Case Study #53: Hustling Through a Pandemic

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Storage SquadIn 2011 Nick Huber was a junior at Cornell University.  He was one of the captains of the track team and ended up becoming an All-American in the decathlon.  But the summer after his junior year, he was just trying to offset some of his expenses.  He had overlapping leases on his apartments and since he planned to be out of Ithaca during the summer, he hoped to sublease at least one of the rooms in those properties.

Unfortunately, no one bit on a sublease but one parent called and asked if Nick would be willing to take $150 to store some of his son’s stuff over the summer.  After picking those items up, Nick realized he would need to get a lot more “customers” in order to help cover these leases.  He got email lists, made flyers, contacted fraternities and sororities, and even wrote in chalk on the ground.  He managed to fill up a couple rooms and the following year he brought on one of his fellow student athletes, Dan, as a business partner.  That partner happened to have a house with a basement and they filled up all the rooms and the basement and when all was said and done they had about $8000 for a few weeks of work.  Storage Squad was born.

A Different Path

Parents who send their kids to Ivy League schools, like Cornell, expect Ivy League outcomes, which is not usually expressed as, “Dad, I want to start a business of moving boxes around twice a year.”  But thankfully Nick’s father didn’t oppose Nick’s desire to build a business and was willing to let it play out.  Nick and Dan ended up buying a couple of cargo vans and expanding into other states.  In 2012 they did $300k in topline revenue, followed by $750k in 2013.  In 2014 they did $2.2M in topline revenue and had tripled their profitability.

Learn by Doing

But given that Nick and Dan had started this business while they were still in college, they had no “experience” from either running a business or from working in corporate America.  They learned the way many entrepreneurs do: taking risks and making mistakes.  

One thing they learned early on was that their business did really well with small prestigious schools that had a lot of out-of-town and international students.  The big state schools had 80% of their student population from in-state, so they could just as easily have family come haul that stuff home at the end of a semester.

They also found that employees really did well with structure rather than autonomy.  When they first started the business, their drivers were their main employees and had 28 different tasks they had to complete, including billing the clients!  Obviously it made more sense to systematize and specialize and before too long drivers only had 5 tasks, not 28.  They had a card with contact information to give to clients if there were any billing or customer service questions and those drivers could say, “I’m just here to pick this up for you and bring it back to the warehouse.”

Seasons Offer Reflection

Storage Squad was a seasonal business.  This was great for two reasons: 

  1. Cash flow was great – a lot of money came in at one point during the year (May).
  2. There was down time to reflect, tweak, and improve for the coming year.

It was during those down times that Nick and Dan were able to reflect on how they were running their business and what was next.  What seemed a natural fit was real estate.

Because they had spent so much time and energy leasing storage spaces to house their clients’ goods (they weren’t using basements anymore!) they realized that there was a future in building a separate real estate business that specialized in storage facilities.  In 2016 they built their first storage facility from the ground up.  After they felt comfortable with how that was running, they got outside investment and acquired many others.  At the time of this article they have 24 facilities spanning 500,000 square feet under management.

They knew their future was in this real estate business, and Nick was managing that full-time while Dan was running the Storage Squad business, and in late 2019 they had put a lot of changes in place that made them feel 2020 was going to be their best year ever, after which, they could put the business on the market.

Pandem-economics

In March 2020 many schools sent their students home for the semester.  Storage Squad was in the midst of its regular build-up to May in which they went from their 6 full-time employees to an additional 300 seasonal workers.  But some schools had sent their students on Spring Break and told them not to come back.  Nick and Dan got on the phones with these universities looking to come up with a solution for all the students’ stuff in the dorms.  The hustle paid off and their workers used FaceTime and other technologies to work with the students to pack their stuff remotely.

Storage Squad ended up having their best year ever due to this hustle, but also because they got large institutional checks from the schools, as opposed to the smaller transactions they had with the students, which always came with the 3% credit card fees (Storage Squad had never accepted cash or checks from day 1, keeping that part of their bookkeeping very simple).

