The $10 Million Membership Model

Transcript

John Warrillow:                Generally speaking, small, service-based businesses are pretty tough to sell. And I think I’d put Walter Bergeron’s business in the early days in that camp. I mean, they had a million dollars in sales, they were struggling with competitors, cash flow was tight, very lumpy in terms of demand. When he made a simple strategic change to the way he ran his business and the way he billed his customers, that change made a huge difference to his overall business. Then he started to grow very, very quickly, ultimately were acquired, bought for a $10 million price tag. It’s a great story on the power of subscription models. I’ll let Walter Bergeron tell you the rest of this story.

John Warrillow:                Walter, welcome to Built to Sell Radio.

Walter Bergeron:             John, thanks so much for having me and I’m really excited about sharing whatever I can with your audience. This is gonna be a lot of fun, I think.

John Warrillow:                Oh, good. Okay, well tell us about this business that you sold, Power Control Services?

Walter Bergeron:             It’s not a very sexy business at all. It was something I learned whenever I was in the NAVY, we repaired industrial electronic circuit boards. So when I was in the military, I actually repaired circuit boards on nuclear power plants aboard aircraft carriers. So I took that skill set and took it out of the NAVY and started doing that for large manufacturers in North America. Large, we specialized in food manufacturers like Tyson Foods or large places like that that actually had an automated process for making food. During that process, there’s a lot of electronic equipment that’s involved and it worked out great because there’s a lot of water used in making of food and water and electronics don’t mix. So that was great for our business because it broke all the time and we got to fix those electronic circuit boards for all of those manufacturers.

John Warrillow:                Excellent. And so you had technical people in a factory somewhere who would take these old or broken circuit boards and fix them? Was it sort of a people-intensive business?

Walter Bergeron:             It was. It was really service-based intensive and that was one of the lessons I’ve learned along the way was to try to get away from that. But it was a highly technical skilled environment that we would have the manufacturers pull the broken parts out of the equipment and ship it to us at one of our service centers. And we’d repair it at the service center then ship it back to them and then they’d install it and go back to operating.

John Warrillow:                And what does it cost to fix a circuit board at Tyson Food? I mean we’re talking hundreds of dollars? Thousands? Tens of thousands? What would a typical job cost?

Walter Bergeron:             A typical job would be in the four or five thousand dollar range. Anything less than that, it’s kind of like your television, you know? If you can replace it for a few hundred dollars, there’s no real reason to replace it. When you get into the really high-end stuff, then you want to repair it versus replace it. So it really depended. Sometimes we’d get the lower end stuff, but for the most part we repaired the higher-end, large industrial circuit boards.

John Warrillow:                And so you were in the NAVY, I mean were you an accidental entrepreneur? I mean had you always dreamed about being an entrepreneur or was this something you kind of fell into?

Walter Bergeron:             It was something I’d been doing probably since I was 12 years old, washing cars in my parent’s driveway. It was always something I was driven to do. My dad had owned a small service company when I was younger, so I saw that example. And even though he got out of it at a certain point, I kept in it, and even when I was in the NAVY, I actually did businesses on the side while I was in the NAVY, so it was something kind of always, I felt like was born to do some kind of a way.

John Warrillow:                Got it. And so tell us about the growth. I mean you left the NAVY, was it just you? And tell us about the growth rate and where you ultimately got to before you sold it.

Walter Bergeron:             Well, it was really slow growth, I think, as any entrepreneur will attest to. Many times, you start off thinking that the business is about performing whatever it is that you do when you realize that it’s about so many other things other than, for me it was repairing circuit boards, and that was just doing the actual, the service itself. But there’s so much more that goes into it. So at first, it was really slow. It was a huge struggle to find customers and service clients and do sales calls as well as do the repairs. But we eventually grew it slowly, it probably took me almost eight years before we hit the million dollar mark. And when I sold it, it was the end of 2012, we were right at a run rate of just at seven million dollars. It grew, and towards the end it grew a whole lot faster because of some of the things I did I’m sure we’ll get into, but it took a long time. It was a slow-growth business and it took me 16 years to get to the point where I was ready to sell it.

