Podcast: What Happens When You Miss 'Your' Exit? Interview with Tim Hall
In this podcast with Tim Hall, you'll learn all about what to do if you miss your 'perfect' chance for an exit.
About the Host
Ryan is an entrepreneur, podcast host of the show Life After Business and the co-owner of Solidity Financial. Having personally experienced the hazards of selling a business, he joined up with his friend Brandon Wood to educate others on the process. Through their business (Solidity Financial), they provide a platform for entrepreneurs called The Value Advantage™ that helps in exit planning, value building and financial management.
About the Guest
Tim Hall founded and managed all aspects of global business making consumer electronics, software and technology products for niche markets including children’s entertainment and education. Within just 5 years from start grew to $85M sales, $11M EBITDA, and 100 talented employees.
After 2008 recession a private equity firm took control, managed for cash, and shuttered most operations. I continue to serve in part-time caretaker role for asset protection and monetization.
- Acquired assets from Intel to start company on accretive terms.
- Oversaw development of over 150 individual products with effective brand and marketing campaigns.
- Leveraged dozens of direct response advertising campaigns across television, print and digital platforms to efficiently build awareness and trial.
- Bootstrapped operations for five years and then raised $12M of Series A equity and $25M senior/mezanine facilities at a $75M pre-money valuation.
- Established an efficient sourcing office in Hong Kong with our own Chinese employees, building strategic relationships with 15 OEMs.
- Closed 22 sales and distribution deals across Europe, Latin America and Asia/Pac.
- Led our North American sales team to secure distribution of our products at big chains including Walmart, Target, Best Buy, Sam’s Club, Costco, Staples and others.
- Negotiated and closed 15 licensing agreements with major entertainment verticals like Disney and Warner; sports leagues; and toy companies including Mattel and Lego.
- Acquired two smaller software companies, then spun them out a year later for multi-million dollar gain.
- Won a $1M research grant from National Science Foundation, serving as principal investigator
If you listen, you will learn:
- Tim’s career journey, full of twists and turns, beginning when he was a young teenager.
- How Tim jumped feet-first into Intel, which is what he considers his foray into entrepreneurship.
- How he kept the cash flowing in his early days at Intel, later called Digital Blue, when he bootstrapped through the first five years.
- How factoring works: Tim explains recourse and non-recourse factoring and how it differs from traditional lines of credit.
- Tim’s top priorities when the company’s revenue quadrupled.
- How the recession in 2007 and 2008 hurt Tim’s business, as well as what he would have done differently.
Ryan: Good morning Tim, how are you doing?
Timothy: Good morning, Ryan. How are you doing?
Ryan: Doing good. I’m excited to have you on the show today. You and I met through some of the ventures that you’re doing today, and then we ended up having an awesome conversation about your past, which is now why you’re here. For our listeners, can you give us a little bit of a story, a backdrop on when you became entrepreneur because you actually worked at some pretty big name companies before you went off and ventured off on your own.
Timothy: The story I’m going to share with you actually goes way, way back to when I was 14 because I and this other guy started an ice cream cart business. We bought from the original Ben & Jerry’s Store in Burlington, Vermont. We bought wholesale and sold cones on the street. This was back in the late ‘70s. I’m famous for having told Ben Cohen, the co-owner of Ben & Jerry’s that the brand didn’t matter, people just wanted ice cream, which is the first stupid thing I did in business. Then we got into a territory dispute, and I was like, “I’ll just go buy my ice cream somewhere else.” I should have stuck with that one. That would have been a very lucrative business over these decades.
Ryan: It’s awesome. You started selling ice cream, and then you got in - and you were working at Procter and Gamble and Hasbro and Cartoon Network. How did you get into those industries, and then at what point did you decide to venture off and start your own business?
Timothy: Great question. I was a corporate guy. I was comfortable in the corporate environment when I started out, out of college. I was lucky enough to get into Procter and Gamble’s Marketing Department without an MBA. They take a smattering of people from undergrad. It was really excellent training because it’s sort of nuts and bolts marketing. I worked there for about four years. The Hasbro Toy Company had a division at the time in the same town as Procter. A bunch of former P&G people had gone to the toy company. I went from working on Folger’s coffee at Procter and Gamble to being in charge of toy dinosaurs for Jurassic Park Movie. It was a cool dynamic. I never thought in my wildest dreams I’d be working in a toy industry, but I was at Hasbro for about 10 years, working all kinds of toys tied into movie products like Jurassic Park.
Ryan: Is that when Jurassic Park was totally hitting mainstream, too?
Timothy: Yeah, that was when the first movie came out.
Ryan: That’s awesome.
Timothy:I got to present the toy dinosaurs and action figures to Steven Spielberg, which is really cool. I worked with George Lucas. I helped bring back the Star Wars toys in the ‘90s. They’ve been gone for a while, and got to work with Lucas’s people. It was a lot of fun in that industry.
