THIS IS MY 43RD BLOG ON UNDERSTANDING MONEY TOOLS
This is going to be a fun re-cap of some of my life’s hard
learned lessons. Hopefully, if you are a reader of my blogs you will learn from
my mistakes. Because of so many mistakes, this will be a lengthy blog!
I have made a lot of money, and also lost a lot of money in
my life. Some losses are from economic changes, some are from selecting the
wrong partners, and some are from not having the legal agreements in place. I
am using actual businesses I have started, or have been involved with and tell
you what went awry. The old saying is, “don’t repeat your mistakes”. Here we
go….
In 1971, a friend, who is still a good friend today, asked
if I would put up the money and write the business plan for Denver’s first
health/organic food restaurant, called Hanuman’s Conscious Cookery. The name of the restaurant named after
“the great monkey”, Hanuman. The corporate stock ownership was divided 3 ways,
myself getting 1/3, my partner getting 1/3 and a non-profit company he was
affiliated with in California getting 1/3. Now, coming out of college with a
business degree I should have structured a buy/sell agreement written by a
lawyer and I did not follow my wonderful professors’ advice. After a couple of
successful years in business my friend and managing partner wanted out, and
gave his 1/3 stock ownership to the non-profit, thus leaving me with a minor
shareholder interest. We did not have a “first right of refusal” on stock
purchase. It turned out well for me, but I was totally at the mercy of
controlling interest. Lucky. Lesson learned, have an understanding in writing
as to what happens if a partner wants out, dies or other unforeseen things
happen. Perhaps three outside appraisals of a business should be completed.
In the 1970’s I was broker/manager of one of Denver’s
largest full service real estate companies. (This company’s name I won’t
mention.) After a couple of years with the company, the company was sold. I was
going to be out, so one of the owner’s asked if I wanted to go into business
with him as he was buying up residential and commercial properties for rental
income. I declined, and am happy I did. He took several investors financially
for a lot of money. How? He
pocketed the rental income, didn’t pay mortgages and it was several months for
banks to foreclose. His investors lost their money, and he left the country.
After that I joined a wonderful small oil and gas company.
The company was Energetics, Inc. and I was their 19th employee and
became manager of partnerships and corporate finance, later starting the
investor relations department. Energetics had three of the finest owners I ever
have known. We grew to almost 300
employees and contract workers with offices in Houston, a supply yard in
Austin, and owned a refinery, Western Oil Company in Salt Lake City. In March
1983, Energetics, Inc. became a publicly traded company with the assistance of
Rothschild, Inc. in New York City. The owners gave the first 100 employees 25%
of the company’s stock, making these individuals comfortably well off. Insider
stock is controlled by Securities Exchange Commission Regulation 144, which
restricts the salability of stock for 2 years. Lesson to be learned, industries
can change. Oil/gas pricing went from highs to new lows, crushing most of the
US independent oil producers, including Energetics, Inc. The company went bankrupt and we lost
any value to our stock. Thought we were retired, nope. Another lesson learned
from one of the owners was that everyone in a company serves a purpose in the
company just like members on a sports team and should be treated with the same
respect whether it is the chairman of the board or the janitor. Treat people
the way you would want to be treated!
While working for Energetics, my past restaurant partner
asked if I would put up the seed capital and write a new business plan for a
fine continental food restaurant he would be the manager of in Durango,
Colorado. Our third initial partner was also a good friend and fine restaurant
architect, so we started “Eye of the Eagle” restaurant. Yum….fresh fish flown
in, oysters Rockefeller, prime cut steaks, etc. We needed far more capital and
the owner of the building had investors who wanted in. We relinquished 61% of
the stock to them and controlling interest. This partner was an out of state
lawyer and CPA. One lesson I should have listened to is never have a partner
who is a lawyer or an accountant, they know more tricks than you ever will
know! After several months the restaurant was more successful than was
projected. The controlling partner abrogated our managing agreement, closed
down our corporation and continued business under a new corporation, “Harpers”.
We were entitled to damages, and could sue; I did. Have you ever tried suing an
out of state lawyer? It all comes
down to time and money. I needed a law firm in Denver where I lived and also a
corresponding law firm in the state where this ex-partner lived. Bottom line,
after several months and thousands of dollars in legal fees, I wrote the entire
deal off.
After leaving Energetics, I purchased 18 oil and gas wells,
and 2,000 acres of mineral rights for development drilling surrounding the
producing wells in Gorman, Texas.
I had 3 partners, and we formed a partnership for ownership and operations
called Gorman Partners. We selected one partner’s company to run operations.
The owner was retired from one of the major oil companies. This partnership was
a disaster from the onset. First, our Texas lawyer who closed our purchase of
the mineral rights delayed the filing with the county clerk and recorder until
the end of the week because of the long drive to the county seat. It later
surfaced that the company who sold us the operating wells, Comanche Oil and
Gas, sold the mineral rights twice, once to Gorman Partners and again to
another company, who filed of public record before our filing……ouch! Lawsuit.
We didn’t sue the out of state lawyer for negligence, as I had been there
before trying to sue lawyers! We did sue Comanche Oil and Gas in Denver court
for fraud and compensation. The Denver court system was backed up one year for
a court date. Before our court appearance Comanche Oil went bankrupt, and we
had nothing to look forward to as far as compensation, and had accrued healthy
legal bills that we paid. Lesson
to learned, whether it is oil and gas rights, real estate or another asset that
you need to file of public record as soon as possible after transfer of title
or deed and money changes hands.
