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.
If you have questions, give us a call.

Case Study #37: Built for Communities, Acquired by Cracker Barrel

BiscuitsEarly on his journey of building Maple Street Biscuit Company, Scott Moore had to offer a personal guarantee for some of the restaurants that put his home at risk. But he had confidence in the brand, his team, and himself to add to the willingness of a spouse to be exposed to that risk, and less than a decade later that confidence and willingness to take risk was vindicated in a $36M acquisition by Cracker Barrel.

Comfort Food…with an Opinion

Maple Street bakes their biscuits fresh every day with flour and real butter.

On top of that base they have a sausage or shiitake gravy (again, made fresh in house), all-natural never frozen chicken, and house made jams and jellies. While those sound like typical ingredients, their dishes are anything but.

Their “Squawking Goat” got featured on the food network: fried goat cheese and pepper jelly on top of that chicken and in a biscuit. Scott noted that he knew the flavors were familiar but he wanted people to say, “I’ve had those flavors before, but never like that” and that would make Maple Street a destination, not just another diner.


At the core of Maple Street’s hospitality is what they call “gracious service.”

This is a value that flows from Moore’s top level philosophy that a business has a right to do good in the community and gracious service is a way to “earn” that right to do good in the community every day. This isn’t a formula in which someone introduces themselves by name and comes to the table to check on you (Maple Street is a fast casual concept anyway, so you need to bus your own table when finished) but rather a level of care for the food and the customer that shines through.

This even comes through in the words that are used. Locations are not called “restaurants” or “storefronts” but rather “community stores” which are led by “community leaders,” not managers. The community helped give Maple Street its name and even helped name its dishes (like the aforementioned Squawking Goat) so this is another value the company lives and doesn’t just parrot.


When Moore was putting together the concept, he worked off three different P&L projections. One was simply “average” for the industry. One was premised on doing really well. The last was half of the average.

His idea was that as long as they could at least hit that last projection, the “half of average” one, they could get the business going. He focused on a lean team and profitability from the beginning, and they leveraged an interesting system to grow the concept quickly, using a joint venture vehicle in which someone would put up $150,000 and then enter into a 49/51% partnership with Maple Street for that location. With Moore’s focus on Lean principles and responsible growth, Maple Street had 28 company-owned and 5 franchise-owned locations in 7 states at the time of acquisition.

What’s an important part of understanding how compelling Maple Street’s business was to Cracker Barrel was the fact that they already had a biscuit restaurant concept called Holler and Dash in their portfolio. This acquisition is another example of “if you can’t beat ‘em, join ‘em” and the power of “build it and they will come.”

Key Takeaways

  • Culture truly matters – it’s not just hooey that people give speeches or write books about. It’s what the best companies always have under the hood.
  • Grow responsibly – While Scott had his own skin in the game by personally guaranteeing the first loans of the company, he also made sure that strategic partners who built out restaurants did the same. By staying lean he made sure the money could be invested in growth instead of expense accounts.
  • Stand out – the “comfort food with an opinion” angle hit big and in the first weeks of the first restaurant opening and he saw an hour long line snaking out the door Scott knew his hunch had been right.

Case Study #36: Airline Software and the Value of a Patent

Case Study #36: Airline Software and the Value of a PatentTimothy O’Neil-Dunne has been an aviation and travel insider for years and his most recent business, Air Black Box, was acquired by 777 Partners in early 2019. Along with his fellow co-founders, Timothy was able to create a way for airlines to sell more seats by using new software to access very old technology which is the domain of just a few companies.

Why “Black Box”?

It turns out that airlines are not really interested in hearing about the technology behind innovative software, nor are they interested in the larger philosophical discussions about how they can still make money when their flights connect with airlines that stand outside the big three (SkyTeam, OneWorld, and Star Alliance) airline alliances. So rather than force these ideas on the airlines, they leaned into this lack of desire to understand technology and just called it “Black Box.”

They also conformed to the way that airlines and airports prefer to see proposals: as a per transaction cost. What does it take to get a passenger on that jet bridge waiting to board the plane? That’s what they understand and that’s how they built all of their projects. One of which was creating a new airline alliance, the Value Alliance, which mostly includes low-cost carriers.

