Frank:             You’ve got to get your hands around the cash register of a company in the sense of wherever that money is being generated. I think Art’s said this too and that is cash flow is king. He’s absolutely right about that. If you don’t’ understand the cash flow of the company then you really don’t really want to buy anything. You don’t want to do anything until you thoroughly understand it. I know more about the loan than they do before I walk into the door.

Michael:          Hi, this is Michael Senoff with Michael Senoff’s www.hardtofindseminars.com. Here’s a recording from a gentleman named Frank who is looking for Art Hamel. In his 20’s he had attended an Art Hamel seminar. So, it’s 30 years later. He was wondering if Art Hamel was still around. I talked to Frank and he told me since going to Art’s seminar he has purchased over 60 different companies. He graciously allowed me to interview him and to pick his brain on his experience over the last 30 years buying companies. 

                        I touch on a lot of the aspects that Art teaches and you’re going to hear a lot of great inside information from a multi-millionaire who has bought over 60 businesses himself. I hope you find this helpful and I hope it inspires you to give the Art Hamel system a try.

Michael:          You told me you went to Art Hamel’s seminar how many years ago was that?

Frank:             It had to be in the late, late 70’s, like ‘79 or ’80.

Michael:          Where were you living at that time?

Frank:             I had just come in from New York. I was in Los Angeles.

Michael:          And how old were you?

Frank:             I was in my 20’s.

Michael:          And were you an entrepreneur back then? Were you searching for something?

Frank:             Well, what happened was our family had been in a small business for generations. We came over from Scotland and started textile plants up in Massachusetts in the 1850’s or 60’s. As the generation went on the family has diminished a bit, so it’s just me and my dad and my little brother, by the time it got to me. My dad died when I was 16. I took over the companies he owns. And then my brother and I, I was 16 he was 14. It was a matter of survival trying to keep the companies alive and do what we could to make ends meet.

Michael:          How many companies did he have?

Frank:             He had about six all together.

Michael:          He had six companies and you were 16 trying to take over these things?

Frank:             Yes and some of them were really a problem. So, the first thing we tried to do, he had a real sentimental issue about letting go of things. So, the first thing we tried to do is cut the bleeding of the finances. So, we really had a good strong revenue stream, but I was just a kid. Even though I grew up in the company, I wasn’t really privy to a lot of the financial issues that went on. 

Michael:          What was the company doing?

Frank:             Well, the biggest thing he did was construction. We were doing contractor work in Brooklyn, to renovate all the old Brownstones and that was the biggest business and we had a commercial laundry firm. He had a dealership that sold cars. My mother owned a chain of restaurants on Staten Island, so we had those too.

Michael:          Did you parents come over from Scotland?

Frank:             No, not my parents, but my great-great grandparents did. My parents were actually here already.

Michael:          I see, now were your grandparents entrepreneurs?

Frank:             Yes, first grandparents that came, the great-grandparents, they were already in business in Scotland. Their objective was to come here and to start a trading company and sell textile products or raw materials to the US for finished goods. Then they established that. One group went back to Scotland and one group stayed here and started other companies. One was a construction firm that actually build plants in Massachusetts and the other one was a company that imported the machines or doing the textile work.

Michael:          Was your dad teaching you and your brother the business, letting you know that you weren’t going to be working for anyone as you got older?

Frank:             No, not really. It was sort of like one of these things that you had a choice. You could either go with Mom and hang out at the restaurants, go with Dad and hang out with the builders or stay with a baby-sitter who was a martial art guy who was sort of a strange character. So, we basically decided we’d hang out with Dad because he was a little more liberal than Mom was. We couldn’t go in the kitchen; we couldn’t do a lot o things with her.

                        So, my earliest memories were looking up at him standing on a ladder. But that was my earliest remembrance as we would grow up in the business. As soon as I learned how to read and write, I was running the office doing stuff like filing and putting papers together and having contracts prepared so that we could find customers, offer new houses. It was a natural thing instead of some kids go out to play, I stayed at the office and worked a lot of the time.

Michael:          So, what happened when your dad died then you had these companies, did they go under?

Frank:             They didn’t go under. What happened was they were floundering as what we call it in our business. But the first thing we had to do was get rid of the IRS. The IRS just swarmed in on a whole bunch of things. So, my first objective was to get control of the company because as a kid you’re going out to tell people in a job site what to do, when you’re a skinny little guy about 80 lb., then you have a major construction guys looking at you like you’re a piece of meat. So, I had to figure out how to get some kind of authority with them and it took a long time to do. But that was the first issue now as I look back.

