How to Determine When a Business is Ripe for Investment

If you’ve been thinking about growing your business through a capital injection that may include working with a private equity firm or being acquired by another company, how do you know if your company is actually worthy of investment?  Positive cash flow and consistent year-over-year sales growth may not be all that is needed to lure the right investors or buyers.  On this edition of “Deal Talk” we’ll find out what an experienced serial entrepreneur and venture capitalist has to say about the companies he’s helped turn around and lead in the past.  Join us as Jeff Allen speaks with Dan Tamkin, currently the Corporate Developer and CTO at Transdev.

Questions Answered For You


You do not really know how big the market is for what you are building. You got to really bet on the Management Team.

- Dan Tamkin

Key Takeaways

  • The concept itself in most businesses that are having trouble is you got to have focus; usually businesses get in trouble when they start doing too many things.
  • In venture capital, you are betting on that quick change, the quick product cycle.
  • When you have a growing market, the money should be spent growing the market.
  • PNL mapping: You take the things that you are spending the most money on and those are the things you want the diligence and understand why and how they impact the business.
  • The biggest challenge with the resources is not only having the right people in the right place but is also removing blockages that may be around processes or that maybe around your politree of people and then finally all that kind of comes down having clear expectations.

Read Full Interview


Jeff: Welcome to Deal Talk brought to by Morgan and Westfield, I am Jeff Allen. If you are selling or buying a business or just interested in this subject, then this is the place to be. Our mission is to educate and inform you with the help of some of the most credible, highly regarded experts in the industry of transacting businesses so you will be better equipped to make some very important decisions when the time comes to sell your business or to buy one.
 
On this edition of Deal Talk, we are going to make a slight departure from the norm. What is it like, do you think, to be one of those fortunate few who have had the opportunity to be involved with multiple businesses, both as an owner and investor? You, as a listener, might very well be in that situation yourself. Maybe you are on your second, third or fourth business, or maybe you are a part of an investor group and you have minority holdings in a several investment opportunities out there, in terms of businesses, that you are maybe a part owner in or maybe you are an absent manager, where you do not really have much to say about things other than just being able to front the money and help afford necessary improvements for that business to operate in the manner that your board seems fit. We are going to find out today what it is like to be a successful multiple business owner who has had a lot of opportunities to come through investing businesses and turn them around. We are going to talk to him right now. His name is Dan Tamkin. Two-time successful turn-around leader, entrepreneur, CEO, venture capitalist and you are Chief Technical Officer of company called Trans Dev, is that right?
 
Dan: Yes. Yes, I am.
 
 
Jeff: Dan, welcome, first of all to Deal Talk. It is good to have you on.
 
Dan: It is good to have you. Thanks Jeff.
 
 
Jeff: Tell us a little bit about Trans Dev. and what you do there.
 
Dan: Sure. So, Trans Dev. really has two functions, the Chief Technology Officer, so that is really kind of helping the organization respond to Uber and Lyft with all the disruptions and change we have had in our market. The second function is corporate development, which is really getting out of this start up world, helping find interesting investments for Trans Dev., but also beyond the investment it is learning what is beyond the market place, making sure we are able to see things earlier in the pipeline before they get so big that it will not give us the chance to react or think about how those things might impact our future market.
 
 
Jeff: You know Dan, there is always a lot on anyone's plate as a business owner, it does not really matter what size business have, whether it is 1 to 50 million dollars, a small business owner in town some place, or if you are part of a larger organization or even a publicly traded organization as far as maybe CEO is concerned; business is always on your mind but it is something you really have to have a passion for. When was it for you that you started to think "I am not just interested in running a business but I enjoy the world -- the world of being in the business and making a difference"? When did it all start for you, in terms of wanting to get involved in investing in businesses?
 
Dan: That is a fantastic question. Maybe it is a little cheesy when I answer but what I do is -- remember the movie Field of Dreams, when the guy as a doctor gets to be a ballplayer finally, but he has to step across the field and walk out and save the daughter from choking and Kevin Costner said: "I am so sorry I cost you your dream," and the guy basically says: "Hey look, it really would have been a shame if I never have gotten to be a doctor.” I was involved in music and doing tons of things, and I love music but I always knew that I would come back to business. I have always found business working with people, growing things and changing things to be very exciting. I have always hoped that analogy played well for me. I always felt at home in business.