What many of us who use online websites to do bookings don’t realize is that the slick and shiny software we use is connected to very old legacy software and technology. While these software operators still benefit from being able to sell tickets to people like us who want to buy them, airlines really still lack the ability to drive more revenue by airlines networking and cross-selling with each other. That’s where what Air Black Box was doing really made a difference that went straight into the bottom line for its clients.

Invest in People

Early in the process, Timothy and his co-founders made the decision to make sure that his employees had a stake in the future of the business by giving them some ownership shares. One third of the company was then allocated in such a way that if there was a future transaction, his employees would get a guaranteed amount. Whereas any speculative part of the deal that required more work would be his risk (but also his reward). When asked why, Timothy responded that his staff were loyal and went above and beyond. They were the type that if you called in the middle of the night they would do their best to try to figure out how to solve a problem.

Ask for Help

While he did bootstrap the company with his own funds, Timothy was also happy to partner with the government to get some matching grant funds. They approached Innovate UK and made the case for how their UK firm could obtain some significant international business if they could get some seed funding at a crucial stage. That funding was important early on when Air Black Box only had one customer, Changi Airport.

Invest in Technology

Part of the value of Intellectual Property (IP) in a future sale is the competitive advantage you have over others because of your technology. The other part is the ability to gain from adversarial lawsuits. The patents obtained by Airline Black Box combined with their transaction revenues made them an attractive target for 777 Partners, which has a collection of companies in its portfolio that it helps to scale to a high level of success.

There are many important and valuable businesses that exist all around us. But they are invisible because we don’t know they play a role in our everyday lives. We deal with a lot of these off-the-beaten-track businesses here at Apex. Give us a call if you’d like to learn more.

Case Study #35: Jazz Guitar Lessons and $250k Annual Revenues

Jazz GuitarFor some years, Marc-Andre Seguin was the typical struggling artist, specifically, of the musical variety. But unwilling to face the fate of so many before him, he decided to create a blog about his music, and almost a decade later, that site pulls in a cool $250,000 a year in revenues. How did he get there and where is headed? Let’s take a closer look!


Marc-Andre first started by simply providing some content about jazz guitar pieces and improvisation. He would link to Google Adsense and Amazon Affiliates, earning revenues from the growing number of visitors to his blog. Some of these clicks would earn him 15 cents, others 30 cents. He also began to charge for PDF versions that could be downloaded and also allowed people to book private lessons with him via Skype. These strategies got him from the early months of $30/month in revenue to $700-800/month.


One of Marc-Andre’s students happened to be experienced in email marketing and convinced him to start creating infoproducts, be they e-books or private “classes” that could be sold via email marketing. This was also a success, and started to bring in significant revenues, but that also meant time putting together an infoproduct for each email launch as well as the right combination of marketing and wording to make the offer compelling. Revenues were now into four figures a month for Marc-Andre, but he grew tired of having to come up with each new promotion for the email push, and decided to take a look at another model…

Then, Subscriptions

While there is a universe of “guitar lessons” available on the Internet, Marc-Andre discovered that he was part of a very small cadre offering anything relating to jazz guitar, and so he decided to pursue that niche with all of his focus. But instead of the overwhelming all you can eat Netflix model, he offered something more course-oriented. He created a “start here” engine that guided people through the lessons, starting at whatever level they were comfortable at (and eliminating those who were too advanced for what he was offering). Then, as more and more content was being created, the users would then be an infinite loop of learning.

His current churn rate is around 10%, which is standard for an infoproduct business. As of late 2019, Marc-Andre’s brings in roughly $20k/month.

Key Lessons

  • Niche: in the era of the internet, embracing a specialized niche for an infoproduct business is not just smart business, it’s absolutely necessary.
  • Subscription Model: Software as a Service (SaaS) has prepared many customers for a recurring monthly charge rather than a one-time payment. Leverage that shift in mindset for your own benefit.
  • Embrace the Pivot: Several times in his business journey Marc-Andre found himself at an inflection point. At each juncture he embraced more work to get to more income, but he also did it while creating systems to make that work easier over time.
  • Begin with the End in Mind: As of the publishing of this article, Marc-Andre has not exited the business, because his goal is to hit 1,500 subscribers who are paying $39/month. With the multiple that accompanies solid subscription businesses, he’s come a long way from struggling artist. But he’s also demonstrated that you don’t need to reach a lot of people to build a million dollar business.