John Warrillow:                So the first eight years it took you to get to a million, and then how many years between a million and seven million in terms of annual revenue? How many years did that take?

Walter Bergeron:             Well, the seven million dollar ramp up started, see we stalled out for a few years, too, so right around ’08 and when the economy kind of took a tank, we slowed down quite a bit. And then we ramped up again probably in ‘9 or ’10, and for the last three years we were doubling in size every single year before we got to the seven million dollar run rate point and sold it. So it was growing really quickly because of some of the decisions we made with our marketing and sales process.

John Warrillow:                I mean, I want to get into the sale itself, but before we get there, if you could distill down say one killer idea, one thing that you could point to that really helped you grow the top line of the business, what would you say?

Walter Bergeron:             It would be the marketing and coming up with a unique message.

John Warrillow:                Give me maybe a specific example of what unique message you came up with and how you got there.

Walter Bergeron:             Well, our unique message was that we repair it and we give it a lifetime warranty. In our industry, one year was the longest anyone would warranty their repaired equipment for. Well when we took that out of the equation, a lot of businesses started coming to us because we had a different message. Everyone else was in a me, too mentality while we came in at a whole different angle.

John Warrillow:                So if I’m Tyson Foods and I’m dropping water on all of these electronics, isn’t that a bit of a liability for you though? If you’re guaranteeing them for the lifetime of the part?

Walter Bergeron:             Sure, but we knew that our cost to make the repair was so low that even if they did this four or five times we would still be on the positive end. We’d still be in the black on the repair because there’s such a high margin in the repair.

John Warrillow:                And does the customer still have to pay for the shipping to ship the part back to you to get it repaired?

Walter Bergeron:             No, we built all that into it, and that was another key thing we did was put membership into a service-based industry. And so when we had membership levels, that was all included in their monthly membership fee.

John Warrillow:                Well now you’re talking my language. Tell me about the membership. I love this stuff.

Walter Bergeron:             Well, see, something that we stumbled upon was how do we get paid? See every month we’re staring from zero again. If equipment didn’t break, which we were a bit seasonal, so during the summer, when the heat would get into all of this electronic equipment, the moisture and humidity, they would break more frequently. So we’re busy during the summer, not quite as busy during the winter. So we had to figure out a way to do this. And we took it from the HVAC industry where they had maintenance contracts. So we stole that idea from the HVAC industry and applied it to our own industry where they would pay us. I think the starting level was at 997 a month, so right at a thousand dollars, they would pay to be a member where it included all their shipping, it included free insurance on the equipment that we’d ship back and forth because a lot of these guys would self-insure it. And so we built in different services that they would normally pay for separately and we built it into a membership. And we had three or four different membership levels.

John Warrillow:                How much of your revenue was coming from the membership levels when you sold the business?

Walter Bergeron:             Close to 40%. We had quite a bit of it coming in through membership, and it was really nice to start the month with some cash in your pocket, knowing that the employees will be paid based off of the recurring revenue.

John Warrillow:                Love it. Love it. Love it. So let’s get into the sale itself. You’re growing this business, it’s doubling every year, I mean the skeptic might say why on Earth would you sell it? What was the trigger?

Walter Bergeron:             Yeah, so I think the trigger was really three events happening all towards the end of 2012. One of the biggest ones was that the tax laws were about to change here in the US from the capital gains taxes were going from 15% to 25%, I believe, was the detail. So a 10% change in capital gains rates, which is significant at a $10 million level because this was literally a one million dollar law that was gonna significantly affect the sales price. So that was one thing, we knew that that was coming.

Walter Bergeron:             And then somebody made us an offer, even though we had told them no previously, that had met my own personal goals of selling the business for. And then, growing at the level, we had been performing so high-level that I was getting a little bit burnt out. There was a period where I just wanted some rest and it was really, it looked really appealing to not have to work for a little time if we were to sell the business.

John Warrillow:                And so somebody came to you with an offer that met your dream offer, what you in your own mind had decided was the price that you’d sell the business for?

Walter Bergeron:             Yeah, we I guess played a little bit more savvy game beforehand. We had actually divested part of the business 11 different times prior to the final sale of the business. And it was one of those previous divestitures which was the final buyer for the company at the end. So they came to us knowing first-hand what the business was about. So it sped along the diligence process quite a bit.

