Inspired by similary titled book by Textron founder Royal Little, Norman Rentrop will share his many experiences of how he has lost and made millions and other business survival trips. Famous for his case studies at NPA publisher conferences, Norman will present a special case study in which he will ask for audience perticipation and will entrust you with his eight rules for financing start-ups and 12 rules for acquisitions.
Norman Rentrop is chairman of VNR Verlag für die Deutsche Wirtschaft AG (VNR Publishing House for the German Business World), a $100 million newsletter publishing group with operations in Bonn, Berlin, Munich, Vienna, Zurich, Warsaw, Bucharest and Washington, D.C. Founded in 1975, the company employs 260 people and more than 400 authors at its Bonn, Germany headquarters, and over 600 people and 1,000 authors are employed worldwide. The group publishes 60 newsletters, looseleaf services and magazines in the fields of marketing, public speaking, finance, investment, real estate, human resources, taxation, stock-market analysis, business expansion, and more. Norman was born in 1957 in Bonn-Godesberg, Germany, was schooled at a Jesuit school, later becoming an exchange student at Eton College in England and graduating from Cologne University with a degree in Business Administration. He gained journalistic experience at a school newspaper, a youth magazine for Bonn, a local newspaper and the armed-forces newspaper. He started his first newsletter (die Geschäftsidee) while he was in school with 10,000 Deutschmarks earned from being a reporter for a local daily newspaper. He turned to American-style direct marketing to grow the company, since German newsstands were crowded in the mid-70s and bookstores did not welcome newcomers. NPA meetings, Folio conferences and DMA conventions became his training camps. His training was enhanced by seminars given by visiting North American direct marketers like Henry Cowen, Joan Throckmorton, Dick Benson, Ted Nicholas, Stan Fenvessy, Ted Kikoler and Dick Hodgson.)
Thanks for staying until this last seminar of the Washington 1999 NPA Conference. When Patti Wysocki, our very able Association head, called me a couple of months ago, asking: “Norman, what topic would you like to talk about?” I had just retired, withdrawn from day-to-day operations, handed the CEO position over to Helmut Graf at our company and become chairman of our supervisory board. Germany has a two-tier board system.
So I did not think it would be prudent to talk today about day-to-day operations like mailing results or similar activities of ours but rather concentrate on what my role as a chairman is, that is watching where we invest and helping determine the strategy.
Sir John Templeton, the founder of the Templeton Mutual Funds, recommended a book to me: “How to Lose a Hundred Million Dollars & Other Valuable Advice”. You can see from the typeface of that book that it was written in 1979. And let me ask you this: You see there a name “Royal Little”. For all participants, please do raise your hand, is this a real name? I see two hands, three, or is this a fake name? I see most hands.
I will show you his picture. Royal Little is the founder, the father of a conglomerate. He started Textron, a 12 billion Dollar market capitalization company, so even by internet company standards pretty good market capitalization. And some of you might have heard of a consulting firm by the name of Arthur D. Little. That is his nephew. So Royal Little, who wrote that book: “How to Lose a Hundred Million Dollars & Other Valuablea Advice” started back in 1923, when he was 22 years old, with a company called “The Special Yarns Corporation” in Boston. Revenues of that first year was 75,000 US$, and that was pretty much the same revenue I did in my first year back in 1976.
His modest beginning was a seed that ultimately grew to become the world’s first conglomerate today known as a multi-industry company. And when he started out in textiles, Textron, in 1952 that business was declining pretty much, the textile business. So he approached the board of directors for approval to diversify by acquiring businesses in unrelated industries. And by acquiring many, many unrelated businesses, he created the first conglomerate. We see that in many other companies that are pretty successful.
One of my heroes is Warren Buffet, who bought another textile company in Berkshire Hathaway. All textile used to become a very solid, value orientated conglomerate approach.
So when I was asked by Patti to speak, I said, probably the most I could contribute here is telling you about my real life paid by real hard cash experiences in buying businesses, folding newsletter titles into our existing properties, doing venture capital type of activities and share with you the results.
I have seen so many people speaking at these conferences and I have been attending for many, many years and learned so much, I have seen a great openness here, great willingness to share information. I think this has been one of the main reasons why this industry has become so successful over the years.
