John the Factotum

How to Give Away a Company

I owned a meaningful percentage of a company that was making north of $20M per year in revenue, and we had to give the company away for precisely $0. You read that right. It seems impossible, but trust me it's very possible and it's very heart-breaking. Let's re-live the journey together so you can learn from my misfortune.

How It Started #

Much to my employers' chagrin, I believe in being open to opportunity no matter my situation. You never know when a conversation could turn into something fun or lucrative. You think you have a job that I'd like? Sure. Let's talk. You have a business idea you want to explore? Let's see if it has legs. To me, there's no reason any of us should preclude ourselves from opportunity by responding with "No thanks. I'm happy with my job."

And so it was that a friend and business partner pointed me to a small-but-promising business that needed to replace one of the founding partners. The founders' relationship had soured, and my friend saw the opportunity to buy 50% split between the two of us. The value we could bring to the table was enabling online sales. The company was early enough that the purchase price was manageable. I had a small custom software shop that got acqui-hired by a customer. That gave us the cash we needed to complete the purchase. We were in. We immediately began creating the e-com site for our new venture and sales started rolling in.

How It Went #

The founder, and 50% owner, was given free reign to do what he felt was right. He was really good at product-market fit and branding and running ads. Product delivery was decent at a small scale with the expected bumps as things scaled up. As owners there were occasional disagreements. But they were good disagreements that created enough friction to make us think about what we are doing. We made money - a good amount of money. In the beginning we were excited when we passed our first month with $100K revenue. 4 or 5 years in we celebrated our first $1M month. $2M wasn't far behind. As owners we got distributions that were really nice, but left what we thought was more than enough cash in the business to keep things healthy. It sounds great, and it was great…until it wasn't.

How It Fell Apart #

Things always start going poorly long before the symptoms become apparent. For us the first symptom was when there was a persistent manufacturing defect. Our CEO, to his credit, dove in head-first and really tried to systematically root the cause and right the ship. While he does have his strengths, unfortunately he was no expert in manufacturing at the scale we had achieved, and he certainly didn't know the particulars of the products and processes that were failing us in this episode. This is when his real shortcoming was revealed: He wasn't able to get out of his own way and recognize that the situation needed someone with more experience and expertise.

The defect situation led to delayed deliveries and a backlog of manufacturing that couldn't catch up. Now we had whatever the negative version is of a flywheel. Our CEO needed help. We tried hiring a super-smart business guy to be his right-hand man. He never built trust, was never empowered, and ultimately failed. We brought in a capable industrial engineer to make recommendations on improving the manufacturing process. His ideas were never implemented. Finances were looking grim. Cash on hand was less than the cost of the product we owed people. We hired a capable controller and moved to accrual accounting. Return on ad spend was diminishing. We hired a guy that had crushed it with a couple of other e-com companies. He couldn't get the ROAS to where it needed to be quickly enough. My fellow 25%-er and I suggested hiring a professional CEO several times along the way. It either fell on deaf ears or wouldn't get the founder's focus. I had no leverage to force the issue.

Ultimately nobody we hired could perform to the best of their abilities because the leader was the limiting factor. Even so, it was probably too late. We ended up needing cash to fuel the machine. No bank would touch the situation. We ended up taking out a high-interest loan from a lender that deals exclusively in high-risk situations. That's never a good sign. The ship was sinking. A couple of businessmen had been watching the situation for a while and came in with a $0 offer to take on the debt and re-capitalize the business. It was the only option other than bankruptcy. It was painful, to say the least.

Lessons Learned #

If you find yourself engaging in a business opportunity that could turn into something real, you should go for it. It's really fulfilling and, if you're lucky and persistent, can be very lucrative. Regardless of how far you can see around the corner and predict how "real" the opportunity is, you should see it for what it could become - good or bad. Here is a short list of things I will do differently the next time around:

Structure business relationships unfairly on purpose. A big problem we ran into is that all the owners in my situation were friendly in the before-times and we structured our ownership and implied responsibility equally (50/25/25 with a pretty strong coalition among the 25s). What we should have done is figure out a 51-49 split with accountability mechanisms in place for the 51%. That way there is a clear tie-breaker and responsible party, come what may. If we had done this, we would have likely sold the company in a deal that seemed terrible to me at the time but would have been significantly more than $0. Hindsight…

Make founders fire-able. This doesn't mean that you will fire the founding CEO. It just means that everyone involved has checks and balances for the sake of self-awareness (or lack thereof) and that there are mechanisms in place that make it easy and unemotional to make sure the business has the right leadership in place to flourish.

Start with very clear goals and timelines. When everything is framed around an endgame, it makes otherwise emotional decisions less so. Everyone has their eyes on the prize and makes decisions that serve that end regardless of ego.

Become an accountant. Learn what EBITDA and "gross margin" mean. Ask yourself, "What if this is wildly successful?" Know that growth can outstrip your ability to deliver when you don't have enough cash on-hand. Accrual accounting helps you understand what you owe customers versus the resources you have to deliver on those promises. It may be the single greatest, if not most boring, business intelligence tool you can employ for growing your business.

Debt is a tool when used appropriately. It's a death blow when used in desperation. Analyze your finances often. Better yet, pay an expert to watch your financial health and do what they say. Money isn't as intuitive as you think. With respect to debt, you absolutely should use it judiciously to grow your business in a way that outpaces what's needed to service the debt. By definition, that debt is no longer just debt, it's an investment.

Trust your gut. Don't hire the snake oil salesman. If things feel weird, stop. Be formal about regular checkpoints that do a gut check on the business and reflect on current state, decisions that got you here, and where everyone thinks things are going. Trust a diverse set of viewpoints rather than believing blindly in a single leader or groupthink.

Don't overstay. Get out when you can unless you have clear line of sight to a better exit and a game plan to get there. Take your cues from good comedians: "Thank you and good night!" You might get more out of it someday. But you might not. Gambling is often referred to as "games of skills and chance." To be clear: You are gambling. Follow Kenny Rogers' advice.

Some may read this advice and think they know better. I probably would have 10 years ago. Some of us need to learn the hard way. If you choose to heed the warnings and leverage these lessons, it can be a cheat code to achieve success faster and to a higher degree. If you happen to have an idea and want to buddy up with somebody who knows these things all too well, hit me up.