Why it could be wise to go public and why a royalty-based investment can make sense

‘Ask Mal’

Editor’s note: Mal Mixon, former chairman of Invacare Corporation and a well-known entrepreneur, will regularly share his business advice and experience with Smart Business readers. Ask him a question at [email protected], and your inquiry could be the inspiration for his next column.

Q: What are some of the reasons to take a company public? What may be some of the drawbacks?

A: There are three primary reasons to consider going public. The first reason is if you need money, most often to grow your company. When I was considering taking Invacare Corporation public, I checked with several venture capital firms. I compared their offers with the option of going public, and in almost all cases, the venture capital firms wanted twice the percentage of the company that I would give up by going public.

Second, going public will make a liquidity event for your original investors. They have no other way of getting out of their investment unless the entire company is sold, and a market recapitalization is out of the question. When a company goes public, shareholders can then sell their interests or keep them.

The third reason is that for a family owned business, being public gives liquidity opportunities without having to sell the whole company. It means if I wanted to sell some shares, I could do it.

As for the drawbacks, one of the principal ones is cost. You have to pay the dues for the New York Stock Exchange, comply with the Sarbanes-Oxley Act, you have to pay a public board of directors — that all adds up to cost.

Another drawback is that your financial information becomes public. You have to report a lot of information. But from the viewpoint of competing, you should never chase a competitor — you should chase your customers. If you take care of your customers in a superior way, you will beat your competitors. If you just chase competitors, by the time you catch up with them, they will have moved on.

Other considerations include how much time you want to spend wooing Wall Street. A lot of CEOs focus on the Street instead of running the company. I gave three or four talks a year, but I wasn’t obsessed with visiting Wall Street that much, and I had a person who works for me that covered most of that work.

Q: What is your advice on royalty-based investment models?

A: I built a great company that way. I was trying to buy a startup company that had a home health care bed, and I knew the product line fit very well with Invacare. I didn’t have a lot of money but I was able to convince the company owners they really had a good bed. I offered to pay them royalties. It was a win-win for both of us. I would make a profit, they would get their royalties.

We agreed upon a figure and once I paid that amount, it was the end of my commitment. So be sure to have either a specific amount, in my case $3 million, or a length of time, in your agreement.

A lot of people have inventions and instead of trying to start a company from scratch and go through all those problems, they can sell the product to a bigger company for royalties. There’s no cost; it’s all profit.

Mal Mixon is the former chairman of Invacare Corporation. A complete story of his Mal Mixon’s rise from rags to riches is told in his book An American Journey, published by Smart Business. It can be found at www.anamericanjourneybook.com and on Amazon.com.

Mal Mixon offers answers to readers’ questions on turnarounds and joint ventures

Editor’s note: This is the first installment of “Ask Mal.” Mal Mixon, former chairman of Invacare Corporation and a well-known entrepreneur, will regularly share his business advice and experience with Smart Business readers. Ask him a question at [email protected], and your inquiry could be the inspiration for his next column.

I have an opportunity to acquire a company and bring it out of bankruptcy. Can you give me some advice on how to turn it around?

A: If you feel strongly that the company still has a heart, the first thing to do is to try to restructure it. Cut the fixed costs to the bone and look at improving cash flow.

But many people live in a dream world, and if the sales don’t supply enough margin, you really have to adjust your fixed costs to the level of business you are in. Banks will generally be supportive with lending if you are in a positive cash flow mode. Even though you may be losing money, if your EBITDA is positive, you can generally find financing to get you through the crisis.

The one principle that I would tell you about turning around a company is achieving positive cash flow. The point is, cash flow is more important than profit. Lengthen your payables and shorten your receivables. When you try to lengthen your payables, you don’t want your vendors to get too nervous that they cut you off. But generally, you can get another 15 to 20 days.

Look at a sale-leaseback on any property or buildings you own.

If you’ve got a plant, sell it and lease it back. That will give you some cash. You would be renting instead of owning a building or facility. With your sales representatives, if they have a high salary and low commission, you need to put them at a high commission and low salary.

Q: What do you think about joint ventures as a means of taking a company global?

A: When I was a young man, the company I worked for was trying to do some joint ventures, and I was never impressed because, first of all, you argue about who is in charge. If it is a 50-50 arrangement, nobody is in charge. That is even worse than having somebody in charge. Let’s say you make $100 million in this country — you only get to keep half of it.

