My Most Challenging Transaction – the One that Taught Me the Most!
In the late 1970s, I was a farm specialist and received a call from a former client. Pat then worked for a small-town feed company that was owner and manager of a 640-sow farrow-to-finish hog operation that he wanted to sell. Being a young broker, I was really proud of my new listing but never expected it to be as challenging as it was.
As a novice property-oriented broker, I focused on marketing materials. I took aerial pictures of the hog facility and created an attractive, colored flyer. I realized early on that the design of the facility was unique and wasn’t the norm in the industry. For those somewhat familiar with agriculture, these were not fully enclosed modern barns with climate control and current-day waste management. Instead, there were 640 individual huts for each sow, requiring much labor and year-round outside work for employees. I learned quickly that most swine industry owners found this undesirable. This was a problem!
After mailing flyers, I had only one showing and one prospect. This was a young man who worked in a large commodity firm, but having grown up on a small farm with hogs, Tom wanted to strike out on his own. Unfortunately, he and a couple of friendly investor partners had only modest financial strength.
I was at a dead end after months of working on this. I decided to call the American Society of Farm Managers and Rural Appraisers in Denver and asked them, “Isn’t there a national Farm Brokerage Group somewhere?” I had learned about the Farm and Land Institute (now REALTORS Land Institute, or RLI), so I called to get some help. The representative there convinced me to attend an upcoming meeting and “marketing session” in Chicago. I had never heard of a marketing session but decided to attend at my own expense because my broker wouldn’t pay for my trip.
I walked into the Knickerbocker Hotel, where approximately 100 RLI/CCIM brokers were conducting a marketing session, and this was a career-changing event. I learned later that there were also several Society of Exchange Counselor members in attendance.
It was an extremely interesting session. I heard words like “Counseling,” “Taker,” “Benefits,” and “Don’t Wanter,” and I realized I didn’t fully understand them. I presented my listing and couldn’t answer most of my moderator’s questions with confidence. What is the current financing on your listing? Is it assumable? Are you sure who the decision makers are for the Seller? What is the real reason they are selling? What is their actual motivation?
I realized that I was a poorly trained broker who had talked his way into a listing and didn’t really know how to counsel or ask the right questions. I didn’t know that I should be talking to my Sellers regularly—even when I didn’t have anything good to tell them.
Immediately upon my return from Chicago, I called Pat, my client, but couldn’t reach him after multiple tries. I didn’t really know his boss, Oscar, who actually signed the listing, so I called a local resident to see whether he knew where Pat was. His explanation went something like this: “Haven’t you heard both Pat and Oscar’s marriages broke up and now Oscar is with Pat’s wife? Pat is no longer with the Feed Company.” Wow, this was getting complicated!
I knew both Pat and his wife well and felt bad about the situation. However, Pat was still a partner in the hog farm and now probably wanted a sale more than before.
Because I already had a lot of time and money invested in this listing, I decided to set up an appointment with Oscar. I told him that I had gone to a marketing session and needed a lot more information. I then embarked on the first in-depth counseling session of my career and learned the following:
The Feed Company and Oscar owned only 50% of the Hog Farm Corporation, and the rest was owned by “10” local investors, including Pat. The Feed Company acquired its interest and management from a lawsuit for unpaid feed bills. Any sale would require that all partners agree on it. Why didn’t I already know this information? I realized I was working for multiple Sellers and that I better get to know at least the key investors.
Through my counseling with the clients, I learned that one Benefit I hadn’t previously known about was an SBA Loan on the property with monthly payments. Even though the interest rate was 17%, typical for the time, any alternative financing was highly difficult to get. Looking back, one might ask how that was a Benefit, but it was. This loan also had personal guarantees of $50,000 from each investor, which created motivation for all.
I also learned that Oscar was a Don’t Wanter. He realized our listing price was too high. He shared with me that the hog farm was continually losing money and that Oscar only wanted $40,000 net to pay some of his suppliers a negotiated settlement. Why hadn’t I learned of this “motivation” before?
I remembered from the marketing session that you always need a “Taker.” Could my young prospect, Tom, be the Taker? I called Tom and suggested that maybe if he assumed payments on the SBA Loan, he could buy the property. That way, Tom could acquire with minimal down payment and use any cash he had for operating funds. Tom said his attorney would write up an offer. That loan Benefit I formally didn’t know about was key in turning a Taker into a Buyer.
