Sherry Slater The Journal Gazette
At a glance
Tom Ellis’ business tips include:
•Draft a well-written, definitive letter of intent. Make clear what you are buying and how. Specify what’s included and excluded in the deal, including items such as office furniture.
•Perform due diligence before the deal closes. It’s your job to verify everything the seller has told you. “Maybe the business is for sale because a big competitor is getting ready to open that will make his product obsolete. He knows it. You don’t know it.” You also need to check for lawsuits already filed and pending and any other issues that could cause future problems.
•Improve your chances of getting a bank loan by assembling all the items the bank needs to make a decision, including cash flow records, company history, a collateral list, a list of company officers, copies of tax returns and photos of the physical building and machinery.
At a glance
Ellis Co.'s portfolio comprises Hudson Aquatic Systems, an Angola company that makes treadmills used underwater for low-impact exercise; Jasper Plastics, a Syracuse manufacturer of spas, fences, windows and doors; Leading Edge Fabrication, a Milford business that makes kitchen and bathroom countertops; and Sports Insurance Specialists, a Fort Wayne agency that insures small motorsport racetracks and other venues.
Tom Ellis owns numerous companies but wouldn’t dream of starting his own.
“I preach: Don’t start a business. Buy a business,” he said.
The Fort Wayne native looks for profitable companies being sold because the owners are retiring, divorcing, ailing or feuding with each other. Ellis avoids companies that need to be overhauled because of fundamental flaws.
Ellis has bought about two dozen companies over the past 40 years, including a local insurance provider three years ago. The businessman holds on to them long enough to pay off the loan, build up the value and sell for a profit.
In his most recent transaction, Ellis sold Better Way Partners last month to recreational vehicle maker Patrick Industries Inc. for $40 million. Better Way, which makes fiberglass components for RVs and boats, is projected to hit $50 million in sales this year.
Now, at age 61, Ellis has launched a new enterprise: the Institute for Business Acquisitions, which offers members his eight-step guide to buying companies.
Building a portfolio
Ellis grew up with an insider’s look into the hard work of running a business. His father, William, was a founder and longtime president of Ellison Bakery.
A 1976 graduate of Indiana University’s business school, the younger Ellis found his calling after a brief detour in sales.
Within two years after college, Ellis bought his first business: Carbonic Dry Ice. The owner, who delivered dry ice to customers, needed to sell because of hip problems.
Relying on his own resources, Ellis ran the company for a year before selling it to a competitor in Indianapolis.
He learned some things in those early years. Most people who buy a small business want to run it personally. But Ellis isn’t one of them.
“I’m more of a finance person than a manager,” he said.
Ellis formalized the Ellis Co., a private equity group, in the early 1990s. The legal entity allows him to pool money with friends to buy bigger, better businesses than he could alone.
Companies with $5 million to $20 million in annual revenue at the time of purchase are his sweet spot. The more partners, the smaller Ellis’ ownership share is – sometimes just 20 percent. There aren’t particular industries he won’t touch, but he prefers manufacturing, distribution and services, including insurance and travel agencies.
“I don’t really care if they make baseball bats or drain cleaner. It makes me no difference,” he said.
But Ellis does make sure the company is profitable before he gets involved. He does not invest in fixer-uppers, which differentiates him from some other local investors, including Jerry Henry, who buys companies with turnaround potential. Henry’s venture capital firm is Arlington Capital LLC.
Henry, who is also president of Midwest Pipe & Steel Inc. in Fort Wayne, looks for businesses that are beaten down or poorly managed but that have a good product. Then he makes significant changes including, when needed, new management.
“I started out buying small businesses and turning them around because I could afford them and nobody else wanted them,” Henry said.
Over time, the businessman turned his strategy into a social mission, making investments that would save or create local jobs.
Henry’s notable investments have included local buildings once owned by Fallstaff, Fruehauf, General Electric, Coca-Cola and the Zollner Pistons.
Henry referred to Ellis as a good, disciplined businessman with a different but equally valid approach.
Ellis’ strategy includes asking the seller to agree to be paid a portion of the sales price over a few years. That motivates the seller to ensure a smooth transition by recommending someone capable of running the business, he said.
“You need to hire a president that is full time and passionate about running that business,” he said.
Managing money
The first company Ellis bought after launching the private equity fund was Angola Coach, which made high-end RVs.
The investment was a good one for about five years. Then the 9/11 terrorist attacks plunged the economy into recession.
Ellis and partners defaulted on that loan, one of three times the investors have failed to pay back money at the original loan terms.
“They were always situations outside our control,” Ellis said.
Most of his investments have paid off, however.
Aaron Knight is founder of one company Ellis has invested in: 110 Athletics, which makes portable snacks that give young competitors the fuel they need to perform at an optimum level.
When Knight was searching for advice and investors, a mutual friend introduced him to Ellis.
“Tom is extremely smart,” Knight said. “He puts good management in place. He trusts their judgment and lets them do their jobs.”
Even when his ventures hit choppy waters, Ellis doesn’t panic or bail out, Knight said. Instead, Ellis trusts that his next three or four deals will more than make up for any losses.
“When you’re overly nervous about every little thing, you get paralyzed, and it’s hard to make a decision,” Knight said. “Tom’s not like that.”
Ellis thinks he’s owned 23 companies over the years. About 12 of those have been what he terms substantial investments of at least $5 million.
The investor doesn’t have a formula for how long to hold on to an investment. Some he keeps as long as 20 years, but the average is seven to 10.
Ellis has owned companies as far away as Los Angeles and Toronto, but today he considers only acquisitions within 150 miles of Fort Wayne.
A new direction
At a friend’s urging, Ellis decided to collect the lessons he sometimes shares with college business classes into one big binder.
He is offering free seminars as he markets the how-to book. Over dinner, he walks through his eight steps for buying a business.
Ellis has paid to have a website designed and manuals printed.
He hopes to offset his costs, which he estimated at $100,000. The manual sells for $499. To put the cost in perspective, Ellis said, aspiring business owners should consider that it’s less than the fee for 11/2 hours with an attorney.
The cost includes a lifetime membership in his institute and discounted admission to quarterly, two-day workshops with accountants, lawyers and business brokers.
Ellis’ website includes a FAQ section that addresses common problems because he doesn’t want to get into personal, one-on-one coaching. He also offers a 90-day money-back guarantee for those who don’t have the personality needed to buy a business.
And not everyone does.
A franchise may be a good option for someone who wants to be hands-on with the business but needs training and support, Ellis said.
Those who buy a stand-alone business need some savings, a tolerance for risk and a bit of savvy to make sure they’re not buying a has-been,he said.
“Don’t quit your job to go out and do something like this,” he added.
For additional information regarding Florida business sales, acquisitions and valuations, please contact Eric J. Gall at Eric@EdisonAvenue.com or 239.738.6227. Also, visit our Edison Avenue website at www.EdisonAvenue.com or my personal website at www.BuySellFLbiz.com.
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