                        The other issue was trying to figure out how to sell companies, which I didn’t really know how to do. We’d never sold anything. And so, we tried to negotiate these other companies out and we wound up selling them. But most of the time was for asset base sales what they came down to. But we were able to get enough money together to do more advertising and build the construction end of it up. And we started some other little things around that. We started to diversify around the core company.

Michael:          Well, who was helping you? You were only 16. Were you doing this all yourself with your brother?

Frank:             Good point. No, another person that helped me was gentleman named Mr. Freeman. He was my dad’s right hand guy. He was a much older fellow and without him, I don’t know how we could’ve done it actually. So, yes, he was there and he would tell me things that would be very helpful and I was not really very rebellious at 16 like most kids might have been. I was really interested in trying to figure out how to save what we had so we weren’t going to go down hill and that was a big issue. So, I was a good learner in those days.

                        But what Freeman could do basically was the construction side and knew how to run the men and how to push me into a supportive role with these guys and get them to do things that I was surprised that I could get them to do. Like come on time and all that kind of thing. By 19 or 20, I had felt like I had been in the building business and the business itself forever. So, as my brother started to get older and I looked at him and said you know you could probably do everything I’m doing and I could just cash in and go out and do something else. By then the companies were doing pretty well. They were breaking even and making some money. We were doing better than we had for quite a while. So, I told my brother, look, I’m going to take some cash out of here and I’m going to go off and do my thing and see if I can build other companies and do something different because by then what I had noticed was that I had a real fetish for buying small things and building them up. We bought a little lumberyard company and we used that as a warehouse and then we also _____ selling lumber.

Michael:          All right was this the first thing you bought?

Frank:             That was the first thing I bought, yes.

Michael:          And how old were you then?

Frank:             About 20. 

Michael:          Now had you met Art Hamel yet?

Frank:             No, I hadn’t.

Michael:          All right, so at 20 you were looking for stuff you could buy and grow?

Frank:             Right.

Michael:          So, who’s we? Was your brother involved in this or just you?

Frank:             Well, we started out together, but he was more interested in staying in the building side. It’s a different attitude about buying and managing companies. Just going out and doing the job and he was more of the hands on guy and I was more of the office kind of guy.

Michael:          All right, so let’s see if we can remember back that first company you bought? How did you find the company?

Frank:             It was very easy. They were clients we worked with. I grew up with these people so I knew the lumbar guy, I knew the hardware guys we bought all the hardware from.

Michael:          And did they approach you or how did you know it was for sale?

Frank:             Well, because my dad had this attitude about buying companies, I sort of knew that concept and so I kept trying to find ways to cut cost. That was my big thing. My brother’s big thing was building quality homes, mine was finding ways to cut corners, sign contracts, get the best price. So, I kept staying on the money side versus the building side. Actually I wasn’t a good builder anyway. We knew that from day one.

Anyway, so when I realized that we could buy this company for a pretty decent price because he had talked about how things weren’t going well. The guy’s name was Charles and so I said Charles, do you mind if I buy into your company and teach you things? One, to build a little bit more assets for us, but also the other thing is to get a better price on quality and I can get it wholesale if he keeps selling stuff this cheap, I could get a good price. So, that was the idea of it and so we didn’t own the entire company. We owned about maybe 40% of the company.

Michael:          How much did you have to pay for it?

Frank:             He was so desperate for money I think we gave him about $15,000 for 40% of the company. And it’s sort of a shame because the guy had been in business for 80 years by then. And that $15,000 we made that back over no time at all, obviously just in discounts. And then we had the access to the lumbar company and the lumbar company and the hardware store both went the same kind of way. I think one was $15,000 for the hardware store and I think the $25,000 for 40% or 45% of the lumbar company and we were doing well. By then we could cut our prices by quite a bit.

Michael:          Okay.  So that first buy on your own, you learned some pretty important things about leverage?

Frank:             Yes, I did.

Michael:          What really stuck out in your mind about being able to do what you did that first time?

Frank:             I think the thing that stuck out was when I first got the reports in the mail or when I would go down and get the income statements to do the taxes, which was about a year later or so. I remember looking at all this cash flow that went through the company. I guess the first thing that hit me was I only got 40% of this company, what if I had the whole thing? What if I had a bigger share of it? What can I do with this cash because it was always this 30 day leverage between paying and receiving the cash flow. So, I felt if I could figure out a way to manage that cash flow more, I could do more things like buy other companies or do something else. So, that cash flow became the signature of what we’ve done for the last 35 years. We’re cash flow company buyers, that’s what we still are. But that’s where we first started.

