This Little Piggy (12) Bob was about to light up himself when Tothson opened a wooden cigar box. “Please,” he offered. “Try one of these.” “A Facundo?” “Sold only in Cuba. I’ve got this newspaper in Puerto Rico, El Progressino, run by some Cuban expatriates.” His eyes twinkled. “Somehow my boys get them, and like magic, a box just appears in the interoffice mail, routed through the Dominican Republic. If we have a drought, Barbara slips down there in her plane,” smiled Tothson. “How did you get into the barter business?” asked Bob. “My background is direct marketing,” began Tothson. “I worked for the old Longines-Wittnauer watch company and then the Columbia Record Club. We were big in marketing directly to consumers. At the end of every annual clearance drive, we still had inventory left over. Management would trade it for media credits to avoid a write-off. Interestingly, regardless of which Company they dealt with, the credits were rarely utilized and disillusionment always set in. (Tothson failed to mention that he bought some of his own inventory for cash at bargain basement prices and attempted to remarket it overseas at a significant profit. Unfortunately, his overseas ‘partner’ took title to the inventory and disappeared. Leaving Tothson about $1,500,000 in the whole. He eventually declared personal bankruptcy, but for a nominal extra fee was able to find a court clerk who removed his personal bankruptcy from the public records. The bankruptcy left a significant impression on the manner in which Tothson conducted future business. He refused to put any of his own cash into a deal, hence his exclusive reliance on using receivable barter to purchase inventories. Nachman knew nothing of the bankruptcy. He just assumed Tothson was a chicken-shit cheapskate.) “I decided to enter the business with a point of difference—integrity. Mansfield has a staff that does nothing but assist clients to exercise their barter credits. Sam and I work well together. We have complementary skills and that makes us tough competitors. Sam decides how much cash to offer the manufacturer, what price to sell the goods for, and which channels of distribution to utilize. I analyze a company’s media needs and purchasing patterns, then devise a plan they can use, building a trusting relationship which makes for repeat business.” “United Medical was always about delivering on what I promised,” boasted Bob, who suddenly went strictly for numbers. “So what’re your annual earnings?” “I’ve never been publicly audited, but I would be willing to guarantee I can deliver a net of three and a half million dollars per year for the last three years. My goal was to build a business I could sell, so we’ve kept impeccable books and records.” “Are you certain they could pass the scrutiny of a public audit,” asked Bob. “Absolutely. On my mother’s grave,” smiled Tothson. “How much do you want?” blurted Bob. “I recognize that as a private company Mansfield only has appeal to a select group of buyers, so I’ve discounted my purchase price to only ten million up front, or about three times earnings. I’m prepared to earn anything above that on a performance basis.” “Sounds fair,” said Bob. Michael remained silent, as the two egomaniacs sunk deeper into their own bullshit. “Sam said you were a straight shooter. We’ve met so many guys who are just after our pot of gold. That’s why it’s always better to do business with people you know or are referred to you by good people.” Tothson took a on his cigar as he slipped a little goody under the radar. “There’s a bit of inventory from past deals, as was the case with Nachman, that would obviously inure to my benefit,” said Tothson. “As I see it, Mansfield is essentially a goodwill purchase, with an ongoing management team, and a historical earning stream.” “How much inventory are we talking about?” “The spreadsheet entry is thirty million because I overstate my balance sheet to enhance my credibility for sales purposes, but on a liquidation basis, the inventory’s worth pennies on the dollar.” Tothson, a natural salesman, moved to the assumed close with a little smokescreen. “ As you can appreciate, since we’re talking such a low acquisition price for Mansfield, I’d like to net as much of the ten million as possible. My attorney, Dan Boyar, will be happy to work with you on the most mutually advantageous purchase structure. I presume those legal fees would be an ITI expense.” “How much?” “Tops fifty thousand dollars.” “I’m not sure that’s fair,” said Bob, demonstrating he was not about to get nickel and dimed. “Let me sleep on it.” “No problem,” said Tothson who realized two things: Goldstrom had just left millions on the table, and could probably be had for even more. “I know you’ve done a lot of these transactions before, so maybe you can help me think through another issue.” Bob’s vanity puffed on the Facundo. “I’ll do my best.” “For a number of years, under advice of counsel of course, we’ve accumulated earnings to avoid paying taxes. Consequently, we now have a rather large cash buildup that can potentially be distributed as capital gains or ordinary income. That’s an income tax differential of almost twenty-six percent. How do I make sure I don’t make an obvious mistake here?” “I’m sure we can