John Warrillow:                You lost me on 11 different divestitures, what do mean by a divestiture? Can’t even say the word.

Walter Bergeron:             Yeah, so-

John Warrillow:                Tell me more.

Walter Bergeron:             The divestiture is just really, it’s selling a part of the business. And in most cases, it’s selling a division of a company that’s usually under-performing. Earlier on, I had gotten involved with a mentor from SCORE, the Service Core Of Retired Executives, that had gone through this in his own company. And what he had done, is we would take small parts of the company that were actually high-performing, what we called renewable Rembrandt’s, so the Rembrandt in the closet is the really great part of your business that you really don’t realize that you have until you kind of pull it out and see what you’ve got. So I often say that MacDonald’s is really good at training teenagers to operate a hamburger stand. Well the NAVY is really good at taking teenagers and allowing them to operate nuclear power plants and fly fighter jets. So the process by which the NAVY actually trained people was something I took into my company.

Walter Bergeron:             And what I did was I took that part of the company and actually sold the process of training employees to other companies so we would actually divest, sell, part of the company to other companies, and it was renewable because we never lost the ability to train our employees. So we had gone through the acquisition and mergers process multiple times before the eventual sale and the eventual buyer was one of the people that actually bought one of those smaller divisions of our company.

John Warrillow:                So the divisions that you were selling, I mean give me a sense of their size. Are these small exits, or if you could, what sort of revenue?

Walter Bergeron:             Yeah, it started off very small, I think the very first one was around $17,000. And it went with one employee and just a bunch of procedural manuals and how-to books on what we did what we did. And we didn’t sell it to our competitors, we always sold it to a complimentary business like, see we were in electronics, so we would sell it to a mechanical firm that had a similar customer that we did. So we’d sell it like that. And so we’d gain some experience at sitting down at the negotiation table. So by the time I actually sold it two years ago, I had done this a number of times, which I think played a key factor in being able to handle the diligence a lot faster, a lot easier, and then getting the eventual sales price.

John Warrillow:                Got it. Well, speaking of price, what did you sell it for?

Walter Bergeron:             So the final price was just over $10 million, which was a multiple of close to 17, because the earnings were fairly low since we were investing so heavily in growing the company. So we were just under half a million dollars in the actual earnings. So selling it for ten was a pretty significant number for me.

John Warrillow:                Wow. Yeah, no, that’s for sure. Now, let’s get underneath that number a little bit. Was that in cash? Or did they pay you with some sort of earn out, or what was the make up of the 10?

Walter Bergeron:             Well, it helped that they came to me. So the way the transaction occurred was really in my favor. The first time I divested a part of the company to them, it was 100% earn out, meaning I would not get anything had it not performed. When it came to me, when it came to them to buy the me, the very last time, it was a all cash deal. Which, I don’t know if I would’ve done, if I look back, I might’ve done it a little bit differently knowing what I know now, but at the time it was an all-cash deal. And that also played into the fact that the tax laws were getting ready to change since this would all be counted as a capital gains transaction.

John Warrillow:                Got it. Okay. So that was important to you for the reasons you’ve already stated. You had this experience selling companies in the past, so you were using that. Of the 11 sales that you’d gone through before, what proportion of them were sold to the same buyer?

Walter Bergeron:             Just one. We had sold it just one time. The other times were all to different buyers.

John Warrillow:                This is such a fascinating, I’ve never heard this before in terms of business strategy. So you’re selling off parts of your business that aren’t as high-performing, is that right?

Walter Bergeron:             Well, that’s the normal way to do it. So when the larger companies divest a division, they usually sell a division that’s under-performing because they want to get rid of it as a burden to the main company’s profit level. We took a little bit opposite approach. We looked at the parts of the business that we doing extremely well that we could replicate so that when we sold that division, we didn’t actually lose any asset of the business. We were just really careful on who we sold it to. So we would proactively seek out buyers versus having buyers come to us. So if we identified someone that had the same customer that we did, we would very easily, and we knew that they had some type of problem with … Initially it was hiring and training new employees. So if we saw a customer, or complimentary business that had problems training employees and keeping good employees, we would offer them the little teaser sheet and see if they wanted to buy the company. We did it enough times to where we actually got some people that’ll actually pay for it.

