Armando (0:00 – 1:56)
Well, hello founder, you built your business over decades and now it’s time to think about that once in a lifetime exit from your business. You’ve come to the right place. Here, you will hear business exit professionals involved in the buying and selling of companies talk about what you should know before you exit your business.
If you’ve never sold a business before, this podcast can be super helpful to you. You will come away with an understanding of a successful business exit done right. I’m Armando, host of the Founder’s Guidepost, enjoy.
But first, a quick disclosure. Opinions expressed are those of individual professionals. The Founder’s Guidepost is a service of Axiom Founder’s Family Office Inc., a registered investment advisor, licensed or exempt from state registration in all states in which it operates. The Scottsdale Founder’s Forum is a biannual live event for you, the founder, considering exiting your business in the next 36 months. More information available at ScottsdaleFoundersForum.com. Well, hello, this is Armando with the Founder’s Guidepost here with Dan Schweiker this morning who founded the China Mist Tea years and years ago with his business partner, John Martinson.
And Dan, you know, your company grew and through blood, sweat, and tears and all those things that every entrepreneur goes through, you founded a successful business. You had it for a long time and then it came time to exit that company. And if we can talk about that exit a little bit and maybe before that, if you can just give a little more background on you, who you are, talk about China Mist and how you built that to what it was.
And then let’s talk about when you decided, you and your partner decided it was time to exit, what did that look like? What was that thought process and how did that go forward?
Dan (1:58 – 9:40)
So China Mist actually started, you know, as many businesses do, I think, because of the result of other business failures. So my background was, I was an attorney, graduated from Drake Law School in Des Moines, Iowa, practiced law for a few years, decided I didn’t like that and ended up as part owner of a book and coffee store in Iowa and then came down here to visit my sister and she wanted me to open up a coffee store down here. So I did, got all the money I have, borrowed money from the bank and everything and opened my first business and failed miserably at it.
Spectacularly miserably at it. I had it for about a year and a half and right before I was going to go broke with it, I sold it to somebody who gave me a down payment that I ran to the bank and cashed. Good thing because that was the last payment I got and it ended up going into bankruptcy about a year later.
That down payment, I went and bought back my old coffee roasting equipment and sold it to another coffee company in town and at the end of the day, didn’t have much money but I met somebody else who became my business partner, John Martinson. John was going broke in a different part of the coffee business. We became friends.
It’s kind of a small world in the coffee community and I had installed the first coffee roaster in Arizona since 1925. This was like 1978, 79, early when I was getting up and going. I opened, I think on May 10th of 1979 when it was 110 degrees outside, I was in a brand new strip shopping center and that year there were like 50 brand new shopping centers that opened up and nobody knew what fresh roasted coffee was.
It was a real experience but I learned a lot from it, had a good time but at the end of the day, John and I each scraped together $300 and it was John’s idea by the way that we do something in tea. He had been approached by one of the commercial coffee maker equipment companies, Bunomatic and their local salesman. Bun dominated the commercial coffee making equipment and one of their new products was an iced tea brewer and they thought it was just the best thing since sliced bread.
So they took it out to the restaurants and the restaurants said, well, I’m not going to spend $850 on an iced tea brewer. Whoever I buy coffee from gives me my coffee makers for free. So go talk to them.
Bun went and talked to the coffee companies and they all said, we have people brewing their tea right now through their coffee makers. We’re not going to spend $850 for a machine. Go talk to the tea companies.
So they went to talk to the Lipton’s of the world and they said, we put a lot of money in technology into developing liquid teas that they can just run through their fountain guns. So we’re not about to buy that machine. So Bun had this great machine with no customers for it.
So they turned it loose to their local sales reps and our rep, a man named Stan Skinner, fantastic human being, brought it to John and John called me up and said, hey, come up and take a look at this at my house. So I went up there and John and I looked at this machine and literally the only time in my life that that little light bulb has actually gone off. And John and I looked at each other and said, you know, there’s a business there somewhere.
Now we didn’t know what that business was going to be. And it turned out to be completely different than what we thought it was going to be. We were going to, or at least my vision was, we would buy tea from the Lipton’s of the world or the Tetley’s and mark it up a little bit and lease the machine to the restaurant so they didn’t have to buy it up front and then we’d sell them tea.
And the restaurants came back and said, you know, nice idea, but we’re not going to pay a lease for that. You want us to use your tea, you have to give us the equipment. So we needed more margin than we could get from buying tea from other people.
It was John’s idea. He said, you know, when you had your coffee store, you sold all these different teas. Why don’t we blend our own tea and make our own blend and cut out the middleman?
So we each scraped together $300. We bought 80 pounds of tea, started playing around with it in John’s garage, blending it by hand. And we kind of knew the flavor profile we wanted because a lot of the teas at that time were very bitter and we didn’t want that.
We blended until we got rid of the bitterness. And one of our favorite things was, a glass of China mist looks fantastic. It’s got kind of a deep ruby red color.
And we got that by blending iced teas until we came up with one that looked like a glass of wild turkey over ice. We always thought wild turkey was a great looking drink. And so we blended that and we thought that our market was going to be the high-end hotels in Scottsdale because we thought those were the people that would pay a little bit more for a product just because it was better.
But then it turned out to be a much bigger market than that. And then we started getting approached by restaurants that wanted to use it. And it just kind of took off from there.
And then I think most fortuitously, the bun salesman who sold us the iced tea brewers, we bought so many of them, he became their salesman of the year. So the rest of the bun sales reps around the country saw what was going on here. And they started calling us up and saying, hey, I’ve got a customer in Albuquerque or Omaha or other places where I could sell them iced tea machines if they had a nice tea to go with it.
