Len Pagon Jr.
How a failed deal led to a better price for Brulant
Len Pagon Jr. was about to become a very wealthy man.
It was 2008 and the sale of Pagon’s Brulant Inc. to Sir Martin Sorrell and London-based WPP was going to be a monster deal. WPP was a global marketing giant with a $13 billion market cap. Brulant was a red-hot digital agency that had grown from $4 million to $80 million in annual revenue over a six-year period, with an EBITDA of more than $18 million.
Pagon was ready to cash in. “I spoke with Sorrell, met with him a couple of times and he was the one we decided to do a deal with,” he recalls.
After extensive due diligence, a purchase agreement was approved by WPP’s board.
Then Pagon got a call from Sorrell that changed everything. The board’s vote was not unanimous and Sorrell was concerned.
“I said, ‘I don’t understand what you’re saying,’” Pagon recalls. “‘Are you telling me you don’t want to do the deal? Do you want to renegotiate? What are you telling me?’ He says, ‘Well, I’m not really sure. I need to think about it.’”
A few days later another call was filled with the same uncertainty. After months of negotiation, Pagon’s deal was falling apart. He gave Sorrell an ultimatum: Sign the purchase agreement the following Monday or the deal was off. Monday came, Sorrell was still skittish and Pagon stayed true to his word.
“His concern was my commitment because all of a sudden, I was going to be a very wealthy person,” Pagon says. “He wants people to do well, whoever the founder or principal is, but he wants that person still very much engaged. His concern was that I’m going to be very wealthy and I wasn’t going to be able to tolerate being in the WPP bureaucracy, which was probably true. I would have been there for a little bit and been like, ‘Yeah, I can’t deal with this. I’ll walk away for a whole bunch of earn out.’”
Walking away is all part of being a dealmaker, says Pagon, who these days is chairman and CEO at Next Sparc LLC.
“To some extent, even if you love the deal, you just want it over one way or the other,” Pagon says. “You think maybe it’s not meant to be and you start having a strange internal dialogue. It’s really work to get something closed, even when you have strong motivation and strong trust and a strong business case. In the heat of the due diligence and the lawyers and the accountants and all the different parties that are involved, it can be a grind.”
Smart Business Dealmakers spoke with Pagon about how he recovered and got a deal done to sell Brulant to Rosetta and the many twists and turns that come with being a successful dealmaker.
The sale of Brulant
Our exclusivity period had run out. Since I had the first conversation with Sorrell, I reached out to the group that was No. 2, which had even a little bit better of a deal in some ways, and said, ‘Are you still interested? We’re close to getting a deal done, so it might be done later this week, or it may not.’ They upped their offer with more cash up front and a higher offer from where we left it when we had told them we were going in a different direction.
When I sold my business in 2008, it was before the Great Recession. I knew things were not good. Some weekends, the market was dropping by a lot. At the same time, our business was way outperforming our forecasts. I was really strongly considering re-trading our deal up because we were beating all of our forecasts. I went to some friends of mine who I take counsel from and said, ‘I’m really thinking about going back to the buyer and raising the price significantly because we are beating our numbers significantly.’
They said, ‘Would that extra money make a difference and change your life? Why are you doing this deal?’ It would have made me happier and I would have made more money, potentially. It might have also soured the deal. I ended up closing in July 2008. Now fast forward to September and I’m in a meeting. The day was Sept. 16, the day after Lehman Bros. went away and went bankrupt. I realized the best deal is sometimes the one that gets closed. While I could have re-traded earlier in the summer, I was just grateful that my deal was done. So not being greedy and not over-negotiating is really important.
The craft of dealmaking
A successful deal gets done if there is trust and strong motivation on both sides. The motivation comes from the why. Both the buyer and the seller need to spend time understanding the why and the motivation to do a deal. It’s about being open and transparent on both sides. If you have strong motivation and strong trust and the deal makes sense, you can work through a lot of the other issues that come up.
The process by the end, it can be very fatiguing. But it’s really understanding the motivations and what each party is trying to accomplish on both sides. There is lots of room on a deal to figure things out. A lot of people get hung up on valuation. But my experience is there are lots of other important terms. Maybe you’re generous on the valuation, but less generous on other terms that protect your downside or defer some of the valuation. There are lots of ways to structure deals that can meet the motivations or support the why.
People can sometimes really grind on certain deals. Deals are either good to very good or bad. It’s almost somewhat binary. Even if it’s OK, it’s kind of still OK. In reality in my experience, a good or great deal doesn’t necessarily matter at the margins. People might be grinding on a valuation or working capital. But if the deal turns out to be good and you’re hoping to get dollars, the nickels and dimes don’t really matter. Where things break down is where people will constantly be negotiating and changing this and that. That will ruin trust and ruin a deal. If possible, minimize the amount of time and the turnarounds in negotiations.
The mental approach
I do know people who are deal junkies or deal guys. They are phenomenal at negotiating and structuring and love the adrenaline and intensity. Finding a deal is a bit like hunting. There are people who feed on that who are more predisposed to it and like it that do not have the skills to operate a day-to-day business. They don’t have the day-to-day grind it out mentality. To some extent, it’s just learning how to do it. I didn’t have much experience in it, but I learned.
My day-to-day business now is investing and managing a portfolio of companies. Had I had the experience with my former business, I could have been a lot more aggressive. I didn’t realize how well we were run. I did a couple acquisitions. I could have done one or two a year in a very manageable way. It would have been stressful, but the deals that we did performed phenomenally well. We executed really well and we could have done more of that and been a much larger business than even we were.
The Last Word
Every process goes through ups and downs. There are moments where you feel like the deal is going to fall apart. If you’re still excited about it and you still trust the other party, you keep working to get it done. That motivation and the why is really important. If you have some spider sense that you don’t trust this guy, then don’t do it. Because there’s a lot of work ahead. There is so much work to get a deal closed, but there is even more work post deal. Is there strong motivation on both sides? Or are you having to work really hard to convince somebody? If the other side is really excited about it and you keep having good conversations and it feels good, you’re probably going to get a deal done if you’ve got the terms right.
How to reach: Next Sparc LLC, http://www.nextsparc.com/
Related articles: Next Sparc’s Len Pagon Jr.