Small Business
Selling out but staying on
October 11, 2000: 12:15 p.m. ET

Work is your world, so how do you stay in the game after selling your company?
By Jane Applegate
graphic graphic
NEW YORK (CNNfn) - On Aug. 31, Howard Sherman, CEO of Roundhouse Inc., was rushing to pick up his daughter, Annabella, from preschool when an e-mail message flashed on his computer screen: "The deal is done -- the funds are flowing." "There was no place for my emotions to go," recalled Sherman in an exclusive interview. "Seven years of brutal work had led me to this moment."

Having built Roundhouse, a maker and designer of CD storage products, into a $40 million success story, Sherman and his team opted to sell out to Targus, a major manufacturer of computer carrying cases. Terms of the deal were not disclosed, although Roundhouse received a combination of stock and cash.

Still in shock at the finality of what he had done, Sherman called his wife, actress Sela Ward, but could not speak. He hung up, drove to a coffee shop, bought a cup of coffee and called her back from the car. "It was a very strange time for me," Sherman said. "I had gone through eight months of misery, dealing with the financial people, my management team and our backers. I hated life. I wondered, why are we selling when sales are up and things are so good?"

At one point, when an initial investor was fighting the sale and Sherman was ready to back away, his investment banker called him with this blunt message: "'You make frigging CD cases, Howard,' he told me," said Sherman. "'You guys didn't change the world.'"

How the world changes

But every entrepreneur knows that your business is your world. And selling your business radically changes your life. The emotions associated with letting go are deep and powerful. You have to deal with relinquishing power and responsibility. You have to report to the home office and be accountable to a new layer of upper management.

Day-to-day, operations are supposed to remain the same; Sherman and his top managers signed three-year employment contracts, but fundamentally they have changed. They all work for a very big company now.

"There were three reasons we bought Roundhouse," said John Sargent, vice president of communications for Targus USA, based in Anaheim, Calif. "Products, customers and design."

Sargent said Targus employees joke that the company makes computer cases in two colors: "black and dark black." "We wanted to expand our thinking and reach younger computer users with a line of modern, sexy different colors," said Sargent. "We also liked their management team. They are good guys."

The good guys are founding co-presidents, Scott Oshry and Sean Brosmith. Executive vice president of sales, Jeff Magsitza, also was asked to stay on after the merger. When Sherman, who has an MBA from Harvard Business School, joined Roundhouse in 1993, it was basically a 3-year-old design studio run by a couple of struggling young graphic artists. They revolutionized CD storage with the philosophy that "good design doesn't have to be expensive." Roundhouse is probably best known for a Rolodex-style alphabetical CD storage unit, as well as trendy plastic cases and attractive CD storage units.

Adding some business savvy

"When I got here, the founders were doing a few design projects that put Top Ramen on the table," Sherman recalled. They recruited Sherman to add some business savvy to the management team. After graduate school, Sherman founded two small consumer-products companies and a company that created amenity programs for high-rise office buildings. He brought his management expertise and money to invest. They had talked about selling out eventually, but nothing materialized until about a year ago. They were introduced to Targus through an investment banker who said it would be "a natural fit."

graphicNegotiations heated up at the end of last year. When the founders finally sold the company to Targus in late August, it had grown to 16 designers, 200 employees and two locations, a facility in Rancho Dominguez and a high-tech design studio in West Los Angeles. Sherman, who has an office in the design studio, said Roundhouse will maintain its West Coast locations as well as its branding.

So far, not much has changed around the office. To celebrate the sale, they threw a party at Patina, a trendy Los Angeles restaurant that Sherman always thought was too expensive for a company party. A few days after the deal closed, two of Sherman's colleagues went out and bought $100,000 Porsches.

"We still feel like it's our company," Sherman said. "I still run it. I have the same power and authority, but now I have a CFO to report to." He said his greatest fear is dampening the wild, entrepreneurial spirit that fueled the company's rapid growth.

"We'll water it down, but won't drench it," he laughed. He said the upside of being acquired by a much bigger company is finally having the financial resources to grow quickly. "We'll be able to quit saying 'no' to good ideas that we just couldn't afford to try before."

What to wear, what to wear

One of Roundhouse's first challenges was deciding what to wear to the Consumer Electronics Show trade show. Roundhouse reps were used to wearing cool, black Armani suits -- Targus reps always wore slacks and polo shirts with company logos.

"We had to have a meeting about what to wear," said Sherman. "The compromise was to wear black sweaters and slacks!"

Although the top five managers will remain on board, there will be some jobs lost in the human resources, accounting and warehouse divisions, Targus' Sargent said. He said the Targus management team is very excited about the acquisition, which instantly added $40 million worth of business to the privately held company.

"This acquisition will get us close to $500 million in sales next year," said Sargent, adding that the company plans to expand sales of Roundhouse products in Europe next year.

"We are not looking at this acquisition as a way to knock off a competitor," he said. "This was a very strategic acquisition. They came out of nowhere to build a great brand, and they've done a great job."

(Jane Applegate, a syndicated columnist and author of 201 Great Ideas for Your Small Business, covers small business for CNNfn. "Succeeding in Small Business" appears on on Wednesdays.)
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