Since November of 2006, I have read with interest and amazement the “Street Smarts” articles written by Norm Brodsky in Inc. Magazine. My interest is borne of having served as Managing Partner of Northshore Capital Advisors, a mid-market intermediary that has closed several dozen document management transactions in the last five years. During that span, we have worked with all of the industry players and know first-hand the details of how transactions are structured, the valuation parameters that are used and how the buyers handle the transaction process.
With that background as a foundation, my amazement and concern has grown with each article that Norm has written. Now don’t get me wrong, I have nothing personal against Norm or his business. I have talked with Norm at the industry conference and found him to be a pleasant enough guy. But his behavior over the last seven months is very troubling.
First, confidentiality should be respected. Unfortunately, he has gone too far in this regard twice. Using a national magazine to drop names and reference past interactions with publicly traded companies is inappropriate and at best stretches the confidentiality agreement he signed with those firms. One could argue that if Norm had pushed it too far he would have certainly heard from the three multi-billion dollar companies. I disagree, having spoken with numerous individuals at these companies; I can assure you they are appalled at Norm’s lack of confidentiality. At that same time, what do they have to gain by going after him? Nothing. In spite of his declarations, Norm is not a driving force in the industry. Getting into a contest with him would be a waste of time.
As if the initial breaches of confidentiality were not enough, he walked all over the buyer he calls Greg and Greg’s firm for months, disclosing conversations and replaying interactions as though they were part of some dime store novel. In fact, in his most recent article in Inc. dated May, 07 he outlines specific deal terms that have been discussed and agreed to. I am certain that the confidentiality agreement he signed with the prospective buyer precludes either party from sharing deal terms, but he doesn’t seem to care. In one of Norm’s articles he points out that maybe he was subconsciously trying to kill the deal. Maybe, or maybe he was just unable to control himself and just wanted to talk about it and himself. Regardless, the real lesson for owners trying to sell their business is that confidentiality is important and hubris is dangerous.
Unfortunately, the problems don’t end with loose lips. Much of the anecdotal advice that is espoused in this series is flat wrong. To be fair, some sound advice is provided, but unfortunately it is clouded by the overwhelming amount of bad counsel suggested in the series. First, Norm claims to have dictated the EBITDA multiple to the buyer. A few months later, he points out that there is some disagreement over the trailing EBITDA number to be used. Imagine that. As is obvious, the purchase price valuation is derived by multiplying EBITDA times a multiple. I have seen countless times were a buyer has “agreed” to a multiple and then secured their target valuation by negotiating the EBITDA amount that will be used in the calculation. This probably seems almost silly to mention, but Norm didn’t explain what happened. He continued to give off the impression that, he and he alone, was in control. The reality is that rarely do buyers come to a transaction without having a valuation in mind and even more rarely will they significantly exceed that number.
I am also bothered to read numerous examples given by Norm as to why he should sell his three businesses. The delivery business’ margins are thin, the storage building is almost full and it is going to cost him a fortune to open a new building, the best time to sell is right before you have to invest in the business to keep it moving forward, the future plans the city has with the space, etc, etc. After hearing all of that, would you want to buy his business? The problem with these comments is that he fails to fill in the gap and acknowledge that the buyers aren’t stupid. They understand these concerns and at least from the public companies’ perspective, they represented enough of a problem that they never gave Norm a deal he would agree to.
Finally, he goes to great lengths to brag about his relationship with his employees and to chronicle their inclusion in the process. I found it amusing that it was his fourth installment before he decided to clue more of his people in on what was happening. Did he think they couldn’t read? He was chronicling the deal in Inc. Magazine. But I digress. Telling your employees is a bad idea. It is rare when something positive comes from telling your employees you are thinking of selling. I know, I know. The buyer says at one point that he was impressed that Norm had such a great, open relationship with his employees. Give me a break. The buyer loves it when employees are accessible. It gives the buyer a better chance to continue due diligence and look for any hidden problems. Norm’s description of how open he was to his employees is a huge disservice to sellers who are going through the selling process for the first time.
So what conclusion can be drawn from watching this play out in Inc.? I guess the best judge of that is whether or not the deal closed. Well it didn’t. Sources close to the process say that the deal is off. Not a surprise here. I predicted in January that unless Norm stopped what he was doing, his “offer of a lifetime” would be gone. There are many rumors as to what happened, and I won’t spread those tidbits. I will say, however, that selling your company is hard. It’s not a game. It’s not a chance to promote yourself. It should be enough that someone wants to buy the company you built.
I wait with baited breath to see how the next installment describes why the deal fell apart. I am sure we will endure the long story of how they wouldn’t do what he asked of them and how he thought about it and his people and just couldn’t pull the trigger. As we say down here in Tennessee, hogwash. This deal was doomed from the beginning. Norm was playing the readers and the buyer, and in the end, the buyer simply had had enough. If you were the buyer wouldn’t you have reached your limit? My advice: do yourself a favor - if you desire to sell your business, consider this series for what it is. Well-crafted fiction.