structure something. How much?” “About twenty four million.” “There is one other thing,” said Bob, completely oblivious that Tothson had stripped the company of working capital by removing all the accumulated cash. “Your books do need to meet public accounting standards. Audit fees to clean up the books are an expense of the seller.” “How much.” “In the neighborhood of a hundred thousand dollars for a three year audit.” “Wow, that’s a lot of money.” Tothson faintly protested. “You’re not dealing with General Electric here.” “This is a deal point,” Bob insisted. Tothson acquiesced, knowing he had given up squat because Mansfield was unmarketable without an extensive third party audit. * “I THINK WE JUST agreed to a ‘zero net worth transaction,’” said Michael sarcastically as they left. “What the hell is a zero net worth transaction?” snapped Bob. “Sounds like advertising jargon to me. In corporate finance, nobody uses ridiculous terms like that. I’ve completed hundreds of acquisitions; each has their own rhythm, their own individual peculiarities, partially based on the wants and whims of the seller. The trick is to give the acquirees the appearance they got what they wanted plus some, while in reality never giving away anymore than originally planned.” (Michael heard Krotsky’s “The perception versus reality of the peanut butter thief” conundrum reverberating in his ears.) “That’s what we just did,” Bob pressed on. “Tothson got what was fair, until he tried to cross the line by nickel-diming us over legal and accounting fees. That’s just the way these characters are. You’ve just got to be firm. “’Zero Net Worth’ isn’t advertising lingo,” argued Michael with surprising insight. “But the true value of an acquisition after it has been stripped of its underlying real book value. We’re paying ten million for Mansfield’s historical earnings stream and a startup, or start over as the case may be, with a high fixed overhead. Plus Tothson keeps all the operating cash and all the existing inventory, while we get to keep all the barter credit obligations that generated the cash and the inventory in the first place.” “You’re over thinking matters,” Bob persisted. “It takes time to understand the subtleties of The Street. Knowing the way they think. From an investor standpoint, we are buying real value, real earnings. The Street loves earnings. We are simply giving them what they want. They don’t care about balance sheet items. If you do your job right, earnings will grow exponentially, giving me the breathing room to complete a series of other financings. In a short time, the public will be clamoring to value us at fifteen to fifty times earnings, maybe more! Compared to those dotcoms, we’re a real company.” ########## Chapter 9. Visiting Toyland KROTSKY CALLED BOB with disquieting news. But Bob was already a step ahead. “Martin is moving to Florida. He explained he had a ‘unique investment opportunity,’ which means he won’t be accessible to ITI as a financial advisor. Frankly, I’m not sure if he has just lost interest or there is some SEC complication and he’s trying to disappear. I didn’t push the issue.” “We both respect Martin’s intellectual firepower and his marketplace insights,” replied Bob, who wouldn’t miss Martin’s abrasiveness, arrogance and greed. “Yeah he lost interest alright, like in ‘Ray cash me out, I want my five million now. “ “What are you talking about?” Ray Dothan told me Marty sold his entire position. “ “Disloyal bastard,” complained Bob. “And to think I made the man.” “Robert, don’t get yourself agitated. I pretty sure I have an acceptable replacement.” “Who?” “Lou Braffman, a terribly discreet CPA I’ve known for many years,” suggested Krotsky. “He has an interesting practice with relevant experience.” “Such as?” “Financial advisor to a select number of successful entrepreneurial companies and excellent connections with the major accounting firms. He’s also very aggressive on income recognition issues.” “Sounds like our man. Let’s meet ASAP.” Clearly, Bob still needed Krotsky. He wasn’t ready to tell him Delano Mondrain Hudson had replaced him. * LOUIS BRAFFMAN WAS an instantly likable, jovial sort with a homely face almost hidden behind thick black horn rimmed glasses. Hardly a fashion plate, Lou’s off-the-rack suits never seemed pressed or his shoes shined and he was always wearing a stain on him somewhere. His practice was located in the historic Lincoln Building across from Grand Central Station. The lobby had beautiful brass work and hand painted ceilings, but the actual tenant floors had old tile floors and dull walls. One needed a key to use a bathroom. There were shared suites with odd company names: A.D. Sutter & Beckstein and Benton, Leader, Sampson, Trockey and Fine. Lou’s offices were modest but professional. He greeted Bob and Krotsky with a big smile. He didn’t waste a minute getting to business. “I’ve made a career out of working with acquisition minded entrepreneurs.” Bob cut to the chase. “What will your services cost ITI?” “Twenty thousand dollars a month should cover all the basic bookkeeping chores, my financial advice and counsel,” replied Lou with a straight face. “And any help you might require on acquisitions analysis.” “Why so reasonable?” asked Bob. “I