Case Study #28: Paying the Idiot Tax

Before Uber Eats and DoorDash became the VC-backed juggernauts in the food delivery space, Kenan Hopkins had already taken his 7 figure exit from this new space with lean margins. At the time of sale his company, Valet Gourmet, was doing $4M in annual revenue and employed 50 staff in Asheville, North Carolina, and Knoxville, Tennessee.

Revenue Model

In 2011, the concept of home delivery of anything other than pizza seemed like magic. Customers loved the idea, and restaurants loved adding marginal additional revenue. The restaurants could make money they weren’t otherwise going to make (these customers didn’t want to leave their house, for whatever reason) and hence utilize unused bandwidth in their kitchens, and customers loved the idea of upgrading from *the* deliver-at-home option, pizza. Restaurants paid up to 30% of the total ticket before delivery, and the delivery drivers/riders got to keep the delivery fee plus any gratuity. Both customer and restaurant were willing to pay something to make this happen, and many companies were born out of the process.

The Idiot TaxIdiot Tax

Among the things Kenan says he would have changed would have been stopping the “idiot tax” sooner. Drivers of said tax included:

  • Having no management skills (and not urgently acquiring them)
  • Having no strategic plan (and not being more intentional about building one)
  • Using credit card debt to bootstrap the business (and not restructuring that debt sooner)
  • Having no company culture in place (and as a result having high turnover)

This all changed when Kenan read Tony Hsieh’s Delivering Happiness, about the founding of Zappos.

He realized that the company desperately needed reform from the inside out and he went to work, focusing on branding, core values, and aligning hiring practices with values like “Exceed Expectations Through Service.” Kenan particularly liked this value as it wasn’t customer service but just service which allowed the team to focus on kindness both inside and outside the company.

Accidents and a Text Message

A number of things happened nearly simultaneously which were stressful for Kenan and led him to say “enough.”

Two driver accidents happened and one driver got stabbed. Insurance covered all these situations and no one was permanently injured, but after 7 years of building, Kenan wondered, “what if” and sent a text message to a competitor in the industry:

“Would you buy Valet Gourmet for 50% of projected revenue over the next 12 months?”

The text received a positive reception, and before too long, a 50% cash, 25% stock, and 25% earn-out deal was negotiated. Kenan has learned to read his business growth really well and despite the fact that his previous year was $3.3M he felt confident he could hit $4 in that 12 month window. And he did.

Money isn’t enough

While Kenan says that he wishes he had asked to stay more involved in the business in some way, as a board member, for example, his biggest regret was not planning for having a big pile of money and no purpose. He lost himself in the lifestyle and became, in his own words, a massive jerk. It’s a theme we have discussed before, that planning for what comes after the sale is almost as important as working on the due diligence during the sale.

That’s perhaps the first lesson of many we can take from Kenan’s experience selling Valet Gourmet: Purpose matters.

While he used the exercise of adding company values and a clearer vision which drove better culture for his business, he could have taken some time to identify a core purpose within himself, which would have aligned with his business and given him some kind of roadmap for when that business went away.

The second lesson is closely connected: pay as little idiot tax as necessary.

Identify where you are weak and hire those weaknesses, either in employees, contractors, or advisors. As Ben Franklin once said, “Experience is an expensive school, but fools will learn in no other.” Learn from the experience of others rather than pay to learn yourself.

Finally, network within your industry.

Because Kenan was friends with the competition, he was able to start a sale negotiation with a text message. We can say we don’t often see such a move, but even if you don’t end up selling to the competition, being on friendly terms can often help you share important information, build a better business, and help with hiring.  Lead with kindness, but don’t let it be mistaken for weakness.

Have you been paying the idiot tax longer than you should have been?  We have access to many resources that can help you drive down and eliminate that tax altogether! Give us a call.

Warning Signs in Your Business

Warning SignMany people, for better or worse, avoid going to the doctor. No news is good news or if they feel fine all must be fine. But often there will at least be some kind of warning sign to nudge you to seek help. It may not be serious or life threatening, but it’s enough to get your attention.

This happens in business as well. In this article we will talk about a few of these that should make you pay attention.