I proceeded to contact the “10” investors to gain their input. I quickly found out that the Feed Company’s lawsuit caused a lot of hard feelings, and they blamed Oscar for poor management and thought losses were a scam to acquire the whole property. My original client, Pat, had now joined this group of people, and they all despised Oscar. They were not going to easily cooperate if it helped Oscar. I did explain that I was currently working for everyone, and they did encourage me to find a way to get all investors out of the investment.
In my discussions with the “10,” I determined that only two of them were leaders and that the others followed. After receiving the offer, I set up an appointment with the most vocal leader of the “10.” Mike hated Oscar more than anyone and was very vocal about it. I explained to him that a possible Buyer was found after a long and extensive search and that although it was not an ideal situation, it might be our only option. I explained that Oscar wanted only $40,000, but with added closing costs, commission, and other items, we were going to be $114,000 short.
Mike said that he would never agree to that, and I explained that Oscar would never agree to anything if it didn’t happen. Therefore, the Hog Corporation would have no choice but bankruptcy. I figured that the local investors didn’t want some of the community’s most prominent local businessmen to be bankrupt. Also, bankruptcy would not remove anyone from the $50,000 personal guarantees.
I suggested that maybe the “10” agree to pay Oscar his $40,000 if he would immediately tender all of his stock in the Corporation to the other “10.” This way, Oscar would be totally out of the picture, and they would never have to see him again. I suggested that if each of the “10” wrote a check for $14,000, they could all probably avoid bankruptcy and ever having to perform on their $50,000 guarantees. If the Buyer failed, they at least were back in full control and could find a manager and make their own management decisions. Mike told me to call a meeting but wouldn’t promise how he would vote.
My next question was how I would run the meeting. I remembered from a retired Executive Instructor in graduate school that one should plan and control all meetings, especially if one knows there might be controversy. I needed a plan.
During my next meeting with Oscar, I explained the proposal I had made to the “10,” which got him his $40,000. Oscar was fine with that, but then I said that we had a problem that needed to be addressed.
I told Oscar that the “10” honestly hated him and that we needed to accept that fact. He couldn’t be combative in any meeting. I told him that the “10” knew that I met with him regularly and that if it appeared like I was favoring him, it might crash the sale. I told Oscar that I knew he was bringing his attorney to the meeting for some support. I said that I was therefore going to show up at the meeting by myself and sit with the “10.” I told Oscar that I might even say things that he may not agree with but that he had to understand the goal was to close the sale for everyone.
The meeting started, and I presented the Purchase Contract and then proposed the settlement to give Oscar $40,000 for his Hog Corporation stock. There was complete silence. Finally, Mike, the vocal leader I had met with, stood up and stated that he would vote to give $30,000 to Oscar for his stock and not a dime more, and then he stomped out of the meeting. The others looked perplexed and didn’t know what to do. Finally, the President of the Corporation said, “It looks like we can’t go any further. What do you think, Steve?”
My mind was racing, and I could see this sale balancing on a cliff over an abyss. I realized that if everyone walked out, there would be no hope of ever finding an alternative and that all partners would face bankruptcy of the Hog Corporation, personal guarantees would be called, and I would receive no payment for my work. Fortunately, I had a nice-sized commission on this transaction, and there were no cooperating or referral brokers to pay. My answer was, “It looks like we have a deal! I will give $10,000 of my commission to Oscar so that he gets his full $40,000, and everyone needs to sign the contracts.” The sale closed.
Looking back on this transaction, I realize that it was my most significant counseling and learning experience. When I listed this property, I had no idea what I didn’t know or even why I needed to know some of this information. This transaction and the Chicago marketing session made me learn quickly.
Almost every counseling tool was used in this transaction. Do we really believe we are in the “property” business? No, we are in the “people” business, and it sometimes gets very complicated!
For the record, the names were changed in this narrative. A couple of the investors later become clients, and Oscar and his new wife remained friends. When the dust settled, this transaction changed my counseling approach forever, and marketing sessions became a key part of my brokerage and investment business.
Article Features: http://www.secobserver.com/2015/08/my-most-challenging-transaction-the-one-that-taught-me-the-most/