1 Entrepreneur s M&A Journal Episode 25 Intro: Welcome to Entrepreneur s M&A Journal, with lawyer and Harvard MBA Jim Cumbee, a weekly podcast dedicated to helping entrepreneurs make better decisions when selling, buying, or launching a business. And now, here s your host, Jim Cumbee. Jim: Hello, friends. Welcome to this week s episode of Entrepreneur s M&A Journal. This is the podcast dedicated to buying or selling a business. My goal is to help business owners gain a competitive advantage and make smart decisions when going through the M&A cycle. Each week I interview a successful been there, done that entrepreneur, and through his or her real-life story of going through the M&A cycle, I hope you will be inspired and more confident along your M&A journey. This week I m talking with Jim Lackey, who led his company, Passport Health Communications, through a 12-year journey, which included angel investment, then venture capital, then two rounds of private equity, before being sold to a strategic investor. But let s listen in as Jim tells us how he did it. Jim C: Well, Jim, welcome to this week s episode. Now, before we dive into your M&A journey with Passport Health Communications, tell us a little bit about your professional background. Jim L: Okay. I ve always been in healthcare it feels like, even during the college days I was an orderly at a local hospital here in Nashville and also I finished up out in Oklahoma and kind of a smaller, community hospital there, so really I ve always been involved in healthcare at some level. I wanted to be a doctor, but when I flunked ninth-grade Latin, I thought that was a message from God to forget that part, so I really jumped straight into the administrative side as soon as it made sense. So, I ve always done that, worked in hospitals. I ve worked with entrepreneurs, building HMOs and HMO-management companies, building organizations, and building value in companies. Jim C: Now, you started with Passport Health, I think you told me, was it 98 or 99 Jim L: 96.
2 Jim C: 96, okay. You were not the founding partner of that company, were you? Jim L: At Passport a guy who was actually an acquaintance of mine came to me. I was running another company, and he came to me, and he said, The internet s going to change the world, and I just looked at him. Well, he thought that the internet could really be useful in healthcare, and he knew I knew a lot about healthcare in the administrative side, so I helped him with his business plan. I helped him get going there. When he raised his first capital, the angel investors that had invested in him felt like they needed somebody that had more operational experience, so they approached me at that time. So, it had been going three, four months. They had burned through a little bit of money before I got involved. Jim C: Back in 1996, if you can think back that far, were you thinking at the time about an exit or was that even on your radar screen? Jim L: No, no. I think at that point in time I didn t have enough experience with exits to know whether that was good or bad and probably assumed it was bad because then I d have to go get another job, so I really did not. Jim C: So in 1996 you dove in, not sure what the future was. At what point did you guys really hit traction and say, Okay, we have something here? Jim L: The first year or so was trying to figure out what it was we were going to be. We raised a lot of money, and I had never personally raised capital until Passport, and we raised probably 6 million dollars in angel money and then another 20 million in venture before we got to the private-equity level. So, I think we lost money for about four years. At the end of that four years, we finally started making money, and that was such a great thing to see the cash balance going up versus down. Jim C: Now, the way it works with VC, did they come in after you had reached product viability and cash flow, or did they help you get to the cash-flow stage? Jim L: No, they were very early. They experienced us losing a few million dollars every year. Jim C: Okay.
3 Jim L: They were very early, and that was a time, too, when the internet was just taking off, and people would invest in, if you remember 1999 and 2000, they were investing in companies that had never made money. They were investing in companies that had no revenue. Jim L: So, it was a pretty crazy time to be raising money. Jim C: I remember in those days if you even acted like you had a plan for success, you were considered a short-term thinker. Jim L: I actually asked a guy, Would you even be interested in me if I was making money, and he said, Absolutely not. We figured we d missed the curve. Jim C: Yeah. Jim L: I was like, Wow. Jim C: So, it sounds like you guys kind of began to hit traction around 2000, Jim L: Yes. Yes. Jim C: So, what time, fast forward a few years, when did you begin to think about your eventual exit? Jim L: I think probably in We had our first private-equity-level company come in and take a piece of it, and we did a little recap then. What happens during a recap, as you know, all of a sudden people start seeing visions of grandeur a little bit. You re taking some money off the table. We rolled most of it. We kept most of it in, but you could sort of see, Uh oh. We could make some money out of this thing. Jim L: So, probably It was a nice feeling to have people that interested in you.
