Case Study #48: Believe in Your Business

Believe in Your BusinessLong before he bought and built, Ryan Daniel Moran was building small online businesses, which was one of many experiences he shared in his Freedom Fast Lane podcast.  One of those businesses led to what should have been an 8-figure exit, but due to his inexperience it became a 7-figure exit instead.

While today you may know about huge businesses being built on the Amazon platform, in 2013, when Ryan and his business partner spent $600 to get started, that world was still developing.  They built a company called Sheer Strength, which provided supplements to the body builder market.  Ryan was the visionary and his partner Matt was the integrator.  Their secret sauce for Sheer Strength was learning and owning keywords in the Amazon algorithm for their product categories.  That sauce paid off: at the time of their sale they were doing $10M in topline revenue annually with EBITDA of $3.2M.

End of the Road

Ryan and Matt felt that they had built the business to the limit of their capabilities, and for the company to get to the next level, they would need to bring in experts who could help scale and grow the company.  They felt that they could get six times their EBITDA and were looking for a company who knew the nutrition and supplementation space and had grown a smaller company before.

Ryan had never sold a business before, so he took the first serious LOI that came his way and entered a diligence period with the potential buyer.  They looked at the numbers and decided that the EBITDA was not $3.2 but $2.9.  Given that represented a $2M swing in the valuation, Ryan says now he should have stepped back and gone back to market.  But he didn’t know what he didn’t know, and worse, he didn’t realize that he had the asset: these were people with a lot of money who wanted to invest in something worthwhile.  Ryan didn’t understand how worthwhile the company he had helped to build was.


Ryan and Matt did end up selling to the buyer they had entered diligence with, even with the lower valuation, and they sold 60% of the business and left the remaining 40% in so that they could stay on and help the company grow.  

But a shift of values happened.  Instead of a focus on service to the customer, they found that the buyers had a focus on profits.  Instead of being nimble, humble, and gritty (the culture that brought them their success), the new company was big, structured, and arrogant.

The big problems were threefold:

  • Clueless management were hired
  • Serious debt was laid onto the company as part of the financing of the purchase
  • The clueless management was found out and fired, but then equally clueless replacements were hired.

Before too long, the new entity that had been created went bankrupt, and even though Ryan and Matt made a very aggressive offer to the bank in order to try to buy back control, the bank went a different direction.  The 40% they had risked to grow the business evaporated.


Ryan puts himself forward as a cautionary tale but is happy to have learned important lessons in this transaction that help guide the way he does business now.

  1. Believe in your business.  You’ve built something great and are now on the verge of a life-changing transaction.  Know your terms and believe in your numbers.
  2. Be willing to walk.  If you’re not happy with the way things are developing, always be mentally ready to walk away from a bad deal.
  3. Find the right buyer.  Don’t just take the offer that comes with a lot of money.  When you want to grow the business, find a buyer who is aligned with your values and management philosophy.

Are you looking for a buyer to work with in order to take your business to the next level?  We know people looking to do just that.  Give us a call today!

Case Study #47: Partner Remorse

Partner Remorse

Tyler Jefcoat was a newly minted MBA when he started Care to Continue, a home healthcare service. He had had two grandparents who went through nursing home experiences that weren’t great, and he wanted to find a better solution. Care to Continue provided hourly in-home care, keeping these elderly clients in familiar surroundings.

Tyler had a passion for the industry, but didn’t have the finances to create a company. So he connected with a better-capitalized partner who was happy to let Tyler gain a 25% ownership share while Tyler ran the business.

Business Model

This type of home care is not usually covered by standard insurance, so customers paid out-of-pocket or out of the legacy LTC plans that did provide for this service. At the time he sold his share of the business the company was charging $22/hour to the patients and paying out $11/hour to his team of certified nursing assistants (CNAs). This particular industry was also undergoing legal questions as to whether the CNAs would be classified as 1099 or W-2. Tyler saw the advantage in using a professional employer organization (PEO) to help him manage these compliance issues and as the company grew, Care to Continue averaged around a 15-20% EBITDA on topline revenue.

Success and Failures

Tyler was dedicated to making sure that his team got paid every Friday, but since he didn’t establish firm (and consistent) guidelines on when clients should pay, at one point he found himself with $150,000 in receivables! He came up with a smart, frictionless solution. All existing clients were told that their rates wouldn’t change as long as there was a method of payment on file, be it an ACH order or a credit card. There was absolutely no churn and the negative cash flow and huge receivables backlog disappeared.