While they had wanted 2X EBITDA originally, because they had such a great year AND because it was clearly a one-off type of year, the acquirer, 1-800-PACK-RAT, ended up offering them 1X.  They came back to them in late 2020 after having had conversations with them in late 2019.  The deal was fairly straightforward and closed in 45 days.

Lessons

There are some wonderful lessons that Nick (who’s very active on Twitter) shared about this acquisition:

  • Treasure key personnel.  The operations manager for Storage Squad was very talented and they didn’t want to lose him as the business grew.  They offered him shadow equity and when the time came for the business to sell the acquirer also offered a bonus for that employee to stay on for a certain amount of time.
  • Boring is profitable.  Nick has famously said that you can make a killing in any business that has a lot of profit and still uses fax machines.  He exploited the weaknesses of traditional storage firms that still used physical contracts and didn’t answer the phone after 5pm to dominate the storage market in his locations.
  • Have strong opinions, loosely held.  By “learning on the go,” Nick and Dan had no sacred beliefs they had to get rid of as they built their business.  They were willing to take risks and try different ideas in order to grow.
  • Look where the puck is going.  By studying how to improve the business they were already running, they saw an opportunity to build a business with perfect synergy that had a better path to scale into the future.

Are you interested in buying a “boring” profitable business or in selling one of your own?  We know just how to help!  Give us a call.

Questions Buyers Ponder About Price

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Questions Buyers Ponder About PriceWe’ve done a series of articles on general business questions that buyers will ask about the health of the business.  In Part 1, we asked, among other things, Why Sell?  In Part 2 we asked more granular questions, like the demographics of core customers.  In Part 3 we lead with a look back, asking what the seller would do differently with the knowledge he/she has now.

In this article we will look at questions that a buyer will consider when looking at the price you are listing the business for.  The answers to those questions will determine if he/she is willing to pay what you’re asking.

Capital Investment

What rate of return do I want?  Businesses, ultimately, are investments.  They probably don’t feel like investments the way that a stock portfolio or a 401k can, but they are.  In fact, they are often the most important investments of your life, in part because they offer a chance for outsized returns.  

A Main Street business buyer doesn’t normally have hedge fund expectations.  But that same buyer expects much more than one can get in traditional investments, in part because running a small business is significantly more risky than holding an index fund ETF.  Some might want a rate of return as low as 10%, some might not be willing to take the plunge for less than 20%.

Action item for seller’s diligence: Can I show a consistent rate of return on my own invested capital, or can I provide an estimate based on someone meeting my selling price?

How quickly do I want to repay my acquisition costs?  Buyers may have liquidated financial vehicles, borrowed from family and friends, or simply used their own savings if they don’t take out an SBA loan.  The buyer will need to calculate how long it will take them to pay back that outlay in relation to your asking price.

Action item for seller’s diligence: Have standard, accelerated, and best-case scenarios for repayment of acquisition costs based on your current cash flows, less any liabilities that the incoming buyer will not have.

Growth

How steady are sales and margins?  Here projections for new products and services will not be as useful as they are, at best, good estimates.  A buyer is going to look at your history over years.  Just as our buyers in the early teens used to look at how a business weathered 2008 and 2009, you better believe they will be paying attention to your 2020 and early 2021 numbers to see how your business weathered an unexpected global event.

Action item for seller’s diligence: Have your sales and margins charted year by year.  This is also a great internal auditing tool to share with your team to see if those numbers can’t be made better.

What are the biggest risks?  We’ve actually asked this question in other ways in our Questions for Buyers series, but this is more focused on financial risks.  For example, a buyer might consider the risk that a key employee will leave, but that may be less of an immediate financial risk than a key vendor going out of business.

Action item for seller’s diligence: Have some of the financial risks plotted out with your estimate of the likelihood it would happen, with the necessary consequences.

