Entrepreneurship Buying a Business

Anita Brick: Hi, and welcome to CareerCast at Chicago Booth. To help you advance in your career. Today, we're delighted to be speaking with Russ Maki, who's a Booz Allen and CEO and president of Graphic Conservation Company. Russ, thank you so much for making the time. I know that you've done a few different things in your career. Being in corporate, doing a startup and then buying a business. How did you decide to buy a business?

Russ Maki: Well, as you point out, I've gone through a number of phases in my career. The first was a specialty paper distributor where I pretty much rose through the ranks and ultimately ended up becoming president of the division that service the offset graphics market. As the printing industry was beginning to compress, pricing was beginning to change and margins were beginning to change.

The structure of the organization was that we were partnered with venture capital. The nature of the relationship between myself and those venture capital partners changed from one of playing offense to point defense because of what was going on in the market. To be honest, after 15 or 20 years of doing that, it wasn't enjoyable anymore. Having gone from growing a business division by division, region by region, to deciding headcount reductions and things along those lines, it just wasn't something I was interested in doing.

After working with a publicly traded company, I ended up acquiring, with a group of investment partners, a small manufacturing business. We literally quintupled the sales for the course of a three year period. And then the recession hit. And just as fast as we increased, the top line, the top line came down too quickly, and I came in and ended up having to terminate the entire manufacturing crew.

And, once again, it was a very bad situation. At that point, I decided two things. Number one, if possible, if I could self-fund a deal where I was the guy making all of the shots, that would be great. And secondly, if I could move away from a share oriented business in favor of something that were more along the lines of growing a market, that would be ideal.

Thirdly, and finally, I did want to get back into paper or graphics or something along those lines. Somehow, somehow, serendipitously, that's exactly what ended up happening here, but I didn't start out thinking I was going to buy a business. But now that I have, and I'm running the show here at a conservation company, it's quite rewarding. It's very enjoyable.

Anita Brick: So you said it happened almost by chance. What things did you put in play to make it easier for you to be lucky?

Russ Maki: You're going to hear this a lot, but it's about networking. My definition of networking is it isn't about who you know. It's about who knows you. Getting to know a lot of key people in the market you're interested in is extremely important. As it turns out, a friend of mine knew about this company that was for sale. That's how I ended up getting connected with it. Just as simple as that.

Anita Brick: It's one of those things that seems so obvious because people know people, and whether specific things you did to build the relationships and let people know that you were looking for a business, and then to have the credibility that people were like, yeah, Russell would be the guy.

Russ Maki: Just to be clear here, this company is so targeted, so niche, that the former owner found it difficult to attract interest in the business. She ended up using a broker to handle the deal.

Anita Brick: Oh, wow. Okay.

Russ Maki: He was negotiating with a broker on this. And to be candid, it wasn't always the best experience. The broker is out for the broker. I think also, when you are looking to identify a target, you have to realize in my case specifically, I really didn't know what I was looking for. There's a certain amount of freedom that comes along with that.

I looked at the audio industry. I looked at the food industry again. Never did the thought of a conservation lab enter the radar screen, primarily because I didn't even know this kind of company existed. It became very clear within a very short period of time there were unmet needs here I could fill the bill with. As I think about it.

And in hindsight, I was really looking for an opportunity where it's trite to say it, but, you know, we're one plus one equals three. And that's pretty much what we ended up with here, where the people that ran the company prior to my coming along, they're world class conservators. That does not mean they're marketing people or cost accountants or finance people or salespeople.

They're world class conservators. They spent an inordinate amount of what I perceived to be very inefficient time management areas of the business that they weren't interested in managing to begin with. So I came in, took all of that off of their plate, and ended up freeing up their time to do more of what their world class is doing.

That's where I come up with one plus one equals three, because it literally increases the capacity of the company dramatically and particularly at the higher level, because we had senior people involved with these other non conservation related tasks. And then you put someone such as myself who has a strong sales, marketing, branding, corporate identity, background, in addition to all the other aspects of general management. And that was really what was necessary here and that's how we leverage it.

