Founders - #45 Built From Scratch: How A Couple of Regular Guys Grew The Home Depot from Nothing to $30 Billion

Episode Date: November 5, 2018

What I learned from reading Built From Scratch: How A Couple of Regular Guys Grew The Home Depot from Nothing to $30 Billion by Bernie Marcus and Arthur Blank. ---The creation of The Home Depot began with two words: "You're fired!" [0:01]Blinders on focus on the customer [5:45]Learning how not to manage people from Ming the Merciless [8:37]Meeting Ken Langone / the prehistory of Home Depot [11:00]81% private / 19% public partnerships [18:40]Ken sells to Ming. Predicts Ming will fire Bernie [28:30]Getting fired was the best thing that ever happened [35:00]Bernie Marcus at 49 years old: little cash and a ruined reputation [38:15]How Bernie Marcus walks away from Ross Perot [38:50]The importance of equity [49:19]Do not work with people who don't know how to care about other people [51:00]How they got the money to open The Home Depot [55:30]The critical importance of selling at the right price [58:32]Knowing the right way to do something by seeing it done the wrong way [1:08:54]Mistakes can teach us we're never as smart as we think we are [1:11:25]  ----Founders Notes gives you the ability to tap into the collective knowledge of history's greatest entrepreneurs on demand. Use it to supplement the decisions you make in your work.  Get access to Founders Notes here. ----“I have listened to every episode released and look forward to every episode that comes out. The only criticism I would have is that after each podcast I usually want to buy the book because I am interested so my poor wallet suffers. ” — GarethBe like Gareth. Buy a book: All the books featured on Founders Podcast

The creation of the Home Depot began with two words in the spring of 1978. You're fired. Twenty years ago, we were two out-of-work executives. Our situation was not a lot different than millions of others who were shown the door. We had little in the way of capital and faced some daunting personal and legal challenges as we tried to get our careers back on track. In our early years, we lived on the edge, with no balance sheet and a lack of financing. It took great romancing to establish the vendor base necessary to open and maintain

the broad product selection for which we quickly became known. We were always pushing boundaries beyond where our industry's conventional wisdom suggested we could go. Building the Home Depot was a tough, uphill battle from the day we started in a Los Angeles coffee shop shortly after we were fired. No one believed we could do it. While we want to tell the story of the Home Depot because it's a great entrepreneurial tale, our larger goal is to convey what we learned along the way about customers, associates, competitors, growing a business, building a brand, and many other topics everyone in business needs to know. This book is the story of that virtually unparalleled growth

and the values and culture that nourished it. Okay, so that is from the introduction of the book that I want to talk to you about today, which is Built from Scratch, How a Couple of Regular Guys Grew the Home Depot from Nothing to $30 Billion. And it's written by two of the many co-founders of the Home Depot. It's written by Bernie Marcus and author Blank. Before we get into the rest of the book, I just want to remind you that I need your support for this podcast. So once we jump back into the book, I'm not going to interrupt our time together with ads.

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member, please go to founderspodcast.com forward slash support. Or you can just look in the show notes and you'll see a link and you can just tap on it right there. The second way that you could support this podcast is by signing up for Founders Notes. If you want to do that, you go to foundersnotes.co. And just like I take a lot of notes and highlights when I'm reading a book, which is the result of Founders Podcast, I do the same when I'm listening to podcasts that I'm learning from. So Founders Notes are my podcast notes about entrepreneurship. I listen to podcasts with company builders, write down their key ideas, and email them to you every Sunday.

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And I'm going to skip. See, since this book was written by two people, I'm going to skip over most of their early life, which is where I normally like to start off and spend time on the podcast. But I want to talk about a lot of the stories. I would call it the prehistory of Home Depot because it's all these events that had to occur for Home Depot to be able to exist. We're going to start out, most of the book I would say is written by Bernie Marcus, which is, he was the CEO in addition to being one of, I think there's five co-founders. He was the CEO for a long time and he kind of is the main character in the book. So we're gonna start out when he is already

in his 40s and he is he's an executive in a lot of retail companies and this is the experience that he's gathering before we get to the founding of Home Depot. But it's important to understand so you understand how Home Depot came about. So at the time, he's working for this retail company called Two Guys. A lot of the companies they work for, both him and Arthur, are conglomerates. So I'm just going to start here because it informs how he winds up getting to Home Depot. And the important part is, the note I left myself is that when you're building a business, you should have blinders on like horses do in a race. And your blinders should just be on what's best for the customer. And yet a lot of the examples that we

talk about in the podcast is like everybody focusing on competitors, which is not a good idea. So it says, as a conglomerate, Two Guys was a disaster. People in the company focused on their own careers, not the customers. As a result, the customers disappeared and careers sank. The history of retailing is filled with once great companies that disappeared off of the face of the earth. Two Guys included. I carried the lesson I learned about the importance of customers throughout the rest of my career. And so he leaves two guys and he starts working for a company called Odell and then eventually leaves Odell for another huge conglomerate called dalen corporation and dalen corporation is going

to be the last job he has before he starts um before he starts home depot and so we're going to spend some time uh understanding a little bit what he was doing at dalen because it's really important to the story but i want to just read this paragraph so you have an understanding there's a lot of um i see like myths and entrepreneurship propagated all the time that like oh if you don't start a company when you're really young uh that's it's gonna be too late well one if you do know what you want to do from a very young age then yeah you have an advantage but it's definitely not too late and so this is bernie marcus's life the status of his life before he starts Home Depot. And it says, I never had any real money to speak of in those days, despite holding lofty titles

in some of America's best retail companies. And he's going to get to why this was and the importance of equity in a little bit. And by 1972, so this is roughly six years before he gets fired and about seven years before september and by 1972 i had an ex-wife two kids in college and a new wife another child and another child no matter what i was paid it wasn't enough real money is in equity and that i didn't have and there's no i have another story coming up about that too. But when I was handed the reins to another Dalen chain, remember Dalen is a conglomerate, handy Dan home improvement centers, it forever changed the course of my mind of my life. So he's going to be running this. I think there's about by time he leaves the company is about 60 plus stores of these handy dan home improvement centers

which are basically like smaller versions of what you would what a home depot or a lowes is today and there's two important i'm going to introduce you to two important characters in the lore of home depot and the first is this guy named sandy sigaloff and we need to think of him as like the anti-Bernie and this is the boss of this huge conglomerate called Dalen Corporation and Bernie learns basically everything about what not to do when running a business. Him and Sandy are they do not get along and we'll see I'm going to go into this great story in a minute and the second person I'm going to introduce you to is this guy named Ken Langone. And let me start here before I get into Ken Langone. Because when I ordered this book, it came in the mail.

I looked at it, and I made the mistake of judging a book by its cover. I'm like, oh, man, this might be corny. Like, I don't know. Like, am I going gonna waste my time and by the time I got to page I would say 54 I was genuinely worried about how many notes and highlights I had it was that interesting because there's so usually when when what I like about when entrepreneurs write their autobiographies as opposed to books written about them even though those are helpful as well is there's just no fluff

so these guys just shoot off story after story after story. And I don't actually have to sit there and pick apart what they mean. They explicitly tell you. So out of all the characters and the crazy stories in this book, which there are numerous ones, nobody sticks out more than this guy named Ken lenko who becomes eventually one of the uh co-founders of um of home depot so let's talk about sandy first and we're gonna get into ken and we're gonna see how they all have led to the founding of home depot so it says this is bernie now writing he says he called himself ming the merciless it wasn't a nickname used behind the boss's back the sign sign on the CEO's

office door at the Dalen Corporation impressed upon all who entered how proud Sanford C. Sandy Sigaloff was to be known as Ming. Ming, of course, was the villain in the old Flash Gordon movie serials of the 1930s. He was a nice looking, they're talking about Sandy now, he was a nice looking, sharp dressed man, very smooth, slick, and articulate. A chief executive who couldn't just fire an underling and get on with business. When people leave Sigalov, he once told me in a coffee shop, it was very important that he affect them economically, emotionally, and physically so that people think twice before they ever turn on him.

