Punching Above Your Weight When It’s Time to Sell

Transcript

Disclaimer: Transcripts may contain a few typos. With most episodes lasting 60+ minutes, it can be difficult to catch some minor errors.

John Warrillow:

So, you’re looking to sell your business? My guess is you’re actually not. My guess is that you’d like to know that you could sell your business down the road. But right now, you’re busy building it. And if that’s the case, standard operating procedures can be your secret sauce. These are the documents that you need to show your employees how to do their work and we just developed a new eBook. You can get it at BuiltToSell.com/SOP.

Alright, so, here’s the deal. If you resell other people’s products or services, it can be really tough to create a valuable business. If you think about it, why would I acquire your business if I could simply compete with you by lowering your price? If you’re reselling someone else’s product, you’re effectively in a commoditization game. And it can mean that you really don’t have any value in your business.

That is the situation that Mehul Sheth found himself in our next guest. He had margins around 20, 25% and he was effectively just a middleman. But listen for how he remade his company, a really masterclass in getting out of the commoditization game. I’ll let him explain how he did it in the industry and he was supplying airline parts, got a very commoditized space, but he did it like a master.

He also did some really savvy negotiation when he went to sell his company. I’ll have you listen for some of the kind of tactics he used, how he found out he had more leverage than he thought he had in the process, how he validated. The acquire was legitimate and really had a genuine interest in building his company. He talked about how he got standard operating procedures to work within his company. Lots to enjoy in this wide-ranging interview with Mehul Sheth. Enjoy. Mehul Sheth, welcome to Built to Sell Radio.

Mehul Sheth:

Thank you for having me on the program. I really appreciate it.

John Warrillow:

Yeah, VMS Aircraft. I’ve got to find out what this company does, tell me about it.

Mehul Sheth:

VMS Aircraft, this was or is still in a different form of distributor of consumables for the aircraft. So, what happens is, when you take your car to the mechanic, of course, you’ve got to do your oil change and all. But when you take a plane into a big hangar and do a C or D check, a lot of times you change the seats, you change the windows, you add polysulfide sealants. Even today, you see the golf clubs, they’re full of those resin systems and prepregs and so on. All of that stuff, we distributed. So, that’s what VMS Aircraft did. We did it for commercial and the military.

John Warrillow:

So, your customers were the airlines and the military?

Mehul Sheth:

Military, airlines, third party aircraft maintenance facilities, because sometimes airlines still do not do their own inhouse heavy maintenance. Also, satellite builders, and actually OEMs people who make aircraft.

John Warrillow:

Okay. So, why wouldn’t the airlines and the OEMs just buy the stuff direct from the manufacturer? Why do they need a middleman?

Mehul Sheth:

Buy from the manufacturer when they make aircraft and they have very strong buying power and guaranteed production quantities and so on. When they’re doing third party maintenance, and one day they may have United Airlines in their hangar and one day they may have American, and those two companies use a whole different set of products, and they’re not sure exactly how much sealant they’re going to need. And they can’t wait for a manufacturer’s lead time because every day that the plane is late getting out of the hangar cost them $50,000 a day. So, they rely on a distributor network stocking that material to get it to their facility when they need it.

John Warrillow:

Got it. And so, your value proposition was you’ve got the inventory and you get to the airline quickly. That’s going to cost you a truckload to keep all that inventory somewhere. How did you kind of finance all that inventory? Did you literally have it in a warehouse somewhere?

Mehul Sheth:

Yeah. We had our own warehouse. Initially, of course, we used other people’s warehouse, we rented space. But in the end, we had bought our own building and held the inventory. Now, by the way, you don’t always have everything in inventory. Okay? There’s other reasons that these airlines use you.

One is you understand what they need. You understand the technical requirements and the paperwork. Because sometimes in this business, paperwork is more important than their product. When I mean paperwork, I mean, batch number, lot number, all the thing is because you’re talking about aircraft, so they’re FAA inspectors onsite, and they have to make sure that all of the certifications flow down from the manufacturer. So, as a distributor, you’d have other requirements, like you would be ISO 9000 or you would have other requirements.

The other thing is, you’re always bringing them new products. Your manufacturer is giving you new products, you’re staying ahead of the technology that’s out there, you’re offering them new things. And so, they rely on you. At the end, it comes down to this, you’re a one-stop shop, not only for the product, but for where to get other types of products and you understand the market. So, that’s what they pay you for.

John Warrillow:

That was the original value proposition in the beginning. How did that one-stop shop value prop, [inaudible 00:06:35] rhyme, how did that evolve over time? Because again, the Amazonification of the world, everything’s available 24/7 now, it’s a click away.

I’m assuming United Airlines wants seat covers for their 737s. They don’t have to go through a distributor, they could go through to the direct. I guess what I’m getting at is did that one-stop shop value proposition, did you feel that weakening over time?

Mehul Sheth:

Absolutely, absolutely. So, that’s how you started and get people’s interest. But it can’t sustain, especially for a smaller organization. Because the big guys get bigger in that, like you’re talking about Amazon. So, what did we do?

Then you have to look for specialized services that you can provide. Here’s what we did. We got ourselves into advanced materials, like I was telling you, bonding materials, prepreg, film adhesive. Those have much difficult requirements for distributor because you have to have special freezers. You have to have special monitors. You have to ship them in specialized boxes that are dry ice capable.

