Case Study #8: What’s Your Sweat Equity Worth?

Dr. Phil Carson (a different Dr. Phil than the one most people know) is the owner of Carson Natural Health. Before he began that business, he helped create a pharmacy business. He didn’t have anything to invest in that pharmacy business as he’d been wiped out in 2008-2009, so he earned his equity via sweat.

Why did the owner need Dr. Phil in the first place?

The owner had a medical supply company and was dealing with changes in the law that made it impossible for diabetic patients (which were his bread and butter) to buy from him. They had to buy from a pharmacist. So the owner needed to find a pharmacist in order to serve those clients who were leaving in droves at the time.

The early months

Sweat equityPhil had a regular 9-5 job at the time and worked nights and weekends to build a “closed door” pharmacy (one that wasn’t open to the public) that could fulfill the mail order clients.

After 6 months of this, he quit his day job and went full blast in the business and received a percent of shares in the company.


While the company had started with a focus on diabetics, they started to expand.

At the time of the sale they had five locations in all. That included retail locations to service local customers in addition to all the mail order business that had been built up.

It was clear to Phil that the expansion was a bit messy and that the company needed help. He reached out to someone he knew who consulted for businesses. Phil’s partner wasn’t only reluctant about the need for the analysis, but even made Phil pay for it.

When presented with the results, the partner simply decided to ignore the facts and refused to hire the consultant to implement any recommendations. At that point, confronted with such behavior, Phil began looking for an exit.

The sales process

Unsurprisingly, the owner didn’t take Phil seriously when Phil proposed a sale of his shares in the company. While Phil was frustrated enough at the situation that he would have happily walked away for $250,000, his business coach urged a professional valuation (so do we). When all the work with the numbers was done, the revenues indicated that Phil’s share was worth closer to $1.2M.  

As one can guess by now, the owner didn’t even offer half of what Phil would have settled for (Phil hadn’t told him he had done the due diligence already) and in response, Phil handed back the professional valuation and asked for $1.2M.

After a delay of a few more weeks while the owner double checked all the numbers, Phil got a check for the majority of that amount, and has been taking payments while doing some consulting work for the company and transitioning out.

Dr. Phil went on to build a company focused on holistic health. You can learn more about it here.

Case Study #7: Sold to a Competitor

Sold to a Competitor

Andrew YangAndrew Yang Sold to a Competitor was the CEO of Manhattan GMAT when he sold to a competitor, Kaplan, in 2009.  

At the time of the sale, the company was doing $11M annually. Andrew stayed on post-acquisition and added an additional $6M a year in revenue before departing to start a non-profit.

What is the GMAT?

The GMAT is a computerized standardized exam (think ACT or SAT, but much harder) which students take in order to enter the top business schools.

Manhattan GMAT only hired instructors who scored in the 99th percentile on that test. They then paid them $100/hour as a base salary.

How did Andrew get involved?

Andrew was first asked to help create a curriculum for the one-man band that was the kernel of what would become Manhattan GMAT. He did just that and from 2001-2005 helped grow the company to $2M in annual revenue.

Why did he decide to sell?

The seeds for the sale were actually sown during a legal exchange. The general counsel at Kaplan had sent a letter identifying a question that was on one of Manhattan GMAT’s online forums. This question bore a close resemblance to a Kaplan question. Andrew was asked to remove the question.

Andrew responded promptly and said he would take the question down. He said also that he hoped future interactions would be around more positive issues. This took the general counsel by surprise, who subsequently shared the positive experience with the CEO of Kaplan. A few weeks later, the CEO of Kaplan asked Andrew to lunch.

Andrew had no plans to sell at the time, much less have the business sold to a competitor. Kaplan wasn’t offering to buy, but they were direct competitors. Kaplan’s CEO indicated that he would like to be part of any discussion for acquisition if and when Manhattan GMAT decided to sell.

Key lesson here: Being courteous when complying with a legal request isn’t hard and it may lead to wonderful results.

A year later, as more investment offers had come in, a financially-based offer from one of Kaplan’s competitors, Princeton Review, came in. Andrew let Kaplan know that a deal was in play.

Kaplan came back with a strategic valuation which offered roughly 40% more than the financial offer. There was really only one choice at that point. Andrew accepted Kaplan’s offer.

What was the toughest part of diligence?

