Episode 68 – The Benefit of a Deferred Sales Trust

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Greg Reese of Reef Point LLC is back to discuss the benefits of a DST. If you missed part 1, please check it out here.

During this episode, he will discuss how to qualify for a DST, who can benefit, and how.

Interested in learning more about Deferred Sales Trusts? Head on over to Greg’s website

Are you considering selling your business? Are you considering entering the world of entrepreneurship? If so, please get in touch for a FREE consultation. The best way to learn about us is at our website, which includes connecting with Doug, Andy, or the rest of the Apex Team.

Book Club #32: Built to Last: Successful Habits of Visionary Companies, by Jim Collins and Jerry I. Porras

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Built to LastEven though Jim Collins wrote Good to Great years after he finished Built to Last, he considers the former a prequel to the latter. It’s one thing to make a company great, but to make it a visionary one that lasts for generations, that’s an enduring accomplishment. The same research-driven conclusions frame the important lessons of this still-relevant text.

Clock Building vs Time Telling

“Having a great idea or being a charismatic visionary leader is time telling; building a company that can prosper far beyond the presence of any single leader and through multiple product life cycles is clock building.” With a business press that focuses on big personalities it’s sometimes easy to miss companies that don’t need charismatic leaders to prosper…because they’ve got a culture that survives, even thrives without needing to be pushed from the top.

This doesn’t mean that visionary leaders should be ignored. A helpful example might be Jack Welch. Welch got a lot of press in his day, but did you know that relative to his other predecessors at GE he came in second place in ROE and fifth place on average cumulative stock returns relative to the market and its biggest competitor, Westinghouse? Welch was effective…but so were his predecessors. He simply kept up with a pace that had already been set for him.

If you want to go to deeper with other examples like Welch, the authors dedicate Chapter 8 to homegrown management: Welch only ever worked at GE before ascending to CEO. His achievements are just as attributable to the culture he grew up in as his own personal skill and charisma.

BHAG

Just as many people know the term “right people on the bus” from another Collins and Porras book, they probably also know the abbreviation BHAG to stand for “big hairy audacious goal.” That term originated in this book as a characteristic of visionary companies. A couple of the BHAGs highlighted in the text include:

  • Boeing betting the farm on the 707 and 747, projects which would have ended the company if unsuccessful.
  • Sony creating a pocket radio for consumers when no one thought transistors had value outside of military applications.

A BHAG should be so clear and compelling that it requires little to no explanation and even if not fully achieved, can set the company up for a future success. The other danger of achieving a BHAG is letting complacency set in from a “we’ve arrived” mentality. Companies with no history of BHAGs don’t become generational, visionary enterprises.

Try a Lot of Stuff

While small business owners may be aware and comfortable with the “throw stuff against the wall and see what sticks” school of thought, they may not know that this is also a characteristic of generational visionary companies as well. Some fascinating stories in Chapter 7, which focuses on on this topic, include:

  • Johnson & Johnson received a letter from a physician complaining about patient skin irritation from certain medicated plasters (at this time that was J&J’s primary business). The company’s director of research responded by sending a packet of soothing Italian talc to apply on the skin. That same director encouraged the company to include a small can of talc for free with certain products. People started asking for the talc directly and this “accident” grew to become, at one point, 44% of J&J’s revenues.
  • In 1892 an American Express president took a European vacation and found that his letters of credit weren’t easily translatable into the cash he needed. When he returned he vowed to fix the problem, thinking that if he had challenges, what might everyday people without his connections have? The American Express Travelers Cheque was born and pointed towards the financial services future of the business, which was then operating a secured cash-shipping business.
  • How Wal-Mart greeters originated from one store manager’s concern with shoplifting: greeters made honest people feel welcome and put shoplifters on notice that someone would see them if they tried to walk out with stolen merchandise.
  • The “give it a try, and quick!” mentality at 3M that led to their adhesive tapes, waterproof sandpaper, and Post-It notes.

By focusing on empowering staff at all levels rather than trying to direct everything from the C-suite, these companies harnessed the power of their people.