Sellers can sometimes get hung up on multiples and what they think they should get for their business and when you offer action items like we have above, they might resist doing them.  But what the most successful sellers know is that these are action items that not only telegraph the confidence a seller has in his/her or business, but pass that confidence on to the buyer as well.  This is why my number is my number is what the answers to these questions communicate.  The better your answer, the likelier a buyer will agree with your number.

Are you pondering what size business you can afford?  Or how much you want to sell your business for?  Our team can help you answer either of those questions.  Give us a call today!

What is the Entrepreneurial Operating System (EOS)?

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Entrepreneurial Operating SystemAs entrepreneurs build their businesses they often have to figure out not just how to keep track of everything that is going on in the day-to-day, but also have a solid grasp on long-term planning.  Some find this balance, but many do not.  The Entrepreneurial Operating System (EOS) is an answer to this dilemma: it’s a set of concepts and tools to help entrepreneurs consistently get what they want out of their businesses.

Origins

EOS is outlined in Gino Wickman’s landmark book Traction.  We obviously can’t explain every part of the system in this article, but we can look at the broad outlines.  There are six categories that Wickman thinks every business should master:

  • Vision – where are we going and how are we going to get there?  Does everyone know the answer to those questions?
  • People – are the right players in the right places?  Do we have A-players or warm bodies?
  • Data – what story do the numbers tell us?  Does everyone who should have access to relevant numbers have access to them?
  • Issues – what are we consistently working on both short and long term?   How are we tracking them towards completion?
  • Process – do we have documentation for all we do?  Do we have a process for updating that documentation?
  • Traction – do we have focus, discipline, and accountability in the management team?  

Compartmentalize

One of the most cited aspects of EOS is how issues are dealt with.  Wickman proposes four different boxes:

  1. Goals  These are items that must be achieved in the next twelve months.  There should be no fewer than three but no more than seven of these.  Less is more.  They will be reviewed and assessed annually.
  2. Rocks  These are items to achieve in the next three months.  As with goals, you are looking at 3-7 items.  These will, unsurprisingly, be reviewed and assessed quarterly.
  3. Issues  This is subdivided into two parts:
    • Items to be dealt with in the medium term (will take more than 90 days)
    • Items to be dealt with in the short term (will take fewer than 90 days)
      Issues can be reviewed and assessed on a monthly basis.
  4. To-Do  These are items that must be dealt with in the next seven days and should be reviewed every week for completion.

Traction

Busy entrepreneurs can get stuck in firefighting or in simple list-conquering mode.  While fighting fires and smashing your to-do lists are part of running a business, they aren’t coherent and sustainable practices that can run a business long-term.

Business owners who want to implement EOS have to face up to three things if the deployment of it is to be successful:

  • Change is hard but necessary – even if things are not going well, people often prefer the chaos they know.  Make sure you get buy-in from your team about moving to a better system of accountability, and one that isn’t dependent on personality but on metrics.
  • Expectations can’t be met if they aren’t defined – part of why so many businesses thrive on EOS is because the management team is better acquainted with long-term and short-term numbers so that they can focus on what’s important to hit them.
  • Creativity and energy should be deployed where they are most needed – Wickman says to “systematize the predictable so that you can humanize the exceptional.”  You want to use the talent of your team members (and yourself) where it can really take the company to the next level, and that can’t happen when you’re just attacking to-do lists and fighting fires.

Do you feel like you’re just fighting endless fires?  Check out Wickman’s free tools here.  If you want some help with those fires and how to build a better business, we can help with that.  Give us a call!

Case Study #52: When You Want to Get to The Next Level

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High Level MarketingWes Mathews started High Level Marketing (HLM) to focus on small to medium-sized businesses. Back in 2009, social media was in its infancy and businesses were trying to figure out how to deal with this new frontier in digital marketing. Almost a dozen years later, HLM was at the top of its game, and merged with another company to start playing a new game at a higher level.

