Losing Your Company In A Bad Roll Up…Pink Sheet Company And Pink Slips

Recently I was contacted by an entrepreneur that I had met years before (but never worked with). He found me through a friend. When I originally met him, he was trying to put together three small companies, one of which he owned, into one combined business and buyout the other owners. He ran a small distribution and logistics company and when I asked him how he had been, I got a very long answer.

This entrepreneur in an effort to grow his business decided to sell it to a publicly but thinly traded company (often called 'pink sheet' company). For that he received cash equal to 20% of the purchase price and stock in the parent company equal to 80% of the value of his business. He did this transaction because he believed in the broader vision of the public company and believed the public company would help him handle payroll and administration for his business which would allow him to realize some shared savings and allow him to grow his own business. The plan was that as the business grew, each owner could sell his shares in a public market based on his own unique liquidity needs (a very common rationale in any consolidation "story".)

Within less than a year of completing this sale, the entrepreneur began to receive notices from his vendors saying he was past due. Under the new arrangement the parent was supposed to collect the company's revenues and pay his bills. Well it turns out they did one and not the other.

Around the same time the entrepreneur figured this out, the company filed bankruptcy and he and his legal counsel believed they had no legal recourse. They believed this company had devised a (legal) plan to utilize revenues from one company to fund select others. Upon liquidation each owner got his business back but his was saddled with debt. Within 60 days the business he 'sold' was out of business and over 100 employees lost their jobs. (This is all based on his personal account. I did no further fact checking or investigation.)

Stories like this are sad when they happen to well intentioned entrepreneurs. The lessons are obvious and the only objective is to let others know, things like this happen and often to the least deserving of such grief.

What I told him back then, I will tell you know - anytime someone wants to buy your business and 80% of the purchase price in their stock - RUN!!!!! If you don't get (mostly) cash, you haven't sold your business. Small businesses that feel they have no big buyers fall prey to this. Don't you do it too!

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