Case Study #34: Printing Profits

Case Study #34: Printing ProfitsJohn MacInnes started Print Audit in 1999. He aimed his software at anyone who would normally charge people for printing costs, like law firms or schools. Those businesses were often very aware of photocopy costs, but not of direct printing costs, and the software Print Audit provided allowed those individual prints to be properly assigned and then billed to clients.

As time went on, Print Audit also put software in place to monitor ink and toner levels so that those companies with copier leases would experience less friction with service and refill calls. Instead of having to call up the service provider telling them that the machine was malfunctioning or that toner needed to be refilled, the software proactively notified dealers so that service interactions were enhanced and a lot of time and money was saved, by both the dealers and their customers.

Too Many Eggs in One Basket

The company was growing well, but a latent problem in their customer distribution forced them to make some drastic changes. One of their customers, Ricoh, was responsible for 70% of overall revenues, which was roughly $600,000 a month. Ricoh made a strategic acquisition and lost focus on this particular component (software helping to manage service calls) of their business. John noted that some of the people who were added to Ricoh during the acquisition were tasked to Print Audit, but they didn’t really know the company and in the meantime the $600,000 a month had plummeted to nearly $60,000 a month.

John had two insights: focus on the individual dealers rather than the corporate office, and switch to a subscription model. He did just that, not just making a better version of the software but making it a subscription service, and adding a number of key peripheral services that created a larger base of clients worldwide.

Focus on Retention

He also did something unexpected for a tech business: work on winning the retention game. As we discussed in an article about recurring revenue businesses, retention is a big part of success. John and his team made sure they were spending 80% of their time satisfying existing customers while spending the remaining 20% of time on adding features that would lure in new customers. At the time of acquisition, Print Audit had a 99.5% retention rate, so John figured if he wasn’t going to sell Print Audit, he might have another company in the stable: one that helped other companies improve their retention rates!

As it was, John had been building Print Audit for 20 years, originally on bootstrapped friend and family funds of $75,000. He saw that the industry was in consolidation mode, that there wasn’t room for too much more growth over time. Even though he had restructured the company in the aftermath of the decline of the Ricoh account, people were simply not printing as much as they used to… not simply because of the number of ways that paper was being saved digitally, but because of growing pressure for large companies to be more environmentally responsible, and printing on paper was one of those targeted areas.

Software as a Service

Interestingly, because he had transformed the company into a SaaS (software as a service) recurring revenue model, he became a smart strategic purchase for a large firm. While he says he wasn’t excited about the 2,000 items that he was assigned by the buyers for due diligence, he had a lot of support from his broker and banker to keep him on task and positively oriented towards a fruitful conclusion.

Key Lessons:

  • Never be lopsided.  While John was alert and talented enough to pivot his company while it was in the midst of a revenue free fall, he should never have allowed one customer to be 70% of revenues.  Anytime any customer is more than 15% of revenues, you should be concerned and take the opportunity to diversify.
  • Innovate in your space.  While the copier and print industry was probably slow to change because of its high capital costs, John invested in improving his software when it already was an industry leader.  That allowed him to grab even more uncontested market space.
  • Don’t be afraid to own a category that isn’t a core competency.  Customer retention of a subscription product wasn’t a core competency of Print Audit…until it was.  John made it a priority, invested the people and resources in that direction, and the numbers say it all: 99.5% retention rate.  

Case Study #33: The Acquirer Gets Acquired

Long before the general public knew what Amazon Web Services was, and that it provided the backbone for entities ranging from Netflix to the CIA, Glenn Grant was building G2 Tech Group.

G2 Tech Group was leading the industry in migrating services to the cloud, where Amazon Web Services lives. While it’s true that many times pioneers get slaughtered and later settlers prosper, if the pioneer seeks an exit at the right time, he/she can enjoy the fruits of all that hard labor.

