Haircuts & Lice
The Acquisition Process: Lessons Learned (Part 2)
Dear Fabulous Female Founders,
I hope you are all enjoying the Spring, wherever you are.
Let’s get back to the story of the Alta Bicycle Share acquisition. In Part 1 (The Smell of Desperation), I wrote about being distracted by my young son’s injuries while negotiating with a NYC-based group I refer to as the Investor. Although my partners and I signed a term sheet in April of 2014 with a target close date of June 30th, June came and went with no further momentum.
On a call, our very experienced attorney Mike Pagnozzi1 chuckled, “Oh you folks thought that the deal wouldn’t change? That was just the first step. Now come the haircuts.”
A Boat in Madagascar
Backing up a bit, when we’d signed the term sheet a few months earlier, our Montréal-based supplier PBSC2 was in limbo, having filed for bankruptcy the previous December. We’d put in a purchase bid and been waiting many weeks for a court decision.
One day in May, we got the scoop: PBSC’s new owner was a wealthy Montréal furniture magnate named Bruno Rodi.
No one in the transportation world had heard of him.
Over the weeks to come, we pieced together that Rodi was a suave, globe-trotting adventurer with a light shock of grey hair who had climbed the highest mountain on every continent, visited the North and South Poles, and rowed more than 5,000 miles across the Indian Ocean. On a boat in Madagascar, he had witnessed the annual hatching of green sea turtles, a species threatened by climate change, pollution, and hunters. Deeply moved by the turtles’ plight, he instructed his people that he wanted to do SOMETHING. PBSC was for sale, they told him. Would he like to throw in a bid? From a satellite phone, the answer was yes.
Rodi’s bid was lower than ours, but it was all cash as opposed to coming out of future revenues. The fact that he was Québecois must have helped. Whatever the reasons, he was the key to our future. Unfortunately, he wasn’t in a hurry to end his travels. It wasn’t until July that he returned home and began to engage. Only then did negotiations with the Investor begin again.
Infestation
For the next few weeks, my business partner Michael, from his office in San Rafael, CA, led negotiations on earn-out clauses, liability, responsibilities, titles, compensation, valuation, and more. (All by phone, this being the pre-Zoom era.) The original terms had been abandoned, it seemed, the Investor’s warm kumbaya tone masking cutthroat “adjustments” suggested in the guise of due diligence.
One day in August, Michael asked me to participate in a crucial meeting. Naturally, I said yes, even though I was clearly an imposter. The Investor and his team were all wealthy, powerful men with decades of business experience. How could I possibly be helpful? But Michael and I had been partners for many years, and I knew that if he was asking for my involvement, I’d better step up.
In preparation, I called my brother Russell, a restaurateur with a finance background, who listened to my whining and snapped, “Mia, here’s one thing I’ve learned: just because they have more money than you does NOT mean they are smarter or better. Get it? You show up with confidence. You listen. You ask questions. You make no commitments. You know your business better than they do. I guarantee it.”
I also called my stepbrother Michael, an M&A specialist, who went through the latest term sheet with me, patiently offering observations and suggestions. By the time of the meeting, I felt at least somewhat prepared.
But again, real life intervened.
My daughter Sasha needed a bug-free scalp certification to attend summer camp. The plan: a quick stop at the lice clinic, where they’d check her head, give us a thumbs up, then I’d drop her at home and head to the office for the investor call. Not in the plan: a technician holding up a tissue full of legged black sesame seeds retrieved from her scalp. Not just her scalp, but mine as well.
New plan: do the investor call while getting my head scraped.
As a technician sprayed a detangling, bug-stunning substance on my hair, I plugged earbuds into my phone and joined the call. Sasha zoned out next to me, watching the Wizards of Waverly Place on a wall-mounted screen as the lady behind her slid a nit comb through section after section of her long, curly hair.
From NYC, the Investor began a recitation of sales price deductions including hold-back of certain fees, reduced equipment value tied to the dysfunctional software, dented reputation, impending unionization, cost of new salaries, calculated costs of future potential lawsuits, increased software fees, future software upgrade costs, future capital costs, potential future differential analytical deviation asset ratio uncertainties. He continued onto the earn-out formula: calculations based on investor payback minus bonuses, claw backs, hold backs, risk assessment fees, underwriting, depreciation, amortization, interest, taxes, repairs, promises, unfulfilled orders, returns, recalls, carelessness, and stupidity, payable over 30 years, retractable in the case of death, divorce, disease, malfeasance, negligence, greed, hunger, or if just he said so.
We’ll never get paid, I thought, just as the technician stabbed my scalp.
“Ow!” I yelped, my back bucking, right arm yanking out an earbud as I reached for my head.
“Sorry,” said the technician.
“Am I bleeding?” I squealed.
“Excuse me?” said the Investor. I had thought I was on mute.
Sasha asked, “Are you ok Mommy?”
I fumbled with my earbud, spitting out, “Yes–crap–are we done yet?” as the technician blotted my scalp.
“About halfway,” she said, and drew the comb through a new section. “Really not bad up here, just a few nits.”
The Investor heard something else altogether, responding, “I see your point. Yes, we can make that adjustment.”
Michael jumped back in, saying he had to jump on another call. Meeting adjourned. I pulled both ear buds out, unclear what had just happened.
“All done,” pronounced the technician a little while later, leaving me with a head full of slicked-down, lice-free hair.
I stepped into the lobby to call lawyer Pagnozzi while they finished up with Sasha. He answered right away, blurting out, “Heh heh heh, you got him! Nice!”
“Oh, um, I did?” My squawking somehow had prompted a recalculation of a key number, adding back a chunk of change to the sales price.
Brother Russell, as it turns out, was right. Multiple times in the negotiations that followed, I spoke up and asked what I thought were probably stupid questions that turned out to be legitimate and useful.
Here’s my lesson from this chapter: truly, you know your business better than anyone. Sure, they might have more money and power, but that doesn’t make them smarter or better. The more clear you are about what you want and what you’re willing to give up, the better.
~ Mia
Next installment: The Finish Line, Part 3 of the Acquisition Process: Lessons Learned
Mike Pagnozzi started his career as a litigator then spent many years in business, with a specialty in turning around distressed hospitals. A college buddy of my business partner Michael Jones, he’d helped Alta many times over the years, free of charge, offering rock solid, no nonsense advice. So when Superstorm Sandy wiped out our equipment and the insurance company shorted us, we hired him as our in-house counsel as well as Chief Managing Officer. Chain smoking, salty, and brusque, as likely to show up in fishing gear as a business suit, Mike Pagnozzi jumped in feet first to wrestle with the insurance and supplier messes, overhaul our systems and staffing, straighten up our finances, and represent us throughout the acquisition process. I am endlessly grateful for all he did for us.
PBSC = Public Bike Sharing Corp., a.k.a., Bixi.