The days of holding onto a business until you retire and then passing it on to your children and eventually grandchildren may be coming to an end. More and more entrepreneurs are looking to create (or acquire) and then sell a business in just a few years at a substantial profit. But how do you know what business to get into and when the time is right to sell? We caught up with three area entrepreneurs who have made their mark turning short-term business ventures into high-end profits.
Mark Swanson backed into the business that first made him a millionaire. Now involved in Sarasota's Startup Florida and a local real estate project, the former Atlanta businessman knew when he formed Swan Interactive Media in 1993 that his technical skills and natural entrepreneurial bent would serve him well. Even though he didn't have a product yet, he started with an ultimate goal-create a successful business and then either take it public or sell it in five to seven years.
"I didn't start with a product. I started with a problem," Swanson says. "I knew that businesses were interested in going paperless but I wasn't sure at first about how to take them there. I looked at the problem and saw an opportunity to create something new. I sat down with the customer and let him tell me what he was looking for."
Switching from product-centric thinking to problem solving was the key to Swan Interactive Media's success. Through networking in the Atlanta area where he was based, Swanson heard that BellSouth and Holiday Inn Worldwide were looking for a way to leverage emerging computer technology to help their corporate marketing departments. Initially he focused on developing CD-ROMs as a marketing tool. Then he figured out that it was more efficient to compile data on a network and offer it through the Internet. But the concept of using a large-scale network of connected computers was cutting edge at the time. With a clearer notion of where he wanted this new technology to take him, he was able to convince those two giants of industry that it would be worth their while to take a chance with his fledgling company.
"We were able to develop our new technology on the customer's dime," Swanson says. "First, we convinced them that we were knowledgeable and credible. Second, we showed our know-how from a planning perspective and putting a team together. And third, we developed a price that they were willing to accept."
These initial contracts led to more business and Swan Interactive Media started taking on large corporate accounts including SunTrust Banks, AT&T, Lucent Technologies, KinderCare and PriceWaterhouse. But the payoff didn't happen overnight.
"I basically bootstrapped the business by funding it out of the growth of the company. I put in a lot of sweat equity," Swanson says.
A few years into the venture, Swanson decided to seek investors. One convinced Swanson to join up with his company.
"We combined efforts. The new company went public in 1999 and I sold my shares in 2000 and 2001," he says.
From his own investment of $50,000, Swanson's sale of his shares netted him several million.
"It's great to have a plan," Swanson advises, "but it's even more important to be able to recognize an opportunity when you see one."
Dan Barwick's recipe for success took a different turn. Rather than creating a new business venture from scratch, he and one of his brothers had had their eyes on Sarasota-based Baker Electronics for more than a decade. A third brother had started with the company in the '70s and worked his way up to the presidency. By the early '90s, the Barwicks knew that Baker-a leader in cockpit aviation best known for the famed "Baker Box," a cockpit audio panel-was a solid organization that was in need of some updating if it was going to survive.
"Baker's key product, the Baker Box, was rather out of date. The competition had hurt the company badly and even though Baker had started to lose market share, they had strong brand identification," Barwick says.
Barwick did his research and learned that the field was wide open in cabin management equipment development, for the commercial aviation industry
"Research was the key to our moving forward with Baker," Barwick says. "In the 1980s, cabin management equipment was basically for controlling the cabin lights and adjusting the temperature. In the late '90s and early 2000s the technology exploded. Cabin management started becoming more sophisticated and included technology to operate entertainment equipment like DVDs and video, and building moving map displays."
When Barwick purchased Baker in 1995, it was hard knowing what was going to happen with the industry. "We did our research," Barwick says. "We looked at the number of airplanes being built and tried to estimate the refurbishment market. That, we thought, was where the future was going to be, cabin management refurbishment. It turned out that the market was moving toward new aircraft."
Through careful research, Barwick pinpointed where he needed to take the company. He set out a five-year plan to get into the cabin management arena, and then either find a strategic buyer or take the company public.
"When we bought the company, we figured there were two ways to formulate an exit strategy: either take it public, which is not a good idea for a medium company, or sell it to a strategic buyer," Barwick explains. "We asked ourselves, who was already in the business of providing equipment to aircraft manufacturers? We found that there were really just 10 to 12 companies in that business."