But on the other side, Tyler admits that there was some conflict that he avoided that should have happened with the silent partner. Some debts that the silent partner had put on the balance sheet strained cash flow and made it difficult to grow the company. Tyler’s rationalization at the time: we can scale our way out of these problems. Turns out that’s not a solution.

Seeking a Solution

Tyler had developed a relationship with an investor who had significant home health care experience and went back to his silent partner with an offer from this investor to buy out a significant part of his majority shares at roughly 5X EBITDA. But because Tyler had avoided conflict some years before he had no idea that this was not really about the money for the silent partner, but about the idea of “passive income” that he had nurtured. It was a hard “no.”

Tyler came out of the meeting dispirited and realized an outside investor wasn’t an option. Around the same time, Tyler wanted to fire someone who had become toxic in the organization (turnover had massively increased in her department when she took it over) but the silent partner read this as Tyler trying to leverage the situation: by firing a senior member of staff, Tyler’s bargaining position for a buyout would be better. While this was not Tyler’s intention, it was clear the situation as it was was no longer tenable.

The original operating agreement had made provision for a buyout along the lines of a ten-year note, but Tyler was willing to give up some of the valuation in order to shave that down to a five year note. That negotiation worked and he ended up getting 3.5-4X EBITDA for his 25% share. The silent partner ended up selling the business entirely some time into that agreement so Tyler got a lump sum (and some extra) when the company sold.


While Tyler was ultimately happy to have had an opportunity to build a business without having to put up any capital, he wishes that he had embraced conflict as a way to build a better business and get on the same page as his partner. Other important takeaways:

  • Consider having payment methods on file. More and more people are used to subscription model businesses and seeing regular payments come out of their accounts.
  • Be clear on your balance sheet. When putting together an operating agreement, make sure that partners don’t have an outsized ability to put debt into the business, even if they are the majority shareholders.
  • Talk it out. By talking about the future ahead of time as well as embracing conflict early in the process, Tyler could have saved himself a lot of time (and possibly earned more).

Are you thinking about selling a business but have a partner who doesn’t want to sell? We’ve seen many different ways of dealing with this positively. Give us a call and let us share some with you!

Case Study #46: Simplify and Multiply

Pet BusinessesWhen Lee Richter and her veterinarian husband acquired San Francisco-based Montclair Vet nearly 20 years ago, they weren’t really taking a risk.  That practice had already been around for 40 years and had 3,000 regular clients at the time they bought it.  But by the time they sold it, they had nearly 25,000 clients and got to enjoy the EBITDA rewards that came with a thriving and niched business.

What niche?

There has been a boom in recent years in pet care, especially as more and more people treat pets like family members and opt to have them instead of children in the home.  The Richters understood the strong attachment that many had to their pets but wanted to bring a completely different take on visits to the vet that the customers had always known: more preventative care, and the use of Eastern medicine and practices combined with the newest technology: think chiropractic, acupuncture, and hyperbaric oxygen.

Sound unusual?  The numbers don’t lie.  Even more interesting, by insisting on this level of care for the pets that came in, the Richters began to see the customers end up taking better care of themselves as well.  By encouraging “wellness” instead of just bringing in pets when something was “wrong,” visits happened more frequently, and unsurprisingly, revenue went up to.  

Roll Up

Lee had a business background to complement her husband’s veterinary skills and she referred to him as the “simplifier” and herself as the “multiplier.”  As he imposed these new ideas on the existing practice and trained the growing team (they went from 3 doctors to 10), Lee went about marketing the business and coming up with smart ways to get the word out about the different way that they approached pet care.

This didn’t change when an acquisition possibility came their way as one of 500 practices being targeted for a roll up.  The work she had done with SEO and ownership of relevant URLs partnered with the new level of vet service her husband was offering allowed them to get 10X EBITDA when the industry normally trends around 5X.

Second Bite of the Apple

Not wanting to take all the proceeds from the sale of the practice, the Richters asked if they could “invest” in a future liquidity event by leaving some of the sale proceeds in the deal as skin in the game.  Out of the 500 practices that were rolled up, they were the only ones to ask for this, and the buyers, while surprised, took them up on the deal.  In fact, two years later when the roll up was complete and the new conglomerate sold to an even larger buyer, the $2.5M they had “invested” had doubled.  Unsurprisingly, they’ve asked to be included again, and they’ve put that $5M into the new company to see where it goes.  This gives them a seat at the table for a business way above their level but also puts them in the catbird seat when it comes to new deals and opportunities.

