Archive for category: Case Studies

David 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.

Curveball

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.

Lessons

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!

When 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.

Demand

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.

Ana 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.

Funding

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.

Bryan 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.

Timothy 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.