Chapter 1
Donât Take Your Eye Off the Ball
Obstacles are those frightful things you see when you take your eyes off of your goals.
âHenry Ford
I remember our sales meeting in December 1999 like it was yesterday. We were all gathered in the conference room of our new office in Collierville, which at one time was a beauty shop. Swanky? Not exactly. Our office was not only very spartan, it also had an annoying habit of leaking every time it rained. And I do mean every time. I remember it being so bad that every time it rained our systems engineer would put his computer on the very top of his cubicle to keep it from getting wet. Pretty crazy, but that office was all ISI could afford at the time, and we all knew we had to keep bootstrapping until the company turned the cornerâwhenever that might be.
We were all wondering what the next year was going to look like. There was no doubt about it: we were still struggling, and our future looked uncertain. What are we going to do about it? I thought. Doesnât every business need to set goals to move forward, to have something to shoot for?
Thatâs when I stood up and made a statement to my team: âIf we could sell two million next year, the company might just make some money.â
I paused. âWhat do you guys think? Can we do it?â
They looked at me as if I were out of my mind.
For me, it didnât seem like a lofty goal, but the reality was that company sales had been hovering around one million or so for several years in a row and we simply werenât moving the needle. We had been doing business for over three years now, so ISI could no longer consider itself a startup. As much as we hated to admit it, we were still failing to turn a profit. Truth be told, I was getting more than a little frustrated about it.
Then the mind games started: Was starting this company a bad idea? Are we ahead of our time selling videoconferencing in such a conservative market? Is it really worth the risk? What if ISI fails? What impact will that have on me and my family?
A lot of hard questions with no easy answers. Times like these reminded me that doubt can be a nasty enemy. Also, beyond the doubt, I could no longer deny that both the company and I were at a crossroads. Something had to happen. So, the questions in my mind continued: Was ISI really going to make it? When would we finally get some traction and turn the corner?
Then I started thinking back: Wasnât it just a few years ago that we struggled to get the financing to start the business, bought out our investment partners, and survived not only my melanoma diagnosis but also a fifteen-thousand-dollar supplier embezzlement? Then there was that matter of buying out my partner and going hopelessly into debt when ISI still wasnât making money. I remember âeating stress for breakfastâ in those days. When was all this bad stuff going to end? Was it ever going to get any better?
Now we were approaching the year 2000, which was the year of the infamous Y2K scare when so many people feared that their computers would not interpret the â00â date correctly and would stop working on December 31, 1999. In fact, many companies in the Memphis area did a great deal of planning and spent a lot of money in their IT departments to prepare for the so-called âMillennium Bug.â And the crazy part of the Y2K crisis was the frightening amount of expense it took for so many companies to fix it. Assessments of the cost to Memphis companies ranged from hundreds of thousands of dollars for smaller- to medium-sized businesses to many millions of dollars for the Fortune 500 companies. Suffice it to say the Y2K crisis made selling videoconferencing equipment in the IT space even that much more difficult for ISI. We learned the hard way that it was tough growing a company with so much chaos and uncertainty swirling around.
Riding the Wave
But once the year began and the Y2K crisis was averted, a strange phenomenon occurred. After the first of the year, as we were trying to pull ISIâs 2000 sales plan together, the customer and prospect calls rolled in. It was totally unexpected. It began with a few calls, and then the calls came in more frequently, one after another. For whatever reason, all of a sudden, every customer or prospect we had ever called on in the past three years seemed to be contacting us at the same time. The conversations were very similar: âMr. Myers, remember that proposal you sent me a few years ago? Can you or someone on your team update it for me? Weâre ready to move on it.â Others simply asked, âHow long will it take to get delivery on our videoconferencing equipment?â
Is this really happening? I asked myself. I had no clue what was going on, but I sure wasnât going to look a gift horse in the mouth. Even with all the sales activity and customer requests, I constantly preached to my team, âLetâs just put our heads down and focus on the work.â No questions asked.
Letâs ride the wave as long as we can, I thought. Since we simply werenât used to it, the hardest part of 2000 was keeping up with the crazy increase in demand. It made for some really long hours, working way past five oâclock and on the weekends as well. Is this when all our hard work and perseverance is finally going to pay off? Is this what success looks like? If it was, it sure had a nice feel to it, and all of us wanted to keep it going.