I was shocked at such tactics. When you treat people like that, it comes back to haunt you, I said. People are fearful of you. But Sigalov wanted people to be fearful of him. He didn't want to let a person out with dignity. He wanted to see them destroyed. That was his style. He didn't call himself Ming the Merciless for nothing. So Bernie hates this guy, but he has to work on Durham for several years.

So now we're going to meet Ken Langone. And well, let me just go right into it. Gary Urobaum once ran a small chain of Philadelphia-based home improvement stores called Panorama. In 1976, Eurlbaum and his investment banker, Ken Langone, talked about the future of Eurlbaum's industry. So this is the home improvement industry in the mid-'70s, okay? Let's start with a benchmark of who is the best in the business. Langone said, who do you think are the best operators? The best is a company of California called Handy Dan, Erbom said. That worried Langone. Gee, Gary, he said, if my memory serves me right, those guys are in bankruptcy.

If that was the fate of the best, little old Panorama didn't have a prayer. I think that while the majority of Handy Dan is owned by a company named Dalen Corporation, 19% of it is owned by the public, Erlbaum said. So we're going to get into this, which I had never heard of before. I guess in the 70s, a bunch of companies did this where they would sell up to 19% of the company and retain 81%. We're going to learn more about why they did this where they they would sell up to 19 of the company and retain 81 we're going to learn more about why they did this and why it was a disaster so it says majority of handy dan is owned by a company named dalen corporation 19 is owned by the company and urban is telling ken lingone he said listen dalen went into bankruptcy but handy dan didn't later Later that same day, Langone got his books packed with data on publicly held companies.

Not only was Handy Dan not bankrupt, it was a solid company doing very well, despite the woes of its parent company. Handy Dan Home Improvement Centers began in 1955 as a small hardware store. Two decades later, it was under our management and had become one of the nation's most respected and successful home improvement chains. So Bernie is running Handy Dan Home Improvement Centers, which is just a subsidiary of this giant conglomerate called Dalen, and at the top of Dalen is Ming the Merciless Sandy Sigaloff. So Langone's discovering this hidden jewel.

And he says, Langone was further intrigued that it was selling for $3 a share and it appeared likely to earn $1.50 a share. Even in 1976 terms, that was awfully cheap. Earl Obama, so this is the guy Ken's talking to, had mentioned that he and I were good friends. So Bernie and him were good friends. A relationship began when I had considered acquiring Panorama.

And while ultimately passed up the deal, a close personal relationship blossomed between us. Langone asked Earl Obama to call me and make an introduction. So now we're going to see this character. And Ken's going to be present throughout this entire book. But it says, Bernie, Erbom said, this guy, Ken Langone, wants to meet you. He is a very tough guy, really tough. This is one of the most aggressive people I've ever met. He's a tough businessman, and he can be overbearing, but I swear this is the most honest, ethical man that I have ever met in my entire life. And when he tells you something, you can

believe it. I have more trust in Lingone than I do anybody in the entire world. So he says, intrigued, I said I'd certainly take Lingone's call. Half an hour later, the phone rang and I heard the following statement. I think you have the greatest company I've ever seen in my whole life. You run the greatest business I have ever seen. That said, Lingone was still suspicious of Handy Dan's numbers. This doesn't make sense, he told me. You're gonna make a dollar fifty a share? Yeah, after taxes. In that case, Lingone announced, I'm going to buy every share of stock I can in your company, and I would advise you to mortgage your house and buy the stock, because this stock is going to go straight up.

Langone, who later joined us as a co-founder of the Home Depot, was a man who formed instant irrevocable opinions about people, and I, he decided, was the kind of man with whom he could do business. Would you mind if I came to see you sometime, Langone asked. Sure, sure, I said. Anytime you want, come out. Anytime you want to come out, fine. Good, Langone said. I'll see you tomorrow for lunch. Langone seemed very excited. He took the first flight out of New York the next morning and landed in Los Angeles by 1130 a.m. in time for lunch. Still overwhelmed by the speed with which with Langone operated, I took a more cautious approach. And this he's about to describe Langone based on what I've read about Ken.

This is a great one sentence description. Langone was like a fire hydrant let loose. Langone was the single brightest, most energetic person that I have ever met. I just want to pause here for a second. Bernie is writing this, I think today Bernie is in his 80s. And at the time he's writing this, he's in his 60s, had a lifetime of experience dealing with people and all kinds of businesses, had an amazing life experience. And that's a hell of a statement that out of everybody he met, he said, Lingone was the single brightest, most energetic person that I've ever met.

He is intuitive, smart, and a real street fighter. Over lunch, Lingone described his background and how he represented a group of investors who had every intention of buying up Handy Dan stock. He asked pertinent questions. The more he learned about the business, the more he realized how undervalued our company was in part due to the Dalen bankruptcy and his enthusiasm only grew. And this is a result of his enthusiasm. As soon as he returned to New York, he and his enthusiasm only grew. And this is a result of his enthusiasm. As soon as he returned to New York, he and his investors started buying every share of handy Dan stock that came on the market, more than 400,000 shares in all,

at prices ranging from $3 to $12 a share. Now remember that, 400,000 shares, $3 to $12 a share. That's going to become important in the next few pages. So Ken has made his move. He winds up acquiring every outstanding stock. Now remember, they only sold 19%. So 81% of Handy Dan is still owned by Dalen. And the only stock that he couldn't get his hands on was owned. There's like 50,000 shares owned by Dalen. And the only stock that he couldn't get his hands on was owned,

there's like 50,000 shares owned by a church. And Langone didn't buy that. So it says, now that he possessed so much Handy Dan stock, Langone personally visited every one of the company's stores. We became fast friends, our relationship growing far beyond a common desire to see Handy Dan grow. It's very uh i think bernie he might even explicitly said this in the book i don't remember but there would be no home

depot without ken lingo i said we generally enjoyed each other's company and socialized whenever possible now we're gonna go back to the evil guy ming okay so Sigalov, of course, was more than a little curious about who was buying up all the handy dance stock. So I arranged a meeting. It was all handshakes and politeness on the surface, but that was as good as it ever got between Langone and Sigalov. Neither liked the other, and they never would. Sigalov viewed Langone with suspicion. Langone didn't care for Singaloff's attitude toward me This is a really bad guy, Langone said after his first encounter with Singaloff This is a guy that you can't trust and that would kill you in a second Now, we're going to get into this unique ownership structure

That was taking place at the time I don't know if it still exists today, but I've never come across it before. And how this had unintended negative externalities that lead to a big payday for Ken, a really bad day for Bernie, and the beginning, the birth of Home Depot. So it said,

Handy Dan wasn't the only U.S. corporation in the 1970s that was held by an 81% private, 19% public partnership. A number of holding companies like Dayland sold 19% of their wholly owned subsidiaries, such as Handy Dan, to the public. The holding companies kept 81% on the belief that the public would unlock value in the asset, creating a higher value so that the 81% would be worth much more than if it were completely private. For tax purposes, the companies had to own more than 80%. But a fascinating thing happened at at least three of these companies. So I'm going to say a bunch of company names. They're not really important to the story. What's important is what happens to them