Missing Revenue Targets

All businesses have bills to pay and if you don’t hit your revenue targets you may be in a more and more compromised financial position. You may start to rely on credit card debt or some of the higher priced alternative financing options out there. This can lead to a challenging situation if managed from a position of stress without foresight. Instead of limiting your liability to your corporate obligations, you may be putting your personal assets at risk as well.
Why are you missing your projections and what can you do to fix the situation?

Health Problems

Sometimes we have health problems because of genetic dispositions or because of choices we have made outside of the business. But on many occasions we’ve heard stories about health problems directly related to a business. The stress you are dealing with has to go somewhere, and sometimes it’s inflicted on your body, with devastating results.
If your business is causing you health problems, what are you going to change?

Loss of Passion

Many of us get into a particular business not just because we are good at it, but because we happen to enjoy it and find meaning in it. But sometimes, for various reasons, we lose our mojo. Very often it’s because of burnout.
If you’ve lost your passion for your business, can you keep it going?

Loss of Mission

While it’s true that businesses pivot to deliver something slightly (or greatly) different from where they may have first started, sometimes in the excitement to build and extend, a mission can get lost or muddled. These effects are felt throughout the business: from customers who aren’t sure exactly what you do, to staff who are confused about the change in direction, to you, who repeat what you think the mission of the company is but which has no basis in the reality of what your company is doing day to day.
If your company isn’t mission-focused, how will you correct that?

Key Staff are Leaving

If you don’t see the writing on the wall, sometimes your staff will. And when it’s key staff that leave, it’s the hardest to take, as they are the hardest to replace. They leave with institutional knowledge that is hard to pass on, and worse, they are probably leaving for preventable reasons.
If you’re losing key staff, are you willing to take a hard look at who the problem may be? (Is it you?)

If any of these are an issue for you, that’s cause for concern. If you have more than one, you’re in a crisis and need some help. If you want to rebuild and keep going, it’s possible, but it’s going to take a lot of work. But it may also be a good turnaround opportunity for one of our opportunistic buyers and can offer you a light at the end of the tunnel instead of just a longer tunnel. Give us a call to see if we can help.

Year End Review

Year End ReviewIn previous articles we’ve made the case for having an annual meeting to make sure your staff are properly rewarded for the year that has passed and are properly oriented for the year to come. But, have you considered doing an annual meeting for yourself? A Year End Review, you could call it. Enough time has passed since the beginning of the year that you can’t defer to holidays and time off. We are well and truly into the year, but it’s also a perfect time, if you haven’t already done so, to look back.

How did it go?

The question that sits above all the other more specific ones is “how did last year go?” Did you feel good about it? Why or why not?

This assumes some things: that you had a plan or orientation for last year whereby you have something to judge or compare it to. If you didn’t have a plan, well that’s only fine if you actually intended that, most probably because you are happy with your performance and hit the cruise control button for your life last year. And you might be ready to do that again this year. But the point is that’s not laziness. That’s being intentional. It’s knowing what you want and then executing it.

The same cannot be said of the person who put up some goals, entirely missed them, and then moves into the next year setting new goals without examining what went wrong with last year.

If you own a business

How did we do against last year’s numbers? What will we do this year? Am I still excited about this? Why or why not? Do I want to sell? If not, do I have an exit strategy?

If you want to own a business

Why do you want to own a business? Have you talked to a broker about it? Have you taken at least a basic look at how you would finance it? How serious are you about it?

If you have a job

How was your pay and performance this last year? Are you happy with them? Why or why not? What will be your exciting challenges this year? Will there be any? Why or why not? Is this really what you want to do – short, medium, or long term?

If you want to get a new job (or own a business – see above!)

Why are you unhappy at your current job? What are the top things that you dislike that you would like to see rectified in a new situation? How serious are you about making this change? Why or why not?

We have a pretty good record of hitting our goals here at Apex, but we don’t let that build complacency.  We’re always looking to improve and do better every year. Give us a call to see if we can be of help in your goals for this year.

Apex is actively searching for top quality candidates to join our team of Advisors. If you’re interested in a career helping people buy or sell a business, think you have relevant experience, and want to find out more, please call Doug Hubler, President of Apex, at (913) 433-2303.