Ryan: That’s a blast! You went from there to Cartoon Network, and you were there for a little stint, right?
Timothy: That’s right. I moved to Atlanta, where I live now in ‘99 to work with the Cartoon Network at that time. Most American households were just starting to expand around the world. That was my third corporate job, and then when I was there, one of my clients was the Intel Corporation. Intel had been developing these cool gadgets for kids that were all tied into a computer. Intel, their mission’s to sell more silicon chips. They’re trying to find ways to seed the market place. They have developed this cool line of little gadgets, like a microscope where you use all the images on your computer. One of the first video cameras that was designed for kids, and they could see their video footage and make movies on their computer.
I was helping Intel develop the marketing plans with our teams at Cartoon Network to do television advertising and online advertising. Then in the middle of the planning, I heard from the people in Intel that their corporate management was just going to get out of that area. This was 2001; it was right around 9/11. There was that first bust of the Internet 1.0 that time. Intel was going to go focus on just a core business and get rid of this division, and I thought, this is a really cool opportunity because it was a cool wide space between toys and technology. I wound up leaving the Cartoon Network, which is part of Time Warner and doing a deal with Intel to buy the business unit on my own. That’s how I really became an entrepreneur, aside from that Ben & Jerry’s story. That was my first jumping in feet first.
Ryan: That’s fantastic. Were they shutting it down? Did you just offer to buy it? How did that whole negotiation go - to get a value of what they’re going to shut down?
Timothy: It’s interesting. It’s like swimming in the ocean. You got to just be confident in your ability to swim, not really knowing where the sides are. They had this division that have this kids business, and then they also had a consumer electronics business. Those goes way back to 2000. This was before there was an iPod. Intel actually was manufacturing and selling some early mp3 players, some early digital cameras, and then this kids division. They had about maybe $100 million in annual sales of these stuff. First I had to hire a lawyer and pay out of pocket to negotiate the deal. Then I had to hire an investment banking firm to perform advisory and really to just prove to Intel that I wasn’t just messing around, that I was potentially serious person who could raise capital to buy this division.
We wound up getting it for very, very little money because once we did due diligence, we realized that there really wasn’t a good value there. Certainly wasn’t a $100 million business because they had gotten out of that business, and a lot of the inventory that they had shipped to retailers like Walmart or Best Buy was coming back. In the end, what I thought was probably a $10 million transaction that I had to go find outside money to buy, we actually wound up buying it for less than $500,000.
Ryan: No kidding!
Timothy: Everybody else who was bidding on it just gave up, and I won just on perseverance and stuck with it.
Ryan: What’s it like doing due diligence on Intel?
Timothy: It’s impossible!
Ryan: Just a bunch of suits walking around just stone walling you or what?
Timothy: No, the thing about the big companies like that is it’s nothing for them to just shut down a big division. This is Intel. Cisco did this with another business. For them, these are multi-billion dollar companies, so they’re not really interested in selling off small businesses for a few million dollars. You can understand that if you’re in their standpoint, it’s not really worth their time.
Ryan: They could probably spend more money just dumping resources if they don’t get in front of it.
Timothy: Yeah. Or they’re happy to just close and take a tax write-off. I think the only reason that they stuck with me was a lot of the guys who run the other end of the table had kids, and they liked this business for their kids. It resonated with them. I think they just did it because they were good people, not because it was some big economic value for Intel to get my $470,000 check one day. It was a little bit of luck, but perseverance is key because there was at least three times when I thought I should walk away from the deal, but I stuck with it.
Ryan: After you do the deal, where did you start? Did they just dump a bunch of vendor relationships? Obviously you didn’t take their accounting package. How did you get it up and off the ground to keep going?
Timothy: You raised the correct word which is “dumping.” They just dumped it. They were very nice, but it was, what we would call, an as-is asset deal. They didn’t make any representations that anything was working. They had a number of employees who were really talented people, who had worked on the business. Within this big companies, they have internal - they can tell somebody, “Okay, you know what? You’re not gonna have a job, but you’re not getting let go. You can apply for another job within our corporation for a while.” A lot of big companies do this or used to do this.
We had a number of talented people who were in limbo, not sure if they were going to get a new job at Intel. I was able to persuade about a half dozen of them to stay with the company under the new name - join a new company. That was a huge, huge help because I wasn’t really starting from scratch. These people knew the products really well. We got going from that standpoint.
Ryan: What was the cash flow - because you got six guys or gals that I’m assuming make a pretty decent chunk of money. What was the cash flow launching pad that you had in order to take it to the next level, in order to keep these people and everything?