So Brunswick Corporation owned 81% of the Sherwood Medical And abruptly bought back the 19% Of the outstanding public shares and took it private again This happens over and over again They release these 19% Something goes wrong and they buy back And go private again

So Langone is noticing that this is happening And so he meets with a lawyer that did this transaction for two of the three companies. And he's like, is there any common theme in why this is being done? Why is the stock being reacquired? And this is a lawyer now. It says the economics didn't work, the lawyer said, and the holding companies didn't realize as much value as they anticipated. In many cases, instead of asset values rising, the exact opposite occurred. The publicly held shares plummeted in value. Well, that and one other thing, the lawyer said. And what is that? And this is the most important part to understand. This structure is

a time bomb, the lawyer said. We believe, theoretically at least, that if somebody were to get control of the 19% minority, remember that's what Langone has done in the Handy Dan case. The only way the person who held the 81%, that's Ming Singaloff, could really exercise their fiduciary responsibility to the minority would be to vote it in direct proportion to the way the minority votes on any issue. Langone was thunderstruck. Not speechless, of course, just thunderstruck. And this is where he's clarifying. He's like, wait a minute, you mean, Langone asked, that if 60% or 90% of that 19%, right, so a majority of the minority is a way to think about that, said they wanted to do something, the only way that the 81% owner could sanitize their vote

would be to vote directly proportionate to the minority? Does this mean that the 81% owner could sanitize their vote would be to vote directly proportionate to the minority? Does this mean that the motion would carry, which means that the minority controls the company? That's the most important sentence. Yes, the lawyer said. It seems convoluted, but considering fiduciary duties, that is the only way the majority owner can say, hey, I didn't shout, I didn't force my will on anybody. Langone, who controlled virtually all the 19% of Handy Dan public shares, wasted little time in calling Sigalov and asking for a meeting. A few days later in California, the two men shook hands and Sigalov, completely in the dark, asked, what's up? Well, Sandy, Langone said, I just wanted to see how you and I are going to run this company going forward. The gauntlet was thrown down, the line drawn in the sand. Insert your own adversarial cliche,

any will do. What do you mean we? Sigalov erupted. Langone filled Sigalov in on what the attorney told him. This is why these other companies are all buying their shares back, because there is a potential time bomb here. I don't want to have any trouble with you. This is Langone speaking. I think what you and I ought to do is to stay in constant contact and communicate with one another the things we want to do with the company to the best interest of anybody. A major control freak who had no intention of ceding a whit of influence to Langone, me, or anyone else, Singaloff was furious. I don't believe that. It's crazy. This is stupid, Singaloff said. I never heard of anything so dumb

in my whole life. Okay, Langone said, using his most conciliatory tone and keeping as straight as possible. I just hope it doesn't get to the point where one day we have to test it. That day came sooner rather than later. A month after their first partner's meeting, Langone received a call from Singaloff. One of Singaloff's lieutenants, this guy named Jeffrey Channon, was going to be in New York and wanted to say hello. Langone alerted me because he expected the attorney's visit would be anything but innocence. So this guy Jeff comes over and says, So on the appointed day, Jeff Channon arrived at Langone's office, took off his jacket, and sat down. He lost no time with idle pleasantries, saying that Singaloff was taking handy Dan private again

and that Langone and his investors must sell out jeff cut the crap langone said calmly i control enough stock that you can't do any such thing if that's why you were we you are here to threaten me you have the wrong guy excuse me just then lingon picked up the phone and called bob priory priory arrived in a few minutes. Priory is this guy. Before the meeting, Ken figured out something nefarious was afoot. He calls one of the most notorious corporate takeover attorneys that's in New York at the time and says, I need your meanest SOB. I want him standing by for this meeting we're going to have. So he says, okay, that's this guy, Bob Priory. He's like, perfect, I'll call him when I need him. So he calls Priory. Priory arrived in minutes.

And it said, who's this guy, Channon demanded. This is my lawyer, Lingon said. Now, what do you want to talk about? Look, we really don't want any trouble, Channon said, backpedaling. The stock is selling for about $8, $8 a share. We know that you are boxed and you can't want any trouble, Shannon said, backpedaling. The stock is selling for about $8, $8 a share. We know that you are boxed and you can't sell any stock, meaning there was very limited liquidity in these kind of markets when you only had 19% of the shares available.

It says you have no liquidity. How about if we pay you $10 a share? No way, Lingon said. This is hilarious. This part made me laugh when I first read it. The price is $12. Shannon was shocked. Forget it. Wanting to leave Shannon swimming alone with his personal barracuda, which is that mean guy, Bob Priory, Langone left for the men's room. Barely two minutes later, Shannon followed him in. Okay, he said, $12. And this is when I start chuckling.

Jeff, you don't understand, Langone, tell him. I told him. You offered to buy it for $ Okay, he said, $12. And this is when I start chuckling. Jeff, you don't understand Lingon Telum. I told him, you offered to buy it for 10. I said, no, I offered to sell to you for 12. And you said, no. Now you're back wanting to buy it at 12. That offer is off the table. That's gone. We had an offer and a denial. No deal. What? I suggested a price of $12 in my office, right? Chanon nodded, acknowledging Lingon. And you declined. Well, that's it. I don't want to sell it now. You must have some price, Chanon said. Okay, Lingon said, $14.

Chanon left in such a blind rage that he almost banged his head on the door. About a week later, Singaloff called Lingon. Let's not mess around, he said. We will pay you $14. Sandy, you guys don't get it, Lingone said. I offered it to you for $14. Channing said no. That offer is now off the table.

I don't understand, Singaloff said. It is this simple. You had a chance. You turned it down. I have reconsidered my position. I don't want to sell. Singaloff hung up the phone madder than hell. Singaloff wanted to change the handy Dan board so that he controlled it, but I wouldn't allow it. This is Bernie Marcus talking now. Singaloff didn't like me and the feeling was mutual. I rejected everything about Singaloff,

the way he dealt with people, how he talked down to people. He just didn't like how he ran his business. He was extremely mean. The difference between us was that I didn't need Singaloff. This is where Bernie is now making a monumental miscalculation. Difference between us was that I didn't need Singaloff.

Singaloff needed me. He couldn't get rid of me even though he wanted it more than anything because every time he moved against me, he got a call from Ken Lingone. Lingone would call him and threaten him with a shareholder lawsuit, and in that way, Lingone kept Singaloff in line. Once Singaloff realized that Lingone was correct about the explosive nature of Handy Dan's stock arrangement, he wanted Lingone out of his business. He made several more miserly attempts to buy back the publicly held stock all rebuffed by Langone

and the more Langone resisted the more pressure Sigalov placed on me. Okay so when he's talking about we find at this point in the story we find Bernie kind of between a rock and a hard place. He's got this good relationship with Ken.

Ken owns almost, at this time, Ken and all his investors own 19% of Handy Dan. Because Ken is not selling to Sigaloff, Sigaloff is really putting the screws into Bernie. So Bernie's finally had enough. He has dinner with Lingone, and he says, hey, do me a favor, I said, get Singaloff off my back, sell him the stock. Another miscalculation by Bernie we're going to see here and we're going to see how astute that Ken is, not only a business, but about human nature, which I really think like that's the crux of this entire podcast.

Yeah, we're learning about companies, building companies, starting companies, but companies don't exist without people, not only the people inside of them, but the customers that you sell to. Fundamentally understanding human nature, I think, is valuable for us all because at this time, Bernie didn't understand something about human nature that Ken clearly does. He's going to lay that out for him now. What he's asking is not what he actually wants. It says, Bernie, trust me. You don't really want me to sell him the stock because if I do, I'm signing your death warrant. You're a dead man. You don't know what you're talking about, I responded.