So, now you’re starting to add some values that the one-stop shop guys don’t have. Then you have to have a clean room, 100,000 particle clean room to have positive airflow to handle those materials, so dust doesn’t set a lot of. So, you have to do have specialized extraction systems.

Then we looked at, okay, now we should start repackaging. Manufacturer put something in a five gallon pail. United Airlines, to your example, needs 100-gram tube to get in a very tight spot. They can get the five gallon pail from anywhere, where do they get the 100-gram tube? Well, we opened a repackaging facility, which is another level because you need additional certifications for that and machines that know how to repackage very nasty type of chemicals.

So, to answer your question, you hit it right on the head. You start as the one-stop shop, you bring the customers in. And over time as that business gets more difficult, you go into very niche services that not many people can do and that’s how you sustain your value.

John Warrillow:

Thank you for that. How did your margin evolve, your gross margin or your profit margin for that matter, as you went into these advanced materials and repackaging business models?

Mehul Sheth:

Well, I’ll give you an example. In aerospace chemicals distribution, let’s go back to the one-stop shop. At one time when I first started, those margins were upward of about 30%.

John Warrillow:

Gross margin, gross profit.

Mehul Sheth:

Gross margin, gross margin. Over time and as of today, the market runs on an average of anywhere from about 22 to 23%.

John Warrillow:

Skinny.

Mehul Sheth:

Yes, very skinny. Okay? That doesn’t include all your costs and your employees and everything else.

John Warrillow:

That’s just gross margin, yeah.

Mehul Sheth:

You haven’t wrote your rent check yet, 23%. You cannot sustain as a small business in that. So, what do we do with, to answer your question, with the advanced materials? Once we were able to repackage it in smaller quantities and rebag and reseal it and pull it out of the freezer and put it in that dry ice box, the margin popped back up, 60 to 70%. Okay? Because yes, you’re selling them a smaller role, you have risk of it sitting in the freezer, can you sell it to someone else? But when that product goes out the door, it’s going out at 60 to 70%, not 20, 23%. So, that right there, you hit the nail on the proverbial head.

John Warrillow:

That’s awesome. What about recurring revenue? Did you have any recurring revenue? I know you had consumables, so it was reoccurring. You’re never sure when United or Southwest is going to call, but you know they’re going to call it because they run out of the stuff. Did you have any subscription based or recurring revenue in the model?

Mehul Sheth:

Absolutely. Because once you started working with military, a lot of this stuff goes under contract. So, they have delivery schedules and when they need it.

Now, you would say, you asked me a question. Well, if the military can put it under contract and predict their quantities, why wouldn’t they go back to manufacturer and buy it? If you were going to ask that, that’s a great question.

The answer is, is because military needs to use small business as set asides to fulfill their government quotas. So, military that goes direct to manufacturers is not a good look for the US military. They need to get money out of the government by saying they support Small Business Horsepower. So, that’s how we were able to then tap into scheduled government contracts. And by the way, airlines as well, like United, sign those contracts as well. You say, why do they sign a contract, they can go out and look for what they need?

Well, they also want to squeeze the margins and the price and they don’t want to face the manufacturers price increases. Because if a manufacturer’s sole source on a product as approved by Airbus or Boeing, they could squeeze the airline by keep raising their prices. Airline wants to lock in their price and sustain their costs with their suppliers over a period of time. So, they’ll put that on distributors, and then they’ll sign contracts as well.

John Warrillow:

Got it. A lot of this added value, the advanced materials, the repackaging, and particular I’m thinking of how you treated some of these materials where contamination could have catastrophic effect, right? I’m particularly interested in how you got your employees to follow your processes. I mean, we’ve talked a lot on this show about standard operating procedures, so that employees have sort of instructions for how to handle some of these advanced materials. Did you have any of these sort of standard operating procedures or systems or processes in your business?

Mehul Sheth:

Oh, it’s all about process. And let me tell you who was a great driver for these advanced materials in the process? Boeing Company. Now, you say Boeing makes airplanes, why are they involved in that? Well, it used to be if you wanted to be a vendor to Boeing, which by the way, wasn’t our main business, but if you wanted to be a vendor to Boeing, they would have to come out, and they’d have to audit your facility, look at your standard operating procedure and your processes and so on.

Well, Boeing had a lot of vendors and they were paying a lot of money to stay in hotels, send auditors out for all these audits. So, what did they do? They got smart. They helped a partner, a standard called Nadcap.

John Warrillow:

So, [crosstalk 00:14:23] Nadcap?

Mehul Sheth:

Nadcap, right. So, it’s a national association, I don’t know the exact acronym to be a little bit embarrassed stands for I got. But Nadcap. So, what they would do is they would go to one organization, let’s call that Nadcap, Boeing. And they would say, “Here’s what we want to see from our vendors.”

Now Nadcap, the vendor would call Nadcap and pay Nadcap to come out and do the audit. So, basically, Boeing then subcontracts Nadcap, tells them these are the standards we want to see. Then Nadcap comes out and audits you, or it’s actually called AS9100. Okay? So, Nadcap and AS9100. The AS9100 standard, if you look that up, that’s Boeing basically telling another organization that these are the standards we want met.

Now, that manufacturer of your product, Boeing tells them don’t sell it to that distributor unless they meet these standards. So, then the manufacturer sends out a person to your site to say, before we give you these advanced materials, will you meet Nadcap? Will you meet AS9100? Will you meet these standards? That’s the baseline.

