From the Built to Sell Podcast Description of the Show –
Tom Hannon started FPD to create and distribute niche publications. He grew the company to $3M in revenue over 18 months, when a family illness prompted him to reach out to acquirers.
His company was valued at $2.1M and received four offers, but he ended up walking away with $1.5M. Hannon candidly shares why he left money on the table, and what he would do differently if he had a re-do.
In this episode, you’ll learn:
• One trick the acquirer played on Hannon that dramatically devalued his business
• How Hannon used a third-party valuation to keep the price as firm as possible
• When not to overplay your hand in a negotiation with an acquirer
One reason Hannon’s business was discounted by acquirers was that a single customer represented a large portion of his revenue.
First, I want to thank John Warrillow for inviting me on the show and letting me tell my story. It was a fantastic experience. I would highly recommend John’s podcast and his tools to help evaluate your business.
Covering multiple business sales during a 40-minute podcast was tricky, and my goal here is to dive a little deeper into the podcast.
I was not super creative naming companies. My first company was FPD Distributors, Inc., Free Publication Delivery if you are wondering what the initials stood for. Our main business at the time was distributing free magazines, brochures, and posters to targeted distribution locations and publishing free titles. I ran this business with 4 partners initially, and eventually just 1 partner. This was my first real step in owning a business with employees and contractors, and I learned to acquire businesses. In fact, we acquired a company called The Delivery Vehicle very quickly, and it helped launch our business from a start-up to 20+ employees and contractors. During this four-year period, we acquired other distribution businesses and magazines. Eventually, we were able to sell this entity to United Advertising Publications, the company was based in the UK that had many properties. UAP published periodicals such as Harmon Homes, For Rent magazine, and other free and paid products.
UAP at the time was our biggest customer, and they were fairly active acquiring businesses. At the time of the sale, my relationship with my partner had deteriorated and sold the business became the best option for both of us. Partner issues are a big reason why businesses fail, close, and sell. We failed to include proper buyout language and neither one of us could come to a reasonable agreement to buy the other party out. Looking back on this, I see it as a real shame because the industry really took off and we missed some great opportunities. Just as I had targeted businesses to buy, I also targeted UAP and a few others as possible landing spots for the company. I knew finding the right buyer was going to be important because I didn’t want to leave the industry. We were able to make a deal with UAP that worked for all parties very quickly, and although we did get two other parties involved, UAP seemed like the right choice. The sale actually was very easy, and we were able to complete it in short order at an agreeable price.
The main stipulation was they wanted me to come work for them. As I detailed in the episode, it was a wonderful learning experience. UAP put me through a dozen training, I flew all over the country, and I learned more than I could have imagined about the publishing and distribution business. During my time with UAP, we grew the Boston office to be one of the largest and most profitable in the company. We acquired many exclusive retail contracts and multiple magazines.
One key thing I learned during this time, which later became a staple during the next iterations of my career, was the power of publishing Single Advertising Marketing magazines. I called them SAMs. The SAM gave the publisher full control of the magazine to market their services and also create advertising revenue if they so desired.
Sadly, UAP sold to Trader Publishing, which down the road actually became a large customer for us for years. However for me at the time, I was starting to think about going back into business for myself as my non-compete had expired. So essentially I went back into business with much more experience, training, and knowledge. I made the initial mistake of having a partner, but this time we covered ourselves with buyout and separation language and we had to execute this very quickly.
This time, however, I named the company FPD Distributors, but it was a d/b/a under the parent, TP Hannon Media. Again, it was not
the most creative of names.
The company took off rapidly. I developed an excellent marketing plan and landed what would be the biggest account of my life, a company called East West Mortgage that started a website called ISoldMyHouse.com. They were providing free web listings to homeowners and hoped to acquire their mortgage business. After I had a meeting with them, we started publishing magazines with them and it took off dramatically. The internet was in its infancy at this point, and the magazines actually started to bring in more leads than they ever could have imagined. Not only that, but ISoldMyHouse.com became a profitable advertising business as well. Within a few months, we were publishing and distributing eight regional titles and over a million copies a month. In addition to this, we had 150 other clients, and we were going to 20,000 locations a week.
However, if you read receipts in a box, you will see that despite the growth, all was not well. The business was out of control and I needed help. I strongly recommend using QuickBooks. Back in 2001, it was obviously not what it is today but learning QuickBooks and having a CPA firm fix my books changed my life. I could see the entire business for the first time, and leaving the back-of-the-napkin bookkeeping was a game changer.