That’s how we kind of fell into the wholesale distribution business. And one of the things that allowed us to do all that was when we started working on the tea, we knew we could never be the cheapest tea in the country. I mean, Lipton owned their own tea plantations, right?
They were vertically integrated. We were never gonna have that advantage, but we knew we could create the best tea product. And we thought if we created the best tea product, we could charge whatever we wanted to for it.
So when we came out to market, we priced it in kind of the back of our minds. We knew we might sell this in other areas and we knew we had to have a margin to pay distributors because they had to make money off of it. So we brought out a tea that was five times more expensive than Lipton.
What we didn’t realize was by doing that, we created a whole new category, the premium tea category. Now, in the beginning, it was kind of a rough sale going out there selling this tea that was five times more expensive, but then another company in California kind of copied what we were doing and they brought out an expensive iced tea. And as soon as there were two of us doing it, it became a legitimate category.
We were the category leaders in that.
Armando (9:40 – 9:43)
Oh, fantastic. The pioneers in that space, fantastic.
Dan (9:44 – 9:55)
You know, it sounds brilliant. What I tell people is, John and I were standing under the apple tree where the catchers met when the apple fell. We just happened to catch it.
We were smart enough to catch it.
Armando (9:56 – 10:33)
Well, and you started by saying that, you know, you had failed in something else first, but it’s not unusual or really not unusual for a founder in a successful business to have gone through iterations before where it wasn’t successful. So then you had China Miss Tea Brands, you grew that, and at some point, you and John came to the conclusion that it was time for you to exit that business. And- Well, yeah, we did.
How did that come about? How did that, what was that thought process? When was the time, when did you know you were ready?
It was time for you to start thinking about exit?
Dan (10:35 – 10:41)
Well, okay, and that’s two different things. We thought about exit long before we decided it was time to exit.
[Speaker 3] (10:42 – 10:42)
Okay.
Dan (10:42 – 12:55)
When you’re doing something and you’re doing it right, and by the way, John and I made a million mistakes when we were starting the company, but we kind of did that purposely. We wanted to make mistakes when we were little, where a mistake might cost us a few hundred dollars or a thousand dollars, rather than wait till we’re really big and that mistake could cost you a million dollars. So we did it that way, but when you’re doing something the right way, you start getting phone calls.
And at first you’re flattered. You know, hey, somebody’s interested in my business. After a while, you realize most of them were just fishing.
You know, there was no real interest there. So you learn how to weed out the legitimate phone calls from the ones that weren’t legitimate. And 99% of them were not legitimate, nothing we would be interested in.
And then, but after 35 years, and we’d had some executive changes and we’d hired and we promoted a person who started out delivering tea for us to CEO and she came down with a serious illness and had to go on disability. So I had to step back into doing something I hadn’t done for like five years. And I realized that, you know, after 35 years, it was getting ready to be time.
And one day I got a phone call that I thought was legitimate. You know, this one really was from people that I thought would be a good fit for our company. The first thing I did was I had to talk to John about that.
And we weren’t both on the same page originally, but after a few discussions came around and both of us realized, yeah, this is something we should probably explore. But maybe the smartest thing we did was to realize that we weren’t smart enough to sell a business ourselves. We’d heard, you know, and we both belonged to different business mentoring groups over the years.
And we’d heard all the stories about people that had tried to sell their own businesses. And, you know, it seemed to seldom work out very well. So we were smart enough to realize that we shouldn’t do this alone.
Armando (12:56 – 13:11)
Thinking of exiting your business? Come to the Scottsdale Founders Forum, a biannual live event for you, the founder, considering exiting your business in the next 36 months. More information, it’s Scottsdalefoundersforum.com.
Dan (13:12 – 15:43)
So we started going through the Rolodexes of people we knew, and we picked out three different companies, two local and one out of Chicago. And I had an advisory board at China Mist made up of people much smarter than I was. You know, they were wonderful people that were willing to help a small company get going.
And we set up a interview committee of all those people, and we brought in the three companies and interviewed them and asked them a million questions, you know, because really when you’re going, and we didn’t realize at the very beginning, but once you get into it, when you decide to sell a business, that person you’re going to work with for selling it, I mean, it becomes like a marriage because they’re living with you almost 24 hours a day. We had been warned about how much work went in to developing the pitch deck that they were going to use, but it still doesn’t prepare you for the amount of work that goes into preparing that pitch deck. You know, you hear the stories, but until you get into it, you don’t realize how time consuming and energy consuming it really is.
So we interviewed the three companies. The one we picked was actually someone that I had known for probably 10 years. Rami, our former CEO, had known him for maybe 15 years, and he went around to a lot of the food programs, the trade shows around the country and would do breakout meetings on how to sell your business.
So he just happened to have in-laws that lived in Arizona. So every time he came down to see them, we’d get together for a cup of coffee and it was never a high pressure sale or anything. And it was kind of interesting when we brought the three groups in, before we started, all of a sudden the interview committee had kind of our favorite one that we were going to pick, but we thought we should go through the formalities of doing the interviews.
And the one we picked was not our favorite at the beginning, but they came in and out of Chicago, made a great presentation. And it’s the kind of thing that you develop a relationship with. I mean, we sold China Mist over six years ago and that investment banker was just back in town two weeks ago and we went out and had lunch with each other.
Armando (15:44 – 15:55)
So what was it about them out of the three that you interviewed? What was it about them that spoke to you that helped you understand that that was probably the best choice of those three?