Case Study #22: From Side Hustle to Strategic Acquisition

From Side Hustle to Strategic AcquisitionAnswering an Ad

In 2001 Joe Keeley was just a college student looking for a part-time job. He saw an ad for “hockey player wanted to watch kids, $10/hour.”

Keeley happened to be a hockey player, which wasn’t so unusual in Minnesota, and eventually, he was hired.

This turned into a three-year relationship in which he saw himself more like a big brother and mentor than a “nanny.”

Other families began to ask him for referrals to people he knew, and before he knew it, College Nannies, Sitters, and Tutors was born as a business.

The business model was a one-time fee for a matching of a family to a nanny or tutor, but that quickly changed, as families were unsure about how to legally pay those nannies and Joe saw the potential for recurring revenue.  

So the business quickly became a staffing company of sorts. Joe thought that once he’d done this right in one location, franchising would be a way to expand further.

In fact, at the time of sale, the company was very close to the 100 locations mark, a milestone not many franchising companies ever reach.  

But the leap forward that directly led to the acquisition of the company was software development. Joe saw early on that a major bottleneck for clients and even potential clients was scheduling. So he spent the money to develop software to solve that problem.  

By the time he’d built the software, the $34M the company was taking in annually had one large vendor that accounted for $10M of that revenue. That vendor was a Boston-based publicly-traded firm that specialized in child-care centers and often contracted with Joe’s company to find staff.

That $10M slice didn’t happen overnight. It developed over an eight-year period, during which Joe was often invited to the headquarters as an important vendor.  

He got to know the executive team and, when the software was launched, he began training sessions to help them integrate the software to help their own clients. Soon, everyone around the table realized an acquisition might make the most sense.

Deal

It took 11 months for diligence and closing, mostly because, as Joe noted, a public company needs specialized documents that aren’t necessarily needed when a private individual or company does an acquisition.  

If he had to do it all over again, he says he would have found out what those documents were and had them constantly updated in some kind of file. He’d always planned to sell the company, but when it came time for the exit, they asked, and he agreed, to stay on and keep building.  

He appreciated the ability to grow, but “with someone else’s balance sheet.”

The terms of the deal weren’t publicly disclosed. Joe was able to take a portion of the payout up front. He’s currently finishing a three-year earnout, but also plans to stay at the new company long-term.

Key Lessons

Joe knew from the start, once he moved from a side gig to a real business, that he wanted to build a company to sell. So he made sure his books were very clean, insisting on an annual audit for all of his franchisees.

Joe was also unafraid to invest where he saw a major problem. While the investment paid off for his business operations, it also was what made a strategic acquisition so sensible for the buyer.

Most importantly, Joe stuck to his brand.  

More than once he dealt with marketing companies who said that “College” was a bad adjective for the brand. But he owned his niche, focusing instead on the “young, vivacious, upwardly mobile” subset of college students that his clients visualized when seeing the company name.  

That belief was vindicated when the acquirer chose to keep the name after the acquisition. 

Starting a Rotary Club from Scratch in Brookside/Waldo

Waldo Brookside RotaryMany of our brokers are involved in giving back to our community. We will occasionally share some of those stories with you.

“It’s important to take care of where you live, not just your own street…but your neighborhood. You naturally want to improve it in every way.”

With an attitude like that, it’s easy to see why Steve Weaver simply saw starting a Rotary Club in the Waldo/Brookside area as something logical to do.  

For those who don’t know, Rotary Clubs are local chapters of Rotary International, a fraternal organization dedicated to positive community initiatives and worldwide change. (One of their recent worldwide initiatives was polio eradication. Due in large part to Rotary and the Bill and Melinda Gates Foundation, the disease has been isolated to Nigeria, Pakistan, and Afghanistan).

 There are quite a few clubs in the Kansas City area, but they were pretty “established” and in the mold of a breakfast or lunch meeting. By picking 5:30 pm on Wednesdays at Waldo Pizza as a meeting time, Steve and the other 52 charter members of the club were signaling that they were definitely onto something different.

