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Nick Gray built Museum Hack, a company that offers fun museum tours in major cities, to almost 3 million dollars in annual revenue when he had an idea.
Nick Gray built Museum Hack, a company that offers fun museum tours in major cities, to almost 3 million dollars in annual revenue when he had an idea.
Gray wanted to thank his 50 employees for a fantastic year by taking them away on an all-expenses-paid vacation. The idea backfired when his part-time employees couldn’t leave their other job to participate in the retreat. Gray felt betrayed. Why was his generosity met with such ambivalence? It was the trigger that caused Gray to sell Museum Hack. In this episode, you’ll discover:
In the beginning, Gray did all of the Museum Hack tours but soon realized if he wanted to build a sellable business, he would need to hire guides. He found the best hosts were stand-up comedians with some extra time between gigs. Have you found a way to make your business less dependent on you? If not, we’ll help you through the process when you complete step seven of The Value Builder System™ — get started for free by getting your Value Builder Score.
John Warrillow: So listen, I’ve got a question for you. Do you ever feel under appreciated for some of the things you do for your employees? Maybe you give vacation days on people’s birthdays, or you bring in lunch from time to time, or you do things that for whatever reason don’t seem to get appreciated.
John Warrillow: My next guest, Nick Gray went through the experience of planning a company-wide retreat when he found out that his employees were not going to be able to attend, and it left him feeling somewhat jilted. And as a result, he decided that he had gotten to a point where he could no longer run Museum Hack, a 50 employee company with almost $3 million in revenue. It was the trigger that made him decide he wanted to sell. And in this episode, I think you are in for a really special treat. Nick really shares with tremendous candor, his own experience going through building Museum Hack. The interview can be broken down in a couple of steps.
John Warrillow: The first chunk really is how he structured Museum Hack to go from a business that was dependent on him personally to one that had almost $3 million in revenue doing thousands of museum tours a year in cities across the United States. What was his formula for getting the business less dependent on him? Take special note for his definition of a job audition and how it compares in contrasts to a job interview.
John Warrillow: The second part of this discussion with Nick is really about how he went through the process of selling his company, in particular in this case, to his employees, how we valued it. I really liked his formula for figuring out what it was worth to him, how he structured payments, how he ensured that those payments would be in fact paid over time. Lots of really transparent, thoughtful input from Nick Gray. Enjoy.
John Warrillow: Nick Gray, welcome to Built to Sell Radio.
Nick Gray: Awesome. Hello.
John Warrillow: Museum Hack. Okay, I’ve got to confess, I read your blog and what I read about Museum Hack, in general, but also the sale, I couldn’t help but get you on. Before we go any further, what is the URL of your blog? Where do people find your blog?
Nick Gray: My website is www.nickgray.net. Make sure you do .net, and I’ve got a cool blog there where I share business, whatever.
John Warrillow: Every entrepreneur needs to read your blog. Okay, so Museum Hack. Tell me about this business. What on Earth did you guys do?
Nick Gray: Museum Hack may be one of the weirdest businesses that you have or haven’t heard of. We do Renegade Museum Tours at some of the best museums in America. And this is a real live guided tour, so it’s not like an app or a piece of software. You actually show up, we sell tours and tourism. But what’s special about our tours is we hire people like stand-up comedians and Broadway actors who lead those museum tours. They work for me, not for the museum.
John Warrillow: Man, those guys must be hard to find. I get it in New York. It probably wouldn’t be hard to find struggling actors, but you’re in Arkansas. I guess there aren’t a lot of museums in Arkansas maybe, but how do you find great people in markets that aren’t necessarily hotbeds of talent?
Nick Gray: A great super good question and that’s limited our growth because we only are in metropolitan, major Metro New York, D.C., Los Angeles, San Francisco, Chicago, where there is that type of community of people, frankly also who are willing to work on a part-time basis because our tours-
John Warrillow: How do you find them?
Nick Gray: When we started in New York, you know, where we reached out to was a lot of the theater and comedy and science teacher community actually, reaching out to people that are musicians that are used to piecing together their lives as freelancers. This fit in really well there.
John Warrillow: So give me the pitch. I run a off-Broadway production, and you come to me, what would you say because I’m imagining it’s not a lot of money, or maybe it is? Tell me what you would say to get me to come do a tour for you.