When you look at the people who started this industry, basically all of them started from a kitchen table. You hear about them. Tom Philips starting back in 1973 with 10,000 US$ and now having a 300 million Dollar business, you hear all these success stories. And I thought, well, sure I could add another success story, how I started from my sleeping room at the age of 18. But that is another story. I wanted to contribute by telling you, how I lost money and what I learned from losing money.
I mean, when we ask ourselves, why does God put us through certain experiences, when we are in the deepest of our down feelings, setbacks and whatever happens to us, I feel, it is my obligation to learn from every experience I am having. So it is like learning from every direct marketing test we do, whether a new headline will work better than the old one, whether a different type of positioning will work better than the other one.
And so I am viewing investing as a very similar thing. Our company Rentrop Publishing, and I am talking about the group now, has about 100 million in sales, last year we grew like 10 %, 600 people and we are active in seven countries. Our core business is consultative journalism for business owners. Everything from starting the business, growing the business to finally managing the money they have earned.
In the US we are active with the Georgetown Publishing House right here in Washington, D.C., doing loose-leaf services on a horizontal approach, that means, not industry-specific but going across all industries, from public speaking, protocol and etiquette, organizing your work, and then the Global Network which publishes the Trendletter, another horizontal newsletter. And then we have a minority interest in Garrett Communications, Tom Woodalls company. Travel distribution report, inter-active travel reports.
We have teamed up with really fine partners. Dani Levinas, who manages both Georgetown Publishing House and the Global Network, and Tom Woodall who manages Garrett Communications.
Our basic business model, and I am talking about small numbers compared for what is in this room, Bruce was telling us this morning about the Internet, our core business model, I always laugh. When I am talking about horizontal products like Working from Home, we have a loose-leaf service for people, who work from their own home, whether or not they have to ask their landlord, if the are renters, what specific psychological things there are to know about, how to avoid the refrigerator trap, the TV-trap and all the other traps you have when working from home.
So we find it’s fun finding a need, let’s say Working from Home, then do a dry test in mailing with ten lists, 5,000 names each for 25,000 Dollars, you create it for another 25,000. Product management, in-house costs of another 50,000. So the total investment is 100,000. We do two tests to get one hit usually. So we have a 50 % success rate on that level. So we invest 200,000 Dollars to have a winner.
And then it is relatively safe to invest more money into that winning product, because we have tested these ten lists and we know which lists are working and whether or not we can make money at all. So if you buy another 10,000 subscribers and maybe invest another one million, 100 Dollars a subscriber, we have a total investment of 1.2 million. And the nice thing is, with a nice money up front offer we get 500,000 of that very, very soon back. So our total cash-outlay is never more than 700,000.
And what do we get for that? We get annual subscription revenues of approximately a million, we get a list rental, another extra income of another 100,000 let’s say. So a total sales for the year 1.1 million. Now when I am asking myself, how much is that publication, doing 1.1 million in sales, how much is that horizontal publication worth, I am going for a very traditional yardstick, if you buy that very good book by the NPA on how to evaluate newsletter properties,
I mean, it’s one times sales, it’s five to seven times profits, so I am assuming a value of 1.1 million here, so for an investment of not more than 700,000 of which at a risk never more than 200,000 worth there is a value of 1.1 million. So that is what I consider very good value investing. I am not talking about internet investing where you are looking at a multiple rate. That is the kind of investing that I am not familiar with and I don’t know enough about.
So I am sticking to what I know about, which is the beautiful type of value investing we have in this wonderful newsletter world. And basically the very same approach applies if we go to vertical products. A newsletter for a specific industry. And in Germany we are not doing the one for the undertakers, we are doing the newsletter for the German mail order industry or the German cable and satellite industry. So we do a wet test, that means, we do three to six months, at a total production of 50,000 we do another third-class mailing of 10,000 names at maybe 5,000 Dollars. It comes to pretty much the same, 100,000 to test it.
Again two tests, one hit, you have another 200,000 spent to get a hit. Then, if you role out to get 1,000 subscribers, add 400,000 you have a total investment of 600,000. And then basically we have a similar kind of ratio, it is probably worth 900,000. And I am using again a conservative yardstick here of 1.2 times sales, 5 to 7 times profit and I am assuming that vertical publications, industry-specific publications because of their higher renewal rate are somewhat more profitable and get a higher evaluation for that.