Keeping the process from his staff. Andrew prided himself on transparency. He was having to produce all the necessary due diligence documents personally, though it seemed he was making strange requests of his staff for obscure and old reports.

Manhattan GMAT had been the tough, scrappy underdog, and now they were going to sell out to the “man,” the biggest corporate behemoth in the space.

Andrew made up for what he considered a departure from a core value of the old company by setting aside 10% of the earnings of the sale to pay out his staff based on service and loyalty. He particularly remembers that one of the team members used that payout for a down payment on a house.

Andrew now runs Venture for America, which places top college graduates in startups for two-year periods to help build the next generation of entrepreneurs. That venture grew directly out of his time building Manhattan GMAT.  You can learn more about it here.

If you liked this case study and would like to read others, check out our case study archive.

Case Study #6: What You Don’t Know Can Absolutely Hurt You

hurtToday Erik Huberman runs Hawke Media, which is an outsourced digital CMO agency that works with the likes of Bally Total Fitness, Verizon, and Red Bull.

But the opportunity to build that company came from settling debts from previous startups and a bit of cash from selling a company called Swag of the Month.

The Beginning

We live in a world in which a monthly subscription product aimed at men sold for $1B (Dollar Shave Club to Unilever).

But before companies like Harry’s or Dollar Shave Club even existed, there was Swag of the Month, which was simply an idea of Erik and a friend’s: how to find a better way to sell t-shirts, without the hassle of retail shopping.

They created a quiz which allowed men to share what they were looking for in a t-shirt and then they mailed out a new shirt to that customer each month.  Over time they built confidence by delivering exactly what their customers wanted.  The brand got a lot of prestige from being written up in all the major men’s magazines.

Then, the wall

Unfortunately, Erik had built his company right into a wall.  They had 5 employees and thousands of customers, but the only way to grow was going to be to raise money or sell.  They were simply doing too much work on a day-to-day basis and not making enough money.

Selling, and the two big mistakes in hindsight

One of the vendors of the company was interested in using the platform that Erik and his team had built to push more sales of their own. They were familiar with the brand and, over the course of an afternoon, learned how the business worked, made an offer, and wrote a check.

Mistake #1

The pain and stress was great enough in Erik’s life that he walked into that afternoon meeting with a number in his head.  That number recovered all the investment in the current business, paid off debt from previous businesses, and took a little off the table for themselves.  It was, by no means, life-changing money.  He made the mistake of blurting out this number when asked and hence blew all his leverage.  The buyer clearly had no problem with that number and wrote them a check immediately.

Mistake #2

The reality is that many competing firms at the time had poorer systems, no profitability, and no brand recognition, but they were still awash in venture cash.  Erik had no confidence or connections to enter this world, so he simply folded his cards.  In retrospect he realized that a bit of networking, a bit more asking, or a bit more willingness to look foolish as he started to pitch VCs would have changed everything.

The new owners went on to quadruple the topline revenue in the 2nd month after taking over from Erik and his team.  

Moral of the story: What you don’t know can hurt you in a business sale. With that in mind, know you can trust a team like Apex, which has more than a century of business ownership and sales between their brokers.

Case Study #5: Don’t Be Lopsided

lopsidedIn 1994 Rick Day founded Daycom Systems.  It started by selling used telecom equipment, but over a 17-year period it became the largest Avaya-authorized telephone equipment dealer and installer on the US West Coast.  It did $23M in annual revenue, between 4 locations, with over 55 employees.

It was late 2007 when Rick decided to sell, for two reasons.  Firstly, Avaya had come from Lucent, which had spun off from AT&T, and he was not convinced of the long-term strategy of that company.

Secondly, he saw on the horizon what was then a novelty but what has since become an accepted technology: IP telephony (For the uninitiated, this is simply the difference between the old copper-wire phone lines vs. the phones most of us use today, which are powered by our internet connection).

In this brave new world, his company’s value as an added-value reseller would diminish in a race to the bottom as the industry became commoditized.  He turned out to be very right, of course.

Apart from these external reasons to sell, Rick also had identified an internal one: 85% of his business came from reselling Avaya products. He had tried, unsuccessfully, to diversify, but it was too late.  He had conditioned his sales and technician teams to love selling what they knew, so when he looked at branching into Cisco and Siemens he got a lot of pushback and realized he would have to double or triple his infrastructure in order to successfully add those categories.

