Podcast: A Serial Entrepreneur's Guide to Building and Selling a Business
Most business owners only sell a business once. Serial entrepreneurs are a different breed, though. They understand maximizing value and exploiting market timing. In this podcast, David Finkelstein shares his experience on building & selling businesses.
In this session you will learn about:
- Importance of housekeeping in a business sale;
- How to find the right buyer for your business;
- Possible tax implications on a sale; and
- When is the best time to sell.
About the GuestDavid Finkelstein has been a serial entrepreneur since 1994. He is currently the owner of Contextuads, LLC, an internet advertising business expanding into big data. David has successfully built and sold two internet businesses.
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Read the Full Transcript Here:Noah Rosenfarb: Hi. This is Noah Rosenfarb here with another of our episodes for the Divestopedia Exit Strategy Podcast. I’ve got a great guest with us today. Everybody loves it when we bring on different business owners and today we have a great one with David Finkelstein. He started his first company over 20 years ago - great creator and entrepreneur - and went on to do it again, and he’s doing it again. He has lots of stories to share with us today. David, thanks for joining us.
David Finkelstein: No problem. I’m happy to do it.
Noah Rosenfarb: Great. Why don’t you start by telling our listeners about when you started your first business, what motivated you to get out and create a company, and walk us through the sale of that business and what you learned?
David Finkelstein: Sure. The first business was started in 1994. I was actually only about six months out of college. I guess I kind of always knew I was not the type of person who’ll work for someone else so I ended up starting my own company at a pretty early age. It was an Internet company - an Internet service provider - and quite frankly at that time I was just looking for Internet access. In 1994 it was kind of hard to come by but I was used to using it at college. There really weren’t any Internet service providers in my area, in New Jersey, at that time, so I looked to a friend of mine and the two of us got together and decided we could start it out on our own.
We did that, like I said, it was in 1994 when we officially formed the company, although we had started about six months prior. Then we grew the company over the course of about six years and ended up selling it in 2000 to a company called US Cable Corporation, which provides cable systems in about 13 states. It was an interesting transaction. At that time, I thought my company was worth more than they thought, of course, which is normal, so it did take a long time for us to negotiate an agreement. I think that overall, I’m happy with the transaction but mainly because I took the advice of some of the advisers that I had, which I know that you talk about a lot, being important, making sure you have advisers that can help you along the way. My advisers were really my accountant and my attorney and without them I don’t think I could have had a successful transaction.
Noah Rosenfarb: Tell me about before you got US Cable Corporation to make you an offer. Were you shopping the company for sale? What was motivating you and what was motivating them and how did you meet up?
David Finkelstein: Well, I’m not sure what motivated me would be the same as what motivates everybody but for my motivation, it was that I found that I was the type of person that really liked to build a company. The company that we were running was running pretty well and it was getting to the point where I found myself spending more time managing people than building the company and for me, the day to day management of people was what made me want to sell the company. It just wasn’t in my character. I always tell the story that one day I got into the office and never really sat down in my desk. I spent the whole day going from desk to desk helping other people, managing everyone, and by the end of the day I realized I still had a bagel from breakfast sitting on my desk.
That’s when I realized that I no longer enjoyed what I was doing. I guess I had the option of maybe hiring somebody to manage the business more so I could concentrate on growing it, but at that time - when I first was looking to sell the company it was in 1993 - and the dot.com bubble was huge then and it hadn’t burst yet so Internet companies were selling at really high multiples and I said to myself, "Wow, this is a really good time to sell the company." I really spent, quite frankly, about six to nine months just looking for a buyer. I worked with various different brokers to help me find the right buyer. I took some of the wise advice from some of my advisers not to do a few deals actually that I was offered. There were a lot of companies at that time which were trying to do reverse IPOs and rolling up ISPs and things like that and a lot of things that didn’t have much of a guarantee of success. My advisers were telling me, "Get as much cash as you could in the deal because you just don’t know what the future’s going to bring when someone else takes over your company and how successful they’re going to be able to make it."
At that time, we ended up finding - actually, one of the brokers I was working with had introduced me to US Cable and they had made me a really sizable offer that unfortunately got talked down quite a bit after the dot.com bubble burst. They started saying, "Well, the company’s not as valuable as it used to be," because all Internet companies were not quite as valuable as they were at that time. But we ended up coming to terms and coming to an agreeable deal.