So we get the same, investment of 600,000 at a risk of never more than 200,000 for a value of 900,000. In our business the critical success factors obviously are high class editorial number one, aggressive marketing number two and number three follow up by ancillary products. That is what I call the turbo for profits.
And when I was asked, o.k., how to lose a million Dollars and more, and someone asked: “Norman, you lost one million Dollars?”, no, I am not talking of one million Dollars, I am talking about many millions of Dollars. And yesterday there was a great session on how people like me, owners who have built up the companies finally retire or semi-retire and what the experiences have been, how owners and managers work together.
And Mike Mealey gave three specific rules what you should do to become successful. These rules are number one: hire good people and delegate, number two: hire good people and delegate, and three: hire good people and delegate.
So being a publisher of loose-leaf services on public speaking I was sure somebody in the audience would immediately cite the page I was reading the joke from. Having that in mind I thought, how can I immediately apply what I just learned? And we all know that it is not the big businesses buying up the small businesses, it is rather the fast, the quick moving businesses that win the game.
So I immediately applied it. And there came a gentleman who I have known for many years and I immediately asked him: “Frank, will you be willing to tell us a great joke that applies to what I am talking about here?”, and he immediately said: “Yes”. And here is the gentleman.
A guy walks in and says to his wife: “Honey, I need two Dollars to go to the fair”, and she goes nuts and says: “You have lost every single cent we have, we are on the welfare and we are sitting around here with not a stick of furniture. Everything is at the pawnshop, get out of here!” But he begs and pleads and finally she says: “Alright, here is two Dollars. Get the hell out of here.”
He goes to the race track. He bets the first race and he comes in and he has 60 bucks in. He bets the next race and he keeps winning and winning and winning. At the end of the day he has got 50,000 Dollars. And he walks home from the track and he is feeling great. And right near his house he walks past an alley and there are some guys gambling and he says: “I can’t lose” and he puts all his 50,000 Dollars on black and he loses everything. And he goes home and his wife says: “Well, how did you do?” and he says: “I lost the two bucks.”
Thank you Frank. So it is up to you whether you want to hear the false story or the right story. When I looked at what we had done, first of all I looked at fold in’s. What do I mean by fold in’s? I mean titles, companies we bought and folded into our existing publication and/or into our existing management.
We did seven deals. In seven deals we were the highest bidders. In the audience there is one gentleman who was bidding against us one time. We lost three times to other higher bidders. In the worst deal of those fold in’s we only changed money. We did not lose any money, but we did not gain anything. So we just changed money. The best deal which was in audio-cassettes, we quintupled our money. So I like fold in’s. You know, management is your management, you know them.
Reinhard Mohn, the founder of Bertelsmann, or successor of Bertelsmann I should say, always has this rule that he wants to know someone he is intrusting money with at least for two years. So he has built his whole assistant concept, hiring people, he always had a couple of assistants, and over time he gave them more and more special projects, got to know them. And those 25 or whatever percent that stayed with him, he knew he could entrust with bigger jobs, running companies, starting companies, whatever.
I love fold in’s, because you know the management, you know who is doing what, and our value yardstick has been pretty good. Did we overpay? Sure we overpaid. But we never lost money. The downside is, it’s only 2 % of our sales. So my strategy will be, I will be a platform company and I will fold everything else in the industry in. It’s a proposition, maybe other people achieve more than 2 % of their sales, well we haven’t been able to achieve more than 2 % so far.
So it is good, whenever we have something we can fold into our publications, we get big ears, we are very aggressively bidding and paying high prices for that. But unfortunately it has not been more than 2 % of our sales.
Second category is established businesses. When we wanted to increase the deal flow, you have to understand that in Germany it’s not like in the US. Traditional Germanic way of thinking is, you start a business and you keep it, not only until the end of your life but for the next several generations to come. Activity in buying and selling businesses in Germany is not as active as over here.