Through his meticulous research, Barwick isolated three likely future buyers, Honeywell International, Thomson-CSF (now Thales) and Rockwell International. Moving forward with his strategic plan, he positioned Baker to work on collaborative projects with companies who might become strategic partners in the industry, knowing to remain competitive, they needed to expand their coverage in the business aviation market. Eventually, according to plan, Honeywell approached Baker with an offer to purchase the company.
Barwick's initial investment which he calls "low eight figures" yielded a sale in the "medium to high eight figures" at the time of sale in 2002.
"Companies are either technology-driven, process-driven or customer-intimacy driven," Barwick says. "When you get into business you had better define which it is going to be. At Baker we started with a primarily technology-driven company, but realized that we were really customer-intimate. We were successful because we hired and kept good people and we knew how to handle growth when it came. And we were damned talented at doing our research and anticipating where the market was going. Relying on research was a smart way to go. You can rely on intuition, but the people who do are probably more lucky than smart."
Along with creative problem solving employed by Swanson and the research-driven model employed by Barwick, another area entrepreneur, Rich Swier, has learned the hard way how important timing can be.
"I now know that the right time to sell a business is when you hit the right mark that falls somewhere between profit and greed," Swier says. "Knowing when it's time to let go is more an art than a science. You look for the point where you reach a return that you think is the best you will see from your investment."
Swier, who had dabbled on the Internet during his college years, made his mark early in the information technology world. "The first time I saw the Internet was my first year in college. All I knew about the Internet was that it was a good way to talk to girls."
In 1994, when he was just 21 years year old, Swier decided that the up-and-coming Internet might be a place to throw his hat into the ring.
"This was before the first browser was available. My partner and I were doing some computer work for a print shop. We put all the money we made at the time, along with about $5,000 we borrowed off our credit cards, into our new business. It's kind of comical, looking back. We were just kids. We kept asking ourselves, how are we going to learn to do this? We had to teach ourselves. We were creating on Tuesday, learning on Wednesday and selling on Thursday."
The pair created the first Internet service provider, or ISP, in Sarasota. By providing dial-up Internet access to consumers, and coming up with the innovative idea of offering local businesses the opportunity to increase visibility by advertising on the Sarasota site, Sarasota Online was one of the first virtual cities on the Web.
"We decided to drive traffic to our site so that we'd create a community-based feel. We put up all the community hot spots, the arts organizations and other nonprofits as well as local businesses. Michael's on East was the first local restaurant to go on the Internet. We basically were one of the first to create a virtual city."
Six months after starting Sarasota Online, Swier was approached by Comcast. "We had invested six months and $5,000 of our own money and Comcast approached us with an offer to buy the business for a million dollars. We sold it and a few months later, Netscape went public. It was one of the biggest IPOs ever. We sold too early, but we learned a lot."
Swier knew he had sold Sarasota Online just before the big Internet boom hit and he was determined to learn from his mistake (if you can call making a million dollars off a $5,000 investment in six months a mistake). He raised $1 million from investors in 1997 to start his second business, Backsoft. Eager to ride the second wave in Internet technology, he focused on e-commerce, creating software that would allow bricks and mortar companies to expand to the Internet. Although he had had numerous offers to sell Backsoft, he held on to it until 2001.
"When I finally sold Backsoft in 2001, it was a fire sale. I sold it for $3 million. I had turned down an offer in 1999 to sell it for $12 million," Swier says. "Backsoft was a great company with a great vision, but other factors, like the market crash in 2001, came into play."
"It's hard to predict when to hold 'em and when to fold 'em," Swier says. "A lot of it is just gut, a sixth sense. Ideally, I look to make 10 times my investment. That's perfect for me. If I try to get 20 times, I might lose out to the competition or the economy could tank. You've got to always keep your investors in mind. Your investors are your lifeline and the last thing an investor wants to do is give you their money to hold."
Swier also adheres to the philosophy that a good exit strategy is necessary from the outset.
"If you don't have someone there who is willing to buy your product," he says, "then you've got to go public. That's a big if and not a good liquidity strategy. A true liquidity strategy is to get acquired."
Swier acknowledges that the high-stress world of creating and selling businesses isn't for everyone. "You've got to have the stomach for it. If you don't, get out of it. I go to bed scared every night, but then I wake up motivated."
Cliff Wildes' tips for a smooth sell.
