Case Study #24: Last Chance Saloon

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tomatilloJulie Nirvelli never planned to be in the food business.  She was simply someone who enjoyed making a good green tomatillo salsa. 

It was so good, in fact, that her Mexican friends teased her, saying they couldn’t believe “white girl salsa” tasted so good.  

After years of being constantly asked to bring it to parties and prodded to sell it professionally, she took the leap and started a salsa company.

Early Days

Julie wasn’t necessarily passionate about the actual making of the salsa, but rather about the brand and the creation of different product lines.  

As such in the early days she found a co-packer to make the product, which she then picked up, stored in her house, and then went to farmers’ markets with.  

It was a great way to get immediate customer feedback, gain a following, and then use that following to leverage introductions into retail.

The retailers and her team told her the same thing: White Girl Salsa wasn’t going to work as a national brand, for a number of reasons.

In fact, Target specifically declined to work with her, despite really enjoying the product, because of “branding reasons.” Julie made the decision to rebrand as Winking Girl Foods.

Distribution Challenges

It’s one thing to come up with a great-tasting product that customers crave.  It’s even another to develop smart and snappy packaging and branding.

And it’s yet another to market and place your products in stores.  You need to compete for (and buy) shelf space and somehow displace others, especially when you’re in a competitive category like salsa.

Additionally, one of the distributors that Julie worked with managed inventory poorly and issued her a $30,000 chargeback (she had to pay to take back product labeled “White Girl Salsa” at the time of the rebrand) which was a big part of her marketing budget at the time of the rebrand launch.  

Nevertheless, she managed to get into Kroger and Safeway but was just shy of $1M in revenue.

Secret Sauce?

She continued to develop the company with a sauce extension and potential investors told her to come back when the sauce was developed (when she did that, they told her to come back when it had traction).  

She utilized loans for small business, including the Whole Foods Local Producer Loan Program, which offers 5-year, 5% loans.  But she ran into the same problem she did before: good product, good branding, no money left for marketing and getting shelf space.  

So, she decided to start distributing using Amazon to get some traction. And while that did start to take off, her distributor woes continued.

After one chargeback too many, Julie decided she had had enough and was willing to shut down everything and let the personal guarantees get activated for all the credit that was extended to the company…

Send an Email

She sent an email to three vendors, all of whom had experience with Julie and her products over the years. She told them that she had a meeting with Kroger the following week (she did) but that she planned to shut down the company and pass on the meeting unless she had some kind of offer on the table before then.  

Because she had already decided on shutting down the business, a “why not?” attitude served her well, and unsurprisingly, all three were interested.

Julie ended up coming to an understanding with them and took them to the meeting with Kroger. While Kroger didn’t buy in on what would be a newly merged company at that point, they did later. As a result, Julie had an exit and positive liquidity event instead of a failure and massive debt or bankruptcy.

Key Takeaways

  • Don’t be afraid to start slow and small.  Farmers markets allowed Julie to really understand her customers.
  • Find lesser known loan programs, like the Whole Foods program Julie participated in. She also found the Colorado Enterprise Fund, which also gave her money to grow her company.
  • Even if you’ve accepted defeat, consider every possible option.  Julie showed that even when you think it’s over, it’s not over until the fat lady sings.

Why Do Sales Fail?

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sales failIn a previous article, we discussed how long it takes to sell a business and how and why an accepted offer is only a phase in a multi-phase process.  

Many things can intervene throughout the process to prevent a sale from closing.  

In this article, we want to explore just a few of the various ways a sale can fail and what you can do to avoid them.

Seller Side

  • Failure to disclose.  Whether it’s to us as brokers or to the buyer, sometimes a seller simply fails to disclose something that has a major impact on the deal.  This can never entirely be prevented, but buyers have to follow our lead as brokers and never make assumptions: ask the questions necessary in your due diligence and keep lines of communication flowing and open.
  • Failure of motivation.  The seller may not have had a good reason to sell or was pushed into it against his/her will, and so during the due diligence process may simply slow down or quit entirely because of no requisite motivation to close the deal. Sometimes, reminding the seller why we’re here is critical to keeping the deal going.
  • Failure to investigate.  The seller may have failed to consult his legal and accounting team about tax consequences and wants to change deal points too late into the process.  This can sometimes initiate a breakup of the sale entirely due to suspicion of bad faith on the buyer’s part. Make sure that whatever side of the deal you are on, you are completely briefed on the financial and tax consequences of the transaction early in the process.

Buyer Side

  • Failure to leap.  Especially for first-time business buyers or owners, there is a critical stage that is a mirror for the seller’s decision to sell: the decision to sign on the dotted line and become a business owner.  We’ve seen it before.
  • Inability to secure financing.  While people may be creditworthy sometimes circumstances arise that prevent them from getting financing which is part of their overall offer, and without that bridge, the deal falls through.  As a seller you need to properly scrutinize the various buyers who are courting you and examine their fiscal health as part of your decision matrix.
  • Undue influence of others.  Again, for first-time business buyers or owners (or even for veterans) there will be the naysayers in their lives who tell them not to do a deal, and remarkably, sometimes they listen, contrary to everyone else’s advice.