Timothy: I think my story was like every entrepreneur. I took a second on my house. I actually have a third on my house, technically. I had this additional loan that I really didn’t have any collateral behind it, but the banker took pity on me. I’ve done well because I’ve worked in the corporate sphere for so long, I had a pretty big savings account. I juiced that out. I traded in my kid’s college funds because they were little kids at the time. I’m like, I’m sure I can replenish this before they go to college. My wife was so patient with me at that time. I liquidated everything I could find, borrowed money from my brother, just went totally in the hock to run it. We did it pretty well in the first couple of years. We made some money. It was a good bet. It wasn’t blind, but it was, like I said before, it’s like swimming in the ocean. You just hope you get to the other side.
Ryan: I love that analogy. What year was that you started? You had some crazy growth out of the conversation that we’ve had. Can you walk us through the first few years and what were the things that were going on? How did the operations work and where were you guys going?
Timothy: We started in 2002. In the very first year, we had this really interesting obstacle, where we had brought all these inventory in. It was stuff that Intel had made, but we repackaged it. We changed the colors and changed the brand name. It used to be Intel Play, and now it was called Digital Blue. This is the fall of 2002, so we were prepped for a big Christmas Season sale. We got it into all the mass merchant customers you’d expect like Toys R Us and Best Buy and Circuit City back then.
Ryan: Were they already in there or did you have to get in there?
Timothy: We had to go account by account and sell it in. They had seen it before from Intel, and our head of sales at the time had been Intel’s head of sales, so we had some continuity. We weren’t coming in cold, but we also had problems in the channel because Intel - it shipped stuff in and taken it back. The waters were a little bit poisonous, so we had to work hard to convince people and sell it in.
The funny obstacle that happened - I can laugh about it now. We had done this delicate balance of converting the customers, so that they would take it again, getting the factories going, financing the goods so we could pay for them, because we had to pay our factories in China before the goods would come over. In the middle of all that, the west coast ports had a labor action, almost like a strike except the port slopped out the workers.
Ryan: I actually remember that because we used to get all of our toner and consumables from Japan and all the countries over there, and literally couldn’t get anything. It was like a hand grab for anybody. They would just buy anything they possibly could in the States.
Timothy: Absolutely right. We were stuck. Half of our goods for Christmas of 2002 were sitting out at the water waiting to dock, and they didn’t dock until November, and half the goods missed the season. The funny part was I had committed to television advertising on Nickelodeon and Cartoon Network, and that was my old school thinking. I was thinking more like a public company person with an unlimited budget, not like an entrepreneur. I’m like, “Yeah, we’ll spend a couple million dollars advertising these stuff.”
We couldn’t pull the advertising, so in 2002, the advertising was running. Kids really wanted our products, and the goods were on the water. That was a disastrous 2002, but somehow, we got through it. We created a sense of demand in the marketplace, so we did pretty well in three and four and five and so forth. Sometimes when you overcome your obstacles, you get a little momentum after that. If it doesn’t kill you, you’re a little bit stronger than you were before.
Ryan: Fine-tune and tighten up operations, which helps with the additional growth. You and I were talking in a previous conversation about the different ways that you were financing, and you and I both in our previous businesses were financing some of the operations. You having to pay for the goods prior to - you’re floating all your customers. They’re using you as the bank. How did you deal with the overseas manufacturers, getting it into the stores? What were some of the ways that you were financially structured to make it work?
Timothy: That’s a great question. We were bootstrapped the whole way through for the first five years. There was no outside money coming in other than the occasional loan here and there. I developed a variety of different mechanisms to get the goods over. The first thing I did was make personal contact with each of the factories. I flew over to China and had dinner with the factory owners. We got a little bit of trade credit out of the factories - kind of sold them the vision on how we were going to grow this business and how it was in their economic interest to trust us. A lot of it just came down to them starting to get comfortable and trust us.
We’re able to get a little bit of credit from the factories, then I did a typical factoring agreement on the invoices with a factory at the time - I think it was GE Capital, where once we sold to someone like Best Buy or Toys R Us, even though they didn’t pay us for 60 days, the factory would advance 85% of the money upfront. The third thing we did was I got a small line of credit from a commercial bank here in Atlanta that I was very comfortable with the import business, which is tough. Depending on where you live, if you’re in the business of importing goods from overseas, it can scare a lot of banks, and certainly most banks in Atlanta are frightened by the notion of international trade from Asia. But this particular bank had ownership that were first and second generation immigrants from China, so they were comfortable with it. We had to knock on the doors of maybe 20 banks and get turned down before one did that.
We have this combination of these different structures. There was no one-size-fits-all solution, and there certainly was no idea of, “Oh I’m going to go out and find a venture capital fund that’s going to give me all the startup money I need.” Sometimes we get an impression that we can go to one source and do this wonderful capital raise, just like many tech companies do. Particularly when you’re not in tech, that can be a very tricky thing to do.
