Archive for category: Case Studies

After law school, Diana House took some time off in Bali, Indonesia, where she discovered that people were fascinated with Mala beads – meditation beads used by serious practitioners of yoga. Sensing a blue ocean opportunity, she built a website and in the very first month of business she had paid for the website and had money in the bank.

The Process

Diana used local Indonesian artisans, as well as factories in China and India to create what she characterized as “luxury yoga jewelry.” Not only was she first to market, but she really pushed the gas, using Facebook organic marketing, email marketing, and influencer marketing long before it was a common practice. She would give the jewelry to well-known yoga teachers in exchange for their sharing it with their communities.

She quickly hit seven figures in revenue and after the first year she wanted to sell. Diana is a serial entrepreneur and personally she was becoming less interested in yoga and wasn’t wearing the jewelry. A sale she pursued fell apart and she didn’t look to sell again for five years.

The Problem

Diana had too many irons in the fire, trying to run multiple businesses while also trying to organize a wedding for herself, and at one point when she asked her accountant when she should sell Tiny Devotions, this yoga jewelry company, he told her, “a year ago.” The revenue was starting to flat-line, and while it hadn’t yet started to decline, all signs pointed to complacency from the founder.

Diana knew that she was mentally checked out of the business, and in a small business, the staff feed off the energy of the leadership team. Diana had been out of operations for years and so without her attention it was simply running on autopilot. In the meantime, literally thousands of competitors had moved into the space and were competing well and driving her once 80% margins way down.

The Failed Sales

E-commerce businesses sell on average for three times normalized EBITDA. Diana used this number in early conversations with potential buyers and started three planned months of diligence with a strategic buyer that had given her a great offer. Despite having a law background, and despite seeing that there was no deposit required at time of the LOI, Diana chose to hold back on stopping things to push this deal point. She was also the one driving the due diligence process: a huge red flag. Unsurprisingly, 2.5 months into the three planned months, the “acquirer” decided to sell his company instead of acquiring hers.

At this point, revenue had started to decline and she thought she was being too smart for her own good trying to sell the business on her own. She hired business brokers to try to sell the business, but kept running into roadblocks like lack of financing, unreasonable requests during the diligence period, and even one fight between spouses about the deposit amount that killed a deal right at the start.

Despair

Diana’s lack of engagement turned into despair about the business, and she started to see that her ego was goading her to sell the business because she didn’t want to be one of “those people” who shut down a business because she couldn’t find a buyer. But she realized that the mental anguish she was going through in being tied to something she no longer cared about was much worse, and she set a deadline of “sell or close down” by the end of August. It was August 1st when she made that decision, and on a whim, emailed her customer list letting them know she was planning to sell, but would have very tough deadlines to meet in order to close on time.

The last offer she got, she told the buyer that she needed a deposit that evening, due diligence to complete in 48 hours, and the deal to close in 9 days.  As crazy as those terms may seem, we have seen such deals go through on more than one occasion, and in this case, it happened for Diana, but not without a few bruises, bumps, and lessons learned.

Lessons

It’s refreshing to hear people who can put their ego aside and point out things they did wrong in order to make sure others don’t do the same.

• Sell when you’re no longer engaged. Diana did try to sell early on, but she notes she should have simply tried again, probably with a broker.
• Sell when you’re in a good market position. Diana waited too long, when competitors became entrenched and were bringing great skills to the game.
• Use a deadline to drive a sale. This isn’t just something you set with an acquirer, but a mental one for yourself, to drive momentum.
• Get out of your own head. Don’t force a sale for prestige for yourself.  A sale has to be for the right reasons, not just to satisfy your own ego.

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.

Julie 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.

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. 

Jim McManaman owned Solution One, an accounting and tax firm that handled business and personal accounts.  

At its peak, he had six employees and had just added a fee-only financial planning practice to the company.

The company was very much a “main street” business, and for Jim, apart from tax season, it was a lifestyle business as well.