When asked why they wanted to keep letting the money ride, Lee noted that she had been blessed with good business mentors and had taken notes whenever they discussed their acquisitions and what they had done or wished they had done.  This led her to ask for a second (then a third) bite of the apple — staying in fractionally post-acquisition — when none of her colleagues did.


  • Buying is easier than building.  While the Richters were able to build an enormous practice, they didn’t do it from scratch.  They stood on the shoulders of the practice they bought.
  • Focus on your niche.  Not every pet owner is going to be interested in the holistic approach that the Richters championed.  They weren’t worried about that.  Instead they focused on winning new clients.
  • Create recurring revenue.  Rather than be content with just wellness visits and “break/fix” pet scenarios, the Richters implemented a wellness program which led to more frequent visits and hence, more recurring revenue.
  • Be willing to ask for deal points.  As noted, not a single other one of the hospitals involved in the roll-up even asked to leave some money in the transaction to pay forward.  The price of audacity in this case?  Doubling their investment within 24 months.

Interested in buying or selling a veterinary practice?  We’ve got plenty of experience doing both.  Give us a call!

Case Study #45: From the ICU to a Strategic Acquisition

Case Study #45On New Year’s Day 1996, after some time as a freelance writer, Steven Smith and his wife Michele decided to take the plunge and create a content agency, WordSouth. Their background had been in telephone and communications and they used this to help many rural telecom companies tell their stories, market their services, and train their people. They were recently acquired by Pioneer Utility Resources, but that was only because some years before Steven finally started delegating when he found himself in the ICU.

One Week Becomes Seven

In 2014 Steven was diagnosed with a rare neuromuscular disease. It had taken him a year to get a diagnosis in the first place, and when they finally did identify the real problem the doctors recommended surgery which led to greater complications. After the surgery he ended up in the ICU, where he was only expected to stay a week. That turned into seven. But this wasn’t just a health problem for Steven: he had had problems delegating and WordSouth couldn’t really function with him laid up in the hospital.

This meant that the entire team had to take turns coming down to the hospital, where Steven finally delegated responsibilities and processes to members of the team. Not only did the business not suffer, it doubled during this new period, and continued to grow even when Steven was better and could return to the business full-time. It shouldn’t have taken a health crisis to create these systems, but to Steven’s credit, he made the necessary changes that should have been made years before.

A Future Sale

Even before this hospitalization, Steven and his wife had been contemplating a future sale. They had been inspired by observing colleagues that had sold businesses and completely changed their lifestyles: they slowed down, took time off, and started to work on some hobbies and projects that really mattered to them. But in the early days of pondering a sale, Steven was concerned that the business would only net 1 to 1.5X revenue or 3 to 4X EBITDA in a traditional transaction.

With that in mind, Steven began to consider pursuing a strategic buyer. A strategic buyer would be able to add the assets that WordSouth had in place to what they already had to create economies of scale and greater opportunities. With this mindset Steven began having more conversations with the bigger players in his industry.  At conventions and conferences he would ask some of the principals to dinner or coffee and get to know each other better. With the party that would become the eventual buyer, this conversation essentially lasted two years.

Synergy & Unconventional Structure

The company that ended up buying them had a strong presence on the West Coast, but almost none where WordSouth was based, in the South and Southeast.  While that firm shared work in the electrical industry with WordSouth, they were interested in growing in telecommunications, which WordSouth had strategically grown over the years. These considerations made for a good environment for a strategic acquisition, and after NDAs were signed, discussions were able to go deeper.

Because the acquirer was a co-op, the structure of the deal needed sign off from representatives of many different members. The co-op necessarily wanted to spread out both the risk and cash outlay, whereas Steven definitely wanted a commitment of cash upfront instead of a long earnout.  

Steven wanted to be with the company for an extended transition time, and while the terms of his eventual deal were not publicly disclosed, he has said in interviews that what got the deal to the finish line was both sides’ willingness to look at unconventional structures for the final deal.

Key Lessons

Takeaways from this case study:

  • As we’ve talked about before, it’s important to remove yourself from the scaffolding of your business so that your company can survive, and even thrive in your absence.  Have systems in place!
  • Don’t wait until you’re in the ICU to delegate.  Do it now, and be ruthless about it.
  • Sometimes a strategic acquisition will make sense for your business. These things don’t happen overnight. Keep your ear to the ground and build relationships that foster such possibilities.
  • Be willing to be flexible on your deal points. Be open to looking at unconventional ways you and the buyer can get what you both want.