As the calls continued to come in, ISI got another serious boost of momentum later that year from two of our major accountsâin the same month. After many years of hard work and persistence, both FedEx and Oak Ridge National Labs (ORNL) informed us that ISI had been awarded various videoconferencing/audio-visual contracts that totaled well over two million dollars. Little old ISI was going to outfit the brand-new FedEx worldwide headquarters in Memphis with the latest in videoconferencing technology. On top of that, we would be doing much of the same for numerous ORNL laboratory locations all across the country, which included places like Los Alamos, San Francisco, New York, and Chicago. I almost couldnât believe it. I felt like I was having an out-of-body experience.
Then it hit me. âWe are on to something, guys,â I proclaimed at one sales meeting. âScrew this survival stuff; letâs thrive! Letâs raise the bar and grow this thing, gang!â
And that is exactly what we did. In fact, we didnât just settle for selling two million that year. We blew past that number and booked over $4.3 million in revenue in 2000. At the end of the year, I remember remarking to my wife, âHoney, I think we may have finally turned the corner. I think we actually have a real business now.â
âThank God,â she replied. Then she said, âI always knew you could do it.â That statement meant the world to me thenâand now.
Starting to Get Noticed
Even though I didnât want to jinx things, after four long years the gamble really was looking like it was starting to pay off. So many major corporations, hospitals, and universities bought our videoconferencing, distance learning, and telemedicine systems that year it was mind boggling. And candidly, that was half the fun of it. We were all doing so many things we had never done before and enjoying every minute. As we reflected on all that was happening, my whole team and I agreed that after so many long years, ISI had finally established a solid brand in the Southeast US market and was poised for growth. With that growth, many people and organizations took notice.
For instance, one organization, the Memphis Business Journal, recognized ISI as the âSmall Business of the Yearâ in March 2001. We were so excited to receive that award. And that recognition from the local business community reinforced our belief that even though it was fun to sell stuff all across the country, it was still important to take care of our backyard. Later that year, ISI earned its most prestigious recognition after we grew the business 1,541 percent over the previous five years and placed #182 on the Inc. 500 list of the fastest growing private companies in the United States.
Pretty cool to be on a list that at one time included companies like Microsoft, Oracle, Under Armour, and Timberland. Naturally, making the Inc. 500 list greatly increased ISIâs visibility both regionally and nationwide. We couldnât have paid for better publicity. Now people around the country were taking notice of ISIâs success.
It was on the heels of this recognition that I started getting the calls. It seemed like every investment banker and private equity firm in the United States was trying to talk to me about ISI and our plans for the future. It was also pretty clear to me that most of them had gotten ISIâs name off of the Inc. list, which made us a likely target. All of them basically had the same pitch: âMr. Myers, we would like to talk to you about ISIâs growth strategy because weâd like to make an investment in your company.â Others said, âWe are really impressed with what ISI is doing with videoconferencing technology and think there is some big-time growth potential.â Still others would ask, âWould you ever consider a potential acquisition of ISI and taking some chips off the table for you and your wife?â I wasnât 100 percent sure what that really meant, but it did give me something to consider. Was this the right time to cash out? Or should we press on and take the company as far as we couldâin other words, should we âbe all we could beâ?
It seemed the calls would never end. Although it was very flattering to have people across the country interested in the company, it was also very distracting. I had the same conversation with so many of these folks over and over again: âYes, we had a great year in 2000 and are working hard to continue growing the company,â I would remark, and âNo, I donât have any interest in selling the company at this time, but I appreciate your interest in ISI.â
It would have been so easy to take my eye off the ball and let my mind wander. With so many people talking about ISI, it was hard not to. Given the circumstances, who wouldnât have illusions of grandeur, of getting the big check and staging a glorious exit?
After some soul searching, I knew in my heart I had to discipline myself not to get caught up in the hype and to keep working on growing the company. What did my father always say? âDonât believe all of your press clippings.â Easier said than done. For so many entrepreneurs (like me), thriving on recognition is in our DNA. We love getting our egos stroked. In many cases, itâs what we live for.
Plus, when you have someone interested in buying a company you built out of dirt, youâre not only flattered but also curious. If I ever did want to sell, how much could I get? At the end of the day, every entrepreneur wants validation that the company they have worked so hard to build has some kind of value. That is one of several reasons why the many opportunities from high-powered investment firms across the country were so tempting.
Yet I had to remind myself that ISI was getting all this attention mostly because of one good year. âCan we do it again?â I asked myself and my team. âIs our success sustainable? Are we a one-hit wonder?â Those kinds of questions, coupled with an overwhelming feeling of uncertainty, helped me realize that not only was ISI not ready to be acquired, I wasnât personally ready either.