Over time, Rick had used an executive search firm to intentionally build a Board of Directors entirely composed of people who had previously sold companies of their own.  He compensated them in phantom stock that would be realized in a liquidity event, as well as travel expenses for meetings, and when he notified them of his desire to sell, they went to work making the company as lean in operational cost and as fat in profitability as possible, to make them a desirable target.

The Board brought on a broker who identified 15 companies that might be interested in a strategic acquisition.  That list narrowed to 5, and then 3 who were willing to get involved in due diligence and extensive meetings.  After about 3-4 months in which all three were serious contenders, one company really distinguished itself in terms of culture, team, and go to market strategy, and after a final conversation confirming their seriousness, they submitted a Letter of Intent.

In this industry, companies go for 3-5 times EBITDA, and Rick estimated that he might have been able to get more if he had had more long-term contracts in place and if he wasn’t so dependent on Avaya.  He ended up getting 4X, and not a moment too soon, as the deal ended up closing in April 2009, during a major contraction in many businesses.

Rick ended up negotiating 40% of the purchase price in cash, 40% in a 3-year note payable with minimal interest (3-4%), and 20% in an earnout.  He stayed during the two-year transition, but he didn’t hit the earnout, which he attributes more to the difficult market conditions than anything to do with his acquirer.

Rick has since taken the time to get into all sorts of businesses, ranging from yachts, to finance, to salons, to business coaching.  You can learn more about him at his website, Business By Day.

Apex is actively looking for Advisors to join our team. If you or someone you know would like to learn more, contact Doug Hubler at or 913-433-2303.

Case Study #4: The Phantom Buyer

Trent DyrsmidYears ago Trent Dyrsmid was one of the principals of Dyrand Systems, a Vancouver-based IT firm.

He managed to build the company to $1.2M in revenue before a series of events forced a sale…and to a party he never expected.

Where they started

Like many IT firms “back in the day,” Trent was running a basic break/fix IT service.  There was still the notion of computers and technology being somewhat of a utility – like water or electricity – and the idea that you didn’t really need to worry about those things until something was broken.

But early in 2002, due to competition for a client with a much larger competitor, Trent came across “managed service,” in which a monthly recurring charge covered ongoing monitoring and maintenance.  These days, such a service is the industry standard.

Growth peaked

Trent had a lot of success growing the business, doubling revenues until they approached $1M in topline…and then things slowed down a bit.  They were in an odd place, as when they approached larger clients that already had IT staff, they were fought tooth and nail (because the IT guy didn’t want to get fired) and smaller firms were already paying at “budget” or above, because they didn’t really count IT as an integral part of their businesses.

Where things started to go wrong

Trent decided that “sales cure all” and told the management team that he was heading to Seattle to help build and grow an office there to push revenues. He didn’t really get buy-in from the management team and, though he was growing revenues, two months later he got an email from his co-founder offering to buy the business for $1M ($200k in cash, $800k in a note). In addition, an ultimatum was included that if the offer wasn’t accepted in 24 hours, the co-founder was going to quit.

The other offer

Before all of this had ever happened, a competitor in the space had offered Trent the same amount (but all cash) for the business.  Trent wasn’t really in the mental space to sell and so he simply turned down the offer, but continued to keep in touch with the potential buyer.

As he moved to try to deal with the fire in his backyard, he reached back out to the potential buyer, expressing a willingness to sell, but asking for more, since the latest quarter showed significant growth.  But the buyer smelled a problem and asked a key question, “How long will the co-founder stay on?” to which Trent answered “a year”.  But, because the previous answer had been “three years”, the buyer halved his offer instead of raising it, and Trent was now looking at a $500k sales price.

The wait

Due to advice from a savvy friend, Trent had informed the co-founder that there was a possible sale in the background and there was no need to resort to the drama of a 24-hour ultimatum.  The co-founder agreed but got anxious waiting for the buyer he thought was bidding at $1M.  When he called Trent asking for an update, Trent responded, “Well, you guys could always up your bid for the company and buy it yourself.”  That’s exactly what they did, but they never realized they were bidding against themselves.  Trent accepted the deal at $1.2M, or $700,000 more than was on offer.