Anita Brick: So before you even sign on the dotted line and said, okay, I'm going to take over this company, which really was not in your wheelhouse from an industry standpoint. An evening student asked, what are the key metrics or attributes that you looked for when you were evaluating the business? Once you found it.

Russ Maki: I presumed that a small business like this was going to be suffering in some way, shape or form. In some sense, I had to rely on the fact that my management skills would give the company a new lease on life, and that we would be able to build the business. Again, no one at the company was focused on the things that really needed to be focused on.

So from a metrics perspective, obviously I was looking at whether it's top line trends, whether it's income statements, reformatting those income statements and my own performance, that allowed me to have a fairly good view of what the business could look like. Balance sheets, cash flow. But again, I was buying what I would perceive to be a business in distress, not going out of business, but it needed a lot of help.

And what you need to realize going into that is until you actually are part of it. Looking at a sheet of paper is only part of the picture. There's a lot more that goes into it than that. You also have to realize the financial component of acquiring the business, but there's also what is the business capable of becoming?

Does all of that fit your personal needs? In my case, what were my personal needs? Yes, it should be an income generating business for myself. There's no question about that. And it took us a while to get to that point. In addition to that, I'm one of these guys that I don't really have a good off switch. And the concept of a traditional retirement.

I'm in my mid 50s now. For me to just kick back and do nothing. That possibility doesn't exist. So I was looking for a business that was endlessly engaging and interesting to me, where I could come in on a daily basis and just be intrigued, whether it's with the clients or the projects we're working on. On top of it, I work with and have the privilege of working with some of the most talented people I've ever known in my entire life. It's very fun from that perspective and financially rewarding at the same time. So probably a little different way of looking at it.

Anita Brick: As you said, you looked at the traditional income statement, balance sheet, etc., etc. and your needs. How did you evaluate the people there to make sure that that side of the deal was a good deal, and it was sustainable?

Russ Maki: Well, that's some of the risk that's involved in this, because in a closely held company like this, it's not common knowledge that the company's for sale. So I had very limited visibility other than the current ownership in terms of what the culture of the company was like, what the personality was like, what was really going on in the place.

Part of it, too, is in my case, specifically, the former owner was looking, to her credit, to partner with someone that could take it to the next level again. To her credit, realized she didn't have the skill set to handle that transition herself. I mean, we both know people that because of pride and ego, would allow the business to be run into the ground and literally shut the doors.

To her credit, she opted not to do that. Part of the due diligence process occurred on both sides of the table. She wanted to make sure that me coming into this business wouldn't be massively disruptive. Our field is an interesting field from the perspective of the ethics that are involved. I mean, we're dealing with fine art. We're dealing with important documents, the conservation and restoration of those.

We're dealing with very high profile individuals, very high end institutions. She wanted to make sure that as I came in, that I wouldn't deviate from the high ethical standards that the company has had for decades and decades and decades. There was an awful lot of conversation about that, which I found interesting and refreshing that it wasn't. What are we going to do to grow the business? We're going to grow the business or want to do it the same way we've been. We've been doing it and doing it the right way.

Anita Brick: Sounds like this person was on board. She really wasn't going to walk out the door with all of her skills and talent and experience. One of the questions that came up, actually from an executive MBA student, he said, I'm getting to the final stages of negotiation, and I have a concern about retaining critical talent in addition to retention bonuses. Do you have any other advice on how to get current employees to stay after the sale?

Russ Maki: Not knowing what the structure of that retention bonus is, there's a lot of ways to structure those. If you're willing to create a structure that allows them to participate in the upside potential of the company, that's fantastic. I don't know if this particular student is interested in this or not, but the concept of phantom equity is another great way to go.

You know, the problem from the other side of it is that they're banking on the fact that your leadership is going to take the organization to that next level, that they're going to be able to participate financially. But if the objective is to retain key talent, there's a concept of a phantom equity program is a wonderful way to go about it that they can, upon the next transition in the organization, exercise that either and cash out or potentially roll it into the next organizational structure. It's not exactly what I did here. This deal happened to be more bonus oriented, tied specifically to things that are within that individual's control.