Unfortunately, we’ve seen many a potential listing be lost because the owner ended up in the hospital and was not able to save the business, as Steven did.  If you want to sell your business but don’t know where to start, give us a call!

Case Study #44: Doubling the Deal at the Last Moment

Hand Sign - OkayDavid Jondreau grew up watching his father teach Sign Language classes in their family living room. No one in the Jondreau household was deaf, but David’s father had befriended members of that community and became passionate about teaching ASL. Before too long a legitimate small business sprang up that was part of the highly fragmented industry that was (and is) language interpretation services. If you needed sign language services for government meetings and speeches, or hospitals, or education, the Jondreaus’ American Sign Language was there to help.

A couple decades ago, when most people had no idea what “remote work” was, David began helping his father two time zones away. The business was in NYC but David lived in New Mexico. He helped with administrative tasks and booking classes. But one day David’s father passed away suddenly, and he and his sister inherited the business.

Start With Systems

While David was grieving, he also knew his father would want the business to keep going, so he started to put together the pieces of a real, sustainable business. His father was a selling dynamo and also ran the business completely out of his head. David had to learn sales as well as create written processes where none had previously existed.

Determine Ownership

In a nod to keeping the business in the family, David asked his mom to join as a 2% owner. With David and his sister at 49% each, it meant any big decision where there was disagreement needed to involve his mom. But this also meant the business qualified as “female owned” which really helped with some government contracts that listed that attribute as preferential.

Losing a Contract

All small businesses are challenging in their own way, but of particular stress to David over the years was the renewal of contracts. Not getting a contract renewed could massively affect the outlook for the coming fiscal year, and when David lost a game-changing sized bid for a large New York City school system, he had decided that it might be time to investigate a sale.

Thankfully, he had always beyond clean books: they were audited. He had taken the time to put key people in place, and he had refined the systems he first started putting in place when he read The E-Myth in the early years of the business. He started poking around at large regional conferences of language providers for possible buyers before deciding to hire a broker.

One of the possible buyers the broker introduced was building a conglomerate for a family office. David’s business would add a sign language component to a few other small businesses that would roll up into one entity. David was enjoying 10% margin on $2M of revenue and was looking for 3.5 times seller discretionary earnings (SDE).

When David chatted with the buyer he felt instant rapport and connection and felt comfortable moving forward once the price had been agreed to. Due diligence began and they were roughly two weeks away from closing on the sale.


The contract that David thought he had lost? Hard to believe, but the government had messed up the paperwork and David had actually won that five-year, multi-million dollar contract! Worse, the client demanded that the services start being delivered within a few days, which was when the school year was scheduled to begin. David leaned on that good relationship he had with the buyer and let him know about the development and asked for two weeks to completely focus on fulfilling the contract, after which time he would come back to work on the deal. That good relationship turned out to be rock solid and David was given that time to put everything in place.

But that meant that two weeks later, the value of the business had effectively doubled. What had originally been an 85% cash/15% paid in a one-year note couldn’t work anymore, especially since David would need to help babysit and optimize delivery in the early years of the contract. An earnout was put into place to account for the new revenue.

Unsurprisingly, the school system couldn’t seem to get their act together on paperwork and it was seven months before the first payment on the contract arrived. In the meantime, David maxed out all his personal and business credit and had even gotten some bridge financing from the buyer (again, see the power of openness and transparency in a transaction?). But as the payments started to be made regularly, the deal closed, and David stayed on for a period of transition, then as a consultant for the large contract.


David’s story is filled with key lessons for those who want to sell their business, even if they don’t work with family:

  • Have systems and manuals in place. You never know when something catastrophic might happen (like a worldwide pandemic). Hope is not a strategy.
  • Use a broker. You might predict this, coming from us, but in all seriousness, running a business is a full-time endeavor, and selling a business is at minimum a part-time project, but the stakes are possibly the largest financial transaction of your life. Do you want to be juggling that many balls?
  • Be transparent with the buyer. By developing a relationship early on and communicating at each step of the process, not only did David not lose a sale when he very well could have, but he ended up doubling his take.
  • Don’t give up. Oftentimes the selling process will have obstacles that come out of nowhere, like the late payment that put severe financial strain on David.  Those who accept the obstacles calmly and work through them will get to the finish line.  Those who panic, don’t.

All we do all day is help buyers and sellers come together and get to a mutually satisfactory outcome.  Let us help you!