John Warrillow:

Okay. My question, Mehul, and I think a lot of people, I mean, a lot of people listening to this had know nothing about the airline business, but they do have employees who they want to get to follow a system. And in many cases, the stakes are lower than yours. If your employees didn’t follow the AS9100 processes, you risk losing Boeing as a partner. So, how did you get your employees to follow the processes, the instructions?

Mehul Sheth:

So, what you do is you hire a strong quality manager.

John Warrillow:

This is what you did?

Mehul Sheth:

That’s what I did. You hire a quality manager. Your quality manager looks at all the standards issued by the authorities we just talked about. Then your quality manager and your team of whatever it is, whether it’s customer service related, warehouse related, trains their employees or your employees, in this case, my employees in all of the processes that need to be followed. We got all the external training done.

For example, our company shipped a very large amount of hazardous material per day. One error in shipping hazardous material was a $25,000 fine with the DOT and FAA, no questions asked, even if you admit to the mistake.

So, as an owner, you can see that when you hire someone, you have to get them trained. So, what did we do? We went out and found, in our case, we found Steve Hunt from ShipMates who actually wrote some of the regulations for the Coast Guard, and works with big companies. We actually brought him into a small company our size to work with every one of our warehouse employees and get them trained on the regulations and how to double check to make sure that you didn’t ship a corrosive as a flammable or flammable as a corrosive and you labeled everything properly.

Now one more thing, the consequence of that would be that we’d have an internal corrective action system. Because when you hire the quality manager, you have a quality system that tracks your employees’ performance. And if they make a mistake, there’s a corrective action written. The corrective action then drills down to why was it made. Was it carelessness? Was it lack of training? What it was? So, we had a lot of systems in place to make sure that all of these quality requirements were supported.

John Warrillow:

Okay. So, it involves some fairly hands-on training. And the corrective action was issued when someone made a mistake. So, that was clear was on their file and you had a [inaudible 00:18:47]. But again, I want to drill down further on that. So, a lot of people listening would be like, “Yeah, I’ve got a process, but it’s sitting in a Microsoft Word document and nobody looks at it. I wrote it three years ago, I put it in a Dropbox and nobody follows the process that I created.”

And so, the process never gets followed, because some employees ignore it. Other employees don’t know where it is or can’t find it when they need it. What was your technique to ensure that these very high stakes processes were followed to the tee? [crosstalk 00:19:29] employee if they didn’t do it right?

Mehul Sheth:

Right. So, we have a quality manager that would go out and do audits, unannounced audits, to look at what’s going on, what exactly is being done, do double checks, spot checks on what’s going on with the paperwork. We would go out to the warehouse and do a sample. Because the whole system flows down. You know that every year, you’re going to have an auditor from an audit [inaudible 00:20:03], a third party auditor, come to your site, and the first thing they’re going to do is show me 10 invoices. Show me 10 purchase orders. Show me the flow down. Show me the whole stream of how this work from cradle to grave from when you receive product to ship it out.

So, we would do the same thing. Internally, we would do audits every quarter. Okay, show me what you’ve done here. Show me how you receive that. Show me that it matched them. And so, we would have to keep on that because you’re right, the minute you take the foot off that gas pedal, you’re in trouble.

John Warrillow:

Got it. I love this. How big did you get this business VMS before you decided to sell it, either in terms of revenue or number of employees or just some proxy for size?

Mehul Sheth:

I started at my parents’ basement before I fled out here to California and New Jersey with $25,000. I started this thing with $25,000. At the height of our sales was $8 million.

John Warrillow:

Wow.

Mehul Sheth:

So, I took it from 25,000 investment with no sales to $8 million in gross sales. That’s as far as I got, a little bit over $8 million before I sold it.

John Warrillow:

What triggered you to want to sell?

Mehul Sheth:

First of all, we didn’t advertise this to sell it. A company that was looking for a company like us found us. I’ll tell you a little bit about that story. What’s interesting there, we were working with 3M, which is one of our main business partners that we distribute for that company [crosstalk 00:21:54]-

John Warrillow:

So, these advanced materials?

Mehul Sheth:

Advanced materials. And also some consumables tapes, and so on. Remember, 3M is the inventor of the scotch tape, and so on, so forth.

So, 3M contacted me as one of their leading channel partners and says, “We’ve got a company that we’re partnering with that can add our catalog to your website for an online shopping catalog, and so on.” So, we looked into it and found out that they were charging us about 28 to $30,000 to be able to have online shopping and put a card on and so on.

John Warrillow:

This third party company, not 3M?

Mehul Sheth:

Not 3M. This recommended by 3M third party company. And we thought that was a little bit expensive. And at that time, we had a lot of expenses in supporting the cash flow of the business. But we say you know what, we have to do this. So, long story short, we invested that $30,000. We took our website to a different level than it was before, which was kind of an inhouse handmade website.

And when the company that bought us was looking around and they came to our website, their target, John, their target was to buy a 10 to $20 million company. I found this out later. We were an $8 million company.

So, we did not even fit their target range. But when they saw the website, the gentleman that was based in the US for this French company, who was tasked that looking around in the US to see who’s available, when they saw our website, they said “Hey, this looks like a 15 to $20 million company because we had just gotten the site done.” And that’s how they made the initial contact.