When Sarasota-based serial entrepreneur Cliff Wildes took Morgan Beaumont, a technology company that produces money cards for the sub-prime market ("the credit-challenged and un-banked consumer" consumer), public through a reverse merger last year, it was the eighth time since the early 1980s he'd sold a business he'd started.
Wildes readily admits that his entrepreneurial talent lies in formulating the business idea and starting up the company-he's both been the founder of Microtech International, which he sold to a publicly traded Japanese company in 1994 when U.S. domestic sales reached $60 million, and co-founder with famed guitar designer Wayne Charvel of Ritz Guitar, who designed guitars for Eddie Van Halen, among others. But when a company grows beyond 25 employees and the bankers and lawyers and corporate bureaucrats start to take over, that's Wildes' cue to move on.
Now the Zen master of exiting a venture offers his top 10 tips to accomplish the big sale.
ONE Plan an exit from the start. As you draft your business plan, include an exit strategy. You may not want to distribute these exit plans to potential investors or partners, but knowing up front that you plan to sell will put you in the proper mindset. If you operate the company as if you are preparing to sell it, merge it or take it public, you will be more disciplined, the accounting will be more efficient, and you won't be as emotionally invested. "As someone once said, 'If you don't know where you are going, every road will take you there,'" says Wildes.
TWO Use professional services. Hire attorneys to review and/or draft your contracts. Use professional accounting services to ensure your company is always audit-ready. Outsource payroll services, which can also often provide insurance and benefits services for your employees. Get a good insurance agent who can set you up with the right insurance policies, including business interruption insurance, which is important in the technology industry. "When you start talking with venture capitalists or banks, they will ask you who drafted or reviewed the contracts," advises Wildes. "Professional services will bootstrap all those details you need to enable an audit or sale."
THREE Keep detailed records. Just as a potential buyer or investor may ask about your professional team, they will want to see how your company developed and how it works. Wildes keeps all of his company's contracts and other pertinent documents in organized binders, explaining, "It helps with audits, with attorneys, and it ensures that there are no IRS problems."
FOUR Make sure you own the code. It may be your business's most valuable commodity-that program, process, system or concept you developed. Hire an attorney to help you procure the patent, copyright or other appropriate legal rights that you need.
FIVE Don't believe your own B.S. You have to have confidence. You have to believe in your company, your product or service and yourself. But know the difference between reality and your sales pitch. If you start believing your own sales pitch, you're going to have major problems.
SIX Surround yourself with people who can take you where you need to be. Entrepreneurs are notorious for failing to delegate. When many business owners do bring people on board, they are often inferior underlings, people the business owner can control. The smartest entrepreneurs have the confidence to bring on board highly capable people. Then they give them the authority they need to do their job. A management team of intelligent, competent individuals is going to be far more successful-and ultimately far more attractive to buyers or investors-than a team of yes-men under a dictatorial boss.
SEVEN Never hire good friends or family. "When you hire family or good friends, you tend to overlook their weaknesses and make excuses for them," says Wildes. "And that can hurt the business. Once you start making excuses for poor performance, you step through a door into a different world. This is business."
EIGHT Treat everyone's money like it's your own. For most small business owners, the first layer of financing comes from family, friends and the business owners themselves. The second layer brings either debt (i.e., a bank loan) or equity financing (i.e. sales of ownership shares). Wildes advises business owners interested in an ultimate exit to always treat it all like your own; be frugal and responsible with the money, accounting for all expenditures.
NINE Lay the groundwork for the sale. Keep all your options for an exit method open at first, but through the course of business, be open to narrowing the field. Though your initial goal is to take the company public, you may find that a merger with another company will work better. Make people aware early that you are interested in talking, whether about a sale or becoming part of another company's expansion plans. The best places to go are seminars and industry conferences. You may also want to speak with investment bankers, who know which companies may have plans that could include your company.
TEN Adequately define your business model, but include "technology" if you can. Your business model should be defined clearly and specifically enough to spell out its value. But Wildes advises any business owner, regardless of the industry, to incorporate a technology element into the business description. "It's the future and people always bet on the future," Wildes says. "Emphasize the technology element; it can distinguish you from your competitors. More importantly, it is a valuation multiplier; you get higher multiples in a stock valuation for a company with a technology element." -Kendall Jones