This was mostly because he had read The E-Myth early on and ensured that his entire company was systematized, even down to having an internal wiki that had hundreds of pages.  

Out of the Blue

Jim had no plans to sell.  One day a letter came to him out of the blue from a competitor in town with a soft offer to buy his firm.  Jim didn’t think this person was a good cultural fit for his clients, so he unhesitatingly turned it down.

But a few months after that, he got a second letter, this time from someone who he considered a friendly colleague more than a competitor, and he took a meeting with her.

He had a productive first meeting, but spent most of the time politely thanking her for the interest, but reiterated that he had no intention of selling.  

And yet, as it often does, even the thought had pushed forward one domino. Within a couple weeks, he started a series of meetings with her that lasted six months, with only a delay for a few weeks during the peak of tax season.  

At the end of the day, the potential buyer didn’t have the finances put together to really make the deal happen, and so the deal collapsed.

Ball was already rolling

Jim wanted to take the momentum from that deal and move it in another direction. Soon, he became the hunter instead of the hunted.  

He reached out to another respected colleague and let him know he was interested in selling. There was a clear meeting of the minds.  They started the process in midsummer and closed on December 31 of that year.

The buyer was very slow and methodical. Jim is an A-type personality and at times he mistook their difference in styles for a lack of seriousness about the deal.  

But they got their communication style down. The buyer was so impressed with how Jim’s operation worked that he vowed he wouldn’t change a thing, from the name to any of the employees or operations. The buyer even had the humility to say he would be taking some of the best practices and applying them to the two offices he had.

The Deal

Jim worked off a 1.25X multiple on gross revenue. This was something he saw in the two previous offers and the buyer himself had used that approach in a previous acquisition.  

It’s a number that’s often used in regards to accounting practices. However, sometimes those sales are subject to earnouts and financing, but Jim held firm. If he had a good business, he wanted to get paid. He ended up getting an all-cash upfront deal, with no financing.

Key Lessons

Jim went through six months with one buyer only to find out at the end she didn’t have the funds to even be having the discussion in the first place.  

One of the things we ensure at APEX is that you’re not dealing with a potential buyer who doesn’t have what it takes to buy your business. We do our diligence so you don’t have to.

Keep in mind that whatever your personality is, your correspondent – be he/she the buyer or seller, may not have the same personality.  

A broker can stand in the gap and help ease those communications so that a text or email doesn’t get misinterpreted and blow up a deal for absolutely no reason whatsoever.  It’s happened, believe us. Lean on our experience to help you manage the communication flow.

Finally, remember that it’s important to manage how you tell your employees and customers that a sale is happening.  

Ironically, Jim mentioned that months later some clients still thought he was involved in the business because it was running how he’d always run it…in a lifestyle manner.  

Shelley Rogers has been a leader in a field that’s now very trendy.

But many years ago no one even knew the field existed.

That field? Electronics recycling.  

Little did she know that her initial success would lead to an even more ambitious move that ended in catastrophic failure.

She didn’t let those lessons go to waste. Instead, she went on to an excellent exit in the next business she built.

Easy Money

Shelley’s first business in this space was Admincomm Warehousing.

They helped companies recycle their old technology. Several Chinese firms were interested in many components that were inside old computers and phone systems.  

Shelley would take in the equipment from Canadian companies. Chinese recyclers would then fly into Calgary, where she was based, in order to bid on the equipment.  

She had a check in hand before the equipment ever left the port, and the companies who sold her their old equipment got paid 30-60 days after that. Excellent cash flow and what seemed to be significant supply.

In fact, at some point, she started getting new phones and computers that had never been used. Unsurprisingly, a government program had been inefficient, leading to sales of perfectly good, never used equipment.  

Shelley started a new division of the business that would resell that equipment rather than earmarking it for scrap.