Today the world is becoming one community. There are different languages and different cultures, but people essentially have the same challenges worldwide.

People should embrace it and accept the way it is. It is fun to compete in the world market. I have done business in virtually every country in the world.

You can sell in any country. You don’t need a factory to start. All you need are receivables, inventory, salespeople and service people. Later on, if your business gets large enough, you can build a factory or buy an existing one.

Mal Mixon is the former chairman of Invacare Corporation and a well-known entrepreneur. A complete story of Mal’s rise from rags to riches is told in his book “An American Journey,” published by Smart Business Books. It can be found at www.anamericanjourneybook.com and on Amazon.com. Visit www.invacare.com


In sports, academics, business and life, victory counts

Once when my son was playing Little League Baseball, I overheard the coach telling the kids, “Just have a good time. It doesn’t matter if you win or lose.” At this point, I interrupted the coach and said, “Wait a minute. I do not want you to teach my child that it is OK to lose. I want you to teach him how to win! Americans do not like to lose. They like to win. It’s much more fun to be a winner and not a loser.” That’s in sports, academics, business and in life.

At this point, my wife grabbed my arm and pulled me away. She was embarrassed.

The message resonates

Years went by, and I thought the matter was long forgotten. During my son’s senior year in high school, he was required to give a senior speech. I was very proud to attend and hear his talk. Somewhere in his address, he brought up the story. He said, “Back in Little League, my father said I should learn to be a winner — that I do not want to be a loser. That comment has stayed with me from that day forward. I want to be a winner in life.”

This lesson in life has always been important to me from my earliest days. I wanted to be the best I could at whatever I undertook. I didn’t always win, but I always tried to win. In sports, I gave my all to the team. In academics, I wanted to please my parents. In music, I wanted to be first chair trumpet in the band.

When the opportunity arose for me to attend Harvard College, I wondered if I could compete with prep school city boys, and at the same time, I was invigorated but also challenged. I figured the worst thing that could happen to me was I would end up in a small Oklahoma state college. I decided to attend Harvard.

Give it your all

I gave it my all — night and day. I didn’t even have a date for six months. My classmates were talking about subjects I knew nothing about. Everyone had a better secondary education that I did. In a way, I was scared, but I persevered and made it. In my mind, I was intense.

When I look back over my life, the desire to win has never left me. Clearly, the desire followed into my business life, especially at Invacare. I was able to transfer this “desire to win” to my associates. We rose from an obsolete wheelchair company to the world leader in home health care equipment.

The important lessons to be learned here are never be afraid to try something new and always play to win. I have always said, “Show me a good loser, and I will show you a loser.”

How we are a collection of life’s experiences, so live fully!

When I look back over my life, I often wonder how I ended up becoming an entrepreneur in Northeast Ohio, and that makes me think we are the sum of life’s experiences. I was raised a country boy in a small Oklahoma town. My parents were intelligent, but neither were college graduates.

Looking back, I think I learned that I was competitive and, more importantly, ended up with a lot of common sense. But I learned nothing about business. My father sent in a college application for me to Harvard, I had no ambition to go there, but somehow I was accepted. What a change in my life!

Competition was a lesson

In college — I barely took a book home in high school — I suddenly found out I had to study. Bright students surrounded me and all had a better secondary education than I. Through that four-year experience, the most important thing that happened to me was that I learned that I could compete with the best and brightest students.

My family was very patriotic, and I was raised with a sense of responsibility to our country. I was more proud to have my mother pin on my Marine Corps second lieutenant bars than I graduated from Harvard.

When I look back on my four years in the Marines, including a year in Vietnam, I have asked myself, “What did I learn?” For the first time, I had management responsibility — to lead under stress and pressure — to be responsible for other people’s lives. But I still knew nothing about business. From the jungle of Vietnam, I submitted an application to Harvard Business School and was accepted. I departed Vietnam and became a bank teller in Boston for the summer.

Getting business experience

I learned about business at Harvard Business School, but it was all theory. I had no business experience. So naturally, I took my first job. Why Cleveland? Because I married a gal from Cleveland, and thought that would make her happy.

For 11 years I worked for several companies before I did my first leveraged buy-out with a company called Invacare. It had taken me a while to learn that I did not like to work for someone else, and more importantly, I did not like to make money for someone else when it did not include me. I decided I wanted to have something of my own where I would be rewarded if I succeeded.

