Acquiring Distressed Assets the ASP Way

Paladin Corporation is technically an acquisitions group. Its overall objective is to acquire distressed businesses which have good potential cashflow, turn them around, and develop them into “cash-cows” to fund the largescale initiatives which Paladin undertakes to change culture in the Australian marketplace.

With this in mind it is imperative that Paladin conducts the acquisitions in a manner that leads to prosperity for all parties and stakeholders in the transaction, including the vendors who themselves are likely to be facing financial hardship and distress at the family level. When businesses fail, family relationships tend to suffer; they go hand-in-hand. Since 2001 the slogan for all of the 32 Paladin companies has been “That All May Prosper”.

CEO and Managing Director of Paladin Corporation Dave Hodgson, discusses one of their acquisitions whereby they utilized the policy embodied in their slogan.

“One of the earliest acquisitions of the Paladin Group was a two million dollar women’s health club. This is a large five-star health club with a staff of over 60. It is regarded as one of the most upmarket women’s health clubs in Australia.

My wife Merlene has been the managing director of this club since 2007. In 2011 it became known to Merlene that a competing women’s health club in the region was “having difficulties”. This was not an upmarket club and the memberships were much cheaper and services provided were of a much lower standard.

Merlene came to me and asked if we should go and offer any help, maybe a friendly hand, or even offer to buy her out. We agreed that Merlene should approach the owner of the distressed club and offer assistance, including the opportunity for the lady to sell her club to Paladin for a generous price. The owner of the distressed club was somewhat indignant as might be expected and she declined the offer. However, Merlene developed a friendly relationship with this lady, and reminded her that we were available if needed.

About six months later the distressed club was on the verge of collapse. The revenues had dried up, the bills had mounted up, and the owner was about to lose everything as the landlord foreclosed on the lease. To complicate matters the lady who owned the club was now heavily pregnant and was not coping with the stress of financial collapse and the associated social shame.

This lady contacted Merlene and asked if Paladin would buy her club. She was desperate and would accept any offer. She had already approached other health clubs in the region and nobody was willing to buy her out.

Once again Merlene asked me what we should do under the circumstances. We decided we would purchase the club, and we formed a plan whereby if the vendor worked hard at the sale, she could make some really good money out of the deal. Since I was the “specialist” in the field of acquisitions Merlene asked me to take over the negotiations.
I contacted the vendor and advised her that we had formulated an offer to purchase her business with the deliberate intention to ensuring that

she was given an opportunity to make good money from the sale, while at the same time ensuring that Paladin benefited from the deal.

The offer was presented as follows:

1. We would buy her club for the same price we had offered 6 months ago, despite the decline in value.
2. We did not want the premises and would ensure there was sufficient money in the purchase offer to pay out the lease.
3. We only wanted the members and the equipment, and therefore I explained to her if she contacted every member that had ever walked through her door, every person on her database, and all past and present members and staff of club, and sent them over to Paladin’s club, we would pay her a significant amount for each one that joined our club. This payment per member was over and above the fixed price for the business itself, and it was based on an escalating scale – the more members she sent us, the higher the price for each member.
4. This offer stipulated that each member would be accepted into Paladin’s five-star club for free until their existing membership with the distressed club expired. We knew that if these ladies had the opportunity to train in our club they were highly unlikely to ever go back to a lesser establishment. Our staff are trained to utterly spoil our members and we knew these girls would sign up with us once their existing memberships expired. This meant that eventually Paladin would have hundreds of new long-term members and less competition in the region.

What happened next was very much what we had expected. We paid the vendor for her club and equipment. The lease was paid out and the vendor paid all of her creditors. Then she set to work on calling members and encouraging them to join the Paladin club for free. This was an offer too good to be true for these ladies and they joined our club in their droves. As each one walked into Paladin, the vendor was paid more and more on an escalating scale.

At the conclusion of the transaction the vendor walked away with much more money than she could have envisaged, she went on to have a comfortable pregnancy and childbirth, we prospered from loads of new memberships, and to this day the vendor is one of our greatest advocates.

In conclusion, it should be noted that we had two option when the vendor came, hat-in-hand, to plead for a sale. We could have taken the typical greedy, self-centred, marketplace approach and fleeced this lady, leaving her in debt, and financially destitute. We would have saved some money on the purchase price, and would have scored a few new members. The vendor would have gone on to have a very distressed pregnancy, given birth to an angry baby, and would have had to enrol in the social security system. Or we could have acquired her business the ASP way, whereby it ensured the vendor prospered, Paladin prospered, and nobody had to go on to the welfare system.

In this case, as in ALL cases, Paladin chose the ASP way, because by doing this we ALL made a lot more money out of the deal, and we ALL came out far better off than if Paladin had maximised its own interests at the expense of the vendor, and nobody was impoverished. This impacted all the stakeholders in the deal, including the staff and members of both clubs, and it effectively changed all of their mindsets on how an acquisition should be conducted.
I want to conclude by mentioning that the vendor walked away with her dignity intact. My point is we did not give her a handout; we compelled her to work for the memberships and this meant that she actually earnt the prosperity. This is a crucial criteria to trading the ASP way. Handouts do not work in the long term. “This is the Biblical principal of “gleaning” practised in the modern era”.

We do not do it because it is in the Bible, we do it because IT WORKS!

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