Archive for category: General

Answering 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. 

Earlier 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. 

In 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!

In 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.

Most of you may be familiar with the “annual meetings” required by law for corporations. For small businesses these meetings are often virtual and imaginary, a function that’s simply required for corporate compliance.  

For others, it’s a real and genuine chance to meet their shareholders in order to look over financials for the last year and cast a vision for the following year.

But some of the best companies also ensure that there’s an annual meeting with employees as well, in which their input is solicited and their efforts are specifically recognized.

The Meeting Itself

You could take a half day or a whole day, but make sure it’s not entirely devoted to business. Make sure you’ve got some good food set aside – whether you choose to do it onsite or offsite. Also, make sure that you’ve given them at least some sense of the agenda so they can prepare ahead of time.

Things to cover

• Financials
  Now you don’t have to give your employees a full set of financials. What you can do is put together a custom report with some key numbers which may lead to some questions that can promote conversation. You can ask where you think growth is coming from, where savings could be gained, what the overall reaction is to growth/decline, etc. The major intangible for the employees is the feelings of trust and inclusion you will foster by sharing these numbers. They’re unlikely to have experienced this in previous jobs and you have a chance to make them feel special and valued. 
• Brand audit
  As businesses grow and develop (and sometimes pivot) the original sense of the brand can drift. This isn’t a bad thing – it’s a natural part of the journey. However, it’s important to use opportunities like this to recalibrate. If you ask your employees what the brand means to them (and these are people ostensibly working in and around the brand on a daily basis) and you don’t like what you’re hearing, it’s a chance to make a course correction. On the other hand, you may hear something you hadn’t even considered, and can double down in that direction.
• Employment audit
  Think of this as a group version of an annual review. Ask people what it feels like to work there. Would they recommend it to their friends? Why or why not, etc. By making it a group activity, people will feel safer sharing things that they might not in an individual format.
• One good/bad thing
  Ask them both:
  • What is one thing we do exceptionally well?
  • What is one thing we can really improve?

This will allow you to revel in something positive while also being honest and focused on ongoing improvements.

The secret weapon in all of this is safety. Your staff must know there will be no recriminations for whatever they say. That means you may need to, as a leader, go first.  

You may have to be vulnerable and share some dreams/hopes/fears that you normally hold back. This gives them permission to be honest with you too. It’s obviously a delicate line to tread, but the best leaders and owners aren’t afraid of that.

Here’s to a great new year for you and your team!