but I do know what it means for all of us who bill our customers after we've delivered whatever product or service we happen to sell: Now is the time to take a good hard look at our receivables. When credit is tight, you need to find other sources of cash, and your receivables are the place to start. They are, in effect, loans you've made to your customers. Whether you realize it or not, you're sort of a banker, and you need to start thinking like one. You need to assess the quality of your loan portfolio. Is it taking you more time to collect than it should? Do

customers need to be called more often? Are some of them struggling because they have problems of their own? Or are people taking advantage of you, in which case you might want to apply additional pressure--or maybe even terminate the account? Of course, if you're borrowing against your receivables through a bank or an asset-based lender, I suspect you already have a pretty good idea of the shape they're in. Your lender is no doubt making sure that you track them closely. But even without that incentive, we should all be tracking our receivables as if we had a lender looking over our shoulders. Unfortunately, it's easy to lose that discipline, particularly if you have strong cash flow and money in the bank. I discovered that danger during the due diligence process we went through last year as we negotiated the possible sale of our businesses, including the records storage business. After looking at our receivables, the buyer wanted to increase our reserve against bad debt by about $400,000, which would have reduced the purchase price by $4 million. "What are you talking about?" I said. "Our receivables are all good. We have the customers' boxes. They can't get their records back without paying us." "Yeah, well, your own records show that about 40 percent of your receivables are more than 120 days old," the auditor said. "That's a big number. A lot more of them may be uncollectible than you've made allowance for." I was shocked. Even though we do a lot of business with hospitals and government agencies--which pay reliably but slowly--it was a much bigger number than I would have guessed. We had a good system in place for tracking receivables. The problem was, I hadn't been paying attention. It wasn't as if we'd been having cash-flow problems, after all. We were paying our bills on time and had plenty of money left over. The thought that we might have a receivables problem had never entered my mind. But the prospect of losing $4 million on the sale of my business got my attention. I

assured the buyer that almost all of the 120-day receivables were collectible and that we'd prove it. We spent the next few months doing just that. We began by looking at the breakdown of our receivables month by month for the previous three years--that is, the monthly percentage of receivables that were current, 30, 60, 90, and 120 days or more outstanding. It turned out that the 120-day number had been creeping up steadily. The average monthly increase may have been only half a percent, but that translated into 6 percent a year. At that rate, you could start out with, say, 10 percent of your receivables in the 120-day category--the acceptable amount depends on the kind of business you're in and the type of customers you have--and wind up with 28 percent by the end of the third year. That's more or less what happened with us. Part of the problem, we realized, was that the collections department was overworked and understaffed. So we hired an additional person--not to go after the long-term nonpayers we already had but to keep their number from growing. That's the first step in problem solving: Make sure you don't keep repeating your mistakes going forward (see "Problems, Problems," February 2004). Then you can go back and deal with what happened in the past. Accordingly, we next turned our attention to collecting the money we were owed by customers that hadn't paid us in more than four months. Because we weren't in a money crunch, we were able to avoid two common mistakes made by people desperate for cash. When you need cash right away, you naturally go to the customers most likely to pay you quickly-namely, your best accounts, those that already pay on time. You put pressure on them to pay early or you ask for favors, neither of which helps build good relationships with the people who are most important to your company's success. The second mistake is to have your accounting people do the collecting. They don't know the customer nearly as well as other employees do, and they don't have the personal relationships that they could use to avoid inadvertently antagonizing people who should be allies. A salesperson, a customer service person, or an operations person who interacts regularly

with the customer may know a better way to make the request or may be able to offer a favor in return for a favor. With that in mind, we divided up the 120-day accounts among our sales, service, and operations employees and began contacting customers. What came next was a revelation. Some people blamed us for their failure to pay for the services that we'd performed. "Sure, we'll pay you," said one customer, "but why did you wait so long to call us? You shouldn't have let it get this far." It turned out the customer had a problem in his accounting department that was discovered only when we asked for our money. Who knows? Maybe he had a point. In any case, we apologized and moved on. With other customers, we found that we had to modify our procedures. One hospital group, for example, had a purchase-order system that we weren't fitting into. Without knowing it, we were forcing the group's accounting people to adapt to our system, rather than making our billing process work with their payment process. When we asked how we could get paid more quickly, they showed us what information they needed from us and in what form. We made the appropriate changes. Then there were instances of our bills not reaching the right people. We discovered that we weren't updating our contact information often enough. We'd get the information and check it again when the contract came up for renewal in five years. In the meantime, there could be changes in personnel, departments, procedures, even in the company's name and location, and we wouldn't know about them. Or maybe our collectors knew about the change, but our billing people didn't, because--for security reasons--we don't allow anyone who handles money to make changes in our system. So we developed new procedures for coordinating the exchange of information and making sure the bills wound up where they were supposed to go. We also came across some customers we didn't want. They were mainly small customers we had to hound constantly for payment. It would take six months to a year for us to collect from them, and then they would pay only

because they needed to retrieve a box. That type of customer literally takes money out of your pocket. To begin with, you don't have the use of the money that the customer owes you and promised to give you when you signed him up. Let's say his outstanding bill is $1,000. If he doesn't pay on time, you may have to get the cash somewhere else--probably from your bank. If you're paying 9 percent annual interest on your loans, that's $90 per year. So the $1,000 you think you're due is really just $910. Meanwhile, your accounting person is spending half an hour each month calling this guy and listening to lame excuses and false promises. That's six hours a year. If you pay the accountant $25 an hour, the slow payer costs you an additional $150 annually, meaning the $1,000 is now down to $760. Look at what that does to your gross margin. If you're fortunate enough to operate in a high-margin industry like mine, you would expect an account that small to have a gross margin of at least 40 percent. So, on $1,000, you should be earning gross profit of $400. But because he takes a year to pay-and makes you spend $240 on interest and labor that you wouldn't have to spend otherwise--your gross profit is $160. That's a 16 percent gross margin. I don't know about you, but if we had too many accounts like that, we'd be out of business. We decided to make those accounts pay up or leave. In four months, we were able to reduce by more than 50 percent the share of our receivables that hadn't been paid for 120 days or more. The would-be buyers could hardly believe it. They insisted on sending in their auditors again, and they confirmed that we had, in fact, shrunk the number by that amount. Not only did we address the immediate problem, we also implemented new procedures that will keep it from arising in the future, and we did it before the credit bubble burst. Our receivables are in great shape right now. For that I have to thank the people who almost bought my business. We couldn't have done it without them.

Follow the Numbers


It's the best way to spot problems before they become lifethreatening.
By Norm Brodsky | Jan 1, 2008

Norm Brodsky

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As longtime readers of this column know, I strongly believe that when you launch a new business, it's important to track monthly sales and gross margins by hand for the first year or two. I tell people, "Don't use a computer. Write down the numbers. Break them out by product category or service type and by customer. And do the math yourself, using nothing more sophisticated than a calculator." To be successful in any business, you need to develop a feel for the numbers. You need to get a sense of the relationships between them, see the connections, figure out which ones are critical and have to be monitored. Why? Because numbers run businesses. They tell you how you can make the most money in the least time and with the least effort--which is, or should be, the goal of every company. You can give it all away if you want. But first

you have to earn it, and the numbers can tell you how to do that as efficiently as possible, provided you understand their language. Tracking the numbers by hand is the best way I know to learn that language, at least as it applies to your particular business. You can switch to computer tracking once you've mastered it, but if you let a computer do the work in the beginning, you won't develop the same intimate connection with the numbers. As a result, you may miss important signposts later on, when the numbers start to change. Those changes can be significant, especially if they come as a surprise. They may herald new competition arriving or indicate a shift in your customers' preferences or reflect unseen problems with your products or services. There could be any number of reasons for the unexpected changes. But you'll see them--and be able to respond quickly-only if you get into the habit early on of looking for them and trying to understand what they mean. My friends Bobby and Helene Stone are a case in point. They have a company, Data-Link Associates, that sells computer supplies as well as an improbable sideline: cabinets and cases for firearms. The Stones added gun products at the urging of a major supplier, a manufacturer of office furnishings that makes the gun cabinets as well. More than 15 years ago, I had helped Bobby and Helene get their business up and running. (See Bo Burlingham's article "How to Succeed in Business in Four Easy Steps," July 1995.) Back then, I insisted that they track their monthly sales and gross margins by hand until the process became second nature. As they've increased their sales from $160,000 in 1992 to $3.2 million today, they have continued to monitor their numbers closely. When they notice a disturbing trend, they call me. Not long ago, they called in a bit of a panic. They told me that for the previous five months their monthly sales had been 20 percent to 25 percent lower than normal. Among other things, they'd lost almost all of their "special sales." Those are nonrepeating, high-volume, low-margin sales-exactly the kind of sales that I wouldn't let them accept when the company

was small but that had become a nice source of profit for them in recent years. I should probably say a few words about why those sales were dangerous in the early days but perfectly fine once the business became established. It has to do with risk. Whenever you extend credit to a customer, you run the risk of not getting paid and being stuck with having to cover the cost of whatever you've sold, plus delivery charges. The bigger the sale, the greater the risk. It's generally a bad idea to take that risk on a large, low-margin sale before your business becomes viable--that is, able to sustain itself on its own, internally generated cash flow. On a $2,500 sale with a 30 percent gross margin ($750 in gross profit), you'd lose about $1,750 if the customer went out of business or just refused to pay for whatever reason. On a $25,000 sale with a 10 percent gross margin ($2,500 in gross profit), you could lose $22,500. Granted, it's tempting to go for the larger profit, particularly when the sale seems like an easy one, but until your company has reached viability, you have to guard your start-up capital like the crown jewels. You can't afford the risk of losing a big chunk of it all at once. That $22,500 could be the difference between success and failure. The picture changes, however, once your company becomes viable. Not that you should ever be blas about the possibility of losing money. It's still important to do thorough credit checks on customers, especially highvolume ones. But if you know you'll survive even if you get stiffed, you can accept some high-volume, low-margin sales. You just have to make sure they don't become such a big percentage of your total sales that not getting paid for them could jeopardize your business. As Data-Link's core business of high-margin sales had grown, Bobby and Helene had been able to do more high-volume, low-margin sales, and it had paid off handsomely. In their monthly income statements, they'd created a separate line for these special sales and kept a close eye on it. Whenever such an opportunity came along, they would decide whether to accept it based

partly on how their regular low-volume, high-margin sales were doing and partly on how confident they were of getting paid. Thanks largely to the special sales, they'd grown accustomed to doing from $250,000 to $300,000 a month in overall sales, and so they were concerned when they noticed a significant drop one month. One month's drop can be an aberration, but if it happens two months in a row, you start to wonder what's going on. After three months, it's "Houston, we have a problem." Bobby and Helene were well beyond that point by the time they came to see me. "Look at these numbers," Helene said, pointing to a spreadsheet. Special sales were zero. "Why is this happening?" I asked. "We don't know," Bobby said. "The answer is important," I said. "Maybe you're doing something wrong that you can change." "How do we find that out?" he asked. "You can start by calling up customers who've done special sales in the past. Ask them why they haven't come back lately. Meanwhile, let's think about what you can do if the special sales never come back." "That would be horrible!" Helene said. "No, it wouldn't," I said. "You have a wonderful business. You're making good money even without the special sales. But if you lose them, you'll probably want to find another source of revenue." I didn't have to explain. They knew that they'd reached a saturation point in their main line of business. Their regular sales had been more or less stable for four or five years. "While you're investigating the drop in special sales," I said, "think

about ways to expand something else you're doing. Then we'll get back together." When we reconvened a couple of weeks later, Bobby and Helene reported that the special sales decline appeared to be happening for several reasons. For one, there were more competitors offering these products. For another, the Internet allowed customers to shop more and pay less. In addition, one big customer had stopped buying, claiming that some products it had bought had been defective. That turned out to be untrue, but the customer was no longer placing orders with Data-Link. "Given all this," I asked, "can you get back in the game?" They weren't sure. The special sales came in via the Internet, and nobody could predict when one would show up. The best they could do would be to improve their chances by upgrading their website and working on their search-engine placements. But they said there was another opportunity they could go after. A few months earlier, the gun-case manufacturer had told Bobby and Helene that they were missing out on sales because Data-Link was not an approved vendor of the General Services Administration. The Stones had submitted an application shortly thereafter and won GSA approval, opening the door for sales to the armed forces and various federal law enforcement agencies around the country. "We're doing a couple thousand a month in GSA sales right now," Helene said. "The average sale isn't as big as the average special sale, and the gross margin is lower, but the opportunity is basically limitless." "So where are you going to get the biggest payoff over the next five years?" I asked. "Well, obviously GSA," Bobby said, and Helene agreed. So did I. By and large, the special sales were one-shot deals. The sales to government entities, on the other hand, had the potential to become repetitive. That meant Bobby and Helene could build a business around it. In fact, their GSA sales were up to about $40,000 per month the last time I checked. But what made me

happiest about the episode was their ability to answer the question of what to do by themselves. They could answer it because they knew their business. They had a firm grasp of the numbers and used them to make a smart decision. That's what happens when you educate yourself the old-fashioned way.

"You Do What?"

"I import dirt," he said. And if he can keep his focus, it just might work.
By Norm Brodsky | Feb 1, 2008

Mark Hartman

LAND BARON: Steven Friedman came up with an intriguing plan to sell Israeli soil.

Norm Brodsky

Travis Ruse

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I recently read a New York Times article about a professor who'd done a survey and found that 35 percent of American entrepreneurs, by their own admission, are dyslexic. I think if she had been asking about attention deficit disorder, the number would have been closer to 90 percent. It's no secret that most entrepreneurs--including me--suffer from ADD. Actually, I can't say that I've suffered from it, since I think it's had a lot to do with my success over the years. For that matter, I'm not sure I agree that ADD is a disorder. To me, it's just a condition, a personality attribute, and it has pluses and minuses. In some situations, I'm sure, people who don't have ADD are the ones at a disadvantage. That said, if you happen to be a lucky ADD sufferer and you're in business for yourself, you can do yourself a favor by developing some counterbalancing traits. The most important one is the most obvious: the ability to focus. Let me tell you about Steven Friedman, who came to see me a few months ago looking for help. As soon as he walked through the door, I recognized him as a kindred spirit. He was a hyper young man in his mid-20s, with so many great ideas for businesses he could hardly contain himself. Every time he turned around, it seemed, he spotted another fabulous opportunity. Not only that, but his friends were constantly coming to him with more ideas. He was drowning in ideas. He didn't know what to do with them all. "OK, let's just take it easy," I said in my most soothing voice. "Do you have a business now? Tell me what you do." "Right now, I import dirt from the Holy Land and sell it," he said. "You do what?" I asked, not sure I had understood him correctly.

"I import dirt--you know, soil--from Israel," he said. "I've been to Israel quite a bit, and I know how people feel about earth from the Holy Land. I figured it would be easy to import some in large lots, sell it in small lots, and make a lot of money." He noted that, at Jewish funerals, the mourners traditionally sprinkle dirt on the coffin. He figured that a lot of people would like the idea of sprinkling Holy Land dirt, and he could sell it through funeral homes. I was impressed. "That sounds like a pretty good idea," I said. "Yeah, I liked it, too, until I tried to bring the dirt in," he said. Steven explained that, after getting the idea, he did some research on the Internet to see whether anyone else was importing earth from Israel. He found that several people had thought about it, but no one had done it. When he dug a little deeper, he discovered why. Because soil contains organic matter, it is subject to the same importing rules that apply to fruit and vegetables--that is, you have to get permission from the U.S. Department of Agriculture to bring it in, which involves getting it treated, tested, and formally approved. That process alone can add considerable expense, and then there's the cost of acquiring the dirt, shipping it, packaging it, storing it, marketing it, and delivering it to customers--all before you have any idea how much of it, if any, you can sell and at what price. And yet Steven had somehow managed to overcome those obstacles. He'd imported 40,000 pounds of dirt from Israel with USDA approval. He'd even put out press releases at the time of its arrival, and the story had been picked up by dozens of newspapers around the country, including New York Newsday and the New York Daily News. He'd trademarked the name Holy Land Earth and set up a website where customers could order one-pound bags of the dirt. (The price is $39.95.) Lest anyone doubt where the dirt came from, he'd lined up an eminent rabbi in Jerusalem to vouch for its authenticity. And although he recognized the potential appeal of Holy Land

Earth to Christians and Muslims as well as to Jews, he'd targeted his marketing at Jewish funeral homes and succeeded in making some sales. "That's very interesting," I said. "Where is the dirt now?" "It's in a warehouse that a guy I know has in New Jersey," he said. "He doesn't charge me too much to keep it there." "So what are you going to do with it?" I asked. "I'll keep selling it," he said, "but it doesn't take up too much of my time, and I've got these other things that I can work on." And he started to reel off his ideas, none of which had anything to do with Holy Land Earth. "Wait a second, slow down," I said. "You're talking about six different businesses here." He gave me a funny look. "So?" he asked. "It says in the magazine you started six businesses." "Yeah, one at a time," I said. "And I don't even think about doing another until the one I'm working on either fails or reaches critical mass where it's able to live off its own cash flow. It's hard enough to concentrate on one thing and make it successful without having others competing for your attention. You'll be so busy chasing after opportunities that you'll miss the big opportunity in front of your nose. Listen, you've already made some classic mistakes with this one, and you need to learn from them. That's how entrepreneurs get to be good at what they do: by analyzing their mistakes so they don't repeat them." He seemed a little taken aback. "What classic mistakes?" he asked. "Well, the first was that you got all this fabulous publicity before you were ready to take advantage of it. That was all wasted. The idea is to make sales. You should have waited until you had a product to sell. You'll never have that same shot again."

