Deal Review Gone Wrong: Founders Suing Eachother

In this week’s issue, Michael will be doing a live review of a high profile acquisition where the founders and the acquirers have now acrimoniously and very publicly fallen out, with lawsuits and counterlawsuits flying in all directions.

10X Health began as an idea from biohacker Gary Brecka about optimising your health and using your genetics to personalise your fitness routine and supplementation.

Grant Cardone, the real estate mogul and social media personality, saw this company and knew he could use his marketing skills and massive reach to scale the company quickly.

A deal was struck between Cardone Ventures, headed by his private equity partner Brandon Dawson, and Brecka. Cardone would take a controlling stake of 82% and scale it, with Brecka keeping an 18% stake to participate in the upside and $250 000 up front.

But there was a catch. The up front payment would all (!) be invested in Cardone’s own real estate fund, an illiquid asset that’s non-discretionary (you can’t pull your money out whenever you want). This definitely was disadvantageous to the Breckas, Cardone was essentially investing in his own company and spinning it has a payment to Gary. Over the years I’ve built a sort of sixth sense for how people are feeling in deals, and my spidey senses say that this was the start of Gary getting frustrated with the new owners, everytime they took money out it must have stung.

The lesson here is, get some real cash out at closing before the earnout, and if you’re a buyer keeping a founder on, you need to reward them properly before they start resenting you.

The company exploded in growth going from $4 million in revenue to over $100 million, but they fell out over differing business practices and payouts, I think overall Gary refused to acknowledge that he no longer owned the company, and this cognitive dissonance caused him to resist changes made by the new owners.

As a business seller, private equity will always want to keep you in the short term, and always want to fire you in the long term, for precisely the reason that you don’t think like an employee and will naturally resist an overarching authority.

It should also be noted Brecka was still the face of the company while being an employee, so any changes made by the new owner had Gary’s personal brand on it, which must have made it incredibly difficult to accept changes he didn’t like. This is another reason to remove yourself as the public face of your business before an acquisition.

Brecka’s suing for $100 million plus other damages, Cardone’s claiming Brecka took out about $13million from 10X Health and is counter suing to claw that money back. The hearings are scheduled to be heard in Florida courts over spring, we’ll be following how it goes.

Interestingly enough, there was a point where Brecka raised finance for a $65 million buyout, which Cardone Ventures refused. Maybe this messiness would have been avoided if one of them took the cash.

Obviously, a lesson here is pick your business partners wisely! but also realise that once a deal is done you need to accept you’ve given up control of the company, something many passionate founders refuse to accept.

Here’s to your next (successful) deal.

Unlocking Wealth Weekly