Anita Brick: Okay. Got it. And just to flesh it out a little bit, what's the difference between traditional equity and phantom equity?

Russ Maki: Well, phantom is basically you're saying you're going to give that person equity in the organization for a certain amount of longevity and success in the position, and it can ramp up. You can start out with a very small number, and then over time, it can build to a larger number in terms of the percentage of the value. I would certainly tie the structure of that to the incremental increase in the value of the business, not the baseline for which you purchased it, but the delta, the net change in the value of the business at the time of that transition. Theoretically, that person had a great deal to do with that. If that person is that key and there's lots of creative ways to go about, making that very attractive.

Anita Brick: So there were a number of questions, which is not a surprise, but thank you for that. Related to financing. One person said, how did you raise the money for a down payment? And I would take it broader and say, how did you decide what the financial structure was going to be? And then how did you find the resources to actually purchase the company?

Russ Maki: Sure. Going back to the food industry experience, where I had a group of partners that I was working with, as the business was growing substantially, everything was great and wonderful. As the business fell on hard times as it did because of the recession. Now all of a sudden my partners were calling me pretty much every day. I was truly in a situation where there wasn't much that could be done.

It's a very stressful environment to be in. I guess my own personal evolution was that I wanted to make sure, if possible, that I could self-fund the deal. I really didn't want to be involved with a partner anymore or partners. This company and the way we structured the deal allowed me to self-fund it. That's a luxurious position that I'm in that I was able to do.

Yes, there is a small note that's associated with the former owner. I really wasn't interested in making business presentations to venture capital groups that I wasn't on. The same page with. Part of the issue here, too, is the philosophy in terms of the rate of growth as a company. It would be entirely possible, but if I were to bring in other partners because of their demands for the return on their investment, that their growth objectives would be significantly greater than mine.

This is a unique business in that I am not looking to quadruple the sales of this company in a short period of time. There's a training and almost a gestation period for the key people that actually do the work here. By ramming a lot more work through this place with limited staff. A couple of things happen. One is obviously lead times increase as a result of that, which is not necessarily good for our clients.

And secondly, there's the distinct possibility that the quality would decline. I am on a very measured pace of growing the business. And don't get me wrong. The rate of growth in the business since I've taken over has been double digit percentages every year for the last five years while it is growing, but it's not growing exponentially.

Anita Brick: I understand I have a friend who did a debt plus VC relationship for two and a half years, but heads with the partners of the VC firm who wanted a much more accelerated rate of acquisition. And he refused because he thought it would implode the company and eventually they fired him. Well, the good news is he did get the company back in the end, but he never went down that path again for the very reason you mentioned. That said, though, what if someone doesn't have the money to actually personally fund something? What else would you recommend?

Russ Maki: There's lots of sources for capital, and obviously it's perfectly reasonable and rational for venture capital to demand significant rates of return given the risk they're taking. And the further you drill down in terms of the visibility of the business or the company or the industry that they're in. Like the industry I'm in, there isn't widely available data, which just increases the risk premium that's going to be paid for that kind of deal.

I think you have to be very careful about selecting who those partners you're ultimately going to end up with. You may find there's some creative financing solutions with the existing company within the existing management team of that company. You just don't know. Personally, I haven't had wonderful experiences on the VC side of things. I don't fault any of them. I completely get it. And I'm probably in a little different position than most from the perspective of my ability to self-fund.

Anita Brick: We all have options, right? There are many options for financing as well, but it's so important to know what you as a potential business owner needs, not just in terms of the financing, but also the person. If you will talk about smart money all the time and we can buy knowledge, but we also have to buy compatible personalities, I think to some degree, and make sure that your purpose in my purpose, if we're coming together, are aligned enough for us to have a successful relationship so we can actually both succeed.