Case Study #42: Cash From the Cloud

Cash from the CloudWhen Aric Bandy joined Agosto in 2007 the company had already been in the managed services business for seven years. Managed services was a saturated and capital-intensive space, and Aric saw an opportunity in a then-emerging market that we take for granted now: the cloud. While he didn’t know then that a big exit was in his future, he knew there was the possibility of one if he moved with intentionality.


From 2007-2014, Aric only saw demand for cloud services and the support related to them increase, whereas the market lagged to keep up with demand. He knew there was a finite window to expand his firm to fill that gap, and managed to encourage the company not only to divest its managed services division, but to plow the majority of those profits back into the company to expand its cloud offerings.

The “cloud” market has three big players, Google, Amazon, and Microsoft. Even with their large investments in the space, they weren’t equipped to handle individual accounts. They relied on certified and trusted partners to use the infrastructure they provided to cater to individual client needs. As such, Aric often found himself walking into boardrooms of big companies, many in the Fortune 100, side-by-side with a Google representative. He was able to bask in that brand halo and become a trusted vendor for these companies.

Exit Thesis

Unlike many business owners, Aric was obsessed not only with the idea of selling, but with the way to do it right. He wanted to engineer his business to yield a premium valuation.

Key components of this “exit thesis” included:

  1. Audited financial statements. He hired a reputable firm at significant cost to make sure they had squeaky clean financials that would stand an audit.
  2. Assignability. Since he had contracts to manage the cloud services of many firms, he needed to make sure that those contracts could be transferred to a future buyer. In the early days of growing the business, he wasn’t as serious about the wording in the contracts. But in 2016, as he got ready to go to market, he went back to tighten up all those contracts.
  3. Growth possibility. He had developed loyalty with his existing customers and they wanted more services than he could provide. That meant that there was good growth potential with the right partners/acquirers.
  4. Timing. He had to be willing to walk away from offers if he didn’t feel the premium was right. This happened on more than one occasion when they went to market and got offers they weren’t happy with.

Notice that all of these ideas of Aric came from a place of reflection and patience. He wasn’t in a hurry to sell the business, but that didn’t mean he put off thinking about how to do it right.

Blood In the Water

What changed things was the strategic acquisition of a competitor in the cloud space, for 13-14 times EBITDA. Suddenly other players woke up, and the offers that Aric and his team were dissatisfied with before this acquisition suddenly got a lot better. He went exclusive with one buyer in December 2019 and closed in April 2020, in the middle of lockdowns and a global pandemic. At the time of closing, Agosto was providing services to 360 companies, 80 of which were in the Fortune 100.

Key Lessons

  1. Be on the lookout for where your industry is moving and see if you can’t move there first. Aric ditched the comfortable model of managed services and leaped into the opportunity of cloud services.
  2. Have your paperwork and contracts in order. This is probably one of the first three questions we always ask people who come to us to sell: do you have your financial paperwork in order?
  3. Have a plan. Aric didn’t just wait to get tired of running the company. He planned for a future exit for almost 13 years. And he got a corresponding reward for that planning and patience.
  4. Be ready to walk away. If you don’t have to sell, you have the freedom to refuse an offer if you feel you can continue to grow the company and get a better value.

If you need help with any one of these lessons so you can plan for the exit of your dreams, give us a call.

Case Study #41: Tiny Bottles, Huge Exit

Tiny Bottles, Huge ExitLara Morgan spent almost 20 years building a company that started by selling sewing kits to hotels and ended up selling them shampoo, body wash, slippers, laundry bags, and much more. When she finally sold to a private equity firm for 20M pounds sterling, her company, Pacific Direct, was bringing in 3.3M£ of EBITDA annually. But a major reason she had a successful exit was a failed acquisition attempt some years before.

The Business

Ever wonder how those tiny bottles of shampoo get into your hotel? The most upscale hotels are interested in showcasing the best brands with the most attractive branding. Lara and her team would create a license deal in which she paid a fee to use the brand likenesses but was responsible for absolutely everything, from the packaging to the products themselves. At the time of the sale, Pacific Direct had factories in China, Czechia, and Egypt and were delivering goods to hotels in 110 countries.

The Toll

In the last year before she decided to sell the company, Lara spent 220 nights away from home. Her children were 8, 6, and 4, and while she was driven to succeed and create a legacy for them, she was deeply conscious of “losing them” in the present. She knew something had to change. But thankfully, she had already gone through a big challenge in 2004 that prepared her for a successful sale: a failed acquisition.