Ryan: I think there’s this misperception that’s going on with that’s what it gets all the PR with all these funds, then the VCs and these businesses and the apps and software out of the west coast that just get all these money, and then they just go make a billion-dollar business, where the main industry at mid-market has to - financing and getting the money is one of the biggest challenges that can either make or break. I think that’s where you and I have had a lot of the overlap.
When you talk about the factoring, so you’ve got multiple ways because your whole goal is to get the money to buy the goods and then make sure that your customers pay you. Can we dive a little bit more into that factoring because I think, depending on where the entrepreneurs are that listen to this, they might have a normal line of credit where they got a million bucks that they can just deplete and then pay back, as they get paid from their customers. This whole factoring - you got a combination of lines of credit, but then you also have this factoring. Can you elaborate a little bit more on exactly how that works?
Timothy: Sure. Factoring itself, there are two kinds of it. It’s recourse and nonrecourse. Recourse means that the bank tries to collect on your receivables, and if they fail, they can put them back to you. Non-recourse means if they fail to collect on your receivables, it’s their problem. The way it works is you would present your invoices. Let’s say I sold something to Target stores for $100,000. I would present that invoice - and Target’s not going to pay me for 60 days. I’d present that invoice to a factor, and the factor would say, “Okay, I’m going to advance you 85% of this invoice.” It was a $100,000 invoice. “I’ll give you $85,000 on day one. Then Target’s going to pay me (the factor) directly, and then I’ll give you what’s left over, minus my fees.” It sounds great on paper. I’m going to get 85% of my money upfront, and then in 60 days, I’ll get the rest of my money less their fees.
Ryan: Which the fees are super cheap right?
Timothy: The fees are generally going to be in the low 20%, and the advances are not necessarily going to be 85%. It’s almost always up to the discretion of the factor of how much they actually advance based on - once this thing gets going. Some invoices don’t get paid on time, so they can set up reserves. What you wind up doing is paying a lot of money for a very small amount of liquidity relative to your receivables. Depending on the factor you use, and there are some that are really good and very transparent. There’s others that I’ve worked with that are not so transparent. It’s like you’re spending all your time arguing with your lender of what your borrowing base could be. I think that resonates with you, doesn’t it, Ryan?
Ryan: Our bank brought on a factoring division. A normal bank does deposits, and they do lines of credit and they give you mortgages. This bank brought on a division like that. It was a different software. They had zero idea what was going on ever.
Timothy: It’s a different animal. It’s risky from their standpoint. You have to stand in their shoes too. They take on a lot of risk because if you could qualify for a normal bank loan - you’ve got great cash flow. You’ve got equity. You’ve got savings account in the bank, then you wouldn’t need factoring. Factors are generally working with companies that from their standpoint are more risky, not quite ready for prime time commercial credit. Therefore they’re very cautious with it. But it can really cause you some gray hair, as you go through those relationships.
Ryan: With the factoring too, it’s risky in multiple different fashions of the word “risk” because you had a viable business. You needed the factoring. You needed the money up front to run operations and also to get the goods. Actually, Phil Knight in his book Shoe Dog, talks about a lot of this, and it’s a fantastic book. I had the shivers while I was listening to that book. With a growing company like yours - we were exponential growth - you can’t just go get a normal line because they have no trend to base off your line of operations. Because your growth is the animal, right?
Timothy: That’s right. A normal products company like I had - it’s different for a service company. But for products company, a more normal line of commercial credit, they’re not going really be comfortable extending to you ‘til you have at least a million dollars of net profit a year or EBITDA per year. There are a lot of companies that have great growth stories, and the growth requires so much capital that it makes them risky. That’s something I became more aware of. I was booking these great top line numbers year after year, and my lenders weren’t getting all warm and fuzzy. I realized there is this risk of growth that doesn’t bring profits with it as fast as the growth. The trap of profitless growth can be very dangerous for a company. As a products company, the riskiest point is after you pass maybe $10 million in annual revenue. That’s when it’s very easy to fall apart as I very well proved a few years later. Therefore the banks tend to be very, very conservative with these factoring lines.
Ryan: Just to put a bow on that conversation, because the factoring - you’re making ends meet. The whole goal is - actually I think in one of your emails talked about the next rung of the ladder. The whole goal is to get to that million in EBITDA so you can get to the conventional banking situation. You’re just trying to get there, in that $100,000 example. With all those fees and all that time, you have to have some serious profits in order to even make that work because they’re skimming everything off the top. Did you have certain benchmarks on EBITDA or revenue or distribution? What were your KPIs that you were trying to march towards to get to that around the corner, if you want to call it that?