Managed Service Provider

While Glenn had started the firm as a traditional break/fix IT firm, over time it became a managed service provider (MSP). His MSP offered managed devops (maintaining tools for developers) and got ahead of the industry in two ways:

  • Introducing Amazon Web Services to clients long before it was standard practice.
  • Creating a subscription model of recurring revenue. The services he offered gave clients an insurance policy “just in case” but also was proactive in offering assistance and tutelage in using these tools.

At one point Glenn was directly and indirectly managing thirty employees. He wanted to use his market position to start acquiring smaller firms and take a more powerful role in the industry. But as he started to do his own research into a possible exit, he saw that there was actually a chance for a strategic acquisition, not just a financial one. Potential buyers were discussing multiples of revenue instead of EBITDA. With money out there chasing a functioning business like his, he decided to pivot from acquiring smaller firms to being acquired himself.

Selling Sooner Rather than Later

Acquirer Gets AcquiredHe was ahead of the curve and was well-built, so he could have easily coasted for a few years and banked the profits. But Glenn knew that while business moves fast, tech businesses move even faster. Worse, if he didn’t sell, one of his competitors might, and then instead of the competitor he knew, he’d be dealing with an 800 pound gorilla that might be able to simply outspend him.

When the time came for Letters of Intent, all three of them came from Private Equity Groups.

While Glenn had heard horror stories of what PEGs can sometimes do with Mid Market businesses, he did his own homework. He took the time to get to know the partners of the PEGs who were competing for a deal with him. And he asked to speak to fellow entrepreneurs in the portfolios of those firms. They could tell him first hand how the transaction went and whether promises were kept after acquisition.

Second Bite of the Apple

Because Glenn had started working with Amazon so early, the firm was a “trusted partner” with Amazon. This gave G2 Tech Group even more leverage in a potential sale.

Glenn saw the value of these first acquisitions in his space defining what the industry would look like in future. So he didn’t want to just ride off into the sunset, but wanted to have an impact in the evolution of his company. As such, in the transaction he was able to take a significant amount of money off the table, but he also was given the chance to invest some funds into the new entity (enough to keep it “interesting,” he noted). He was now in a position to give it a push while he was at the height of his subject matter expertise (and since he still had the desire to push on). He stayed on for two more years with the new company and did indeed enjoy a “second bite of the apple” with a subsequent exit from that firm.

There are as many ways to structure business exits as there are businesses. If you possess the drive and energy of someone like Glenn, we can help you structure your exit to be something similar. Give us a call today.

Case Study #32: Health Scare, Quick Sale

Health ScareThere are many occasions we’ve seen a quick sale over the years. One of the two factors that can often lead to one is having an exit strategy. The other? A health scare. While sometimes the health scare is genetic and unrelated to the business, very often conditions in the business manifest in some health condition, and this causes a re-evaluation of priorities, and often, a sale.


Jim Remsite was one of two partners that started a custom software company called Adorable. In an industry dominated by robotic and functional logos and names, Jim and his partner decided to zag with a sort of pink coral decor: “We wanted customers to love their software.” And they did. Jim and his partner started the company in 2014 and by the end of 2015 they were looking at $1.5M in topline revenue.

But towards the end of 2015, Jim’s partner decided that he wanted to move on to another project he was more interested in, and because they had a buyout agreement in place, they had a good starting point for discussions. Since this other project would take longer to start providing a salary, and because the buyout agreement was set for five years, they negotiated to get a lower total amount in exchange for it coming at an accelerated rate.

Losing a Partner

With the challenge of losing a partner, Jim decided to push himself hard. This was due in part, he confessed later, because he was trying to prove to himself and everyone else that he “didn’t need a partner.” And while the company did grow to $3M in topline revenue in 2016. By 2017 it had returned to its previous level, $1.5M, and Jim had to lay off almost half of the company.

It turns out that while Jim obviously didn’t “need a partner” to go out and sell, he needed someone to balance him out, and he also needed an easier path to going from managing 11 people to managing 23. People weren’t properly managed, the sales pipeline wasn’t properly cultivated, and bad results ensued.

The Headache

A short time after these layoffs Jim was at a conference and was struggling with a very bad headache. He thought that it might be due to the conference being held at altitude, but when resting in his room didn’t work he checked in with the paramedics and they found that he had unusually high blood pressure. He went to the hospital where they monitored him for the rest of the day. The next morning he was fine and brushed it off as just a possible fluke.