Time went on, I was doing well, so I decided to go and live
in Paris, France, for three months. I received notice that these oil/gas wells
were not performing as projected. Our managing partner blamed it on paraffin
problems clogging the wells’ flow. Another partner and I went to Texas to interview
our on sight well hands and go over operations; nothing amiss. We went back to
Denver and decided to have an accounting firm do an audit. Our wonderful,
father like managing partner had skimmed $250,000 from the Gorman Partnership. We had a meeting with the partners
including this man about the fraud. He had planned this well in advance and
told us he had everything including his home, cars and all assets transferred
out of his name and his wife’s name over a year before all this came to light. Colorado’s statute of limitations is 12
months, and if we sued him all we would show is more legal bills and no
compensation for damages.
How did this man accomplish this? Each oil and gas well normally has several owners including
mineral rights owners. Purchasing companies of the oil and of the gas have
records of individuals or companies who own an interest in each well. A “division order” of all the owners is
created, so that checks can be sent out monthly for payment on purchase of the
oil and gas. After a couple of
years into our business and production, our managing partner called these
companies who purchased our minerals and gave them bogus corporations that he
owned. Our audit tracked two additional, non-existent shell companies back to
his address. Where there is a will there is a way! Lesson to be learned, stay
on top of things. If something doesn’t appear right or missing projections, try
to be a problem solver early on.
During this period with 5 other people I started two
companies in the gasoline retail service station business. These companies were
National Data Corporation which was computer (hardware and software) related to
the industry, and Warranty Service Systems, Inc. (WSSI) in Wheatridge, Colorado. WSSI became fairly large and
successful. This company managed two auto insurance programs, Amoco’s Certicare
Program and Shell’s Autocare Program. Part of WSSI’s business included monthly
reminder cards mailed to customers of gas station retailers for auto service
and monthly specials. We took National Data Corporation public and I gave my
wife a couple million shares and I owned a couple million shares of stock; a
penny stock, but nice. The stock was trading at around $.15/share, but “thinly
traded” with very little stock in the “float”. What does that mean? Most of the
stock was held by us, the insiders, and restricted with the Securities
Commission. Very few shares of stock were owned by the public therefore, very
little traded and very few trades would make the stock either go up or down. Then, one of our original very wealthy
partners who had control of the stock decided he wanted to take the company
private and control the business operations. He didn’t concern himself with paying his original partners
for their shares of stock. Could we have sued, yes. Would I have just lost more
money in legal fees, yes! Lessons
to be learned…..be careful of partners. Wealthy partners can get what they
want, and will sink you with legal fees if you try to sue them. They can
outlast you financially! The original partners’ stock in the company was all
restricted, and again I found myself lacking liquidity.
About the same time, in 1986, a classmate of mine from
college, great guy, and CFO of one of the largest builders of downtown Denver
office buildings resigned his position because of the downturn in real estate
caused by the collapse of the oil industry. He had a great idea related to the auto business. Because of
my relations in the auto industry/gas station business he approached me to be a
partner, which I agreed with. We started a company called Auto Source, Ltd.
which was a unique auto leasing company in that our company strategy would “be
open and honest” with the customer, in a business known for straying from
honesty and hiding the actual cost of a new auto. We would work from actual manufacture cost plus $500 fee. We
had several top dealership people join us including some leasing managers. At this time, and to date unheard of,
the auto manufacturers decided to build financing and interest into their car
prices to the dealers, thus a dealer could offer free or 1% financing to the
customer. We had commercial loans from local banks for auto leases and
purchases, but we could not
compete with zero interest. The manufacturers protected their dealers and we
closed up shop! Lesson
learned…..business can change quickly, if you can’t adapt, you are out.
I will shift now to about 2002 when in previous blogs I have
written about being an active partner in one of Arizona’s largest master
planned real estate communities. After 10 years of work and a lot of money, we
lost the development and our money. Why? We didn’t see the oncoming 2008
banking/financial crisis and recession in the US. CITI Bank called our operating line of credit. Land
developers including our company could not get new bank financing. Was it our
fault, no. The business theory up until 2007/2008 was to build assets, then
borrow on assets to accomplish more in business and development. The partners had enough cash to sustain
a normal recession period. Don’t
assume things. When you assume,
you make an “ ‘ass’ out of ‘u’ and ‘me’ “. Lessons learned:
- Large developments take longer therefore have
more variables.
- Don’t
assume that historical recessions only last 18-24 months.
- Don’t
assume that successor mayors and commissioners in office will favor your
project and work well with you. This may delay a project years.
- Business
can change, laws can change, regulations can change, almost
anything can change and you are out.
What value does this have? These were expensive lessons I
learned, both financially and emotionally. My partner/friend who I owned the restaurants with once
mentioned that his successful father once told him, “It’s better to be a peanut
grinder and owning/controlling everything than being a minor partner of a
peanut factory”; perhaps good advice. Partners may be important, however they
need to check their egos, power trips, etc. at the door before entering into a
partnership or you will have problems down the road. If you can get the money and contract similar talent outside
the company I would strongly recommend going that route. Remember an outside
consultant does not have a vested interest therefore may not have the same
drive toward a common goal. A partnership needs to be just like a good team in
anything whether it is a sports team or a business team; all parties need to be
focused on the topic and the good of all members, not themselves.
People say to me, “Couldn’t you see this happening”? I
didn’t have a crystal ball.
Perhaps in my analysis I thought it could happen, but then decided to go
ahead. This was definitely the case with the restaurant, Eye of the Eagle. We did discuss what the controlling
partners could do, under worse case scenarios, and weighed the odds. Too bad
the lawyer followed through with the worst case.
Foremost, and most important, don’t forget that these
results do not make for a content domestic life and or happy spouses!
Philosophically it helps if you look at life as, “the journey
in life is what matters, not the end result”.