Timothy: Yeah, great point. I actually sat down with the banker - an asset-based lender who would do a normal commercial loan for a product company, early, maybe in 2002. He’s like, “You don’t really qualify for what we’re doing. Here are some factors you could talk to.” I pursued this guy, and I eventually talked him into meeting me for breakfast. I said, “What would I have to look like to qualify for an asset-based line of credit? A normal credit line with a 6% or 7% interest rate.” He spelled it out, and it was the million dollars of annual EBITDA, a couple of years of runway where the company was well-managed, we didn’t run out of cash any particular month, recurring customers that came back and bought over and over, and no risk, no concentration in just one customer. They were afraid, “What if all your businesses with Walmart, and then one year, Walmart doesn’t buy you?”
I pursued this guy and made him give me the vision of what it would take to get commercial credit, and our KPIs were all around that. The million dollars of EBITDA, the lack of concentration, not having any one customer account for more than 20% of our sales, collecting our receivables on a relatively timely basis. I don’t think we ever graded that. And then keeping operating expenses at a certain benchmark of sales - I forget what it was. The point for your listeners is, if you figure out from the banker’s point of view - or this could be any kind of lender but if you figure out where you’re trying to get to early, you can build your plans around that and move and use factoring just as that stair step to get to that better level.
Ryan: I love the parallels of our stories because the banker was driving our situation too. The banker in anybody’s situation, because you’re on the factoring and so are we, we had to get to that. Our goal is to get to the healthy, less stressful situation, but all of those things that you just mentioned are the same thing that any buyer’s going to look at when they’re valuing your company. Whether it’s a banker just trying to give you a line of credit or a buyer - everything just ties to value and sustainability.
Timothy: Yeah, you’re exactly right. It’s about overall value and transferable value and sustainability. I totally agree. A lot of us entrepreneurs when we start out, we’re just thinking about dollars that - we’re trying to get to a top line dollar and then probably a gross margin dollar to run our business. That’s very laudable because it’s really hard to sell stuff and collect and that piece of the business. But you somehow have to - you’ve got to open your perspective as little bit to look at these other characteristics because that’s how buyers or lenders are going to value you.
Ryan: You talked to this asset-based lender, you’re driving towards these KPIs. Where did things start to - were the wheels rumbling? You raised some money. You also brought on some other partners. Elaborate on the story on how things continued to progress.
Timothy: We were growing nicely, and almost every year, I took the time to re-pitch our factoring line and then trying to improve this line of credit or that line of credit. It was a lot of work on dealing with the banks or the factors. I remember getting to a point around 2006 where we were bound to close a pretty big asset-based loan, and it fell apart in the closing documents for some reason. I don’t remember what fell apart, but we thought we were going to close. For us, summer time was important to get all this done, because we had to get the goods going because we were very heavily a fourth-quarter business.
I remember this deal falling apart at the last minute. My attorney who was helping me with the closing documents was giving me a hard time. He’s like, “I don’t know why you are working with this particular bank. If you’d just come to me earlier, I would’ve introduced you to this private equity fund that I work with.” I was like, “Yeah, I was too cheap to hire you earlier, Attorney.” So I didn’t pay for getting valuable counsel. The lender left us - quit the deal. I think we were raising mezzanine funds, so we were profitable. We were a good-looking company, probably doing about $20 million revenue at this point. I think we had a mezzanine deal that was coming in on top of a senior line of credit. We have these different lenders bringing different kinds of credit capital.
I remember the mezzanine guy backed out, so the senior couldn’t close without the mezzanine. The whole deal fell apart at the closing statements, but it was fortuitous because my attorney introduced me to this family fund. They did a loan to our company that covered what we needed. We were going to do a revolver of maybe $20 million with this bank, but we wound up getting about $8 million, but it was a term loan, unlike factoring asset-based loans, it was just a chunk of money. We used that to fuel growth.
We went from 20 - then within a year, we were doing about $80 million in revenue because it’s a big chunk of capital. Everything was going well. This was pre-recession, so we had this enormous growth curve. Then we brought in more capital.
Ryan: What did you do with that money when you got it? Because to go from $20 million to $80 million - obviously you probably had an order of operation and stuff that you wanted to deploy that money to. What were some of the top priorities?
Timothy: We were all about expanding our product line. We have pretty good distribution at the big merchants like Walmart and Target and Toys R Us and people like that for our products. We used that to develop new products and bring them to market. We had a deal with Disney Company at this point, and that fueled a lot of the growth as a partnership. We would license Disney’s brands and put them on little electronic gadgets. This was back when these things called digital cameras that people had for their phones. We made digital cameras based on Disney characters, and we made these mp3 players based on Disney characters and stuff like that. We were able to go from having a dozen products to 50 or 60 products, going from having a foot of shelf space to 4ft of shell space, and all of a sudden, the business just took off. We actually expanded internationally, and it was a really, really good run.