He nodded his head slowly. "What others?" he asked. "You targeted almost all of your sales efforts at a very limited market," I said. "Let's say there are four million Jews in the United States, and 40,000 die a year. Of that, say, 20,000 have religious burials. Of the 20,000 burials, let's say 10 percent are done by people who think Holy Land Earth is a good idea--which is optimistic. In that case, your total market would be 2,000 people a year, and you never get 100 percent of your market. You're doing great if you get 20 percent of it. That's 400 sales per year at $39.95 a bag. Even if you had the highest possible gross margins and doubled your price, you couldn't survive on that." Steven listened and kept nodding. "And that's not repetitive business, either. It's a different group of potential customers every year." "So maybe I should try something else," he said. "I get ideas every day." "Well, that's for you to decide," I said, "but why would you go on to the next thing before you know whether this one can be successful?" I pointed out that he could expand his marketing efforts to Christian Evangelicals, for example. He could also come up with uses that would be repetitive--like planting a tree or a flower in Holy Land Earth once a year to commemorate a loved one's death or to celebrate a birthday. And maybe he could find related products to sell, such as Holy Land seeds. "You've already spent a fair amount of money and, more important, time," I said. "The expertise you've acquired is worth even more than your financial investment. You've figured out a lot of things that stopped other people from doing it. And you still have all this imported dirt. Don't you want to see it through?" It's a common situation. I've seen a lot of people who get an idea they think is hot, but when they try it, suddenly it's not as hot anymore. So they shove it aside and start on the next one. You need patience, persistence, and focus to succeed. First efforts often meet with failure. When I started my recordstorage business, I thought it would be easy to get sales. I would just offer great service at a good price. I set up a booth at a trade show--and came

away without a single sale. I could have said, "OK, if people come to me with boxes, I'll store them, but I'm going to move on to the next thing." I won't repeat the story here; I've already told it elsewhere. (See "What Business Are You Really In?" December 2000.) Suffice it to say that I wouldn't have 3.5 million boxes in my warehouses today if I hadn't kept asking questions. Steven didn't need to think long about what he wanted to do. His ADD tendencies notwithstanding, he had shown quite a bit of persistence to get this far. I wasn't surprised when he indicated that he wanted to see how far he could go with Holy Land Earth. Understand, it may turn out that the business can't succeed in the long term. Even if he comes up with other products and other markets, he may find that selling dirt from Israel just doesn't have much of a future. Then again, he may be able to use it as a launching pad for a more promising business that he discovers along the way. The trick is to stay focused without putting on blinders. You need to use your peripheral vision to spot things that you didn't expect to see but that may hold the key to your long-term success. Steven must have heard what I said. The last time I saw him he mentioned that he'd had another great idea for a business while he was sitting in a barber's chair a few days earlier. "But I'm not thinking about it," he added quickly. He also told me that he's coming out with a variety of new products--bracelets and necklaces with Holy Land Earth in them, Holy Land rocks, seeds from Israel, and Dead Sea cosmetics. Evidently, he has figured out how to put his ADD tendencies to good use--by keeping them focused. Norm Brodsky is a veteran entrepreneur who also writes The Morning Norm at Inc.com. His six businesses include a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham.

The Simon Cowell of Sales


Few things are more fun--and productive--than critiquing someone else's sales performance.
By Norm Brodsky | Mar 1, 2008

Norm Brodsky

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Inc.'s Small Business Success Newsletter


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Like most entrepreneurs, I'm a salesman at heart, and I love watching people sell, especially when they're trying to sell me. Aside from the entertainment of seeing how others play the game, I usually learn something along the way. That has certainly been the case over the past few months, as my partners and I have been shopping for a new insurance broker. I have to admit that I approached the process with a certain amount of sympathy for the contenders. I can think of few sales more difficult than selling your services as an insurance broker to a company like mine. What we're buying is service, pure and simple. Since we're looking for a new broker, not a new insurance provider, the product--that is, the insurance itself--is exactly the same no matter who represents us. The policies will come from the same large insurance company, Chubb (NYSE:CB), we've

been using for years. Even so, every brokerage we talk to will intimate that it can get us a better deal. "We see you have Chubb," its reps will say. "We've been representing Chubb for 25 years, and we have some pricing power with them." But that dubious claim isn't going to win our business. We're looking for the best service we can get, which, frankly, is a guess. We won't really be able to judge the new broker's service for a couple of years. In 20 years, we've had only four insurance brokers. Whenever we've hired a new one, we've thought we were upgrading our service, and yet none of them turned out to be quite right. One, we discovered, was what I'd characterize as integrity-challenged. The others just didn't provide the level of service we needed. That's what happens when you have to base your decisions on gut feelings. Even if you do a good job of checking references, you still make mistakes, and they can be costly. But what's the alternative? As for the prospective vendors, they don't have many tools they can use to capture our hearts and minds. Whether they get the account depends mainly on how well prepared we think they are, how closely we think they listen, how experienced they seem to be, how well we think they will take care of us, and how much we like them--all factors over which they have limited control. As I said, it's a hard sale. Then again, we're a substantial piece of business, worth several hundred thousand dollars a year in premiums--enough to attract the interest of almost any broker. The first step was to put out feelers and get recommendations. The managing partner of our accounting firm suggested one brokerage. Our bank wanted us to consider its insurance subsidiary. I approached a contact I have at Marsh, one of the industry giants. My partner Sam knew someone at a firm we'd interviewed before. A publisher friend-not Inc.'s publisher--asked me to include one of his advertisers. That came to five candidates, which seemed like enough. We sent each of them summaries of our current policies and began scheduling meetings.

One of the initial revelations was that we had two glaring problems with our coverage. The first group we met with pointed out that each of our six buildings was insured separately, which could cost us a lot of money in the event of an accident. Let's say we were hit by a tornado that caused $8 million worth of damage to one warehouse. (This isn't completely farfetched. Brooklyn was hit by a tornado last year. Go figure.) If each building was insured for $5 million, we would have to pay the remaining $3 million out of pocket. We could avoid that fate by covering all six buildings in something called a blanket-limit policy. Our current broker had never mentioned that such an option existed. The second problem had to do with our lack of certain types of coverage--such as for wind damage. We could have had it at no extra cost. We simply had to ask. I found it interesting that all the candidates identified these problems--all, that is, except for the last firm we interviewed, the one recommended by the publisher. Like the other groups, it sent in a team of people, including the man in charge, a young woman who would be our direct contact, and a guy who made the main presentation--and quickly demonstrated that he wouldn't listen to a word we said. We'd ask a question, and he'd ignore it. We'd tell him we weren't really interested in everything his firm could do, and he'd keep right on running through his prepared script. Finally, I said, "OK, but you looked at our policies. What do you think?" He seemed taken aback. "We didn't get your policies," he said. "You got the same packet we sent to everyone," I replied. "It included a summary of our policies. What would you do with them?" "Well, that depends," he said. "We haven't had a chance to study them, but I'm sure we can find things that need to be corrected." It became clear that he and his colleagues hadn't done a stitch of work to prepare for our meeting. I thought the head guy was pretty sharp, and the woman was perceptive enough to cut short her remarks in response to my

comments, but we certainly weren't going to use a firm whose people didn't care enough to come prepared. Afterward, I called the head man and said, "Listen, you're not going to get the account, and--out of respect--I want to tell you why. That's what I'd want someone to do for me." I explained why we'd disqualified his firm. He thanked me, and we parted on good terms. The bank's insurance subsidiary was another story. Its representatives were excellent and had done their homework, but none of them had been around very long. That's a common problem with a giant company. You're always dealing with new account representatives, which means constantly rebuilding relationships. Just as you're beginning to feel comfortable with a new person, he or she is gone. We didn't want to have to go through that with our insurance broker, so we crossed the bank's brokerage off the list. We might have eliminated Marsh for the same reason, had its people not done something very smart: They let us in on an industry secret. "We're very transparent," said the leader of the team that came to see us. "We pride ourselves on that." "OK," I said, "but what does that mean?" "For example," he said, "when we send you a bill, we show you what the insurance company is charging you for the policy and what exactly we're getting, as well as any fees we've added on. You can see exactly what you're paying for. And we also give you the choice between paying us the standard rate or having a negotiated fee." "A negotiated fee!" I said. I didn't know it was possible. "You're saying we can pay you more money or we can pay you less money. That sounds like a pretty easy choice." "Well, it's true that, in the beginning at least, you'll be paying us less than the standard fee. But we'll monitor the work we do and see how much money we save you. We'll take another look at the fee after a year." He indicated that,

for an account our size, the initial fee would be about two-thirds of their standard fee. Marsh was the fourth group we'd interviewed, and the others hadn't said anything about negotiating fees. Neither did the last group--until I said, "Well, you negotiate fees, don't you?" "Yeah, we negotiate fees," the head guy said. From his tone of voice and body language, I deduced that his firm did it only when forced to, which I could readily understand. I figured that the biggest accounts had probably begun to insist on it. After all, much of the work required to service a policy is redundant. A huge policy doesn't require twice as many man-hours as one half its size. Nevertheless, I had to give Marsh credit for spilling the beans. Its transparency kept it in the running, along with two other groups whose people had impressed us with their experience and professionalism. Though substantial firms in their own right, they were smaller than Marsh, which gave them an edge. With either one, we wouldn't expect to deal with constant turnover of account reps. Besides, I generally prefer to be a large fish in a small pond. The question was, Would the smaller firms negotiate fees? Our initial inquiries suggested that the answer was a reluctant yes. In that case, we would probably have gone with the brokerage recommended by the managing partner of our accounting firm. The firm Sam brought in would have been fine as well, but my partner Louis Weiner, the company's president, preferred the other group, and he was the person who would be dealing directly with insurance issues. For that reason alone, I would have sided with him. As it happened, I was leaning in that direction anyway, and I liked the idea of doing a favor for our accountant, who I knew would return it.

But then, just as we were getting ready to make our decision, things took a twist. A private equity firm we had been talking to came up with another brokerage that we had to consider. Why did we have to consider it? Well, that's part of another story that I'll be telling you next month. Let's call it "The Offer: Part 10." Norm Brodsky is a veteran entrepreneur who also writes The Morning Norm at Inc.com. His six businesses include a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham.

The Long Road to Nirvana


By Norm Brodsky | Apr 1, 2008

Norm Brodsky Inc. Newsletter

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Part One Norm discovers that getting a substantial offer for your business can actually be a little scary. Part Two Norm negotiates what (at the time) seems to be the offer of a lifetime (ha!) -by refusing to negotiate. Part Three Norm confronts a truly challenging question: If I sell my businesses, who exactly will I be? Part Four Norm endures the business equivalent of a colonoscopy: due diligence. Part Five

Norm makes his decision: Despite certain misgivings, he agrees to sell. Part Six The doubts begin to set in: Are these guys stalling? Is this deal about to fall apart? Part Seven They are stalling, and Norm has just about had it. Can this deal be saved? Part Eight Uh, no. The deal cannot be saved. But you won't believe how and why it falls apart. Part Nine What Norm learned from his fiasco. For one thing, if he ever gets another chance to sell his businesses, he's not going to write about it until the deal is done. Part 10 The deal is done.

The Offer: Part 10


In which our columnist finally finds the pot at the end of the rainbow.

By Norm Brodsky | Apr 1, 2008 So where were we? Much has transpired since the last installment in the saga of "The Offer." That column (July 2007), you may recall, was subtitled "What I Learned From My Fiasco." Well, it turned out that my fiasco wasn't such a fiasco after all. On the contrary, it was just about the best thing that has ever happened to me in business. It opened my eyes to possibilities I had never considered and probably wouldn't have considered if I hadn't gone through the excruciating process of trying to sell my records-storage, documentdestruction, and trucking companies to Nova Records Management. Those possibilities became apparent soon after I walked away from the Nova deal, on April 5, 2007. By then, we had received several inquiries from private equity firms that wanted to get into the records-storage business. We had told them that the company wasn't available. As word spread that the Nova deal was dead, the trickle of calls became a flood. We quickly realized that we would have no trouble doing another deal if we wanted to, and that -- given the business's growth in the previous year -- we could probably get at least 20 percent more for it than Nova was going to pay. My partner Sam Kaplan and I were surprised. While we were wrapped up in the Nova negotiations, the world had changed. The most important development had been the discovery of the records-storage business by some major private equity firms. Our deal may have played a role in attracting their attention, but the primary stimulus had been the sale of another company, ArchivesOne, which at the time was the third largest in the industry. ArchivesOne had retained a mergers and acquisitions firm to find a buyer. The firm had put together a deal book and sent it out to private equity investors, who were duly impressed. What they saw was an industry full of companies with guaranteed cash flow. That industry, moreover, had only one dominant player, Iron Mountain (NYSE:IRM). The investors realized that if you could acquire and merge the right group of smaller companies, you could build a credible challenger to Iron Mountain in four to six years, at which point you could have a so-called liquidity event. That is, you could take the company public or sell it to someone else and earn a nice return on your investment. To do it in that time frame, however, you needed to start with a company that was large enough to serve as a platform. ArchivesOne filled the bill -- until it was acquired by Iron Mountain at a substantial multiple. That left only a handful of potential platform companies, and my business, CitiStorage, happened to be one of them. So the phones started to ring. People wanted to meet with us -- any place, any time. They wanted to take us to lunch. They wanted to sit down with us at the next industry conference. They wanted to visit our offices. They wanted to tell us about themselves. They wanted to make us an offer. The calls just wouldn't quit. We laughed about it at first, but the fun quickly faded. The calls became a constant, nagging reminder that we didn't know what we wanted to do. We began to feel besieged. We cringed whenever the phone rang with another suitor on the line. Finally, Sam and I had had enough. We decided to

sequester ourselves in an office, stop all phone calls, and spend as much time as we needed to figure out what we were going to do. We quickly realized that we basically had two alternatives: We could do nothing right away and wait for a better moment, or we could take advantage of the hottest private equity market in history. The more we thought about it, the more convinced we were that, by sheer luck, we had been handed a golden opportunity to cash out. By all indications, the private equity market was nearing its peak. Besides, we had already separated from the business. Neither Sam nor I had been involved in operations for more than a year. The Nova episode had left us feeling a little beaten u p and depressed, as well as about $500,000 poorer, but the company was coming off a spectacular year, and the stars were aligned for a sale. So we said, "OK, we're going to do something." But what? We decided to list all the groups that had approached us. There were six or seven that understood the industry and were desperate to get into it. The first question was, Should we deal with them ourselves, or should we hire an M&A firm to represent us? Some people had criticized us for not bringing in experts to help us with the Nova deal and for not shopping it to other potential buyers. That criticism was probably valid, but Sam and I decided we knew enough at this point to go ahead on our own. (I'm not necessarily recommending this to anyone else. Frankly, I'm not sure it was the right decision even for us.) < We further agreed to two conditions on any deal we might make. First, our employees and our culture would not be put at risk. We would be the platform company, and ours would be the defining culture. Any company that was added to the platform would have to adapt to us. Second, we would work only with private equity firms that had the financial resources to do the deal themselves. With Nova, most of the financing would have had to come from outside sources, which greatly complicated the entire process. We didn't want to go through that again. We proceeded to invite the interested buyers to meet with us in our offices. Louis Weiner, who is CitiStorage's president and a partner, joined us for the meetings, each of which lasted about two hours. The interested firm's people would make a pitch. Then we would ask questions, as would they. We learned about their investing philosophies. They learned about some of the uncertainties in our business, including our dwindling warehouse capacity and our search for additional space. We told each group that we were interviewing other potential buyers. They all left with the understanding that we would soon be back in touch. By then, Iron Mountain had also put out some feelers, but -- because of our commitment to our culture and our people -- we knew we wouldn't be selling to the giant, and so we didn't pursue that possibility. After finishing the interviews, Sam and I went back into the office to think about our next step. We asked ourselves, Is there anything else we can do? Hardly had we posed the question than the same thought popped into both of our heads: What about Allied?

Allied Capital (NYSE:ALD) is one of the preeminent private equity firms in the country. It was founded in 1958 and has been public since 1960. Today it has total assets of about $5 billion. More to the point, it is a firm we have known for a long, long time. Sam has done six deals with Allied Capital over the past 35 years. I've done four or five, the most recent being the debt restructuring that allowed me to get rid of my personal guarantees (see "Free at Last," September 2007). Over that time, we have formed strong bonds with Allied Capital's people. Indeed, we liked them so much that we invited Allied Capital to become a shareholder, with 10 percent of our stock. Given all that, you might wonder why we didn't think to approach Allied much sooner. I have asked myself that question. The reason is that, up to that point, we had been in defensive mode. We were so caught up in reacting to what other people were doing that we didn't see the potential solution right in front of our faces. I suspect that some of Allied's people may also have wondered what took us so long when we finally broached the idea of selling them the business. They reacted very positively. Although they weren't as familiar as some other firms were with recent developments in our industry, they knew the players. We suggested that they do some fact-finding on their own. They did and came back to us ready to do a deal, but then events took an unexpected turn. Previously, Allied Capital had had little contact with anyone in the company other than Sam and me. Its people were unaware of the strength of our management team and didn't realize how well it functioned without the two of us. In our discussions, we noted that Sam and I had been out of operations for more than a year, and -- thanks to the hard work, skill, and dedication of our people -- we'd had one of the best years in our history. Allied's people asked, "With all this talent you have, what's your role going to be? What are you going to do after the sale?" Sam and I said we didn't know. "Well, you know what?" they said. "We don't want to buy your company. We want to do a leveraged buyout. We want you to leave a substantial amount of money in the company and become our partners. Then we want you to work with us to do acquisitions. We'll provide the financing. You'll provide the contacts and the industry expertise. If it goes well, there'll be a liquidity event in four to six years, and we'll all do very nicely." It was an appealing proposition. The shareholders -Sam, Louis, me, and my wife, Elaine -- would get to cash in most of our stock while retaining a significant investment in the company. Sam and I would continue to work together to build the company into a major player in the industry. Employees at all levels would have opportunities to grow and take on new responsibilities while keeping the culture they had come to know and love. And I would be close enough to advise them if they wanted me to. With half a dozen interested buyers, we had a decision to make. The first step was to narrow the field. Sam, Louis, and I went into Sam's office, shut the door, turned off the phones, and opened a flip chart. We decided to begin by listing the various issues that were most important to us. We framed them as questions. There were five: 1. Which acquirer would be the best for our employees? 2. Which would be best for our customers? 3. Which would be best for us from a financial standpoint? 4. Which would be best for our lives going forward? 5. Which do we have the best chance of closing the deal with?