Sigalov doesn't know this business. I know this business. He needs me to run it. Bernie, look, the only thing of any value in the mess Sigalov has on his hands is handy Dan. As long as you were there, he is never going to be able to take credit for its success or for the recovery of Dalen. Oh, you don't know what you're talking

about, Bernie. I have never been more certain of my position than I am right now. I am telling you, I can read this guy like a book. He can't stand to see you succeed. The more you succeed, the more pain he feels. I felt very cocky about myself. This is now Bernie talking. That I ran the company as well as it could be run and that handy Dan made so much money that single off would be stupid to get rid of me. Don't worry about me, I said. I'm a big boy. I can take care of myself. It's your funeral. So will you sell? Yeah, sure, Lingone said. I'll sell, but I'm not going to mess around on price. On the spot, I called Ed Kaufman, Daylon's lawyer at home. I told him that Lingone was ready to make a deal. Then I handed Lingone the phone. I want to make you an offer, Lingone said. You don't want it? This is the end of it,

and let's leave it alone. If you want it, that is the price. Well, what's the price? Kaufman asked. It's $25.50 a share. Why the odd number? Because, Langone explained, it has to look like we had some real hard bargaining here. Kaufman said that he would call Langone right back. Five minutes later, the phone rang. Be in my office tomorrow morning to sign the pay attend to sign the papers the next morning i picked up langone as we drove down the street langone tried again to dissuade me to dissuade me offering to cancel the deal but i could not be dissuaded i honestly believe my position at handy dan would be more secure once langone was out of the picture i think you can kind of see where we're going here. Remember at the very introduction that Home Depot started

on the day he gets fired. Okay, so I'm going to skip ahead a little bit in the story. And this is, we're now in April of 1978. Okay. It says, April 14th, 1978 is a day that Arthur and I will never forget.

That's Arthur Blank, the co-founder of Home Depot. We were scheduled to attend a Friday 1 p.m. corporate planning meeting. The plan was to spend a couple hours reviewing our budget

and plans for the coming year. That was what it was supposed what it was supposed to be. Remember, he had this lesson a few months earlier from Ken about human nature that he didn't understand yet. He understands it now. He says, I still believe that if you did something well, if you made a lot of money, that people, even if they didn't like you, would tolerate you. How wrong I was. And so before I get into this, it's very important to understand that he's about to get fired,

as you have guessed by now. It's not because of poor performance. It's because of what Ken Longone said. This guy does not want you to succeed. If you succeed, he cannot take credit. His ego is bigger than his ego is in control, not his logical part of his brain. So what does that mean? It says, by this point, Handy Dan was 66 stores and had almost 155 million in sales. So this is the business that Bernie's running. Remember Remember he's running it, but he doesn't have equity in it. During fiscal year 1976, handy Dan earned $7.8 million. While the, while Dalen as a whole. So all the other businesses Dalen owned made 7 million. Okay. So that's what Ken was talking about. Like you're the one running the business. He's not, his ego is not going to let you take credit for it. So he's going to find a reason to fire you.

At 1 PM sharp, we walked into a room. Sigalov was there waiting accompanied by an assortment of lawyers, accountants, and stenographers. It was an odd group for a planning meeting. Sigalov finally had us where he wanted us. and today was Ming's version of corporate show and tell to make a long story short I was fired and in rapid succession so were Arthur and Ron Brill both of which become co-founders of Home Depot okay so he's fired I'm gonna skip over um a part because remember how he said earlier that Singaloff won't let people just leave. He'd have to destroy him. He's accusing him of like employment violations. They were fighting with like a labor union and one of their stores in San Jose.

And then he just ties him up personally in lawsuits. So Ming ties up Bernie and he's telling him, hey, you have no money. I know you don't have any money, and you're going to have to pay to use your own funds to fight this lawsuit. Meanwhile, I'm just going to use company funds, and I'm going to bury you. Eventually, against his will and having to swallow a lot of his pride, he just stops fighting the lawsuit. So he winds up basically leaving, and I'm going to get there in one second, almost penniless, almost as broke as you can be. Think about it. He's going to be 49 years old before he starts Home Depot with fired and no money.

So, again, I think the reason I bring that up is because I do think that's also inspiring because if if you can, you know, some people at that point are like, oh, my life's over. I give up. What am I going to do? My reputation's tattered. I have this guy trying to sue me out of existence. And I just lost my entire career. And yet he got knocked down and gets back up and builds something even better. So I think it's encouraging for all of us.

Okay, so before I get there, though um the note of myself was getting fired was the best thing that ever happened or getting kicked in the ass with a golden horseshoe and this part really reminds me of if you watch it i talked about and other steve jobs podcasts i've done but it's also um if you ever watch Steve Jobs' commencement address, he talks about how getting fired from Apple and then going to start next was, I think he said it compared to getting hit with a brick in the head or something like that. But he talked about it's medicine that the patient needed. It wound up being the best thing that ever happened to him. But at the time, he didn't realize that. So Bernie's going to go through something very similar here.

And we're going to go back into a conversation he's having with Ken because Ken is this crazy character, and he's actually really smart about what he's going to tell him here. So he says, it was late Saturday. Okay, so he's on the phone now with Ken after this all happened. Kenny, a terrible thing has happened. You told me what would happen to me. You told me that I would get fired, and it happened, and now he's trying to destroy my life. But Langone what would happen to me. You told me that I would get fired and it happened.

And now he's trying to destroy my life. But Langone wasn't at all sympathetic, not one bit. And he wasn't interested in wasting time on I told you so either. What he actually said was more upsetting. Oh man, that's great. That's unbelievable, Langone said. What the hell are you smoking? I asked. This is the greatest news i have ever heard lingone continued this is oh i'm so happy i cannot tell you what is the matter with you kenny did you hear what i said no no no you don't understand lingone insisted you have just been kicked in the ass with a golden horseshoe this is the opportunity. Now we can open up that story you talked about when we were in Houston. Langone actually thought being fired was a blessing. I thought he was crazy. Kenny, I said, I was just fired. There's nothing golden about that. Are you kidding, he said.

This is the greatest news I have ever heard. I thought he was a raving lunatic, which he is. What the hell is the matter with you, I said. I just got fired. Langone just breezed right over that. You guys have been really hamstrung and haven't been able to do a lot of things you wanted to do, and it's pretty clear to me as an investment banker and a financier that you have a lot more capacity than what you can do here. Don't view this as a negative. Bernie, he continued, you never know where life is going to take you.

This is a great opportunity for you to do your own thing. Let's go into business together. The conversation continues. I'm going to skip over towards the end. It says, Bernie, Langone said, you have repeatedly told me how handy Dan and this whole industry is vulnerable. Too many small chains, no national companies, and the prices are too high. Do you still believe that? Yes. Good. Then let's you and I meet as soon as we can. I have no money, I protested. Well, how much would you need? I threw out a number. 25 million. At that, Langone let the subject drop without further comment and said goodbye. And now this is Bernie Marcus at age 49 before starting Home Depot. With very little cash on hand, my reputation at issue, and at the age of 49,

my future prospects shaky at best. That's how he's describing his situation. So Ken, as you can see, he just hung up and got right to work. Bernie referenced earlier that the speed at which Ken moves was disorienting to him. So I'm going to skip ahead. So they're looking for seed capital for Home Depot. And there's this really bizarre, unexpected story right in the middle of the book. They're meeting with a bunch of – that I want to share with you. They're meeting with a bunch of businesses and wealthy individuals, and they're trying to round up this money, right? And this name will probably sound familiar to you guys. And so this is the story of how Bernie walks away from Ross Perot.