Timing Is Everything
Even more important than the question of value was the question of timing. Iâm not going to lie. It was fun getting all those calls and engaging with potential investors. However, even if you can fool some people some of the time, you canât fool yourself. I could see ISI still had a lot of opportunity to grow, and I felt our best days were ahead of us. We were on to something and needed to see it through. I had to recognize that I was way too busy trying to grow my business to focus on trying to sell it. I needed to keep my eye on the ball.
Even though the timing wasnât right, it got me thinking about the process of acquisition and how little I knew about it. It seemed to me that selling your business was the biggest deal of your life, and it shouldnât be taken lightly. If I ever seriously considered selling ISI, how would it impact ISI employees, customers, and suppliers? These were serious questions I simply didnât have answers to. Hell, I didnât even know the right questions.
So, after a lot of careful thought, I took a deep breath and decided to get educated. How else would I know if an acquisition would ever be right for ISI? At the end of 2001, when the investor calls finally started slowing down, I began attending the various M&A seminars in the area, primarily to learn more about the M&A world and how it might impact ISIâs future. Here are just a few things I learned at this early stage.
I became familiar with key terms such as EBITDA (earnings before interest, taxes, depreciation, and amortization), the primary benchmark in the M&A world. Essentially, EBITDA is a way to evaluate a companyâs operating performance without having to factor in financing decisions, accounting decisions, or tax environments.
I also became familiar with another term in the M&A process known as the LOI, or letter of intent. In some cases it is also called a letter of understanding or memorandum of understanding. Itâs not really an offer but more the starting point of a discussion that eventually lists the basic terms of a possible agreement. I also found out that it is an important first step for both parties to gauge each otherâs interest in putting a deal together.
Additionally, I learned why entrepreneurs need to look at recasting their financials in order to portray the companyâs true net income. So many entrepreneurs and small business owners tend to run personal expenses through the company (cars, vacations, country club memberships, etc.), which distorts the companyâs net income. It is also commonplace for the potential acquirer to make recast adjustments, also sometimes referred to as add-backs, pro forma adjustments, or normalization adjustments. In addition to personal expenses (noted above), the ownerâs compensation is also part of the recast process, which in the end creates an income statement that represents the true value of the company to the potential acquirer.
And there was still so much more to this game. I learned about the importance of the due diligence process and how involved it can be. Due diligence is almost like a fact-finding mission for a potential acquirer to confirm all facts about the company; this includes a review of their financials which need to be audited (not compiled) in order to more accurately represent the financial strength of the company to the acquirer. Also, I discovered that when a deal gets to the due diligence stage it can be time consuming for small business owners to secure so much information. But it is also a key step in the M&A process and needs to be fully completed before either party enters into a more formal agreement.
Some of the items on a due diligence checklist include compliance issues, information technology equipment inventory lists, company publicity, outsourced professionals (lawyers, accountants, etc.) business and health insurance coverage, any outstanding litigation, a complete listing of the companyâs product and services, company customer lists and company purchasing history, tax information (outstanding issues), company licenses and permits, as well as details on intellectual property (software, patents, etc.), employees/benefits (401Ks, etc.), company financial information (audited), and the run rate of revenue streams. As you can see, the process can be arduous, requiring you to retrieve so much information while youâre still trying to run your business.
Other M&A terms I learned about include net working capital calculations, and pegs or true ups (the net working capital target)âall typically left until later stages of an M&A deal but important parts of the acquisition process. For example, I was told that millions of dollars are at stake in the true-up process, yet, for the most part, most small business owners donât really understand it. In addition to these terms, I also got a better understanding of what companies look for in a potential acquisition target, as well as the difference between a strategic and financial buyer. I also learned that some acquisitions are based on geographic location.
It was like drinking from a fire hose and learning a whole new language. At the same time, a lot of it made sense to me. And the more seminars I attended, the more I realized how much went into the M&A processâand that ISI still had a long way to go.
At least for myself, I wanted to continue to build the value of ISI so that if and when the time was right, the number wouldnât just make sense for the investor; it would make sense for me, my family, and my employees. So, I set out to build the value of our company, and in many ways, I ended up building value by simply doing what came naturally. In fact, now that I look back on it, the value of ISI was being built way back when I was a child, in the way I was raised.
Swing for the Fences
- Although it is flattering to get calls from investors and potential acquirers, stay focused on the business at hand. Donât get caught up in all the M&A talk, which can be distracting. Keep your eye on the ball.
- Get educated about the M...