expect to get compensated in other ways,” came the reply. “What does that mean?” pressed Bob. “I have a few clients who might be acquisition possibilities,” said Lou. “Should any of those deals come to fruition, I’ll collect a fee from the acquired company. Consequently, taking a higher retainer would make me feel like I’m double dipping. I don’t operate like that.” “ITI is going to need a public accounting firm,” said Krotsky, hoping Lou would take the cue. “Income recognition issues surrounding non-cash transactions is a minefield.” “Not a problem,” said Lou. “I have somebody specific in mind.” “Let me guess,” said Bob. “You get a referral fee from the accounting firm.” “It is the custom,” said Lou with a smile. “But I’ll disclose such referral fees in advance. There’ll be no hint of conflict.” Bob instantly took a liking to Lou; his forthrightness, his entrepreneurial triple dipping and his immediate grasp of ITI issues. “I’m curious,” said Bob. “Do you also get a referral fee on the paper you use in the audits?” “Good point,” chuckled Lou. “I’ll check into it.” Bob couldn’t help but laugh. Then he reached for his inside jacket pocket. “How about a cigar from your new client?” “I’m sorry,” said Lou, waving his hands. “I have a very low tolerance for cigarette smoke. My employees don’t like it, and my wife and daughter smell my shirts before they go to the laundry.” Bob put the cigars back. They shook hands. “Didn’t you read the Surgeon General’s report on second hand smoke?” asked Lou. “Almost sixty-seven percent of people who inhale nicotine...” “Lou,” Krotsky cut him off, “earlier you mentioned there might be an acquisition candidate worth discussing.” “Oh yeah, right. Ever hear of F & M Industries, a wholesale distributor that specializes in excess toys?” Bob and Krotsky shook their heads. “Nice, well run little business,” said Lou. “The owner, Jerry Foreman, is a hard nose negotiator. Jerry’s almost sixty, lives well, but wants to put some capital in the bank for his children and grandchildren. His two sons, Steven and Bobbie, both work in the business.” “How big?” “About twenty million in revenues. Two million in earnings after taxes.” “Sounds like they could be worth a meeting,” said Bob. “Do you think Foreman could work with Sam Nachman and Fred Tothson?” “You’re talking to Nachman and Tothson?” asked Lou. “’Talking’?” said Bob proudly, “We’ve already agreed a deal to acquire both of them.” “I thought you only raised ten million from the IPO?” said Lou. “Just the beginning. Nachman, Tothson and whomever, will be part of a new round of financing. The idea is to sign up a group of synergistic acquisitions, then identify a major investment banker to fund the deal.” “What kind of capital are you looking to raise in the next financing?” “A hundred million, maybe more.” Lou pushed his glasses down his nose, and looked over the top. “Are you sure?” “Of what?” “You can raise a hundred million.” “I can do it in my sleep,” bragged Bob. * “WATCH AND LEARN,” Bob advised Michael on the way to the F & M offices. “My research tells me Foreman could be tougher to deal with than Tothson and Nachman.” Filled with tourists, the lobby of the Empire State Building lobby was sixty feet high finished with brushed steel gargoyles and highly polished gray and white granite. The twenty-fourth floor had glossy white walls, and black and white tile floors and yellowed drop ceilings like nineteenth century pharmacies. The F & M lobby had an unreal look about it—mirrors, chrome fixtures, funky knock-off contemporary Italian furniture. So did Jerry Foreman. He came on with a big smile and a strong handshake and though it was February, he appeared to have a healthy tan like the Miami Beach commuter set. Then Michael noticed a patch of white skin where Jerry’s shirt collar and neck met. Jerry’s attire was perfectly coordinated—expensive sharkskin silk suit, silk shirt with monogrammed cufflinks, even dark silk socks. Remarkably, at sixty years old, he appeared to have a full head of wavy black hair straight and not an ounce of body fat. “Lou spoke very highly of you gentlemen,” said Jerry and then admitted, “I don’t quite understand what you’re up to.” For the next twenty minutes Bob gave his ITI speech, but when Nachman’s name came out... “That son-of-a-bitch! He stole my Mattel deal last season” said Jerry angrily. “That won’t happen if you’re on the same team,” Bob assured him. Foreman wanted to say more but he bit his lip. Nachman’s bribes and payoff modus operandi had derailed at least a half a dozen deals that Foreman could remember. But Foreman saw Goldstrom as a payoff of a different kind. “We’ll be using Fred Tothson’s expertise in issuing and fulfilling barter credits so we can own excess merchandise at an even lower overall cost,” boasted Bob Tothson too! Another crook, thought Jerry who again responded with restraint. “I gather Tothson’s got his following. But as far as I’m concerned, cash is the only way to buy merchandise. It’s harder competitively but it’s the right way. The manufacturers know I’m a tough negotiator. They get cash up front and I work with them on the proper channels of resale. My word has been my bond for twenty-five years.” Bob looked over at Michael, hoping he’d say something. He