Ryan: I think I caught that this PE firm was actually a family fund. Was it a wealthy family that had their own private equity or holding company?
Timothy: Basically. It was a family, and then they had limited partners in the fund. I can’t say the name of them of course, because of confidentiality. A family was the core, and then they had a hundred limited partners in the area. They had a unique model. They could do both debt and equity.
Ryan: That was where I was going with this because I actually interviewed a gentleman who was in the family office industry. We talked about how the family offices work, and it is interesting that they just gave you a term loan because most of the time they’re going for - the traditional PE firm wants equity, and most times, it’s the controlling shares. Just to get a term loan is just interesting. Was there any stipulations with the chunk of money? Explain how that worked.
Timothy: Because we were in closing documents with the big lender, and it was somebody like a major US bank. I think they got comfort that we had passed all the diligence with the big lender, and our attorney was their attorney so they had a lot of comfort. Even though they never met me, they had a lot of comfort that this was a good deal. They stuck with us through thick or thin over the next five, six years.
Ryan: What was the partnership like? Then you said the five or six next years, the recession’s coming, and you’re in manufacturing and toys. Where did this journey take you after you started to grow like that?
Timothy: I missed my exit. When I started the company, I thought I would do it for five to seven years and then sell it to a larger public toy company or maybe a VC fund or something like that. It wasn’t my lifelong dream to keep running this particular company. By 2008, we were doing well over $80 million in revenue. We’re very profitable. We’re bringing about $10 million to the bottom line. That was the point where I should have - my equity piece was still the largest equity piece in the company. I had sold some off to the fund I mentioned, in the form of warrants or whatever. That’s when I should’ve been entertaining bids or pitching the company or something like that. But I was so focused on trying to get to a number which was $100 million revenue. For some reason, that number resonated with me, which was foolish, that I didn’t really fully consider what was going on between the recession and the obsolescence of things like digital cameras and mp3 players, due to this little iPhone thing that had just come out.
I didn’t really look at all of these things. We knew that recession was coming in 2007, 2008. Prior recessions had not really impacted the toy industry. I think I had lived through two at Hasbro, and what we would find is when a recession comes, consumers will pull back on buying houses, buying cars, would not go buy new refrigerator, but they still indulged their kids. But that was not the case with the recession of ‘08. It kind of hit ’09 pretty hard too. They really pulled back on all kinds of consumer shopping, and so our sales were suffering. But what really hurt us was when our customers went out of business. Circuit City went out of business, I think that was before the recession, and then a couple of our distributors in Europe and UK went out of business.
Also they had these big black spots, where you thought somebody was going to pay you $1 million, and you might collect $200,000 margin on that - you get zero. We had these big holes happening at the same time that our products were becoming less important to consumers.
Ryan: When they’re filing chapter 7 or 11 of these different companies, were you impacted with your cash flow as well in that situation? Because usually there’s a lot of stuff that can happen in that situation.
Timothy: It certainly hurt us. Some of the American companies we had credit insurance on, so if they went out of business, the credit insurance will pay a piece of it. Then the international ones really hurt because we couldn’t get credit insurance on them to begin with, and we got surprised on a couple of those. I think a more experienced manager in my seat would have said, “I’m going to pull back on credit to these guys in 2007 or 2008.” These are companies that we’ve been working with for four or five years. We’d grown up together. We had a lot of trust at the top. That does you no good, Ryan, if they go out because especially in Europe - it happened very suddenly, and you’re just hosed.
Ryan: That’s a big deal. I think there’s a lot of people in the retail space that are probably in similar or different similar situations as that. I want to go back a couple of points. At $80 million in revenue and $10 million or $11 million in EBITDA that you’ve mentioned, and you had sold some equity to the fund, you would obviously had some talks about valuation. You said you missed your exit, so what was the number that you saw that technically wasn’t good enough, and then how did it all unfold?
Timothy: Great question. I had my mind set on just getting to $100 million revenue, and I thought we could do even better. A lot of that was coming from our customers. I remember in 2007 being beaten up. I went to Target’s stores. I remember the divisional merchandising manager at Target was giving me a hard time because we weren’t in stock enough. Trying to keep up with all the demand, it was tough.
I was listening to my customers, and they were saying, “More and more growth.” I was listening to my own sense of greed, and I was saying “More and more growth.” What I should have been saying was, “What really are the conditions in the market? What’s my piece worth right now? If I took the time to sell this company,” which isn’t easy because nobody was asking to buy it. I would have to figure out how to put it up for sale. But if I had sat there and done the math, I would have been like, “Okay, the amount of equity I would take out of this company would be a generational life changing event - not just for me, but for - think of all my descendants who could be totally messed up because they grew up with money.” Which I did not, right?
Ryan: You saved them from all that horrible stuff.