Bad Press

As the businesses continued to thrive, there was a news expose about bad practices among the Chinese recyclers. There was blatant disregard for the environment in the methods that were used, to say nothing of the use of child labor.  

Shelley realized she would need to ensure the recycling was done at home, and done right, in Canada.

This required a fair amount of work and capital. Not only would she need to advocate for favorable recycling legislation from the Albertan government, but she would need to acquire the expensive machines from Europe that could do the work well.  

This business could do well if it could scale up and do a fair amount of volume

Reverse Merger

She changed the name of the original business from Admincomm to Maxus Corporation and bought a shell company in the US in order to go public on the OTCBB (pink sheets).  

She did a “friends and family round” and raised $3M via this IPO. But this was the last thing that really went right for her in this particular company.

The first squeeze was cash flow. Unlike the last business, in which she was paid upfront before product was delivered, the program in Alberta mandated that she couldn’t get paid until the recycling was complete and she had provided proof.  

Additionally, she had to pay to acquire some of the equipment for recycling up front.

The second squeeze was a dishonest CFO who was consistently promising letters of intent from strategic partners, but was failing to deliver those and was embezzling money via the US shell corporation.

Very quickly they hit a wall in which much of this fraud was revealed. Many relationships were tested. Some were broken. Many of the people who backed the IPO were friends and family and a failure of this level was devastating for a number of reasons.  

Shelley lost her marriage and lived on her savings for a year while she continued to try to battle to make the rest of the company work while the Canadian division went into receivership.  

But, very little could be done.

The comeback

Even during the difficult period of the collapse of Maxus, Shelley had pulled aside a couple of her best salespeople. From there, she proposed to start a business with them in a related field.  

This new company, Top Flight Assets Services, would go to large organizations and offer to take out old computers and phone systems on consignment.

Top Flight would then refurbish these systems and sell them wholesale. When a company called E-Cycle bought the remaining assets of Maxus, Top Flight built a partnership with E-Cycle to handle any recycling of equipment that couldn’t be refurbished.

Time to sell

After building Top Flight over seven years, Shelley decided to sell the company in order to pursue a relationship abroad. Initially, she went to a “sell your small business” course. Feeling unimpressed, she decided to try to do the sale on her own.  

She compiled a list of 150 companies and sent out an anonymous infosheet with information on Top Flight. Interested parties could then contact a consulting firm she had contracted with. Of the 150, seven parties were willing to sign an NDA to proceed further, which led to 3 serious buyers.

After further discussions, Shelley decided on a closed bid process that required a deposit and asked for 6 times EBITDA in an industry in which sales were between 3.5-7X EBITDA at the time.  

This led to one buyer returning the bid with a request for audited financials, whereas the other two submitted bids, including a leasing company who was already one of Shelley’s largest customers.

The final sticking point for the LOI was the earnout. She had obtained 6X EBITDA upfront for her and her partners. And the full earnout would have brought her to 7X in total.

And while she resisted this for a while, an old friend asked her if she was happy with the upfront number. Because if she was, the earnout was just a bonus.  

She realized she was holding up the sale over something that wasn’t key to her, and the sale closed. She and her partners ended up only realizing 50% of the earnout over a 3-year period.

Shelley is a great example of the fact that you can be down, but not out. More importantly, she shows how not to shy away from building another business, almost in the rubble of the last one, just because of failure.  

She also didn’t let the amount of the earnout hold her back from closing the deal. This was smart as she’d already obtained a number she was honestly pleased with.

Worst case scenarios happen every day, but we’re defined by how we respond to them. Shelley chose not to give up on herself or her business partners and had a handsome exit as a reward.

Shelley didn’t use a broker. But when interviewed about her exit, admitted that she could probably have obtained more, and faster, had she not tried to do everything herself.  Managing a sale of a company by yourself, while trying to run a business, while trying to keep it all secret from your employees…isn’t something most people can do well. So before you try that route, give us a call to see if we can help you with your situation.