So in order to increase our deal flow, we asked several people to help us with that, we looked at 150 deals, of these 150 deals we researched, research meaning going in depths into the business, taking at least not only from the investing point of view but also from the operational point of view a deep look at these propositions. We looked at 30 deals that way, researched 30 deals, decided to make a bid on six deals, we won five deals.
And our experience has been that management is the key. So remember the rule: hire good people and delegate, we can underwrite that one.
But also note that if in doubt, be more selective. Back in 1992 I wanted to invest in US real estate, because I had the feeling, this situation in the US, where you could buy office buildings for 50 % of the price it took to build a new office building, some newsletter publisher in the real estate industry told me: “Norman, you have to be very selective. The very good real estate investors look at 200 different properties to make one acquisition.” Looking at our track record today, I would say, we have not been selective enough.
Seed financing. Seed financing meaning, we invest in companies that are not yet existent or just starting up. So we invested in eight deals, three successes, one on its way, one too early to tell and three flops, complete disaster. High risk, high reward. When I am talking about the risk-reward-ratio, I am not only talking about monetary loss. All that we are using direct marketing and test, test, test, we all know that we cannot win all the times. Otherwise we are not testing aggressively enough.
I am also talking about things that are non-monetary. There is a natural tendency in people, how do they handle setbacks. Some immediately try to deny responsibility. They are like Alan Woods who advised: blame someone else and get on with your life. Some just pass it off as part of the learning process. As Oscar Wilde observed: experience is the name everyone gives to their mistakes. The world is full of people who say: “I am very experienced”, meaning they have 20 years of repeated mistakes.
Some seem almost proud about it, acknowledging a bad political appointment, New York City Major Laguardia, after whom the airport was named, once said: “When I make a mistake, it’s a beautiful one.” Or Harry Trueman once said: “Whenever I make a wrong decision, I just go out and make another one.”
Who of you is familiar with the term ‘non-recourse loan’? When I, coming from Germany, first heard that term explained to me by someone putting together a venture capital type of deal, I did not understand it.
In Germany we have almost no non-recourse loans. And then it was explained to me this way, that if someone gives a loan and says, it’s a non-recourse loan, so I have no recourse to you personally of repaying the loan, but in case the loan is not repaid, I’ll just take over the assets, the house or the business or whatever the asset securing the loan are, then that is called a non-recourse loan.
In Germany, if you buy a house for, let’s say 500,000, and you take out a mortgage on that house for, let’s say 300,000 and for whatever reasons you do not repay the mortgage, the one who lends you the money can have the house auctioned off. And if in the auction he does not get his full 300,000 mortgage loan back, he then can still go after you for the difference.
So it’s always a personal loan. And a non-recourse loan, was explained to me as a non-personal loan, so there is no personal guarantee for anything to it. But the one who lends reduces his lending to the amount that he thinks he will always get back for the assets that secure that loan. Also non-recourse loans are priced differently. They are more risky, therefore the one who gives a non-recourse loan gets a higher yield, a higher interest rate for the loan.
If anyone in the audience ever has the situation, he wants to take a non-recourse loan and thinks, well, a non-recourse loan really is a non-recourse thing, that is nothing that would get back to me, just remember there was Norman Rentrop back on the 8th of June 1999 telling you in Washington, D.C., give me call and I can, on a private basis, tell you differently.
My eight rules for acquisitions and 12 rules of what I call the do’s and don’ts of seed financing. First my eight rules for acquisition:
1. Do not pay any money until all contracts are signed.
2. If it’s a non-core business, pay a lot of attention to due diligence.
Many times we thought, oh, wonderful, we want to be smart, we want to stick just to media industry, so we invested into German CNN, n-tv, or the radio business and we thought, we understand the media. As soon as there is a different business model, for us it’s a non-core business.
As long as it is the same core business, for example, I invested in a German cable company and they have the same type of business model, where we send out mailings to get our subscribers, they dig in the ground, put cable in or get on the telephone poles and put cables up and then go out to all the households and ask them, do you want to subscribe? That is the same kind of business model. There we did not have any problems. Where we did have problems was, as soon as it is a different business model. My rule is, pay a lot of attention do due diligence.