And this week's Founders Members episode, the extra episode for this week, is actually a story. So we're introduced with Ken when he's starting Home Depot, where there's an interesting story, almost like I would say like a prequel to Ken's career that is the bonus episode. It's fascinating. It doesn't really fit into what we're doing here, focusing on Bernie and Home Depot,

but there's some lessons in there. There's some good lessons in there. So that's what I made the bonus episode on. All right. So it says, because he was the only person Ken Langone knew with $2 million to spare, Ross Perot nearly became the majority owner of the Home Depot. And this is probably one of the great what if business stories of all time. So Ken took me to meet Perot in Dallas. My first impression was that of a gregarious and enthusiastic man who was a model of the American free enterprise system. Remember, Ross Perot became, at least I became aware of him and famous. He's in the 60s and 70s, he founded this technology company called

EDS, which a lot of people compare to like, EDS had the impact in the 60s and 70s that Microsoft had in the 80s and 90s. But I didn't know that. I only knew of Ross Perot when he ran for president and he garnered like, I think he had the most third party votes ever in the history of u.s elections and that was much after that was you know after he was very successful i think he was already he might have been retired at the time anyway so that's the little background on ross perot so it says um he was a model of the american free enterprise system he was a patriot for the entrepreneurial spirit who literally created something out of nothing. A former IBM salesman and look at him now, I thought. Ken told Perot about how Arthur and I had built this great business, Handy Dan, and the injustice of Sigaloff that had committed against us. Ken told the story

in a way that we could not and Perot ate it up. There were a few structural and compatibility issues that I felt I needed to run by Perot right from the beginning to see if we would be compatible. Ross, I said, I am not interested in doing anything with you unless I know that I'm going to deal directly with you. I don't want to deal, this is Bernie talking to Ross, I don't want to deal through intermediaries and I will not become part of your existing organization. If I have a problem, I will call you and you and I will agree on how we proceed. I am not going to a captain or a lieutenant. I am not interested in that nonsense. If we get caught up in corporate crap, I won't be a part of it. It was my way of throwing down a gauntlet, challenging Perot to accept me for who and what I was. I like straightforward people, Perrault said.

No, I wouldn't put anybody in between us. You have my word. During this time, Perrault hired a consultant named Brian Smith. Perrault gave our presentation materials to Smith for a second opinion. At our next meeting, the new man was alongside Perot. Perot introduced Smith, and I could see a barrier already developing between me and Perot. So first meeting, hey, I don't want to deal with anybody else. Yeah, okay, great. You're straight talk. You have my word. Second meeting, here's this new guy. Ken raised the issue later, and Perot waved it away. He said that because of his intense travel schedule, we would need someone who could act and make decisions in his absence. Smith was that man. Uneasy, I let it slide for the time

being. And this story really could be called, my people don't drive Cadillacs. And we'll get there in one second. But Smith thought our retail concept was a bad idea. At the time, gross margins in the industry were about 44%, really big markups. But we were talking about gross margins being as low as 29%. We expected to make up the difference and more on volume. But Smith just couldn't get Perot's wallet wrapped around that concept. So I left it out, even though he's one of my favorite people I've ever covered. Bernie winds up having a close relationship with Sam Walton.

And a lot of the decisions they made for Home Depot, specifically lowering margins and then selling cheaper, lower prices but more volume, he borrowed directly from Sam and the people running the business after Sam died or retired the first time. All right. But Smith couldn't get his head wrapped around that. Okay. So, Ken turned to Perot.

So, he's jumping in because Smith is saying, hey, you know, I don't like this deal. Ken's in the meeting. So, Ken talks to Perot. I just don't agree with Brian, Ken said. He doesn't understand the concept, meaning the higher volume, lower prices. Perot wasn't one who worried much about stepping on the views of his underlings. He wanted to do what was best for the business. Smith, meanwhile, remained resistant to the deal. For his $2 million, Perot would own 70% of the company, as yet unnamed. Ken would get 5%, and we would own 25%. Out of our 25%, we could bring in a team of people such as Ron Brill and others.

Ron worked for Bernie at Handydam, and he winds up being one of the co-founders of Home Depot. We made one final trip to Dallas intended to iron out a few final details. There were strong signals of future culture conflicts, however. We were more than a little discomforted by the military nature of EDS, including the corporate uniforms. Everybody had to wear a shirt and tie, and the only acceptable shirt color was white. During a discussion of what perks would go with my salary, I told Perot I had a small problem. While my salary and perks would be similar to those i enjoyed at handy dan there was the matter of a company car the least this is

such a weird story the least car i had been driving was still being paid for by handy dan but the company would repossess it unless i plan to take over the lease or buy it for the depreciated value this was a good deal for the new company. We ought to try to save as much money as we can, I said. I would like to buy it outright at the depreciated value. Would you like me to buy it, and then I will just charge it to our entity? Or do you want to give me a check,

and I will pay for it? That's fine, Perot said. You can either do that or buy a new car. I don't really care. But then Perot decided to test me. What kind of car is it? Perot asked in that peculiar Texas draw of his. It's a Cadillac.

Perot did not like that answer at all. My people don't drive Cadillacs, he said. My guys at EDS drive Chevrolets. That's fine, I said. I think it's a good policy for you, but this is a new company we're forming, not EDS. And look, this is a four-year-old car and I'm a big guy. It's cheaper to have an old Cadillac than it is to go out and get a new Chevrolet. So how do we pay for it? Not that that question meant anything. My people don't drive Cadillacs, Perot said again. And again, my people don't drive Cadillacs. And when he said it for the third time,

I realized this was never going to work. Perot was establishing who and what his position was and what mine was, partners or not. My mind flashed back to the day sigalov and i nearly came to blows during a board board of directors meeting when we went into another room to hash out our disagreement privately singalov told me that he was the boss he controlled my career and i needed to understand that then he demanded that i literally repeat that back to him I said nothing of the sort Nobody controls my life but me Let me just interject here People are so bizarre

Especially people that are Let me rephrase People that are insistent on controlling other people I find extremely bizarre The idea that you want a grown 45 year old man To repeat back to you that I'm the boss It's's just bizarre to me. Now I was looking across a different table staring at Ross Perot, my blood pressure rising, my face turning red, and I was hearing Sigalov's words coming out of Perot's mouth. I am the boss. I control your life. I will

tell you what to do and what not to do. Regaining my composure, I smiled. Ross, I have to talk to Kenny for a minute. Would you mind if we step outside? Ken was perplexed. Look, Kenny, I whispered, I know Perot is a very important person in your life, and you have to understand something. If this guy is going to be bothered by what kind of car I am driving, how much aggravation are we going to have when we have to make really big decisions? If we can't be free to run the business the way we know it has to be run, it isn't going

to work. I am never going to have this man for a partner. I would rather starve to death. You must be out of your mind. Are you crazy? My God, he's going to give you $2 million, Kenny said. Kenny, I wouldn't touch it with a 10-foot pole. I am out of here, I said, and I headed down the hall. And that is how we walked away from Ross Perot. The interesting thing is that if Perot hadn't been so hung up on Cadillacs, his original 70% share of the Home Depot stock would be worth approximately $58 billion today. So after that, they're all talking, him, Arthur, and Ken. And he says, I was the first to speak.

What do we do now? Now we're going to raise the $2 million at 50%, Ken said defiantly. What are you talking about, Arthur said. Let's put together a group of investors where you won't have to worry about that. I'm going to get my 5%, Ken explained. You guys are going to have 45, and the next investors will get 50%. That doesn't make sense, Arthur argued. That means we'll have a better deal by walking away from this deal. And this is a great quote from Ken. That's right, Ken said, in the retail business, when you can't sell something, you mark it down.