John Warrillow:                Wow. That’s fascinating. And were they all to do with training employees? These 11 different businesses?

Walter Bergeron:             At first, it was. I think we did the training section of it six times, five or six times. Then we did, well you mentioned membership. So one of them we did as a membership and then another one we did as the sales division. So we had a way to go and visit clients and if anyone wanted to get into that distribution channel to sell their products the same way that we sold our products, they could buy that division of our company. You see it all the time now, John, you see companies selling consulting for … sales consulting. And so we just took this to a whole different level and sold it as a division of our company.

John Warrillow:                Wow, so what was the difference between just selling it as a service, which a lot of companies would say well that’s just a service that we’re selling, versus selling a whole entire division? What made those two things different in your mind?

Walter Bergeron:             Some key parts to it. One was we would always do it as an actual company. So we’d sell it as an LLC or an S-Corp. So we’d sell it as its own entity. It would usually come with people attached to it, and then it also came with an employment agreement. So I would usually go in myself and if it was the training aspect of it, I would go and actually help them train for four to six, sometimes as long as nine months to train their employees and then sell that portion of the business. And then once we kind of got rolling, we were able to … I was able to train other people within my business that would actually do the employment agreement portion of the sale.

John Warrillow:                Got it, got it. Okay. So when you sold this business for 10 million bucks, you were, if I’ve got the math right, you were doing about seven million in annual revenue with about $500,000 in profit, pre-tax profit?

Walter Bergeron:             Yeah. Sort of. So we sold it towards the end of the year, and the run rate, I don’t know the actual tax number at the end of the year, the run rate was at seven million dollars. Which means that we had an income of just under $600,000 per month. So what we ended up at the end of the year, I don’t exactly know. It had to be close to seven million just because of the way we were moving towards that goal.

John Warrillow:                And that’s really back to the membership idea that you’re charging people every month?

Walter Bergeron:             Exactly. Exactly. Yep.

John Warrillow:                Got it. Got it. And was the buyer worried about this idea of the unlimited money back guarantee on fixing the components? How did you get them over the hump with that?

Walter Bergeron:             Well, that was part of the reason that they did. So I think, I know one of the reasons was the things that differentiated us within the industry was what attracted us to them and one of them was the fact that we could justify, with the numbers, how this worked out better every single time and that the industry standard way of doing things with a one year warranty only, it didn’t make any sense. There’s no reason to only have a one year warranty, that you could repair it multiple times over because we had 15 plus years of data that showed that even the worst customers only sent it back once or twice after they get it repaired. So the best ones, we would make money every single time. And we knew that that was a message that would resonate with our clients enough to make us look different than our competitors.

John Warrillow:                Got it. Okay, great. So let’s get into the actual negotiation itself. You mentioned if you had it to do over again, you might do a couple things differently. What were some of those?

Walter Bergeron:             Well, I think the biggest thing I’d done differently was, and I know this is a bit counter-intuitive, but I might’ve built in a little bit of earn out on the back end, seeing what they did with what they bought. So they took this $10 million purchase and turned it into, as far as I can tell, over $50 million in just under three years. So that kind of growth, because they had fantastic … They had a really, really big client list, they took this and really grew it faster, if I would’ve done it again, I might take as much as a 20% earn out knowing that they were gonna grow really quickly. Now, the structure of the earn out would have to be just right, but I think I’d have done a little bit more of that earn out on the back end.

John Warrillow:                How would you have structured the earn out if you had it do to over again?

Walter Bergeron:             Well, I think, because part of the earn out would be that growth of that division versus growth of the whole company. There are also earn outs that are done where if the parent company makes no profit, then it doesn’t matter what your division grows at, there will be no pay out of that earn out. So, you’ll have to structure it properly to where you can actually earn the money and not make it to where the earn out is really easy to say no to, to where they don’t have to pay it. Because most earn outs are like that, that I’ve heard of, that it’s designed to where any little hiccup in the performance-based disclosure document that you sign, any little hiccup in there prevents the earn out from being paid. So I’d have to be real careful with it.