Russ Maki: If you look at the role of the investor in your business, you're there to run the business. Managing the relationship with that investor shouldn't be taking up an inordinate amount of your time. If it is, it's taking away from your objective of growing the business profitably. That's where you've got to be really, really careful. If you find yourself spending an inordinate amount of time on reporting and conference calls and how's everything going that's detracting? That truly is. So as I said, I'm a little biased there, probably. But you should be living this business you're buying and that last deal with the people that you're working with and certainly your clients and potentially vendor relationships as well.

Anita Brick: To your point, if you know what the relationship is during the negotiation phase, it's probably never going to get better than that.

Russ Maki: That's correct. You are being sold.

Anita Brick: Right, right. That's why it's key to really pay attention and not get enamored by any one particular deal.

Russ Maki: Well, yeah. And that's where it's serious. You are considering venture capital. You may want to look at their portfolio companies and find out how the relationship exists between those organizations and the managing partners.

Anita Brick: Very good point. So there were really five questions related to tricky things to ask during a negotiation. Things you want to know as a potential buyer, but on the other hand, don't want to offend the seller. The first one was from a weekend MBA student and said, in addition to asking directly, how would you suggest I find out how much of the business depends on 1 or 2 key customers or 1 or 2 key vendors?

Russ Maki: It is perfectly within your rights as part of your due diligence to look at the distribution of those clients. And if it turns out that you've got 1 or 2 clients that represent half of the business, either walk away from that deal or discounted so heavily to reflect the fact that that risk exists. There's varying stages to the due diligence process, but at the early stages I insisted, a top down list of clients, what their revenues looked like, I want to say it probably lasted three years cumulatively, and what percentage the top ten clients represented as a whole.

And I would also think it's a good idea to anecdotally and in conversation, reiterate and verify those points. Additionally, I asked questions early on in terms of the probability of those clients doing similar levels of revenue with the organization, and it's a little harder question, more subjective to answer. But what I was trying to get at is these loyal clients. And I also had to acknowledge the fact, with new ownership coming in from the perspective of the clients, there could be risk associated with that as well. And if they were on the fence to begin with, that might be the issue that causes them to go elsewhere. You're trying to do a lot of things with those questions. I'm sorry. It was a vendor. The other question.

Anita Brick: Vendor was the other question. So how do you also manage if you only have 1 or 2 key vendors?

Russ Maki: You have to be very careful. Again, I came from a long history of wholesale paper trade where we had key vendors producing private label product for us and the contractual arrangements in terms of them continuing to supply us and the pricing structure of that deal over the long term, there could be opt out clauses in those contractual agreements where upon transition in the organization, they're out of the deal.

And you have to be extremely careful of that. Just as a general rule of thumb, I have never wanted to have a single vendor represent more than half of my business. I certainly don't want a single client representing half of our business. That's dangerous, and that's the kind of thing that will keep you up at night.

Anita Brick: Got it. And you and I have both heard and I mean, probably a lot of people listening have heard where the whole company goes under because someone pulls out, they have a change of leadership and they decide to change everything, including you as either a vendor to them or if it is a vendor, maybe they don't want to supply anymore. So it is. You're absolutely right. It's very, very tricky.

Russ Maki: Well, and on the client side of things, especially where you know, you're going to do everything in your power to maintain that relationship and make sure it's a successful, thriving relationship. But in some cases, through no fault of your own, you will lose that business. Whether it was an acquisition that the client was a part of, whether it was a bankruptcy, you know, these things happen.

Which brings up a point. And I don't know if it was in your questions or not. When you buy a company, it's human nature to think your management skills and talents are just absolutely wonderful. And you're going to produce growth that first year. You know, it's entirely possible that that won't happen. And as you're building out your performance and looking at what the projected cash flow of the business is going to look like, I would highly recommend taking a very pessimistic view of what happens if I lose 20% of my top line that very first year. What is that going to look like from a realistic cash flow perspective? Because those things do happen. I would rather know the answer to that question in advance than have to fight it out, as it's in the process of occurring.