I have always found business working with people, growing things and changing things to be very exciting. 

Jeff: You know most of our listeners are small business owners who manage their own company and you have had a tremendous amount of success as an executive officer and turnaround specialist for different companies, how would you describe your management philosophy? I mean, everyone's business is run a bit differently and they have different expectations and different philosophies, have you found it necessary to kind of mold your own philosophy a little in order to bring about the positive changes that you have been responsible for each of the organizations you have led or helped lead? 
 
Dan: I think the concepts are generally the same anywhere you go. What happens is the implementation of them, maybe a little bit different and you might have various speeds in that implementation. The concept itself in most businesses that are having trouble is you got to have focus; usually businesses get in trouble when they start doing too many things. That is a real risk for small business owners because typically you will find that they rush in their own nature and after can lead 2,3,4 years they will start dabbling in another product line that really does not fit with that business and that is when the business get upside down. So the first thing to talk about is focus; the second thing to talk about is the resources and if you have the right resources to execute what you need. The biggest challenge with the resources is not only having the right people in the right place but is also removing blockages that may be around processes or that maybe around your politree of people and then finally all that kind of comes down having clear expectations. 
 
I should say one more thing on the focus, the best words I have ever heard about focus in the small business was when I was a VC the words were: "You are more defined by what you say no to than what you say yes to" in a startup or in small business. There is a lot of wisdom in that because if you are banging around the market and you are talking to people, you are going to see lots of opportunities and it takes a lot of discipline to go: “You know what, I am not going to chase that specific opportunity because that is not scalable and that is one offer that is going to take me to a direction where I do not want to go.” That is why I think it is really important that small business owners come back to that notion of focus and start there.
 
 
Jeff: And sometimes it is hard for people to do because your head is just filled with a bunch of ideas and you see some success in the early going with your original plan and then you say: "Why don't we expand our product line to do this?" Then you do not have enough time to kind of test your outputs and your outcome may reflect poor strategy and somewhat short-sided about really the very possibility that your ideas, despite them sounding good on paper are not tested early enough. We just do not have enough time to put these ideas together and make them grow with your business. So scalability is very important there, take away from your remarks. By the way what is it about tech that you enjoy so much? I mean it seems to be a really growing passion for so many young executives and investors today.
 
Dan: Well, I think there are a couple of things. First, I do not think tech is anymore a receptor, I think every business is being infiltrated by technology and the rising, the next generation of leaders are going to be all technology and abled. So I do not think it is a choice to like technology or software if you are thinking about the next 20 or 30 years. You are correct, you have to. To tell you exactly why I love it, the reason I love it is there is an aspect of it that feels like magic and you bring something to life. I just think that is extremely cool. On times you are automating a business process that is really cumbersome or difficult for somebody to do and you make it happen and you go: "My life is so much better." I just personally get a real take out of that. I think it is good to stay around your passion as much as you can.

I do not think tech is anymore a receptor, I think every business is being infiltrated by technology and the rising, the next generation of leaders are going to be all technology and abled.

Jeff: And it is always advancing. Technology is not just when you think that we have seen something that is just amazing, it is going to be life changing The next life changing thing comes along about 6 to 7 months making that thing that you think is so cool practically obsolete by 7 months from now and that really, is quite fascinating.
 
Dan: That is a great point. I think that is where you are going to be careful about, at least for me I am on different sides of the table I like to play at. In venture capital, you are betting on that quick change, the quick product cycle. Most of the stuff I am interested in, from a turnaround perspective, is businesses that are not doing software but they could be in lower turnover industries in the sense that the rate of change in that industry is much slower.
 
 
Jeff: Dan Tamkin is our guest and you are listening to Deal Talk. We are talking to Dan; he is an entrepreneur, a multiple business owner and venture capitalist. We are getting some sense of what makes of venture capitalist and certainly Dan himself taken things that he looks for and that are important to him when considering a new business to look at in terms of ownership and investing. Dan, when you have learned of an opportunity to invest in or acquire promising young company, what is your vending process? I mean where does your research start and how long might the entire process take you to decide whether this is something you are going to get serious about? 
 