Dan (15:56 – 16:29)
It’s kind of like when money looks at a business that they want to invest in, what they really look at are the people behind the business and that’s what really sold this company. Not a fancy presentation or anything, but just the team they had were thoughtful, genuine, they actually weren’t really trying to sell themselves. They were just presenting the options that were out there and what we could do.
And we just developed kind of an instant trust with them.
Armando (16:31 – 16:40)
And it sounds like that trust then was pretty important in the selection and that ended up being a good choice for you as you went through that exit process.
Dan (16:41 – 19:45)
Yes, that trust was very important because if you’re gonna successfully sell your business, you have to be a blank slate. In that prospectus that they’re putting together, you have to give them the good, the bad, and the ugly. You have to tell them everything because when people do due diligence, they’re going to dive down into that and find it.
So we’re the company of the only time we were audited by Internal Revenue Service and there was one minor little thing, this was early in the China Miss career, one minor little thing that we had, a mistake we’d made when we changed accounting systems in the middle of the year. And my business advisors at that time thought, well, we’re not just gonna tell Internal Revenue that we made a mistake, we’re gonna make them see if they can find that mistake. And it turned into a very, very contentious process.
And finally, at the end of it, I threw my advisors out of the room and I got Internal Revenue in there and I said, look, here’s what we did, we made a mistake and here’s the mistake we made. So what do we need to do to correct that? And then everything was okay.
But investors, when they’re looking at your company, they’re like that. If there is anything you’re trying to hide, they’re going to find it. And that only devalues your company in their mind.
So if you show them that whole thing, it kind of reminds me that John and I always had a great relationship with the working press. We got so many articles in the newspaper because they would come and talk to us and we would do that same tactic. We’d tell them all the good and the bad things about what was going on in our business, but they only printed the good things because they knew they could come back to us and interview us again.
But if we tried to hide something, that’s what the reporters would have focused in on and they would have found that. So one of my advisors always called it the open kimono rule that just show them everything because they’re going to find it eventually. And if you’re trying to hide it, it’s just not going to work.
So we told the investors everything that was good and bad. And one of the ways we learned to do that, by the way, was when we first started our banking relationship, once a month, I would send, it used to be a letter because that was before email, but it later became an email. Every month I would send our banker just five bullet points, five things that were going well, five things that weren’t going well.
So if there was ever a bump in the road, they were never surprised. And so we took kind of that approach with people wanting to buy the company. We told them absolutely everything.
You do the SWOT analysis, you figure out what your weaknesses are, what your threats are, tell them that upfront because they’re all bright people and they have bright people working for them and they’re going to figure that out anyway.
Armando (19:47 – 19:51)
So during that process, Dan, had you sold a business before?
Dan (19:52 – 19:59)
No, no, I’d walked away from the coffee business but I’d never sold one before. So my first experience.
Armando (20:00 – 20:16)
So what was the biggest surprise? You started that process, went through the process, had a successful exit. As you look at it now and think about that time, what was the biggest surprise to you as you walked down that path of exiting the company?
Dan (20:18 – 21:55)
Probably two things. One of them is you have to make sure you’re mentally ready to do that. And I’ve always been very good at that.
When I finish a chapter in a book, I don’t go back and reread it. I turn the page and I’m onto the next thing. But the thing that really was surprising was the amount of work that goes in to preparing their pitch deck when they go to sell your company.
Because they ask you questions and make you look at your company in ways that you’d never really looked at it before from an operating point of view because operating, we’re just trying to figure out how to bring in more money than we send out so we can grow the business. And they have all these different perspectives as somebody that’s going to be out there putting their money into your business. They want to know not only what are you doing right, but what are you doing wrong.
And they have to figure out how to make enough money out of the business to pay for buying it. So just the sheer amount of work that went into preparing that pitch deck. Now, luckily we were kind of pack rats at that time.
We in our warehouse, we still had old boxes of computer printout financials for the company from like 30 years ago or 35 years ago. Some of them were, you know, the old ones where they were just written on a yellow legal pad before we got accounting systems. So we could back up everything that we told people.
Okay. Wow. But it was a real experience.
It was fun. It’s an interesting journey.
Armando (21:55 – 22:20)
And you’ve talked about being ready. You know, not looking back when you read a book, you close that chapter. How did you, you also said that your partner wasn’t really there with you at the onset.
So you probably had to have this conversation to both get there. But for you, when you think about, you know, you were ready, how did you know that you were ready? That once you walked away, it was going to be the right time to do that?
Dan (22:21 – 23:22)
You know, it had been 35 years and no matter how thrilling the business is or anything like that, new customers and new distributors, after a while, it’s kind of, yeah, you’ve seen that, you’ve done it, been there before and kind of the spark went out of it. You know, it became, it became more, at first I was one of those people, I was always TGIM, thank God it’s Monday because I’d love to get into work. And towards the end, it became a job.
And when it becomes a job and you’re not passionate about it anymore, you know, I, at least for me, that was when I knew it was time to start looking around. And had I not gotten that phone call, and by the way, the phone call I got was not the company we sold it to, we sold it to somebody that wasn’t even on our radar screen. Matter of fact, we sold it to somebody that I would have thought, no, no, I would never sell a company to them.
And they turned out to be by far the best partner.
Armando (23:23 – 23:28)
Wow. Well, that sounds like it was a surprise along the way that you didn’t expect them.
Dan (23:29 – 24:15)
Yeah, you know what? One of the interesting things, and I don’t know how all investment bankers do it, but they put together a list of about 300 potential targets to buy our company. And we went through with them and we had the veto power.