Both/Neither Sides

  • Foreseen or Unforeseen Legislation or Natural or Unnatural Events.  We sometimes think we “know” that legislation will pass, and it doesn’t, and other times, it takes us out of the blue.Same thing with natural events like a hurricane or unnatural events like 9/11. All of these things can adversely affect any number of businesses, either physical locations themselves, parts of a supply chain, or a customer base.They can sink a business deal with no warning, and it’s something to keep in mind, not because you can prepare for it, but to be resigned to the fact that there’s nothing to be done but to accept it as one of life’s possibilities.
  • Landlords/Accountants/Attorneys.  Yes, we’ve seen landlords, accountants, and attorneys sink perfectly good deals.  This isn’t to say we don’t like them. In fact, there are all three of those types on our team here at Apex!But what it means is to make sure from the beginning that all those people – on both sides of the deal – are aligned with the goals and vision of the outgoing seller and the incoming buyer.It’s a shame to let those peripheral to a deal sink it, but it can only happen because the buyer and seller don’t take charge, keep an even keel, and work hard to resolve challenges.

The best way to keep a sale from failing is to have a broker in your corner helping you navigate the waters of what will be one of the most important transactions of your life.  Give us a call today to see if we can help you.

Book Club #19: Delivering Happiness, by Tony Hsieh

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happinessMany business books offer solutions or systems or case studies to make their point.  Very few offer a simple narrative with lessons gleaned on the journey.

Tony Hsieh’s Delivering Happiness: A Path to Profits, Passion, and Purpose, happens to be one of those books.  

It had no agenda other than telling the story of Zappos, and yet, when you tell the story of a company that gets acquired for a billion dollars in stock by Amazon ten years after its founding, no agenda is really necessary.  

The journey itself is a compelling narrative.

Pay Employees To Quit

Hiring is such a challenging part of any business that one would think that once you’ve got a new hire, you want to do your best to keep him/her.  Zappos agrees, but adds a twist.

During the training process, they offered a $2,000 bounty to anyone who quits during a certain time period, in addition to getting all pay/vacation time accrued.  

This worked so well in making sure the best people stayed (and the few short-sighted ones left) that Amazon created their own program after acquiring Zappos called Pay to Quit. This program allows full-time associates to take a $5,000 one time bonus to leave the company, but it means they can never work for Amazon again.

Instead of the focus being on bringing on warm bodies, it was on bringing on long-term players, part of a team, part of a family.

Customer Service That Matters

More and more companies are making it difficult for you to contact them if you have problems, questions, or just feedback.  Zappos chooses to go the other way, by plastering their 24/7 telephone number at the top of their website.

In the book Tony mentions at the time of publishing their longest customer call was 6 hours long.  They chose to focus on the relationship with each individual customer.

And when you are focused on relationships, you aren’t focused on metrics like quick turnover times on calls. You want every part of the buying experience to be fun and delightful, and Zappos lives that.

Giving employees the freedom to really represent the brand, as a partner of sorts, inspires them and rubs off onto customers, who go on to become loyal customers, right after they rave about you on social media.

A Culture on Display to the World

Tony would make a point of posting internal company emails and memos to a public blog. He did this only moments after sending them out to the company.  

He also compiled a culture book each year which was printed and distributed to all employees and was then made digitally available to the public.  

The only rule was that no one at the company could censor what each employee wrote. (which, by the way, was their own personal experience of what Zappos company culture was to them).

Culture can’t be made.  It can only grow by the environment created by the work you do together.  Being unafraid of sharing only adds sunshine to an already fertile project.

Should You Grow Through Acquisition?

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growthThere are two ways you can grow your business: the fast way or the slow way.  What’s important is that there is no easy way.

Both have their pros and cons, and in this article, we’ll examine the question of whether you should grow your business through acquisitions.

Organic Growth

If you have the time and the money, organic growth is almost like compounding interest: it will happen as long as the fundamentals are sound.  

You can add new products or services, increase sales, increase market share, etc. This growth will be part of a narrative that will make for a valuable exit one day, but it is a day in the far future, as organic growth is slow.

Growth through Acquisition

On the other end of the spectrum is growth through acquisition.  You can instantly acquire new revenue, resources, and introductions to markets.  But you have to pay for it with time and money as well, just at a different pace.

  • You will have to pay for the acquisition.  Sometimes a good earnout can be negotiated with an outgoing seller, or good payment terms negotiated.  What is important is never to pay too much in cash or to take on too much debt.
  • You need to have a plan.  Since this business will need to be integrated with your existing one, you’ll need to have a plan as to how departments will come together, including the hard decisions to let some people go.  Those first 100 days after the acquisition are a key part of success.

Beware of Deal Fever

We’ve seen this illness before, and it can happen to the most rational and cool-blooded among us: like Ahab chasing the white whale, people can get lost chasing a deal.

  • Keep in mind that pursuing an acquisition can become a part-time job/project.  Don’t let yourself be distracted from your core business that you are looking to improve through this acquisition.  Either have someone (like a broker) help you through it, or make sure you delegate parts to your team so that you don’t take 2 steps forward only to take 2 steps back.
  • Don’t let deal fever blind you to the facts.  Sometimes we want a deal to happen badly enough that we will ignore our own due diligence and say our “gut” is telling us to move forward.  Deal fever can confuse you: that’s why it’s important to have an unbiased third party (like a broker) help you evaluate numbers and your integration plan.

It’s not binary.  You can grow organically and through acquisition.  What’s important is to stay focused and enjoy the journey, never letting present success go to our head as we plow forward to possible future success.

Are you considering making some acquisitions to grow your company?  Give us a call to see if we have any listings that are a good fit for you.