Now what drove them to our website? In Europe, they were a big 3M and still are a distributor in the industrial space tapes and adhesives. In the US, they already bought a company in Milwaukee that was into tapes and adhesives. But they really wanted a West Coast aerospace company that had those advanced materials with that 60% margin we talked about and not necessarily all 22 to 23%. So, they looked at our site, saw that we distributed those advanced materials for 3M aerospace, which was clear on the website. And that’s how they found us and then the rest is history.

John Warrillow:

I love this. So, it’s the front door to the world. We always think about our websites as how our customers find us, but equally acquirers are going to find us and before they ever pick up the phone and call you, they’re going to go to your website. And I love the fact that you highlighted this.

So, the site that you invested in the 30 grand, if I’m mischaracterizing this correctly, but it took your website from kind of brochure, where a little bit mom and pop looking to pretty slick, pretty sophisticated. And all of a sudden, you’re punching above your weight when it comes to your website.

Mehul Sheth:

John, this thing moves so fast that you’re absolutely right. So, in 2016, it looked pretty slick. And today, they’re trying to redo it inhouse in France saying it’s outdated. It looks like a dinosaur. Because all the competitors have gotten shopping carts and stuff that are way more advanced than this site. But you’re right, in 2016, it did what it was supposed to do.

John Warrillow:

Got it. And so, okay. So, you get the slick website, then what happened? The French company proactively approached you about acquiring you or what triggered you to start having this conversation?

Mehul Sheth:

So, the gentleman that found the website, he had already worked for that organization in France and in the US for about four years. And he was tasked with finding the company or one of the people tasked, he called me and he said, myself, and also, at that time the person that they had bought the other division I mentioned in Milwaukee would like to come out and see you. We’re doing a tour of the West Coast on perspective companies that we are interested in buying, and through your website, you’re on our list. Do you mind if we come out and have a look? So, those two gentlemen arrived in my conference room a couple of months after.

John Warrillow:

Before we get to the conference room, you’re on the phone, what was your reaction to this guy’s cold call?

Mehul Sheth:

I didn’t know I was prepared for it. Because you asked me an interesting question, did you prep the business for sale or how did someone find you? I already had it in my mind that this business needed to be sold at a certain time. And the reason I had that in my mind is remember, we talked about it earlier, bigger guys getting bigger on these narrow margin businesses like Amazon. And guys that are working at 23% at 8 million in sales with all their overhead, gasping for air.

So, we weren’t gasping for air exactly at that time. But ever since 2008, ’09 and ’10 when the market went down and the banks tightened their credit lending policies and the ability to grow your business, and what I saw was that trend that smaller companies were going to have a hard time raising that kind of capital, especially if they’re working at those margins. So, to answer your question, I had it in my mind that this business would be benefit of tying our cart to a more stronger horse. And when that guy called, I guess I was mentally prepared for it.

John Warrillow:

And before he called, you’d come to the realization that sooner or later it would make sense to sell. What was your sense of what your business might be worth? Did you have a sense on a multiple of EBITDA, or a multiple of whatever, revenue? Did you have kind of an inkling of what you thought was fair a range of what you thought a business like yours might sell for?

Mehul Sheth:

I thought 68 kind of was going to be fair, it’s a lot. But you have to remember, let’s get back to that advanced materials thing. If you’re a one-stop shop and that’s all you are, six to eight is not going to be in range. But now that you add those niche services and those hazardous shipping and the fear of the 25,000 fine, and everything you’ve put into that business, you’re thinking, okay, a multiple of eight is a good target to have.

I mean, when I talk to some people, because a couple business brokers that I never signed with came and said, “Hey, we’d love to help you out. And we think eight is a kind of a target for this kind of business.”

John Warrillow:

Got it, got it. Okay. So, you’re thinking somewhere in the six to eight range felt right. French company says let’s come and see. So, you agreed to let them come to the conference room and take me inside the conference room. What was that conversation like?

Mehul Sheth:

The initial conversation is okay, everything looks good. We’re interested. It was just those two guys that came. But those two guys were really scouts, if you talk in football terms scouts. The main boss was in France, and they were supposed to report back to the boss, who traveled to the US a lot. And they were supposed to tell him, “Yes, this is one you want to meet.” And so, what they did is they went back to the mothership and got the big boss interested in meeting with me.

John Warrillow:

Got it, got it. Were you trying to sell them, the scouts?

Mehul Sheth:

At that time, I didn’t want to seem so desperate, like I’m desperate to sell this business. I don’t think that bodes well. I was showing them that I’m strong. I know what I’m doing. I do represent 3M. I know you’re looking for a 3M distributor. I’ve got a strong brand. I’ve got a strong customer base. I’ve got advanced materials. I was looking at it from more of that perspective of showing a strong hand.

John Warrillow:

Were you also concerned at all about revealing too much confidential information, because presumably they could have set up shop to compete with you?

Mehul Sheth:

Absolutely, I was really concerned about that. And of course, before then you talk, what they did is later on they used a company in New York, that was a company they use to buy companies and then that’s the company that then if they’re interested, sends you the nondisclosure agreement.

And so, then other measures of safety and security come into play, which by the way, I found out later, those don’t really work too well, either. If they don’t buy you, somehow information gets out any way to these kinds of companies. So, there was a risk that I was really worried about that was a legitimate concern.

John Warrillow:

And what did you do to minimize that risk?