Nick Gray: Basically, this is the best job that you’ll have. You get to run around what we think is the best museum in the whole world for two hours and show people your favorite thing. See-
John Warrillow: Well, Nick, I’m busy, I’ve got auditions. I’ve got all kinds of stuff going on. I’m not sure if I have enough time.
Nick Gray: Well, and we also pay really well. We also pay way more than you’re making as a theater community. When we started out our tours, we’d give people $100.00 per tour, and that’s good money to do a two-hour tour and get $100.00. Now, because of the way and legal things and paying, it works out to about $35.00 an hour that our tour guides get because we pay them to come before and afterwards. But we pay really, really well, and that has helped us attract really the most important thing to our business, which is the people.
John Warrillow: Got it. Okay.
Nick Gray: And labor costs, by the way, for our business we’re sometimes operating as high as 70% of all our revenue. We’ve really had very high labor costs.
John Warrillow: Right, okay. I want to get to how you find customers for the tour, but before I go there, tell me about the genesis of this business. Did you start as a museum junkie yourself? How did it actually get off the ground?
Nick Gray: I never was a museum junkie. I thought that museums were boring, that the art was stupid, that I hated that you had to be quiet inside of these huge places. And frankly, it all started off of a romantic date that this woman brought me on to the Metropolitan Museum of Art. It was our third date, and she just showed me around the space in a way that I had never had someone talk to me about it. She spoke to me at my level, which is like a third-grade reading level, and we just saw things. We saw painting, and sculpture, and Egyptian artifacts. And it unlocked within me, that tour that she gave me a sense of curiosity about art and museums.
Nick Gray: And I just started to go back and show my friends around. I’d explore the space. I thought, “Hey, I could go drink at a dive bar in Brooklyn, or I could go drink at the museum. I’m going to go drink at the museum.” And so it all came out of that really.
John Warrillow: Okay, I get the idea. How did you actually make a business of it though? When did you get the idea to start charging for it?
Nick Gray: Yeah. I really struggled with that because it was a hobby, and I never wanted to charge for the tours. It felt so dirty to me to make money. Probably folks who listen to your podcast that started out with a hobby and then turned it into a business may have wrestled with this same thing. I lost sleep over it. Eventually though, I had so many people wanting to join these tours, this blog wrote about it and said that “Nick Gray’s museum hack tours are the best thing to do in New York city.” 1300 people sent me an email overnight wanting to join one of my tours, and I knew then that this was much bigger than me.
John Warrillow: Wow. Sorry. What was the blog that wrote about you?
Nick Gray: The blog is called Daily Candy. They’ve since gone out of business. Do you remember them?
John Warrillow: Oh, sure, I remember that. Yeah, yeah. Yeah. And so they wrote about you and literally you got 1300 emails saying when’s the next tour?
Nick Gray: 1300 emails overnight of people wanting to join this tour, and it just blew up. And I had been thinking about other tour guides. But yeah, that was the moment that I said, “Okay, this is bigger.”
John Warrillow: And then so you started offering your own tours, right, where you personally gave the tour? Right?
Nick Gray: Yes, yep.
John Warrillow: At what point did you flip the switch and think, okay, I’ve got to start hiring some people?
Nick Gray: I think it really was when that article came out, I was getting my friends to work with me. And, like any new small business, when you have your friends working for you for free, it’s awesome and it’s incredible and I never could have got here, but you also can’t hold them accountable. And that’s what happens when you start to pay people to work for you, there’s that sense of accountability. And so for me, I knew that there was so many more people out there that were just amazing tour guides and amazing talent.
Nick Gray: Maybe they weren’t a tour guide yet, but I thought they could be, and I knew that for me to get them to come on, I’d have to hire them. I had experimented with having friends work for so long. But yeah, that was the moment where I started to charge for the tickets. The first time that I charged for a tour and I led it felt so awkward to me that at the end of the tour I gave everybody their money back.
John Warrillow: Seriously?
Nick Gray: Yes. Yes. It felt weird. I was like, “I had so much fun. I can’t take your money for this.”
John Warrillow: You’re like the reluctant entrepreneur.
Nick Gray: Right?
John Warrillow: But you built an amazing business, so I want to hear more. Obviously, Daily Candy … It’s Daily Candy, right?
Nick Gray: Yeah, yeah.
John Warrillow: That got you on the map, but once that had sort of run its course, how did you find customers for the tours?