John Warrillow:                Had you always dreamed of the $10 million number? Is that a number that was important? Did you have it written down on some sort of goal sheet that you tracked?

Walter Bergeron:             It’s so funny. At the beginning of that year, I did a mastermind group, and one of the exercises was to write down your enough’s enough number. It was my number. I forgot about it. I had kind of forgot about that number until after the deal was over, when I’m going through some older notes. And sure enough, it was $10 million. And I didn’t remember that I’d had written it down until afterwards.

John Warrillow:                Why was that number so meaningful? What did it represent to you in your mind?

Walter Bergeron:             I mean, we were only at, at that point, we were probably doing just around three million dollars, so ten just seemed like it would be enough. It would be enough to live off of the little four percent retire thumb rule that everyone talks about, so that would be around $400,000 a year, and I can live off of that. I mean, and that’ll be enough to where I could pass it on to my son and I could help out some people that I do some work with now. So it just seemed like it would be enough number to, enough money to do what I wanted to do with it. And as well as I could to it quickly because I felt like the company was growing pretty quickly at that point, it could achieve that without 10 or 15 more years of running it.

John Warrillow:                Got it. So you have this negotiation, did you use an M&A professional to sell the business? Did you represent yourself? Maybe walk us through that.

Walter Bergeron:             So during those other divestitures, I built up relationships with a CPA that had done multiple M&A events. At the very end of it, it was just a local law firm that had a little M&A department, a real boutique M&A firm that was only focusing in industrial sector and in the southeast of the US. So it was I guess a real small M&A firm at the end.

John Warrillow:                Got it. So you didn’t hire an M&A firm to go out and get you like five different deals, you did this deal with this one company that you knew was an acquirer but you did use a lawyer to paper it correctly?

Walter Bergeron:             Exactly. Maybe I could’ve done it a little bit differently by having them present multiple offers, but we were pretty tight on that December, 2012, timeframe when the tax laws were gonna change. When the offer came up, when LOI came in for larger than my enough’s enough number, we decided to run with that offer.

John Warrillow:                And how long did you have between the time you got the letter of intent and the end of the calendar year?

Walter Bergeron:             Oh, right about 90 days.

John Warrillow:                Wow. And so there was a real intense period of time getting that diligence. What was the due diligence period like for you?

Walter Bergeron:             It was about six weeks long, which is fairly quick, as far as I’m concerned. It was still as intense, way more intense than any of the other small divestitures I went through, so it was still tough. It was so revealing of the things that I had done wrong.

John Warrillow:                Like what?

Walter Bergeron:             It’s a tough period. So some of the things that I had done wrong, I should have hired a sales staff much more quickly. Some of the divestitures, there was some tax issues that I didn’t take care of like I should have that we had to go back and do some more paperwork on to make it look right for this final sale. So there were some things that I didn’t do right, but it was a tough, it was as tough as of the ones I went through.

John Warrillow:                What advice would you give another entrepreneur just about to go through due diligence?

Walter Bergeron:             Prepare. Prepare on the front end. Get as much information as you possibly can. And you can also do your own due diligence if you have the right firm that’ll help you go through it that has done this before that can help you prepare on the front end and have as much documentation ready. Because a lot of this is standardized. There’s a lot of things you’re gonna ask for that you know you’ll have to present. And so your own M&A firm that’s helping you through this can guide you along that process and make it a little bit easier when things get started.

John Warrillow:                Yeah, I mean we’ve heard a lot of people doing pre-diligence. Even accounting firms offering pre-diligence, which basically means getting your business … Everything they’re gonna ask for in due diligence ready in folders, completely buttoned down, so that when the other side says okay, now we gotta do diligence, that they’re just checking boxes, sending off pre-prepared documents.

Walter Bergeron:             It makes it easier. It also makes you look a whole lot more professional, like you’re prepared for this. And when you show that you’re really prepared, I think it induces a whole lot fewer questions because it looks like you’ve done your homework. It’s not your first rodeo, so to speak, when you go through this.

John Warrillow:                What’s life been like? I mean you’ve got this eight-figure check, 10 million bucks in the bank, I mean just qualitatively, I know you’re a family man, so how has this sort of changed your outlook on life? How has this changed the way you live every day?