In 2004, the hotel industry was still dealing with the effects of 9/11 and fewer people traveling. There was a terrorist attack that year that scared off the investment group that was interested in acquiring the company, but even in the process of preparing for the sale Lara was completely dissatisfied with her role in the company. She realized she hadn’t been a good teacher of her team and was more of a benevolent dictator than a competent leader.

She took some time off to reflect. When she came back to work, she went to her brokers and asked, “Where would I have scored poorly if we had made it further in diligence?” Armed with that feedback, she created a permanent data room and incentivized the employee in charge of it with a hefty bonus: a full year of pay if diligence went smoothly on the way to a successful sale.

Going to Market

Lara knew that natural acquirers included her own competitors, but where she was completely clueless and that’s where M&A professionals really helped. When the dust settled, she had three offers from the industry and two from private equity, ranging from 14.5M to 27.5M pounds sterling.

This is something we encourage here at Apex: cultivating multiple offers and not just jumping at the “highest offer.”

If you look closely, there is often a catch. In this case, it looked like Lara would need to be bolted to her desk for years as part of the deal for the highest offer. In the end, she took a private equity offer in which she took 14M upfront, left 6M in the company, some of which was at a 12% note during a time in which nobody was paying a lot for capital, and got to cash out again when the private equity firm sold the company.

One of the “non-negotiables” that Lara included as part of the acquisition was bonus payouts to all her employees, weighted towards those who were most senior. As part of her data room strategy, she had aligned senior management with incentives for a successful exit. This ended up being at least 8% of the total payout. She knew she wouldn’t have gotten to the successful transaction without her team, and she let her actions speak louder than her words.

Key takeaways:

  • Know when to say when: Lara was more successful than she had ever been, but she decided to stop planning for the future and start living in the present with her young family.
  • Fool me once: Lara wasn’t crushed by the first failed acquisition. She learned from the experience and made sure her weaknesses would be strengths the next time around.
  • Align your team: By targeting a future acquisition and making sure her senior management was on board with financial incentives, Lara ensured everyone would be pulling in the same direction.

Whatever your reason for selling, we’re here to help. Give us a call!

Case Study #40: A Covid and Due Diligence Casualty

Case Study #40: A Covid and Due Diligence CasualtyAna Chaud started Garden Bar some years ago in Portland as a fast casual restaurant which featured salads only. While such chains as Chopped and Sweetgreen existed on the East Coast, nothing comparable existed in Portland, and Ana pioneered the market.

While Ana had some background in nutrition, she had no restaurant experience. She partnered with someone who had fine dining experience and in the first year they did well. They brought in $500,000 in top line revenue, doubling that in the second year. They had a “clustering” strategy similar to Starbucks, in which a commissary location supplied all the produce for a group of stores.


The very first store was completely self-funded by Anna, and the second store was covered by a small SBA loan and some funds from friends and family. This type of business needed to scale to really make great margins (not just to achieve economics of scale in purchasing, but in sales). To add four more stores, Anna took $500,000 in funding from eight investors, yielding them 20% in equity.

To add more stores and inject more working capital, Ana went to another set of angel investors and raised $1.1M in the form of a convertible note. At this point, Ana made a mistake in her due diligence. She allowed one of the investors to draw up the note and didn’t hire someone to represent her interests. If she had, she might have seen one of the terms that would have given her pause: if the company was acquired prior to the note converting, the investors would get a 2.5X return on the original investment.

The Acquisition Clause Became Important

As Ana grew Garden Bar, it became a very attractive acquisition opportunity for a company who had a similar concept in Seattle. And they were looking to become a regional player in the Pacific Northwest. She wasn’t aware of this prior to getting an extension on the convertible note, with no change to the return clause she had missed. Three months after that acquisition, she was looking at an LOI.

While the note holders had liquidation preference in a sale, the preferred shareholders, the original investors that funded stores 3-6, had to approve the increased payout to the convertible note holders. You might guess they were not too keen to do so. That said, everyone who had invested in Ana and Garden Bar up to that point were angel investors, people generally more interested in helping entrepreneurs get up and running, rather than a high rate of return. Everyone put their heads together to negotiate, and Anna gave up all her immediate upside to make sure that all the investors were at least made whole. And then they would profit via an earnout mechanism over a couple years.

It might have been an improbable happy ending if it weren’t for the arrival of COVID-19. In Portland, this meant an extreme lockdown. While the first part of the transaction had closed and her investors had been mostly made whole, Ana’s earnout is now at best in jeopardy, and in the worst case, completely gone. Only time will tell.