After some time on the International Committee and as Sergeant-at-Arms, Steve currently serves as the assistant treasurer for this club. As part of the leadership team that helped to found the club in the first place, he had a chance to participate in a one-year program called Rotary Leadership Institute.  

While the program focuses on all aspects of Rotary and club management, Steve noted that he particularly enjoyed the classes on more effective messaging. Those classes helped people move towards action, as well as workshops on how to lead people with varying viewpoints.

While there’s currently some movement behind a project to build a park/community space in an area that formerly housed a school, the Club’s main community focus is their 7540 Project.  

The 7540 Project

Many people don’t know that, when someone is in foster care, the state takes care of a fair number of their needs. But at 18, they age out of the system and there’s no corresponding program to help in the transition.  

Unfortunately, this all too often leads to these young and vulnerable people becoming homeless, dropping out of school, and/or engaging in crime.

It’s always easy to complain about the lack of responsiveness of government. But rather than complain this club set up 14 apartments to provide housing and ongoing support to these members of the community.  

The members engage in mentoring, job training, and often come by for meals that they bring or help make. Far from just giving a handout, this initiative offers a “hand up”, and it’s already leading to some life-changing results.

To learn more about this Rotary Club and its initiatives, visit their website.

Why Due Diligence Matters

due diligenceEarlier this year, Todd Edwin Rood was sentenced in federal court for lying about the assets and liabilities of a company he’d sold just the previous year, Rood Machine & Engineering, in Kearney, Missouri.  

In addition to a jail sentence of four years without the possibility of parole, he’s been ordered to pay $1.3M in restitution to the defrauded parties.

On top of that, he has to pay $1.2M in a judgment to the government, which accounts for the false gain he made in defrauding the bank and the buyer.

Manipulating the Books

The tricks Rood used were not particularly complicated but were nefarious. He had his bookkeeper reclassify two loans ($120k) and loans from his parents ($120k) as income. 

He also directed his bookkeeper to record as income sales that were totally fictitious ($340k). These simple “adjustments” inflated the income of the company by almost $600k while simultaneously reducing his liabilities.

Using these fake numbers, Rood was then able to present the company for sale for about $2M. The buyers sought a $1.7M SBA loan, and the SBA required them to invest an additional $200k into the business themselves.  

They also sought a quick sale of their home, which cost them around $40k, as Rood claimed to have terminal colon cancer. The total loss to the bank and the buyers was a little over $1.3M, which hopefully, will be paid via the restitution in the court judgment.

Here at Apex, this is just another story for the “You can’t make it up” file.  Although Rood wasn’t a client of ours, it doesn’t mean we haven’t seen situations like this (or even worse) come up.  

But it’s because we’re doing our job. We encourage our clients to bring an impartial third party with an objective eye to review their books.

We can (and do) ask hard questions about assets, liabilities, and growth. These questions often bring issues out into the open where they can be dealt with before we ever bring the business to market.  

We know that if it seems too good to be true, it often is. Benefit from our experience honed over thousands of business sales. Let us pair you with professionals who can assist with due diligence so that you don’t become a sad part of a story like this one. 

Lessons from the latest PR Disaster at Facebook

FacebookIn all likelihood, you’ve already heard about the far-reaching Cambridge Analytica/Facebook scandal. In case you haven’t, here’s a brief summary:

Cambridge Analytica, a British political consulting firm, used a personality quiz application on Facebook, presented as “for academic purposes,” in order to gain access to over 50 million user profiles since 2015. It did this in a perfectly legal manner, as Facebook’s user agreement freely gave access to the profiles of the friends of everyone who took the “personality quiz.”

While this news may seem to be “Facebook’s problem” it really underlines some themes all of us need to be clear on at our own businesses, with our employees and clients.

Privacy and Security

While Facebook took some consolation in pointing out that this was “not a hack”, many users were displeased. Elon Musk deleted his and his company’s Facebook accounts and started the #deletefacebook trend on Twitter.  Facebook has never truly taken user privacy seriously, and worse, they didn’t make it easy for users to protect that privacy.

Unlike the old days of paper shredders, data is more sturdy. Once it gets out into cyberspace, it’s very hard to retrieve and “shred.”  Therefore, it’s important to make sure that, whether in paper or digital format, data of your employees and clients is carefully safeguarded, and if necessary, periodically destroyed.  