You’re listening to Michael Sennoff’s www.hardtofindseminars.com.

Michael:          So, when you say cash flow company buyer, explain what that is. If you’re telling other Art Hamel students when they’re looking for companies, why are you cash flow company buyers and why is it important to have cash flow.

Frank:             There are two types of buyers out there. One of them is an asset base buyers that buys the assets of a company. They use it to leverage the company to acquire funds, which Art does and I also do part of that. But the other part is studying the cash flow, which Art was very good at and something that I could never stop learning more about.

Michael:          And explain in remedial terms what cash flow is, give me an example.

Frank:             Okay. Cash flow is the lifeblood of the company. It’s the cash that comes into the company at the beginning of the month. It’s the cash that goes out at the end of the month and whatever is left over is what you survive on. But it’s that whole volume of cash flow that goes through. It allows you to do different things with it. You could leverage that, you can manipulate that cash as long as you don’t burn it out or use it or utilize it and disadvantage it. You can do things with that other than just pay the bills. You can extend out your payments a little bit more. You can negotiate with the banks and Art taught us a lot of these techniques later. I knew them, but when I got to meet Art, I realized I was being reinforced a lot of this at a better level.

Michael:          What did you end up doing with that lumbar company and the store? Did you use that cash flow to leverage the business at all?

Frank:             Not on the first two. By then we were doing fairly well, but I used part of it to buy the third company, which was another construction company that was like us, a competitor in a sense.

Michael:          And how did that deal happen?

Frank:             Well, what happened was we were getting muscled out of some projects in Long Island, New York, and the company was called Forest Builders, I believe, and I basically saw his ads. His ads were killing me in the newspaper because his ads were big and mine were quarter page ads. And I didn’t think he would do well with them because he was spending a fortune, but he was going very well.

                        So, I decided one day I would go down and meet this fellow and I said, well first of all you do a great job and to my surprise he was getting eaten up by advertising and thank God he was very perceptive to me. I was still fairly young and this guy was in his 50’s already. I don’t know why, but he just sat down and showed me exactly how he was doing it. And I said you know basically we’re both making about the same amount of money. So, let me ask you this, I need more projects. You’ve got more projects than I have. Why don’t I buy into you as a partner and let’s work on the deals together. Let’s work on projects together because you can’t get enough projects done fast enough. I’m short of projects usually during the wintertime and you’ve got access left over from the whole summer, so why don’t I buy into some of this. And that’s what started that deal. And the money that I used from the first two, that was where that money came from.

Michael:          So, how much did you buy into on that?

Frank:             That one was a little more, that was about $30,000. By today’s standards it’s nothing, but it was $30,000. To me it was real sizeable amount of money back then.

Michael:          When you were buying these companies, you weren’t paying them the whole $30,000 at once, you were financing it, right?

Frank:             That’s exactly right.

Michael:          So, your payments may have been $500 a month or something.

Frank:             That’s exactly right.

Michael:          And you were getting jobs from him? That was just easy money.

Frank:             Pretty much, yes. It wasn’t a big sweat at all. Sometimes it’s a matter of finding people that are open to needing some cash right then and there. And also the big push was to show that we’re building a residual income for you by coming into the company. And they always like that phrase.

Michael:          How many businesses have you bought over, I guess the last 30 years?

Frank:             I can’t compete with Art still to this day, but I would say that we’ve done about maybe about 40 – 45 companies all together. And many of them I still have some investment in either at a minority or some cases a majority level.

Michael:          Do you want to talk about some of the other businesses that you bought? What was one of the most exciting ones that you’ve bought? Let’s talk about the story how you found it and how you purchased it and what it’s meant for you.

Frank:             Well, it was a chain health clubs. I wouldn’t say it was the most profitable, but I would say it was the most fun.

Michael:          When did you get this one?

Frank:             By this point, I was about 29 years old.

Michael:          Still in New York?

Frank:             I still have a place in New York, but I was out here in California when I came across this. We were going back and forth. My brother was having trouble running his companies by himself, so I would go back and help out. So, I was going back and forth, but in California I joined a health club. When I was talking with the owner and he said you know I’m getting ready to sell this place and I said how much do you want for it? We started to talk about it. And this discussion went on for a couple of months. And I really didn’t know if I really wanted to take on a health club because I didn’t know a lot about it. I was just a member there. But as I looked into it more, it was basically a cash flow haven is what it was. So, I thought yes, I can do this.

                        So we bought that club and then we turned around and by the end of about maybe 12 or 14 months we owned about 7 clubs in the Los Angles area, right around companies like Jack Lelane and Holiday Health Spas and those kinds of companies. And we had a very specific market of clientele that we were going after and that happened very quickly. One thing happened and all of a sudden everything snow balled and it all just came in place.