Timothy: Think of all the great grandsons that I could turn into just - anyways, when you’re running a company, you don’t really take the time to sit back and think about these things because you’re so busy with your priorities for that day and that week. We would do strategic planning, but it was all about our business model. I think that every entrepreneur needs to have some group of people, a kitchen cabinet if you will, who stops her or him and says, “Hey. What are you really trying to get to? What is your personal goal here, and does that intersect or split off from the company’s goals?” My goals were too focused on the company’s goals, so I missed the exit.
Ryan: It’s so funny I hear that so much. Ours was too. Ours were all revenue-based. I hear people - it’s revenue-based, going international, going national, opening up in new locations, and no sight on “What does this mean for me?” Before we jumped on the call, we’re talking about all the concentration that people have in their houses for their assets, but the business is 95% of the owner’s net worth in most cases. To double down in a specific industry that might have risk and not think about that is a huge deal.
Timothy: Yeah, absolutely. But as entrepreneurs, we have to build in time to go think about it. A lot of times, people don’t ever think about their exit until somebody comes and offers to buy their company, and then all of a sudden they’re playing catch up on tax matters, on getting their audits done, “Was this the best price I could get for it? Should I have sold this thing?” A lot of guys will sell their companies - men and women sell their companies, and then after a factor like, “Jeez, I paid way more in taxes.” Or “I paid all the state and local income tax.”
Ryan: You’ve read too many of my blogs.
Timothy: Exactly. You have to be thinking about your exits a year or more ahead, especially for any kind of estate planning or anything like that. There is a whole industry of people out there, who will help you do that for large fees. You can read your blogs and just take the time to go do this. Talk with some people, who don’t have a dog in the hunt and can give you some advice.
Ryan: As you started seeing the wheels fall off, what were you emotionally feeling as you’re going through that?
Timothy: I like talking about up to the recession. I don’t like talking about it as much after the recession. It was a really tough time because so much of my ego is built into the company. The hardest part is letting people go. You talk to anybody who’s been in either public or private company that had to do layoffs - it’s horrible. I’d literally laid off 110 people, and it was the worst experience of my life. I had done that before for private companies. I remember once in the ‘90s, my corporation bought a division, and then I had to go let go several dozen people. It’s even worse when it’s your own company because it’s like your family. Literally going to people I had worked shoulder to shoulder with for a decade and telling them, “I can’t make payroll, and I’m going to let you go. There’s no future.”
Owing people money - it was hard to cover people’s expense reports and everything at the end. That was just a horrible experience for me going through that, and it took a couple of years. We didn’t think we were out at first. We would do the first year in 2009, we might have laid off about 1/3 of the company thinking we were cauterizing the bleeding and stabilizing the company, but we were in so much debt at that point that we just kept putting out all our money to debt payments. The growth wasn’t there that we were hoping, or the revenue wasn’t able to be stabilized that we are hoping, so a year later we had to lay off more people, up to the point where I think by 2014, my last two people had to go. That was pretty much the end of that company, Digital Blue.
Ryan: I can relate so much. The stomachache that I feel right now for you, as you’re going through that. Is there anything that you would have done differently knowing exactly where the trending would go? Would you have tried to sell it? The reason why I’m asking that question is because being in the corner office like you were - and it becomes more about, like you said, the pride and ego of keeping this going than it is about anything money-related at that point. Would you have separated the emotion from the situation and done something differently, now that you know what you know?
Timothy:Yeah, absolutely. I paid millions of dollars in tuition basically, and now I have the degree from the school of hard knocks, and so I know better. The first one is not to miss your exit while times are good. There are plenty of books written on that too, but basically when you’re in an up economic cycle like we were. We can see the peak of that economic cycle in 2007, 2008. You didn’t have to be an economist to know that bad stuff was happening. That’s a good time to sell the company. So just knowing your cycle is important. Then knowing what would be your goals and what would be the right number for you is important. I could’ve easily gotten out in seven or six and been very happy with my economic conditions after that. Those are easily covered.
I think the second set of learning isn’t just about “ Don’t miss your exit,” but when times are bad - you’re the captain of the ship and times are bad, I learned that you have to be more brutal and tough with expenses than you could possibly imagine. Throughout my whole career, I’d always been on growing businesses or I find a way to make businesses grow, whether it was the public or private companies. I’d never been in retrench mode where you just need to be an extremely tough bean counter. I was resistant to putting the company into bankruptcy protection, in part because I didn’t want to screw over the guys who had supported us from the family fund, because they had an equity at this point. They would have been out.
I think in hindsight, I probably would have taken advantage of a chapter 11 to restructure some of our debt because we’re talking about that factoring - after the recession, we were stuck in that ink well of factoring, and it was just a money-losing proposition. I would’ve been more careful when things were good, and I would’ve been more tough when things were bad.