But a couple of months later it dawned on him that this might be symptomatic of how things had become unbalanced, and he decided to become proactive and look for a possible acquirer. While there were three suitors, he ended up selling to the company that was much much larger than his (around ten times larger in revenue) because he knew that the problems which had created the imbalance in the company would be rectified: he would get support staff for his sales efforts, and he’d be given a c-suite – a seat at the table without having the entire burden for running the company falling on him.

Don’t wait for a health scare to consider a business sale or transition. Give us a call today so that we can take a look and see what we can do to help.

Case Study #31: Skunky Business, Sweet Sale

Hemp LeafWhile it’s still an issue of tension between state and federal governments, cannabis is the base of a booming nationwide industry. That means we’re already starting to see transactions in that space. While we can’t say we are experts in this space, we are watching it with interest and wanted to share a case study with you that will illustrate it isn’t as simple a road as any might lead you to believe.

Brandon Ruth and his wife had spent some years abroad after college. They used that time as an opportunity to explore the world but also to become debt-free by living way below their means. But some time after they returned to the US, Brandon’s mother-in-law was diagnosed with cancer, and part of her treatment involved the medicinal use of marijuana. Brandon and his wife were intrigued by its positive effects and really began to learn about the product.

Regulation, regulation, regulation

When Washington state opened up the possibility of marijuana for recreational use, they were the third person to submit a completed application to become a licensed producer/processor. That’s the first stifling regulation of many throughout this story – the state won’t permit vertical integration, so you could apply to operate a storefront or you could apply to grow and process. You weren’t permitted to do both.

Now, because the state regulated the number of producer/processors and the number of storefronts they didn’t realize (or didn’t care) about the market effects.  Because there were so few store licenses issued, and so much grower capacity, by contrast, a major supply/demand disparity was created. With so many growers, the stores could dictate prices to the producer/processors.

The regulation didn’t stop there. Growers had to pay $1,000 per month for software that ensured compliance with the state, apart from mandatory insurance. Oh, and if you violated any growing conditions you would be fined per occurrence. Growers were also not permitted to have a website or buy billboard space.

No deductions

As if these conditions weren’t enough, federal law classifies marijuana businesses as operating in an illegal market, and as such, standard business deductions are not permitted, which meant that the 20% before tax income that Brandon was netting from $1M in topline revenue was essentially subject to a 75% shadow tax in the form of losing those deductions. Worse, he hadn’t paid himself or his other business partners a salary.

This was not an isolated story. In fact, the location that Brandon cultivated his product was home to many other growers as well. While many may think of large indoor warehouses when they think of marijuana cultivation, smaller operations, like Brandon’s, often operate in a hybrid outdoor/greenhouse model, growing some of the product outdoors as regular plants while keeping some varieties in a greenhouse. These other smaller growers were feeling the squeeze and after a couple years of frustration, they decided to have a big meeting. Almost 40 growers were present.


As they talked through the issues they realized that consolidation made the most sense. If there was a roll-up of existing sellers, then the current supply/demand problem could be “corrected.” Meaning, if there were only five growers in the whole state, then the stores would suddenly be in the position of having only a few choices, and would no longer be able to dictate pricing, but would probably have pricing dictated to them. One of those 40 growers had the financial backing to execute the roll-up, and before long, there were 39 deals in progress.

Now, interestingly, because of the state of affairs, the value of the business wasn’t in inventory, employees, or traditional assets. The value was the license from the state, which were no longer being issued. It was the equivalent of a taxi medallion: a license to make money, under certain conditions. The value of the “medallion” in this circumstance was being somewhat dictated by all the other deals in progress.

Thankfully Brandon stayed diligent. In an industry not usually populated by those who had studied business, Brandon stayed persistent with the buyer, pointing out the crop timeline and the importance of closing a deal by a certain date so the buyer would be certain to be able to pay for the cost of the sale by harvesting that crop instead of having to wait another year. While state regulation doesn’t allow him to disclose the terms of the sale (are you surprised by yet another regulation?) he did manage to, after clearing the business debts, make a little profit on his original investment.

And now you know that while marijuana as a plant grows very easily, business conditions are currently such as to make the business of cultivating it pretty hard.