Michael:          And what kind of volume were all seven of them doing?

Frank:             On the average they do about between $500 to about $1 million a year in the beginning. We always have to do renovation and all that. But after a while, we were doing about $1.5 million to $2 million on most clubs, and the smaller ones we didn’t really want to get rid of them because even though they were generating less cash flow, we had much more loyal clientele in those smaller clubs. They were more sentimental, so there was less late payments and less other problems, which lead me to my next business. We did have like most clubs had as I discovered a lot of people who didn’t pay on time. A lot of people did pay late and all that type of thing, so we decided or I sort of decided to do two things. One was to open up a finance company to refinance my own paper. And I took a partner in who was from another club who knew how to do that really well. He had a whole room full of nothing but delinquent paper and he showed me how the business worked and we bought into that company. That was sort of a quasi start up. It was an extension from what we were doing. It was in the same building, but on a different floor.

And the other thing I noticed was that every time people would do an aerobic class, and this was when aerobic was first coming out before Jane Fonda, just before--Richard Simmons, I think was around before her. And I noticed that these young ladies or whatever would come in, a very few guys in those days, and we had one floor we set up for aerobics, which was brand new. We weren’t sure how that was going to work out and we had another floor set up for heavy weights and the men. We had another group of Martial Art guys who were in another part of the building. And we generated more money from the aerobics because we though it was fad and it would just sort of come and go and it would be off. Then we would be setting up some other kind of class, who knew what. But that was sort of the way things work. We were setting up different types of classes; Yoga and I would bring in people that knew how to do these things. I just simply managed it. 

I took on a partner and we managed this company together. What I noticed was at the end of each class, the first place these people would head for, especially the girls, was the delicatessen right next door and I said to myself, you know, there’s cash flow over there. Maybe I should look into that. And so we bought 49% of Brooklyn Deli, which was unusual because Brooklyn Deli was in Los Angeles and Harvard Street, which was not Brooklyn at all. But I loved the name. I was homesick for Brooklyn and it was a cash flow and these people were spending more money in the delicatessen than they were in my club by the end of the month.

Michael:          Well, I’m noticing a pattern. You’re buying percentages. You’re not buying the entire business and taking over everything. It seems like you’re going in and buying percentages so you don’t have to run the thing. Is that right?

Frank:             That’s true and that seems to be most of the time that’s what happens.

Michael:          One would want to know and it’s always a concern that if you’re buying a million dollar business like Art teaches or even a smaller business that you’re going to be buying yourself a job. How have you been able to buy these companies and having them run and operate because you’re only one person? How do you, whoever is the operation of the business through management or what strategies do you keep in mind to keep yourself from not going crazy operating all these things?

Frank:             You know it’s an easy question to answer and yet it’s probably a harder a thing to do and that is just basically being an expert on time management and organizing.

Michael:          Okay, but let’s give an example, the Deli. You went in there and you bought 40% of the deli?

Frank:             About 49%.

Michael:          So, what did that mean for you? What were your responsibilities?

Frank:             Well, the guy was a fairly young fellow. His first company he’d ever started and he was very new at it and they had some management issues. So, I said to Chris, who owned the place, also Chris was broke, he had no cash flow at all. Whatever cash he had at the end of the month, that’s what he lived on. I said Chris I’ll tell you what I’ll do. I’ll give you some money each month to survive on if you keep things going here because you know you’re doing a great job, the food is great. And what I’ll do is I’ll take a percentage of whatever comes in the door. If it doesn’t make well, then we’ll deal with that later. But at least give me bout 49% of the company so that I have some asset control over things in case you decide to sell. I would never offer to sell anything. If they decided they did want to sell then we would deal with it. But most of the time I left that to the other partner.

Michael:          Now, you said you wanted a percentage of what came in the door. Did you want a percentage of gross or net?

Frank:             Percentage of net.

Michael:          Is that a trap when you add up all the expenses?

Frank:             Well, it could be yes. But remember I also had 49% of the assets, which meant within about a year or two if I felt that I couldn’t turn this around I could say, look I need to get bought out so give me 49% of whatever this place is worth and I’m on my way. So, I could still walk away with some cash flow in my pocket. That’s why I said not every deal works out profitable. But almost every deal at least I broke even. That was my bottom line was to make sure that it was in about a year or two that f I couldn’t make a profit at this thing I should at least consider the fact that I can get out without losing my shirt.