Final Thoughts

There are many great lessons in the book, but perhaps the most important one for our age that has seen multiple (and persistent) scandals in an environment in which “maximizing shareholder value” has gained currency as an investing philosophy is the contrarian finding of Collins and Porras in the text: “[W]e did not find maximizing shareholder wealth or profit maximization as the dominant driving force or primary objective through the history of most of the visionary companies. They have tended to pursue a cluster of objectives, of which making money is only one — and not necessarily the primary one.” The shining example of this is the original 1943 Credo of Johnson and Johnson, referenced in Chapter 3 of this text and which J&J went back to when deciding what to do about it’s now-famous Tylenol recall, which cost the company almost $100M, but was what they considered the right thing to do. 

You can find the most recent iteration of the credo here.

We can’t pretend to be able to help you build a visionary company…that’s why you should read this book! But we can help you figure out what you need to tweak and improve in your business to take it from not sellable to sellable. Let us know how we can help.

Episode 67 – The Best Kept Secret in Business Sales – The Deferred Sales Trust

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Andy is joined by Greg Reese, Principal and Managing Member of Reef Point LLC. For over 20 years, Greg has been assisting people with a little known strategy when it comes to selling a business – Deferred Sales Trust. In this two part episode, Greg joins us today to define what a Deferred Sales Trust and how it can be deployed to help a seller keep more of the money from the sale of their business to use as they see fit.

Interested in learning more about Deferred Sales Trusts? Head on over to Greg’s website

Are you considering selling your business? Are you considering entering the world of entrepreneurship? If so, please get in touch for a FREE consultation. The best way to learn about us is at our website, which includes connecting with Doug, Andy, or the rest of the Apex Team.

Case Study #74: When the Market Changes, Pivot

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Case Study #74: When the Market Changes, PivotWhen Jaclyn Johnson had a $40M all-cash deal for her events company, Create & Cultivate, implode at the 11th hour, she didn’t fall apart. She took the lessons she learned to get an 8-figure exit just a couple years later.

Side Project Becomes the Main Project

When Jaclyn created Create & Cultivate, she already had a marketing agency that kept her busy most of the time. What she was looking for was not in the marketplace: a community specifically for female entrepreneurs. It was a side project but also functioned as a development tool for her agency. The project wasn’t making money, but it wasn’t losing it either. Jaclyn partnered with corporate sponsors and charged a minimum fee in order to focus on building a community rather than an income stream.

When her agency was acquired by a strategic buyer, she was on the hook to consult with the new owners for a year, but in the meantime she also brought in a strategic co-founder for Create & Cultivate and together they decided to take this fun project and really go for it. Soon they were co-branding events with companies like Marriott (who were excited about bringing a lot of women to their newly redesigned properties). These events served as feeders for larger conferences run by the C&C team.

The Deal Blows Up

Jaclyn’s co-founder was going through a transaction for her own company and told Jaclyn it might be a good time to exit from C&C also. Everything was on track until signing day, when the deal fell apart. Keep in mind that Jaclyn had given up the lease on her office space and told senior team members about the sale. The big problem? Jaclyn was too involved in the day-to-day operations and hadn’t removed herself from the scaffolding. The buyers were (understandably) worried about what would happen if she disappeared. The $40M all-cash offer, which represented a strategic valuation of 20X EBITDA and which would make her the head of a publicly-traded company evaporated in an instant.

 

Jaclyn went right back to work. She built a C-suite, got ambitious about having a big exit (for real this time), and focused on recurring revenue, one of the most important value drivers of any business. In the case of C&C, that recurring revenue came in the form of a digital membership that gave access to gated content and members-only events.

The World Blows Up

Six days before an event at SXSW in Austin in 2020, the city holds a press conference to say the event will not be happening. At first Jaclyn was in denial. The cancellation of an event this late was going to represent a financial bloodbath for the company. As she was working through the process she was talking about scaling back events a few months out, but gearing back up for summer 2020. But her team members brought her to the new reality: those sorts of events weren’t coming back for a while, maybe even for years.