3. Watch out if partners or deal makers have nothing to lose.
You will be approached by a couple of people who say, o.k., I have a great deal for you and I will do this and this and this, but always have a red flag coming up when the partners or deal makers, that bring the deal, when they have nothing to lose. When they do not put up what is sizeable money to them. Obviously they have not the money to take a business from zero to 10 or 20 million or whatever in three years without our financial help. But they at least have to put up what is sizeable money to them.
4. Keep it simple, stupid.
This great truth of the founder of McDonalds, Ray Kroc, just means, avoid complicated transactions. You always have people who, for tax reasons, have a company in Panama or a company in the Caiman Islands or where ever. Avoid complicated transactions. At the moment I am repackaging my bags, trying to reorganize some of my real estate investments. And if you ever have to deal with French lawyers, give me a call.
5. Go your own way. Do not let somebody else pressure you into an acquisition.
6. Minimize risk.
7. Keep existing management involved.
Before we did this, I never understood why some people put such a heavy weight on earn out’s, meaning, somebody wants to sell a business, fine, they pay a very high price but hand out 50 % of the price only and say: “O.K., the other 50 % we’ll hand out over the next five years depending on the bank results coming true and you running the business.”
8. Avoid leverage.
Don’t we always hear about OPM, other people’s money, then we can leverage and make a much bigger acquisition? Sure, but there is my Germanic thinking and I see it with Warren Buffet, I avoid leverage. It’s just my style. I feel much freer, I can sleep much better at night if I know, it’s my money at risk, but I do not have to worry about other people’s money. I mean, it’s a sword with two sides.
The publishing business is a wonderful business once you have reached pretty good size. The founder of the loose-leaf publishing business, Prentice Ettinger, always pushed for a 20 % profit margin, 20 % profit on sales. Can it be achieved? You look at a Wolters Kluwer company, publicly traded company, I am not talking about Value Line or some special thing, I am talking about Wolters Kluwer, sizeable, Dutch publishing company. They do a 20 % profit on sales. So yes, it can be achieved. So with a 20 % profit on sales you have a very high self-financing power.
The 12 do’s and don’ts of seed financing:
1. Do not give money to people who have declared bankruptcy.
2. Do not give money to people who love to sue.
3. Trust your own feelings, your own vision.
4. If in doubt, do not invest.
5. Check references.
When I was thinking of all the mistakes I have made, it was amazing, when we hire people, we check references. Why don’t we do the same thing when investing money? Usually, hiring someone is a couple of hundred thousand DM or Dollars business. Investing in a business is seldom less than that, so why don’t we use the same kind of reference check?
6. If you fall in love with an idea, remember that it is not only the idea but also the execution of the idea that counts.
7. Structure your deals so that you have a way out at all times.
8. The entrepreneur must have personal liability.
9. Always secure the option to replace the entrepreneur if things go dramatically wrong.
10. Agree on milestones before.
What do I mean by milestones? Let’s say, somebody wants to have 1.5 million for a business plan like we had in the German construction market data business. We said fine, we love the business, but we want to build in a milestone whereby we invest half the money, 750,000 DM, and if the milestones are met, you tell us, what the milestones are, if they are met, then we’ll invest the other half, the other 750,000.
11. Only give money if the entrepreneur is 100 % committed to this venture.
Quite often I encounter people who run this business on the side, that business on the side and that business on the side and also think, this could be a business, and why don’t you, Norman Rentrop, invest in business number four with me? I always get a better feeling if someone is totally committed.
12. Will you have fun? Does it fit your personality?
After losing money in some media business, I though, hey, why didn’t I just buy a golf course? One of my board members did, and he has this parking space in front of the club president.
One of our copy writers wrote a beautiful piece. You drive to your own company, you see your own name on top of the building, you have your own special reserved parking space. You get into the building and the friendly receptionist opening and greeting you with all her warmth, you go into your own private corner office, windows, your secretary comes in with fresh squeezed orange juice. I mean, it took me 24 years to achieve that.
So my final remark is: test, test, test. One has to kiss a lot of frogs to find a prince.
Question from the audience: Could you describe the worst deal you ever did?
Could I describe the worst deal I ever did? There come two to my mind. One was a seed financing, where we invested probably a million DM, at the exchange rate now maybe 600,000 or 700,000 Dollars. And we detected later that we did not have a thorough background check, that the entrepreneur in whom we invested was doing another business on the sideline. And while he was pretty smart, intelligent, he just wasn’t focused enough. So after a year my investment was gone.
