This is James Marciano with Strategic Exit Advisors. I have the great pleasure today of introducing Phil Patrick on the E’s with X’s interview series. Phil, welcome to the show.
Thank you very much. It’s great to be here.
Let’s start off for our audience with a little bit about the history of your business.
Sure. The business was called PharmaStrat. And I ran it for 11 years. PharmaStrat is a leading provider of strategy consulting and market research services to the large pharmaceutical companies.
Could you give an example of the type of projects you’d do?
Johnson and Johnson or Pfizer would hire us to help them understand some of the issues that they might face with a drug that they have in the pipeline for asthma, blood pressure, or arthritis. They would pay us a fee for asking doctors, nurses, and potential patients what their thoughts are about the strengths and weaknesses of the drug. That would help them develop the best clinical plan, save them money, and optimize the development of the drug which hopefully saves everybody money in the long run.
Did you have a background in pharma? How did you start it?
I did. I worked for the large pharmaceutical companies for years, for a few of the top 10 drug companies. And then I worked for a very large consulting firm for a few years. Then I felt that I had enough background to start my own company.
You said you had it for 11 years?
I did. I started it the old fashioned way. Alone. In my house, with my kids running around in the kitchen while I worked in my home office with a phone and a laptop.
How many hours were you putting in?
Full force. You only have to work half a day, either the first 12 hours or the second.
That’s it? Only 12 hours?
Eleven years is a pretty good chunk of time. Tell us about the progress you made during that time. And why you decided to sell.
You know, slow and steady growth over a nine or ten-year period. I got it there myself – with no outside capital or debt or investors – got it up to about 20 employees. I think one of the keys in realizing that I might have a sellable enterprise is we were getting new projects and hiring new employees without me being personally involved. I remember going to the weekly update meetings and finding out about new projects.
I remember one new project we got and I had literally nothing to do with it and didn’t know the client. Similarly, we had somebody walking around the hallways and I asked, “Who is that?” “They work for you.” Those were some key indicators that perhaps I wasn’t needed in the day-to-day aspects of running the business.
That’s the dream, I think, right of every entrepreneur? There’s a difference between being a business owner and being a CEO. The CEO wants their child to grow up and walk away one day.
Yes, for sure. I met many entrepreneurs who say they want to work on their business and not in it. In my case, I have three teenage daughters, which is both a blessing and a curse. We had a lot of after school activities and I wanted to get to all of them. In the process of doing that, I developed some systems so that when clients and employees had problems, they didn’t turn to me first. I didn’t even understand at the time that when I was just trying to get to lots of soccer games, I ended up creating a tremendous amount of enterprise value as the processes and systems weren’t dependent on me. So, it worked out great.
And when did you start feeling maybe it was time to sell the business?
The combination of my not being needed on a daily basis, and, quite honestly, the opportunity to create financial security for my family. Once I felt that I’d reached that point, with three children, it was just too difficult to pass it up. Perhaps I could have kept going and one day owned the private jet… but I wasn’t willing to risk it.
Time to take some chips off the table.
It was. The main goal in selling the business was very clear. It was not to find profound enlightenment. It was to sell for financial security for my family and me. In looking at the buyers, while I’ve heard people say they wanted the right organizational fit, I really just wanted the best offer.
I love the honesty.
To be clear, I had a better organizational fit with all people that I hand selected to work for me than I thought I would have with any other organization. Why not just clarify what I’m looking for?
Totally fair. I already know the answer to the next question, but did you hire an investment bank or any advisor to help you sell your business?
I did. It’s only later in my career, as I talk to other people that exited I even processed that some people don’t. I just can’t imagine it. I never, for a moment, imagined a scenario where I wouldn’t hire an advisor.
Why is that?
I have a Master’s Degree in Economics and Finance from an Ivy League school. But I don’t do my tax returns. I hire accountants. I hire lawyers. I hire landscapers, mechanics, and architects. I’m committed to the thought that no one person can be an expert at everything. The thought of selling my business without trained, expert advisors never even crossed my mind.
Okay. In full disclosure, we were fortunate enough to have Phil as a client. Phil, tell us what it was like working through this process with SEA.
Sure. Well, if it’s all right, I interviewed several investment advisory firms.
How did you choose SEA?
One of the ways was talking with colleagues. One of the things I found, though, is that there weren’t a lot of experiences out there. The few people who had exited a business only had experience with one provider. They just said, I don’t know, this company sold my business. And it was six years ago and they did fine. It was an unusual sort of recommendation. Then I reached out to see who else had done transactions that I knew from social media and LinkedIn.
The biggest thing that I found between firms was the difference between the first meeting and the second meeting. Most firms that I spoke with did a fine job at the first meeting. I think that’s mostly because they know so much more than I do about how to sell a business that they are all very impressive and solid.
The second meeting told the difference. SEA came to the second meeting 10 times smarter than they were at the first meeting and had really done the research on the companies that could be prospective buyers. The other firms I was considering hadn’t done much homework. I thought that was the best indicator of the amount of work that they would be doing throughout the M&A process. So, it was an easy decision to pick SEA at that point.
I know we really wanted you as a client. I’m glad you were impressed.
Okay sure. First, the exit process is very demanding. The potential buyers are doing this as their fulltime job. So they generate more data requests than I could possibly handle. Each potential buyer had about three people on their acquisition team. They are working almost fulltime on requesting information. It’s overwhelming.
One technique I started employing, and it took me about three months to figure this out, is that I only handled issues related to the deal before 10am or after 4pm. It just wore me down to get a call at 11, 1, and 3 asking for different documents from different people at different potential buyers.