Do you have these policies in place at your company? If not, there’s no time like the present.

Ethics

Cambridge Analytica, in the wake of this scandal, has been able to claim, rightfully, that nothing they did was illegal. Users had waived privacy rights (or simply, as 99.9% of us do, clicked past the terms of service without reading) not just by using Facebook, but by taking the survey.  

Facebook makes money precisely by selling their deep, rich data to companies like Cambridge Analytica. So, it becomes clear that “Is it legal?” is an insufficient question in our fast-moving world of data portability. The question has to be “Is it moral?”

While some might rightfully note that the question of morality should have always been in our minds, the fast-moving world of the Internet has gone a long way toward blurring the legal/moral line. It’s times like this we can slow down, take stock and recalibrate.  

Questions of “Is it legal vs Is it moral” only make sense in a company that has stated values. If you and your employees believe that clients are to be protected, not exploited, then you’ll pay more attention to gray areas like this.

Even better, your clients will always appreciate and respect “opt-in” possibilities for whatever you might choose to do, whether it’s a survey, a study, or a simple analysis of what they’ve done over time.  

Increasing pressure on government may see more regulation before too long. But rather than wait for that regulation to hit your company, start a discussion and have policies in place that can be adapted, rather than be created, when the changes from above may come

Apologies Necessary

While some observers have pointed out that this debacle is a setback to Mark Zuckerberg’s not-subtle presidential aspirations, he did manage to utter the phrase “We made mistakes” which tone-deaf “leaders” like those at Equifax and United failed to do when their companies publicly stumbled.  

Nobody likes mistakes, but almost all of us hate denial of mistakes or a failure to apologize. Walk through “disaster” scenarios at your own office and have templates of press releases or responses ready to go.

That way, if something terrible happens, you’re ready for it and don’t have to do the critical thinking under pressure.

Considerations When Forming a Business with Multiple Partners

PartnersIn a previous article we discussed things to ponder when considering a business partnership. In this article, we’re going to deepen and broaden the conversation by considering the question from the aspect of bringing on multiple partners.  

Partnerships continue to rise, according to IRS data, as do the profits from those partnerships, so this topic deserves our consideration, even if our gut initially tells us “No.”

Why

You need to start with why and ask yourself if you really need business partners. Would those partners provide an accelerant for what you’re doing? Are they necessary for you to do the business at all?  

Further things to think about include:

  • Do you share the same vision for the business?
    Lifestyle business or a growth business?  Does everyone have the same answer to that?  If not, there’s going to be a problem.
  • Do you have the same enthusiasm and energy for the business?
    To invest time, money, and mental energy, this can’t simply be a “would be good to do” but something more like a “have to do.”  Make sure you’re selecting people who share the passion for what you’re building, not just because they have the right resume.
  • Do you have complementary skills?
    If you’re going to explore bringing on multiple partners, make sure that your skill sets complement one another. Naturally, there will be some overlap, but there’s no point in having five Operations people and no Salespeople, or vice versa. The right people on the bus aren’t just defined by personality, but by what they bring to the table. When there’s overlap, it might make sense to pick the best one of multiple choices.
  • Do you get along? Do you have any track record of working together on anything in the past?
    This is key. Without this personal experience, you’re simply taking a guess.

What

We’ve all witnessed partnerships fall apart, sometimes spectacularly and publicly. These situations can often be traced to things that were never said or addressed.

When you first begin ideating about starting a company together, make sure everything is on the table. Spell out rights and responsibilities. Give special attention to what happens when someone leaves and how that happens.

By highlighting from the beginning that an agreement isn’t about when things go right, but how to smartly handle the business when things go wrong, people are free to objectively share all of their concerns.

Be clear on how decisions are made and who makes them, as well as how profits are to be paid out. Do your best to create an environment for open, honest discussion, leaving as little as possible unsaid or unplanned.

Speaking of partners, we’re always looking for the right people to join our team here at Apex. If you know someone who might be a good fit for us, send them this article or connect them with us via email!