Next, we decided to rate the different groups according to how well we felt they addressed these issues. We wrote the five questions on five separate pages. Then, without conferring among ourselves, each of us gave each group a ranking from one to three on every question, with one being the best and three the worst. When we looked at the results, it was obvious that we all felt Allied Capital was far and away the best choice. We signed a letter of intent in late August. In short order, Allied Capital sent in its own due diligence team, as well as a group of outside accountants to examine our books and some lawyers to go over our contracts. Things moved quickly from that point, although it didn't seem that way at the time, partly -- I'm sure -- because we had spent so much time on the Nova deal and its aftermath. It soon became clear that signing the contract, which I had considered so critical back in April with Nova, was nowhere near the end of the sale process. There were still all kinds of things that had to be worked out. At every step, I couldn't help noticing the enormous difference between negotiating with Allied and negotiating with Nova. I can sum up that difference in one word: trust. With Allied, we had it to begin with, and it got stronger as we went along. With Nova, I could now see, there had never been any trust, and any hints that it might have been developing had been an illusion. In negotiations, Allied Capital's people were always willing to compromise and showed a real determination to get the deal done. They clearly wanted us to wind up with a deal we felt good about. Nova, I realized in retrospect, had constantly tried to beat us down. We would reach compromises with Allied Capital on 50 points, and the revised contract would come back with all 50 changes. We would negotiate 50 things with Nova, and the revised contract would come back with maybe 12 of them included and a dozen new changes no one had mentioned, most of them completely unacceptable. Looking back, we could thank our lucky stars that the Nova deal hadn't happened. Even our timing turned out to be perfect, although we weren't sure about that at first. In the midst of our deliberations, the private equity market collapsed, and credit became as tight as a drum. We asked Allied Capital how those developments were going to affect the sale. We were told they would have no effect at all. The firm would honor the terms and spirit of our signed letter of intent, even though it had the legal right to back out. "This is unbelievable," I said to Sam. Thanks to our longtime relationship with Allied Capital, we had managed to escape the turmoil that was killing other deals left and right. And so it came to pass that, on December 21, 2007, majority ownership in our three companies officially passed to Allied Capital, and our new lives began. What that has been like will be the subject of the next column. Norm Brodsky is a veteran entrepreneur whose six businesses have included a three-time Inc. 500 company. His co-author is editor-at-large Bo Burlingham. To read the complete "The Offer" series, visit the Street Smarts archives. Copyright 2009 Mansueto Ventures LLC. All rights reserved. Inc.com, 7 World Trade Center, New York, NY 10007-2195.

The Offer: Part 11


I'll be over here if anyone needs me.
By Norm Brodsky | May 1, 2008

Norm Brodsky

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So you want to know how life changes after you sell a majority interest in your company to an outside investment firm and give up day-to-day management? Let me put it this way: Now I know how Colonel Sanders felt. OK, maybe that's going a little too far. I'm not a complete figurehead. I still have responsibilities. These days, I work on things like long-term planning, mergers and acquisitions, and putting up new buildings. But my partner Louis Weiner is the president, and he and his managers run the business. Sometimes, it's hard for me to keep from butting in. I'm talking about simple things, like going through the mail. I used to do it fairly often. It would give me a good feel for the business. Not that I sorted the mail or opened all the letters; I just flipped through them quickly. Occasionally, one would catch my attention, and I'd think, Hmm, what's this all about? I'd also learn things

about our customers -- how much business they were doing with us, how fast they paid their bills. It's easy to lose track of that stuff as a company grows. Going through the mail helped keep me up to date, and it became a habit. So one day in early January, when I heard the usual announcement over the public-address system that the mail had arrived, I didn't think twice about going to see what was in it. "Where are you going?" Louis asked. "I'm going for the mail," I said. "You shouldn't be doing that," he said. "That's my job now." And he was right. I wasn't even an employee anymore, let alone the boss. As soon as the deal with Allied Capital (NYSE:ALD) closed, on December 21, I no longer had a job at CitiStorage. My wife, Elaine, and I are still shareholders. I still have my office. I'm still getting paid -- but the money is a consulting fee, not a salary. That's a big adjustment, and I haven't finished making it, though almost six months have passed since the company was sold. A lot has happened in that time. CitiStorage is already a different business from the one I used to be in charge of, though the great majority of our employees probably don't notice the change. That's mainly because Allied Capital is committed to maintaining the culture. We continue to buy baseball and basketball season tickets for our employees. We continue to contribute $1.60 for every dollar that an employee puts in his or her 401(k). We continue to run our box game, handing out bonus checks whenever we hit a new milestone. We have the same health-insurance plan as before. We continue to reimburse employees for education expenses, to subsidize their movie tickets, to run our employee training sessions, and to offer all the perks we've had in the past. The Allied people regard the substantial cost of all that the way I used to -- as a smart investment. But although the culture hasn't changed, there's an entirely new way of making decisions and managing the business, and I see evidence of it every day. For example, my partner Sam Kaplan and I are working on acquisitions, some of which are really just purchases of accounts, not whole companies.

Before, I would go to look at the boxes, do a little checking, and make a decision. I didn't need anyone's permission. If I didn't have the money to do the deal, I'd borrow it from a bank, using the contract as collateral. Now I don't have to worry about financing, but I can't make the decision on my own, which is strange to me. The Allied people warned me that the changes would take some getting used to. "The biggest thing for you," they said, "is that we look at everything, and you cannot make on-the-spot decisions anymore. You did a fabulous job building this as an entrepreneurial company, but in order to get to the next level, there has to be more structure. You have to understand that." And I do. The changes they're making are just what CitiStorage needs if it's going to make the transition from a small giant, so to speak, to a much larger, professionally managed business. Indeed, those are precisely the changes that I refused to make in my first company, Perfect Courier, 20 years ago. Back then, I was also buying companies and doing private equity deals, but I had no structure, didn't ask anyone for advice, reported to no one, and wound up in Chapter 11. I firmly believe, moreover, that our people will benefit greatly from the growth we're going to see. Much as I hate to admit it, they had very limited opportunities to advance as long as I remained the majority owner. There was a danger that they would find their work less and less challenging, maybe even boring, as time went along. I began to see a few signs of this in the past couple of years, and it concerned me, but what could I do? I really didn't want to put in the time and effort required to build a huge company, and I knew from experience that I wasn't any good at it. At my stage in life, moreover, it didn't pay for me to take additional risk with my equity, and aggressive growth always involves risk. Now, with Allied Capital, we'll be taking calculated risks with the goal of getting much, much bigger in four to six years. That will open up opportunities for people throughout the organization. Some will thrive in the new environment, and some won't, but no one will be bored.

No one, that is, except maybe me. Actually, bored is probably the wrong word to describe how I'm feeling. Unsettled is better. Before, I was the benevolent dictator of CitiStorage, but the company isn't a dictatorship anymore. Although Sam, Elaine, Louis, the senior managers, and I still own about a third of the stock, the mindset is different. There's a board of directors, which I'm not a member of -- by choice. Sam and Elaine represent the minority shareholders; the other three directors are from Allied Capital. The officers of the company report to the board. The board reports to the stockholders. So everybody answers to somebody, and here I am, an undisciplined guy all my life, never answering to anybody, except maybe my parents when I was a kid -- and even then I was an independent little kid. Now, suddenly, I have to get used to a different way of operating. I have to become a team player, which means adapting to Allied's methods. Allied's people don't make snap decisions. They have standards. They look at formulas and ratios. They go into a level of detail that feels excruciating to a nondetail person like me. They have to do it because they need the approval of a committee to get the money for buying a company or building a new warehouse. We never had a committee. Our decision-making process was simple: Order a couple of corned beef sandwiches, and hash it out over lunch. Don't get me wrong. We were prudent. If we were buying a business, we checked out the customers, the contracts, the receivables, and so on. But we didn't go to anywhere near the lengths that Allied Capital goes. When Allied was buying our company, for example, it hired a big consulting firm to call our customers and find out how happy they were with our service. The firm produced a report of a couple hundred pages, and it was very interesting. We learned about some improvements we could make. The report cost Allied Capital many thousands of dollars. I would never have done such a survey, let alone spent that much money on it. But money doesn't play the same role for Allied's people that it played for us. They have it, we didn't, and that makes all the difference. If we were buying

land to put up a new warehouse, financing was the first thing we thought about. For Allied Capital, it's the last. Its people want to look at the returns. They want to take into account what might happen with our other buildings. They want to think about renting instead of buying and building. They want to consider how big the warehouse really needs to be. For me, the process can get a little tedious, but I understand why they do it their way. Maybe I make one mistake in a hundred, and they make one mistake in a thousand. That's how you have to do things in a large, public company, when you're taking risks with other people's money. Meanwhile, I have to get used to other changes in my life. For example, I used to have a lot of expenses I could charge to the company -- like when I took business associates out to dinner or bought a car to use on company business. I was also in control of my own salary, which I could adjust based on the company's performance. Because of that, we never had to touch the money that Elaine put in our emergency fund, as she called it. Now, whatever I spend comes out of my pocket. Granted, there's enough money in that pocket. I'm certainly not complaining, but that's another psychological adjustment I've had to make. The biggest problem, however, is that I don't have a clear idea of what I'm doing or where I'm going anymore. My work for CitiStorage doesn't fill all of my time or get my juices flowing the way starting a business does. There's a bit of a hole in my life at the moment, and I don't know yet how I'm going to fill it. So while I loved chasing the rainbow, I have to say that I have mixed feelings about having caught it. Any suggestions?

Norm Brodsky, Recession AllStar


Inc. columnist Norm Brodsky just sold three businesses. Two of them were started just as the economy slipped into recession, in 1990 and 2000. Here, he shares his advice for entrepreneurs starting companies right now.
By Norm Brodsky | May 1, 2008

Norm Brodsky

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I certainly didn't go out of my way to start my companies during a recession, but a recession does offer some distinct advantages for start-ups. First, you don't have a big staff or fancy offices that you have to cover every month. Established companies will have these fixed costs, and if their sales drop by 5 or 10 percent, they will be concerned about meeting their obligations. That's one less worry that you will have. And during a recession, people are scared about losing their jobs. Morale at most companies takes a hit. That's another thing you're not fighting. Your people will be excited that they're building something new. A start-up is also, by its nature, keenly focused on sales and marketing. Your only job is to tell the world what you have to offer. Meanwhile,

established businesses will often cut back on sales and marketing, because it seems easier than laying off employees or making another tough choice. But that usually results in a company's revenue dropping further and faster than it would have otherwise, thus aggravating its problems. You should spend every marketing dollar budgeted in your business plan without thinking twice about it. Let the larger companies adjust. When you're making a sales pitch to a potential client, don't use the Rword, but say, "Look, I'm sure you're busy examining every part of your business for ways to save money or streamline operations. We can help you do that. We don't have very much overhead, so we can pass along the extra savings to you." To me, that is a pretty compelling offer.

Ask Norm
How do you know when it's time to sell -- and other questions from our columnist's readers
By Norm Brodsky | Jul 1, 2008

Norm Brodsky

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I've been getting a lot of great letters lately, and many of them have to do with selling a business and moving on. I guess that's what happens when you write an 11-part series on the subject. In any case, I thought I'd share some of the queries -- and my responses -- with you this month. Unfortunately, I don't have time to answer all the e-mails I receive, but rest assured that I love hearing from you and read each and every message you send me. Dear Norm, My family is trying to sell a business we've invested more than 30 years in. We have questions about how much information we should reveal in the initial courting phase, as opposed to the due diligence phase. We're tired of responding to potential buyers who turn out to be window shoppers. Should we be sharing P&Ls, tax returns, and other

financial information from the beginning? Exactly what constitutes due diligence anyway? And how do we protect our information (and our time) from browsers who aren't serious buyers? --Darla Dear Darla: To begin with, ask would-be acquirers to sign a nondisclosure agreement, which bars them from disclosing to anyone else the information you let them see. It will not only protect you legally but also screen out a lot of window shoppers. In addition, you should do your own research on the buyers. Ask them for references. Find out whether they've bought other companies, and, if so, how they conducted themselves before and after the acquisition. Once you have a serious buyer who meets your criteria, the process of negotiating the terms begins. First comes a letter of intent that you both sign. Then comes due diligence, when you open your books and allow the buyer to check out the financial health and internal workings of your business. By then, the window shoppers should be long gone. -- Norm Dear Norm, I started my telecommunications business when I was 18, and I'm going to be 47 this summer. It's a successful business and provides me with a good living. I love the technology. I love my employees. I love my customers (most of them). Yet each day I feel more and more unfulfilled in what I'm doing. At the risk of sounding arrogant, I feel like a big fish in a little pond, unchallenged and bored. I have a lot of business knowledge that I feel is being wasted here, just doing the same thing year after year. I've tried some side ventures over the years without much success. I've also considered selling the business, but it's too large to be bought by a local competitor -- we do about $2.5 million a year -- and too small to attract the attention of large companies. Besides, I don't know what I'd do if I did sell it. And will whatever I do next allow me to earn as much money as I'm earning now? More important, will I like it, or will I regret letting go of the one thing I've had all my adult life? You seem to have ended up with the perfect situation without ever intending to get there. Do you have any words of advice to someone in my situation? -- Todd

Dear Todd: For openers, I don't agree that your business isn't sellable. You can always sell a good business with steady cash flow. It's also a mistake to assume that the only potential buyers are companies in your industry. People buy businesses for many reasons, including some you'd never think of. That said, boredom doesn't strike me as a good reason to sell an established business that gives you a good living. Instead, I'd urge you to focus on finding a way to recharge your batteries. You might start a new business on the side. You might try mentoring young entrepreneurs or getting a teaching job somewhere. Or maybe you've simply set your sights too low in your current business and need to challenge yourself with more ambitious goals. The world is filled with opportunities, and you don't have to sell your company to find them. I think you'd live to regret it if you did. -Norm Dear Norm, I am a manufacturers' representative in the luxury plumbing market. I incorporated six years ago because I had two experienced people working for me whom I wanted to keep. I was selling around $5 million of product per year at the time. Today we sell around $20 million. We now have seven employees, including myself, and generate around $50,000 a month in commissions. We spend all we make on salaries and expenses and never have anything left over. I am 58 and own 67 percent of the company. My partners are 56 and 62 and own 27 percent and 5 percent, respectively. I would like to cash out some of my equity and gain a partner who will help fund us and grow the company, so that I can retire with limited responsibilities in five to seven years. Are you aware of any private equity firms that would be interested in doing a deal with an established manufacturers' rep firm that has an excellent reputation, with the goal of grooming younger managers to eventually take over? -- Lee Dear Lee: I hate to be the bearer of bad news, but no private equity firm will be interested in buying your business. Investors of that sort look for what they call free cash flow -- that is, the cash flow you have after paying salaries and other expenses -- and you don't have any. That doesn't mean you can't sell your business, however. You've come up with a successful way to earn a

living while being your own boss. A lot of other people would like to be in your shoes. There may also be other manufacturers' reps willing to pay for the opportunity to get into your line of business. If you know a good business broker -- by which I mean one who specializes in your type of business -- you might start there (more on business brokers below). Otherwise, I'd begin networking and see what you turn up. -- Norm Dear Norm, How do you know when the time is right to sell your business? I have an online retailing business that's doing well. We grew 60 percent last year, and we've never been in debt. I'm thinking about an exit strategy, and I'm just not sure when to sell, especially since we are having tremendous growth right now. I don't know how long the growth will hold up, but we've experienced it in each of the five years we've been in business, and we are on track to grow another 55 percent to 60 percent again this year. So is it better to sell your business after the growth slows down or at the peak? -- Scott Dear Scott: Sophisticated buyers will take your growth rate into account when calculating the price they're willing to pay for your business. Your decision about when to sell should be based on other considerations. Having just gone through the process myself, I'd suggest you ask yourself three questions: 1. What kind of life do you want to have five or 10 years from now? 2. What are you looking for in a sale in terms of the money you would get, the way your employees and customers would be treated, and the future of your business? 3. What do you want to do next? Once you answer those questions, the path you should take will become much clearer to you. -Norm Dear Norm, Fifteen years ago, we began our business as a father-son venture to add document-management and courier services to the small but growing market we live in. Dad wanted to get out of commercial real estate, and I was fresh out of school and gung ho to create something. Fifteen years later, we are both tired. Our business and our market have grown, but local competitors have sprung up, and large industry players have

encroached on our area. All this competition has greatly depressed prices in our market. While our operating costs have increased tenfold over the past 15 years, the prices we can charge for our storage and services have actually declined. We've also filled all three of our existing buildings, and the prospect of having to find other locations is daunting. Recently, we've been contacted by one of the larger players in our industry about the possibility of being acquired. We have no idea how to qualify an offer or determine our company's actual value. My father's real estate broker background tells us we should hire a qualified agent if we're going to take a serious look at this proposition. What do you think? -- Jimbo Dear Jimbo: Everything you say about the business you're in is correct, but you should also be aware that your company has real value. There are many buyers in the market right now -- including me and my partners at Allied Capital. Although I didn't use a broker when I sold my business, I'm not sure that was very smart. I think you and your father would be wise to hire a broker. I say that even though I usually advise people to avoid business brokers. Many of them are hacks claiming to be expert in every type of business and every kind of deal. The exceptions are brokers who have spent years in a particular industry and have become true experts in it. Our industry is lucky to have two or three of them who are top-notch. I don't want to name names here, but you shouldn't have much trouble tracking down the good ones. And by the way, if you do decide to move forward, I hope you'll include me on your dance card. I'd be happy to meet with you at any time. -- Norm

It Takes a Company
If your best salesperson leaves, how do you make sure you don't lose your best customers, too?
By Norm Brodsky | Aug 1, 2008