Lessons learned

  • Before you make a major decision, confer with your team rather than simply inform them of something already decided. You’ll get better buy-in and/or find out if you’re really headed in the right direction.
  • Pay attention. The COO, who Trent had hired a year before all this happened, was the “snake in the grass” that initiated the entire process by convincing the co-founder to threaten to quit and offering to put up the $200k in cash.  But his performance had been nonexistent.
  • Sometimes waiting helps. If he’d gone back to the co-founder in a panic with the much-decreased offer, he would’ve gotten even less than the original ask/offer.  Instead, he let the weaker party make the move first…and he won.

Trent now hosts a podcast and helps to coach other small business owners on exits.  To learn more details about his story, click here.

Apex is actively looking for Advisors to join our team. If you or someone you know would like to learn more, contact Doug Hubler at or 913-433-2303.


Case Study #3: The Boomerang Sale

boomerangIn 1986 David Phelps started a dental practice called the Gentle Dental.
20 years later, for a number of reasons, he decided to sell.

But before six months had passed, he was in litigation to reacquire the business, and 24 months after that, he sold the business again…this time, successfully.

“Boomerang” Sale?

This was a term David used to explain how he thought he’d sold his business, but it came back to him and he had to take it over and sell it again.

Some Background on David

When David’s daughter Jenna was 2 years old she was diagnosed with a high risk of leukemia. The stress of having to deal with the treatment and care of a very sick child led to the end of his marriage and eventually the treatment for leukemia led to liver failure for his daughter.

During the time he was helping his daughter recover from the liver transplant she received, he realized that he wasn’t capitalizing on the promise that all business owners seem to buy into: living life on their own terms. He needed his daughter’s illness to see that, and he made a decision to sell.

Valuation of Dental Practices

David shared that the formula is usually 60-75% of gross revenue or 1.4 to 2 times net revenue. The multiple is lower simply because the market sees dental practices very often as “technician-driven,” to use Michael Gerber’s terminology.  

Sale #1

Over the years David hadn’t brought on associates with an eye to selling the practice to them. This time he did and he found someone quite technically gifted in dentistry and moved into a sale process with him about 6 months later. Because the buyer had credit issues, he wasn’t able to obtain bank financing to make the purchase. He’d agreed to a sale price of about $1M but it was 100% seller financed by David. David was to find out soon enough that those credit issues were due to character flaws.

Litigation and Damage Control

The former associate had only made five or six on-time payments before missing a payment and, before long, he was in default. David spent eight months and over $100,000 in litigation costs to take back control of the business. That doesn’t even take into account the PR campaign he had to undertake to let the community know that the business was “under new (old) management.”  The revenues were down 50%!

Sale #2

Having gotten this far, David wasn’t going to give up easily. He re-assumed the technician role for 3-6 months, but then aggressively brought in associates – three in all – and expanded the hours of the practice. In 12 months he exceeded the revenues of the business for the previous “sale,” and 12 months after that, one of the associates who’d proven himself a leader in the practice went down to the bank and obtained 100% financing. David sold the business for 100% cash upfront this time, instead of 100% financing, and lived to tell us the story.

Key Takeaways

  • Don’t wait until a family tragedy to build your business to survive without you
  • Strongly reconsider a 100% seller financed deal
  • Make sure you trust your gut when it comes to judging the character of your potential buyers
  • It’s those with grit that survive botched business exits

To learn more details of this story and what David is doing now, click here.

Apex is actively looking for Advisors to join our team. If you or someone you know would like to learn more, contact Doug Hubler at or 913-433-2303.

Case Study #2: What to Be Aware of in an Earnout

Jason Swenk In 2012 Jason Swenk sold his digital advertising agency, Solar Velocity.

Solar velocity helped with websites and web applications for brands like Aflac, Coke, and LegalZoom. At the time, he took 50% of the sale in upfront cash and took the remainder in a 50% earnout.

What is an earnout?

An earnout is another way for a seller of a business to receive payment that is based on future performance of that sold business.

Why do some buyers offer them?

Sometimes they lack the cash or capital to buy the business for the entirety of the selling price, so asking the seller to, in a way, finance the deal through an earnout is a strategy. Many times there may be some skepticism as to the viability of the firm without the seller in position, the business may have customer concentration issues, or are using aggressive projections, so this helps “steady the ship” during the transition time as the seller is incentivized to do what he can to make his earnout provisions.

Why did Jason decide to sell the business in the first place?