In my business, when you can't sell something, we mark it down. In my business, when you can't sell something, we mark it up. So a short while later, this is the importance of equity. Remember, Bernie was talking about earlier, despite holding all these fancy titles, he just never really had money, even all the way up until the age of 49. And so what Ken does is he sets up a meeting with a bunch of his investor friends, and he's doing a presentation on why they should give the Home Depot guys $2 million. He says, we felt like beggars, this is Bernie talking, asking these successful peoples to invest in our company. Not that that was necessary. They gave us a rousing reception.

Why? These were the people who bought Handy Dan's stock between $3 and $9 a share and sold it at $25.50 a share. Of course they loved us. Of course, while they had made tons of money, we were broke. The importance of equity. The irony wasn't lost on Ken. You guys made a ton of money on Bernie and Arthur, he told them.

Take a portion of it, roll it into their new business, and sure, it's a real, real gamble. So what the hell? Let's drop it here and see if these guys can roll sevens again. In the end, they gave us $2 million in two years to open up any business that we chose. This is the way our company started. Okay, so now I'm skipping ahead.

Remember he said he needed 25 million to start the company. Using 2 million to seed capital and they're going around and trying to raise the rest. And so they do a deal with this Boston-based venture capitalist or they do an almost deal. And so the moral of the story I'm about to tell you is do not work with people

who have no clue what it means to care about people. So they do a deal. They agree $3 million. Okay, everything's good. So now he needs to drive. After they do the deal, they agree, but the money hasn't been deposited yet. And he has to drive. Bernie is now driving his new investor to the airport.

And this is the new investor. Listen, there are things I didn't want to talk about in the office because they are very sensitive, and I want to discuss them with you, he said. What are they, I asked. First, I need two men on the board of directors. That was easy, something I anticipated. Okay, you got it. Now, when I make an investment, I like people to invest with me,

and I need an investment on your part. What do you mean investment? Well, I need to have you invest. We started the business. We left everything in California. They relocated to Georgia, by the way. Especially our support systems, I said, puzzled. We are sacrificing our lives here.

No, I mean more than that, he said. First of all, you should not have company cars. We had leased company cars because so much of our time was spent in cars driving all over Georgia on company business, and none of us could afford to buy cars. Pat, this is another, all these guys he's naming here are the other co-founders of Home Depot. Pat was broke. I was broke. Arthur and Ron had no money either. So at the time, they're ranging anywhere from late 20s to, I'm sorry, anywhere from 30s to 40s, and they're all basically broke. That would be kind of tough for us, I said, but if we could figure out a way to pay for auto expenses, maybe we can do that. Okay, the man said. Another thing is that everybody needs to take a 10% cut in salary. I stared at him in disbelief. Everybody?

Yes. Do you know what I just went through to hire these people? I hired them from all over the United States. I brought them here. I sold them on this dream. They took less money than they ever had made before and they left their security, all of those things, and you want me to cut their salaries by 10%? Yes. Well, I guess we could do that if it's so important to you. I don't think it's fair, but what choice do I have? Now, the man said, is the best of all. I am not paying your employees or managers medical insurance. I think they should get it on their own. That was an issue reminiscent of the matter of principle

that nearly caused a brawl between me and Sandy Sigaloff. Isn't it amazing how much Sandy influences life? The blood rose in my eyes. I swerved and pulled the car onto the shoulder of the highway my gut told me this was a terrible mistake and my premonition so far had been right get out of the car i said get out of the goddamn car the man just looked at me he thought i was crazy we were in the middle of nowhere cars and trucks were zipping by i said get out of the car you are a stupid son of a do you think i would get in bed with an imbecile like you get out of the car you can walk to the airport for

all i care i then got out of the car and as the man timidly got out, I tossed his luggage by the side of the road. Please don't leave me here, the man pleaded. I have to catch a plane. After several minutes, still fuming, I relented and allowed the man back in. Don't talk to me for the rest of the trip. I will have nothing to do with you. We are finished. This partnership is over before it has begun. Here, again, was someone with whom I was going to have to live with who had no clue what it meant to care about people.

His $3 million investment would have been 15% of the Home Depot's original market value. Today, 15% of Home Depot stock would be worth $12 billion. There are some things money alone can't buy, as several would-be Home Depot investors learned. Okay, so now I'm skipping ahead to how they actually got the money to open Home Depot. They were after this. They almost went out of business before they even opened because they couldn't get money anywhere. No investors besides the two million they had. So they're going to banks. And they had a previous relationship with a banker from Handy Dan.

This guy named Rip. Well, Rip is, he's the one that got them the money. But he doesn't know this story yet. Okay, so Rip turned 65, the company he's working for, I think it's called Security Pacific, basically making him retire. And Rip was really, really upset and he didn't want to retire. But a few years prior, and I've jumped way ahead in the timeline just because I need to explain how they actually got the financing. So a few years before the story I'm about to tell you, Rip gets them the money they need. So now when he's being pushed out, the CEO calls Bernie and says,

hey, we're going to do a going-away party for Rip. Would you come out and emcee the party? And so he does that, of course, because Rip did him a huge solid by getting the money. But Bernie at the time did him a huge solid by getting the money. But Bernie at the time didn't know how Rip got him the money. So he's sitting up there. Bernie's sitting up there at this party, going away party for Rip. And the CEO does something really stupid.

And, well, here. This guy's name is Flamsome. And so Bernie's talking to the CEO, Flamsome. I love this guy. He's so terrific. Talking about Rip. Well, you should love him after what he did for you, Flamsome said. What do you mean, I said, after what he did for me? He put his career on the line for you.

He then told me the story of how Rip originally presented our loan request to the bank loan officers who turned it down cold. The next time, he added points and other kickers and still was turned down unwilling to give up on us he came up with the letters of credit from our investors and they turned him down cold a third time do you know what he did after that flamsom asked me i guess not i said he burst into my office literally slamming the door open. Rip slammed the door shut and threw an envelope on my desk, he said. Take this, meaning his resignation letter, take this and your job and shove it up your rear end. Flamson was shocked by how angrily the normally mild-mannered genial Rip Fleming had become. Rip said, you don't need a banker. You need a computer. Hire some young kid to come in

here and do my job. I buy people. Bernie, Marcus, and Arthur Blank are good people, and you have turned them and me down three times. You obviously don't need me here anymore. This is an important part. I looked at Rip, Flansom continued, and I realized that when he walked out the door, that $400 million worth of accounts were walking with him. The clients Rip had brought into the bank loved and trusted him and would go wherever he went. Turning down the Home Depot was no longer about denying a $3.5 million loan. Suddenly, it was a $400 million decision. I realized that I had no choice and tore up the envelope containing Rip's letter of resignation, Flamson said. I told Rip I would personally get the loan through the

officers. And that's why they loaned us the money and helped start this company. Okay, so the next story is skipping ahead a little bit in the book and it's the importance of selling products at the right price and what turns out to be the first big break for Home Depot. By this time, they're in business. They have a few stores in the Georgia area. And it says, an exasperating incident with pat reinforced for us just how critically important it is to sell products at the right price pat farah is a co-founder of home depot and the one in charge he's like their main merchant um business what just wasn't booming this

is the description of what's happening at home deep at the very beginning it just wasn't happening we were barely covering our expenses still having difficulty identifying with the market uh so we were still we're barely covering expenses and we didn having difficulty identifying with the market. So we were still barely covering expenses and we didn't know anything about the market. Cashflow was not good. Our financial resources were eroding. A vendor told Pat about a truckload of 3,000 fireplace screens

that were manufactured for Montgomery Ward. Ward canceled the order, but the screens were already on a truck en route to Atlanta. Thanks to some chilly winters, Atlanta was a strong market for wood-burning fireplaces. And it says there's 3,000 of these screens. And he says, so Pat wants to buy them all. And he says, you can't sell all these.

