You gotta know when to walk away

I'm no gambling woman, but the Kenny Rogers hit seems like just the right song for the dilemma we find ourselves in. Let me explain.

When my business partner and I send in an LOI (Letter of Intent, or offer letter) to a potential seller, what we get back is typically a redlined version with changes that are known as "comments." As a sidenote, the comments don't explain any of the changes; the changes are made directly to the text, and are simply called comments. We then go through the seller's comments, and respond with our own comments. And so on. There are lawyers and advisors on either end to help each side understand the consequences of the changes, and the process chugs along at the speed at which the seller team and the buyer team move, hopefully towards an agreement that both buyer and seller sign.

As you can imagine, this process feels incredibly slow to us. And oddly formal. I'm tempted to add in bubbles to explain each change that we put in, but I'm told that is not The Way Things Are Done. Fair enough. Formal processes do bring order to complicated exchanges, and a consistency in style can allow one to focus on substance. But what if the process can be hijacked? Then what does the hypothetical gambler do?

Well this is exactly the situation we encountered recently in an exchange with a seller. After some back and forth comments, we got back a redlined copy, and also a clean copy of the latest seller version. We were puzzled to find that the clean copy was actually already signed by the seller. Then we read the wrapper text. This was apparently the seller's last stand, and we had a week to respond yay or nay.

We weren't sure how to feel. If we were closer to agreeing on the terms, these actions would make sense to us. But several key items in the offer were nowhere near the point of settlement, and we thought we'd be addressing them through verbal discussion or more LOIs. Now the process was out the window, and though it looked like we were about to go a lot faster, we were in uncharted territory. It was hard to figure out what to do next:

     a) ignore the power play and just send back comments as before
     b) ignore the power play and not even respond
     c) choose yay or nay and respond as directed
     d) choose yay conditionally, presenting a third option that is better
     e) choose nay on principle and say we don't work with bullies.

The options ran the gamut, but we didn't know how to choose from among them. This was a whole new world. We still don't know, but we've got some questions for ourselves as we work through this period of the deal cycle:

• When we encounter a bully or a bullying action, do we respond in kind (escalate), do we try to change the tone (mitigate), or do we walk away (terminate)? This sounds like a strategic decision but it's as much a gut check. I'm not sure I can stomach the escalation option.
• What do we consider appropriate reasons to walk away? Quitting isn't fun, and given sunk costs of time and effort, it's hard to let go of anything. But when do we really need to? (And why?)
• And finally, if we can figure out when to walk away, then how do we actually do it? There are reputation issues, and breaking up is never easy besides. So when push comes to shove, how do we shove off?

So many questions. Answers to follow.

Retaining counsel

I used to want to be a lawyer. My favorite read of 1992 was John Grisham's The Firm, and I ruefully admit now that Mitch McDeere, a figment of Grisham's imagination, was an early professional role model for me. A high school colleague I ran into at my ten-year reunion this past weekend referred to Grisham's influence in her career visioning, and we laughed about the author's surpassing professional influence on our generation. The difference is that she's a litigator today, and I'm still wondering where my criminal defense lawyering fantasy went.

So anyway, here's a primer in retaining counsel I've cobbled together after three months of searching: How to hire a good lawyer.

To begin, my business partner and I had been vaguely aware of the need for counsel eventually, and had gleaned in our professors' asides how important legal counsel could be to the health of our business investments. But we didn't know what to look for, and certainly couldn't say concretely why we might need one. More than anything, we were suspicious of the billable hour. Being a pair of bootstrapped search funders, we weren't keen on shelling out $300 to $700 an hour for advice we could get from our deal advisor as part of our normal course of business.

A note on the billable hour. My business partner and I are dumbfounded that this payment system is the norm in the legal profession. We're not legal types (come to think of it, we're not financial types either), but it doesn't take a law or finance professional to react: Now wait a minute. You're incented to take as long as you can to solve my problems? That just doesn't sound right. The norm of compensating lawyers by the billable hour certainly didn't endear us to the firm-based lawyers we spoke with -- through no fault of their own, we allow -- so we held out. Maybe there were others in the wilderness.