Noah Rosenfarb: Did you do any housekeeping at the recommendation of the business brokers or were you pretty much trying to run the business half a day and trying to sell the other half?
David Finkelstein: I actually did do a lot of housekeeping over that time, mostly from the advice of my accountant and my lawyer. The brokers also came in and helped me cleaned up some things that they knew that other companies would want to see in their due diligence, so from an accounting point of view we made sure that we had everything documented, all our contracts and everything, as well as employment agreements and everything. We just made sure that we had everything ready so that when a buyer was there and wanted to do their due diligence, we were able to present them with everything that they needed to see.
Noah Rosenfarb: Yeah. From the time you first hired a business broker until the time your deal was closed, did it end up being two years?
David Finkelstein: It ended up being about a year and a half. The deal took somewhere - I don’t recall exactly - but somewhere around nine months to close and I was looking for about six to nine months, so easily a year and a half.
Noah Rosenfarb: Right. Okay, what would you say was kind of the biggest lesson you learned through that process - a year and a half - before you got to post closing, what did you learn pre-closing that you think our listeners should learn from you from what you did right or what you did wrong?
David Finkelstein: You mentioned one thing. It’s the housekeeping. It’s definitely an important point. I spent a lot of time in that year and a half making sure that I had basically all the company’s documentation in order. Luckily - I guess in a way luckily - it took a year and a half to close the deal so I had a lot of time to do that, but I would definitely recommend that if someone’s looking to sell a company to think about that first because it doesn’t always take a year and a half. If you do find a buyer early on, you don’t want them to come asking for something and then you don’t have it. It just will give them the wrong taste in their mouth and could cause the potential buyer to back out.
Noah Rosenfarb: Yeah. One of the things that we often recommend when we work with owners that are just contemplating what the next transition’s going to be for them, whether it’s going to be to an outside buyer at the highest price or maybe it’s going to be to a private equity firm or even sometimes to a management team, let’s do the pre-sale due diligence because it’s a great investment of time and effort and energy and money. Segregate all your data, get all your documents in a row, have it all somewhere, and that way its’ not going to be a problem. When somebody comes knocking and they want to see some records, you don’t have to have all of your management team running around trying to find the information for them to comply with their requests.
David Finkelstein: Yeah, absolutely.
Noah Rosenfarb: How about post closing? Tell us a little bit about what happened after the sale. What was your role and how’d it go?
David Finkelstein: Post closing, what happened was they took my Internet company and it became more or less a division of one of their companies. We’re not their parent company but a subsidiary, which was a local cable affiliate. I think that I learned a few lessons in the deal. For one, I ended up with some stocks that were not in the parent company. It was in the subsidiary, which limit its growth capabilities. I kind of learned a little bit from that. I also learned that I had to deal with the fact that I was running a company, still, that was now a division of their company so I was really working for someone else and no longer working for myself and that was a difficult transition for me, to have a company for six years where I made all the decisions and then overnight I no longer make the decisions. They made the decisions and what they said, I had to do. I didn’t always agree with those decisions and it was a really tough year for me. I ended up only spending one year with them after that. I think that I hadn’t really anticipated how difficult it would be to work for someone else in that manner. Had I known that, I might have tried to agree to do it more on a consulting level instead of full-time employment.
Noah Rosenfarb: Yeah. I think a lot of owners don’t necessarily think that through in advance and they have to take the deal structure as it comes to them. One of the benefits of advance planning is you can talk through with your advisers and, you know, what’s your exit plan or whatever it is that’s kind of taking the lead with you to say, "Do you really want to work for the buyer, go through the responsibilities and the authority that you have?"
We just had a great guest on last week. He was talking about capex and that if you’re an owner that’s used to being able to make capex decisions in your company and you think freely about what you want to do to grow your business, and now you’re constrained with the capex budget that’s controlled by higher authorities that, you know, you’re just one division or part of a larger entity, it will drive you nuts.
David Finkelstein: Yeah, I certainly experienced that in this transaction as well, absolutely.
Noah Rosenfarb: So then what happened? One of the things you had mentioned to me when we were talking about our interview was getting a tax bill that maybe could have been better prepared for or structured around some tax implications that you add to the deal. Can you talk a little bit about that? What was the lesson learned there and maybe for our listeners, what should they be thinking about as it relates to their accounting and tax?