Ryan:The chapter Restructuring in Bankruptcy is something that is - it’s like this horrible wall between you and your ego. Even when you throw it on the paper, it’s like, “Who gives a shit what this is called? This is the best idea ever.” There is just so much emotion tied into that. There are so many people that I know - actually one of our old executives that came onto our team, he went through this. There’s a whole side story, but he went through his own unwinding like this. He had about $25 million revenue, 107 employees. He was a Union shop because they made third party tools for some of the big hardware stores. He’s in a lot of big bucks, and the recession happened. They eliminated all of his stuff, and he could have restructured - same situation, and he wounded down and kept the corporation alive. Then the union came back and sued him for unpaid dues, which was like, “Dude, there was no money there.”
Timothy: That’s hard.
Ryan: Yeah, it’s just a bummer. There’s a whole thing there about - what are the options when you’re actually in the tough times that you don’t really know about because all you’re just trying to do is fend off the next punch?
Timothy: Yeah, absolutely. You can be living day to day. We would roll out our cash flow for 10 weeks at that time to see if we could pay bills and stuff. When you’re in that crisis mode, it’s hard to step back and look at different options. The people that will help you step back and look at different options usually want retainers. It can be a really tough time, better not to get into those tough scrapes, but if you are, you have to be all the more diligent with what you decide to do.
Ryan: If you were to go back and sit down with yourself when you’re doing $80 million and $10 million in EBITDA, what are the two things you would’ve said to yourself?
Timothy: I would’ve said, “Hey, let’s go sell this company, and let’s take selling the company seriously as we take selling next year’s product line.” When we would go sell next year’s product line, we’d go to Las Vegas to a trade show. We would rent a bunch of suites at the Bellagio, and we would bring in presenters and make cool sizzle videos. We would really sell the product line and get everybody to buy the dream. Selling a company can be that too. You don’t have to hire an investment banker to position yourself in the best light. But in hindsight, I would have gone out to L.A., where a lot of the public toy companies have had quarters and set up a little showroom like that and brought in some models and try to just sell the magic. That’s probably the best advice I would give myself back in the good times - was to take the sale as seriously as I took the business.
Ryan: That’s super, super good advice. It doesn’t have happen overnight either. I don’t know if your experiences from what you went through is - people have this assumption that you just have to sell immediately but it takes a process. It takes a long time to actually spend the time doing it, like you said, “Use the sizzle” just like you’re selling the next product.
Timothy: A lot of entrepreneurs can do that if they focus on all of their external facing channels. A website is a great example. Let’s say you have a service company and you know you want to sell it a couple of years down the road, and you have a cookie cutter website that you built from the tools and register - you hired your neighbor’s kid to build it. You might want to think about investing to have a really sharp-looking, up-to-date website because that’s your calling card. When people are thinking about buying you, what’s the first thing they do? They Google you, and they Google your company. They go look at your site. That’s like one tactic that companies could follow to spruce up what they’re presenting out to the world, make sure it’s up to date as possible. Of course that’s good for business, too.
Ryan: Yup, yup, I love it. Tim, as we’re wrapping up here, what is the best way for our listeners here to get in touch with you?
Timothy:I can be reached by email at my new company, which is called Simporter. I’m Tim at simporter.com. It’s funny because Simporter was just started up to address some of the problems that I had with the old company because it was hard for us to get credit. It was hard for us to finance back to the China factories. It was hard to know if the inventory that we were selling was going to maintain its value or prices were going to decline and stuff. I created Simporter to help companies with that curve. It lets a company that’s in the products business or a lender to companies that are in the products business, keep track of the value of their collateral, whether it’s the inventory that they’re selling to Walmart or Amazon or something like that.
It’s also a way for them to access credit markets where they might be able to get better credit than the typical factoring stuff that you and I slogged through.
Ryan: How rewarding is it being able to help people go avoid all the shit that you went through?
Timothy: It’s amazing. I worked with a lot of very young companies with entrepreneurs in their 30s. I tell them the horror stories and show them, “Hey, learn from my mistakes but here are better outcomes for you.” It’s a lot of fun to be able to share those cautionary tales in a constructive way, not just lamenting over it.
Ryan: How much would you have paid for just a little bit of advice when you were...
Timothy: It’s one thing to get the advice. It’s another thing to actually listen to it and follow it.
Ryan: That’s true. Hundred million, hundred million.
Timothy: Exactly, exactly.
Ryan: Thank you so much for coming on the show, Tim. I appreciate it.
Timothy: Absolutely my pleasure, Ryan. Thank you very much!
Written by Ryan Tansom
Ryan runs industry-specific podcasts on his website which pertain to mergers and acquisitions, and all the life lessons he wish he had known then. He strives to bring this knowledge to his listeners in a way that is effective and engaging by providing new material each week from industry experts.