Nick Gray: The big thing for us was TripAdvisor reviews. We knew that we needed beyond word of mouth. By the way, when I was doing free tours for my friends, I tried to have them be like, “Hey, if you like this, let your friends know.” Nobody would recommend it. But the minute I started to charge for things, people started to take it seriously. I think they thought it was a scam or something before like what are you going to sell me? Why are you doing these weird tours? But when I started to charge for it and really kind of productized it, that made it real, that really drove it for us.
John Warrillow: Got it. Okay. So TripAdvisor reviews, how did you get people to write a review?
Nick Gray: We would let them know. We would pour our hearts out and do an amazing, amazing experience. And when you’re with somebody for two hours as a tour guide and you can hear how excited I am to talk about this now, just imagine that’s me and you face to face for two hours at this museum that I truly love. And I would tell people, I’d say, “Look, we’re a small business. The only way that we can find out and get more customers is if you share about us on TripAdvisor. It would really mean a lot to us if you would write a review. That would help us grow this business and do more tours for more people.”
John Warrillow: So it was a straight up ask.
Nick Gray: It was a straight up ask.
John Warrillow: Got it. When did the business go from New York only to expand? What triggered that expansion?
Nick Gray: The first city that we did was Washington, D.C., and it really came out of our customers consistently asking, we want this somewhere else. D.C., arguably, is the biggest museum city in all of America. There’s so many incredible museums, all the Smithsonians. There’s free museums there. For us, this was the test. Are we going to be able to grow this? Is this just something in our own backyard that only works in D.C., or sorry, that only works in New York, or can it truly grow and can we build a multimillion dollar business out of this?
John Warrillow: Speaking multimillion dollar business, how big did you get it before you decided it was time to sell?
Nick Gray: Based on revenue when I sold the business we were doing $2.8 million a year, and that’s a lot of museum tours.
John Warrillow: Yeah. How many museum tours is that?
Nick Gray: I think each year we tallied it, it’s over 10,000. I’d have to run the number again because increasingly, we’re dealing with B2B clients and we can talk about that, but they are hiring us for things like team building activities, and those pay a lot more than the average visitor.
John Warrillow: How did going B2B change your business model? I would imagine, for example, you needed new people or different people to fulfill that.
Nick Gray: Really, we needed to give our tour guides more work. We needed to give our tour guides hours during the week so that they could continue to commit their schedule to us, and that’s why we started. Once again, this came out of our customer wants and needs. It was like a holiday season and people were like, “Can I have my company party with you? Can I bring people to do a tour?”And we did a couple of those and it was great money. They’d fill up the whole group, and it seemed like a no-brainer for us to start to do that.
John Warrillow: By the time you sold at 2.8 million in revenue, what proportion of your revenue is coming from B2B versus the B2C business?
Nick Gray: I don’t know that exactly. I would guess half of it.
John Warrillow: Oh wow! So, substantial. Okay.
Nick Gray: Yep.
John Warrillow: Got it, got it. So you’re at 2.8 million, you’re doing thousands of museum tours a year? I mean for those watching on YouTube, they can tell you’re a young guy. What was the trigger that made you think, okay, now is the time to sell?
Nick Gray: I can say, and I’m trying to think how to word this for people, but for your listeners, they are business owners and operators that have seen their businesses grow, I think my business got … The short answer is things got to be way too complicated for me that we had 50 employees, maybe more even at times because of seasonality, and managing those people and giving them a great place to work at 50 people is completely different than what I started out, which was just doing fun Renegade Museum Tours. So that’s the short answer. I mean there was one specific moment when I knew that it really wasn’t my business anymore, which I could talk about if you’re interested, but that’s kind of the summary of it.
John Warrillow: Yeah, give me the moment. What was it?
Nick Gray: There was one particular moment that was very frustrating for me, and that is that I was trying to plan a company retreat for the whole business. And we had had a great year, I had made a lot of money. And I wanted to give back, and I wanted to pay for everybody to go on a vacation together. And I was going to do it during the slowest time of our year because our slowest time is January. There’s very few tourist activity. They’ve all traveled. There’s no business stuff.
John Warrillow: And of the 50, before we go further, of to 50 employees, those include, I’m assuming, the tour guides themselves, is that correct?
Nick Gray: Yes. Those include the tour guides. And so if you’re running the numbers in your head and wait, 2.8 million, 50 employees, I would say that the majority of our staff are tour guides that work part-time. They work nights and weekends.