Anita Brick: What if you don't? And what if something happens, like in 2008, 2009? And Alan asked the question, he said, how do you manage financial partners if projections need to be adjusted downward? What do you do ?

Russ Maki: First thing's first, be honest and upfront immediately. Don't delay the delivery of that news. Depending on the structure of the partnership and how heavily invested you are in the equation, and how much leverage you have in the equation, that has something to do with how you may choose to communicate that information. Generally speaking, if you have bad news to deliver, deliver it just that simple.

You'll know. You'll know when it happens. In some cases, I suspect with businesses, the bad news may be part of an industry trend and overall trend that you may not be in control of, but you'll need to adjust the management of the organization in order to accommodate that trend. Similarly, when you have good news, deliver that too. It's a good thing to make those phone calls or send the emails.

I guess I'll say one other thing that has to do with communication in general, kind of a macro sense as a society moving away from one on one relationships and phone calls and conversations and dinners and all those kinds of things to my way of looking at the world. If you're just going to exist in cyberspace by sending text messages and emails to your business partners, you're probably missing out on a great deal of contextual information you could be sharing, which will hopefully allow you to benefit more greatly with that partnership. I can't say enough of that. It's incredibly important.

Anita Brick: I agree, it really is often a missed opportunity because people will help us to a greater degree. The deeper the relationship is, as long as we are honest and create a positive exchange, it makes a huge, huge difference.

Russ Maki: Along the lines of X, these people obviously have financial resources and wherewithal, but they also have management resources and wherewithal. So it's entirely possible that through the discussion of the bad news side of this, they could point you in the direction of, why don't you talk to this person and get their take on it? It could be genuine, helpful. They don't want to say they're going to do everything in their power to make sure it doesn't fail.

Anita Brick: That's a very good point. In some ways, that's rule number one in negotiation. If you can get the other person to problem solve with you, number one, you can tap into their gray matter. And also in their experience, if you're working on it together, it moves it away from, well, what did you do wrong here? Why isn't it going the way we expected it to go? Adversarial kind of point of view. A couple of other things asking these tough things. And MBA students said how do you ask the question what's your biggest challenge right now without offending the seller?

Russ Maki: Personally, I don't take that as an offensive question. It's perfectly within your rights to ask for the top three areas of improvement that you see as the seller face that you are, whether self-funding or with venture capital about to commit substantial resources to an organization that you do not own or live, that person subjectively can give you a great deal of information.

Make sure whatever questions you're asking are quite open ended. And this is the conversation. It's going to depend, I think, a great deal to that person staying with you. Does that person have a vested stake in making sure that the organization continues to grow? And if so, there's no reason for them not to share that information with you, subject to the confidentiality agreement that may be in place, that there's points in the discussion that you can't ask them, or some points that you can't.

I had no problem whatsoever asking those types of questions. And it kind of brings up in my mind you're also trying to figure out as a manager, you're really good at some things, and you're probably not really good at other things. And throughout the course of this discussion and negotiation, you're trying to figure out whether this individual is going to compliment your weaknesses.

I know we'd all like to think that we can do everything exceptionally well, but in point of fact, that's not the case. So you're trying to surround yourself with hopefully people that are smarter than you, people that can complement your weaknesses and I think a lot of the conversation early on can help to flesh that out.

Anita Brick: It makes sense. What if you walk into a situation? There was another executive MBA student who said, Maybe I've been watching too much Shark Tank, but I'm in the midst of evaluating three potential businesses, and I think that they are all valued too high. How would you suggest that? I approach a discussion by asking them how they arrived at the valuation without making them defensive. It seems like the people who ask these questions are concerned about upsetting the other parties. Maybe you can address that a little bit here too.

Russ Maki: It's harsh to say that I don't care about upsetting the other party. You have to be sensitive, but asking questions about what metrics they are using and the valuation of the business is absolute fair game. I would like to think that a booth student would be able to arrive at their own valuation for that business, independent of the number that was thrown at them, which is logical in its assumptions and has enough risk parameters entered into it that you've sheltered yourself from some of the potential harm that we discussed in terms of top heavy client bay's top heavy vendor base.