Key Takeaways:

  • Get help with due diligence.  If you’re going to need investors, get representation. Have a professional with your interests in mind look over any document that gives away equity or indebts you or the company.
  • Accept risk. At one point, Ana had personally guaranteed almost all the leases for the stores, simply because she was still considered “risky” for the banks, despite being able to show strong cash flow.
  • Remember that earnouts are never a sure thing. While we’ve discussed the risks of an earnout in ordinary situations, COVID-19 has added one more possibility into the mix.

Case Study #39: E&J Gallo Acquire Barefoot Cellars

Case Study #39: E&J Gallo Acquire Barefoot CellarsMany years ago, Bonnie Harvey and Michael Houlihan were a couple working as business consultants in Sonoma County. One of Bonnie’s clients, a farmer, hadn’t been paid for his grapes for over three years. The total debt? $300,000. Michael went over to the vendor to see what could be done to satisfy the bill. The morning he arrived, the vendor had just declared bankruptcy. The debt was looking to be worth about 3.5 cents per dollar. As Michael looked around the property, and the work in progress at the vineyard, he negotiated to take $300,000 in bottled wine that hadn’t been labeled. Neither he nor Bonnie were wine drinkers, nor did they know anything about the industry. But they were about to start an adventure that would end prosperously.

The Power of What You Don’t Know

After doing research for six months about wine and the industry, Bonnie and Michael offered to buy the debt at 100 cents on the dollar but with no additional interest and good repayment terms.  The client agreed.

Precisely because they didn’t know anything about the industry, they asked friends who did and packaged the wine at the right price and in the right varietals. When they showed up to the big distributors, they were asked, “What are you going to spend for advertising?” Bonnie and Michael were broke and answered, “Nothing!” The response? “Then we won’t carry it, and neither will any other distributor until you do.”  This left them with Plan B and a much longer timeline: visiting individual mom and pop stores throughout California to build a following. That took years, but that’s precisely what they did.  

After two years, one particular small retailer took a shine to them and when they launched nationally outside of California, they took Barefoot Cellars, Bonnie and Michael’s brand, with them. The name of that retailer? Trader Joe’s.


As they sold through the initial $300,000 of inventory, Bonnie and Michael didn’t keep any of the earnings. They plowed it back into the company and a wine brand that had no vineyards, no bottling lines, and no facilities to maintain. They created departments for sales, accounting, and quality control. They did have a winemaker, but that winemaker would simply rent the facilities of other vineyards on days and weeks when Barefoot needed to do a production run.  

They also took advantage of lines of credit based on their accounts receivable, and they were able to do this because they developed a relationship with their banker (something we recommend often).  

They also made sure to spend time with the distributors and retailers in a customer-facing way. This allowed them to learn what people wanted and how to improve their product. By the time Barefoot got acquired, they were selling 600,000 cases of wine a year (for the wine novices, 12 bottles are in a case, so that equates to 7.2 million bottles a year). But growth alone wasn’t going to get them the sale they wanted.

Broker Education

Remember Bonnie and Michael had never owned a wine company, so they certainly hadn’t sold one before, either. They decided to take a broker out to lunch and ask questions about the metrics in such a sale so they could use those metrics to optimize their business (as an aside, you don’t have to take us to lunch to get some of these insider facts, but we aren’t likely to refuse if you offer!) They learned about valuation (anywhere between 2x and 10x gross sales, depending on both the wine market and the stock market in any given year), growth rate, and position in the market, key factors that the bigger players looked at when considering an acquisition of a smaller player.

Bonnie and Michael also wanted to target an acquirer and get in their sights. When doing their research, they found that E&J Gallo wines were the only ones selling faster than theirs, and this was due in part to a strong presence that their sales team had with distributors on the ground. Barefoot then focused their energies on the largest distributorships of Gallo, trying to get Gallo’s attention by performing well as a competitor.

They also found a broker who had not only done a lot of transactions in the wine space, but had recently completed an acquisition deal for Gallo. Another lunch later, Bonnie and Michael had the list of due diligence items that Gallo required from any acquisition target. They went about getting all of that lined up and Gallo was impressed to get such a fast reply to their due diligence requests (little did they know that the couple had been working on their homework proactively!)

The terms of the transaction were undisclosed, but it’s fair to say that Bonnie and Michael definitely turned that original speculative $300,000 bottles of unlabeled wine into a fortune.

What can we take away from this story?