John Warrillow: Okay, gotcha.
Nick Gray: And some of them have come on full-time, but yeah.
John Warrillow: So you’re figuring, let’s bring the whole team together, including the office staff along with the actual guides themselves and do a retreat.
Nick Gray: Yes, yes, yes. And let’s do a retreat during a week in January when there’s not … Long story short, it became very contentious because, while I was willing to pay for all the expenses of the travel and the trip and everybody’s food, they wouldn’t have to pay a dime, many of our part-time workers frankly, weren’t going to be able to book any work time, and they would have to give up and leave from some of their other jobs. If they were working at a restaurant, for example, they’d have to sacrifice that restaurant wages that they would’ve made, and I wasn’t in a position to be able to pay them those lost wages.
Nick Gray: And it just became a very complicated, contentious issue that I left feeling like I can do no good. I tried to give a free vacation, all expense paid, and now, frankly, people were mad at me. And I think that there had been other things bubbling up, but it was that moment, something I’d worked so hard, that I realized I don’t have the skillset and the expertise to manage a business of this size anymore.
John Warrillow: Why was that so … I should maybe ask it different. What was it about not being able to organize the retreat that was so emotionally painful for you?
Nick Gray: I love retreats. I love live events, and I was writing a very large check. It would have cost me between 50 and a hundred thousand dollars perhaps. And I felt like something that I was so passionate about, I had a hard time at that time. Now I can see, right, because I didn’t have the empathy for somebody that lives paycheck to paycheck and would have to sacrifice wages. At the time, it was hard for me to see that, and I felt like I was trying to do something so good, and I couldn’t see all the other views of how it was. That was very hard for me.
John Warrillow: Man, it brings me back to be honest, Nick, to a time in a company that I used to run, God, 20 years ago. And I had the idea of … I wanted to make a great culture, and you’ll bring the dogs to work, and we’ll all go on vacation together, and there’ll be drinks on Friday. And nobody seemed to appreciate anything that I was doing, and it really hardened me to employees. To this day, I’m very skeptical of team building stuff.
Nick Gray: Huh. I really do see the value in team building activities, and so I want to challenge you on that. We’ve had so much success in bringing people to the museum that have never been there before. Huge companies like Google, and GE, and Nike bring their staff to the museums on team building activities with us. But I think there are a lot of different perspectives, and getting buy-in. And there’s all this stuff that’s been said, I’m sure you know, about when you start a company and you think you’ll have unlimited vacation policy.
John Warrillow: Right.
Nick Gray: I mean, we did that, right? It’s great until it isn’t.
John Warrillow: Yeah. It only takes one person to take advantage of it. Right? To realize that you’re trying to be a cool place to work and all of a sudden it has to be this bureaucratic thing.
Nick Gray: Yes. That absolutely happened to us.
John Warrillow: Yeah. Yeah, and that’s when it went from being fun, it sounds like, to being beyond what you were willing or able to handle.
Nick Gray: Yeah. I never thought in my wildest dreams that I’d be doing this museum thing for, I don’t know, five, six, seven, eight years and would build a multimillion dollar organization. Never, never thought that this would happen.
John Warrillow: Why do you write about it?
Nick Gray: I like to write. I’ve met so many great people through my blog. And I find that being a business owner, it also helps me to collect my thoughts. I think there’s so much that I’ve learned from your book, from talking to other entrepreneurs that because of the way that our sale was structured as well, I think I had an interesting story to tell that I haven’t seen elsewhere. Right? This wasn’t a venture backed startup. I never took any debt. We sold to some of our employees. You don’t hear that talking about a lot and so I thought it was a good story that somebody else maybe could give them an idea of something like that.
John Warrillow: Yeah, and I want to get into the actual sale. Before we go there though, it sounds like you implemented some of the core ideas and built to sell the idea of making your business less dependent on you personally. I think a lot of people conceptually get that, they understand it. But when it comes to the actual doing, sometimes it falls short. What did you find to be the most helpful tactics that enabled you to build Museum Hack so that it wasn’t dependent you personally?