Digital Marketing

Digital marketing in 2009 is quite similar to digital marketing today. Businesses need help with website design and upkeep and organic and paid SEO. But because the platforms have been constantly developing, Wes learned how to deliver leads “on the job” with his customers. By 2020, the firm was doing $6.5M in real annual revenue (not counting the advertising spends of its clients) on the back of four key pillars:

  • Recurring revenue: This $500,000 monthly income stream meant that they weren’t worried about how to pay their bills month to month
  • Process: Wes is a big believer in the Entrepreneurial Operating System (EOS) which continuously updates processes across various team members rather than making it a burden on one or two individuals 
  • People: HLM focused on hiring A-players and keeping them
  • Proprietary CMS: Most businesses know about WordPress and Squarespace.  Those are content management systems.  Well there are others out there too, including MYCE (Manage Your Content Easily) which is owned by HLM. They didn’t like the solutions out there so they scratched their own itch. Their customers loved the ease of use and so it was one more way to keep customers attached

Level Up

Level UpWes never had a real plan for how he was going to get to the next level in his business. He was the sales and revenue guy, his full partner in the business was the CTO and was heads-down on the software and tech side of the business. His hustle and drive had gotten HLM this far.  But how could they go from a 7 figure business to an 8 or 9 figure business?

Seth Godin has famously said that if you want to make that kind of leap you have to hand your business off to someone else, then be an understudy with someone with the kind of business you want for 1-2 years. Then you can return and transform your business. But Wes never considered that. In fact, in Summer 2020, after the first wave of Covid-19, he felt himself slowing down: he wasn’t feeling the same fire he used to.

Call from a Broker

Any broker will tell you that at least once a week we are on the phone to a prospect, either warm or cold, who we would like to work with.  Wes had gotten plenty of these calls before and wasn’t really interested, but after he had felt himself begin to slow down that summer, he decided to have a longer conversation.

It turns out that Todd was helping a company look for suitable merger candidates, and the last deal that they had been working on fell apart.  Wes said, “Why not?” and before too long he was on the phone with first the CEO and then the COO of Bell Media. They really got along and Todd saw puzzle pieces coming together. He saw himself as a revenue guy and his partner was a CTO. Bell Media had neither proprietary tech nor someone entirely focused on growing revenue. This could be a great marriage.

Gap in Pricing

When the first LOI came in there was a pretty big gap between what Wes wanted and what Bell offered. He felt strongly that the company merited a 6-12X EBITDA pricing and his internal “deal breaker” in that range was 8X. The original LOI came in at roughly half that.

That low number allowed Wes to focus in on his deal points:

  • He wanted no fiduciary responsibility in the new company – he just wanted to stay in his lane and sell
  • He wanted to be able to take a second bite of the apple – he wanted to reinvest some of the sale proceeds and become a shareholder of the new company
  • He wanted a guaranteed 3 year contract as a new employee

While Wes didn’t have total clarity on all these points initially, they developed, and after 3-4 LOI exchanges they finally got over the finish line and started moving towards closing.

The New Company

Even though HLM ended up being the seller in this transaction, the new company kept the HLM name, which was a real point of pride for Wes. He and his partner were each 10% partners in the new company, and freed from trying to be a CEO that might take his company to a $100M valuation. Wes knows he’s part of a team that will get there in 3-5 years, and he’ll get to be part of that transaction too.

Because both companies had already been working remotely at various times of 2020 due to Covid-19, the merger was much less painful, with nobody having to relocate.

Takeaways

Key lessons you can take from Wes and HLM:

  1. Know what the value drivers of your company are and how to lean into them
  2. Know when you’re “done” and seek an exit that will make sense for everyone
  3. Stick to your guns on your deal points and valuation – but take your time to think through those before you get started in a transaction
  4. Know what your personal limits are and have the humility to ask for help

Are you looking for a merger with a company that can help take you to the next level?  We’d love to help you find that company.  Give us a call!