Mehul Sheth:

I think I delivered information, what’s the word, not exactly slowly, but a deliberate process of delivering information. I didn’t walk into the first meeting with the owner when he came from France and said, “Here’s all my customers, here’s all my suppliers. Here’s this.” Got a feeling.

And I think what happened is the owner and I, which we still do today, really hit it off and right in our first meeting, looking into his eyes, I felt a sense of comfort and trust. And I feel like I know how to read the quarterback. That’s one of my positives in life that I read people pretty well.

And the first time I met him, I felt the sense of these people are a much bigger business. They’re into so many businesses. They’re not there to find out one customer that they can steal from you. I never got that feeling. They’re in the establish something in the United States with the right partner. And once you get that feeling, and then you sign the NDA, and then you talk a little bit more, you start to disclose more and more information at the time.

John Warrillow:

Yeah. And to be clear, it was a mutual NDA. You were revealing them and they were revealing to you?

Mehul Sheth:

Absolutely.

John Warrillow:

You had to honor that, I’m assuming. Got it. Okay. So, where does it go from there? So, the big boss flies over from France, I’m assuming.

Mehul Sheth:

Yeah. And that was a very surreal experience because I actually had to go to Nashville for something personal on that week that he was flying over. And I mentioned you there were two gentlemen, the young guy from France who called me.

John Warrillow:

The scouts, whatever?

Mehul Sheth:

Right. The scout, and the other scout was the owner of the company they bought in Milwaukee. So, that owner of the company they bought Milwaukee calls me up and he says, “Our boss in France is flying over. He can meet you in New York or Atlanta.” Why is that? Well, because I found out later those are hubs that Air France flies out of that he wanted an easy way to meet me at one of those hubs because he was looking at other acquisitions. He was pressed for time.

I said, “I’m sorry, I can’t meet him in New York or Atlanta. I’m sorry to say, but I have to go to Nashville.” He said, “Oh, you’re going to Nashville?” He says, “He was actually flying to Nashville because they were also looking at buying some other tape company. But he didn’t want to tell you Nashville because nobody meets at Nashville. So, he wanted to give you the hubs that he was flying out of, which was New York and Atlanta.”

And then the other thing that happened is his term kind of came to an end. I don’t know all the details, and I don’t want to, but he had a little falling out within the organization. So, at the last minute, he told the owner, he’s not going to show up in Nashville.

John Warrillow:

Wait, the Milwaukee guy?

Mehul Sheth:

Yeah, yeah. And so, he called me up and said, “Look, I’m kind of done. I’m not going there. But here’s the owners contact. If you want, contact him and work it out yourself.” So, it was a little bit abrupt. I was confused, but I was on it. I called the owner, who was in France. I said, “Your guy, it’s between you guys is telling me he’s not coming. But I’m going to be in Nashville. I don’t know if he told you.” We had breakfast at the hotel he was staying at in Nashville. And the rest is history.

John Warrillow:

Did it give you pause that the Milwaukee guy, because Milwaukee guy was someone in your shoes, he was a business owner that had sold the company and France. What did that do to your level of confidence that this company in France was legit?

Mehul Sheth:

You know what? It would have done a lot, because then you start asking your questions like why aren’t they sustainable? Why isn’t it working out? The great thing is it happens so fast. I mean, we’re supposed to meet, let’s say on a Friday in Nashville. And here on Wednesday, he’s calling and saying “By the way, I won’t be there. Here’s the owner’s phone number. You can meet him direct. And you’re already on your way there.”

And so, you really didn’t have time to go through your mind of what went wrong there and why and what. And so, I reached the owner. By the time I got there, I was in a different world. I had already connected with him. And he understood me. It seemed and I understood him and we had instant chemistry. So, I never really addressed that idea till later what happened there.

John Warrillow:

Got it. So, take us inside the meeting in Nashville. What was that like when you met with the big boss from France?

Mehul Sheth:

He wanted to see a level of sincerity. He wanted to see whether I was humble or not, whether I was arrogant in my approach to things.

John Warrillow:

What did he do or say that led you to believe he wanted to see how arrogant or humble you were? That’s a strange thing to say. I’ve never heard someone say that before.

Mehul Sheth:

Well, I mean, he would just ask some very simple questions. He was just like how do you do this or how do you deal with this being as a smaller company, let’s say. He didn’t say like, “Okay, you’re a big executive, and all these people you have.” He was more looking at you as the entrepreneur and how you go through the minefields of this business as on a smaller scale. And I think you got to appreciate that.

And the other thing that you appreciated from him, he owned $150 million company, but he started that with more money, more investors and all, but still on a fairly smaller scale and built it up over I think it was 20 years at that time, so, slowly, slowly, putting one more log on the fire.

So, you’ve got to see that he was also a dealmaker, entrepreneur type guy. He wasn’t a hard operations numbers guy. He was a project guy. He knew who you were. And he was that over there. And you see you kind of started understand each other quickly.

John Warrillow:

Got it, got it. You mentioned you read people well, and you can read the quarterback. It’s one of your superpowers. So, what sort of things did this French executive say or do that led you to believe he was legitimate and worth doing business with?

Mehul Sheth:

One of the things that he said was quite interesting was the way we want to operate is like this, we don’t want to be a French company doing business in the US. We want to be a French company that owns a US company who’s doing business in the US. And that US company, we want them to be local. His always thing was, we’re global but we’re first local. We’re global but we’re first local. And he always carried that through.