Norm Brodsky

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A while ago, I received a message from a reader that brought back some bad memories. He wrote: "I know you believe that, if you run your business right, departing salespeople shouldn't be able to take your customers with them. So what am I doing wrong? I give our project managers and salespeople a lot of freedom to serve customers. After a year or two, the employees walk off with the account. Each time, I get the same feeling in my stomach that I have when I receive a letter from the IRS." I can't tell you how many times I've heard similar stories, and not just from inexperienced businesspeople. I remember being approached once at a conference by the founder and CEO of a former No. 1 company on the Inc. 500. He said he needed my advice on a difficult problem he was struggling with, namely, what to do about an 85-year-old salesman who was making

from $3 million to $4 million a year in commissions. Aside from creating a tremendous imbalance in the company, the commissions were depriving the business of cash it desperately needed to finance its growth. "I'm at a total loss," he said. "I made a big mistake in setting up the commission structure like I did, and it has come back to haunt me. He's just getting too damn much money, but I'm afraid if I cut him back now, he'll get angry and go to one of my competitors, which would be a disaster. He knows everybody in the industry, and he's extremely tight with his customers. I could lose half my company overnight! I tell you, I'm scared." I have to say, I was taken aback. Here was a guy with a $100 million business, making plenty of money, who had received all kinds of honors and awards, and yet he was terrified that if one salesperson left, he would lose half his business. It was his greatest fear. Fortunately, there was an easy solution. I suggested that the CEO talk to the salesman and try to buy him out of his contract in exchange for a deal that would guarantee him an income as long as he lived. At 85, I figured, he just might be willing to go for it. As it turned out, he was. Now, if you're a longtime reader of this column, you already know what I think about sales commissions (see "The Sales Commission Dilemma," May 2003), and I don't intend to rehash those arguments here. Suffice it to say that commissions make it more difficult to solve the underlying problem in these situations. I'm talking about the problem of customers feeling greater loyalty to the salesperson than to the company that is actually providing them with a product or service. When salespeople are compensated based only on their relationship with their customers, they have a vested interest in making sure that the loyalty problem isn't solved. In almost all cases, however, the customer's loyalty to the salesperson is misplaced. (There is an exception, which I'll get to later.) After all, the salesperson doesn't create the product or service, and if the customer needs help after the sale, the salesperson is not the one who can provide it. It takes a whole company to satisfy customers, and the company's leadership should

make sure the customers are aware of that. If customers have relationships with people throughout the business and truly understand what everyone contributes, salespeople will have a much harder time taking those accounts with them when they leave. Of course, this lesson -- like most business lessons -- is one I had to learn by getting whacked in the head a few times. I remember vividly how, at my first company, we would scramble whenever a salesperson left. We would print up a list of his or her customers and make sure that somebody went to see each of them. Then I would say, "Now, you go see the ones I saw, and I'll see the ones you saw." The disruption was huge. Yet, no matter what we did, we lost a significant percentage of the salesperson's customers anyway. And while we were running around trying to shore up those accounts, we stopped focusing on servicing other customers -- and lost some of them as a result. It was incredibly frustrating, not to mention a big waste of time and energy. In my heart, I knew there had to be a better way, but it took me a long time to figure out what it was -- mainly, I'm sure, because it required an enormous change in how I recruited, trained, deployed, and compensated salespeople. I didn't begin implementing the new system until I had been in business for nine years. I should have started much sooner. As you would expect, a big part of the implementation challenge had to do with persuading salespeople to move from commission to salary plus annual bonus, but my new approach involved much more than a change in compensation practices. I wanted people throughout the company to work together -- supporting one another, covering for one another, relying on one another. If we were short-handed in customer service, I wanted our head of operations to feel he could call any of our salespeople and say, "We're in trouble. Could you come in here and answer the phones for a while?" If a problem arose with a customer, I wanted our sales manager to know he could always ring up our customer service people and say, "Hey, I got a call from a customer. I know you guys are really busy there. But can you do me a

favor?" And he wouldn't have to yell or scream, because they would all understand that they were members of the same team. Developing that kind of esprit de corps took some time. For openers, we had to make sure the salespeople understood the inner workings of the business. So we had them spend time inside the business, answering customer questions on the phone and putting boxes on shelves. New salespeople didn't do anything else for the first six to eight weeks after they were hired. By the time they finished their training, they knew the whole operation and could explain to a customer exactly what happened in every area of the company. What's more, they knew the operations people personally and understood what each person did to contribute to our success. We also provided customer service training to all of our full-time salaried employees. In the process, people began to understand better what role each of them played, what challenges their co-workers faced, and how important it was that they all work together. Among other things, they started providing more feedback to one another. When customers called in with praise, the telephone representatives made sure that the warehouse workers heard about it. When there were complaints or special requests, employees were able to coordinate among themselves to do what had to be done. As the barriers between departments broke down, something interesting began to happen: Employees throughout the company became more visible to customers. The salespeople played a key role here, often bringing operations people on sales calls. As a result, when customers had issues they wanted to discuss, they didn't have to contact the salesperson and then wait for him or her to come back with an answer. They could go directly to the employee or executive who could give them the answer right away. Granted, the customers usually had a closer relationship with their salespeople than with other employees, but the customers knew that servicing the account wasn't the salesperson's job. If there was a billing problem, they went to the accounting department. If they needed to talk about storage or delivery

issues, they called the operations person. If they had a question about their contract, they got in touch with me or Louis Weiner, the company president. When that happens -- when customers see the business as a whole -- the danger of losing them to a departing salesperson goes away. Not that they will necessarily stay with you forever. You still have to give them great service and do it at a price that keeps you competitive. But they aren't going to leave just because a salesperson moves to another company. It has been many years since we lost a salesperson to a competitor, but if we lost one today, I wouldn't worry for an instant about him or her taking customers along. Our customers know that their satisfaction depends on a team of people. No matter how close they may be to the salesperson in question, they are going to say, "Well, I hope you're happy at your new job, but I don't know these new people you're with, and I do know the people at CitiStorage. They do a great job for me. Why would I leave?" I believe that almost any company can develop such a relationship with customers. It's more difficult to do with a commissioned -- as opposed to a salaried -- sales force, but even then, there are things you can do to make sure customers know they are being served by a whole company and not just a salesperson. The exception: personal services businesses in which the salesperson is, in fact, providing the service as well as making the sale. I'm talking about real estate brokers, travel agents, hairdressers, investment advisers, and the like. Those businesses call for a different approach -- but that's a subject for another column.

Falling in Love With Growth


As everyone on the Inc. 500 knows, building a company can be exhilarating. Just don't forget what got you there.
By Norm Brodsky | Sep 1, 2008

Norm Brodsky

Sanford/Agliolo/Corbis

GROWTH ADDICT: As Norm learned, opportunities can be dangerous.

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One of the newspapers I read every day is The New York Times, and an article in its business section recently caught my eye. It concerned the attempt of Starbucks (NASDAQ:SBUX) to return to the practices that had fueled its initial expansion. Apparently, the company, seduced by growth

opportunities, had abandoned the standards for selecting locations that had once been its hallmark. As a result, it wound up with hundreds of underperforming stores it is now planning to close, and founder Howard Schultz has had to return to day-to-day operations in an effort to get the company back on track. As I read the article, I couldn't help thinking about my friend Ernie Graham, who went through something similar with his real estate business in Telluride, Colorado. I met Ernie in 2002, on one of my early visits to Telluride, where I was learning how to ski. My wife, Elaine, and I were thinking about renting a place or buying a small time-share in the area, and I decided to check out the market. I walked into one of the real estate businesses in town and asked for the person in charge, as is my custom. He came out and introduced himself, but when he discovered I wasn't planning to spend much money, he sent me upstairs to see the new guy in the office, Ernie. We chatted for a while, and I learned that he had been a salesman for one of those 10-second Internet sensations, but the stock had tanked before he was able to cash out. He moved to Telluride with his wife and their two young children to get his life back together. Although I didn't wind up renting or buying a time-share from him, we became fast friends. I could see that he was an entrepreneur at heart. And, sure enough, a year and a half later, he and a partner left to open their own real estate business. When I began to buy and sell real estate, Ernie was the person I used. He had a little office in Mountain Village, located high above the town of Telluride, the center of commercial activity in the area (you take a gondola to get from one place to the other). The office didn't get much walk-in traffic, and the agents had no privacy, jammed together as they were in a small space. Still, the atmosphere was warm and collegial, and the location -- near one of the major ski lifts -- was good for people like me. I would come off the slopes and join Ernie in his office, where we would look at stock-market reports together on his giant flat-screen television and talk about business.

Then, three years ago, Ernie told me that he was moving his office to a new location in the center of Telluride, on one of the busiest corners in town. I went to the opening party and was impressed. The space was spectacular. There was a huge reception area, where he had put the flat-screen TV, and beyond that a large conference room and a hallway lined with private offices. In the windows, Ernie displayed photographs of properties he was representing, including one of the largest developments ever undertaken in the area. That had been a major reason he had moved. The developer felt he needed a bigger, fancier, more centrally located office to represent its properties well. Ernie was willing to oblige. Although I could no longer walk straight from the ski lift into Ernie's office, we continued to see a lot of each other, especially as I bought and sold more property. To all appearances, his business was booming. So I was taken aback when he told me this spring that he was planning to move back to Mountain Village, this time to a much smaller office on the ground floor of an apartment building. "They're giving me a great deal," he said. The space, which was off the beaten path, had previously been occupied by two real estate agents who abandoned it because they couldn't make money there. When I asked him why he was leaving his beautiful offices in town, he mentioned rising taxes and an impending rent increase. Now, I understand the importance of cost control, but Ernie's decision came as a shock nonetheless. The Telluride space had so many advantages that I couldn't see why he would ever let go of it. It looked to me as though he was making a mistake. Elaine agreed. "You have to talk to him," she said. "This could ruin his business." The next opportunity I had, I took him aside. "Listen, Ernie," I said, "I have to ask you something. I'm an outsider, but are you sure you're making the right move? There's no foot traffic where you're going, and the offices are small. Are the savings really worth it?"

"Well, let me explain what happened," he said. It turned out that the tax and rent increases had simply been prods pushing him to take a good, hard look at his business. Things were not going as well as he had hoped. To begin with, the big development project had been delayed for two years, forcing him to scramble to make ends meet. Worse, the move to a prime location had led him and his partner to abandon the innovative business model they had pioneered at the old location. Having made a significant investment in expensive new space, they naturally wanted to get the most bang for their buck, and so they had begun spending their money and time the way established real estate agents did -- on print advertising, office dcor, staffing to handle walk-in traffic -- rather than relying on the Internet tools that had served them well in the past. Along the way, the business had lost something: its mojo, he said. The sheer size of the new place turned out to be a liability. "At the old office, we were a close, tight-knit group," he said. "We didn't have enough space to spread out. So we would sit around and talk about ideas, and we would come up with new ways to do things. Here we say, 'Good morning,' and then we don't see each other all day long. We're ships passing in the night, even my partner and me." True, they were getting a lot of walk-ins, but those turned out to be a lot less important than Ernie had imagined. Most of the walk-ins had already established a relationship with an agent. They came to look, not to buy. In the new real estate marketplace, Ernie realized, you could sign up more customers by building a strong online presence or by socializing in the community than by waiting for people to walk through the door. So location was less important than in the past. "I could be a mile outside of town," Ernie said. "Our customers are going to come see us no matter what. On top of that, the costs of staying here are astronomical." "Were the costs the main consideration?" I asked.

"No, they were the last thing," he said. "Don't get me wrong. I'm making a good living here, but we could be doing a lot better. I know what got us where we are. When I sat down and thought about it, I realized I had taken a left turn when I should have stayed straight." So his decision to move made sense after all. Like Starbucks, he had been tricked by what he thought was a big growth opportunity, and it had led him astray. I understood perfectly how that could happen. I had once fallen into the same trap. The temptation arose after I had achieved considerable success with my first company, Perfect Courier. It had been on the Inc. 500 list for three years running and was still growing. Part of that success came from a decision I had made early on to go after city and state government contracts. The gross margins on them weren't the greatest, but they were good enough, and the cash flow was totally reliable because the customers always paid. Accordingly, government contracts became an important part of the foundation on which I built my company. Then I discovered the magic of acquisitions. I learned how to buy other companies, which allowed me to expand Perfect Courier much faster. As a confirmed growth addict, I cared only about increasing the top line. I decided that government work was a waste of time and that I should concentrate instead on making acquisitions. And that's what I did -- until I made the one, fateful acquisition that eventually pushed me into Chapter 11. (See "Groundhog Day," July 2001.) It took five months from the filing for the lesson to sink in. By then, my company was a shadow of its former self. I had been wracking my brain to figure out how I could hold on to what was left. One morning in the shower, it suddenly hit me: I had to return to my roots and start doing again the things that had made the business successful -- like going after government contracts. We began focusing on them, and Perfect Courier survived. When I later went into the records-storage business, I made sure that I didn't make

the same mistake. As the business grew and growth opportunities emerged, I never forgot the roots of our success. I remained loyal to the customers, and types of customers, who had gotten us where we were. Fortunately, Ernie didn't have to learn his lesson the way I learned mine. I suppose that's why he's able to take a more philosophical view of his detour into downtown Telluride. "I'm not sorry I did it," he told me. "I've made a lot of contacts here that are going to help me in the future. And you know what? I don't think I need a splashy office with big display windows in the center of town to convince the developers of these giant projects that they should do business with me. I believe I'm in a position now to sell on my reputation." I have to hand it to Ernie for getting the full benefit of his experience without having to go through Chapter 11. For that matter, he didn't have to lose the kind of money that Starbucks squandered when it got away from its roots. I guess that makes him a lot smarter than Howard Schultz and I are. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, will be published by Portfolio in October.

The Knack and How to Get It


Veteran entrepreneur Norm Brodsky, the man behind Inc.'s popular Street Smarts column, and Inc. editor at large Bo Burlingham, his longtime collaborator, team up once again as authors of The Knack: How Street-Smart Entrepreneurs Learn to Handle Whatever Comes Up. An exclusive excerpt.

By Norm Brodsky and Bo Burlingham | Sep 29, 2008

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We all have mentors in business, although we're not always aware of the role they're playing. My first and best mentor was an independent businessman, a solo practitioner, in New York City. His business was custom peddling. He'd visit his customers in their homes and sell them clothing, appliances, whatever. He was like a one-man traveling department store, and he handled the full range of business functions by himself -- from purchasing to bookkeeping to managing credit and collecting receivables. I sometimes went with him on his route. I'd ask him a lot of questions, and he'd explain the logic of what he was doing. That's how I learned some of the most important business concepts I use to this day. At the time, however, I didn't appreciate the education I was getting. I was only eight years old. The custom peddler was my father. It's ironic, I suppose, that growing up I never wanted to go into business. I had no desire to follow in my father's footsteps. After college, I went to law school, figuring I'd make my fortune in law. But life is funny, and I eventually wound up in business anyway. Only then did I begin to realize how much my father had taught me.

He was the one, for example, who first explained to me the importance of maintaining high gross margins. He called them something else -- big markups -- but the thought process was the same. "Always make a good sale with a big markup," he'd say. "Make sure your customer is someone you can collect from." "Don't take advantage of people." "Be fair." Those are fabulous business lessons embedded in my mind, and they came straight from my father. Then there were his expressions. "Don't worry twice," he'd tell me when I'd get anxious about an upcoming event -- a final exam, for instance. He'd ask, "Have you done your homework? Are you prepared?" I usually was. "So don't worry twice." In other words, don't waste time and energy on problems that may never arise. Or when I complained about not knowing what to do with my life, he'd say, "There's a million dollars under your shoe; you just have to find it." It wasn't until I became an entrepreneur that I understood what he meant. Or when I talked about things I'd like to have, he'd say, "You don't ask, you don't get," whereupon I'd request a bigger allowance. He'd smile and say, "Nice try, but just because you ask doesn't mean you're going to get it." Much later I came to understand that he'd been giving me my first lesson in selling. Lessons like these sunk in when I wasn't looking. They became habits of mind that led me to do certain things reflexively, without even noticing what I was doing. One of my best habits, for example, grew out of my father's practice of breaking down problems and challenges into their basic components. He believed that most issues in business -- and in life -- are fundamentally simple, even though they may appear complicated at first. He taught me that, to deal with them, you have to examine the underlying elements and figure out what's really going on. Never assume, moreover, that the real issues are those you see on the surface. That way of thinking has been one of my most powerful business tools over the years.

Indeed, I believe it's such mental habits that allow people to become successful entrepreneurs. I myself have been an entrepreneur for three decades. I've built more than eight companies, including a messenger business that made the Inc. 500 list of fastest- growing private companies for three straight years and a records storage company that I sold for $110 million in a leveraged buyout. Along the way, I've had the privilege of meeting many other successful men and women company builders, and I've noticed that most of us share these mental habits. They are the secrets of our success. (Well, one of the them. It certainly helps to have a life partner like my wife of thirty-nine years, Elaine, without whom I would not have achieved anywhere near the amount of success that I've enjoyed.) Now, I realize that not everyone wants to hear this. A lot of people starting out in business would prefer to have a step- by- step formula or a specific set of rules they could use to achieve their goals. The problem is, there aren't any. Rather, there's a way of thinking that allows someone to deal with many different situations and take advantage of many different opportunities as they arise. To be sure, having that mentality doesn't guarantee that you'll succeed at everything you do, but it does improve your chances significantly. You win more than you lose, and the longer you stay in the game, the more often you come out on top. I believe most people can develop the habits of mind I'm talking about and use them to acquire the wherewithal to live whatever kind of life they want. Not that every person will be successful to the same degree or in the same way. In business, as elsewhere, some individuals have God-given gifts that allow them to play the game better than others. We can't all be Tiger Woods, or Picasso, or Shakespeare, but anybody can learn how to play golf, or paint, or write a sonnet, and we can all learn how to be financially self-sufficient as well. That's an opinion, I might add, that has been repeatedly tested over the past seventeen years -- ever since I began mentoring Bobby and Helene Stone, an experience I recount in chapter 1 of this book. My work with them led to an

article in Inc. by Bo Burlingham, who later became my coauthor when we launched our column, "Street Smarts," in December 1995. Through the column, I came into contact with literally thousands of people who wanted to start a business, or who were in the process of starting a business, or who already had a business and were wrestling with one problem or another. They wrote me from all over the United States, Canada, and Mexico, as well as from countries as far away as Korea, Lithuania, Brazil, Singapore, and South Africa. They were software developers, insurance brokers, headhunters, artists, swimming pool installers, concrete road pavers, furniture builders, Web site designers, machine-tool salesmen, butchers, bakers, and candlestick makers. (All right, maybe not butchers, but the others for sure.) They had tile-making businesses, diagnostic imaging facilities, cosmetics companies, bellows- making factories, recruitment services, violin shops, investment firms, consulting practices, dot-coms, movie chains, and just about every other type of business under the sun. I read all their e- mails and responded to as many as I could. Every year, I also chose eight to ten of the writers to mentor on an ongoing basis. Some of them you will meet in the following pages. Their goals ran the gamut from building a giant business to starting a day care center to simply achieving financial independence and having more time with the family. Everybody, after all, has a different definition of success. What we have in common is the desire to have happier, richer, fuller lives for ourselves, and create a better world for our children and grandchildren. My goal was to help the entrepreneurs develop the mental habits that would allow them to do that. Judging by what some of them have accomplished, I have to believe that my efforts were not entirely in vain -- which is not to take anything away from the people themselves. Building their businesses has been their doing, not mine. I should note, moreover, that you don't have to have a mentor like me, or a father like mine, to acquire the mental habits needed to "handle whatever comes up." Many of my own habits I've developed the old- fashioned way -by making mistakes, falling on my face, picking myself up, and figuring out

how not to do it again. But you know what they say: A smart person learns from his or her mistakes. A wise person learns from other people's mistakes. I guess that makes me smart. I hope that, through this book, I can help you to be wise.