Working closely with SEA, I thought that that really worked well. They worked during the heart of the day. Kind of grouped all the issues, and then we went through them in a scheduled, daily call. I don’t do very well with ad hoc emergencies. I like to plan my work. So, we just had a daily call, almost every day around 4 or 5 o’clock. That helped me tremendously.
Was that the due diligence during Phase 3, after you had picked the buyer?
Exactly. One of the biggest things I learned in the process is that the work starts after you pick the buyer. I didn’t understand that. I thought that we were 90% of the way there. After all, they put the offer in writing with a dollar amount. And due diligence, how hard could it be? It’s just pass-fail, right? And I knew I had my company’s books straight. I knew everything was legal, so how hard could it be? I think that was the biggest insight in the process that I learned is that the letter of intent represented their highest and best offer if everything they see in the future is perfect. I didn’t understand the issues at hand.
One of the things that surprised me was how late in the game the offer kind of drifted downwards and that the other side poked holes in a wide variety of things that were very reasonable. I had to fight off so much. SEA helped a lot in defending and explaining all of the issues related to primarily the income statement and our revenue streams and the stability and predictability of those revenue streams.
What about working capital?
Working capital was a half a million-dollar issue and I didn’t understand it at all. The potential buyer tried to slip it right in at the last second. Fortunately SEA understood the issue perfectly and took care of it. If I had done it my way, it was easy half a million dollars that would have been gone.
How did you wind up making your buyer’s decision? You had a couple of different options, right?
I did. In my particular case, one offer was significantly more aggressive than the others. SEA managed the process with multiple stages of interest and written offers. But at the very end, in my particular case, the selection was just very easy. They were a good firm with a good reputation with good people. So, thankfully, I didn’t have the dilemma of trying to evaluate a high offer that was risky.
Entrepreneurs who are thinking of exiting are always concerned about deal structure, such as earnouts or being tied up for a long period of time. In your particular case, what did the transaction look like?
The offer was front-loaded. My offer was almost completely a cash transaction which is very unusual in my industry; an earnout is much more common.
Did you have an employment agreement? Did you have to stick around?
I had a three-year employment agreement with a good salary but fortunately it wasn’t tied to an earnout.
You stayed for three years?
No, I stayed for three months. I tried, but you know it’s hard to transition from the boss to an employee. At least it was for me. Fortunately I left on perfectly good terms, and they rolled right on and it all worked out great.
If you had to give one piece of advice to an entrepreneur who is looking to sell their business, what would it be?
It’s hard to boil it down to one. One certainly would be that a team of advisors, including investment bankers, makes all the difference in the world. People can understand the business, understand the numbers, and literally explain to potential acquirers what the value is and why the company is a good investment. I think that’s the whole key. That’s the key in the job. It sounds simple, but it’s very difficult to clearly explain the enterprise value of a company. I think that’s the most important thing.
For the entrepreneur, the advice I would give is you’ve got to take the deal completely over the goal line. Do not let up for a second until the very end of the deal. Until the money is in your account.
I was very surprised that a day before the deal closed, there was a significant attempt to drop the finances of the deal. I learned that if I take my eye off the ball, and if I envision that Ferrari and make a down payment on a jet, I lose my ability to walk away from the deal. Even at the very last day, I was willing to walk away. And I out-pokered the other team. They were very excited about the deal. In the end, I was willing to walk away and they weren’t. So, the deal went through. I thought that was the key.
It’s the same with every deal, you’ve got to push until the very last hour, until that wire hits the bank.
Without a doubt. It was very interesting to me how the finances got changed. When we went to market, everything was counted in terms of years. Then things started to get counted in terms of quarters, then months. In the due diligence period, they started asking for weekly revenue numbers. What happened was that every time there was a slow week, there was a lot of pressure on the other side of the phone call. Like maybe we’re not going to do the deal. There might be a haircut in price.
They didn’t want to know about Sally being sick, or about Joe being on vacation. He’s going to sign it next week, the big deal. Everything that worked to their advantage to lower the price, they tried. I just learned to keep the sales pressure as high as it can be and keep going right up until the very last day.
Would you say, having SEA on your team allowed you to focus more on your business to be able to make sure that those revenue numbers kept coming in?
I would. And I didn’t understand. I fully believed that the acquiring company is happy when you take your eye off the ball because they have enough enterprise value. If they can catch two months of depressed or reduced revenue, they’ve got you a little bit in a hard spot when you go to close. Then they say, I think the bottom is falling out, we’re lowering our bid.
For me, that didn’t happen. SEA helped me because I could keep the revenues going while they answered all the detailed questions from the buyer. In my opinion, stupid questions, but certainly detailed questions. And prioritized when my time was needed. You know, SEA continued to give me good advice, which is: keep bringing in the revenue and let us go handle the due diligence details.
So glad it worked out and that you got your chips off the table. Tell us, what are you doing now that you’ve sold your business?
When I sold my business, I really thought about what I liked about it and what my dream was. I like the coaching. I like working with people every day. I like training them on pharmaceutical consulting, so I became a professor. And I went to Rutgers and I feel proud about that. So, I am now an MBA Professor at Rutgers teaching healthcare consulting and pharmaceutical market research to the next generation of leaders. I do get paid, but it’s not a ton. And it’s truly a labor of love. It’s really worked out great for me. I haven’t missed a girls’ soccer game since, so everything has really worked out. You know, I think all the time about my CPA, my lawyer who looked out for all my defenses, and I’m still to this day, very good friends with the guys at SEA. It’s just rare that you pay somebody a fee for his or her services and you feel truly appreciated and thankful for everything that they did for you. And that’s how I feel.
Congratulations Phil on building a great company, exiting it, and beginning the next phase of your life. Thanks for your sharing your story.