Interview by Mike Sullivan
Hi, I’m Mike Sullivan. Thanks for joining us today on M.O, where we feature entrepreneurs and small business owners and then bring you hints, tips, insights, and perspectives on what it takes to be successful.
Joining us today is Jim Patton. Jim’s got a very interesting background. He started out as an HVAC repairman, and he since built up his company KPAC Solutions. He learned how to do mergers and acquisitions on his own, and today his company buys and turns around distressed manufacturing companies. Jim also wrote a book, “Life in the Turn Lane.”
Jim thanks for joining us today. Can you start by telling us a little bit about your background and maybe leading up to your first failure, or your first major failure, what you learned from that, and tell us a little bit about your first success as well?
Yeah, you know I wish I could do that in a simple sentence. But like a lot of people it’s almost a road that you can’t backtrack and get to. I did have an entrepreneur heart though, as a youngster. I chose not to attend a university. I went to a two year heating and air conditioning school, thinking that everybody was going to need heating and air conditioning at that time. I was 18 years old, or almost 18. I graduated from high school early, because my father was in the air force. So once I got out of the school, after working a few months, the owner of the business came up and he put his arm around me and said, “Jim I’m going to fire you. I’ll tell you right now, because you are terrible at fixing air conditioners.”
I guess I should have picked up on that myself, because I was always the mechanic in school when we took apart something and when we put it back together, I always had parts left over. But nevertheless, it was a devastating time for me. When he let me go, it was right at Christmas, and it was my first job out of school. I really didn’t know what I was going to do. But I did manage to land a job in the electrical field. It was wiring up the trains that are now used in Washington D.C. So I have a legacy of doing some electrical work, in all of those trains that run the mass transit around Washington D.C. From there I had exposure to the manufacturing world, and just with a stroke of grace from God, I was able to get into the industrial engineering department.
It’s a real funny story that I’ll have to tell you about when we have more time. In the industrial engineering department, for the company called Rohr, they actually had a training program, and I learned a lot about industrial engineering and the manufacturing applications. Well, they did not receive an extension to the 300 cars they were building. So that came to an end, and I went to work from there to another manufacturer and another manufacturer and another manufacturer after that and got some exposure. I knew I loved the manufacture world.
I ended up back in the heating and air conditioning business, but as a manufacturer’s rep. So I had a territory. I was calling on distributors and selling the equipment. One of the businesses that I was working for was owned by a parent company out of New York, and it got bought out. I asked one of my friends – I was 25 years old at that time – and I said, “How does that buyout work?” He said, “Well, get the Wall Street Journal. It’s in the story, news headlines.” So I went to the library, thinking it was a book. The librarian said, “Son, that’s a newspaper.”
The reason I tell you that story is it is possible for people to achieve independence and achieve entrepreneurship. It doesn’t always happen in the most traditional way. With me, I continued to read the Wall Street Journal for about ten years. At first it made no sense, but story after story, piece by piece, and I was fascinated by it. I kept reading and finally learned enough to where I thought I could do a deal on my own. I was always dabbling in little businesses. I had a video rental business. I had some tanning, spa interest. I had some little business size . . . we had a computer time sharing service. But I never did have a business of very much size.
So when I was ready to make my first major entree into a business, I bought an old dilapidated tool and dye and metal stamping company. It had 40,000 square feet, and it used to employ about 400 people. But the owner had let it really go out of business. So I bought it and I paid too much for it. It turned out to be a colossal failure, and it took everything I had. It took my money that I had when I worked as a manufacturer’s rep with the air conditioning company. It took my 401K.
I had employees. As I was building the business back up, I was deducting the taxes, and I didn’t send those in, which is an absolute thing you should never do. At the end, I had a couple credit cards that were maxed out, and I had a bank loan. They foreclosed, and the previous owner took it back from me. I remember, I’ll never forget, Michael. I was sitting on the hillside with a good tennis buddy of mine, and he said, “What are you going to do now?”
I just sat there in utter disbelief that I was in this predicament. No money. I had a wife, with a 3-year-old son. We were in an apartment, because I had sold my home and put all the money in that, and really didn’t have enough money for the next rent. I said, “You know, my life is over. It’s just over.” But I had my credit rating. That was the only thing I ever had to begin with.
So from there, I had the opportunity to make an acquisition with this friend. He said, “Well, what did you learn from that company you bought?” I said, “I paid too much for it.” And he said, “Well, I guess that’s a tough lesson to learn.” He asked me to look for an acquisition that was in his line of work, and I was fortunate enough to find one.
That really gave me the platform that I work under now, which was almost 20 years ago, when I finally made an acquisition in the overhead power line construction business with my friend who was in that business. That really established a profitable beginning for what I do now.
Jim, your business of mergers and acquisitions must be very risky and difficult. Can you tell us some of the things you look for to try to ensure success?
Well, it’s hard to ensure success for sure. What we do look at though is the competition in the marketplace and the position that the company has in that marketplace and also the efficiency of the operation. We focus on distressed manufacturers, so we are constantly looking at worst case scenarios, which is liquidation. Although we’ve never liquidated a business and we’ve never shut one down completely, we always look at that as a worst case scenario, and we develop an acquisition model, a financial model by looking at the liquidation value of the equipment and what we call PP&E – Plant, Property, and Equipment. That’s one of the most important components that we use to ensure that we’re not going to pay too much for a business that we’re going to turn around.
Tell me about the book, “Life in the Turn Lane.” Is there information in the book that will actually help us understand mergers and acquisitions and how that works? And are there any lessons to be taught?
Well, the book is about my life before making acquisitions the size of companies that I make now, and it’s a story of how I overcame the major catastrophe that I spoke about earlier, in that colossal failure, to the point where I’m at now operating a global M&A firm, where we specialize in acquiring manufacturers around the world. The book is a story about the principles and the, we call them, the Patton principles, as they are nicknamed, about what I did right and a lot of cases some of the times I did something wrong, and we’ve got that highlighted in the book as well. Then there are appendices in the book that actually, with detail, show the modeling of how we value an underperforming company and also how KPAC is organized and structured from a business standpoint.
As you’ve mentioned, you’ve experienced failure. What can we learn from that? Or what did you learn from that, and what should the next steps be?
Failure is hard, and you can’t deny the hurt and the consequence of it or try to hide it. I learned that you have to put it behind you, and you have to look at your strengths and focus on your skill sets and never give up. In my case, I fell to my knees and prayed to God for him to save my business, and, unfortunately, that wasn’t in the plans. That was the first business I lost. But to get back up and try again is the story of success of many entrepreneurs. You just never can give up. You learn from your mistakes and move on.
Okay, Jim, thanks. I appreciate the information you’ve shared with us today. It was very helpful, and we’ll talk to you soon. Thank you.
It was nice meeting you, Michael.
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