When I worked for him, and I’m still working for that organization, but not from him anymore. What four years, I worked for him under two contracts, a lot of times he would say, “Look, I don’t know if that’s the right way you’re looking at this decision. But guess what, it’s your decision. It’s a local decision. It’s not a global decision.” So, he always kept to that. And I sense that from the first time he met it, that he was going to empower his people.

And usually, when these companies are bought, they come in, they take the assets, they buy the company, they take the product line, they take the customer base, and then they want to throw you out as fast as possible, and then bring in their own people once the honeymoon’s over.

But second time he came to my office, we were sitting there, and he was just listening to me talk to some of the employees and do some stuff. And this and he looked at me and he said, “It’s going to work.” And I said, “What are you talking about? What do you mean it’s going to work?” He says “This. It’s going to work.”

And the one thing he said to me and he would get on me for a lot of things. But the one compliment that he gave me, he said that day, he said, “I know one thing. When I walk out of this office and go back to France, I never have to worry what’s going on there. I know that you’re running things and it’s under control. I don’t have to worry, like are the kids going to play when the boss is away type of thing.” He never felt that with me.

Getting back to some of the other companies they bought without naming the people, that came out later, they worried about when he went, who was on the golf course and not working. With me, he never had that.

John Warrillow:

Okay. I want to get into how he structured your agreement so that he felt confident that. But before we go there, I love to know at what point in this process does the prospect of money come up? When you’re in Nashville, does he put a number on the table? Does he ask you to put a number on the table?

Mehul Sheth:

No, no. He says “I’m busy in France to the lest of the year. Let’s talk till next year.” We talked next year. He says “Before we talk money, let’s have our New York guy do a valuation.” Of course, they didn’t want to go into that unless they had some idea of what I want. And of course, I said I’m looking for somewhere in that range. We talked about that EBITDA range. And he says, “Okay, well, that’s something we can talk about. But of course, we have to see are the inventory levels right? Are things customer base, what you say it is, and so on?”

So, then the NDA signed. They hired the New York firm. The funny story about that is they said we want to do very light due diligence, very light. We’re not going to spend a lot of money on due diligence for a company this size. Well, the next thing I know they go out and hire Moss Adams.

The Moss Adams is a big firm breeze in, a person, a junior, who’s sitting in China to do the job. Let me tell you something, they even find out what color toothbrush you have. I mean, I said to the owner later, “You call this light due diligence, I’d hate to find out what they call heavy.”

But by then, we had struck a report. And so, some of the things that didn’t add up quite frankly, like inventory wasn’t exact what their account was and all, they kind of overlooked a few things because they were so deep by that time into our relationship. So, anyway.

John Warrillow:

Okay. So, he kind of gets out of you that you’re looking for eight times EBITDA. And he kind of acknowledges that and says, “Okay, but before I can commit to that, I’m going to send in the New York firm.” So, the New York guys are the M&A firm, the buy side M&A firm, they like, “Okay, we’re going to get the valuation done, do some light due diligence.” They go away. At that point, at what point does the specter of money come up again. At some point, I’m assuming you’ve got a letter of intent or something?

Mehul Sheth:

Right. We had a letter of intent. They had a rough number on the offer. We accepted that offer. But of course, that offer is always contingent on the resolution of the due diligence, which was going to the last minute.

John Warrillow:

So, what was the offer for if you don’t mind me asking like?

Mehul Sheth:

It was eight times, not eight times, I think if I let me see here, it was about 7.4 times EBITDA.

John Warrillow:

Got it, got it, got it. And so, you’re looking for eight came back at 7.4. So, what happens next?

Mehul Sheth:

What happens next is we agreed to everything in principle but time was getting tight because he was traveling back to the US. So, due diligence didn’t get finished as fast as we thought. So, he was coming to strike a deal with the M&A firm, and he brought back the original guy, the first guy that found me and they came and sat across the table.

And of course, the day before they sat across the table, due diligence gets done. And of course, they find their report and some discrepancies and all. And I’m like, “Look, you guys are sitting right there. I’m not signing a deal for less than this.”

And I’ll tell you one more interesting thing that helped me. I was part of SCORE of CEO group of retired executives, I’m not retired, but they had a CEO group that I was in. So, the Moss Adams was hammering on the cash flow that was in the bank.

So, I talked to the CEO group guys privately about it. And they said, “Here’s what you do. It’s not what’s in the bank today because money comes in and out. You buy material, whatever. You should say to the ownership, you want the cash flow number based on how much was in the bank over a year period.” I never thought of that. But that’s why you’re in a CEO group. They actually came at the last minute with the great piece of advice.

So, when I’m sitting across from the owner, and his M&A firm, and they’re like, “Well, yeah, but the cash is not in the bank the way it was supposed to be.” I pulled out a bank slip for one year. I total the whole thing up on a piece of paper, I write it, and I hand it to him, and I said, “Look, this is the EBITDA that I’m taking from the deal. And here’s the cash flow that matches it over a year period.”

And I basically said, I talked to my wife. It’s like, oh, you’re going to take this job, I got to check with my wife first. I talked to my wife, and we can’t go any lower. I’ll go back in my office. You guys sit here in the conference room and talk it over and let me know if we have a deal. And the rest was history. That’s how the deal got struck.