The vendor is telling that to Pat. Don't tell me what I can't sell. Just get a price pat said he was able to secure a phenomenal price on these screens which retailed for up to 139 each so that's the price montgomery would pay or would sell them at having already set the cost and arranged for delivery pat walked into my office with the news these fireplace screens sell up to 139 at montgomery ward he said The guy needed to dump them right away, and I brought the entire shipment for an average of $33 a screen. How many screens is that exactly, I asked, gulping air. Remember, they're having cash flow issues at the time.

3,000, Pat said effortlessly. This was a commitment of almost $100,000. Pat made a truckload of fireplace screens into a life or death purchase for the Home Depot. Seeing that my partner was oblivious to the trembling of my voice and the fear in my eyes, I tried to see it Pat's way. Wow, so you're saying that we could discount these screens $50, sell them for say $89 and make a ton of money? No, Pat said. Not that price. Besides, the ads have already been prepared. Okay, $79 is terrific. We're going to do really well at $79.

Well, no, Pat said. $69? No. $59? $59 is a terrific buy for the customer. It'll be great. Pat marked them up exactly $2. Are you crazy, I asked. Have you lost your mind? Are you crazy? I don't know what you're going to do. We're going to go broke. The minute the ad appeared,

however, people began flocking into the stores and we blew through the screens in about four days. It was so incredibly cheap, people found it worth their while to drive 50 miles to see us. That was another critical moment for the Home Depot. It took an insane ad to bring folks into our stores to discover the Home Depot secret. So they're expanding stores, they're opening up in the Atlanta, Georgia area and they've expanded to and they they're expanding into South Florida at the time and they realize hey we're having a we're still having cash flow issue they're making a little bit of money but they're not they can't fund their own growth. So they realize that they have to go public.

It's the only way that they can get the money. So let me read that part to you. There is a limit on how much you can expand on starting capital and on borrowed money. The company was succeeding. We were planning years ahead and knew that future financing would be necessary if we were going to expand. We had wonderful support in Ken Langone and his ability to market securities. So it seemed obvious at the time that the time was right for an initial public offering. And this is the downside to it. This was a big step. Going public meant losing the anonymity and cloak of secrecy a privately held business enjoyed.

It meant listening to and considering Wall Street, which would become our ad hoc partner from the day we went public forward. But if we were going to grow, there was no other way. The only reason we would have waited any longer to go public was so that we wouldn't have to give as much of the company away. That and the fact that as long as we were private, the industry perceived us as failing. If everyone knew how much money we were making, there would have been more clones earlier. When we went public in 1981,

the home improvement industry woke up and choked on our sawdust. So this whole part about losing the anonymity, the cloak of secrecy that private businesses enjoyed, the fact that the industry still perceived them as failing and if everybody knew how much money they were making, there would have been more clones. reading some of these books now, some things just connect. It just pops into my mind. I don't know where it comes from. But it reminded me of one of the greatest quotes I've read anywhere. And it's in the book Becoming Steve Jobs. And he's talking about the problems that Pixar is having with learning how to do computer animation.

And I'm just going to read you this quote because I think it applies to almost, there's a million examples that it could apply to. And so he talked, this is Steve talking. He's like, you can't find a book titled The Business Model for Animation. The reason you can't is because there's only been one company, Disney, that's ever done it well, and they were not interested in telling the world how lucrative it was. Same situation here where, I mean, they have to go public, but it's really nice if you can conceal how much money you're making because the more you broadcast and you make aware how much money you're making, it's the clones are going to happen so why home depot is reluctant to do it here disney's not doing it back in in steve jobs time because the same reason like there's no there's no book written

on the business model of animation disney's not going to want to tell you how lucrative it was and so what that makes me think of today is where the internet has enabled millions, even though new company origination is at a 40-year low, the new companies that are being built today are much more efficient than companies of old. And so when I read this, all I think about is like, we can only study the companies you know about, right? Because you can't study what you can't see. But I just have a feeling like there's millions and millions of these super profitable businesses out there hiding um and it's actually smart to hide for obvious reasons you don't if let's say you you've you don't want to tell people how profitable you are because you're gonna then people you know the more competition margins erode and then you're there's kind of like a market equilibrium

at that point um so i don't know i just i like that that that thought um and every once in a while you find these weird you know super profitable businesses some some you know tell on themselves like valve who i covered on um i haven't stopped thinking about since i read their employee handbook and i covered on one of the founders members episodes that you know they make more per profit per employee than any other company at least that's admitted to it i think they make over a million dollars per per year per employee in profit um but yeah i i guarantee you there's a bunch even these you know sometimes i i randomly discover these small companies that that publicize this and you know it'd be 50 people uh less than 50 employees and they're making 20 million a year in profit or whatever the case is.

So I don't know. I really like that succinct explanation by Steve. So the IPO, so this, I went back and looked at the date that they IPO'd and then I looked up all of their ages now and then subtracted to figure out how old they were at the IPO. Because, again, it's really important. They range anywhere from 37 to 50 plus, the age of the co-founders and the IPO. And so this is just going to talk about, you know, the reason the age is important because, you know, they've been basically broke their entire lives. You know, paycheck to paycheck kind of thing um and this is a description of you know not becoming we talked

about earlier how important equity is and now they're not they're going to be you know wealthy um and another example how crazy ken is and why um oh so i i don't think I mentioned it. So next week, the next week's book is a book that Ken Langone wrote. So I haven't started reading it yet. I will have it done by next week. But if the stories in this book are any indication, I cannot wait until I find what's in that book. So all right, it says in this – let's go right to the book. It says in the conversation from private to – excuse me, in the conversion from private to public company, we had our first opportunity

to take some equity out of the company. This was our first opportunity to become liquid financially and pay off our own personal debts. I sold 73,000 shares of stock for 8.7 million. Arthur and Pat sold 54,000 shares of stock for 6.5 million. Today, the combined value of that stock we sold would be 41.6 million shares or more than 2.4 billion worth of stock. By the way, Ken didn't choose to sell any.

So we've talked now from the prehistory of Home Depot to the beginning of Home Depot to then now IPO. And a big part of the book, if you're running a company with a bunch of people, they talk about how we manage, communities they serve, all this other stuff. I'm going to pick out two more stories, but I find most interesting is, you know, what were things like at the beginning? But I do think it's fascinating, something we've been talking about a lot the last few weeks, is knowing the right way to do things by seeing it done the wrong way. And this is Bernie studying other retailers, including reading books about other retailers. And so he says, years ago, I read The Big Store, Inside the Crisis and Revolution at Sears. It's a behind the look at Sears Roebuck.

It had a big effect on me. And for a number of years, I insisted that every executive in our company read the book. The Big Store told the story about how one particular chief executive of Sears, Ed Telling, hated to be in the stores. And that was apparently why he took the world's most revered retail company into virtually every other business under the sun, from insurance to real estate. Sears bought all these other businesses that diluted its ability and energy and management neglected its core business. Remember that line because there's another story I'm going to tell after this. That's the same thing. When you're diluting your ability and energy, it's very dangerous for core business. This is another, remember that line because there's another story I'm gonna tell after this. That's the same thing.