didn’t. “F & M may be a little too conservative for ITI,” Jerry went on. “We don’t buy merchandise unless we have a good idea it’s pre-sold. We don’t shoot from the hip. We are a nice company with a slow, but steady growth pattern. That strategy has made me and my family very comfortable.” “If you’re so happy, why consider selling?” asked Bob. “I want the kids and grandchildren never to have to worry about money,” said Jerry. “I also want to leave an important contribution to the United Jewish Appeal charity.” “How important? asked Bob. “A million dollars.” “To a charity?” asked Bob incredulously. “Bob,” its partially because I’m a Jew. More importantly, it’s for my father.” “Your father?” “When ee came to this country, we had nothing. He did anything and everything to support his family. He was a shoe-maker assistant, a garbage collector. He even delivered ice. But he never complained. He said Jews always had a more difficult time than other people. I must have been twelve years old before papa and mama gave me my first real birthday present – a slightly used red metal fire truck that had a moveable yellow ladder and three firemen. I loved that truck. Eventually, when I got older, I traded the truck to another young boy for three toys. That’s the first time I realized you could buy and sell toys. As far as I’m concerned that was F&M’s first transaction.” Michael was touched. Bob could care less about Foreman’s red truck! “Jerry, if you don’t mind me asking, what does F&M stand for,” said Michael. “F is for Foreman. The M is for Moishe. Papa’s always with me.” “Jerry, we’ve got another meeting. I hope you don’t think I’m rude,” interrupted Bob. “But, it sounds like there’s a lot of family tied up in the business. Are you sure you want to discuss a potential sale?” “Personally, I’m comfortable because I sold F & M once before.” As far as Bob was concerned, the real negotiation was about to begin. “Got three million up front from a small public retailing company that didn’t know what the hell they were doing,” continued Foreman. “Went bankrupt in two years. But it worked out fine. We negotiated with the courts, got F & M back for next to nothing and rebuilt it. Now, it’s time. I’m ready to be a corporate player—unlike some of those names you mentioned.” Cynically, Bob assumed the whole sorid story was a negotiating ploy—albeit an inventive one. He let Forman continue to talk, as he looking for a negotiating angle. “One thing we have to understand here and now,” insisted Jerry. “Any purchase agreement must include exactly the same repurchase clause I had before, just in case ITI doesn’t deliver.” “We’re getting a little ahead of ourselves,” said Bob. “We need to review your financials.” “No problem,” said Jerry. “Lou’s got everything. You look over the numbers. Tell me what you think is fair. I don’t need to be a pig. Life is too short. In the meantime, why don’t we get to know each other better?” Jerry invited his two sons, Bobbie and Stephen, to join them. “Boys, meet the owners of a company called Integrated Trading International. They have a very interesting growth concept. We might fit very well, although I have certain reservations. I’m sure they are going to have due diligence questions and such. Bobbie, I’d like you to work with them on anything they need.” “Sure Dad,” said Bobbie. In his late twenties, he was thin, quiet and conservative. The exact opposite of the father, he handled internal operations. “Perhaps one of you might want to spend a few days with us, observe the operation in action,” suggested the more animated Stephen. In his early thirties, he was a lot like his dad, without the fake, oily tan. “It might also be useful to meet some of our clients. The more you know the better.” “That’s an excellent idea,” said Michael finally. “You’ve been sitting there doing nothing,” Jerry joked warmly. “Who are you?” “Technically I’m the COO. Before I joined ITI, I was a senior officer at A&J Advertising Agency, managing about four hundred million dollars in billings, had a thousand or so people in my group, etc.,” said Michael. “I’d probably be the one working closely with Bobbie and Stephen.” Jerry and his sons were impressed with Michael’s low-key delivery and substantive background. “Cool!” whistled Stephen. “Can we set a date?” asked Bobbie. “I want to be upfront, and not waste anybody’s time,” said Jerry. “There are certain things that are nonnegotiable. As long as I’m here full time, I make all the final decisions on deals. Also, I sell my entire existing inventory. I don’t want some hotshot coming in here telling me how to sell what I’ve purchased…with all due respect to Michael.” “Jesus, after all that fairness stuff, don’t you think you’re being a bit excessive, demanding that existing F & M inventories be liquidated and the proceeds placed in your pocket?” asked Bob. “What the hell are you talking about? If I sell you the Company, how could I possibly keep the inventory?” laughed Jerry. “That doesn’t make sense. What the hell would you be buying? I want control over the inventory to make sure we abide by our contractual agreements---that’s how we get repeat business. Typically, about ninety-nine percent of our contracts identify
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