ENTREPRENEURS, LAWYERS AND DOCTORS share some common traits. Most are bright, competitive and focused. Most of them are good problem solvers. But sometimes being competitive and focused can get in the way of effective problem solving.
Consider an engagement I remember with some frustration. I was called in to represent six physicians with an active specialty practice. They and their practice were highly regarded and they, you could tell, considered themselves shrewd businessmen as well.
Some time back they had backed the development of a new technology. The entrepreneur had worked directly for them but had since moved to independent facilities as his operation grew. The doctors were frustrated with their entrepreneur and felt less informed than they thought they should be. It had been a few years since they have made their monetary investment and they wanted to cash out.
That was my engagement. To get the company to buy their stock now at a price they had designated.
Usually that would be a challenge at the price point my clients wanted. Growing companies like this one, with little or no revenue, rarely have cash lying around in large bundles. They, like this company, are still dependent on inflows of cash from new investors to fuel their growth.
So, diverting a large amount of cash away from the business to buy out some early shareholders usually depends on one of three things: large loans personally guaranteed by the founders, new money coming in at a higher valuation that is willing to buy stock from shareholders, or a significant pending transaction. Entrepreneurs are loath to give personal guarantees so the willingness to buy usually signals one of the two latter reasons.
In this engagement, it turned out, the only challenge was timing. The company was willing to cash out all six of the investors at the designated price but needed time to get the funds together. At the same time, they were not eager to buy. They also encouraged the doctors to wait and not cash out now. They would not say why. But they agreed to let any doctor opt out from the sale.
I passed this on to my clients who were still frustrated with the entrepreneur and suspicious of his motivations. They asked me what I would advise.
Of course, I could not make the decision for them but I pointed out that the company’s ability to gather the cash needed to buy them out coupled with their recommendation that the doctors wait suggested that a transaction might be in the works. Their inability to say why they thought we should wait could be imposed by conditions to a pending merger, acquisition or public fundraising event. If this was true, waiting could get them a higher price.
The fact that they had a couple of emergency board meetings while we were negotiating also suggested a transaction might be imminent. And, their willingness to accept our price without much negotiation indicated they thought the price was undervalued.
I told them I would wait if I did not need the money now.
What did they do? Five of them sold for their price. They remained suspicious of the entrepreneur’s motivations and discounted the possibility of a significant transaction. They accomplished the goal they had focused on - getting out at their price. The sixth held onto his shares.
Six months later, the sixth doctor moved out of the practice after the company whose stock he kept merged into a public company and his shares became worth multiples of the price he did not sell at.
Of course, there was risk in his decision. Events could have developed differently. But he answered the question "what's wrong here" by altering his immediate buy out goal and was amply rewarded. Despite the value of being laser focused, sometimes you have to ask yourself what’s wrong with a situation and consider an alternative path.
Photo taken in Atlanta Georgia. The clerk at the Wild Birds Unlimited store noted the irony of being next to a chicken wing restaurant. “We feed them and they eat them."
The venture moola blog comes to you from Atlanta, Georgia. Find it at readjanus.com. Copyright Clinton Richardson.
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Clinton Richardson, has been writing for decades. His critically acclaimed venture strategy books first appeared in 1987 and are now in their 5th edition. His Ancient Selfies is an International Book Awards Finalist and an eLit Award Gold Medal Winner. Ancient history and capturing photographic moments are among his passions. See his photo galleries at TrekPic.com.