At this point I had done four key things:
• I operated the business out of one location instead of four.
• I implemented QuickBooks.
• I implemented a Route List System software.
• I created a marketing system for my business.
As I detailed during the episode, I had some good and loyal workers, but I could never find a real #2, a COO- or CEO-type person who would come in and really take ownership of the business. I tried to hire this person multiple times, but it never worked out. Interestingly enough, I was listening to a podcast just the other day, and Bo Burlingham had interview hundreds of business owners for his book and most of them said the same thing.
At this point I had been running nonstop from 1992-2004, and I was burned out. My dad got sick with lung cancer and eventually passed away (as an only child, with a mom who didn’t drive at the time, I pretty much had to handle everything), and if you add in two kids, a marriage that ended in divorce a few years later, a multi-million-dollar business and other things, not finding that #2 had essentially drained my battery to zero. It made sense to really drill down and find out what the company was worth.
Although I drilled down on the sale and the process pretty well, the topic we somewhat glossed over was the preparation. To prepare for the sale, I got two opinions of value from brokers and a certified third-party valuation. I used these documents as a starting point for the acquisition price. To me, the brokers were just too shaky, and their numbers didn’t really jibe well. Ironically, as I will discuss in my courses and other blog posts, they did bring me a few offers, but none of them were near the valuation point they gave me.
I was an industry expert at the time, so I knew all the companies that could acquire us, and their presidents and managers. Once I had that list compiled, I created what you would call a confidential memorandum (a deal book).
This book contained everything you could imagine about the business:
Financials: P&Ls, balance sheets, tax returns, valuation, asset lists, product lists, receivables, payables
Operational data: Employees’ job descriptions, roles, salary, profit, and loss for every route
Description to the last detail of every account: What they paid, what we did, routes they were serviced on, and all the additional revenue streams and contracts
Overall view of the business: Marketing, management, how-to guides, vehicle information
What I provided was the due diligence in advance. In fact, other than a few obscure items and updating P&Ls, I never had to provide much after the deal book.
The main point I would want a small business owner to know is this: I created systems that worked well, we got a valuation, I identified my ideal buyers for the deal I wanted before the sale, and I created a deal book. These are all items you need to do, and I teach you how to in my courses. They are going to help you prepare for the sale. One thing I learned was cash doesn’t always equal the best deal.
As detailed about 30 minutes into the episode, we sold the company but it got hard down to the wire, and the company that eventually acquired us did some things you need to watch for.
Post sale: Although I made a lot of money on the sale, it was far from a happy time. One thing I will go over with you in my courses is being prepared for the transition. I eventually found things to involve myself in: I built a baseball field, remodeled some houses, eventually got divorced, and found a new, happier life. It took time, though, because I was not really prepared for it when it happened.
Although I was prepared to sell, I sold, and I profited, the reason I sold was not textbook at all, and as John states in the interview, I missed out on a bigger deal with the deal structure. So you really need to fully understand your options.
From 2005-2014, we acquired and sold companies, and I also spent some time as a business broker. I felt I was going to be able to help other businesses, but brokers are in the transaction business, not the helping-small-business mode. That was not for me.
I saw an opportunity to jump back into the distribution business in early 2014. A few publishers contacted me and asked me if I was interested in distributing the products they had. I evaluated the market, and on Cape Cod, where I lived, the market was strong for free materials, so I went back into the market. The company again was named something very creative: Hannon Distribution. We grew rapidly and things were going as well as could be expected. This company was set up perfectly with excellent records from day one, contracts, financials, and vendor relationships, and we had taken the lion’s share of the market over a two-year period.
As always. we prepared our annual list of businesses that could buy us or businesses we could buy. I had assumed we would be buying at this point. not selling. A funny thing happened, though: I was in the best shape of my life and I suffered a serious injury training for an Ironman competition (see the video about the triathlon). Although I certainly could have taken a new role in the business, I was always a hands-on owner, and I did not want to run the business any other way. So again, I identified a buyer and sold the company very quickly.
As detailed above, I did it all the same way. Although the situation was not what I envisioned, the outcome was good for all parties. I am light on details here because of confidentiality.
The reason I have been able to sell and buy all these businesses is simple: I prepared by finding buyers, became an industry expert, and put systems in place that buyers would want to take over. I would encourage any business owner to look at the courses I created for you. Learn from my mistakes, learn from the things I did very well, and educate yourself about the transition and what options are out there for you. What you’re going to learn is 100% based on real events. We came up with real solutions for every problem, and I am now making them all available to you to help you win your exit.