It had been 12 years in the making, and at the $10M revenue milestone, he knew that the next level for the business would be $50M, and he didn’t have the desire to push on to that level. He wanted to do something new.

What were the terms of his earnout?

He had to stay on for two years and the company needed to hit certain markers throughout that time.

What went wrong?

The company that acquired Jason’s company was itself acquired nine months after Jason sold. The new company then construed the earnout timelines across those 9 months instead of the 24 in the original agreement, and he didn’t get any of the earnout.

The major failure here was from Jason’s lawyer and M&A firm that didn’t foresee the possibility of another acquisition and how the terms of the earnout would survive in such a transaction. That’s why it is so critical not only to get help in structuring your deal, but to think about every possibility, particularly in an earnout.

Before that, however, you must realize that when you’re bought, you no longer control the reins of leadership in the company, and when you make suggestions which will improve the likelihood of your targets being hit, those suggestions may be disregarded. Even if you have yourself covered on the contract side, you can’t control how management will work with you.

So if you have to do an earnout, what should you consider?

Given this experience, it’s not hard to imagine that Jason’s policy is “no more earnouts” should he sell a business in the future. But what if an earnout is part of a deal you are involved in?  You should realize that the best earnouts provide incentives for the buyer, not just the seller.  If you can make it equally beneficial for a buyer to hit an earnout marker, they may stay on the front lines with the seller to make sure those targets get hit.

And, as we noted above, make sure that you account for every circumstance during the earnout, including an acquisition of your acquirer.

Words of Wisdom

Jason’s gone on to bigger and better things since the sale, including authoring a book and creating a smartphone app, so this case study isn’t solely a cautionary tale.  “Build to sell, but treat your business like you never will” and “The grass is greener…on the side you water!” are quotes that indicate that Jason is the sort of person who learns from his mistakes. We hope you will learn his lesson, so you don’t have to re-learn it on your own.

To learn more about Jason, Solar Velocity, and this sale, click here.

Apex is actively looking for Advisors to join our team. If you or someone you know would like to learn more, contact Doug Hubler at or 913-433-2303.

Case Study #1: Build, Acquire, Roll-up, and Sell Out

Case Studies is a new series here at the APEX blog.  We study business exits and break down a few key points for you to keep in mind.  This month’s selection comes from the sale of Appletree Answers.

Appletree AnswersHow it started

John Ratliff started Appletree Answers in 1995 in a spare bedroom in his house, eventually grew it to over 600 employees and over $5M in annual EBITDA before selling to a strategic acquirer.  Appletree was (and is) an inbound high-touch customer service call answering service.  

From 2003-2011 John, in concert with his CPA and the bank that his CPA had a relationship with, completed 24 total acquisitions.  A lot of times acquisitions can be a mask for real growth, but John and his team wanted organic growth within existing locations as well as ongoing growth for new locations.  

Deal Structure

John arranged for the bank to put up no more than 80% of the total amount of the sale price, while convincing the sellers to put up 20% in a seller-financed note.  They were able to do these deals because they built and maintained a sterling reputation in the industry.  They were also very disciplined in their execution and after-action of the sales.

They would routinely pay between 3 and 3.5 times EBITDA for an acquisition.  In every deal, they stipulated that it could not be a turnaround, that no employees would be fired as a result of the deal, and ensured that tweaks were done in the first 60 days that freed up cash flow to cover the loan payment.

Time to go

By 2012 John had been at it for 18 years.  All his assets were tied up in the business, and because they had been so acquisitive there wasn’t a lot of cash coming out of the business, so he was thinking about going to market anyway.  At the same time, an S&P 500 publicly traded company stated to pursue a roll-up in the same industry and so there was an opportunity for a strategic rather than financial valuation of the business.

Despite having personally done 24 buy-side acquisitions, and having acquired a possible buyer on his own, John still hired an M&A firm because, in his words, “we were emotional” and he wanted “space and perspective,” in doing the deal, which a third party gives.  While he admits he paid plenty in fees, he is certain that it was far more than recouped in the added value that firm brought to the table.

Moral of the story?  No matter how many business transactions you’ve been through, you can always benefit from the objective view of a 3rd party who isn’t emotional about the valuation or the sale.  And often, they’ll get you far more than you could have gotten on your own.

Obviously, we know a few people who can help you sell your business or buy one you will love.  Schedule an appointment with us today.

The information in this case study was taken from here.