Dan: Sure. From the investment side, a lot of times you are putting money into and or around so you might be in multi-million dollar round. You are not writing the whole check. So those are kind of easier deals. Those are, for maybe a week, and if it is a sector you really know and you really understand, and you know the guy doing it, it might be a phone call, it might be that simple. If you are going to acquire something that is a much longer process, if it is a travel investment that can be a month but a lot of times some of the travel investments I see get 72 hours. So that is when you have to have knowledge of the market and you have to be able to walk in and grab something, and that is kind of when I see it as a turn around on a venture investment.

Most of the stuff I am interested in, from a turnaround perspective, is businesses that are not doing software but they could be in lower turnover industries in the sense that the rate of change in that industry is much slower.

Jeff: What are the greatest challenges Dan that you have faced or typically faced with a new or fledgling company?
 
Dan: Yeah, I think the biggest challenge for any venture capital is that typically you are investing in something and you have an unknown market size. You do not really know how big the market is for what you are building. You got to really bet on the management team.
 
 
Jeff: With that said Dan, have you been involved in any businesses that had young startups? I mean, we understand you are a turn-around specialist and you have certainly had tremendous success in that area. Do you spend much time with older businesses where you come in and you are expected to come in and fix things up? How many older businesses have you gone into or have you been a part of?
 
Dan: Older for me would be probably something that is already been around for 5 years or so; that tends to be a little bit less of what I am spending my time on. Usually what you are looking for is an opportunity that has pretty good growth potential and a lot more mature, there is not as much of the revenue growth potential and usually if that case has execution challenges or some kind of problem with their capitalization, whether they have too much data or what have you, that kind of creates those opportunities, those will send you PLS to less to meet because I am more operationally oriented as opposed to thinking about restructuring from a capitalization perspective. 

I think the biggest challenge for any venture capital is that typically you are investing in something and you have an unknown market size.

Jeff: Dan, we are going to take a quick break but when we come back, we want to talk to you a little bit about your vision, when you go in and you are sitting in there and maybe you are talking to your board, you are walking through and you are doing an inspection there of a facility or something or an office, I would like to kind of get inside your head to find out what are you thinking when you go for your first tour inside your business that you just invested in, no matter what that might be and what is the dot process that goes through your head? We will talk about that here in just a second, my name is Jeff Allen, and we will continue our visit with entrepreneur, venture capitalist and business turn-around specialist Dan Tamkin when Deal Talk returns after this.

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Jeff: Welcome back to Deal Talk, my guest is Dan Tamkin, he is the Chief Technology Officer at a company called Trans Dev but he has also owned multiple businesses as a CEO, CFO, COO and just about other leadership capacity you can imagine. We are talking to him today on Deal Talk about his experiences as a venture capitalist and going in to these businesses that he just helped acquire. Dan, when you go into acme for the first time and this might be one of your first visit and you are getting a lay of the land, you are having a chance to assess things, and how soon do you know that your investment is going to actually succeed?

 
Dan: That is a great question. I think generally, I feel good about my investment anytime I make it. It would be really hard for me to kind of feel bad about something before I do it because usually, what I find, is if bad is going in, it only gets worse. Everything comes from a mark of positivity. Once you are in the investment, how do I know about how it is going? Well, I think some of it is  kind of coming back to what we talked about at the outside, it is having clear expectations, focusing on what people can be doing with the outcomes we expect are, making sure they have the resources to acquire and execute all those expectations.
 
 
Jeff: Tell us about the most interesting acquisition that you could remember having been involved in? Whether you wade in and you saw something that you really thought: “Well, we are getting some value here”, “this is going to be a lot more fun that I thought it was”, and something that is just kind of worth telling a story about?
 