  • Don’t be intimidated by your lack of knowledge in a business. Do your research, ask the experts, and then be willing to put in the elbow grease and financial sacrifice to make it happen.
  • Play the long game. Wine, like most businesses, is not a “get rich quick” scheme. When the big guys told them “no” early on, they didn’t give up, but started cold calling on each and every wine retailer in the Golden State.
  • Buy lunch for your broker. Okay, so this is a bit self-serving, but you probably get the point: we’ve done thousands of transactions and have knowledge we can share; all you have to do is ask.
  • Don’t be afraid to call your shot. Bonnie and Michael knew who they wanted to be acquired by and reverse-engineered it. That’s not always going to be possible. But the lesson of “have your due diligence ready before you’re asked” is something we all can accomplish. We have to be willing to set aside the time to prepare for the future.

Case Study #38: Removing Yourself from the Scaffolding

Removing Yourself from the ScaffoldingBryan Clayton started building PeachTree, Inc. as a high school student. He eventually grew it to 150 employees and 8 figures in annual revenue. He spent his first years at college telling himself he didn’t want to cut grass for the rest of his life… as the income continued to roll in. Bryan realized that he would probably never earn as much in the job market as he was already doing in his business. When he graduated, he went all in on “cutting grass.”

Learn the Lay of the Land

Bryan really had no background for how to build a business and stayed curious about how to do things the right way. One of the things he did early on was visit large landscaping companies whenever he traveled for conferences. They often allowed tours of their facility on request, and Bryan used those tours as an opportunity to observe and take notes. What were they doing that he wasn’t? What systems did they have that he could put in place as well?

Residential income had been the startup engine of his business. As Bryan began chasing commercial accounts to diversify,  he learned that they paid on 90 day terms. This meant that signing a six figure contract to do work for an apartment complex or a set of bank branches required a certain amount of working capital. It was the only way to deal with such a long delay in payment. These kinds of lessons continued to shape how he built the company.

Differentiate Yourself

Once Bryan felt that he was executing the basics well, he developed a culture that differentiated him from his competitors in landscaping (of which there were many). He saw himself as a true partner with his clients. For example, many drive-thru restaurants often have cigarette butts in the drive-thru lane. They’re unsightly. When people lean out to order or to pick up their food, it’s unappetizing to say the least.

Bryan picked up on that situation and pointed this out to restaurants. He went on to pick up all those cigarette butts as part of his landscaping service. He (correctly) surmised that cleaner driveways might lead to better sales, and the restaurants noted this sort of care and thoughtfulness. The word spread.

Bryan also deployed the same thoughtfulness at apartment complexes. He asked where the model apartment was and what the standard closing rate was after a tour. His goal was to increase that closing rate by improving the appearance around the model apartment by adding touches of landscaping at no extra charge. Bryan wanted to drive home the point that he wasn’t just cutting grass, he was trying to make sure his clients did well financially.

Time to Sell

As time went on and Bryan continued to grow his company, he came across books like Built to Sell and The Four Hour Work Week. He realized that while he had put some systems in place, he felt as if the entire company was just scaffolding that he’d built around himself. He was worried that his absence could cause the company to collapse. “I didn’t realize that the life of a business owner could be something other than rushing around all day putting fires out.” While he did manage to put some systems into place to make the company an attractive acquisition, he wasn’t able to hide the fact that he was “done” and didn’t really want to go back to running the business if a sale wasn’t completed.

An Important Lesson

His acquirer, a large operation who had done many acquisitions, could “smell” this fear on him, and that’s the first lesson Bryan would give to up and coming business owners:

Prepare for a sale when things are going well. This will take some time to put together, sometimes years, so don’t do it when you’ve run out of gas. Do it when you’re doing well, or your buyer might take advantage of your mindset of being “done.”

He adds, “Don’t get hung up on what YOU think the business is worth.” His acquirer was not interested in the 80 paid-for trucks that were part of his fleet (in fact, they sold them all the day after the sale closed and unsurprisingly, brought in their own equipment). The buyer was only interested in revenues and made an offer (which happened to be the best one) with no consideration for the equipment. It doesn’t matter what YOU think the business is worth. It matters what the market, and ultimately, the buyer who has done due diligence thinks.

It’s always possible to differentiate yourself, even in a red ocean like landscaping. Start with the basics of having the proper business systems in place. Then ensure that you have a culture that stands out… not just to your staff, but to your clients. Their delight and word of mouth will carry you the rest of the way.

We’ve represented buyers and sellers for landscaping and other outdoor businesses for decades.
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