Michael:          All right so you had 49%. You were giving them cash to live on. He was operating and running the place. So, what were you doing and how did you turn it around to where it had more cash flow?

Frank:             Okay with very simple things. I tapped in to our own markets, the other clubs. They were all within about a mile radius of the main club, so we did a lot of advertising. He hadn’t done any advertising at all. Most delis don’t do anything. They just sort of sit there and develop a reputation.

                        I’m always very strong in marketing. I’ve been a big marketing company now. We’ve been involved in marketing since the beginning. Even when we had the construction companies I would go around and put out flyers in neighborhoods. That was my big thing for building a company. If I couldn’t find a strong marketing base, I wouldn’t probably go near the company. And with Chris, I knew right away there was a marketing base right across the street. It’s the biggest hospital in LA, which is Harvard General Hospital.

Michael:          So, what did you do?

Frank:             I get flyer crew. We went in there and we canvassed the parking lots and then we went up to the floors. We put them on where the nursing meeting notes go and all the different places in the hospital. We had three major malls in the area. We just promoted the Brooklyn Deli like it was a major restaurant and it wasn’t a very big place, but did have a few tables that you could sit on the inside and a few on the outside. But the biggest thing that turned it around was delivery across the street to the nurses. That was what finally did it. When I did delivery, Chris never even heard of delis making deliveries and I don’t know if they do or not. But I said Chris they’re busy. They’re working. All you’ve got to do is make a gyro, make a sandwich, whatever you’re going to do and just walk over there an give it to them. Send a girl over and do it. And we got quadruple the orders. So, that made Brooklyn Deli a pretty popular place.

Michael:          When you did your advertising over there is that what you featured, delivery?

Frank:             Yes. We sort of did it by accident. I can’t say I invented that idea with them. One of the nurses said look I don’t have time go over there. So, look, I’ll tell you what, I’ll go over and get it for you if you want it. The club, remember, was right next door, so I didn’t have too far to walk anyway. So, that started it.

Michael:          How long did the deli operate for?

Frank:             The deli ran about two years. We opened up a second one next to my other club, then another one next to the third, so we had three delis.

Michael:          Next to each one of your clubs and they all worked the same? The girls went and ate after they exercised?

Frank:             Yes. That was the first thing I noticed was that people just thought that they got rid of that guilt complex, so they wanted to reward themselves, which is a good thing, I’d do it too. I’m not sure it works on the diet thing.

Michael:          That’s right!

Frank:             We did other things. We opened up a snack bar. Every company I own the first thing I try to internally diversify the product lines, then go after lateral markets and then just try to make things so that we can really grab every dollar we can that walks in the door.

Michael:          So, you made some good money on the delis?

Frank:             We did. For about three years, we did very well.

Michael:          What happened after that?

Frank:             Well after that Chris got married and so to have the issue about focus I think was a problem we had. He wasn’t showing up. He was starting to open up late and we still had management issues and I tried to bring in somebody to run it and he felt very intimidated by that, so we basically we offered to be bought out. And we bought out for a good price. We did very well.

Michael:          He bought it out?

Frank:             Basically we sold it to a third party.

Michael:          I see, okay. So, you sold all of them?

Frank:             Yes. I sold all three of them, yes.

Michael:          Oh all right. That’s very good. So, the lesson is if students are going to go out and buy businesses, what do they want to look for when they’re approaching a business? Art talks about buy something where there’s management in place.

Frank:             Absolutely. Management is a key issue. He said it to me and I can remember like it was yesterday. He said, and this is true even with my health clubs, always hire a manager that takes control of what he’s doing because if he can’t do his job you don’t need him. And you’ve got to be able to leave him the key and walk away. And he’s right about that. That’s what I basically had to do with all these companies.

                        That’s one issue. The other one that I like the most is basically studying cash flow. I think Art said this too and that is cash flow is king. He’s absolutely right about that. If you don’t understand the cash flow of the company than you really don’t really want to buy anything. You don’t want to do anything until you thoroughly understand it. The tax returns and the P&Ls, that’s great stuff to know, but you’ve got to get your hands around the cash register of a company in the sense of wherever that money is being generated and really understand where is that money really, really going. That’s where you start to build your strategy. If you’re going to buy a company, you have to know how much money are you dealing with before you run to the bank. I don’t even talk to the bank unless I know exactly how much I’m going to pay back. I know more about the loan then they do before I walk in the door.

Michael:          How do you know that you’ve got a good manager? Are there any tips that you can advise on how do you know if you have a good manager and what have you found is an effective way to keep one honest and loyal?

