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The Mistakes that Entrepreneurs Can Avoid

by Ruyintan Mehta
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I came to the US in 1970 as a graduate student after earning my Bachelor’s degree in Chemical Engineering from IITB. I went on to get my Master’s degree in Chemical Engineering at the University of Connecticut. Following that, I worked toward a PhD in Material Science and Engineering at the University of Utah, but I did not complete it; instead I got a Master’s degree in Engineering Administration.

After finishing my formal education, I worked in several engineering jobs with increasing managerial and executive responsibilities. I left my cushy corporate job as the urge to do something on my own was overwhelming. Moreover I loved the Clean Water area and wanted to apply some of my past knowledge on engineering grade plastics.

Crystal Clear Incorporated & Crystal Clear Container Corporation

In 1990, with the intent of pursuing my entrepreneurial ambitions, I started Crystal Clear Inc in Hillside, New Jersey, a plastic blow molding company which manufactured large returnable water bottles. The only obvious benefit that our company seemed to have was a unique, patented bottle design: a hexagonal bottle with a round top and bottom. This shape could be used to full advantage when filling a 40 feet sea shipping container. The bottle’s honeycomb-like stacking ability allowed us to export 19% more product. As a result, the company developed significant

My partner was 25 years older than me and there was a mismatch in our personalities. While he was not interested in taking at risks, I was very growth oriented. We had a 50-50 joint venture which I discovered does not work in most cases. Someone has to have majority control in order to have the authority to make decisions.

international business. It was our incomplete marketing plan and flawed financial analysis that stopped us from becoming a massive success in the local area. The unique bottle design attracted the attention of one of the largest resellers of water bottles in California, with that company ordering multiple container loads of bottles per week.

After shipping bottles by rail piggyback from New Jersey to Modesto, California for over a year, my customer in Modesto became my partner. His company made pure water machines and sold water and bottles at grocery stores. We entered into a 50:50 joint venture in California and named the company Crystal Clear Container Corporation. My partner was 25 years older than me and there was a mismatch in our personalities. While he was not interested in taking risks, I was very growth oriented. After a short period in time, I came to a painful conclusion that a 50-50 joint venture does not work in most cases. Someone has to have majority control in order to have the authority to make decisions.

Lesson No 1: Ensure that someone in the partnership has majority control to have the authority to make decisions

The final conflict that led to the dissolution of our California partnership was when a new investment was needed to expand further. It was a bank loan with personal guarantees, and therefore a huge risk. In order to implement the expansion plans, I bought my partner out by paying for the real estate he had contributed to business.

Our unique hexagonal bottle design attracted the attention of one of the largest bottlers in South America. In 1995, we secured a huge contract from Coca Cola of Colombia, South America. This enabled the Crystal Clear companies to become a serious “threat” to the world’s largest manufacturer of PC returnable bottles – Reid Plastics Inc. At that time, Reid was a $40 million privately owned company with multiple plants in the US, Mexico, Canada and Israel. Reid was expanding rapidly due to cash infusion from a private equity group and made us an offer that we could not refuse. Both Crystal Clear companies in New Jersey and California merged with Reid in June 1995 – 1/3 in cash, 1/3 in preferred stock with an 8% payment-in-kind (PIK) dividend and 3.5% equity ownership in Reid stock. From 1995 to 1997, we grew Reid from $40 million to $220 million in sales through six acquisitions.

I observed three common mistakes made by owners when approached by a seller. I too made all of them.

Lesson No 2: Almost everyone that Reid acquired did not have a competing offer. Inherently, the seller pays less.

Lesson No 3: Owners are almost unprepared for the exhaustive due diligence process conducted by a savvy acquirer. This invariably forces the seller to take a significant “haircut” in the sale price.

Lesson No 4: Sellers must understand the deal structure – Asset vs. Stock Deal

After integrating our acquisitions at Reid, we sold the company to a much larger private equity group at a huge EBITDA (Earnings before Interest, Taxes, Depreciation and Amortisation) multiple.

Plastic Industries Incorporated

In 1998, after selling Reid and upon termination of my employment contract with Reid’s new owner, I teamed up with a new, like-minded partner. Together we purchased Plastic Industries Inc, a small barely-profitable blow molder in California, for $4 million.

Based on past mistakes we did not want to have a 50-50 partnership. So I readily agreed to let my operating partner have 50.1% to my 49.9%.