You know, whatever. And on top of it, Shark Tank. I've only seen the show once, but it was pretty harsh. There are ways of phrasing these questions that don't need to be quite that direct. And if it's presented in a positive approach, you know, here we're talking about going into business together. And I'd really like to get your input on what you see the issues being or how it is that you feel the company should be fairly valued. Those are perfectly reasonable questions too.

Anita Brick: Ask, I agree. What's the alternative? I mean, now you have sunk a whole bunch of money, yours and or others, and you learn about things after the fact, and then all the things that are surprises that could be addressed or fixed along the way just become huge problems.

Russ Maki: And also remember that what you're doing in terms of setting the stage early on, in terms of your negotiation, that's going to be remembered forever. If the selling party realizes you're going to cave and roll over at an early stage, you're going to be working with this person for a long time to come. Theoretically, do you really want to start your relationship with that approach?

Probably not. I would suggest that you want to employ a great deal of critical thinking skills in the process of your evaluation of the business and your justification, putting them on notice that you pay attention to this stuff. The decision you make is the decision that we're going to go with. Not to say that it can't be discussed, but you're setting the table for a long term relationship with that person or people.

Anita Brick: Got it. Do you have time for one more question?

Russ Maki: Sure.

Anita Brick: Okay, good. Let's kind of wind back a little bit and think about the first time that you were contemplating buying a business. What advice would you give to a first time business owner? What are three things that you would advise that person to do beginning today as they contemplate buying a business?

Russ Maki: The first thing for me was finding something that was interesting and that I could easily see me being a part of that was really important. I want to go to work every day, knowing that the company I'm a part of is an important company. Along those lines, it's important to me that we do important work. And that philosophical shift on my end came about as a result of spending decades in share oriented businesses playing a zero sum game, where my gain is your loss.

I got really good at that, but was it really what I wanted to be doing? No. Sadly, I didn't realize that until later in my career. So the concept of doing important work and working with an organization where you have an immense level of respect for the people that you work with and are responsible for, those are very important points to me.

Beyond that, going back to what are you good at and what are you bad at? And again, it's probably a different way of looking at it. But what I was interested in was can I personally make a difference in this company? The answer is yes. That'll probably help to feed your desire to be doing something that's important. It's interesting for me because the other thing I was looking for was something completely different.

Again, going back to the comment I made earlier, I didn't know this kind of company existed. I had no idea. But now that I do, I now know that we are of the finest in the United States, period at what we do. In terms of my contribution to that, I feel very good about what I have been able to do with the company, primarily from the perspective of the marketing, branding and identity of the organization.

Because really, at the end of the day, I've got one of the easiest jobs in the company, and that is to tell the rest of the world about how good our team is here. That's very rewarding and engaging. I have a very poor threshold in terms of boredom. That's where sales of commodity items into bulk channels in the paper industry.

You know how much 1722 white paper could I sell? That doesn't get too exciting. After the 12,000 cases you sold here. Every day is different. Every project that comes in is unique. The clients are unique. I am dealing with, in my case specifically, as I said, high profile clients, whether they're institutional or private, I get to meet a lot of very, very interesting people in my new world. That's extremely rewarding. And interestingly, the networking that comes out of that is absolutely amazing. It's put me in front of an audience that I never would have had cause to meet before. That's very enjoyable.

Anita Brick: That's great. It sounds like you love what you do and that you had enough credibility on the leadership and management side to jump into an industry that you knew very little about, because between your leadership and your marketing and your ability to manage teams, you could bring enough to not just grow the business but grow the market. And that's wonderful. Thank you for carving out some time to be with us today and sharing your insights and your lessons learned, because it wasn't a straight line and that fact alone is very encouraging.

Russ Maki: Very good. I've enjoyed it. Thank you.

Anita Brick: Thanks a lot and thank you all for listening. This is Anita Brick with CareerCast at Chicago Booth. Keep advancing.