Secrets of a $110 Million Man


There are no guarantees when it comes to running a business. But the best entrepreneurs I know follow these guidelines. By Norm Brodsky | Oct 1, 2008 I've been an entrepreneur for almost 30 years now -- 29 years and two months, to be exact, but who's counting? -- and one thing I've learned is that there is no formula for success in business. Believe me, I wish there were. I would love to be able to give you a step-by-step guide to achieving your business goals. But I can't. That's because no challenge in business is identical to any other. Each is shaped by a multitude of factors that give it unique characteristics, and your response has to be tailored accordingly. Then how is it, you might ask, that some entrepreneurs are able to start one successful business after another and rarely -- if ever -- fail? By successful, I mean a business that lives off its own cash flow, provides a good living for its owners and employees, and generates the profit it needs to keep growing. You have no doubt run into people with the ability to create such businesses almost at will. In the media, they are often referred to as

serial entrepreneurs. I suppose I'm one of them, although I have certainly had my share of failures. So what do serial entrepreneurs know that allows us to have a relatively high batting average when it comes to starting businesses? Or is it just a matter of luck? Far be it from me to downplay the role of luck in any business venture, but I don't believe luck alone accounts for the success I have enjoyed. Nor does it explain the successes of other accomplished company builders I have had the privilege of knowing. Rather, what we have in common is a certain mentality, a way of thinking that allows us to overcome many obstacles and take advantage of many opportunities as they arise. I call it the knack. What exactly is the knack? I think it boils down to a set of rules that can be applied to a wide variety of situations. Some of these rules we learn as children. Others we pick up from mentors of one sort or another. Most we develop the old-fashioned way -- by making mistakes, falling down, picking ourselves up, and figuring out how not to do it again. However we learn the rules, they are the tools we use to deal with the challenges encountered in the course of building any business from scratch. Not that the rules guarantee success, but they do improve our chances significantly. We win more than we lose, and the longer we stay in the game, the more often we come out on top. I believe that almost any person can learn these rules and use them to create the kind of life he or she wants. Granted, they will come more easily to some people than to others, and not everyone will have the same success in applying them. In business, as elsewhere, some individuals have God-given gifts that allow them to play the game better than others. We can't all be Tiger Woods or Picasso or Shakespeare, but anybody can learn to play golf or paint or write a sonnet, and we can all learn how to be financially self-sufficient as well. It would take a whole book to list these rules and explain the logic behind them. In fact, my co-author, Bo Burlingham, and I have written one. It's called The Knack: How Street-Smart Entrepreneurs Learn to Handle Whatever Comes Up, and it goes on sale this month. Rather than repeat what's there, I thought I would give you what I believe are the 10 most important lessons I have learned over the past 29-plus years, the rules that I still rely on today:

1. Numbers run a business. If you don't know how to read them, you are flying blind.
When I started out, I thought that CEOs ran businesses with the help of their top executives. What I didn't realize is that a business is a living entity with needs of its own, and unless the leaders pay attention to those needs, the business will fail. So how do you know what those needs are? There's only one way: by looking at the numbers and understanding the relationships between them. They will tell you how good your sales are, whether you can afford to hire a new salesperson or office manager, how much cash you will need to deal with new business coming in, how your market is changing, and on and on. You can't afford to wait until your accountant tells you these things. Nor do you have to become an accountant. You do have to know enough accounting, however, to figure out

which numbers are most important in your particular business, and then you should develop the habit of watching them like a hawk.

2. A sale isn't a sale until you collect.


There's a common assumption that when somebody buys something from you, it's like money in the bank. Sooner or later, you are going to get paid. That's not always true, of course, and just how much sooner or later the payment arrives can make a big difference. But most people don't think about that when they first go into business. The term bad debt doesn't enter their vocabulary until they suddenly find themselves with a receivable they can't collect. By the same token, the concept of collection time doesn't become meaningful until they discover they don't have enough cash to pay their bills despite having made a lot of sales. As I have written previously, every business that generates receivables is, in effect, a bank (see "What Are You, a Bank?" November 2007). When you deliver a product or a service in the belief that the customer will eventually pay you for it, you are making a loan, and you should treat it accordingly. That means determining whether customers are creditworthy and finding out in advance how long they take to pay their bills. It also means getting into the habit of checking the quality of your loan portfolio regularly and making sure your average collection time is what it should be.

3. When your short-term liabilities exceed your short-term assets, you are bankrupt.
The vast majority of people in small business, I suspect, have no idea what a balance sheet is or how it differs from an income statement (also known as a P&L). The balance sheet certainly doesn't figure into their decision making. It didn't figure into mine until I wound up in bankruptcy court with my first company, Perfect Courier. There I learned that a company is bankrupt -- at least technically -- when its current liabilities (that is, the ones that have to be paid within the next 12 months) are greater than its current assets (the ones that will turn into cash within the next 12 months). That information comes straight off the balance sheet. I could have saved myself a lot of grief and pain if I had gotten into the habit of looking at it on a regular basis and keeping track of the most important ratio derived from it -- the current ratio, which measures a company's ability to meet its short-term debt obligations. You calculate it by dividing your current assets by your current liabilities. If the ratio is 1.25 or higher, you are in fairly good shape. If it's less than 1.00, you could be headed for trouble. Yes, you may be able to juggle your payables and other short-term debts for a while, but you should move quickly to restore your liquidity. Otherwise, you are taking a risk of one day finding yourself with no cash to pay your bills -- a potentially fatal condition.

4. Forget about shortcuts. Run a business as if it's forever.


Building a business is a lot of hard work. Everything that a great company needs takes a long time to develop -- a diversified base of loyal customers, experienced managers, a

vibrant culture, efficient systems throughout the business, a sales force that works as a team, a great reputation in the industry -- everything. Of course, we all look for shortcuts. That's only natural, especially when you are on your first venture. You constantly search for easier ways to make your company grow faster, and sometimes you find them. Unfortunately, they almost always come back to haunt you. I speak here as someone who is more impatient than most and who has tried just about every shortcut in the book -- like hiring salespeople from competitors and promoting employees just because they are available. It finally dawned on me that my shortcuts were serving only to prolong the process of building the great company I wanted. Why was I in such a hurry, anyway? A great company is one that can last forever, and I needed to make decisions in that frame of mind -- even though I fully expected to sell the business someday. My records-storage business, CitiStorage, would be worth more if I took my time and did what was best for the company in the long term. Indeed, it was. As you may know, I ultimately sold it and two related businesses for $110 million.

5. Cash is hard to get and easy to spend. Make it before you spend it.
Most people don't understand the value of cash when they go into business. If they did, they wouldn't waste it by purchasing brand-new furniture, paying designers to produce logos, ordering fancy business cards and stationery, or spending money on dozens of other things that they don't really need and that deplete their start-up capital without getting the business any closer to viability -- that is, the point at which the company can sustain itself on its internally generated cash flow. If the cash runs out before you get there, the ball game's over. The business dies. But it's not just start-up entrepreneurs who waste cash. The corporate landscape is littered with the corpses of companies whose leaders thought the good times would last forever and spent money they hadn't yet made on luxuries they didn't need. I made that mistake myself once and paid the consequences. One of the lessons I learned was: Make the money first. If you are smart, you will put some of it aside for a rainy day. Whatever is left over, you can spend as you please. You can pay big bonuses to your employees. You can make big donations to charity. You can buy a corporate jet. You can run for President. Whatever. But first you must earn it.

6. You have no friends in business, only associates.


Some habits are more difficult to maintain than others, and I constantly struggle with a really important one: Don't do business with friends. I have broken this rule several times and always lived to regret it. In the early days, I didn't hesitate to buy products or services from friends. I couldn't imagine why I shouldn't help someone with whom I had a close, personal relationship. But friends, I learned, inevitably make assumptions that hinder your ability to do what's best for the business. Even though I would tell them up front that they would be treated like any other vendor, they still expected me to make exceptions for them. When I wouldn't, the relationship went sour, and I lost a friend as well as a supplier.

It's even more important to understand that you can't be friends with your employees. I'm not saying you shouldn't treat them with respect and affection. You can laugh with them, cry with them, be happy and sad with them, but neither you nor they should ever forget that it's a business relationship. I had seven employees when I started my first business and became social friends with six of them. All six of those friendships became a problem for the business. And the seventh person? He now runs CitiStorage.

7. Don't focus on the top line. Gross margin is the most important number on the income statement.
In the early days of a business, everybody obsesses about sales. We want to see them increasing every month, every day, and every hour -- the faster, the better. I know that's how I felt. The first thing I would check each morning was the report of the previous day's sales. My investors were the same way. Not once did they ask about the company's profitability. They cared only about sales, and most of them were accountants! But focusing exclusively on sales is very dangerous, especially when you are starting a business with a limited amount of capital. Why? Because sales do not necessarily result in cash flow, and cash is what you need to survive. You run out of cash, you go out of business. End of story. Instead, you should be focusing on your gross margin -- that is, the percentage of profit you make after covering the direct cost of whatever it is that you are selling. In my opinion, gross margin is one of the two or three most important numbers in any business and by far the most important one in a new business. You have to pay all your expenses out of gross profit -- your salary, your rent, the phone bill, gas, electricity, photocopying, and so on. If your gross margin is 10 percent, you need $10 in sales for every $1 of overhead just to break even. If your gross margin is 40 percent, you need only $2.50 in sales for every $1 of overhead. So you will have more to show for the same amount of work with a high gross margin than with a low one. And if you are just starting out and have limited capital, that could be the difference between failure and success.

8. Identify your true competitors, and treat them with respect.


Here's something else I didn't know starting out: Not everyone who does what you do is your competitor. Rather, you compete against only those suppliers that offer the same services, are more or less equally reliable, and charge prices similar to yours. That doesn't mean you won't meet other types in the marketplace. In every business I started, there were people around who claimed to provide a service like ours at a fraction of the price. Invariably, they had tiny operations with little, if any, overhead. If the owner-operator got sick, or if a truck broke down, the customer would be stuck. Customers willing to put up with that risk were not good candidates for us. Conversely, customers that demanded reliability -- and were willing to pay for it -- were not good candidates for the mom-andpop operations. As for our real competitors, I came to see that they were extremely important to our longterm success. They played a critical role in shaping our reputation in the industry -- which

was our most valuable asset -- if only because their opinion carried more weight than that of any other group. When they spoke well of us, everybody listened. So I made a habit of treating them with the respect I hoped they would show us, and I insisted that our salespeople do the same.

9. Culture drives a company. In the long run, the boss's most important job is to define and enforce it.
When I started my first business, it never crossed my mind that I was creating a culture as well as a company. I didn't even realize that companies had cultures, let alone that the cultures might actually affect the businesses' performance. It was only 15 years later -when my wife, Elaine, joined CitiStorage -- that I began to think seriously about the matter. She introduced programs that fundamentally changed our culture, making it much more employee friendly, with business games, contests, educational programs, new employee benefits, and group activities of various sorts. I couldn't help noticing how much better the company functioned as a result. Along the way, it dawned on me that setting the culture was ultimately the CEO's responsibility. Although Elaine was doing the heavy lifting, she couldn't have succeeded without my support. Not only did I have to give her the resources she needed, but I also had to modify my behavior to fit in with the new regime and make sure that everyone else went along. Among other things, I had to learn how to hold my tongue and respect the chain of command. That was probably the most difficult new habit I have ever had to develop -- and certainly one of the most important.

10. The life plan has to come before the business plan.
It took a major whack on the head for me to get my priorities straight. For my first eight years as an entrepreneur, I always put my business goals first. As a result, I missed my first daughter's childhood. I spent too little time with my wife and friends. I didn't do any of the reading or traveling or gardening that I enjoy. My life was one full-bore, supercharged, nonstop, 24/7 rush to create a high-growth business. You know how that turned out. Fortunately, my descent into Chapter 11 came early enough in my life for me to learn the appropriate lessons and make a fresh start. The most important lesson was this: Building a successful business is not an end in itself. It is a means to an end. It is a way to create a better life for you and those whom you love, however you -- and they -- may define it. You need to do the life plan first and then keep revisiting it, to make sure it's up to date and your business plan is helping you achieve it. That habit, I can assure you, will prove to be the most important of them all. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, will be published by Portfolio this month.

What the Financial Crisis Means for You?


The rules of small-business banking have changed, and that's bad news for the economy. But there are ways to cope, and there may even be a silver lining.
By Norm Brodsky | Nov 1, 2008

Norm Brodsky

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Inc.'s Small Business Success Newsletter


Inspiring profiles and best practices for savvy business owners.

Now that we have been through Armageddon on Wall Street, the question is: What effect is all this turmoil going to have on the rest of us -- specifically, those of us who depend on bank loans to finance our companies' growth? My crystal ball is broken at the moment, but I do have some experience in these matters. It seems pretty clear that we are heading back to the time when banks preferred to lend money to those who didn't need it and it took a good deal of ingenuity to get any loan at all. Listen, small-business banking goes in cycles. Even before the latest meltdown, it was clear that we had moved from one cycle to another. Already, I had begun to feel nostalgic for the good old days. Not so long ago, you could still get what bankers affectionately referred to -- in private -- as an "air-ball loan." That was a loan based not so much on your assets but almost entirely on your relationship and history with the bank. Yes, the bank would glance at your company's earnings and cash flow, just to be sure you could make your payments and weren't about to go bankrupt, but the relationship mattered most. And the terms were terrific. If you were financing your receivables through a bank, the monitoring was extremely light. Often, it was just a matter of submitting a report every other month, whereas an asset-based lender would insist that all the money you collected go into a lockbox. Or suppose you needed equipment. In my business, we kept having to buy storage racks as we grew. Leasing companies would charge us 11 percent or 12 percent interest, and we would have to pay the loan back in four or five years. Banks,

on the other hand, would charge 6 percent or 7 percent, stretch the payments out over 10 years, and give us a balloon at the end. That translated into a whole lot of additional cash flow. And banks were falling over themselves to lend us money. I would get six to eight unsolicited calls from bankers every month. Sometimes they would show up in our lobby unannounced, saying they just happened to be in the neighborhood and thought they would drop by. Now, you have to understand that our offices are at the end of a street, with only one other business anywhere near us -- a doggie day care center. Nobody "just happens" to be in our neighborhood. We welcomed the bankers anyway. You never know when an extra one might come in handy. But those days are gone. Two encounters with banks in the past three months clearly demonstrated to me that we were in a whole new world in terms of banking. One occurred in Telluride, Colorado, where I'm building luxury homes with my partner Ernie Graham. We needed to borrow $4 million to cover the building costs, and Ernie suggested we use a local bank. He set up a luncheon with two of the bank's top people, and they indicated immediately that they were very interested in financing the project. My wife, Elaine, and I had already thought about the terms we wanted. Having just gotten rid of the personal guarantees we had had to pledge to finance our companies (see "Free at Last," September 2007), we were reluctant to pledge our own assets as collateral, and I said so. The bank president said he would need to examine my personal balance sheet, which I had brought along. He took a look at it, and we left the luncheon thinking we had a deal. But a week later, the bank president called and said that because we weren't giving a personal guarantee, the bank would lend us the money only if we made a "substantial" deposit, by which he meant an amount equal to 50 percent of the loan. I pointed out that a deposit of that size was hardly necessary from a security standpoint. Our development company had unencumbered assets of $7 million. Once the construction was finished, the value of these assets would rise to more than $16 million. The risk to the

bank was minimal. But it turned out that risk wasn't the issue. "In order for us to make loans, we need deposits," he said. "Things are very tough right now." "In that case," I said, "I think I'd rather give you a personal guarantee." I didn't like the idea of tying up my money in a bank account. "OK," he said. "I'll run it by the board." Another week went by, and he called me back. "The board would really like to lend you the money," he said, "but we only want to deal with people who are customers." "Fine; we'll open an account," I said. "You would still have to make a substantial deposit," he said. It was June by then, and every day brought news of another troubled bank. The big issue, I realized, was the Telluride bank's solvency, not mine. "Why don't you send me the bank's balance sheet," I said. "Sure," he said. "But why?" "The FDIC only insures $100,000 per account," I said. "If I'm going to make the kind of deposit you're asking for, I want to know where my money's going." When the bank's financials arrived, I showed them to my partner Sam, who has served as the point person in our company's banking relationships. "What would you do?" I asked. "I wouldn't put more than $100,000 in any bank right now," he said. I knew he was right. I told the Telluride bank that we weren't going to need its money after all. If necessary, we would do the financing ourselves. The second episode was in some ways even more revealing, because it involved a large bank in New York City. We were looking to do some

restructuring of our companies' debt. Specifically, we wanted a bank to take over the lower-yielding -- and safer -- senior debt, thereby freeing up cash that we could then invest in higher-yielding securities. Sam approached a banker he knew who had been courting us for years. "Do you still want to do business with us?" Sam asked. "Yes," the banker said. "We would love to do business with you, but times have changed. We have to be very secure." "What? No more air-ball loans?" Sam said. The banker laughed. "There's no such thing anymore," she said. "We need to have collateral, and there has to be a substantial amount of subordinated debt and equity behind our senior debt." (In a bankruptcy, the investors of senior debt get paid first.) This was a huge change, and there were others. In the past, we were able to borrow an amount of senior debt equal to four or five times our EBITDA (earnings before interest, taxes, depreciation, and amortization). Now the multiple is more like two and a half or three. And if we had gone looking for a $30 million loan a year or two ago, the bank would have insisted on doing the deal by itself. Sam's banker indicated that the loan would be syndicated to three or four other banks -- with each putting in $10 million or less. So what does all this mean? I have no doubt that companies like mine will still be able to secure the bank financing we need -- mainly because we don't need it that badly. I worry about smaller companies that really do need bank financing and may have a hard time getting it. That will have ramifications throughout the economy. Yes, interest rates are still relatively low, but cheap debt does you no good if no one will lend to you. Part of the problem, I sense, is that the bankers themselves are still trying to figure out the new rules and standards. If you are going for a bank loan, I would suggest you ask right away, "What does it take to qualify for a loan these days?" And make sure your finances are in order. Developing a

relationship with a bank is still important, but you are going to need earnings and liquidity. You might also want to look at alternative means of financing. If you are buying equipment, for example, ask the seller for help getting financing; vendors often have a relationship with leasing companies, which may now be your best option. You might also want to try to obtain receivables financing. Whether you get it will depend largely on the creditworthiness of your customers, given that that's what asset-based lenders look at. For that matter, your customers may be able to help you. If they pay you in 60 days, you might offer them a 2 percent or 3 percent discount provided they pay you in, say, 10 days. And remember: The credit crunch isn't all bad news. Change creates opportunities. Some of your competitors could be struggling. You may want to think about acquiring the weaker ones or at least picking up some of their customers. Of course, your competitors may be thinking the same thing about you. So you would be wise to work on strengthening your customer relationships. In times like these, everybody wants to save money. You can help your customers do that by showing them how to use your products or services more efficiently. Or maybe now, with gasoline prices going down, it's time to get rid of your fuel surcharge. In any case, be sure to do it before a competitor points out that you have left the surcharge in place despite the drop in fuel costs. Whatever you do, recognize that we have entered a new era. The credit crisis will abate sooner or later, but it will be a long time before we see another period of easy money like the one we went through in the first seven years of this decade.