Walter Bergeron:             Well, I guess there’s some good things and then bad things. So the good thing, I really think, is that before, when I was building that company, part of the burnout that I felt was that I was always working and there were so many things at home that I was missing that I really wanted to be apart of. My son, I’ve only got one little boy, his football days and some really significant things in his life, I was missing out. So being able to be the dad who’s there every single day, as much as he does not like me being there at school every day, I was able to finally do that after a long time. So I really enjoyed doing that and being a real significant part of his life. My wife and I worked together, so we saw each other every day, but there wasn’t a whole lot of communication. She ran a different division of the business than I did. So we got to say hello and eat lunch every once in a while, but now we get to spend some quality time, and really that comes from quantity. You’ve got to be there to experience those moments, they don’t just happen. You don’t get just to pick here’s a great moment, I’ll be there for that. You really have to be there a lot.

John Warrillow:                Was there any part of you that was in any way squeamish about sharing the number publicly? I know you shared it in other places. Your son is now in grade seven, so eventually he’s probably going to see some of the literature. Wow, dad’s got a lot of money in the bank. Do you worry that that might have an impact on him?

Walter Bergeron:             So we’ve sat down, and actually he gets paid for performance just like I did when we owned the business. So if he wants money, it comes from his grades. He plays football, so if he starts a game, well then he gets paid just like a professional athlete does. So he has to pay for … He earns via his performance as well.

John Warrillow:                Wow. So that’s great. So you’ve been pretty candid with him and in fact instill those same lessons in the way he’s being brought up.

Walter Bergeron:             Oh yeah, oh yeah.

John Warrillow:                That’s great. That’s great. Now I have to ask this one question which I generally ask everybody on the show, but I mean have you bought something as a trophy to yourself in getting this big check? Was there anything you went out and bought people might have fun hearing about?

Walter Bergeron:             Well, you know, being part of the family, getting that freedom when the employment agreement was eventually over, we called it our summer of fun. So we went out, we bought a little lake house, a big four-wheel drive Jeep, a boat, and two jet skis. So for that entire three months that he was out of school, we spent at a local lake and we also did some SCUBA diving, too. So we went and bought a bunch of little toys for us really to just to be on the water, which is something that we love doing.

John Warrillow:                Yeah. No, I bet. I bet. Are you looking for other sons? I mean you only got one. Because I’m available if you need. Just [crosstalk 00:27:29] joke.

Walter Bergeron:             Only during the summers, and they’ve gotta come with their own jet ski’s, John, so if you can do that, we got it. You’re taken care of.

John Warrillow:                Walter, thanks so much for sharing this. This has really been helpful. What are you doing now? Still at the lake house or I mean are you doing something else professionally now? What’s going on with you?

Walter Bergeron:             Well, summer’s over so now we’re back at home and he’s in school, but now, part of the thing that I really enjoy doing was, when we sold the business I called it being a demoted CEO, which was you gotta sit in the back corner now with your nose in a corner, you can’t even look around, you’re really kind of demoted, but you’ve gotta be there every single day. So if the new owner wants to take the building and paint it purple with pink polka dots, all you can do is advise against it but you can’t stop any of that. Now the sad part is that they do do some really ridiculous things when they take over, but the good side is that when you’re involved in some of the big successes, that really kind of truly filled my heart with a lot of joy. So that leads to, when I left, I wanted to be able to experience that. So consulting with other entrepreneurs. And typically blue-collar and industrial entrepreneurs that wanna grow their business to the eight figure level and are willing to take action is something that I really enjoy doing. So I do a lot of that now on a private consulting basis and I just have a little website, it’s walterbergeron.com, and if anyone wants to go there I’m happy to have a conversation with you it that’s something you’re interested in doing.

John Warrillow:                And Bergeron is a unique name, so for our non-French-speaking listeners, I want you to spell Bergeron in case they’re trying to find that website.

Walter Bergeron:             Sure, it’s Walter, W-A-L-T-E-R, Bergeron, B-E-R-G-E-R-O-N, dot com.

John Warrillow:                Walter, thanks for joining us.

Walter Bergeron:             Thank you so much for having me, John, I really appreciate it.