Frank:             Well, there are a few things that I try to use. One of them is you be as honest with them as you possibly can. You don’t want to play the king game where you’re in charge of everything and you’re trying to micro-manage the guy or the gal. So, you give them some authority, letting them know that they’re responsible for what goes on. Passing the responsibility to them and then having the respect that you need to give them to do that is both of the key issues that you need to put together at the same time.

They don’t always turn out to be good managers. Sometime they get dis-focused. Sometimes things happen. But for the most part if they understands that you’re being honest with them and there’s some kind of reward structure or compensation structure there, which isn’t too hard to reach. Sometimes we set things so unattainable and then they become frustrated. So, I would set goals that are within reason. For example, one of the managers I had for a club, I said, look if you can help me to get this membership up another 5% by the end of the month, I’ll give you 5% of that 5% of whatever. And so that was an easy play for me and it was easy for him to reach that. Then I would set the goal a little bit higher and these guys and gals, if they have an opportunity to make more money, like anybody else, we go for it as long as it’s not going to kill us to get there, for most of us that is. And the other thing is being able to obtain some kind of goals with them that we both feel are reasonable.

And the other thing is really making them know what you mean by responsibility. In other words, if there’s a problem in the middle of the day or in the middle of the night and they’re there, if they get a phone call, they’re going to deal with that issue. And that’s their issue to deal with and they need to take control of that. If you have a manager who’s a really a weak manager and doesn’t want to take responsibility for things, then you’re going to have a problem. You’re going to be living in that company day and night. Now, do you pay a little extra for this? Yes, you do. But in the long run if you can get that kind of a person, you’ve got a pretty good quality person.

Michael:          So, let’s say, worse case scenario; you buy a company, you’ve got good management in there, something happens, they get sick or they quit.

Frank:             Probably, that’s some disasters. We’ve had a few suicides, stuff like that. But it wasn’t related to us, it was a fluke thing. We have had some things like that. We’ve had a heart attack in the past.

Michael:          Were you able to always replace?

Frank:             Yes. But you know what? Sometimes you had to get in a roll up your sleeves and do the job yourself. So, you want to understand what you’re buying really well.

                        A case in point, I never thought that this would ever happen. I had two partners by the time I had these clubs established. Both of them were physically fit shape, black belt, martial arts kind of guys. They could teach aerobics, they could do everything. Then I had three other staff that were also available to teach the aerobic class, so that was the biggest thing going on over there. And it was 6 in the morning until 8 at night. There came one day when nobody showed up at the right time. The schedule was all mixed up and nobody showed up and I just happen to walk in the door in a business suit and I saw about 15 or 20 raging women looking at me like they’re going to tear me apart and I said, what’s up? They said, where’s the instructor, they’re 15 minutes late. I said, well, I don’t know. And they said, well, you’d better do something or we’re going to quit this club. And at that point I did what I thought was the necessary thing to do. I took off my tie and I got up and did the aerobics class. And I didn’t know what the hell I was doing. I just got up there and it looks like a military routine rather than an aerobics class. And I wish we had cell phones because I would’ve been calling Bob, the major manager, every five seconds, but I couldn’t even reach him on the phone and I was totally out of shape for this kind of a class. So, I was almost having a heart attack on top of this little stage doing these callisthenic routines a ___ of aerobics you ever seen.

Michael:          That’s hilarious.

Frank:             At the end of the program all the girls just sat there and gave me a big applause for I don’t know what, probably the biggest amount of guts in the room, I don’t know. Three minutes later Bob walked in the door and said, I’m sorry I’m late let’s start up the class and everybody said, no we’re done, he did a great job.

                        So, I think the moral of that is that when you’ve got a company, you want to really like what you’re doing. You want to have respect for that company. You want to have respect for the manger. You want to be able to put your neck on the line when you have to and they will respect that. When they see that you are not just a guy running around pushing money and paper, but somebody who will jump in and make things happen and be a team player, there’s a lot of respect for that.

Michael:          How did you end up finding Art? At that time you did a few companies.

Frank:             Yes. There was a period of time when I ran into some problems and I had over done my investments, I think a bit.

Michael:          What does that mean?

Frank:             Well, it means I bought a company that began to bleed immensely. It began to lose a lot of money.

Michael:          What was it?

Frank:             It was an international marketing firm. Probably the biggest deal I’d ever done and like most lessons we learn, we try not to take on too much of a chunk, and I just got carried away.

Michael:          Tell me about the deal. How did you hear about it and what did it do?