And so there were. Upon hearing of our woes, our deal advisor and another b-school colleague of ours who is a former lawyer suggested looking for counselors who work on a contingency, or perhaps a success fee. A whole new world opened up. To be sure, business lawyers who work on an arrangement that isn't the billable hour aren't common, and as they tend to be independent, can be rather tricky to find. But once we learned that they were 'out there,' we reset our search terms and began afresh.

We contacted former co-workers, alums who do business transactions typical of those a search funder would do, and anyone else who seemed to have a sense of what we were looking for. We cast a wide net, and as we spoke with lawyers across four states and three time zones, a few criteria became clear to us. We wanted someone in our own time zone who gave us just enough advice to make an informed decision. Lawyers are fundamentally different animals from us MBA types, we came to realize. They are trained to anticipate the 1% risks, i.e. the unlikely scenarios that might derail or harm a business, whereas we're trained to imagine the 1% growth possibilities. We admit that that form of legal training is important -- it certainly grounds people like ourselves when we ignore or downplay risks in hopes of growth. But it was downright depressing to talk to lawyers whose only contributions to our dialogue were those 1% risks.

To wind down this long story, we found our man, and through a most unlikely source: the seller's counsel.  Given our interest in setting up for a smooth transaction (and given that the seller's longtime counsel was someone we liked speaking with), we asked for an introduction to a lawyer the seller's counsel trusted, respected, and had worked well with in the past -- crucially, as opposing counsel. It's not easy to be a watchful consiglieri without also coming across as a nervous Nellie, but somehow our counsel does it, and does it well. And as a bonus, he was willing to work with us on the compensation front too.

Our search has finally ended. Bye bye John Grisham. We've retained counsel, and we believe we're in great hands.

What is the virtue of a financial model?

Having been a philosophy major in college, and being a lifelong proponent of questioning the nature of things, I feel a great deal of resistance to going along with how deals are supposed to be done. Today (er, yesterday), after a seemingly interminable day of fiddling with an off-the-shelf Excel model sourced by my ever-supportive boyfriend, I found myself tapping out this email to my business partner's and my deal advisor:

We've got sort of a philosophical question. We've been working on the terminal value calculations using a model that a GSB class passed out as a template. We're a little leery of investing more into building the model because the level of detail that we could put in seems pretty astronomical (what month do stores open, what would the capex be for a 2000sq ft loc be versus a 1000sq ft, and all sorts of operating issues that aren't settled at this point and require guesswork). I guess we don't like that the accuracy of the thing depends so much on numbers that we're picking out of the air, and we are wondering if we might as well just pick the topline or bottomline number out of the air and work towards those. Sorta blunt and unnuanced, but we really like the quick calculation that you walked me through yesterday. Do you think there is any clear and present danger (so to speak) about keeping things "back-of-the-envelope" rather than doing all the modeling? Thx.


An enduring criticism I have of my business school education is that I wasn't taught how to think about a deal. I learned how to use a bunch of useful tools in analyzing aspects of a deal, but me being me, I ask: What's the virtue of having a box full of tools that I don't know when to pick up -- or put down? What's missing is the virtue of judgment: that know-how expertise that eludes all but the experienced, or what Plato called "phronesis" (practical wisdom).


So in this -- what I refer to as my business partner's and my "practicum year" -- we're learning deal judgment from a GSB friend of ours who has taken on the role of our deal advisor. His experience in banking and private equity has afforded him the opportunity to hone a fine sense of judgment about how to approach 'the deal.' Moreover, he's plainspoken, thoughtful, direct, and doesn't make us feel dumb for asking all the questions we've got. We're incredibly grateful that he's serving as our river guide.


