The Anatomy of a Successful Exit

Stephanie Breedlove started Breedlove & Associates in 1992 as a way to pay her nanny. The big payroll processors weren’t interested in dealing with one person’s wages and doing it themselves was complicated and time-consuming, too much for the then overwhelmed Breedloves.

 

Breedlove saw a business opportunity and started a payroll company for parents who needed to pay their nannies. By 2012, Breedlove & Associates had grown to $9MM in revenue and then she received a $54MM acquisition offer.

To give you some context of how incredible it is to sell a $9MM business for $54MM let’s look at the numbers. Through The Value Builder System™, more than 25,000 business owners have completed the Value Builder Score questionnaire, part of which asks about any acquisition offers they may have received. The average multiple offered is 3.76 times pre-tax profit. Even the best-performing businesses, those with a Value Builder Score of 80+, only get offers of 6.27 times pre-tax profit on average. Breedlove got close to six times revenue.

What did Breedlove do right? We’re going to look at the five things Breedlove did—and that you can do—to drive up the value of a business.

  1. Sell Less Stuff to More People

When Breedlove hit $30K per month in revenue, she quit her job at Accenture (formerly Anderson Consulting) and devoted herself to Breedlove & Associates full-time. To grow, she had a choice: sell more to her existing customers (e.g. busy couples often need lawn-care, house-cleaning, or grocery-delivery services) or stick with her niche of paying nannies. Most consultants and experts would say it’s easier to sell more to existing customers (and they’re right), but it doesn’t make your business more valuable. Breedlove decided to stick to her niche and find more parents who needed to pay their nannies, and that decision laid the foundation for a more valuable business.

Investors from Warren Buffet look for companies with a deep and wide competitive moat that gives the owner pricing authority. When you have a differentiated product or service, we call it having The Monopoly Control and companies with a monopoly get significantly higher acquisition offers.

Rather than selling existing customers generic services in commoditized markets, Breedlove focused on selling one thing to as many customers as she could find.

  1. Strive for 50%+ Net Promoter Score

One feature that interested acquirers look for is your customer satisfaction levels. Increasingly, they are turning to the Net Promoter Score (NPS) as a measure of this. NPS was developed by Fred Reichheld and his team at Satmetrix, who discovered that your customers’ willingness to refer you to their friends or colleagues is highly predictive of your company’s future growth rate.

The NPS approach is to ask your customers how willing they would be to refer your company to a friend or colleague, on a scale of 0 to 10. They are then categorized into Promoters (9s and 10s), Passives (7s and 8s) or Detractors (0–6s). The NPS is calculated by subtracting the percentage of Promoters from the percentage of Detractors. Most businesses achieve an NPS of 10% to 15%, while the very best companies (think Apple and Amazon) get scores of 50% or more.

Breedlove obsessed over her company’s NPS and realized the key to driving it up was perfecting the first few interactions with a new customer. When you call a big payroll company looking for a service to pay your nanny, the response can be underwhelming. With only one person to pay, you are often relegated to the most junior staff member and even they would rather be dealing with a larger client.

When you call Breedlove, by contrast, you get a team of professionals totally focused on setting you up. You’re not an afterthought. You’re not passed on. Instead, you get the best onboarding talent the company has to offer.

This set-up team was a big part of how Breedlove achieved an astonishing 78% NPS.

  1. Create Recurring Revenue Streams

The third thing that made Breedlove’s company attractive was recurring revenue.

Regardless of what industry you’re in, recurring revenue models give acquirers more confidence that the business will keep going strong after you leave.

By 2012, Breedlove & Associates had grown to $9MM and, given the nature of the payroll business, 100% of their revenue was recurring.

  1. Reduce Reliance on Customers, Employees and Suppliers

Breedlove’s company was also attractive to buyers because she had a highly diversified customer base with no single customer representing even close to 1% of her revenue. If more than 10% to 15% of your revenue comes from one buyer, you can expect prospective acquirers to ask a lot more questions.

Customer concentration is one of three factors that make up The Switzerland Structure Module. The Switzerland Structure measures your business’ dependence on a single customer, employee or supplier.

  1. Find an Acquirer You Can Help Grow

By 2012, Breedlove & Associates was growing 17% per year, which is good but not blow-your-mind good. So how did she attract such an incredible acquisition offer? The trick was showing her acquirer how they could grow.

In Breedlove’s case, she sold her company to Care.com. Think of Care.com as the Angie’s List of care providers (e.g. child care, senior care, etc.). If you need someone to care for your kids or an elderly relative, you enter your address into their website and Care.com will give you a list of vetted caregivers in your area.

At the time of the acquisition, Breedlove had 10,000 customers and Care.com had seven million members. Breedlove argued that if just 1% of Care.com’s members used Breedlove’s payroll service, it would equate to 7X growth in Breedlove & Associates almost overnight.

In 2012, Care.com acquired Breedlove & Associates for $54MM—an outstanding exit made possible by Breedlove’s focus on what drove her company’s value, not just their top-line revenue.

To get your Value Builder Score and begin understanding what drives value in your business, please chick here: http://www.gtgrowth.com/value-builder-score

Why Some Mature Companies Stall

 Have you ever wondered why some mature companies stop growing? Sometimes they run out of potential customers to sell to or their product starts losing market share to a competitor, but there is often a more fundamental reason: the founder(s) lose the stomach for it.

When you start a business, the assets you have outside of your business likely exceed those you have in it, because in the early days, your business is worthless. As your company grows, it starts to have value and becomes a more significant part of your wealth—especially if you’re pouring your profits back into funding your growth.

For most business owners, their company is their largest asset.

Eventually, your business may become such a large proportion of your wealth that you realize you are taking a giant risk every day that you decide to hold on to it just a little bit longer.

95% of His Wealth in One Business

In 2000, Etienne Borgeat and Olivier Letard co-founded PCO innovation, an IT consulting firm. The company took off and, by 2016, PCO had 600 full-time employees and offices around the world.

As the business grew, Borgeat and Letard started to become uneasy about how much of their wealth was tied up in their business. By 2015, the shares Borgeat held in PCO represented 95% of his wealth.

That’s about the point that aerospace giant Boeing came calling. Boeing wanted PCO to take on a very large project and Borgeat and Letard turned down the opportunity reasoning that the project was so large it could risk their entire company if it went wrong. In the early days, the partners would never have turned down a chance to work with Boeing, but the partners had changed.

That’s when Borgeat and Letard realized the time had come to sell. They agreed to an acquisition offer from Accenture of over one times revenue.

The success of your company is probably driven by your willingness to put all your eggs in one basket. You’re all in. However, at some point, you may find yourself starting to play it safe, which is about the time your business may be better off in someone else’s hands.  GT Growth & Transition Strategies can help you continue to grow your buiness and help you start planning for your eventual transition, something that should be done well before your actual transition date.  Call Frank at (401) 651-1585 or email him at frank@gtGrowth.com.