We could say, no, we’re not going to talk to them because some of them we thought were too close to home that they could just be looking for trade secrets and things like that. But the company that bought us was one of them that at first, John and I said, no, don’t even want them on the list. And the investment banker said, well, for this reason, this reason, this reason, we think you should at least have them in the net that we cast.
And so we said, okay. And it turned out to be a good thing.
Armando (24:17 – 24:47)
Wow. And so after you went through all that and you said it was a lot of work to get that pitch deck together, a lot of time went into getting that done. As you were going through the process, did you already have a sense or an idea as to what you would do after the sale was done?
And now that you didn’t have these day-to-day responsibilities, these employees and the company that you had to answer to basically, did you have a plan or did you map out life after China Mist?
Dan (24:49 – 25:43)
I’ve always been one of those people that I love my work. I love China Mist. I love building that company, but I never wanted all of my eggs in one basket.
I think you have all these balls in your life and you’ve got your home life, your family life, your friends, your business, your nonprofit. I didn’t want all of my ego tied up in just one thing like the business. And I had a lot of friends who did struggle with that because their entire ego was tied up in what their business was.
And when they sold it or if it failed, they were lost. So I had plenty of other things to do. I was always involved in the nonprofit world.
I’ve always been blessed to have a great group of friends, a wonderful wife, a great home life. So I had other interests. I wasn’t worried about that.
[Speaker 3] (25:43 – 25:44)
Okay.
Dan (25:45 – 25:49)
I knew that tomorrow there was going to be plenty to do whatever it was.
Armando (25:51 – 25:53)
And it sounds like it worked out well for you.
Dan (25:54 – 26:24)
Well, the day we closed on selling the company, my wife and I went over to the old Brio at the Scottsdale Quarter for happy hour. And we’re sitting outside having a snack and a glass of wine. And I pointed over to the air park and I said, I used to work over in that area.
And my wife said, yeah, that was like four hours ago. A different lifetime to me. And that day I got up and just started doing the other things I’d been doing.
Armando (26:25 – 26:39)
Okay, fantastic. So let me go back to, you mentioned again, the three companies you’ve talked with, were all three of them investment bankers that you were thinking about when you first began the exit thought process?
Dan (26:40 – 26:53)
Yeah, one of them was a company that helped other companies find strategic alternatives. And we’d used them on a couple of projects earlier. Very good company, not your traditional investment banking firm.
[Speaker 3] (26:53 – 26:53)
Okay.
Dan (26:54 – 27:01)
A very, very good company and people that I had a lot of trust in. And the other two were kind of a boutique investment banking firms.
Armando (27:01 – 27:16)
Okay, how was it when you would go through that process, employees, if they get wind of the company being sold, they might get nervous, might start looking for new jobs. Can you touch on that a bit during the exit of your company?
Dan (27:16 – 28:21)
Sure, and that’s a really good point. So at first we just kept it down to our executive team. And in a little while we realized, this is not going to be working in the longterm, right?
You have all these people in suits coming in and you’re going into the boardroom and closing the door and stuff like that. So we just got all of our employees together and told them, look, we got interest from some people, we think it might be good for the company. So we were just very transparent with them as we went along that process.
And we didn’t lose anybody during that process. As a matter of fact, it’s six years later and a few of them in the company’s now part of a bigger brand down in Texas and a handful of our employees still work for them. So we were just very open and transparent with everybody because we knew we couldn’t hide it from them.
Too many meetings going on.
Armando (28:22 – 28:34)
Yeah, were there any of those executive comp, in any kind of executive comp things in place that would keep people on board through the sale?
Dan (28:35 – 29:05)
Yeah, we had people with stock options that would invest if there was a transfer of power. Okay. So we had that.
And for our people in the back room, who were loading the trucks and stuff like that, John and I just let them know that we’d make sure they were taken care of. And we did after we sold the company, we went around and gave each one of them a nice little envelope because they were the people that helped us create what we had.
[Speaker 3] (29:07 – 29:07)
Okay, okay.
Dan (29:08 – 30:13)
In the very beginning, John and I did everything, right? We bought the team, we packaged the tea, we sealed the bags, we put it in the boxes, we delivered them in either my old Honda or John’s old Toyota, and so we can do everything. But we also understood as we grew the business that those people that were doing those functions were a vital part of our business.
And one of the reasons I think they were so loyal to us during this whole process was we always looked after our employees. We always were, when you look at the pay brackets for any particular job, we were always at the top end of those because we wanted the best people that we could find. We viewed our employees as an asset.
You know, a lot of private equity and people like that view employees as a liability. We viewed them as an asset because we knew that without that person packaging the tea, we didn’t have anything to sell.
Armando (30:13 – 30:43)
Okay, and then you mentioned having records going back, you know, day one, the old accounting records from say 30 or so years ago. And it sounds like that served you well. For somebody who maybe has started a company now and their intent is to sell, to exit at some point, are there any thoughts you’d like to share with them from, you know, that future exit?
What would you, you know, if you’re given some advice, what would that advice be?
Dan (30:43 – 33:38)
So a couple of things that I think helped us were number one, keeping all those old records so that when somebody came up with a question, when the accountants for whoever is looking at you came up with an accounting question that maybe you had to drill back years to get the correct answer to, we were able to do that. The other thing, and this was John’s idea, not mine, John kept mementos of our journey all along the way because you know, like any company, we had different logos over the years. We had different, we always believed in unique business cards.