Just as she did with the failed first acquisition, Jaclyn got to work instead of feeling sorry for herself. In May 2020, she launched a digital event, with over 10,000 attendees who sent over 50,000 messages in the Slack for the event. By pivoting quickly to digital events, Jaclyn and her team helped lead the way in this relatively new space and by the end of the year the company was on the same EBITDA despite being on lower revenue.

Second Attempt at a Sale

Having been fortified with a blown-up deal and a formerly blown-up business model, Jaclyn was prepared to go to market again. She ended up with a $22M cash-heavy deal which bought out her partners completely and allowed her to roll a portion of her proceeds towards equity in the new company. She also took a portion of the proceeds in a performance-based earnout. Sure, it wasn’t the original offer she got years back, but a valuation only matters if a deal closes, and part of why that deal didn’t was because Jaclyn didn’t have the right value proposition in place. The next time around, she got 22 million validations for putting in the hard work.

Lessons

Some great takeaways from Jaclyn’s story include:

  • Don’t mourn, pivot — instead of crying about the once-in-a-generation impact of Covid to an events company, Jaclyn went to another medium in the same business and capitalized on people’s hunger to continue to learn and connect despite lockdowns.
  • Built systems — when the seller is deeply involved in the day-to-day operations, it means the buyer is buying a job, not a business, and that’s a smaller buying pool with smaller numbers.
  • Be genuine and see what develops — all this came about because Jaclyn was interested in solving a genuine problem — more forums for female entrepreneurs to connect — and built a sturdy foundation for that. Because she did that work, it became easy to monetize it later on.

Are you concerned you’re a bit too involved in day-to-day operations to offer a credible sale to a buyer? We can help you change that narrative. Give us a call.

Episode 66 – The Importance of Planning

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On today’s episode of the Apex Business Advisors Podcast, Andy and Doug discuss the work that needs to be done by the Business Owner before they list the business for sale to do some planning to make sure they’re efficient in the Planning topics of Timing, Goal Setting, Valuation, Tax Planning, and Financial Planning.

 Are you considering selling your business? Are you considering entering the world of entrepreneurship? If so, please get in touch for a FREE consultation. The best way to learn about us is at our website, which includes connecting with Doug, Andy, or the rest of the Apex Team.

What Brokers Don’t Do

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What Brokers Don't DoWhile we do take pride in providing our customers with peace of mind in a business transaction, there are limits to what we can do. In this article we’ll cover a few of those limits (and what resources you can lean on instead).

We’re Not Attorneys

While all of us have looked at more contracts than almost anyone who is not an attorney, we still don’t function as an attorney when we are your broker. We’re not going to bill you by the hour, and we’re always happy to look at some wording you might be puzzling over, but we have a solid list of attorneys who have experience in dealing with business transactions, not someone who’s your friend’s brother’s cousin who does property law.

While your attorney is someone you pay, like us, to advise you on the deal, beware of those who try to take control of the deal. We’ve seen more business sales flame out for this reason than any other. If you don’t manage your attorney, you will get managed instead.

It’s Not Our Decision

Outside of buying a home, this is often the single largest financial transaction our clients go through, and they often look to us for advice. We can’t tell you how often we’ve heard, “Which deal would you take” or “What would you do”? We always try to reframe this by reminding the client that it doesn’t matter what we would do, it matters what they want. We can only provide context and experience, but ultimately, accepting a deal is never going to be our decision.

A classic example of this is on price. If there’s a gap between what the buyer is offering and what the seller wants, and if we’ve already done the work on valuation, we will accept if the seller wants to wait for more money. That means the buying window may likely lengthen, but if the amount is significant enough, and the seller is not in a rush, this may make a lot of sense. In any case, we’re never going to tell a client to take an offer (or to refuse one). Again, our goal is always to advise and be part of the dream team that brings all this together.