John Warrillow:

So, Mehul, I want to make sure I understand the advice you got from your CEO group. So, the 7.4 times EBITDA was never in question. It was what is the balance-

Mehul Sheth:

The bank balance in the bank.

John Warrillow:

In the time of the transaction. When you hand the keys over to them…

Mehul Sheth:

Right.

John Warrillow:

… you have to leave 100 grand in the bank or 500 grand in the bank, million dollars in the bank. And so, the average daily deposit in the bank to try [crosstalk 00:48:25].

Mehul Sheth:

Yeah, no, let me clarify this. There was no exact amount we had to leave in the bank. They were willing to take it over as what it was. But when they looked at the bank balance during the due diligence, the amount of cash they saw wasn’t to their liking to sustain the operations of the company. So, they have to put more money into it.

And I said, “Well, it’s not to your liking based on what you’re seeing from last month’s statement, but last month could have been tight because we bought so much stuff and the inventory hasn’t shipped out yet. So, here’s my idea. Let’s take the last 12 months and average that daily balance over the last 12 months and say this is how much money on average.” Now, who knew if that’s the right formula, I came up with it. And they bought it. That’s all I know.

John Warrillow:

Okay. Got it. That’s helpful clarification. Thank you. So, you go and say, “Look, 7.4, I’m going to go back into my conference. You guys decide.” First of all, had you actually spoken to your wife and was 7.4 your bottom line or was that just a lie?

Mehul Sheth:

Yeah, no, I had spoken to her and we really felt that we could get this offer. And I think what you realize you feel that there’s a trust that’s been developed. You feel that they’ve gone through a process. It’s not cheap to fly these M&A people out here and not just the airline fare, but how much they must be charging them a day for all this. I’m sure paying Moss Adams isn’t cheap to do due diligence, all of that stuff, who else are they going to buy, they walk away, they don’t have a 3M aerospace distributor they’re going to buy. So, when all that happens, I really felt that at that point, we were holding the cards. And that’s why I wasn’t going to waver from that number.

John Warrillow:

Yeah. Well said. So, clearly, the more they invested in the deal, the more you realized you had some leverage as well.

Mehul Sheth:

Yes, sir.

John Warrillow:

Great insight, for sure. So, what happened? Did you leave the room? And did they come back in minutes later? How long did it take it late?

Mehul Sheth:

I leave the room and then, I brought my CPA there. And the owner was slapping the CPA from a mental point of view upside down. He’s like, “Jay, that number can’t be right. No way that’s right. Where are you getting that number, Jay?” And Jay is like, “That’s the number. That’s what we show.” “Jay, that can’t be the number. Let me see that report again and again.”

And this dragged on. And at the end of the day, he said, okay, and we went to dinner. But we never signed the paper. The paper was supposed to be signed because he said he has to go back to France, it was late at night and over the weekend, get the buy in from his minor partners and so on.

So, it’s funny, on Monday morning, we had our third party HR subcontractor to come in and some other all these outside sales reps, because we were supposed to announce the deal on a Monday at 10:00. At 9:45, he’s still sitting in my office, just the him and I. And he’s going, “You know, I talked to my partners, and they’re saying that some of these numbers didn’t exactly add up in their mind.”

And I looked at him and I said, “All those people are sitting in the conference room, some have come from out of town, the outside sales reps, and all they’re waiting for is the announcement. I think we’re done, don’t you?”

Finally, he gave up. He said, “Boy, you’re tough.” Signe the paper. We both walked into the conference room. And to everyone surprised, I introduced him as the new owner of VMS Aircraft.

John Warrillow:

It’s really funny. Not like having a roomful of people to hold your feet to the fire. How did you deal with because clearly, he wanted a French company with doing business in the US or US I can’t remember what exactly you said. But effectively, he didn’t want you to leave. Presumably he wanted you to stay. So, how did he ensure that you would stay? Was it an earn out or did you sign an [inaudible 00:53:16] agreement? How did that work?

Mehul Sheth:

They gave us some incentive for performance, but it was minor. The real thing was they gave us a two-year contract, which you could leave, but you knew they had to pay you for two years. They also put a five year noncompete clause in there.

Now to be actually [inaudible 00:53:39], California, the state of California has had very tough enforcement of those kinds of clauses. They’ve been declared that they don’t stick. Okay? But these companies that are international and national still get you to sign one.

And I also felt, even though I can turn California law against them and say, oh, okay, that’s not me. I mean, if I say that I’m going to sign a deal that I’m not going to compete with you for five years and you want me to sign a two-year contract that I’m going to be here and that you’re going to pay me no matter what, I’m going to stay there the whole two years. Okay?

John Warrillow:

How did it impact your motivation?

Mehul Sheth:

At first, it raised the motivation a lot, because now you’re getting more cash that you didn’t have. You’re also getting product lines from Europe that they have that you may be able to apply to your organization. You’re wanting the mothership and their power to lift you up. So, at first, you’re very motivated, and then they’re flying you instead of economy, business class to Europe, to be to the Paris Air Show and consult with them.

So, at the beginning, you’re very, very motivated. Over time, it gets harder because you also over time, then they see where they feel you’re strong and they think you’re not. And so, they put other people in positions where they felt that you’re not as strong. They kind of limits you to what they like about you. That doesn’t happen at the beginning. That happens over time.

And then, after four or five years, you still work there, then you have to work there accepting that it’s not your company. There’s other people involved. It’s a different organization. Do you fit in that organization? How can you fit in that organization? What’s your value?