We thought they really paid for themselves. So we had, like every year, we would have our advertising firm design new business cards for us. Some of them were like, one of them was, it folded open into a square and it had two little windows in it.
And we had an iced tea brand and a hot tea brand. If you look through one side of the business card, you saw the iced tea label. If you look through the other side, you saw the hot tea brand.
And one year we had our best-selling flavored tea, always was our patient fruit tea. So one year we had scratch and sniff business cards. Let me tell you, those were fantastic, got a lot of attention.
They were so expensive, I didn’t know whether to hand them out or sell them to somebody. All of those things, and John kept all of those mementos. We had a scrapbook of all of our advertising things, all the awards that we’d won and everything.
Wow. Little things really make an impression on people that want to buy your company. We had won the Scottsdale Chamber Small Business of the Year Award, the Phoenix Chamber Small Business of the Year Award, Inc.
Magazine Entrepreneur of the Year in Arizona. So all those things, those really add credibility to your company. And so just having those mementos that you can show somebody added value to the company.
One of the things that I don’t want to overlook is that as opposed to trying to sell a business yourself, using the investment bank, they made one little tweak about three quarters of the way through the project, that that one little tweak more than paid for the entire fee that we paid them. So they know those kinds of things that we as business people don’t know. And the people on the other side of the table, lots of them have bought lots of other businesses before, so they know everything.
So if you’re sitting there with no cards in your hand and they’ve got all the cards, you really want somebody on your side that has those cards and knows how to play them.
Armando (33:38 – 33:54)
Yeah, and that makes a lot of sense. You spent 30 or so years building that company but hadn’t sold a business before. It only makes sense that you get good expertise, good professional expertise on your side of the fence to help you working with those professional buyers.
Dan (33:55 – 34:40)
Sure. And we were kind of used to working with professionals. We worked with the same lawyer the entire time we had the company from when we incorporated to when we sold it.
We spent a lot of money with our intellectual property attorney protecting our trademarks and everything. So we were used to working with those professionals. We understand the value of them.
It’s great to have, we’d been with our accounting firm that we were using for probably 10 or 15 years at that time. So they knew the business inside and out. It’s good to have those relationships because the people that wanna buy you are gonna wanna talk to all those people.
Armando (34:42 – 35:46)
Okay, so it sounds like part of your advice would be to hire professionals in that process. They know that landscape and they can certainly give you guidance. You mentioned that one tweak they did that more than paid for themselves as well.
You had a consistency in your professionals where they could go to that outside CPA firm and get records directly from them going back 10, 15 years, which adds to the solidness of your story of the China Misty brand company itself. And then one thing it’s interesting that the scrapbook you mentioned that John kept of the logos and the awards and the recognition. I don’t know that that would be something most people might would think about because it’s valid, yes, but is it really part of that process?
But you make a good point that that added to the story of China Mist and your company and the solidness and the credibility and viability of the company that you had built.
Dan (35:47 – 35:57)
Yeah, exactly. And I didn’t think of that. John was the one that thought of that.
I was just trying to figure out how to go make another sale the next day. I was the one that thought we should keep a history.
Armando (35:58 – 36:17)
So when you sold the company, you had distributors, you had people who were your customers and then you were getting your tea from some place. What about those relationships in the sale process? Any surprises or hiccups with your customers or your vendors?
Dan (36:18 – 37:35)
No, with the vendors, it was fine. As long as people kept placing orders, we let them know what we were doing when it got close to the end. And we went around with the people that were buying us to, I’m such a believer in that 80-20 rule in life and in business.
So 20% of my distributors were 80% of our business. So we went with the buyers to that 20% and had lunch meetings with them around the country and everything, let them meet the people that were buying us, let them answer the questions. So, because the last thing you want to do is lose your distributors because that took away the value of the company.
So knowing that we’re selling to a strong company, gave a lot of trust to our distributors to stick with us while we were going through that. But yeah, again, it was very transparent. We went out and met with them.
We let them ask us any questions. We let them ask the purchaser any questions they wanted to. So you just have to be transparent with people because at the end of the day, they’re going to know you sold.
So you don’t want it to be a surprise to them.
Armando (37:36 – 37:53)
Yeah. So what about on the, where you acquired raw goods, raw materials, somewhere from different people, different companies, anything on that side that was, as you went through that process and were selling, it was becoming public. What about that?
Any surprises there on that side of the fence?
Dan (37:54 – 38:02)
No, no real surprises there because we sold to a much bigger company. So all of our vendors saw the opportunity to sell more products to them.
[Speaker 3] (38:02 – 38:02)
Okay.
Dan (38:02 – 38:05)
So they were very supportive of it.
Armando (38:06 – 38:10)
Okay. Well, that makes sense. A bigger company buying you, that makes sense.
Dan (38:11 – 38:30)
Yeah. And again, we were very loyal to our suppliers as we grew up. So we were dealing with a lot of these suppliers.
Some of them since the day we started the business. So, we wanted them to know that there was a future for them too.
Armando (38:31 – 38:47)
And what about the industry itself? You mentioned that you helped or you started the premium tea brand. There was a second to join and became an industry or a line.
How has that grown and matured and how did you help that happen?
Dan (38:48 – 41:24)
We were out there always trying to raise the bar on what we did. And we viewed competitors as a good thing. I had lunch with a congressman yesterday at a small business luncheon.
And he was saying that really the function of Congress and state legislators is to erect barriers against competition because all the lobbyists come to them and everybody loves capitalism as long as it’s not in their industry. In their industry, they wanna be a monopoly. They want everybody else to have competition, but not them.
