Fundology: Please give us a brief overview of the client and how you sourced this deal.
Goldblatt: I would be glad to. It was probably the — I probably worked on over 100 deals and I have to say, this was the most interesting, difficult, challenging and fun I’ve ever had. So it was really a challenge, and I enjoy talking about it. What happened with the transaction that you’re referring to was a — it’s an industrial staffing company called Employment Plus. It was based out of Bloomington, Indiana. This is a company — they provide staffing, laborers for companies like Honda or Wabash or other big companies, and it’s a growing market.
More and more companies are going to use staffing to basically have them handle things like when to comp, or handle healthcare benefits and other reasons. It’s a good industry.
This company that we were working with had basically started as a family business, a family owner. Through their formula — which is a good formula — they think a little bit more about placing the right employees at the right place. They have grown rapidly. They’ve grown actually too rapidly, and so there are a lot of lessons to be learned there but they didn’t ever — they were always behind in the capital so they never had the capital to actually grow. You need to get the capital first to grow. They did that for one, and then also, they grew so fast from a $25,000,000 company to a $350,000,000. They didn’t have the proper management either, so they just went from being sole proprietor run, with hands-on everything to a much larger company, but the problem was that the accounting people were not up to snuff and made several errors. Now these errors resulted in a situation where this company — its line of credit had grown from 10 million to 30 million, and they had missed some payroll taxes which ended up — they owed the government a significant amount of money.
As you probably know, that’s one of the worst things that you can be in, is where you owe payroll taxes because payroll taxes are considered to be the government’s money and when you miss paying them, they consider it a theft, so you actually can go to jail for that type of thing. The other thing is, as I mentioned, we deal with a lot of special situations. It creates a real murky situation. What happens in a bankruptcy? It’s unclear sometimes, depending on the state, whether the bank actually would have full priority on everything or whether the states would get priority. Basically, it’s kind of a murky situation. When we became involved in this, and it’s kind of an interesting story — as an aside, I do a lot of networking. I think it’s no secret. It goes to the old — I like to say the slogan, it’s not what you know. It’s who you know. It took a law degree and a CPA and MBA and stuff, but the way I got this transaction was a bankruptcy lawyer that’s a friend of mine, one morning three years ago, a couple months ahead of St. Patrick’s Day, he said, “I’m getting a group together, and usually, we dress up in the same thing, and we go around on St. Patrick’s Day in Chicago. I’m going to have other clients and referral sources like bankers. Are you interested in going?” I’m like, “That seems different.” It also was in my neighborhood. I live in Lincoln Park.
He ordered six gecko costumes basically, green geckos and I went out that morning. The funny part is that my kids are like, “Where are you going?” I’m like, “I’m going to work.” It’s 10 a.m. I went out to the Lincoln Park bars as a gecko, and the thing I really learned about that is that it’s a lot of fun to be dressed as a gecko. Everybody wants to take their picture with you, like I said, so I had good time. One of the benefits of this is — telling this a little longer because it just shows how random networking is, but one of the other geckos was a guy that’s now a good friend, Jason Lavoie who is at Wells Fargo. He happens to be in charge of all their factories in the whole Midwest. At that time he just seemed like a nice guy.
We got together later, and probably about a year later — I remember I was at a Cubs game, and I got a call from Jason saying that he really likes the staffing company, and they want to make a loan, but they need an additional mezzanine loan on it. And so that’s something we do, is help companies find financing. We help them figure out what to do in difficult situations so Eric Welchko and I — we work together, we started working on the company and started meeting the people at the company, and we started trying to see if we could basically find them some mezzanine money.
Well, it turns out actually that we’re starting to work on the company, and we’re seeing it’s going to be very difficult to get the mezzanine finance because they have the back-tax problem, coming off losses, there’s just not a lot of assets there. Well, we’re trying to figure it out, and we know about different mezzanine lenders. Well then all of a sudden we get a disengagement letter from the company. We’re like, “What’s going on here?” We call up the company and they said, “Well, we’ve had this other guy come in and he says that he can get us an asset-based loan.” We were like, “Well, we can get asset-based loans, but you’re not going to get an asset-based loan.”
And they said, “Well they said we’re going to have it, and we can have it by August.” I said, “Look, I’ll tell you right now, you’re not going to have a — You guys just lost two months because we’re having trouble getting a mezzanine loan, but here is how it’s going play out and by August, it won’t happen.” The thing is, is that we stuck with it and we continued to give them good advice and so we kept driving down to Bloomington, Indiana. We became friendly with the owner of the company and the CFO at the time.