Dan: Yeah, I think I have a good story from the beginning of my career. When I first came out of school, I was fortunate enough to unwittingly join a turn-around of the world's first medical robotics company called Computer Motion. We were battling our competitor into the surgical pretty hard. Between the two companies, I think we cumulatively spent about 6 million or 7 million a quarter paying attorneys to fight each other in the path in suit. So we spent a lot of time slugging it out, a lot of time and money. Both of us were unprofitable, as we had to raise money to pay the lawyers in this lawsuit. Eventually, reason gave way and we merged and then what happened is the resourcing company we came to number 2, growth company in that aspect. I think there are some interesting lessons from that. One is that too much focus on your competitor won’t help, you should know what your competitors are doing but you should not worry too much about them because they may not be any better, any sharper than you are and it could steal your moment or a particular strategy. Two, especially when you have a growing market, the money should be spent growing the market. When you have a competitor, you actually have a common problem, and that is the market that you are trying to create does not exist and paying attorneys 7 million to argue over a market that does not exist does not make sense. Paying 7 million to join or to grow that market together which is certainly an odd and difficult to execute concept is really what is valuable because both companies end up being more valuable, it works out better for everybody. So to me that is one of the most interesting lessons I have learned. Another one I will share with you was when we worked with fellow of large conglomerate that required a bunch of assets that could be considered in serial assets that we were in real accord with the business. They were looking at packaging those assets together and getting a piece of a startup, a good significant piece of it. I thought that it was a very interesting deal because we are allowed -- at a large company what we do is find a way that take non-useful assets, put it into something that had a high growth potential and really could take something that was not strategic, put it into a engine that was strategic and realize and unlock a lot of value. To me I find those deals really cheap because it is all about 101 is equal 3. So both laws of examples are 101 is equal 3.

Too much focus on your competitor won’t help, you should know what your competitors are doing but you should not worry too much about them because they may not be any better, any sharper than you are and it could steal your moment or a particular strategy.

Jeff: When you go into a business, Dan Tamkin, is there something that you focus on immediately? Maybe there is a weakness there, there is something involved in the operation, maybe it is a people thing, maybe the culture is wrong, something is broken, you cannot put your finger on it necessarily when you are looking at it from maybe a bird's eye's perspective but when you go in, do things just really start to immediately become visible to you like " I can change that", "we need to change this", "this is not working", what has been your experience there?
 
Dan: Yeah, I think during some of the diligence phase, I had this concept called PNL mapping and it is really pretty simple. You take the things that you are spending the most money on and those are the things you want the diligence and understand why and how they impact the business. And you accept to understand in the context of -- you take the PNL of the business you are looking to acquire and you also have to look the PNL of the customer that they are selling to and any work back was to understand how those two inter-relate. So, there are just two things there: One, understanding the market by looking at the customer's PNL and two, understanding how you are spending your money by looking at your PNL. That gives you kind of an idea of what is important in a customer and what is important to you in business. That should give you an idea where to start and what to figure out. Now, when it comes to culture, culture is driven by people. So it is really hard to change culture, if you want to change culture you are going to have to change people. Usually, there is going to be some change in people. In turn around investments, you are not usually buying into the people that are there; usually you are going to have to make some changes. Some private equity which is more restructuring around capitalization, maybe the existing management team stays. 
 
 
Jeff: You know Dan, as a business owner myself, I am sole proprietor and I have my book of clients and I have other clients that I am always out trying to market to. I am trying to expand my book of business and grow while at the same time trying to pay real strict attention to the clients I have had for many years. I do not want them going down the street. What is it today that separates the really good businesses from the bad ones? We are talking a little bit about customer service, which you obviously just touched on with regard to culture you talked about people. Do you think that there is enough attention being paid by business owners today and by those who operate businesses maybe at the higher level, C-level executives to really that relationship that is so important between that company and their customers? It is not just simply enough to sell something at the lowest pricing you give the best value to the customers, is it? I mean, there is something deeper than that, right?
 
Dan: I think so. There are businesses that are transactional. Certainly, toilet paper is where you are not really going to get a lot of chance to create an impression to the customer but when you are selling high end software or something very personal, you are going to get a lot of hot seat. First, I got to know how much attention from the customer you are going to get in a purchasing process but relationships are always important business. People want to work with people they trust. People want to work with people that you know that when they say "this is what is going to happen" and that they are going to actually make it happen.

In turn around investments, you are not usually buying into the people that are there; usually you are going to have to make some changes.

Jeff: Do you think that more business owners today need to give a lot more thought to preparing their business for sale, packaging it in such a way so that they can continue running this and it is part of their life, they are generating revenue, they are generating income for themselves, their family, to support their lifestyles, the household, the people that work for them but it seems to me, the reason I am asking this, is it seems to me that if you get ahead of the typical small business owner today and you were to ask them, “What are you going to do when it is time to sell your business?” Most of them probably would not have an answer. Do you think that more business owners need to give a lot more thought to preparing their business for sale, when the eventuality comes at it that it is time to move on, it is time to retire, when it is time to let someone else just take the reins?
 