Whose Business is It, Anyway?


It's yours! So don't apologize for setting aside your emotions and doing the right thing. By Norm Brodsky | Dec 1, 2008 Mistakes are part of business, and we all make them. Most of them, I've found, are the product of faulty reasoning. I'm constantly running into people who are about to make a major change in their business for reasons that have nothing to do with what's best for them and their company. Usually it's because their emotions have gotten in the way. I'll give you the example of Brian Kelly, the former fireman I helped get started in the document-destruction business (see "A Few Good Competitors," August 2002). As you may recall, he also owned two coffee shops in New Jersey with a friend he'd known since childhood (see "Taking On Starbucks," August 2007). In the course of getting the stores up and running, Brian ran up a significant amount of debt. Although his partner also invested some money, he had mainly contributed sweat equity, serving as manager of one of the stores. As long as Brian was in the fire department, he could put only a limited amount of time into the business, but that changed once he retired. He then proceeded to implement several programs that improved the profitability of the shops. In the past few years, however, I could see him becoming frustrated. For one thing, he had a hard time turning his partner into a businessman. The guy was a nice person, not to mention a lifelong friend; he just didn't have a business mindset. He wasn't much interested in the numbers. He didn't concern himself with the details that spell the difference between mediocrity and excellence. When Brian didn't keep an eye on things, old habits reasserted themselves, and performance slid. About a year ago, Brian came to me and said he was planning to sell one of the shops. He figured he could pay off his debt with the proceeds. "I don't know how much longer I want to continue in this business," he said. "I really put in a lot of time, and I'm not getting as

much out of it as I'd like. I'm going to look for something else. But I need to get rid of the debt, so I can start fresh." "What about your partner?" I asked. "He's usually willing to go along with what I want," Brian said. "I'm going to sign up with a business broker. Can you help me?" I don't think much of business brokers, particularly the generalists who say they're competent to handle any type of transaction that comes along. But Brian had made up his mind, and I didn't have a better alternative for him. So I helped him negotiate a reasonable contract. Eventually, he found two potential buyers who were serious enough to sign confidentiality agreements and begin their due diligence. For various reasons, however, both deals fell apart. Then, a couple of months ago, Brian stopped by, and I could see he was aggravated. "What's wrong?" I asked. He said he'd gone into the office he shared with his partner and found an application to become an emergency medical technician. He was angry. He confronted his partner, who said he didn't see a future for himself in the coffee shops. He wanted to find a career that would offer him hope of being able to retire someday. Brian felt betrayed. In his mind, he had been protecting his friend for years. Without Brian's help, his friend would not be a part owner of a business -- at least not this business -- and he would not be getting paid as a partner. Indeed, Brian could probably have paid a store manager half what his friend was taking out. Even in deciding to sell just one of the shops, rather than both, Brian had been thinking about protecting his friend. Now, it turned out that the friend wasn't planning to stick around anyway. Brian felt he was being deserted. In fact, he was being handed a golden opportunity. "What are you upset about?" I asked. "Your friend is doing you a favor." "What do you mean?" he asked. "You took on debt for this guy's sake," I said. "You're selling one shop so that you don't get stuck with the debt, and you're keeping the other so that he can still have a job. Meanwhile, you're looking for another business to get into. Let me ask you something: If your partner disappeared tomorrow, would you still want to get out of the business?" Brian was taken aback. "I hadn't thought about that," he said. "But there's something else." "What's that?" I asked. Brian explained that his morning manager at the other shop was an immigrant who had applied for permanent residence in the U.S. Brian had agreed to be her sponsor. "I've had her on the payroll for six years, although I really should replace her," he said. "But if I let her go, she'd lose her sponsorship."

So here was Brian making important business decisions based on what he thought was best for everyone but himself and his business. He was allowing his compassion and sense of responsibility to dictate his actions. It turned out, however, that his compassion was misplaced. His friend was saying, in effect, that continuing as a shop manager and a partner in the business was not what he wanted. As for the morning manager, I happened to know she could work elsewhere while her residency application was being considered. Brian had not bothered to research the question, because he felt obligated to keep her on until her application was approved. Don't get me wrong. Compassion is a wonderful thing, and so is a sense of responsibility toward employees. But those emotions shouldn't have entered Brian's decision-making process until he had first taken a clear-eyed look at the needs of his business. You simply can't make good business decisions unless you are able to put emotions aside and analyze a situation objectively. I believe there is no more important -- or difficult -- skill for an entrepreneur to learn. I'm not saying you should ignore your emotions. In the end, you may decide to go with them anyway, but at least it will be a choice you make with your eyes open, knowing what the tradeoffs are. And that's what I told Brian. "Why don't you go home and think about this," I said. "Make believe these two people aren't around anymore, and you're running the business without them. Think about what you would do to improve the stores' performance and how much more money you'd be able to make as a result. Figure out whether it would be enough to let you pay off your debt. Ask yourself, 'Would I still want to sell one of the shops if they were doing as well they could be doing?' Then come back and tell me what you've decided." As difficult as Brian might find it to reach a decision, he has the benefit of knowing that his partner has already thought about moving on. Most of us aren't so lucky. Often when you set your emotions aside and analyze a situation objectively, you come to realize that the right decision for the business will cause hardship for people who are not at all prepared to accept it. I remember a problem we once had with a guy whose job was to do pricing for my messenger company. I'll call him Arthur. He was a wonderful person. Everybody liked him. He'd been at the company from the beginning. He'd wound up in his position through the Peter Principle. I needed someone to handle pricing, and he was available. It's a common mistake. As it happened, Arthur had very few qualifications to be our pricing person, but -- because we all liked him -- we covered for him. Eventually, however, I had to face the fact that he had become an obstacle to the company's growth. We needed a new computer-based system for pricing, and Arthur didn't feel comfortable around computers. I agonized over what to do. I felt guilty, because I knew it was my fault that Arthur had wound up in this situation. I was the one who had decided to overpay him and give him more responsibility than he could handle. Now I couldn't reduce his salary or demote him without creating even more problems. I'd tried that with other people to avoid having to fire them, and it never worked. Ultimately, I decided that the best I could do was to turn the problem into a money issue. I told Arthur that we had to replace him, but -- because he was

a longtime, valued employee -- we'd help him out by, among other things, continuing to pay his salary until he landed a new job. It wound up taking him eight months to do that, and he kept receiving a weekly paycheck from us until then. I considered it money well spent. As we go to press, I still don't know what Brian will decide. But at least he will come away from this episode with a better understanding of a critical skill he needs to acquire. The sooner he acquires it, the better the decisions he'll make. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, was published by Portfolio in October. So here was Brian making important business decisions based on what he thought was best for everyone but himself and his business. He was allowing his compassion and sense of responsibility to dictate his actions. It turned out, however, that his compassion was misplaced. His friend was saying, in effect, that continuing as a shop manager and a partner in the business was not what he wanted. As for the morning manager, I happened to know she could work elsewhere while her residency application was being considered. Brian had not bothered to research the question, because he felt obligated to keep her on until her application was approved. Don't get me wrong. Compassion is a wonderful thing, and so is a sense of responsibility toward employees. But those emotions shouldn't have entered Brian's decision-making process until he had first taken a clear-eyed look at the needs of his business. You simply can't make good business decisions unless you are able to put emotions aside and analyze a situation objectively. I believe there is no more important or difficult skill for an entrepreneur to learn. I'm not saying you should ignore your emotions. In the end, you may decide to go with them anyway, but at least it will be a choice you make with your eyes open, knowing what the tradeoffs are. And that's what I told Brian. "Why don't you go home and think about this," I said. "Make believe these two people aren't around anymore, and you're running the business without them. Think about what you would do to improve the stores' performance and how much more money you'd be able to make as a result. Figure out whether it would be enough to let you pay off your debt. Ask yourself, 'Would I still want to sell one of the shops if they were doing as well they could be doing?' Then come back and tell me what you've decided." As difficult as Brian might find it to reach a decision, he has the benefit of knowing that his partner has already thought about moving on. Most of us aren't so lucky. Often when you set your emotions aside and analyze a situation objectively, you come to realize that the right decision for the business will cause hardship for people who are not at all prepared to accept it. I remember a problem we once had with a guy whose job was to do pricing for my messenger company. I'll call him Arthur. He was a wonderful person. Everybody liked him. He'd been at the company from the beginning. He'd wound up in his position through the Peter Principle. I needed someone to handle pricing, and he was available. It's a common mistake.

As it happened, Arthur had very few qualifications to be our pricing person, but because we all liked him we covered for him. Eventually, however, I had to face the fact that he had become an obstacle to the company's growth. We needed a new computer-based system for pricing, and Arthur didn't feel comfortable around computers. I agonized over what to do. I felt guilty, because I knew it was my fault that Arthur had wound up in this situation. I was the one who had decided to overpay him and give him more responsibility than he could handle. Now I couldn't reduce his salary or demote him without creating even more problems. I'd tried that with other people to avoid having to fire them, and it never worked. Ultimately, I decided that the best I could do was to turn the problem into a money issue. I told Arthur that we had to replace him, but because he was a longtime, valued employee we'd help him out by, among other things, continuing to pay his salary until he landed a new job. It wound up taking him eight months to do that, and he kept receiving a weekly paycheck from us until then. I considered it money well spent. As we go to press, I still don't know what Brian will decide. But at least he will come away from this episode with a better understanding of a critical skill he needs to acquire. The sooner he acquires it, the better the decisions he'll make. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, was published by Portfolio in October.

Our Irrational Fear of Numbers


No, you didn't start a company because you wanted to learn accounting. But you had better learn some -- pronto -- if you want to understand your business By Norm Brodsky | Jan 1, 2009 January is a good month for fresh starts, and so we've chosen this issue to begin the next phase in the evolution of Street Smarts. In the coming months, we're going to follow a handful of businesses as they grapple with the challenges of starting up, growing, or simply surviving in the worst economy we've seen in a very long time. The companies involved are those I have been, or will be, mentoring. Regular readers of this column are familiar with a few of them -- Brian Kelly's City Beans and Mike Baicher's West End Express, to name two. Others you haven't met yet, as I've begun working with them only recently. And three of the businesses will be owned and operated by readers of this column. Yours could be one of them. Let me explain. We began thinking about changing the focus of Street Smarts more than a year ago, as I was getting ready to sell a majority stake in my three principal businesses. I knew I'd be doing more pro bono mentoring of entrepreneurs, and I figured we'd want to write more about the challenges they were facing. I also thought it would be fun to offer readers the opportunity to participate. You may recall the note we ran in several issues inviting people to contact me if they were interested in receiving my advice. We expected to hear from a couple dozen readers. In fact, we got hundreds of responses, which was gratifying but also put us in a quandary. How were we going to decide which companies I should take on, and how would we manage the logistics of building long-distance relationships? As it happened, my co-author, Bo Burlingham, and I were just then finishing our book, The Knack: How Street-Smart Entrepreneurs Learn to Handle Whatever Comes Up. We wanted a website to go with the book, and as I was talking to our website designer, I had an idea: Why don't we hold a contest? The winners would get an all-expenses-paid trip to New York City, where they would spend a day with me. I'd help them with whatever business challenges they were facing, and we'd lay the groundwork for an ongoing relationship, with the possibility of regular updates on their progress in the pages of Inc.

The contest is now up and running at our website, at theknack.info. There you will find a 10-question quiz on general business topics. To qualify for the next round, you have to get all of the answers right, but you can take the quiz as many times as you like. Once you pass Level One, you become eligible for Level Two, a quiz based on the concepts we've written about both in these columns and in the book. Those who pass the Level Two quiz will be asked to fill out a brief questionnaire, and we'll choose the winners from that group. Let me say a few words here about how I choose the people I mentor. I usually start by interviewing them in my Brooklyn office for an hour or so. By the end of the discussion, I know whether or not I have any knowledge or experience that could be helpful to them and whether they are willing to listen to me. Notice I said "listen to me." I didn't say "take my advice." I never tell people what to do. Indeed, if they have a strong gut feeling that is different from mine, I encourage them to go with it. But I want them to be open to looking at their situation in a way different from how they've been looking at it before. Otherwise, I will be wasting my time. One of the first steps always is to look at the numbers. Consider, for example, a business whose founders I met through my participation in Inc.'s annual Inc. 500 conference. The founders had all been involved in staging the conferences, either as employees of Inc. or as independent contractors. It's almost impossible to spend time around successful entrepreneurs without thinking about becoming one of them, and that prospect had proved irresistible for three of the conference producers: Elizabeth Busch, Anne Frey-Mott, and Beckie Jankiewicz. Two of the women, Anne and Elizabeth, already had their own businesses. Anne's company, Conference Solutions, had been around for 11 years and specialized in selecting sites, negotiating contracts, and managing relationships with hotels and conference centers. Elizabeth, who had launched her business in 2005, focused more on the design and marketing of events. Beckie was director of events for Inc. and its sister publication, Fast Company, and had experience in handling the logistical challenges of developing several projects simultaneously. Although the three of them had no formal link, they often partnered on conferences. Inevitably, they began thinking about starting a business together. The closer they looked at the possibility, the more convinced they became that they could work more efficiently, market more effectively, create more value, and produce better results overall if they were part of the same company -- a full-service events business. Last February, Beckie left her job at Mansueto Ventures (Inc.'s parent company), and in April she, Anne, and Elizabeth formed The Event Studio, with each as an equal partner. The plan was for Elizabeth to phase out her company as its current projects were completed, but Anne would keep Conference Solutions alive for the sake of customers that did not need the other services offered by The Event Studio. They were still in the formative stage of their new business when they first came to me for advice in December 2007. Unlike most companies I work with, theirs was essentially a start-up. Then again, I was already familiar with, and had a high opinion of, their work, and I thought their logic for joining forces made sense. But I could also see that, while they had a clear vision of where they wanted to wind up, they didn't understand the steps they had to

take to get there. Having taken those steps many times myself, I offered to be their guide. They readily accepted. As the offspring of two existing businesses, The Event Studio began with a significant advantage not enjoyed by most brand-new ventures: revenue. Anne's business and Elizabeth's business both had ongoing, unfinished projects of the sort their new company would be signing up in the future. Anne and Elizabeth could hire The Event Studio to do the remaining work on those projects. When the old companies got paid by their customers, they could pay The Event Studio, thereby generating the cash flow the new company needed to get off the ground. That's exactly what Anne and Elizabeth did, but when I spoke with them again several months later, I realized they had neglected a critical step. They hadn't made sure that The Event Studio submitted bills to their respective companies for the work done. They hadn't thought of it, of course, because they were the ones doing the work, just as if they had simply continued to partner. Billing their old companies felt like sending invoices to themselves. Problem was, the customers' contracts were with the old companies, and those were the entities that received the payments. Unless the old companies, in turn, received -and paid -- bills from The Event Studio, it would appear that Anne and Elizabeth had taken the money and invested it in the new business. So, you ask, what's wrong with that? Nothing, in principle. It wouldn't become a concern for them until they had their accountants figure out their respective tax liabilities for the year. At that point, they would discover they owed a lot more than they expected. Why? Because each of their old companies would have revenue with no expenses to put against it. The expenses would have been incurred by The Event Studio. The money that the old companies received from their customers for the work done by The Event Studio would look like pure profit, on which they would be taxed accordingly. Fortunately, we caught the oversight in time. To be sure, they didn't necessarily need my help to avoid this particular pitfall. A good accountant might well have discovered what had happened before Anne and Elizabeth were forced to pay taxes they didn't really owe. Then again, many outside accountants don't ask all the questions they should about the numbers they're given. They're too busy. They have dozens of clients and only so much time to spend on each one. That's why it's dangerous for entrepreneurs to rely on an outside accountant to oversee their finances. Like it or not, you need to understand the numbers of your business, and that requires knowing something about accounting. And if there's one aspect you need to know, it's the difference between cash- based and accrual-based accounting. Otherwise, you won't really know whether you're making or losing money. Here's the (somewhat oversimplified) difference in a nutshell: With cashbased accounting, you record sales and expenses only when money changes hands. That is, you don't recognize a sale until you get paid for it or an expense until you hand over the cash. With accrual-based accounting, you record sales and expenses when you do the work

involved in creating and delivering the product or service a customer has agreed to purchase. All individuals and most small businesses use cash-based accounting to figure out what taxes they owe, and it's fine for that purpose. But cash-based accounting doesn't tell you how you're really doing as a business, and as a result it can lead you astray. I'll give you a hypothetical example. Suppose The Event Studio books two new events in December. One is a large conference that will take place the following spring, for which the company receives a deposit of $10,000 but on which it does no work in December. The other is a sales meeting scheduled for February. Let's say the total fee for that one is $6,000, and the company operates at a 50 percent gross margin, meaning its direct costs will be $3,000. It will be paid half of its total fee for the sales meeting in the middle of January. Nevertheless, it completes a third of the work in December and pays a third of the costs, or $1,000. On a cash basis, the women made $9,000 ($10,000 of cash received minus $1,000 of expenses paid) during the month. If they had no other sales or expenses during the year, that's the amount on which they would pay taxes. But to understand how the business really did in December, they need to look at sales and expenses on an accrual basis. They can't include the $10,000 deposit in their sales figure, because they did no work on the conference during the month. On the other hand, since they've done a third of the work on the sales meeting, they can record a third of the total fee, or $2,000, as well as the $1,000 they incurred to cover the cost of that work. So their profit for the month was really $1,000, not $9,000. (For the purposes of this example, we're ignoring overhead expenses.) Now, all that may seem obvious to you, but it doesn't seem so obvious if you aren't used to working with the numbers of a business. When I asked The Event Studio women for their 2008 income statement, they had no idea whether to include the deposits in their sales totals. Similarly, they didn't know whether to include expenses they'd been billed for but hadn't yet paid. Predictably, what they produced was a mishmash, and not because they're stupid. On the contrary, all three are extremely bright. But if you've never taken the time to learn the basics of accounting, even experienced entrepreneurs can get tripped up. On the other hand, when you do learn the basics of accounting, you realize that the numbers aren't as complicated as you feared and that you're finally developing the knowledge you need to be in control of your company. As we went through their income statement, I had the sense that Elizabeth, Beckie, and Anne felt a fog lifting. It was a small step on the road to building their business, but it was a crucial one. We'll be looking at the next steps in the months ahead. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, was published by Portfolio in October.