But I had learned a lot in those 11 years. Most of all, I developed the confidence that I could run a company. I learned a tremendous amount about sales and marketing, and developed a customer focus, which has served me well over my career.

During this experience, I learned that I am an inveterate entrepreneur. I have purchased more than 50 companies that are now part of Invacare, and I have made more than 50 investments outside Invacare.

I’m 74, but still looking for my next deal. Like I said, we are a sum of our experiences.

Consider a leveraged buyout as a faster, easier way to own a company

The vogue in today’s business world is to start a business, and you may hear how an idea was fostered out of a garage. The chances that a bank will support such a venture are zero. The chances you will find a venture capitalist interested in funding a garage startup are slight. You really must hope to find an investment angel – your only real choice. Sure there are exceptions, but you are looking for a needle in a haystack.

Instead, let me make the case for a leveraged buyout. I maintain the road to riches is easier and much faster via the leveraged buyout route, especially if you are talented and still have little money. Here’s how it works.

The scenario

First, you must find an asset-rich business, preferably a business run by a second or third generation. In many cases, the company is no longer run by the founding entrepreneur, and is in a harvesting or maintenance mode. In other words, the company is just bouncing along with little injection of new ideas, innovation or capital.

Secondly, you must determine the approximate price the seller is asking for the business. Let’s say $5 million. The company’s value is usually determined by a multiple of earnings. A slow growth or zero growth company will usually sell at a low multiple, and a growth company will sell at a higher multiple.

Beauty is in the eye of the beholder. The ideal company for a leveraged buyout is to find a no-growth company that you can turn into a growth company. That is what we did with Invacare Corporation and Royal Appliance Manufacturing Co. (manufacturer of the “Dirt Devil” vacuum cleaner).

In both cases, we made millions of dollars for investors.

Back to the $5 million company. Next, go to a banker and determine how much the bank will lend on the assets. They will usually lend 85 percent on receivables, 50 percent on inventory and 50 percent on the quick sale value of plant equipment.

Getting a loan

Let’s assume the bank will loan you $3 million. Now you need $2 million and then you will own a company. Maybe the plant is worth $1 million, so you sell the plant and lease it back.

One million dollars to go. Maybe you can talk the seller into holding a note for part of the purchase price. Say $750,000. Now you only have to raise $250,000 in equity to buy a $5 million company. But you don’t have any money.

Usually the jockey, or the person who will run the company, gets what is called a “carry,” which can vary from 10 to 20 percent of the company for free for putting the deal together. All you need to do is sell the bank that you are worthy of getting the required loan and convincing investors that you are worth investing their $250,000. If you have any money at all, invest in yourself.

I am always more interested in what percentage of your liquid net worth you are putting in the deal more than the absolute amount. All you need to do is to sell the bank and investors on you and your plan.

Entrepreneur Mal Mixon joins CSU president at Fireside Chat Wednesday

Mal-on-Mountain--smallCLEVELAND, Tue April 9, 2013 — Mal Mixon, chairman of the Invacare Corporation, will join Cleveland State University President Ronald Berkman for a Fireside Chat as part of the President’s Lecture Series to discuss his newly released book, “An American Journey.” The event will be from 5 to 6 p.m. Wednesday, April 10, at Drinko Recital Hall in the Music and Communication Building, 2001 Euclid Ave., Cleveland.

In “An American Journey,” Mixon discusses his life’s experiences and how they built his character and business know-how. An added bonus in the book are his 18 Life Lessons, which have been called “a virtual playbook on how to win in life and business.” The book was published by the Book Development Group of Smart Business in Westlake, Ohio.

Mixon has led Invacare since 1979 when he and a group of Cleveland-based investors bought the firm from then-parent Johnson & Johnson. A graduate of Leadership Cleveland, he is chairman emeritus of the board of directors and board of trustees of the Cleveland Clinic and chairman of the board of trustees of the Cleveland Institute of Music. He is highly regarded in the Cleveland business community and has been recognized nationally for his entrepreneurial skills and leadership. He received his BA and MBA from Harvard and served four years in the U.S. Marine Corps prior to entering the business world.

A reception will follow immediately. Mixon will sign copies of the book which will be on sale. The event is open to the public.