When Doctors Think They are Great Businessmen
I grew up in a family of physicians in a small town in West Texas. Many of my neighbors were also doctors of some sort and in their own right were very successful with regards to their prospective professions. I was always amazed by their intelligence and their ability to cure people of their illness, especially the surgeons. I thought these guys are smart and really making a difference.
However the very nature of their intelligence and success ironically was also their downfall at least from a business perspective. In comparison to most other professions doctors have always been at the top of the earning’s curve. Only your mega investment bankers, CEO’s and hedge fund managers bring in much higher paychecks. In any case the earnings of a doctor can provide for a nifty source of investment capital as was the case when 4 of my neighbors who were all physicians decided to pool their money together, raise more capital from other investors and buyout a struggling vending machine company that made hot French fries. Just like a soft drink vending machine, you would put money into the machine and in just a few minutes it would pop out hot french fries. At the time this concept was a novel idea but the technology to make this seamlessly work was way ahead of its time. In total $15 million was raised to buyout the company much of it from the original investors. An oilman who lived in the neighborhood also kicked in a substantial amount of capital. The company was essentially a start up and had no revenues and only a prototype. However it already had the overhead and expenses of an established company. In a few short weeks my neighbors bought out the company called KFI International. The story made front page of the local news paper and all of a sudden not only were my neighbors known to be great doctors but also hailed as great businessmen.
At the time I was 17 years old and although I had a fascination for business I did not quite understand what it actually took to run and grow a company. Little did I realize that I was getting a first class real life education in how not to buy a company.
About 2 months after the company was bought out a meeting was called at the company headquarters in Colorado Springs, Colorado. People in attendance included company executives, franchise owners and the new owners of the company. Not in attendance was the previous and sole owner of the company which I will not name. When asked about why he was not in attendance I was told that he went back to South Africa as soon as the company was sold, $15 million check in hand. I found this rather odd but then what did I know.
When I arrived at the company grounds, I noticed that the two story building resembled a large log home that blended well with the scenic back drop. I also noticed that there were five bright red BMW 530’s parked side by side as well a full length decked out recreational vehicle with the company logo plastered on each side of the RV. I asked one of the investors who owned all those BMW’s? He responded that they were company cars as well as the huge RV. There was even a company lear jet. To a 17 year old all those fancy modes of transportation was pretty cool especially the jet but as you probably suspect those fancy modes of transportation were nothing but a bunch of red flags.
After the meetings ended on Friday, we drove the next day to Cheyenne, Wyoming to visit the manufacturer of the vending machines. What we saw was the prototype as the machines were not ready for mass production. Matter of fact the manufacturers could not even get the prototype to work that day. But hey we did have a fancy brunch with the CEO of the company afterwards. How cool was that, a 17 year old sitting next to a CEO talking business. When the check arrived, I noticed that we had to pay the bill. Funny I thought, should not the CEO be wining and dining us since we were paying him a lot of money to make the vending machines?
The company had been set up as a franchise operation in which franchisees would own the legal rights to develop a certain territory. KFI International would earn revenue by leasing the vending machines to franchisees and getting a small cut of the revenues generated by the vending machines. The company also generated revenue by charging franchise fees to develop those territories. When the company was bought out about 35 franchisees had already paid the franchise fees to KFI and were simply waiting for the machines to be developed. It turns out that the $15 million price tag only included the prototypes. We still had to pay the manufacturer a bunch of money when the machines were ready for mass production. In order to do this we had to raise more capital and find more willing investors. Several months went by and unfortunately we found no takers. About the only development worth noting was that company headquarters was moved to Dallas, Texas mainly because the COO lived there. The new headquarters were much more modest.
It was then I started to ask myself what in the world did they exactly buy for $15 million. There were no machines but yet there were company cars, an RV, fancy looking digs and yes the cool lear jet. I guess they did buy a brand, thirty -five ready-to-go franchisees and the patent technology to developing the vending machines but other than that did they really buy anything of value to the company? There were no revenues, a company that was fully staffed (which meant inflated salaries had to be paid) a product that still has not been developed and thirty-five paid franchisees waiting patiently for the machines to be completed.
Almost a year went by before the prototype was finally ready for mass production but unfortunately my neighbors were unable to raise any more additional capital for mass production to start. To keep the company going during that year they sold all of the outlandish and unnecessary luxuries except one BMW (they should have sold all of them) and used the cash for salaries and business development costs. By September the layoffs began and by Christmas the company declared chapter 11 bankruptcy. There was one last attempt to raise money during late February the following year and when that failed the company declared chapter 7 bankruptcy. I noticed during that Christmas season none of my neighbors decorated their homes with those flashy red Christmas lights. Their entire investment was lost.
As I reflect on this story, I have nothing against doctors who want to give entrepreneurship a try. If you look at the Forbes 400 of wealthiest people in America some of the people on that list are former practicing physicians. The most notable doctor is Philip Frost, MD who has been on the list for many years. Matter of fact I encourage doctors of all types to be entrepreneurial. To the minimum being entrepreneurial will at least help their professional practice succeed from a business standpoint. If they decide that they want to venture off beyond the scope of a traditional practice I offer the following advice:
1)Put your ego aside. Just because you sport an MD or DDS degree or whatever does not mean your intelligence will ensure you a greater degree of business success.
2)A larger paycheck basically just means that you have more to lose. Invest that money as if you were only earning minimum wage.
3)Don’t be left holding the bag. If an investor comes to you with an exciting investment opportunity there’s a chance that the smart money has passed on the opportunity and so the next best thing are the doctors since they have money and are eager to sometimes throw money at any opportunity that sounds half way decent. There are many genuine opportunities just be sure to do your homework and then some.
4)Don’t get suckered into the “herd mentality”. Doctors tend to feel left out and don’t want to miss out on the next big thing.
5)Your best chance of success will most likely be in something that relates to your professional practice and knowledge base. For example, much of Dr. Frost’s business success comes from the pharmaceutical industry.
6)Put your arrogance aside. Don’t insist being addressed as doctor. Bill McGuire the ex-CEO of United Health Care liked to be address as Dr. McGuire. Sometimes the business community will frown upon you simply because you are a doctor.
7)Consider getting an MBA. There are MBA programs catered specifically towards physicians and dentists in which you can maintain a full work schedule while going to school. An MBA won’t ensure automatic success but it can increase your chances being that you come from a medical background.
8)Insist on a board of directors or an advisory board with experienced business people especially within your particular interest. Don’t form an advisory group full of other doctors. Get help and communicate with these people regularly.
9) Spend money to hire the right people in the beginning to help you, it will save you a lot of money and headache in the long run-maybe prevent you from losing your entire investment.
10)Don’t think you know it all. Don’t think you can do it all. Matter of fact you don’t know a damn thing.
11)Make sure you have the support of your significant other especially if you have a family.
12)If you fail pretty much the entire hospital is going to gossip about.
As for my neighbors their biggest mistake was that they did not know what they were buying and did not hire the right people to perform the due diligence. They bought a company that had spent money on all the unnecessary luxuries before there was even a hint of any revenue much less a proven product. For many years my neighbors did not talk to each other after the company went belly up. One even moved to another part of town just so that they would not have to cross paths on the same street. Luckily they all recovered financially and in time the whole ordeal was pretty much forgotten by all -10 years later.