David Finkelstein: Definitely. That’s another mistake I’ve learned from. It’s okay to have mistakes as long as you learn from them. I started this business when I was six months out of college so business structures and things like that - and I didn’t go to business school - so business structures and things like that and tax, I really knew very little of. Unfortunately, throughout my years of owning this business I actually had a new accountant every - I’d say every two years - because I just wasn’t happy with the accountants I had all the time. I wish I had the accountant that I have now but I didn’t so one of the things was that we had, when we had formed the company we had formed it as a C-corporation. The buyer wanted to do an asset sale. They wanted to buy the assets of the company and the way the company was structured as a C corporation, you know, I still don’t understand all the ins and outs of tax accountings but the bottom line was my accountant said, "If we had known this we could have - actually my next accountant, not the accountant that did the transaction. The next accountant I had said, "If you had done that deal as an LLC, we could have saved you a lot of money in taxes."
It’s a live and learn type of thing, not knowing exactly how that worked when I formed the company and certainly not knowing before the sale of the company what type of transaction they would do, a stock or an asset kind of purchase. It’s a lesson learned and quite frankly now every company I’ve built since has been either an S corporation or an LLC.
Noah Rosenfarb: Yeah, and I think a lot of owners don’t understand the complexity and distinction between asset sales and stock sales. If you look on the Divestopedia website and type in asset sale or stock sale and go to the glossary, you’ll see a bunch of terms and it’ll walk you through the differences between asset sales and stock sales, for any of our listeners that want more information. So tell me, after you stopped working with the cable company what happened next? Did you start a new business right away or was that when you wrote the interactive book that you shared with me?
David Finkelstein: Yeah, that’s actually when I wrote the interactive book. I took some time off. My wife wasn’t happy about it at the time because she wasn’t happy I wasn’t generating any income, but I was pretty satisfied with the money I made off the sale and thought I deserved to take some time off. I took some time off and we traveled a little bit and while we were doing that I was writing that interactive CD and thought that the things that I had learned through the transaction would be useful for those that were looking to sell their business. Maybe I could help some people out by letting them learn from my mistakes.
Noah Rosenfarb: That’s what we’re looking to do on this show so I guess you had the idea before this podcast existed. Tell me about - it was intriguing to me that you were selling the CDs at the back of an entrepreneurial magazine. Did you think that there could be a business there or was it more of a, "I just want to share my experience with others?"
David Finkelstein: Honestly, it was just about wanting to share my experience with others. We sold the CD fairly cheaply just to cover cost, and I was kind of doing that while I was trying to figure out what I was going to do next, what my next business would be in. In all honesty, it led me into my next business idea.
Noah Rosenfarb: How did that happen? Tell me. Connect the dots.
David Finkelstein: Well, it all just started out with wanting to educate business owners and help them learn what I learned through my transaction. Then I started thinking about, from a small business perspective what other types of products or services I could provide to help them. At that time, Internet advertising was getting bigger and bigger and I said, "I wonder if there’s a product that I can build that would help people advertise their business better, and at the time the contextual advertising was kind of like the new thing, trying to match ads with content so that people can target their ads better. Before then, people were just kind of throwing ads out on the Internet and hoping somebody would click, and I was intrigued by the fact that contextual targeting was something that would really help businesses be able to target their ads better instead of just having to blindly throw ads out there on the Internet, and that’s what made me connect the dots and found another business that could help businesses.
Noah Rosenfarb: Tell me about that. How did that get started and who were your partners and what were the mechanics of that business?
David Finkelstein: It turned out, actually I had started talking about the concept with someone that worked for me at NIS, the company I’d sold, and the two of us started talking about ideas, just brainstorming ideas of what we might be able to do, put a whole bunch of flow charts and things down on paper on how it would work. We actually started it out as an eBay affiliate. Our very first product from ContextuAds was actually an eBay auction ad, as we called it, which helped people that were selling things on eBay to target those auctions within an ad and within an ad unit. We were actually the first - and only, as far as I know - eBay affiliate developer that had created a product that integrated both their developer API and their affiliate program which enabled us to make money through commissions from eBay for helping people target ads. Then eBay actually inquired with us about licensing that technology at one point as well.
Noah Rosenfarb: That’s very cool. That company is still in existence?