And in the tea industry, I mean, there’s no secrets, right? This wasn’t like a new computer chip or something. I mean, our product had been around for 3000 years.
There were no secrets to what we did. We just had to do it better than other people. And so by us doing that, it opened up this whole area of premium tea.
Now there are literally hundreds of companies out in that market space. And some of them, especially in the hot tea area, cause that’s a little bit easier. You don’t have to have all the packaging equipment.
In the hot tea area, there are some little niche companies out there that just do a fantastic operation. But here’s one of the things that most people don’t think about when they’re starting a business, especially if it’s a business like ours, where we were local and wanted to expand out. A lot of our competitors in the tea industry, probably the vast, vast, vast majority of them, when they set up their pricing structure to their customers, it was to sell their customers and to make enough money to keep their company going.
What they didn’t realize was that works as long as you’re only selling to a local area. But when you get outside your local area and you have to go to a distributor, none of them had the margins to be able to pay for a distributor. So they tried to expand to become regional or national.
It caused a lot of them to go under. They just didn’t have the margins to do that. Don and I were lucky enough in the beginning to price our tea at five times more than the competitors, and we ended up having that margin.
So you have to think when you’re starting your business, how am I gonna grow it outside my own area?
Armando (41:26 – 41:37)
And Dan, you mentioned intellectual property, spending a lot of money on intellectual property attorneys. How important was that in the sale of your business?
Dan (41:38 – 41:57)
Very important. Because like most companies, it was an asset sale. Nobody wants to buy your stock because they don’t want any baggage that comes with that stock.
They’re just buying the assets. And that intellectual property was a big part of our assets. So very, very important to protect that.
Armando (41:58 – 42:03)
And so were those recipes? Were those logos? Was it the name?
Dan (42:03 – 43:05)
They were logos, they were trademarks, they were all kinds of things. I tell people that one time we discovered, and we were always looking for things, we trademarked the term T-shirts, T-E-A shirts, and we designed our own ones. Mostly we were the only ones who wore them at trade shows and everything.
We didn’t sell a lot of them, a few. But we discovered that Monty Python’s Flying Circus was selling T-shirts on the internet, and we made them quit doing that. We wanted to get a royalty from them, but they just quit doing it.
So we spent a lot of money on intellectual property, and we had some people that would battle us on different things, and we’d end up spending an inordinate amount of money on it. But you have to do that. Otherwise, you become like Kleenex, where you lose your trademark, it becomes a generic term.
So we didn’t want that China mist to become a generic term. So we protected it very, very carefully.
Armando (43:05 – 43:15)
Yeah, but it sounds like it was a good move. I read recently that the Apple logo, that Apple with the bite out of it, Apple, that logo itself was something like $2 billion.
Dan (43:16 – 43:16)
Yes.
Armando (43:16 – 43:17)
That image.
Dan (43:18 – 43:23)
Yes, yes. And so we protected ours every way we could.
[Speaker 3] (43:24 – 43:24)
Okay.
Dan (43:24 – 43:31)
Sometimes it was hard to write those checks to the IP attorney, but we knew in the long term it was the right thing to do.
Armando (43:31 – 44:05)
Right, and I wanted to touch on that as well. It sounds like you had specialists in different areas for legal. So IP is a very specific part of the law with trademarks and that kind of thing.
And you really have to have an attorney or law firm that really understands that space to protect you, not just in this state, but outside of Arizona as well, and as much as they can outside of the country as well. So it sounds like you had the right specialists on board to help you protect the different parts of your business that became part of what you sold later.
Dan (44:06 – 44:18)
And again, it goes back to us being loyal. All of our attorneys were originally with one law firm, with Lewis and Rocha. And you know how attorneys go over the years, they’d split off.
[Speaker 3] (44:18 – 44:18)
Yep.
Dan (44:19 – 45:03)
But we would, like our main attorney stayed with Lewis and Rocha. Well, he went off to another law firm. We followed him over there and then he went back to Lewis and Rocha.
So we ended up back at Lewis and Rocha. But our IP attorney was somebody who’d been with Lewis and Rocha and went out on his own, we followed him. So it’s very important to have those relationships.
And for our company, the longer we had them, the deeper it was, the more they understood us. We didn’t wanna go shopping around for new attorneys all the time, because with that, you have to keep educating them. You know, when they’ve been with you for decades, they know you as well as you know yourself and they can help you avoid making mistakes along the way.
Armando (45:05 – 45:29)
Yep, definitely. And so then when you were selling product, you were an Arizona company, you expanded outside of Arizona and you were crossing state lines. How did, and I’m thinking about operating in those different states, selling those different states, protecting your intellectual property in those different states.
Was all, were all your tea sales then, were they in the US?
Dan (45:29 – 46:54)
No, actually we were international. We had a very large distributor out of Dubai that handled the Middle East for us. So that’s where it comes to have a really good like IP attorney, because you know, there’s the trademark laws in the US.
But when you get out of the US, there’s something called the Madrid Protocol that at least six years ago, that that was kind of the framework for international law. So there were certain areas that you could do things that you couldn’t do in other areas. And that’s why having an IP attorney that knew international IP as well as local was so beneficial to us.
And there were still areas, like we were very, very leery. We never did, even though all of our teas came from China, we never did any business in mainland China because we just didn’t think there was a way to protect our intellectual property there. But we did a lot of work in Asia Pacific where we had a distributor out of Indonesia and then one out of Dubai that handled those areas.
And we did some business in South America. So having an intellectual property attorney that is well-versed enough that they understand all those different areas was very, very valuable on our part.