We told them what to expect. We became an advisor in telling them how to go. What happened is, the company was thinking that it could get itself out of trouble, and then it ended up that we were there and we’re talking about things that could happen and they said, “No big deal. We got a forbearance agreement from the bank.” “Whoa. Hold on here. This is big news.” What we did then is started to advise them to come up with a strategy. Basically. I said, “Look, you don’t have to basically accept what the bank says. They have lender liability. You have your own thing so let us keep advising. Let us help you with the bank.“ If we can finance it we can, but in the meantime we’ll be going ahead with the process. That’s what we do. We were looking for the best possible solution in the thing. What we saw in this situation was a company, although it had just very poor books and records, and it had actually lost money and owed a lot of money. What we saw is that there really here is something very valuable. There’s really a good company underneath. That’s why it grew so fast. So we felt that if we could basically have the time, that the best way out for everybody — because there was no good way out for the bank, for the owner, for the taxing authorities, is to let us have time to basically come in and bring in outside people, and this is where we brought in the Grant Thornton people to help, and redo the books and records so that it’s basically — they were doing, for instance, their accrual accounting almost like on a cash basis. So there’d be wild swings. The books and records — they weren’t accruing. I could go on and on, but let’s just say we thought that we can basically solve. We can add credibility to that, and we could basically work on the turnaround plan in the meantime. The company had already begun that with the help of the bank, as well. So they were raising pricing, and the good thing is they weren’t losing customers because they were underpricing to begin with. They devalued just how valuable that their service was.
We basically said, “Give us time to show this.” And we started to project what the run rate and what the earnings would be once the turnaround is complete and once we’ve rid the company — and we saw this is a pretty big number. Although they had lost money, we can show this is making a pretty good amount, and we feel pretty confident that’s what’s going to happen. In fact, it’s going to be even better for somebody that comes in and acquires them because they can basically just take their great way of going to business and they can merge together the overhead. The accounting problems won’t be a problem for the future people because they — and we brought in temporary people to work — running the accounting department during the meantime as well. So we felt that there’s something here.
Now everybody was saying, “Tom, you’re putting lipstick on a pig.” I took great offense to that. ”No, what we’re doing here is we’re wiping away mud from a beautiful swan.” And that’s really what we were doing. We basically then went through — our strategy was — getting back to what I was talking to earlier, I knew from being on the private equity side just how vulnerable this company would be because at any time any of these authorities could basically put a lien on the company. It was like Russian roulette. You’re done, because we’re talking about a staffing company, here. There’s no machinery or anything. If customers get the word out, and believe me, it’s a very competitive industry. They’ll use what they can against you. They’ll say, “This company is going to fail.” Customers could leave in a day.
It was very vulnerable. We had to work really as hard and fast — and also an interesting thing is, when you’re dealing with a very large amount of money on a deal, people’s morals go out the window. They feel justified doing anything. So you really had to be tough and protect your turf because people were looking to try to get the bank to do a bankruptcy and try to put it through a process and say to the banker, “Look, we’ll give you all the future loans.” One thing that we got very lucky with is that the bank, First Capital, Jay Atkins, the banker at First Growth, he ended up to be an extremely upright guy that recognized and bought into our idea of the process and invested in the process.
If we would have had a less strong-willed banker, or we would have had one with less, let’s just say less morals and honesty, there was many times that people would have basically — the banker could have basically taken the company, and to the detriment of everybody else. Maybe it would’ve been good for him, but it wouldn’t have gone through. The same thing with the owner of the company. We were lucky that that person was very admirable because many buyers would just try to bypass me and go to the buyer, the seller, I mean, and try to get him to go through a process. It would be somewhat illegal, so it’s a good thing, and important I fully understood all the bankruptcy laws and all the different alternatives.
Because what they were trying to do is say, “Look, you’re never going to get out of this mess. So declare bankruptcy. We’ll basically pay you on the backside. We’ll give you a $2 million salary and we’ll pay you on the goodwill.” That would be a fraudulent conveyance or preferential preference, so that wouldn’t work. But I had to fend them off and we had to spend time. We really had to be tough about it because it was a very vulnerable situation.
As far as the collaboration, we brought in Grant Thornton to help. Like I said, they did a wonderful job. I’ve worked also with a lot of their competitors, whether it’s McGladrey, BDO, Deloitte. I can say the same thing about them. The people in that industry are very strong, and you’d be making a mistake these days, even in a healthy deal because of what I was talking about before. I couldn’t do a deal now without sell-side diligence because you’re just going to end up misrepresenting your client. You’re either going to have a lower price or a broken deal.