4 Jim C: In 2006 you began to see there may be light at the end of this tunnel. Did you have a number in mind that would drive your eventual exit, and then how did you sort of get through that process? Jim L: We probably did. I don t even remember what it was then, but in 2006 we sold about 30% of the company that is private-equity group, and then we made great progress. We did four acquisitions over the life of the company when I was with them, and by 2008 we had two other private-equity groups. They were willing to give us almost double of what we got two years ago. It was really interesting. I thought I had to fight with the first private-equity group to get them to do it, because they just hadn t been in long enough to feel like they had cashed in, which they probably hadn t Jim L: But we were able to force them to sell their part. They actually made all their money back that they had put in plus a little extra, and so they just took that off (7:10) in more into the new deal. So, in 2008 we sold about 90% of the company to three private-equity groups, including the first one. Each owned about 30%, and I actually had about 10%. Jim C: So, when did you leave and close the door on your career there? Jim L: In 2008, when the last group came in, actually before they invested, it was a very interesting learning experience, but I told them before they put the money in that I was going to stay on about a year, and then I d like to find a new CEO. That spooked them. They said that usually people don t tell them that until after they get their money, and I said, Well, that doesn t seem very fair to you guys. Jim L: So, that was really a great transition. I stayed on a year, got to know those guys, and then together we went out and recruited a new CEO. In fact, I said, If you guys will pick out the top three and let me pick the one, that would be great, and they did. He was just exactly what the company needed. Jim C: That s awesome. Well, the way the deal works, Jim, do you still have the 10%, or has that since also being cashed out?
5 Jim L: No. We sold 100%. All these private-equity guys are out now. We sold all of the company to Experian, which is one of the big data companies, in November of last year. Jim C: Okay, so that s when you finally closed a chapter. Jim L: After we hired the new CEO, they asked me to stay on as chairman, which I did, until we sold the company last year, but that was a pretty cushy job to tell you the truth. Jim C: Well, looking back on it, it s easy to kind of pinpoint some of the things you did right, and given your success I can t imagine you did a lot of things wrong, is there advice you d give to entrepreneurs who are going through this process of what to look out for or be careful about? Jim L: You hear this all the time, and it almost feels like a cliché, but it s almost not how much money you take as an investment; it s who you take it from. The people that we had invest in our company, the private-equity companies and the venture guys, were both so instrumental in our success. They brought in customers, other partners. They really helped us think strategically, and they had a lot more connections than we did. They had a lot more leverage than we did, candidly, with a lot of companies that they brought in. So, who invests is as important as how much they invest, or even for that matter, the terms of the deal. Jim L: I think that getting a great investor that you believe can help take you to the next level is important. We did do four acquisitions during my time. Three out of four were successful. Our first one that we did, we actually entered California, found California was dominated by this company, got to know that company, and found out they were sort of stuck. The owner was sort of a one-man show, and he was tired of putting in money. They had tried to build an internet version of what they did and lost a lot of money. We already had one, so we actually did a stock deal with them, didn t put out any cash, just traded stock, and that was great. I got us into 200 hospitals in California Jim C: Oh, wow. Oh, my.
6 Jim L: Overnight. We got a strategic customer, and we took Tenet Healthcare, which is now part of CHS, and we had them as customers overnight. So, that was probably one of the smartest and best things we did. It was good for everybody. The guy we bought it from owned a ton of Passport stock, because he made a lot of money of us. That was great. We really bought customers more than product, and that was a great thing to do. That was good. And, I think the other thing that I ve always done is try to overhire from the beginning. Our first CFO had actually taken a company public, so we had almost no revenue and just getting started, and, I think, having that level of experience was so helpful in the beginning, because as you grow you have to keep upgrading, and it is hard to change horses. Part of my advice is always try to hire as high a level of person as you can, even if you get him or her for equity. That s the kind of people you want anyway. Jim C: Well, let s talk about the fourth acquisition that didn t go well. Jim L: I think, one, we probably didn t do enough due diligence. So, we discovered things after we got in that we didn t know. I think the biggest problem with that one, candidly, was we bought it from a Blue Cross plan, and so we bought a little division of a Blue Cross plan, and what we found out the hard way is those people just aren t entrepreneurial. I really hired a bunch of bureaucrats, so no matter what I did, I couldn t get them happy, and I couldn t get them fired up to make progress like we d been doing. So, that was probably the biggest mistake was not learning enough about the business before we got in, and then once we did get in, finding out I just had the wrong people. So, that was one. I learn from everything. Jim C: Well, Jim, I know that you are in the process of repeating this cycle with another opportunity that you are working on. If you look at what you ve done with Passport and what you re now doing with this other company, what advice do you have for your fellow entrepreneurs, because I know you re sought after a lot for your advice and counsel and highly respected on a personal as well as a professional level, a lot of people come to you for advice, what are the two or three things you tell people about how to get ready to take your business to market? Jim L: Two or three key things: One is hire A players, and I even have a definition of A players that I made into a presentation as well, because it was just in the last five or ten years that I realized we talk about It s the people. It s the people. Well, it really is the people.