Armando (46:55 – 47:11)
It sounds like it would be. And having a company buy you, like the company that actually bought your firm would have a better sense of what that means. And they would have their own legal horsepower within their company to help continue that and protect the brand, it would seem.
Dan (47:11 – 47:46)
Well, you would think so. It turns out the people that bought us were afraid of international sales. But they slowly unwound that over time.
I think that was a mistake on their part. But they bought the company, the check cleared the bank, they were gonna do what they were gonna do. So those international distributors are still selling tea, it’s just not China Mist anymore.
When the people, farmer brothers who bought us didn’t wanna sell to them anymore, they found other people and more power to them.
Armando (47:47 – 48:19)
Well, like you said, once you hand over the keys though, it’s up to them. They now own that company, they can do what they want with it. But part of that upfront vetting process, having the investment banker on board that you brought on board, it sounded like helped you understand that there might’ve been some potential buyers there that you, as you said, you kind of ruled them out.
Having this banker talk with you and give you some pros about why they should be included in that mix ended up to be in your favor, it sounds like.
Dan (48:20 – 49:31)
Yeah, very much in our favor. And one of the other things people have to understand is I don’t care what the business is, I don’t care who you sell to, you are not going to like the way they run the business. Because at least in our experience and all my friends who’ve sold businesses over the years, companies buy you because of the uniqueness of what you do and the way you do it.
And the minute they buy you, they think they know how to do it better. And if it works, and maybe it doesn’t work. You have zero control the minute you sign that paper, they’re going to do what they want to do.
And it’s just something about big companies that kind of a hubris of like, yeah, we know how to do it better than you. Well, if they really knew how to do it better than us, they would have started out and competed against us and build up their business. But instead they buy you, and then they try and make this little round peg go in a square hole, and it doesn’t always work.
But you just have to be emotionally prepared for that.
Armando (49:32 – 49:46)
How long did the process take? Once you and your partner said, yes, we’re going to do this, and then you began to interview investment bankers and went through that cycle, how many months from start to finish?
Dan (49:47 – 49:57)
So from making the decision that we were going to go through this process to finish was in retrospect, I think remarkably quick. It was nine months.
[Speaker 3] (49:57 – 49:58)
Okay.
Dan (49:59 – 50:14)
From we started in January, we made the decision, the deal closed in October. So it was nine and a half months from start to finish. It was a long nine and a half months.
Armando (50:16 – 50:53)
Do you think that, you mentioned that you were getting phone calls, you got this one phone call out of the blue, and it sounded like maybe it was, it got you thinking about selling, you and John talked and said, yes, let’s go ahead and do this. So I am curious, had you accepted or began or continued conversations with that one phone caller who said, I want to buy your company? If you look at, if you had walked down that path with that solo, with that one buyer versus going through investment bankers and going through a formalized process as you did, I wonder how differently that might’ve looked for you when it was all done.
Dan (50:54 – 51:31)
You know, I think it would have looked totally different because that one buyer actually was one of like the five finalists when we decided to sell the company. But turns out they had never bought another company before and they were a long-term family held, very reputable, wonderful people company. I don’t think it would have gone anywhere if we’d just gone with them because it turns out they’d never bought another company and they had no idea how to buy one and integrate it into their company.
So I think we probably would have spent a lot of time and ended up not selling.
Armando (51:32 – 51:55)
Yeah. And that’s one thing I’ve heard from many investment bankers and others that one benefit of hiring an investment banker is that you’re gonna close. Your sale will close.
Whereas if you don’t use an investment banker in that process, you can go through that same time, effort, exercise and not have a sale at the end because somebody backs out, it just doesn’t work.
Dan (51:56 – 52:06)
And by the way, if you only have one person interested in your company, you don’t have anybody interested in it. You need at least two people to have that competition going.
Armando (52:07 – 52:14)
And of the five finalists, Dan, who were in the running, were you surprised by some of those who were in those five?
Dan (52:16 – 53:09)
The one I was really surprised about was the one that ended up buying the company because strategically they saw that we fit a need for them and literally their offer was twice what the next highest offer was. So, a lot of people at the end of the day, all they wanted was our customer list or our recipes for tea. They didn’t value the company as a whole.
They didn’t value the brand. They were only looking at the cashflow and the customer list. And they were gonna kill the brand and just switch the customers over to theirs.
The people we sold to valued the brand and wanted it. And to this day, they value the brand. So, they turned out to be the right partner.
Armando (53:11 – 53:20)
And so, because it’s strategically fit with part of what they were doing, you said that they paid more for your company than the other ones likely would have.
Dan (53:20 – 53:50)
Yes, yes, much more, much more. Wow. So, and that’s where the investment bankers come in because they cast that broad net.
If we had just talked to, and over the years we’d talked to two or three other people and they had meetings and they were kind of people that were in that final mix. But again, the investment banker cast a much wider net than we would have even known how to do ourselves. And that’s what really brought the value of the company up.
Armando (53:50 – 54:02)
And as you think about, you said you had ruled that buyer out. What was it about that type of buyer that you, in your mind, you thought, no, let’s not even talk to them?
Dan (54:03 – 54:29)
You know, they did mostly low end coffee and tea to a huge market, to a huge market. But we just didn’t think that they would understand the value of an expensive brand. Turns out they wanted to upgrade their company.
And so we strategically fit in with that. That’s what made us valuable to them.
Armando (54:29 – 54:29)
Okay.