Dan: I think that is interesting but even if you do not think you are preparing for a sale, I think the rigor of preparing for a sale could sometimes be a really good exercise. I will give you a couple of examples. One, I like this exercise that I call fire the CEO, I like to do it every year where basically you fire yourself and you write down if you were to come in fresh and know a little bit, what are the top 5 things you do? That is one thing, I think if you are thinking about preparing for sale you kind of need to have a fresh perspective of the business. It could be healthy exercise for you every year. People talk about the difference in working and in working on the business. That to me is kind of a major perspective. Second thing is that having financials reviewed I think are very important, making sure that you are looking at the business right, setting up KPIs and setting up metrics to measure the business, and the big sum of that is really important for scaling a business but that is also important for anybody coming in. If you are selling a business and you want a top dollar, you have to show good numbers but if you are also showing that it is a business that somebody else can run it, then that is even more valuable. If somebody has to be you to run the business, the business is lot less valuable. So the ability to scale yourself and that whole process as you grow is really important because otherwise it is almost impossible for somebody to come in to your business.
 
 
Jeff: Venture capitalist, entrepreneur Dan Tamkin is our guest today on Deal Talk. Dan, we have just got a couple of minutes left in the program. What if a business owner, instead of going to regular bank route to get a loan, is giving some thought to expanding their business, they have a lot of success over the first 5 years and they are ready to kind of expand and maybe go into some other areas but they do not want to go the regular route of getting a bank loan but instead they want to approach investors, what are the steps that they need to take in order to prepare themselves and their business for getting out in front of some investors for the purpose of expanding or growing their business whether that be in their own region or maybe across borders or across the country at minimum? 
 
Dan: I think the number one thing is you have to understand the size of the opportunity you have and match it to the capitalization you are willing to see. I will tell you why is that important: If you are approaching mature capital, they are looking for 40% IRR manual or return of the investment, part of that equity they target 25 to 30%, infrastructure funds they are 8%, now if you go off and  find an  angel investor someone who could write you a check someone who has got a net worth over million dollars and just write you a check for  25, 50 thousand dollars or 5 thousand dollars, there were termed parameters maybe whatever they feel like that day. It is really important to understand what are the outcome and the business that you can realistically achieve because if you take money from somebody that is expecting a much higher outcome and you do not achieve that outcome, you are going to be upside down with that investor and you probably going to have some challenges going forward. The first thing is be realistic about what you are going to do and how are you going to execute your business, understand the plan to get there and then figure out who are the types of people that meet the invested type of opportunities. It is often more about your business fitting into VC or PD’s portfolio or investments. First is the uniqueness of your investment, the ‘uniquer’ you go the more you have to look at family offices or angel investors or different sources of money that are not pulled and focus capital. 

I think the number one thing is you have to understand the size of the opportunity you have and match it to the capitalization you are willing to see.

Jeff: What advise do you have Dan for small business owners who are just getting started with their businesses? Maybe they are entrepreneurs just like you are and they are just kind of getting their feet wet, they have been in the corporate world and they have stepped aside from that, and they want to kind of go ahead and take the world and the reins by the horns if you will and kind of seek their own path with their own business, what should they do? What do you think?
 
Dan: I think the number one thing is spend as much time as you can with your customers, make sure you are delivering to the customers, make sure you have the customers’ buying from you, figuring out your sales process, figuring why you are selling them. What I like to think of in the early stage of business is that there is only room for two people in terms of - two types I should say, one is people that either sell things or people that make things. So do not spend money on attorneys and other things that are kind of ancillary things that people think about. It is about focus and that focus to me is selling and delivering product. 

There is only room for two types of people; one is people that either sell things or people that make things.

Jeff: Dan Tamkin, we are out of time. We have had a good time with you and it has been a lot of fun. Thanks so much for sharing some of your time and your thoughts with us today on Deal Talk. 
 
Dan: Oh, thanks as well. I appreciate it. 
 
 
Jeff: Dan Tamkin, Chief Technology Officer of TransDev., successful entrepreneur, business owner and venture capitalist. He has been our guest on this edition of Deal Talk presented by Morgan and Westfield, a nationwide leader in business sales and appraisals.
 
If you would like more information about buying or selling a business call Morgan and Westfield at 888-693-7834 or visit morganandwestfield.com. Make it a point to check in with us again and soon for valuable information and insight from our growing list of small business experts on Deal Talk. Until next time, my name is Jeff Allen. Thanks again.