My First Year
When my start-up found itself face to face with catastrophe because of conditions beyond my control, I learned how to cope By Norm Brodsky | Apr 1, 2009 Thirty years is a long time to be in business, and it's sometimes difficult to recall exactly what happened when. But there is one period that, looking back, most people remember clearly, mainly because it represents such a sharp break from whatever they were doing before. I'm talking, of course, about Year One. My first year in business began on August 13, 1979, about the time Inc. was coming out with its fifth issue. On that Monday morning, I started my first company, Perfect Courier, a messenger and delivery service. (I'd had a law office before, but that doesn't count.) I remember the year as incredibly exciting -- I mean, just overwhelmingly exciting. Whenever I turned around, new opportunities presented themselves, and I spent way too much time thinking about them. Like most first-time entrepreneurs, I didn't understand the importance of maintaining focus -- of not letting yourself get distracted from building your main business until it's able to sustain itself on internally generated cash flow and you've begun to establish a good reputation in the marketplace. But opportunities weren't the biggest distraction. My investors were. I had eight of them, accountants and lawyers all, each of whom had put up $25,000. Without their money, I couldn't have started the business, and so I owe them a debt of gratitude. That said, they certainly made me pay -- in part by reinforcing my own fixation on the top line. You'd think accountants would know that profit and cash flow matter more than sales, but the company's growth rate was all these guys cared about, and it was never fast enough for them. Not that we grew slowly. Perfect Courier went from zero to $12.7 million in five years and landed at No. 47 on the 1984 Inc. 500. Yet my investors were never satisfied. They always wanted more, more, more, and let me know it every chance they got. But of all the challenges I faced that first year, one in particular stands out in my mind. It taught me an important lesson about what to do when you're suddenly confronted with potential catastrophe because of conditions over which you have no control -- something a lot of companies are facing today. In my case, the problem wasn't a recession. The United States was in one, but recessions can be good for start-ups, as I've noted before (see "Starting Up in a Down Economy," May 2008). Rather, the problem was a strike of New York City transit workers that shut down all subway and bus lines and brought business in the city to a standstill.

We had seen it coming. The union and the Metropolitan Transportation Authority had been negotiating since early February 1980, and as the strike deadline of April 1 approached, they were still miles apart. A strike seemed inevitable. To make matters worse, it looked as though workers at the Long Island Railroad were going to strike at the same time. I realized I was facing a potential disaster. Perfect Courier was barely seven months old. We were doing about $30,000 or $40,000 a month in sales. Deliveries by car or truck accounted for about one-third of our revenue. The rest came from messengers who got around the city on public transportation. Losing the messenger sales would cripple us. Granted, we could live off our receivables for a while, but we wouldn't be generating very many new ones. What would we do when the cash ran out? And there were other issues: How would our people get to work? For that matter, how would our customers' people get to work? Would we be able to keep selling? Would our customers stop paying us? How would we meet payroll? We couldn't very well lay everybody off for the duration of the strike, which -- for all we knew -- could go on for months. Somehow, we had to come up with a plan that would allow us to survive until some sort of settlement was reached. But what kind of a plan? I was at a loss. I decided I needed advice from someone who'd been through the previous transit strike, in 1966, and could perhaps tell me what to expect. As it happened, one of our clients was a major accounting firm called Oppenheim, Appel, Dixon & Company. The head of the mailroom there was a guy named Sam Revson, who'd been around forever and whom I held in high regard. Because the strike was scheduled for the busiest part of the tax season, I figured Sam might have made some contingency plans, and I wanted to know what they were. I dropped by his office one day in the middle of March. "Sam," I asked, "what are you doing for the strike?" "Why?" he said. "Are you thinking of transporting people during the strike?" The thought hadn't occurred to me, but it sounded like a reasonable possibility. "Yeah," I said. "That's a great idea," he said. "We could really use you. It makes sense, because you have vehicles already." "Yeah," I said. "They're ready to go." "Particularly being located next to Penn Station, like you are," he said. "Assuming the Long Island Railroad doesn't go out, people could just walk across the street, and you could take them downtown. But how are you going to handle the pickup at the end of the day? Have everybody meet somewhere?" "Yeah," I said. "That's what I'm thinking."

"It's probably the way to go," Sam said. "What are you going to charge?" "I figure $20 a person," I said, picking a number out of the air. "Each way or round trip?" he asked. He didn't seem to have any problem with the price. "Each way," I said. "So, $40 round trip." "How are you going to know which people are coming back with you?" he asked. "Once we take them downtown, we assume they're coming back, and so you have to pay for the round trip." "OK," Sam said. "Are you going to issue passes or sell tickets or what?" "We're going to issue passes," I said. "And we're going to number them. How many people do you think you'll have?" "Well, if it's just a transit strike, not a Long Island Railroad strike, we'll have about 50 people," he said. "How often do you plan to run the shuttle?" Suddenly, it's a shuttle. "About every half-hour," I said. "They'll come up to our place. We'll have coffee and doughnuts for them, at no charge." "What if there's a Long Island Railroad strike as well?" he asked. "We'll have a carpool service," I said, thinking fast. "We'll have pickup points on Long Island, one on the North Shore, one on the South Shore, and a couple in Queens." "Sounds good," Sam said. "Do you want a deposit?" "Yeah, of course," I said, "and I'll need a week's worth, because we have to set up this whole system. You're the first person I came to, because you're our best customer. I have only so much capacity. If you want to do this, I'll need the deposit right now." "OK," he said. "What if the strike doesn't happen?" "The deposit is nonrefundable," I said. "OK," he said. I left with a check for $10,000. When I got back to my office, I told everybody what had happened, and we all had a good laugh. Then we went to work calling our other customers, making laminated strike passes, and figuring out how we were going to accommodate all the people who wanted to take advantage of our new service. The truth was, we had only four vehicles, and we had to get

our own people to work as well. "How can we possibly do this?" my employees asked as more and more customers signed up. "I have no idea," I said, "but we'd better come up with something." We decided to call everyone we knew who worked in Manhattan and owned a car. "Here's the deal," we said. "We're going to pay you to drive into the city, plus we'll cover your parking, gas, tolls, everything. You're going to have to drive anyway. With us, you can make money doing it. You just have to agree to take some other people with you." We managed to put together a network of about 40 drivers -- friends, friends of friends, relatives, friends of relatives, relatives of friends, you name it -- and were ready when the strike began on April 1. Coordinating the operation proved to be the biggest challenge. During the strike, some of the drivers got sick, while others ran into conflicts and couldn't make it. The needs of our customers were constantly changing as well. I wound up sleeping at the office along with two of my employees to handle the calls that came in from customers all night long and to find replacements for the dropout drivers. In the end, the transit strike lasted almost two full workweeks. The Long Island Railroad workers went out as well, but only for a day. Still, the city was in chaos. There weren't nearly enough cabs to accommodate the thousands of people looking for rides. We did our best to adapt. Among other things, we came up with a new system for the messengers who didn't depend on public transportation. Far from declining, our messenger and delivery business boomed during the strike. So did our new car service. As word spread about what we were doing, more and more people contacted us. Commuters arriving on the Long Island Railroad would come across the street to our office and ask for a lift downtown. We'd tell them, "Unless you're a customer, we can't help you." We landed a lot of new accounts that way. Just as important, our ties with our existing customers became closer. Before the strike, for example, we'd had only a small portion of the delivery business that Sam's firm did, and we'd had no contact with the senior people. During the strike, we saw them every day, and they became our friends, as did the executives at other accounts. They came to our office for coffee and doughnuts. Our people would serve them and then drive them downtown. A lot of them increased the amount of business they did with us. At the end of the strike, our monthly sales were more than twice what they'd been at the beginning. By then, of course, we were ready for it to be over. Although we'd done well financially, the 11 days of the strike had been utterly exhausting. Aside from the additional cash and the new sales, I took away from the episode one of the most important lessons I've learned in business: When in doubt, go to your customers. They will tell you what they want and lead you to solutions you'd never come up with on your own. Indeed, just about every successful new initiative I've taken in business since then has come from listening to customers. For that, I'm eternally indebted to Sam Revson.

My investors were another story. As time went on, they kept ratcheting up their demands. I had to buy cars for two of them and hire a chauffeur for another. They also insisted on auditing my books every quarter, presumably to find out whether I was stealing from them. Eventually, I got fed up and brought matters to a head. We agreed to go our separate ways. I raised the money to buy them out by, once again, going to a customer -- my largest one, Citibank. I offered our contacts there a five-year contract with no price increases, on condition that they pay the first year's fees up front. To protect the bank in case I wasn't able to deliver for some reason, I bought a so-called payment and performance bond, in effect an insurance policy on the deal. But that happened long after the first year. I think it was right before we made the Inc. 500 for the first time. Or maybe it was afterward. To tell the truth, I'm not sure. Like I said, 30 years is a long time. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, was published by Portfolio in October.

How to Fix Cash-Flow Problems


Cash-flow problems have just a few possible causes. More often than you might think, business is all about the basics
By Norm Brodsky | May 1, 2009

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START CLEAN Andrew Blitstein didn't truly understand his janitorial business until he examined his top two accounts.

Norm Brodsky

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I'm often amused by the reactions of people who come to me for help. I usually start by interviewing them in my office. They explain the problem they're having. I ask them a few questions. They answer as best they can. I then tell them something about their business that they can't believe I could know. They think I'm a genius. If only it were true. In fact, I'm just applying the basic business knowledge that allows you to analyze what's going on in a company. Once you have that knowledge, you can do the analysis on your own. Consider Andrew Blitstein, who took charge of his family's cleaning service a few months ago after his father passed away. Up to then, Andrew had been handling sales for the company and had little or no experience in other areas of the business. He came to see me at the insistence of his mother, who'd worked with her late husband, and his uncle, who was an old friend of mine. From Andrew's demeanor, I could see he wasn't convinced that he needed my help or that I had much to teach him about a business in which I had no experience. But he did want to expand the company and make some money, and he was having trouble figuring out how to do the latter. I started, as I usually do, by asking Andrew general questions about himself and his company. It was a more or less typical commercial janitorial service.

In addition to cleaning offices on a regular basis, the company did special jobs, like shampooing the rugs and washing the windows. As for problems, he said he was having a tough time with cash flow. "I see," I said. "Are you having trouble collecting your receivables?" No, receivables weren't a problem, he said. "How about bad debt?" No, bad debt wasn't a problem, either. "Then do you have a big office with lots of people?" "Oh, no, no," he said. "We run pretty lean." So excessive overhead apparently wasn't a problem, either. Now, cash-flow problems are common in business, and people often have a hard time figuring out what's behind them, but there are actually just a few potential causes. You could have too much cash tied up in receivables or -- if you have a product-based business -- in inventory. Or you could have too many deadbeat customers. Or you could be spending too much on overhead. But if receivables, inventory, bad debt, and overhead are all under control -as they appeared to be in Andrew's case -- there really is only one other likely culprit: weak gross margins, which could mean prices are too low, direct costs are too high, or some combination of the two. I asked Andrew how much he was paying his employees. He said they earned about $20 an hour. "No," I said. "I mean, what's the hourly cost fully loaded with all the taxes, benefits, and so on?" He didn't know, which is not unusual. I would have been more surprised if he did know. "So you don't know what your costs are," I said. "It's hard to make a sale -- at least a good sale -- if you don't know your costs. How do you price a job?" "Well, when we do the carpet cleaning or the window cleaning, I figure out approximately how much it's going to cost us, and then I try to double it." "OK," I said, "that's good. But how do you price the regular cleaning service?" "We just try to be competitive," he said. "We have a lot of competitors, and we want to get the long-term contracts. We make our money on the extras."

So he didn't know how much the regular cleaning service was costing or what a good price for it would be. "Let's take your two biggest clients," I said. "How much business do they do?" He said he had one contract that paid about $350,000 a year and another that paid $300,000. "How much money do you make on those contracts?" "I don't know," Andrew said. "Not much. But they also use us for the extras." "And how much do they pay for the extras per year?" "About $20,000 or $25,000," he said. "So, given how you price the extras, they contribute $10,000 or $12,500 to covering your overhead," I said. "That's not a lot for accounts of that size. My guess is that you're losing money on them." Andrew gave me a skeptical look. "No, that's impossible," he said. "Besides, you don't understand. We need those accounts for cash flow." "How do they help your cash flow?" "They pay us on the first of the month with an American Express credit card," he said. "It's automatic. We can count on it." "OK, but American Express is charging you an extra 3 or 4 percent for that service," I said. "That just steepens your loss." He wasn't swayed. "Listen," I said. "Why don't you go back and take those two largest accounts and break them down. I'd be shocked if you weren't losing money on them. Then, if you want to come back, I'd be glad to sit down with you." I could read his thoughts as he left: Who is this guy? How can he possibly know what he's telling me? But four days later, Andrew contacted me and said he wanted to get together again.

"You were right," Andrew said as he sat down in my office. "We're losing money on those accounts. I figure that, fully loaded, I'm paying $31 an hour." "OK, well, let's see what fully loaded is," I said. We started to go through his numbers on one of the accounts, and it quickly became apparent that he had underestimated the costs. By the time we finished, we could see he was losing from $50,000 to $60,000 annually on the account. "Think of it this way," I said. "If you stopped doing business with this customer today, you'd make an extra $50,000." "I don't know," Andrew said. "I'm not telling you to get rid of the client," I said. "There may be reasons to keep the account. But do you really think any of your competitors would take this account away from you and lose $50,000 a year on it?" He smiled at the absurdity of the idea. "But I'd have to increase my price something like 20 percent just to break even on the account," he said. "I can't do that." "Maybe not," I said. "I realize that it's hard to increase prices in a recession. But the client has to recognize that it will never find a company willing to do the work at the rate it's paying you." I suggested that he put everything down in writing -- every single direct cost he had -- and then go to the customer. "Show him the numbers. Tell him it's being going on for a long time, but you accept responsibility for the past. You just can't go on losing $50,000 a year on the account. You have to at least break even, or you'll go out of business." Andrew said he would think about it. I'm sure he will come around eventually. Meanwhile, he has made significant changes in the way he sells. He told me about one prospect who wanted to use him but felt that his bid was a little high. Rather than reduce the price, Andrew stood his ground. "You're talking about saving 10 cents an hour, but look what you get for those 10 cents," he said. "Our service is far superior."

He got the account. More to the point, he got the concept. And he realizes that you don't need to be a genius to deal with cash-flow problems. You just have to know how business works.

A Deal Falls Through

Norm Brodsky's plans change when a deal to sell his company -again -- falls through
By Norm Brodsky | Nov 1, 2009

Norm Brodsky

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I doubt that anyone is keeping track, but it's been exactly three years since the appearance of my first column about the offer I'd received for my records-storage, document-destruction, and trucking businesses. (See "The Offer, Part One," November 2006.) Never in my wildest dreams could I have imagined back then that I'd still be negotiating with potential buyers this far down the line. Yet less than two years after selling my business, it feels like dj vu all over again. That's because Allied Capital, the company that bought a majority stake in CitiStorage, asked me to help it sell my former company after Allied ran into problems with its lenders in the wake of the financial crisis. As educational as the entire process has been for me, it has taken a toll on the morale of my employees, especially my senior managers. They've endured three rounds of due diligence and watched a parade of potential buyers come through the company. Each group of strangers in suits served as a reminder of the uncertain future we faced. I could almost feel the anxiety level in the building rise whenever a new group showed up. Staff members couldn't help wondering whether they'd still have jobs after a sale. Inevitably, the rumor mill cranked up, and we began hearing disgruntled noises from some key people. Our latest upheaval occurred when Goldman Sachs pulled out of what seemed like a slam-dunk deal after raising a laundry list of doubts in the 11th hour. So I knew I had to lay down some new ground rules when Allied Capital decided to continue shopping the deal. First, there would be no more meetings in our offices. Second, potential buyers would have to deal exclusively with my partner Sam and me. Third, we would not allow any due diligence to happen or discuss any terms of a sale until the prospective acquirer had resolved whatever questions it might have about the three issues that had ultimately led Goldman's people to kill the deal. Those issues were: 1. the terms of the lease they'd have to sign with us (since we own the real estate); 2. the possible condemnation of the property by the city, which wants to turn our land into a park at some point; and 3. the danger that the

buyer might be held liable for environmental problems caused by a previous landowner. Sam and I were pretty certain that Goldman's decision meant CitiStorage wasn't going to be sold anytime soon, but Allied Capital wanted to go back to the other companies that had expressed interest in acquiring us, and so did Harris Williams & Co., the investment banker we'd hired to manage the process. That was understandable. It wouldn't get paid for its work unless there was a sale. Despite our skepticism, we told our contacts at Allied Capital we would do whatever they wanted. In the end, the exercise proved to be instructive, even though -- as Sam and I had predicted -- it did not lead to a sale. There was just one serious prospect, a former storage-company executive backed by Friedman Fleischer & Lowe, or FFL, a San Franciscobased private equity firm. We had a four-hour meeting with FFL at a neutral location and spent most of it going over the three issues. About a week later, I heard back from Mike Hogan, the Harris Williams managing director who was handling our deal. FFL had contacted him and laid out its reservations about buying CitiStorage, and he wanted to pass them along to me and Allied Capital. For one thing, he said, FFL's people had found in the past that entrepreneurial companies don't always maintain their previous level of performance after the entrepreneur leaves. They wondered whether that might happen here. They were also concerned that we were almost at full capacity. Then, too, they worried about the disruption of the business if the city decided to condemn the land and the company was forced to move. And what if we couldn't line up financing when our securitized mortgage expired in five years? These were all risks that FFL would have to take into account in making a bid. Its people said that, as a result, the most it could offer would be a price it knew Allied Capital would not accept. So FFL had decided to pass.