So what's the virtue of a financial model? We don't know yet. What we do know is that, for now, it's not worth our time to guesstimate our way to an all-encompassing model computing the terminal value of a target firm. We're also not going to just pick numbers for the revenue line and the EBITDA line, as we were wont to do in our erstwhile exasperation (maybe desperation). Instead, we're going to focus on the three major categories that our deal advisor suggested in his reply:

• Average revenue per unit.  What is it now?  What should it be?
• Store level profitability. What is it now? What could it be?
• # of stores. How many today? How many new stores can/will you open?

If you build a simple model that focuses on these 3 items, and spend most of your time coming up with reasonable estimates for these, you'll be in better shape than if you spent a bunch of time building a huge valuation model.

Amen to that. What's the virtue of working with a fellow with phronesis? You get work done.

The hardest part

By now, most of my fellow grads have gone to work. My business partner and I have, too, but our days look nothing alike.

Most "day jobs" involve an eight to six (or if you're lucky, a nine to five) schedule. Be it planned or ad hoc, there is some sort of structure to the productivity within the firm, and occasional checks on how you stack up to others' expectations. There's some direction to your career too: up or out, up or stay -- there is an actual "up." In theory, it's also possible to draw the line between your day job and the rest of your life -- doing so could be as simple as putting down the Crackberry and walking slooowly away, or as complicated as managing an unforgiving workload or an overbearing boss. Most important, there's a paycheck.

Searching for the right deal means that these certainties go away. First of all, nobody knows what success will look like. Obviously success will be a deal that goes to completion, but beyond that: Will we start up a new concept from scratch? Will we become master franchisees of a foreign fried chicken joint? Will we acquire and convert (into a plausible target for resale) a rundown mid-sized donut shop chain? Will it be a small multi-unit California casual restaurant that we join and help grow into a national chain? Do we try to go the private equity route and pitch ourselves as the dynamic duo for portfolio operations in Texas? There are many roads to Damascus, as they say, and we've seriously considered each of these. There are probably others too, but we don't know which will actually get us to the destination.

The uncertainties are what make this occupation difficult. Losing the luxury of a bi-monthly direct deposit and spending down the last of my assets are symbolic of a deeper psychological inquiry into how I value myself as a business person. In this search, nobody affirms my contributions with dollars or positive reviews. I dip into an accumulated pride in my skills and judgment to keep the search engine running. The virtuous cycle of working hard and being rewarded for it has been temporarily suspended. And it's not clear when it will be reinstated, or when the search will end. It's not hard for the search to take over all my waking hours (and even those when I should be sleeping).

All the uncertainties: that's the hardest part about being a search funder.

And now I am a search funder.

Woah act two went by fast.

(act two -- two years as a Stanford Graduate School of Business student, that is.)

Now, MBA diploma stashed away somewhere in my parents' apartment, I venture forth to create my act three: restaurateur. This blog will chronicle the triumphs and trials of being a search funder focusing on the multi-unit restaurant space.

What does this mean. For starters, it means I want to make this stage of my career about running chain restaurants. I'm a fan of many chains, including the oft-demonized McDonald's. I especially like Taco Bell and KFC (though the latter's Original recipe in China is tasting better and better than the domestic version these days). Olive Garden's spaghetti and meatballs with Bolognese sauce is pretty damn good -- though the pasta isn't quite as al dente as I would like -- and oh, the bottomless salad!

Chain restaurants provide reliable, widespread meal options for hungry people across a wide geography. They're what's for breakfast, lunch, and dinner for millions of Americans every day. Moreover, these much maligned chain restaurants can provide some tasty stuff. But don't take my word for it. As my old boss, the CEO of a large and widely respected chain restaurant used to say, "people vote with their feet." And by that measure, most Americans agree: chain restaurants are in.

That's not to say that there isn't room for growth. Of course there is. (Why would an MBA care to get into something that doesn't look like a growth vehicle?) Growth in quality, of course, but also in quantity -- some can be downsized, some upsized. Some brands are overextended, some are underextended. Some promise too much, some undersell themselves. Some are too complicated, some could take on a lot more. There's a lot of potential out there. And that's why my business partner and I are setting forth to make our mark on this decidedly unsexy, un-MBAesque corner of the restaurant world.

Please wish us luck.