Delegation Isn’t Sufficient: You Have to Trust, As Well

delegateDelegation.

It’s one of the surest and most necessary components of the growth of any business, yet it’s sometimes looked at too simplistically.  

“You get to do this now,” only works if your colleague or employee knows he/she has your trust. Without that trust, what you delegate can be undermined from day one.

Delegating Well

In order to delegate, you must first prepare. Write down tasks and competencies without any particular person in mind so as to help you avoid biases or avoid writing things down.  

If you think “he already knows that” what happens when “he” leaves?  (You’ll also find this task of writing down things to delegate will spark other ways you can improve the way your business runs.)

Once you’ve prepared to delegate, have a meeting in which you walk through all aspects of what you’re assigning them, and more importantly, let them know that you will not be there to watch over their shoulder, but rather trust them to make decisions (and make mistakes!)

You made mistakes when you started working on this particular task/issue/skill set, so will they. Give them permission to make mistakes as part of the learning process and they will tell you when something happens rather than try to hide it from you. It’s yet another way to foster extreme ownership.

Keep the lines open

Make sure to check in at regular intervals to make sure your delegate has everything he/she needs. Sometimes they just need an opportunity to chat about something that they considered innocuous but that you could use to give them great insight.  

Often, when they ask you how you would do something, reverse first: “I can answer that, but first I want to hear your instincts and thoughts.” It signals your confidence in them, but more importantly, it gives you the opportunity to say, “Yes, and…” or “That’s exactly what I would say/do,” which is a great boost to his/her confidence and mindset. Remind them of your trust and confidence (and mean it).  

Use it as a building block

Successful delegation is a two-way street. It should free you up to do more of the work that you do best, and it should give your delegate an opportunity to grow in skill and ability. Both of you then have the chance to offer each other more opportunities for growth. Delegation is a machine for growth, but trust is the oil that makes it run.  

As a business owner, you create more enterprise value by proving to a potential buyer that the business operates successfully as a team rather than depending solely on the owner.

Equity or Profit Sharing? What’s the Right Way to Reward Employees?

reward employeesIn today’s competitive marketplace, it’s important to consider key differentiators for your company when it comes to attracting (and more importantly, retaining) key members of your team.  

Both equity and profit sharing send the signal that “You’re a direct part of how these profits happened, so we want to share them with you.”  

But which one is right for you?

Key Staff

While we advocate keeping cultural fit in the forefront of your mind when you hire, even those who fit the best with you may not be with you long term. Life changes or spouse relocations can intervene and take some of your most talented people away.  

In most small businesses, it doesn’t make sense to do profit or equity sharing with every single person in the company, but rather with those who it would be devastating to lose.

The difference

Profit sharing can include equity, but it usually just means sharing a proportionate share of “profits” (however you determine that at your company) based on a formula everyone understands ahead of time.  

This can also add extra eyes to your financial statements who are now at least slightly more incentivized to look for ways to save or opportunities to grow.  

If your business is younger and still growing, this is a positive way to demonstrate your core tenets and that’s particularly attractive to millennials who enjoy being valued.

Equity sharing is actual long-term ownership in a company through stock, stock options, membership shares, or other vehicles.  It involves serious legal and accounting advice and often a vesting schedule that ensures employees don’t leave with those shares prematurely.  

If your business is mature and stable, this might be a way to lock up some of your best people for some time to come.

A Caveat

Rookie business owners often make the mistake of thinking that their best and most engaged employees are necessarily interested in some kind of equity or profit-sharing model. “Then, like me, they’ll be even more motivated to build something.”  

The reality that most business owners know is that employees are meant to be precisely that: employees. More than ever there are opportunities for your employees to create “side hustles” on their own and launch small businesses.

So rather than assume such equity or profit sharing schemes would motivate or excite your employees, start with why and ask them (at an annual meeting, for example) what they think you could do to give them more opportunity to engage, earn, and stay with you long-term.

It’s just one more way to indicate that you’re an engaged owner who actually takes the time to ask questions, and even more shockingly, listens to the answers.

Check with your CPA and Financial Advisors on the tax and savings benefits of Profit/Equity Sharing. If you need assistance with connections, contact your Apex Advisor.