7 Jim L: We sort of said there are three A s, and there s ability which means can they do it, attitude which means will they do it, and action which means do they do it. So, we got all of those defined; my team that is here, our four guys that have worked together for years; and we go through the people that we ve hired almost on a regular basis and just grade them again. If a B slipped in, we take them out, because it is just all about the people. So, that s very critical. I tell most people, Figure out who you are going to sell to from the beginning. Jim L: So, if you re creating this company to have an exit, you need to know the person at the company that you think is the most obvious buyer and you sort of play to him or her. Just make sure that they always know you re around. I used to tell people, If they re a competitor, steal their customers. Right. Jim L: So, just always aim at who the buyer is, and make all your decisions. I sort of test the decisions against who the buyer is. In other words, if we re about to go into a new line or do an acquisition, we ask ourselves, Would that make this company seem less or more valuable to that buyer that we re doing? To us it s sort of like building a house: pick the right location, make the color sort of neutral, make sure that you re building this house where you ll get the maximum price out of it at the end. Jim L: That s important. And probably the last thing I tell people, particularly people who are raising money because you almost always have to do that, is when you get ready to raise money, if you can possibly get somebody interested, try to hire a banker. I mean, a lot of people don t like that advice, but I ve just found most people don t know how to raise money, and they don t know the secret handshake.
8 Jim L: A good banker already knows who the investors are before you even start, and the good investors know who the good bankers are. Right. Jim L: They know they won t bring them junk. You know, even if you pay them a piece, they re going to more than make up the difference. Jim C: Well, it s very consistent with your hire A players. A banker is just another player in the process to create value. Jim L: Who knows what they re doing. Jim C: If you knew how to do everything, you could be a one-man company, and you could have it all, right? That s easy enough. It just never seems to work. Well, that s extraordinary advice. What s the future hold for you? I know you re involved in a lot of the venturecapital investments around in healthcare and, I think, around Nashville in a larger sense. What does the future look like for you? Jim L: One of the things I ve really enjoyed is serving on boards of these small start-up companies. I think that I ve learned a lot of things that can be useful to them, as a board member, and being a board member is sort of fun. You just get to go in and get out. You don t have to do any of the hard work. Jim L: My wife always says that I will meet with anybody who calls and says they re trying to get some advice, and I think I do that. I like to mentor people who are just trying to see what s next personally for them, so that s fun. We have four grandkids, so when I took on this role, I told the guy that asked me to take on this company, I said, I will, but if my grandkids call, I m leaving. I m not telling you where I m going; I m just going, so if that doesn t work for you, then I m not coming. Jim C: You need to know it now. Right. Right. Jim L: That s actually a continual thing that I want to keep doing. So, I don t think I m going to run another company. This has been fun, but I ve done all that I think I want to do, being responsible for the day-to-day, employees, everything. I think I will continue to serve on
9 boards that make sense and give free advice to people. You don t get much pushback when you re giving free advice if it s not good advice. Jim C: Jim, I have to tell you, I hope our listeners fully absorb and appreciate every thing you re saying, because I feel like listening to you is sort of like getting an MBA course in deal development and business development. I know we ve lost somewhere between 3 billion and 4 billion details, but you built a fabulous company over the course of a pretty short period of time, with a lot of moving parts to get that done, and you must have been a juggler. You must have some sort of juggling genius within you because there had to have been some challenges at times. Jim L: I tell you the last piece of advice, and this relates to what you re saying, I learned how to delegate a long time ago. Jim C: Oh, yeah. Yeah. Jim L: And, I don t do everything. In fact, I don t do much of anything. I just hire people who are experts at what they re doing, whether it s financial or operational or sales, and I make sure they have what they need and that we re all on the same path, and then I get out of their way. I do not micromanage, and I actually don t know why anybody would want to do that. It s just so much more fun. My son called me a few weeks ago, and he was hiring two guys. He runs an IT shop locally, and he said, Dad, I have a problem. I said, What, and he said, These two guys I m hiring are smarter than me. I said, That s not a problem. Jim C: That s a good thing. Jim L: I said, That s exactly what you want to do because you get credit for all the good stuff they do. Jim C: Absolutely. It sounds like such a cliché, but it is so true, and every successful entrepreneur I ve ever met in my career or talked to a lot, even on this podcast, will say exactly the same thing: Hire people who are smarter than you, and get out of their way. Jim L: They want to succeed, too, and I want them to succeed. It ll make me succeed as well.
10 Jim C: In the long term. Well, Jim, I want to say thanks again for taking time out to share a bit of your really interesting story and personal insight. I know our listeners have really learned a lot. Jim L: Well, thanks for having me. I appreciate it. Jim C: Well, friends, I hope you have learned something about selling a business in this week s episode of Entrepreneur s M&A Journal. Outro I: If you ve enjoyed this program, head on over to itunes to subscribe, and leave us a review. Remember the words of my hero, Benjamin Franklin, By failing to prepare, you are preparing to fail. I ll see you next week with another conversation on Entrepreneur s M&A Journal. Outro II: Entrepreneur s M&A Journal is a production of the Tennessee Valley Group, Incorporated. Be sure to check us out online if you re interested in buying or selling a business. Go to That s See you next week!