Frank:             Whenever I’m out looking around, I’m always looking for deals to do. It’s just a natural thing for me now and I was coming back from an attorney’s office or something and I happened to see this sign on the door, moving to another floor or something. It was a firm called ITC. And I was getting in the elevator and it was one of these things in the hallway that you walk around, like a detour thing, and as I went to walk around it, I bumped into this fellow who was coming from the other hallway and it turned out that this guy was the owner of this company. I didn’t know it at the time, so we sort of bumped into each other getting on the elevator. We were on the 9^th floor, or something like that and as we went down he mentioned something about the company. He was a marketing guy too, I could tell. And I said I don’t do international market, but it sounds interesting. Tell me a little bit about it. He starts talking about it. At the end of his speech, he mentioned three words I usually pick up on and that was I’m looking for more money to keep the company going. And I said well I got a few bucks, I mean I’m not rich, but I can certainly invest in something if it’s a viable deal, so why don’t we go back up the stairs and let’s talk about what you got and see if it’s of interest.

Michael:          How did they make money?

Frank:             The company was involved in technology transfers. That means taking high technology deals and then trying to get them sold off to another party. In other words, the inventor will make up the deals or the companies and they’ll have all this excessive patents lying around and they’ll try to sell them off to someone else through royalty or through some kind of an income stream. And the company on the surface looked like it was doing really well. It was making millions and millions of dollars, but the downside of it was their overhead cost between the offices and the travel and everything else was extremely expensive. Their overhead was killing them.

Michael:          Were they international?

Frank:             By that point, they were already in five countries, yes. But he was an aggressive guy this fellow Mark and he wanted to have 40 countries around the world to do all kinds of stuff. And I sort of bought into that vision thinking oh this is really neat. I could get to do a lot of stuff with this. And I wanted to find a way to build companies that could do more. And I was always trying to expand the health clubs or expand the restaurants; whatever we were doing. And franchising is not always the easiest way to do it. So, I felt a marketing firm, maybe this will be great. But it turned out that it was very expensive, even for me. By the time we were done we had 15 people on the board of directors, everybody was an investor, and it was very, very expensive. And it cost me a lot of money.

Michael:          How much did you buy into it?

Frank:             About $250,000 in cash.

Michael:          Did you pay it all upfront?

Frank:             No, I paid it over time.

Michael:          Was this type of company who was selling to people to patent their products and their inventions and they would do patent searches and stuff?

Frank:             The front end of it did that too, yes. But the biggest part of it in those days was basically going to companies like Ford or Chrysler.

Michael:          Licensing the inventions?

Frank:             Right, licensing and the promoting sale of the product. A lot of times in those days, and now we’re talking the 80’s, the Japanese were coming over and buying up everything. One of the vice presidents was from Osaka, Japan and he was bringing over clients to look at products. First of all, in Japan people would buy just about anything if it was from the US, during those days. And one of them was a battery charger or certain type of battery. You twisted the cap on the battery and it would automatically charge itself, whereas before, all the other batteries would just die if you left them on the shelf over a long period of time. This battery had a thing where it would stay uncharged until you actually needed to use it, therefore, you had a longer shelf life. Just the revenue stream from that was paying off about 40% of the bills of this company.

                        And so the idea was good. You just had to have the right products and we had to go through a lot of different products. The other problem was the original owner of the company, who is there still today at this point, was so diversified that we were jumping from technology deal to consumer deal to retail to commercial to industrial. He just started jumping all over the place trying to find products. Even NASA, we were looking at NASA patents for overseas buyers to see if they would be interested in buying patents from NASA.

Michael:          All right, so you were losing money in this company and then you heard about Art.

Frank:             Well, okay what happened was I was going through down modes I think at that point and I happened to pick up the paper and I saw Art’s picture in there and I said, who is this guy? It was something about the dean of business I think he called himself or something like that and I sort of chuckled a little and said yea, okay. But I looked at him and you know what? Even in those days he was more mature, he was still older than me, of course, by quite a bit. But for a second I thought, you know, he seems like he’s almost like my dad. He seems like he’s a real frontier kind of guy from what I read from the paper ad that he put in there. So, I went down to the hotel just thinking I was going to just go down and take a look around and I was going to probably leave because I figured there wasn’t much this guy’s going to tell me I don’t already know. And usually if you spend your own money on a deal you learn a lot real quick.

                        Anyway, I went in there and there was like 500 people at this event and I’ve never seen a hotel filled to that capacity from a guy who I’d never even heard of. So, I went over to the girl and I said, who is this guy? Well, he’s a guy who owns a lot of companies and he’s doing this and doing that. I said, well, okay, you know, I’ll just sit down and take a look. So, I bought the ticket and I went inside.

Michael:          Was it only an Art Hamel seminar or were there other speakers?