Canam Plastics Incorporated

Six months after the acquisition of Plastics Industries Inc, we had the opportunity to start from scratch a blow molding company in Ontario, Canada. The reason for this wwas the weak Canadian dollar, which at CAD1.40 per USD1.00 gave us a big advantage over US molders. We started Canam Plastics as a wholly owned subsidiary of Plastic Industries Inc.

Canam was the lowest cost manufacturer of blow molded watering cans in the northeast and midwest. Based on our cost advantage, we secured a 3 year “take or pay” contract with a large distributor of watering cans in NJ contracted to supply WalMart.

After 18 months of operation, Canam’s operating management approached us and, with an outside investor, offered us a very attractive buyout package for Canam Plastics. We decided to accept the offer from the Canadians. The profit from the sale was over US$1.8 million.

Unfortunately we failed to recognise that Canadian tax authorities treat Canadian subsidiaries of US-based businesses with a jaundiced eye. We had great US tax and legal advisors, but did not have good Canadian tax lawyers.

Canada impounded 30% of sale proceeds for well over year. In hindsight we should have had proper Canadian tax advisors.

Lesson No 5: Know the local rules intimately and seek local assistance.

Premium Molding Incorporated —– The Biggest Mistake of my Professional Career

In 2001, I still owned Plastics Industries and it was running well without my day-to-day involvement. Somewhat bored I looked to acquire a company in northwestern Pennsylvania or New Jersey. I invested $5.3 million for a 53% equity interest and the remaining 47% continued to be owned by the founder of the company, a man 14 years younger than me. However the acquisition of Premium Molding Inc was the biggest mistake of my professional career. This is because I had only conducted financial and marketing / customer due diligence at the time of purchase. I should have checked my partner’s background and personality. I also hadn’t conducted any investigation as to why the Worker Compensation insurance rates at Premium Molding were so sky high – a function of the workforce ethic and management approach towards its employees.

Lesson No 6: Ensure that you do a complete due diligence of all aspects of the business and key personnel

These avoidable mistakes cost me dearly later, when in July 2006 the accidental discovery of my junior partner’s involvement in sexual harassment forced him to resign causing severe impact on business operations. In addition to this, the deep recession in Q4 2008 hit like a ton of bricks. Sales had shrunk by over 30% almost overnight.

I learnt many lessons from my experience here.

Lesson No 7: It is extremely important the character of your business partner is extremely important.

Lesson No 8: Workforce culture in a manufacturing environment is critical. It is essential to be familiar with a target company’s culture and local conditions. 

Growth without profits is meaningless. In the US, owning your own manufacturing facility real estate is a big mistake.

The profit from sale was over US$1.8 million.Unfortunately we failed to recognise that Canadian tax authorities treat Canadian subsidiaries of US-based businesses with a jaundiced eye. We had great US tax and legal advisors, but did not have good Canadian tax lawyers. Canada impounded 30% of sale proceeds for well over year. In hindsight we should have had proper Canadian tax advisors.

Lesson No 9: Lease but do not own real estate.

Lesson No 10: Reasonable risks are OK, but excessive leverage is harmful.

In late 2010, we sold Premium Molding to a private equity group at a huge loss.

 

Plastic Industries Incorporated — The Ultimate Payoff

At Plastic Industries, which I consider to be my biggest business success, sales grew from $4 million to almost $33 million in 14 years. In late 2011 we became motivated to sell due to the health issues of my partner. In March 2012, wesold the company for $33 million in an all stock deal with no earn out or seller note.Based on an almost 50:50 ownership, our $250,000 original investment netted us about $15.5 million each before taxes, or approximately 6200% over 14 years To put it in simpler terms about a 442% annual return.

 

9 MISTAKES TO AVOID
THAT I LEARNED FROM BUYING & SELLING COMPANIES

1.Exit Planning – Once you decide to sell, begin proactively planning your exit

2. Financial Records Audit – Audited or Reviewed

3. CAPEX – At exit, minimize Capital Expenditures in the final two years

4. Estate Tax Plan – Develop a well thought out estate tax plan

5. Due Diligence – Settle your family and business affairs by completing a “mock” seller due diligence process. Get rid of unproductive family members

6. Timing – Timing is everything. Plan in advance

7. All-Stock Sale – Strive for an all-stock sale

8. Post-Sale Financing – Limit your post sale financing structure

9. Advisory Team – Build a great advisory team of CPAs, lawyers and tax advisors and include a local expert.

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