And that was that. The resale of CitiStorage isn't going to happen after all, not now and in all likelihood not for several years. By then, the company will be larger, the economy will have recovered, and the mergers and acquisitions environment will have improved, or so we expect. If we sell the company at that point, we should all be able to get a reasonably good return on our investment. In the meantime, CitiStorage will continue to grow organically. Sam and I don't expect to be doing acquisitions of other records-storage companies. Although Allied Capital is clearly not in dire straits -- something I could not have said nine months ago -- its business model has changed. It probably won't be buying companies like ours in the future. The new game plan has forced me to adjust my thinking about my own future. The fact is, I hadn't expected to be involved with CitiStorage much longer. Mentally, I was already out of here. I'd told the Goldman Sachs people I could be available on a part-time consulting basis for about 20 weeks in the next year, but no more. Looking back, I figure I've been fortunate to have had two years to scale back my role after selling the company. During that time, my partner Louis and his team have completely taken over day-to-day operations. If they've needed my advice, I've been nearby. But this period was coming to an end. Sam and I had discussed a variety of projects we might get involved in. We'd already made a few investments and were looking for others. Psychologically, emotionally, and practically, we'd moved on. And I was not unhappy about that. Now, suddenly, I find myself looking at an extended period of responsibility for CitiStorage's financial well-being. My partners and I have too much money tied up in the company for Sam and me to walk away and hope others will look out for our interests. If the business isn't going to be sold for another three or four years, we need to make sure we do what's necessary to get the best price at that time. That means, first of all, continuing to expand the business as we've done in the past -- one customer at a time. In addition, we have to address the concerns raised by Goldman Sachs and FFL, which

we can assume other potential buyers will have as well. Those concerns boil down to uncertainty about the future status of the land. You might ask why I didn't realize earlier that questions about the land could have such an impact on the value of the company, perhaps even making it unsellable until they're resolved. The truth is, nobody was paying much attention to risk before the bubble burst, and so these real estaterelated questions never arose. How things have changed! Two years ago, people were lining up to buy this company at 10 times EBITDA (earnings before interest, taxes, depreciation, and amortization), with relatively few questions asked. Today, we can't find anyone to buy it at a price Allied Capital would find acceptable. Figuring out how we went from having many buyers to having no buyers has given me a deeper appreciation of what everyone has been through in the past two years -- and what the future holds. And that's the subject of my next column. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book, The Knack, was named the best book on entrepreneurship of 2008 by 800-CEO-READ.

The Days of Cheap Capital Are Gone for Good


The deal you put together in 2007 is no longer feasible today. Here's why.

By Norm Brodsky | Dec 1, 2009

Norm Brodsky

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I've always believed that you can learn a lot more from failure than from success, and my most recent failure is no exception. I'm referring, of course, to my abortive attempt to sell the records-storage and document-destruction business that I've spent almost half my life building. Had I succeeded, it would have been the second sale of the business in two years. In the spring of 2007, that same business had attracted so many potential acquirers that I'd had to lock myself in a room with my partner Sam and stop all phone calls until we decided what we wanted to do. We eventually sold a majority stake to Allied Capital for a lot of money and thought we were home free. Then, last winter, the financial crisis forced Allied to change its plans and ours. It asked us to help look for a new owner for CitiStorage. We agreed and gave it our best shot but couldn't find one. So why not?

Looking back now, I can see the reason clearly enough. The business has certain risk factors that scared off all the potential acquirers. The most important of these has to do with the status of our land. Four years ago, the city of New York rezoned the area, with the intention of creating a park along the Brooklyn waterfront. (See "Let the (Political) Games Begin," June 2005.) As a result, the city can take our land whenever it wants to, which would create a major, and potentially expensive, disruption of the business. From that perspective, it's not surprising that potential buyers might think twice before putting in a bid. But that just raises the real question: Why was everyone so willing to ignore these risks in 2007 and yet today people find them insurmountable obstacles to doing a deal? The answer, in a nutshell, is that no one was thinking much about risk back then. People were too focused on finding places to invest all the cheap capital they had. It was, of course, the Federal Reserve that had decided capital should be cheap and plentiful, and -- although I wasn't really thinking about it at the time -- that decision had a huge effect on the value of companies like mine. Why? Because it fostered intense competition for good acquisitions among potential buyers and made it possible for them to structure deals based on higher multiples of EBITDA (earnings before interest, taxes, depreciation, and amortization) than would otherwise have been the case. In our industry, the potential buyers included private equity firms, which had lots of capital they needed to invest. Records-storage businesses have certain characteristics that are very appealing to those firms, including guaranteed cash flow. We rent space to boxes, and those boxes keep paying rent no matter what is going on in the economy. In addition, we have an unusually "sticky" relationship with our customers, all of whom agree to pay a permanent-removal fee (typically two years' rental income per box) if they decide to store their boxes somewhere else.

Then, too, private equity firms like to do highly leveraged transactions. When you buy a company using mainly debt, you get a much bigger bang for your buck as the company grows, because the value of your equity increases much faster than it does when you use mainly equity. Assume, for example, that a business has $10 million in sales, 50 percent gross margins, and EBITDA of $1 million, and you're acquiring it for 10 times EBITDA, or $10 million. You can do the math yourself. But let's say you use $8 million in debt and $2 million in equity to buy the business: The value of your equity will increase exponentially -- I'm talking about 20 times -- when the company doubles in size (assuming the multiple doesn't change). If you buy it with equity alone, your equity value will increase about four times when revenue doubles. The ability to do a highly leveraged transaction depends, however, on the availability of cheap debt, especially senior debt -- that is, the debt that gets paid off first in a liquidation and thus comes with a lower interest rate (because of lower risk) than junior debt. Prior to the financial crisis, Fed policy made senior debt both widely available and inexpensive. Banks were eager to lend five or five and a half "turns" of EBITDA as part of a private equity deal. The senior debt could then be combined with junior debt, so that 80 percent of a deal's financing would come from debt of one sort or another. This combination of factors led to a feeding frenzy in our industry. In the last months of the bubble, just about any medium-size records-storage company could command nearly double-digit multiples of EBITDA -- even companies with sloppy financials, mediocre growth prospects, weak management, and other vulnerabilities. Acquirers were so anxious to do deals that they were willing to overlook risk of almost any kind, or maybe they were simply blind to the dangers. Either way, they were snapping up records-storage companies right and left, as if the days of inexpensive and abundant capital would never end. It was ridiculous, and it was a direct result of Fed policy.

All that changed when the bubble burst. Suddenly, everyone became acutely aware of risk as the financial crisis unfolded. Even though the Fed kept interest rates low and the liquidity pump open, banks became much more cautious. In leveraged deals, they would put up only two turns of EBITDA, instead of five and a half, for senior debt, and they'd put a cap on the total amount of debt allowed. They've since eased up a bit, but banks remain extremely cautious -- which is normal. And that's the point. What's happening now is not an aberration. The aberration was what was happening then, at least as far as valuations are concerned. That said, it will take some time for people to adjust to the new reality. If your neighbor's house, identical to yours, sold for $300,000 three years ago and now the best offer you can get is $200,000, there's a natural tendency to think, It's really worth $300,000. I'll just wait until home values come back. You don't want to accept that your neighbor simply got lucky and the market value of your house is going to be closer to $200,000 than to $300,000 for years to come. I'm that lucky neighbor. When I sold CitiStorage and my other two businesses in December 2007, I was even luckier than I realized. I knew then that our timing couldn't have been better. We'd wrapped up the deal within weeks, if not days, of the bubble's bursting. But I didn't fully appreciate how much the bubble had distorted the selling process, both by greatly inflating multiples and by causing potential acquirers to minimize the risks. In the next few years, multiples may rise above the current level, but not by much. I doubt we'll see valuations of 10 times EBITDA again for a very long time, if ever -- at least not in my industry and probably not in yours, either. And eventually people will get used to that idea. They'll realize that the offers they're receiving are the best they'll get for a while, and life can't wait. You need to make decisions and plans based on what's available now, not on what was available a few years ago or what might be available five or 10 years in the future.

Meanwhile, I have my work cut out for me. If the real estate issue is the main obstacle to selling the company, I have no choice but to resolve it. Given the latest news, the sooner I do so, the better: At the end of October, Allied Capital announced it was being acquired by another firm, Ares Capital. I have no idea just yet how that will change life at CitiStorage, but you can bet it's going to change. And when it does, I want to be ready.

Selling My Company (Again)


I thought I cashed out. But then the credit squeeze changed my plans By Norm Brodsky | Sep 1, 2009 Yogi Berra famously observed, while managing the New York Mets, that "it ain't over till it's over." Now I know what he meant.

If you followed the saga of the sale of CitiStorage and my two other companies (see "The Offer: Parts One11"), you probably figured -- as I did -- that I had wrapped up that particular phase of my business career back on December 21, 2007, when Allied Capital acquired a majority stake in the business and I went from being CEO and principal owner to well-paid adviser. Well, not so fast, Kowalski. For the past six months or so, I have been working to find a new owner for the records-storage, document-destruction, and delivery businesses I spent most of my adult life building. Along the way, I've had a front-row seat to the unfolding financial crisis, and I've seen how and why it has caused the rest of the economy to seize up. I've held off writing about the experience out of fairness to the other parties involved, but we're now at a point where I feel I can share with you some of the lessons I've learned. By the time we closed the deal, the credit markets were already tightening, and it looked as though difficult times lay ahead. We had no inkling, however, of the problems that the economic downturn would create for our new majority shareholder, which had been around for almost 50 years and had assets of more than $5 billion. Neither, I suspect, did Allied Capital's people. My partner Sam and I were working closely with two of them as we put together our acquisitions team and began looking for other companies to buy. That was the plan, as you may recall. The companies I had founded would serve as the platform on which we would build a nationwide records-storage and document-destruction business, with Allied supplying the capital and Sam and me the industry expertise, while my other partner, Louis, ran the new company that emerged from the sale. In four to six years, we would have a liquidity event of some sort. With that in mind, my CitiStorage partners and I had reinvested about $13 million of the sale proceeds, for which we received about 37 percent of the new company's equity and an identical share of the junior debt portion of the deal (which included junior debt and preferred stock). The first red flag came in the spring of 2008, although I didn't fully appreciate its significance at the time. Our contacts at Allied Capital told us that they wanted to change the capital structure we had set up for the company. They had purchased our businesses using a combination of equity, junior debt instruments, and senior debt. (Senior debt is senior because it gets paid off first in any liquidation, before junior debt and preferred stock, which in turn get paid off before equity. Because there is less risk involved, the yield on senior debt is lower than the yield on junior debt and preferred stock.) Now Allied wanted to find someone else to supply a portion of the senior debt, presumably because it wanted to invest its capital in higher-yielding investments. Because we had good relationships with several banks, our contacts asked us to see if any of them would be interested in providing the senior debt. We were happy to oblige. It took only one or two meetings for us to realize how drastically the landscape had changed. A year before, bankers would have fallen over themselves to offer up to five times our EBITDA -- earnings before interest, taxes, depreciation, and amortization -- in senior debt. Knowing credit was tighter, we were now looking for three and a half times EBITDA (or "turns of EBITDA," as the bankers say). We quickly came to understand that two and a half or three turns was the best we could hope for -- and the number went down weekly. It finally hit zero, at which point senior debt simply wasn't available. You couldn't

get it, no matter how good your credit was. When we so informed our friends at Allied Capital, they said, "Yes, we know." Our business was, in fact, the least of their worries. In the fall of 2008, Allied Capital began closing offices and laying off staff, including the two guys who had been working with us and who served on our board. During this same period, the media were filled with stories about how mark-to-market accounting rules -- which required periodic adjustments of the value of assets -- were aggravating the problems of financial-services businesses. It dawned on us that our majority partner was probably Exhibit A. Although it had steered clear of the subprime mortgage market, it couldn't escape the general drop in asset values. With each passing day, its investments in companies were declining in value, as would-be acquirers reduced the multiples of EBITDA they were willing to pay. At the time of the sale, for example, businesses like ours were going for nine to 10 times EBITDA. A year later, the same businesses were being sold for six or seven times EBITDA. Thus, even if a company's EBITDA had increased in the interim, its valuation had declined. As long as the business remained fundamentally sound, its equity would recover sooner or later, but the mark-to-market rules required Allied Capital to reflect the decline in its quarterly financial statements. As a result, Allied was in increasing danger of being found in violation of its bank loan covenants, which stipulated that it must always have twice as much in assets as it does in debt. By then, we had long since realized that our plan to build a records-storage giant was dead in the water. Allied Capital was in no position to finance acquisitions. Mark-to-market aside, it had companies in its portfolio that were struggling and needed a lot more attention than we did. When we asked its executives what they wanted us to do, they said, "Don't worry. Just run the business. Everything will be fine. There are some problems we're working out. Just keep doing what you're doing." When somebody tells me not to worry, that's when I start worrying, and the steady drop in Allied Capital's stock price did nothing to reassure me. From $22 at the time of the sale, it fell to about $1.80 just one year later and showed no signs of rebounding anytime soon. There wasn't anything we could do about it, however, so we followed the advice we had been given and minded our own business. Weeks went by in which we had little or no contact with Allied Capital. Although a new person was assigned to us, he and his bosses left Louis and his management team to run the company. Meanwhile, Sam and I kept ourselves busy with other projects and speculated about what the future might hold. Mainly, we wondered what would happen if Allied Capital did wind up violating its bank covenants, as seemed almost inevitable, or even if -- God forbid -- it filed for bankruptcy. Either way, we figured, there was a good chance that we would be sold. So we weren't surprised when the executives of Allied Capital came to us and asked for our help in checking out the market. "We might not sell the business if the price isn't right," they said, "but we would like to know what it's worth. What do you think we can get for it?" "I have no idea," I said, "but I can investigate."

Sam and I had been following developments in the industry closely and knew the various players who, like us, wanted to build the next big, national records-storage and documentdestruction business. We decided to meet with the three most likely candidates and give them a chance to make an offer. The number we got back was $65 million, down from the $87 million Allied had paid. (The $110 million figure I've mentioned before included an interest in the real estate.) When we told the Allied Capital people what we had found out, they said, "No, we won't sell at that price. We don't need to." But Allied's position was continuing to deteriorate. On January 28, 2009, it announced that it was close to being in default on its loan agreements as a result of the decline in the value of its investments. It was opening talks with its lenders to see if they would agree to a waiver allowing the company's assets to fall below two times its debt, as its covenants required. Without such a waiver, it wouldn't be able to pay dividends -- a key reason investors bought its stock -- or borrow money. Whatever the lenders decided, the firm was obviously under pressure to deleverage -- that is, raise cash and unload debt. That meant selling some of its portfolio companies. Unfortunately, the companies most likely to attract buyers, and thus allow Allied Capital to raise the cash it needed, were precisely those that, under other circumstances, it would be most reluctant to part with -- namely, the most solid, best-performing businesses it owned, including ours. Sure enough, the Allied Capital executives soon came back to us. "We have to sell some companies," they said. "We have a couple of big deals pending, but we may have to sell yours, too. It depends on the price we can get. We want to hire an investment banking firm to handle it." That was fine with Sam and me. Working with Allied's people, we looked at a couple of investment banks and settled on Harris Williams & Co., based in Richmond, Virginia. At that point, the major question in my mind and Sam's was, What price, if any, would Allied Capital accept for our business? We could only guess the answer. Allied's people weren't talking, as well they shouldn't have been. Their fiduciary responsibilities to their own shareholders required them to keep us in the dark. What we did know was that, if Allied Capital went through with a sale in the present environment, my partners and I stood to lose our entire equity investment. It was a matter of simple math. Given our own soundings of the market, we could be pretty sure that the bids would be from $65 million to $75 million. Whatever the final offer, it would, if accepted, have to cover, first, the expenses of selling the business, which could amount to a few million dollars. Then the senior debt, about $52 million, would be paid off. The junior debt and preferred stock totaled $16 million, including accrued interest and dividends, of which we owned $6 million, and we could probably count on getting at least part of that money back. But after paying off the debt and preferred stock, there would be little, if anything, left for common stockholders, and we had $8.5 million of our money invested in common stock. Allied Capital probably didn't have much choice. But I wasn't happy about this turn of events. After all, we had fulfilled our responsibilities. The problems Allied Capital faced

were none of our doing. Under the terms of our deal, it had so-called drag-along rights, meaning that as the majority shareholder, it could force us to join in the sale provided we got the same price, terms, and conditions as Allied did. But I felt strongly that we deserved better. Fortunately, we had an ace in the hole. Any new tenant would have to be approved by the landlord -- and we were the landlord. Then again, that was not a card I intended to play at the last minute. We had been doing business with Allied Capital for 30 years, and we had always treated each other fairly. I did not want to get into a fight with Allied Capital. I said to Sam, "We need to tell Allied up front what we want and see what we can work out." He agreed. And so we set in motion a chain of events that would determine our fate. Next: Let's make a deal. Norm Brodsky is a veteran entrepreneur. His co-author is editor-at-large Bo Burlingham. Their book The Knack: How Street-Smart Entrepreneurs Learn to Handle Whatever Comes Up was named the best book on entrepreneurship of 2008 by 800-CEO-READ. Copyright 2009 Mansueto Ventures LLC. All rights reserved.