So we collaborated with them, and what we did basically then is, the strategy was, is we basically wanted to present the company at its best, and we wanted to basically explain all the problems. We wanted to be very open about them all, and we wanted to have a quick closing as much as possible. We also wanted to try to run it as an auction, which is very unusual. The auction — it’s common in Europe. It’s common with distressed homes. In fact, it’s required by law, if you go through a bankruptcy, you need to run an auction because they need to be able to show that they got the highest and best price for the creditors. There’s a reason. The auction works. It’s done in real estate, but because of custom, it’s very unusual and buyers hate it because they don’t want to have the idea of having to compete.
What we wanted to do, though, we used the auction, not so much that we really wanted to actually have a physical auction, but by maintaining the leverage of never letting a buyer get the exclusive. So they always knew there was competition. It allowed us to drive up the price. It allowed us to keep the company from ever being so vulnerable that somebody could have a lot more time. We ended up doing that.
We did a lot of things to maintain control and keep — one of the things that we did, for instance, and this is another collaboration, is, when I was buying companies with Monomoy Capital Partners and Winston Partners, all the time we’d have these deal calls. After you sign the NDA and you have a call with management. It’s almost always an hour call. You basically get the CFO and sometimes the management. Usually the investment banker’s on it. You have these calls and you ask them a lot of questions. You go through the hour, and usually it starts about ten minutes late because people take a long time getting on the conference call.
On almost every one of those calls I realized, first of all, it was really wearing on the management and it was really weird. Then I’d call up the guys at the PE firm, “Well, what do you think?” And they’d be like, “No. Not for us.” And you’d think, why did we waste an hour? Also because we had so many different difficult parts and stuff with this deal, that one of the things we did is said, instead of just letting everybody go willy-nilly and not present it first, and we want to present the best case, we eliminated those type of calls, and we had a live webcast instead. And we had basically 55 buyers sign in.
What we did is, we didn’t take any chances. We scripted it. We practiced it many times. We had mock questions, and the thing is, on this webcast, the buyers couldn’t see who else was on there, but they basically could hear us live. I think also because it was novel we got a lot more interest, but it allowed us to present it in the best possible way. We had all the best players. We had all the bankers there. We had the Grant Thornton people. We had the consultants. We had them really express and show it with graphs and everything. So that was one of the things that we did to maintain the control. There’s some things I did that I can’t disclose to insure I keep those tricks for the next couple deals.
Fundology: That’s a great example of using technology to speed along the deal process.
Goldblatt: Yep. We ended up, and it’s interesting — selling a company is a lot like dating, at least for me. I shouldn’t say that. I’ve been married a long time. What I remember — but let me say that what I mean by that is that when you show — when a potential buyer thinks you have another buyer, they’re real interested and they’re real nice and they really — they’re giving you more little things towards the deal. As soon as they think you really need them, they’re going the other way, things that you thought they agreed to. So you really have to maintain this balance of showing a certain amount of disinterest and that there’s always somebody else because as soon as any type of buyer thinks that they basically have the leverage, then you’re going to start to lose on all the points. The only way you’re going to win something is to be able to talk about leaving the room, which takes a lot of guts.
Fundology: That’s very interesting.
Goldblatt: In the end with this deal, we ended up being able to run a quick process. The beginning part took a long time because we wanted everything right by the time we went to market. We had a lot of detractors. We had some people saying we’d be lucky to get 20 million, 30 million. It’s interesting, we always had faith that we were going to be successful. Never doubted for a minute. Until the last week really, because if you don’t have faith in what you’re going to do and basically that’s the only way you could see. So if somebody said, “No, this isn’t going to work.” You’re kind of like, “What? How could that be? Of course it’s going to work.”
We basically were able to run the process and ended up selling the company for around 80 million, plus potentially 20 million more in earn out. The bank got paid off entirely. They ended up getting a nice fee. The tax authorities all were paid off and jobs were preserved. The owner now has — all his obligations are paid. He’s going to make a lot of money. He’s working for this much bigger company. It all worked out, so we’re feeling pretty good.
Fundology: Are there any interesting take-aways or lessons learned from this deal?
Goldblatt: There’s quite a few lessons learned and take-aways. I was saying about maintaining leverage — I think there’s having vision that you know what it’s going to be. It’s having patience. If you have the right solution, basically try to find — let other solutions happen and try to help in any best way you can. The best solution is going to win out. Also, as far as networking goes, be yourself, have fun, be friendly, be looking out for others, and good things will come around to you. I think the basic lesson though, is just believe in what you’re doing, believe in yourself. Don’t let people talk and just drive to what you can do and amaze yourself at what you can achieve.