David Finkelstein: Yeah, it’s grown and changed a lot ever since we started it. We started it in 2002 so we’re into our 11th year and ContextuAds, although we still have the name, we actually target our ads mostly behavioral. Over the years, contextual targeting is still being used but it’s being used a lot less and behavioral targeting has become more of the focus in the advertising world and our ad system now targets ads behaviorally, contextually, and geographically, and ultimately works to help find the best method of targeting an ad for a user to make sure that the ads that they see are ads relative to things that they’re interested in.
Noah Rosenfarb: Who are your customers in that company?
David Finkelstein: What we did is we wanted to build a model that enabled us to work independently without having to hire too many staff members. As you may recall, I mentioned that managing people was not one of my favorite things about my prior company, so we actually looked at partnering with companies that already had advertisers so that we wouldn’t have to sell the advertising, and we’re actually partnered with companies like AT&T and Horizon and a few other major yellow-paged type companies that have large audiences of advertisers and we basically provide a third party service to them to help target ads for them.
Noah Rosenfarb: That’s great. While you’re busy running this business, you’ve done some other things on the side. Do you want to talk about maybe free air miles and tell our listeners how you got involved with that while you’re still running ContextuAds and where that went?
David Finkelstein: Sure. Freeairmiles.com was a company that was actually started by my brother-in-law’s brother. He came to me - this was back when I had my ISP service and knowing that I was owning an Internet business, he decided to come to me and see if I could help him start this company. He had the idea essentially of building a website where basically you could interact with advertisers and various types of things like take surveys and things like that on the website, but in exchange for doing that you were actually earning airline miles. We essentially built my company and the developers that I had built the back end of the system that would manage this whole thing. It was a great business actually. We had partnerships with American Airlines and a whole bunch of other airlines as well as a bunch of travel websites so when people earned miles they could either transfer them directly to their airline or they could buy tickets with any airline through the travel sites that we worked with. We’d basically just convert those miles to dollars for them through the travel agencies.
Noah Rosenfarb: Interesting. So what happened with that exit? Why was he looking to get out and what was motivating him to want to look for a buyer?
David Finkelstein: Well, what motivated him was dot.com bubble burst and he got really worried, to be honest with you. I was a minority shareholder so I didn’t have much control. I tried to encourage him to stick with it because at the time I hadn’t started ContextuAds yet but I could see the future of Internet advertising and I knew that advertising was a big part of what was driving, you know, where our revenue was coming from for Free Air Miles. I was pretty confident that Internet advertising still have a lot of growing to do and that it wasn’t going to be affected long-term by that dot.com burst, but he was quite worried about it without having the Internet experience that I had so he was destined to find a transaction. He ended up getting an offer - it was an all-stock offer - from a company called Search Hound.
Most people don’t even know who Search Hound was. Searchhound.com was interestingly enough the first company to come out with paid paper per click search listings much like Google has made billions of dollars off of. Search Hound actually started that and did it before Google but obviously Google did better.
Noah Rosenfarb: Was that company public when they looked to acquire you?
David Finkelstein: Yeah, they were a public company. The deal essentially was they acquired Free Air Miles for what turned out to be a million dollars worth of their stocks. The big mistake and the big lesson learned there is that the stock was restricted, unregistered and was restricted for a year, and by the time the restriction was up the company was worth pennies. They had driven the company down into the ground. It was losing money and the stock was worth pennies and eventually went bankrupt.
Noah Rosenfarb: That happens, you know. It happens and then people would think. One of the unique strategies that we’ve used for clients are prepaid variable forward contracts. These are kind of complex but oftentimes you could take restricted stock and essentially through a series of derivative transactions you’ll get a certain percentage of today’s value in cash and if the stock goes up maybe you’ll get some more money by the time your restrictions lift and if the stock goes down, you’re fine. You’re in the clear. For certain people that are selling to publicly traded companies that have a reasonable amount of liquidity, you can enter into one of these types of derivative contracts if there’s enough value.
David Finkelstein: That’s interesting that you said that. Is that what Mark Cuban did?
Noah Rosenfarb: I don’t know but it’s likely because after he sold the market tanked but he still had billions.
David Finkelstein: Yeah. I can’t say for certain but I thought someone had told me that Mark Cuban had done that when he sold his company to Yahoo. That’s why he ended up being so successful and not getting killed on a transaction.
Noah Rosenfarb: Right. So take me back to ContextuAds and where you’re at. You had mentioned you and your partner thought about maybe exiting that company. What’s prompting you there? What’s been your track and what are you going to do different this time that you didn’t do last time?