Dan (54:30 – 54:50)
As opposed to somebody that just wanted to just have our customers and try and sell them their tea. You know, I mean, the brand meant nothing to them and the brand was what we were trying to sell. And that’s where an investment banker understands and knows where to look.
Armando (54:52 – 55:14)
Okay. Well, that’s interesting. And I’ve heard before from investment bankers that a strategic buyer will offer more.
In most cases, they’re looking at cashflow, EBITDA, and some multiple on that. But if it’s a strategic buyer, those prices can be higher. You can get the seller, as you experienced, a better price.
Dan (55:14 – 55:17)
Mm-hmm. I’m a firm believer in that.
Armando (55:17 – 55:38)
Well, yeah. And it sounds like you benefited from that investment banker getting you to the strategic buyer and it was a good fit. Interesting.
So they were more mass market, lower end, more commoditized, but wanted to step into a different space and you allowed them to have that footprint on day one in that space.
Dan (55:39 – 55:41)
Yes, we did. And that’s exactly the way it was.
Armando (55:41 – 56:10)
Yeah. And so your intellectual property that you branded and that you owned, and you got Monty Python to back away from, that really helped. That really helped probably seal the deal with them because they knew how vehemently you had protected your intellectual property as best you could.
So it probably gave them a lot more confidence in buying you because of how you had protected that intellectual property.
Dan (56:10 – 56:18)
Yeah, they knew if we looked after things like that, we were probably looking after the rest of the company equally as strong.
Armando (56:20 – 56:43)
Fantastic. Well, good. Dan, any other thoughts?
Someone who’s maybe had a company like you did for 30 years, they’re really good at what they do. They’ve really honed their skills and they have a footprint in a certain industry. And now they’re thinking it may be time to exit.
They’ve never gone through that exit before. A few thoughts you might wanna share, some advice, suggestions to them?
Dan (56:44 – 57:32)
Well, even in the economic turmoil we’re in kind of right now, there is still a huge amount of private equity out there looking for good deals. There’s always money looking for the right location to land. I would just encourage people to get help when they go into that process, because yeah, you’re smart, you know how to build your company.
You’re not, in most cases, you are not an expert at selling businesses. So don’t pretend that you’re smarter than you are. We got help in accounting, we got help in advertising, we got help in legal work.
Why wouldn’t we get help in selling our business? Right. Because we knew how to sell tea, we didn’t know how to sell businesses.
Armando (57:32 – 57:33)
Yeah.
Dan (57:33 – 57:34)
Totally different animal.
Armando (57:34 – 57:37)
It is, right. A completely different animal. Yeah.
Dan (57:37 – 58:10)
And there are great people out there. There’s great advisors like you, there’s great advisors like business, banking firms, you know, cast that net, get help along the way. You know, we had a lot of mentors in our business, a lot of whom those became advisory board members, you know, get that kind of expertise around you.
And don’t think that because you know how to build your business, that you know how to do everything that goes along with that. So I would just encourage people to get help when they’re looking at that process.
Armando (58:11 – 58:53)
Yeah. Good advice, Dan. Thank you so much.
Hopefully what will happen is a business owner like you who is thinking about that will hear your words and listen, pay attention, and make some calls and ask some questions so that at the end of the day, as you, they feel really good about that exit. They’re good about where they are, their time is done with that company and they can move on and look at the next chapter without looking back. As you may know, most people when they sell their company, they have regrets, they’re not happy.
And you don’t wanna be, you don’t wanna nurture a company for 30 years, sell it and then not feel good about it. That’s just not ideal, not the American dream for sure.
Dan (58:54 – 1:00:48)
I, and I would encourage people to look at the community. You know, when I came down here, I was driving an un-air-conditioned 1976 Honda Civic. You know, the Valley has been very good to me.
All along the path, John and I felt like we should give back. So I would encourage all these business owners not to have 100% of themselves tied up in just their business, but expand that view into how they can help the community and all of those things come back and pay dividends because that was also part of, you know, people thought our company was 100 times bigger than it was just because of the representation we had on nonprofit boards and all the press we got and the newspaper and the awards we got. You know, all those things at the end of the day add value to the company, but also they gave us interest outside of the company.
So we had things to do after we exited the company because, you know, once that check clears the bank, at the end of the day, you are who you are and that’s your next chapter of life and you should be prepared for that. And I would also encourage them that, you know, once they sell the business, understand that it’s not theirs anymore and that other people are gonna make decisions that you might not agree with. I mean, let’s be realistic.
We all ran our companies because we were not good employers, employees for other companies, right? We were used to making the decisions. You have to be prepared that somebody else is going to make those decisions and you’re not doing it anymore.
And, you know, don’t get bitter about that. Just understand other companies have other visions.
Armando (1:00:49 – 1:01:14)
Yeah, well, words well taken. Dan, thank you so much for sharing your experience going through the exit and the growing and nurturing and exiting of your business. Thank you so much.
There’s no teacher like experience and you certainly have that. So thank you. I really appreciate just having this conversation with you that you can help others by hearing what your experience has been.
Dan (1:01:14 – 1:01:19)
You know, my pleasure and people are free to reach out to me and ask me any questions they want.
Armando (1:01:20 – 1:01:54)
Thinking of exiting your business, you have one opportunity to get this exit right. Your family depends on it. Come hear experts who plan and negotiate successful business exits for a living.
Bring your questions, live panel discussion, followed by Q&A. Join us November 17th, 2022 for the next Scottsdale Founders Forum, a biannual live event for you, the founder, considering exiting your business in the next 36 months. More information available at ScottsdaleFoundersForum.com.
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