When you're diluting your ability and energy, it's very dangerous for a business. I wanted our people to read the book so that they understood how important our core business is. Telling, Ed Telling, hated being in the stores and that was where the bread and butter was coming from. That's what paid his salary. He never understood that.

In this company, we do understand that. That is why we insist that every executive of this company works in the stores upon joining us. The policy even applies to our attorneys. When we hired our first in-house attorney, we said, before you assume your regular duties with us, you'll be in the stores for two months. He didn't believe it. Are you crazy, he said? I'm a lawyer. Well, if you're going to be handling lawsuits,

you're going to have to understand the problems of people in the stores. And to do that, you have to work in the stores. So that's what so that when you hear a problem, you can relate to it. He winds up doing that. But it's and this is an important takeaway. But at Sears, they sat up above and all above it all in that ridiculous tower of theirs in Chicago and never went down the elevator except to eat, lunch, or go home. They never had a clue as to what was going on in the stores because they never spent time in the stores. Arthur and I go into the stores alone and walk around,

talking to customers and associates on the sales floor, learning what's really important to the Home Depot. I love being there because that's where the real action is not in my office and a few chapters later they tell this fantastic story and we're gonna see it's about not deluding yourself or your talents but more importantly success breeds arrogance right and this the moral of this story is that mistakes can teach us that we're never as smart as we think we are. And I think this is applicable to all different sorts of people and all different sorts of businesses.

So it says, every young company screws up. It's important for us to remember. We were no exception. With our Atlanta and South Florida stores going great, we looked for ways to dramatically increase the size and scope of the Home Depot brands. So we purchased a fledgling Texas-based chain by the name of Bowater Home Centers. So there's a lot of just bizarre things in this story. And it's a disaster.

Bowater was a $38.4 million acquisition of a chain with nine big box hardware stores somewhat like ours, but in markets we were not in. And when we say somewhat like ours, this is one of the weirdest things, we can say on good authority that they were based on our earliest stores.

That's because the American division of Bowater Corp tried to buy the Home Depot while it was still in the conceptual stages. Their American CEO, Ralph Dillon, was very affable and understood what we were trying to do and was very interested in our business concept. He sent his accounting staff in, although there wasn't much to see. This was all prior to the first store opening, so everything you could know about us was contained on 12 sheets of paper. There was no balance sheet, all the money was going out. All investors were really buying was talent.

He saw that, liked what we were doing, and we made a deal. And then he went back to London and the holding company turned him down flat. But while they wouldn't approve of his investment in our company, they didn't say he couldn't start his own copycat chain. So that's what he did. He literally took our blueprint and started from scratch, opening Bowater Home Centers in Texas and Louisiana. He had all of our numbers and our business plan. The only thing he didn't have

was the experience of how to run it. So that's, first of all, it's really weird that they try to sell the company before it's even started. Then the second thing is they have a deal and then it falls apart. And third, they use the blueprints to start a copycat. And then fourth, they buy the copycat. So this is really bizarre,

but here's where a lot of the lessons are gonna come from. So it says, we weren't gonna get to Texas for many, many years. So copying us so blatantly probably seems safe. Even with our blueprint, they just didn't know how to run the business. Still, we believe that their locations under good management could leapfrog our expansion plan several years ahead,

and Dallas-Fort Worth was a key market we wanted to be in. We never anticipated the ancillary losses caused by sucking all of the great people out of our existing stores and sending them to fix the black hole that was Bowater. When you do that, you weaken yourself. Remember that he just talked about what Sears was doing by diluting their core business, which is exactly what happened to our existing stores. One of the reasons Bowater taxed us so greatly was the indirect drain it put on our existing systems. The Bowater stores were in such disarray that we immediately sent some of our best talent from Atlanta in South Florida to fix them that left gaping holes back in our own stores so we didn't get anticipated revenues in the Bow water stores and

existing Home Depot stores sell sales went flat in the fourth quarter. So it says, culturally, we were as different as night and day. Home Depot store managers spend their days on the floor, wandering their stores, solving problems for customers and associates alike. Most Bullwater store managers were pencil pushers. They hid in offices. They weren't prepared to do the side-by-side go-to work that we expected. Our people sometimes took unusual steps to get across the cultural differences in the two retail cultures. One of their managers arrived at a Bowater store in Louisiana. He pointed to the

manager's office and said with great fanfare, that is not part of the Home Depot. Then he climbed aboard a forklift and literally plowed through the walls of the offices until they were dust. We terminated all of the Bowater corporate executives. Okay, so so far they spent $38.4 million thinking, okay, how bad can it be? They have good locations. So we're paying for locations and the brand's already up and running. Well, it turns out that they didn't really have a lot of talent. So they're firing almost everybody. So all the corporate executives are gone. And about 95% of the original Bullwater crew gets fired too.

We eventually interviewed all the employees and explained one by one what the Home Depot was all about. Simultaneously, we kept the stores open and yet tore them apart, remodeling and re-merchandising them into Home Depots, all the while using employees who resented us. In the end, we terminated almost 95% of the Bullwater crew. So this is the effect that's happening. For a time, remember it's draining their resources and their sales are flat, and they've only been a public company for a few years at this time.

For a time, the Bullwater tobacco severely tested our goodwill on Wall Street. Until we ultimately turned the situation around, it temporarily dampened the euphoria for the Home Depot. It's not easy being a public company. You have to answer a ton to a ton of people, and you have to answer a lot of questions. You always have to run your business worrying about how much somebody else says you will make, somebody who may not have enough knowledge to understand what your potential is but against all those negatives without public money this company would still be a chain of

four stores in atlanta georgia the reason who we we are who we are today is because of the public money so they go and while this is all happening they know that they're in a bad situation so they arrange meetings with a bunch of investors, and Bernie goes up there to try to own up to the mistakes. So it says, rearrange a series of meetings in New York in which Bernie came clean with the fund managers and analysts who covered our company. Standing before each group, this is actually really smart what he does, Bernie stood up and bluntly announced, I am the CEO of this company and I am a schmuck. In precisely those words, we screwed it up. We should have closed the Bowater stores. After that, Bernie told them about the corrective measures that we put in place to prevent a repeat in the future.

He assured them that the growth and profitability would continue and they believed Bernie. Many CEOs would blame a Bowater type fiasco on the economy Blame it on this or blame it on that We didn't blame it on anybody We blamed it on ourselves Excluding Bowater, Home Depot's fourth quarter earnings Would have been up approximately 35% So think about that They never bought the place

They would have reported a quarter to Wall Street of up 35% Because they bought Bowater, they came in flat. It says, this happened soon after we negotiated a $200 million line of credit. And thank God that deal was done and secure. We couldn't have made the same deal a month later. It would have been years before we would be able to go back to the financial community and get this kind of money. And this is the takeaway.

It's even worse. Not only did they buy it for talent locations, talent didn't exist, and now the locations are crap. In retrospect, Bowater wasn't even a good real estate deal because we eventually closed all the stores we acquired and built bigger, better Home Depot stores close by. If we had just passed on Bowater altogether, it probably would have gone out of business anyway. Bowater taught us we're

never as smart as we think we are. You have to look at yourself, your talents and abilities realistically. We thought we were better. We thought we could handle anything Success was breeding a little arrogance And we learned that sometimes You believe you can do more Than you really can do Bowater was a great And hard Lesson learned

So that's where I'm going to leave this story If you want the full story Buy the book You can go to founderspodcast.com forward slash books, and you can only buy this book and help out the podcast at the same time. But you can buy any of the other 40-plus books that have been featured so far on the podcast. If you've listened this far, thank you very much for listening.

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