David Finkelstein: One of the lessons that I learned from my previous sale was to sell when you’re company’s doing well. I think that’s a mistake that a lot of people make. A lot of people end up deciding to sell when their company’s not doing well and they’re like, "Okay, I want to get out of this and I want to sell it," but then it really doesn’t have any value then because potential buyers see that the company’s going downhill.
At that time, last year, my partner and I had gotten together and said, "You know, the company’s doing pretty well. Maybe we should look to sell." We spent about six months talking. We got representation and they made us a bunch of introductions and we got a bunch of offers. To be honest with you, we did get two offers but they weren’t what we were looking for out of the company, and we made the executive decision essentially to turn down those offers because we just thought that the company not only had more value than what they were offering but more potential value as well and that it just wasn’t the deal for us.
Noah Rosenfarb: So I think what I hear from you is sometimes you’d buy your own company at the price other people are willing to pay and stick with it while staying as owners.
David Finkelstein: Yeah, absolutely.
Noah Rosenfarb: In my book Exit Healthy, Wealthy and Wise, we talk about, you know, if you think about what you’re going to do next or if you did sell and you leave ContextuAds and you’re on to something else and it’s likely to be something in the similar space, well, just love the one you’re with. There’s this concept that the grass might be greener but maybe you could stay in your business a little longer, build it up a little differently and reap the rewards yourself. A lot of times for owners when they look at offers, especially in kind of lower middle market or where people are making a nice living - $200, $300, $400,000 a year - they go sell their company and they realize, "You know what, I should just work another two or three years and I’ll make just this much and we’ll kick the can down the road and maybe two or three years from now, I could still sell it for the same price if I’m around, and if I’m not, well then, that’s okay too."
David Finkelstein: That’s exactly where our decision came from. We basically looked at their offer and looked at what we would be getting after taxes and said to ourselves, "You know what, we’re going to make that in another year and a half just by keeping the company, so what’s the point?" We were looking for a transaction that would give us essentially somewhere between three or four years worth of income in order for it to make sense for us. The offers we received were only a year and half’s worth of income. It’s like, "We can continue to run the business even as is without growing it for a year and a half and still own the business," so it didn’t really make any sense for us, just as you described it.
Noah Rosenfarb: Yeah. Tell us what you could share with the listeners that you think will be valuable either about preparing a company for sale, hiring your advisers, thinking about taxes, whatever it is that you think you’ve learned over time either good or bad that you want to share with our listeners.
David Finkelstein: To summarize what we’ve talked about, about having the right advisers is extremely important. You want to make sure you have at least an accountant and a lawyer that you really trust that you’ve been with for - either been with for a long time or really trust. A lot of people think, "Oh, my brother-in-law is an accountant. I’ll just work with him." That doesn’t necessarily mean that he’s the right person for your company. You really need to make sure that the person that you’re using has full knowledge and experience with your business or type of business, how your business is structured, and is able to advise you properly, and the same goes for an attorney. When you’re doing this type of transaction that’s extremely important. Chances are, the buyer that you’re going to have to sell to is going to be a bigger company and they’ll be spending more money on attorneys so they’re going to have really good attorneys and you want to make sure yours is just as good as well.
Overall, record keeping is extremely important. A lot of people overlook the importance of record keeping and it seems like such a tedious task on a day to day basis, having to make sure that you have good records in the house but it sure saves you a heck of a lot of time when it comes to doing a transaction because the buyer’s going to want to see every little detail of where every penny’s gone in your company. If you can’t show it to them they’re going to get really uncomfortable, and you don’t want to make a buyer uncomfortable because if somebody’s potentially going to be giving you lots of money you want to make sure that they’re just really comfortable because if they’re not, you could lose them at any point.
Noah Rosenfarb: What good advice. David, I appreciate you sharing your wisdom with us today. If any of our listeners had a question about something you said or maybe they’re a potential ContextuAds client, what’s the best way for them to get in touch with you?
David Finkelstein: My email is [email protected]. I’m happy to talk to anybody that needs advice. I’m always kind of looking to help anyone I can as far as business owners that I know and anyone that comes to me that’s seeking help because quite frankly, as business owners we all need to help each other.
Noah Rosenfarb: Great. Thanks again for joining us. To all of our listeners, please don’t forget to rate us on iTunes. Leave us your feedback, go to Divestopedia for more resources and join us again for another of our series of podcasts and reach out to us whenever you need help. Take care and have a great day.