We Don’t Focus on Specific Buyers

Our job is to facilitate meetings with different buyers (who may come from a range of backgrounds) but we are representing you, not them. They may have engaged a broker to help them purchase a business, and that broker may even be one of our colleagues, but our job is not to help our colleague close the deal his customer wants, but to make sure our client engages with the buyer he/she is most aligned with, and we’re always going to bring our clients back to the original goals and values they enunciated at their first meetings with us to offer perspective on what to do in a given situation.

So there are three things we don’t do. If you want a reminder of the many things we do, do, check out our Day in the Life article.

Episode 65 – What Does Your Spouse Think?

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On today’s episode, we pose a loaded question that any buyer or seller had better be able to answer. Spousal involvement is not a topic we spend a lot of time on these shows, but it may be one of the most important aspects of keeping a deal on track. Andy and Doug discuss the importance of involving the spouse in the process.

Are you considering selling your business? Are you considering entering the world of entrepreneurship? If so, please get in touch for a FREE consultation. The best way to learn about us is at our website, which includes connecting with Doug, Andy, or the rest of the Apex Team.

Book Club #31: Good to Great: Why Some Companies Make the Leap and Others Don’t, by Jim Collins

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Good to GreatThere’s a reason you’ll find Jim Collins books on the shelves of many C-Suite managers: there’s helpful advice and thinking in them, particularly for large, publicly-traded companies. But in recent years some of his books, including Good to Great, have come under fire for being “wrong.” In this review we will address some of those concerns, but first, some great points that make the book worth reading.

The Right People on the Bus

If you’ve ever heard of or used this phrase, you’ve already learned one of the key lessons of Good to Great. Instead of seeking to motivate the people you already have with mission and vision, start by hiring people who buy into your mission and vision. When you’ve got the right people, you also have to make sure they are in the right seats, i.e. sometimes you have someone who is culturally aligned with you but is in a role that doesn’t leverage his/her strengths. 

Confront Brutal Facts

Collins tells a fascinating story of “short pay” in Chapter 4. Bruce Woolpert of Granite Rock allowed customers full discretionary power on how much of an invoice would be paid based on satisfaction. The customer does not need to return the product or ask for permission. He/she simply circled the offending item on the invoice, deducted the item from the total, and sent a check for the balance. “Red flag mechanisms” like these, allow companies to treat errors and problems as information (and to proactively respond in a way that shows the company values customer satisfaction above all else).

Elsewhere in this same chapter Collins underlines the importance of acknowledging shortcomings so that companies can improve. Less echo chamber, more constructive dialogue. 

Be a Hedgehog

In a chapter called The Hedgehog Concept, Collins puts forward an intersection of three areas: passion, economic engine, opportunity to be best in the world. He notes that the companies he labeled as “good to great” in his study all focused on this intersection with the simplicity and single-mindedness of a hedgehog.

The ability to be a hedgehog allows companies to not be tied to “what we’ve always done” and consider taking bets on where the market is going. One of the most shocking moves Collins documents is Kimberly-Clark’s willingness to sell all its mills in order to become the best in the world in consumer products or Walgreens’ ability to end its nostalgic food service component to focus on clustered convenience both in-store and online.

But, Two Companies Went Bankrupt…

Much has been made of the fact that two companies that Collins profiled, Circuit City and Fannie Mae, have both gone belly-up, for entirely different reasons. But this isn’t a sufficient reason to discard Collins’ book, which is so extensively researched that there are over 40 pages of appendices documenting the methods and questions for its findings. It’s simply a reminder that having a great company doesn’t guarantee that you can’t fail, or that market conditions can’t suddenly and catastrophically change.

Indeed, Collins’ book takes readers on a journey, from getting the right people on the bus all the way to pushing a reinforcing flywheel of momentum that takes a company from “doing fine” to “killing it.” But practices that worked for publicly-traded businesses will work for small businesses too, especially around leadership and innovation. No matter what size your business is, if you become great, you can’t rest on your laurels. You have to always keep tweaking and refining so that complacency doesn’t set in. Greatness never rests, even though sometimes it ends.

Want some ideas on how to take your company from good to great before you exit? Let’s talk.