Frank:             No, this was only an Art Hamel seminar; 500 people at an Art Hamel seminar and it turned out it was a pretty good size event. The first thing I saw when I sat down was I started counting the heads thinking this guy’s got a marketing gig going like no tomorrow. I wish I could fill up a room like this myself. I don’t remember what the price was, I can’t remember now. But I remember calculating the cost and the amount of money and the overhead for the hotel, I figured this guy is going to make a killing. But what I didn’t know was there were a lot of people in that audience just like me that were also company owners who were frustrated and were trying to find ways to make things work. And there was also another bigger majority of people that weren’t business owners. They were just people that were trying to get into a business and didn’t know the first thing about it. And so there was these two types of people and I would go around the room during the breaks and I would talk to different people and I realized that there was a lot of market here for this type of thing and there was a lot of people that were trying to do something and just that alone really made me feel more confident because I knew for the first time I wasn’t doing something that was unnatural. It was really more natural than I thought and that helped a lot.

                        Then the other thing was the reiteration of a lot of the techniques he uses. Some of them I had not heard of before and learning how to leverage assets and leverage cash flow was always the concern for companies and still is today. But in those days you could more with a lot less. Now you have to after bigger deals and bigger cash flows and institutional people sometimes can make something happen. But in those days it was the tools of the trade.

Michael:          Do you think most business owners really understand how to leverage assets?

Frank:             No.

Michael:          So, when you look at a business you’re looking at it in a whole different way than that business owner is. Are there many ways that someone who understands how to leverage assets and cash flow can get into a business with no money, if it’s the right type of business?

Frank:             Well, yes. I know Art brought that up two years ago. There are ways, but you want to be very careful with the no money down syndrome; an owner is usually turned off by that. The first thing you have to understand is the psychology of the person you’re dealing with, the owner. And I’m an owner too, so I understand it real well. The idea--and Art I think used this phrase too--this is your baby and you don’t want to sell your baby or hock it for 10-cents on a dollar. So, if a person walks in with that attitude right off the bat, they’re not going to get that deal. But what you want to do is begin to explain to this person that they have a beautiful baby despite what you really think. It may be the ugliest kid on the block, but it’s a good-looking baby. And there are a few things, though, that you want to point out that might make the baby, or the infant, or whatever, look even better. There are things we can do to make the baby happier by putting in a better crib or doing certain things.

So, I look at it from a value added and a value added is where I usually put my down payment. I don’t give them the down payment, but that doesn’t mean I don’t have a down payment. I have some kind of money. Most of the time I’ll put up a small amount of money as anybody does, we try to put the least amount up front because there’s a lot of things we don’t know going in the game.

Michael:          So, your down payment can be some marketing that will bring in more money for the company.

Frank:             It could be yes. Some kind of value added and that’s tricky to do because you’ve got to really prove that it’s worth it. Now, a lot of times what I’ll do is--we’re buying a gas and oil company now in the Mid West--what I do is I put $5.5 million worth of contract services together and I told them first of all you’re bleeding at about $7.5 million a year. You’re losing from all kinds of problems here. The other problem is the stations and the convenient stores and the restaurants are all falling apart. So, I’ll give you $3 million down as a binder for the company, I’ll bring in $5.5 million worth of contracts to refurbish this place, refurbish everything. If this deal falls through three months or nine months down the road, wah-la, you get to keep everything and I’m out the door. But, of course, I’m not going to let that happen. But that’s one way of getting around a no money down syndrome. I just don’t want to make t sound like it’s something you really walk in and it’s completely free. There is a price you have to pay and sometimes on the onset it’s actually more than you would’ve paid if you just paid the cash. On the good side of it, though, you’re able to control the cash flow better and that’s what really, really counts going into a company.

Michael:          Is controlling the cash flow?

Frank:             Absolutely.

Michael:          How do you structure a deal to gain control of that cash flow; either buy it outright or what percentage do you need to have the control? How do you get control of the cash flow?

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Frank:             Well, if you can buy the company outright, then you’ve got everything. But the idea is to keep management in place so you still have them under contract. That’s the best way to control the cash flow. Then you can do whatever you want.

Michael:          Do you think it’s better to buy a percentage and keep management in there, or buy it outright and keep management in there?

Frank:             That’s a difficult question. It could be either. But if you have to get rid of management, you really need to take a strong look at that company because there’s a lot of things that happen when a manager has been there for 10 – 15 years, when they leave, what’s going to happen to that company could be drastically different.  So, I’ve done both and it really depends on the company. In some cases, like the deal we’re working on right n