Other investment: we rescued a radio station from bankruptcy and again, we did not do enough due diligence. About a year later the gentleman who was managing the radio station for us, found out that the former owner, who was still station manager, it was a very small radio station with like ten people, ten employees, in the last three years had 35 cases at the German labour court, including one case where he had sewed himself.
When we hire people, we partner with people, so our view is, we want to build a long term relationship, we do not want to go to labour court. So we had a different kind of vision about how to run a radio station. So we asked him to maybe go to other industries where they are more adapted to his type of management.
Question from the audience: At what point did you make these investments?
At what point did I make these investments? The point was, when we reached critical marks. In 1990 we had two effects. Our company was sizeable enough, back in 1985 we had like 10 million DM in sales, cut in half, then you have US Dollars roughly, and back in 1990 we had reached 50 million or so. We were big enough to have professional, highly paid managers on every department level and we also had enough sales volume to follow that and make a big profit.
And secondly, back in 1989 I introduced my outside board of advisors who four times a year grill me. So it’s an education. I am a strong believer in those kind of things. Beirat we call it in Germany. So that was having a very good effect on our bottom line. Coming from a background of protestant work ethic, I felt I shouldn’t go out and buy a yacht or a helicopter or a plane or whatever, I kind of felt I should reinvest the money. Obviously, where do you reinvest your money first? In your own business.
The bottleneck in our business at that time and today is not the capital. Publishing is a high free cash-flow producing activity. Our bottleneck is good people. So that’s when I started to make these investments. When we have an attractive proposition to other good publishers who in Germany usually have saved a couple of hundred thousands or a couple of million DM, critical mass to quickly move to pretty good size, that we could team up with them. Does that answer your question?
Question from the audience
Very good question, I have been asked that many times. I feel it’s just, how you were brought up and how you feel comfortable. My grandfather taught me at a very young age to invest in stocks. And as a stock market investor you are always a minority partner. With Berkshire Hathaway I have a couple of stocks, but I mean, I am a very minor minority partner.
Or, let’s see, with Deutsche Telecom or other businesses I own shares I am a very minor minority partner. My long experience showed me that yes, even though I am a minority partner, stocks do go up. They also do go down, but on average over ten, twenty years they move very nicely up. That’s why I’m feeling comfortable. Also my thinking, why buy the cow if you just want to drink a glass of milk? I am not the type of person that needs to have a feeling of ownership or anything.
So maybe I am different there. That’s just the way that I feel. I know, other people are different in that regard, what he needs as a security. I feel fine having minority investments. I also don’t have to worry about anything. If I had to worry about Deutsche Telecom for example, I mean, I am looking out of my window and have their office building, their headquarters right in front, two miles away.
Question from the audience
Different people have different needs and different types of motivation. I don’t think I can build a rule. If you look at Berkshire Hathaway, one of the very successful conglomerates of our times. The Nebraska Furniture Mart, I mean, it’s huge, bigger than the whole block here, just the biggest furniture store in the US, is run by a 102 year old lady. She is from Russia, I think she is four feet something, I mean she had a fallout with her sons ten years ago. Her sons are like 68 years old, and they finally wanted to say something in the business.
She moved across the street and opened another furniture store. She has all these good attitudes that make her a very successful entrepreneur. You have some of these true entrepreneurial types. I mean, she just loves what she is doing, and that’s why Warren Buffet did invest in her. Now that she has lost the financial control of the business by having not the financial majority in the business any more, she still keeps going. Even at 102.
Question from the audience
We believe in advice. So we brought in many advisors. It’s already in the bible, that a good number of advisors can help you achieve good things. We brought in some very professional and very good advisors. That helped.
Are there cultural differences between the United States and Germany? Yes, there are. On the other hand, of all the countries in the world except Austria and Switzerland, the other German speaking countries, the US probably is the country that is closest in mentality to Germany. Why is that? Because of the big German heritage in the United States and West Germany was built up after the American model after the war.
Question from the audience
Of all the countries we have been investing, I feel in the United States the least type of resistance. I feel it’s a great country.
Thank you very much