The first day you feel like, wow, I’ve tied my card to a much more powerful horse and we’re off to the races.

John Warrillow:

Yup. Well said, for sure. Did you buy yourself any trophy or memento for marking the achievement of selling your company?

Mehul Sheth:

It’s funny you say that. I had two Acura MDXs. My wife had one and I had one. And one thing I said was I’d never go to a car show. I have no interest in a car show. I think it’s a total waste of time. One of our friends, it was during Christmas, this was around seven, eight years ago said, “It’s Christmas time. You’re off for a couple days. San Diego has a big car show just come.” I said, “No. I’m not interested.” “No, just come.”

So, anyway, I ended up at the San Diego Car Show. Biggest mistake you’ll ever make. You’re walking by and I saw that Cadillac Escalades. And I walked up to it, and these railing things came out from the bottom. I never seen anything like that, like these little wings, like airplane wings come out. So, I step on this thing. And you get it and you feel like you’re king of the world, like you’re sitting in this big car and you’re in a Cadillac.

And after I sold the company, I had a lot of expenses to pay. So, it’s not like I went right out bought an Escalade. But a couple years later, I did. And it’s sitting in my driveway. It’s probably beyond my overall level of affordability. I don’t care. I mean, when I said my Acura, I like my Acura. We didn’t mean anything, except it was a nice car and it did its job. It held my golf clubs.

It’s so funny, every time I go to my driveway, and I get in my car, whether I’m going somewhere, it’s weird story, but when I get in my car, and I sit in that Escalade and those wings come out, there’s a certain sense of, I don’t know, it’s just certain sense of accomplishment. Like you sold your business and you got yourself this car and what that means to you and so on. I mean, I’m not going to lie about it, I mean, it’s a great feeling.

John Warrillow:

I love it. I think everybody should have some celebratory gifts that they give themselves to mark the process because it’s a huge achievement. And it’s a good idea to have something to look back upon, even if it’s something as materialistic as some would say a car is, I think it’s great that you’ve got something that reminds you every day you get in it that you had a great [crosstalk 00:58:54].

Mehul Sheth:

It’s not the car. It’s not like “Oh, I have an Escalade. You have an Acura.” That means nothing. That’s not me. That’s not my personality. I don’t get into buying expensive things. Because I like those wings in that wheels that I bought it. It’s more about when you get in that car you know that you sold Encyclopedia Britannica on the side on weekends while your wife was crying and you only had one car because you blew the other one up when you came from New Jersey.

You know that you were making $400 selling a lady in her bathrobe Encyclopedia Britannica that’s 100 degrees in Chula Vista, California to keep your business going or delivering food. Everything that you put into that the horsepower, when you sit in the car that brings you back to all of that. That’s what it’s about.

John Warrillow:

I love it. I love it. So, tell us now you and I first met through horsepower, Small Business Horsepower. Is that right?

Mehul Sheth:

Your assistant found that us. She had listened to our podcast, Haley had listened to my podcast, which I do to give back to the small business community. Our podcast is a two types of stories. One, it’s people building businesses from scratch to fruition. And the second, which is what I brought you on the program for, is technical type of information. How do you sell it once you build it as an example, or how do you network or specific things.

So, we started it more with your field good stories of how did you build it from A to Z. And now we’ve gone into a balance of that in what specifically did you do or how could you network or how could you do this? And it’s also interviewing some people that have worked for large companies who have helped. I’ve had people from manufacturers on the program who helped contribute to building a small business.

Anyway, programs called Small Business Horsepower. You can find it on Apple Podcast, Google, Spotify. We hosted on Podbean or if you can’t find it in any of those places, you can go on our website that we launched in conjunction with that, which is called smallbusinesshorsepower.com.

John Warrillow:

Fantastic. And of course, we’ll put links to that at BuiltToSell.com as well. Mehul, this was fun. Thanks for doing it.

Mehul Sheth:

Again, John, I really appreciate you having me on the program. It was just so much fun to be with you and thank you for everything.

John Warrillow:

Hey, if you like today’s episode, you’re going to love my new book, The Art of Selling Your Business. The book was inspired by the cohort of my guests over the years who have been able to negotiate an exit far better than the benchmark in their industry, sometimes two or three times more than I would have expected. I was curious to understand the tactics and strategy to these entrepreneurs and what they do differently from average performers. The result is a playbook for punching above your weight when it comes to selling your business.

To learn more, go to BuiltToSell.com/Selling, where we put together a collection of gifts for listeners who ordered the book, just go to BuiltToSell.com/Selling.

Built to Sell Radio is produced by Haley Parkhill. Our audio and video engineer is Dennis Labattaglia. If you like what you’ve just heard, subscribe to get a new episode delivered to your inbox each week. Just go to BuiltToSell.com.

Outro:

Thanks for listening to Built To Sell Radio with John Warrillow. For complete show notes with links to additional resources, visit BuiltToSell.com/Blog. John is the founder of The Value Builder System™. To find out how to improve the value of your business by 71%, visit ValueBuilderSystem.com. John is also the author of Built to Sell: Creating a Business That Can Thrive Without You and The Automatic Customer: Creating A Subscription Business in Any Industry. Connect with John at Facebook.com/BuiltToSell or on Twitter @JohnWarrillow, W-A-R-R-I-L-L-O-W. Thanks for listening.