Nick Gray: I’m thinking now the very visceral memory that I have of the first time that I ever went on vacation and didn’t check my email for a couple of days and how hard that was. I mean, I’ll be honest, it was not easy. It’s a very scary, scary idea. And I say that first and foremost to say that I’m not perfect at this, that even later, I still would check email. I’d still keep an eye on stuff. But the way that I removed myself was just first hiring other tour guides because remember, this business, so many of my friends was entirely built around me and my personality.
Nick Gray: In fact, one of my most successful friends told me when he heard that I was going to make a business out of this and hire tour guides, he said, “That’s a terrible idea. Nobody’s going to come. The whole thing is based on you. Why would anybody want to come when you’re not the tour guide?”
John Warrillow: Yeah. So how’d you get over that? I think a lot of people listening would be like, yeah, that’s exactly my situation. I’m the personality. I’m the big idea guy or gal and they come, my customers come because of me.
Nick Gray: Yeah.
John Warrillow: I could never build something that doesn’t involve me. So how did you do it?
Nick Gray: I’ll try to say something that maybe people aren’t used to hearing and that’s, you know what, to an extent they were right. The tours were not as good as when I was leading them. Okay? But we would never be able to grow if I was stuck to that one point. Okay? And I’m also probably biased. I think my tours were best. But yes, did we sacrifice a little bit of quality during those early days, especially when we hired new tour guides? Yes. But that didn’t mean that it wasn’t an incredible product. Right?
Nick Gray: I’m so close to the product that I can notice all the things that are wrong with it. Our customers have no clue. They’re comparing this tour to the other options, which are docent volunteer led tours. And ours were still so much better when we started to pay for the top, top talent.
John Warrillow: Love it. So kind of lowering your quality expectations very slightly enables you to scale. What else did you do to make it less dependent on you in it? There was a sort of way that you delivered your tours. Did you try to codify that at all? Did you try to put that into a manual or anything like that?
Nick Gray: We did a little bit of that. I can say that when we would do hiring for the tour guides, we didn’t do job interviews. We did job auditions, right, where it’s like I can read somebody’s resume, but that doesn’t tell me how good they’re going to be with people. And so we kind of flipped it on their script. Because this is a client facing organization, we had everybody come in for live interviews where we could very quickly work through people and figure out who could communicate, who was very comfortable and savvy working with an audience.
Nick Gray: By the way, stand-up comedians are the best tour guides in my opinion, because they can read people and they can insult the audience. They can do all these things that I never could do, and it works. It’s incredible.
John Warrillow: I can imagine. I can imagine. So what would a typical question in one of your job auditions be? What was your favorite question?
Nick Gray: Something would be we would say, “Hey, bring your smart phone to the job interview.” We would have them all together. We’d say, “Look, take five minutes. Find a piece of art that you really like at the museum. Load up their website, learn a little bit about it, and then in 30 seconds or less, why should we care? And seeing how they would create and write the content and then communicate that doing the actual job, jeez, Louise, that’s the number one thing to know how somebody’s going to do. Have them start to do the job.
Nick Gray: And so later on, we would actually hire people for just a couple of hours as a contractor to build and start to develop their own tour. Before we actually hired them as an employee, we’d hire them as a contractor first to see what it was like to work together.
John Warrillow: Fantastic. Fantastic. I loved the notion of job auditions. So you actually brought them to a museum. They didn’t come to your office. You actually did it at the MET or whatever?
Nick Gray: At the very beginning, I can tell you, yes, we did them all at the museum. Eventually it got to be too big and too crazy. And you know where we shifted to? We shifted to a local grocery store here in New York because it’s a little bit of a stressful environment to be in a grocery store, and there’s things that people can talk about and have a story about. It’s a public spot. But for us it replicated, it was the closest thing we could find that’s like being inside of a museum.
John Warrillow: That’s really funny. And there’s people kind of walk around wondering what the hell you’re doing.
Nick Gray: Exactly.
John Warrillow: And they’re kind of bumping into you. I love it! Oh, that’s so good. Okay, what else? So job auditions-
Nick Gray: Job auditions, okay, so that’s on the frontline.
John Warrillow: You hired some people. Yeah, what else did you do?
Nick Gray: On the back side of it, on the backend, I tried to hire vendors and support staff that could get all of the back office things handled. So instead of trying to run my own payroll, we hired PEO to manage all of our payroll and eventually to administer healthcare and things like that. In the past, you’d need your own staff member who would learn about health insurance plans, and manage these things, and file. Instead, we just got one of these things, which I’m sure a lot of your listeners know about. I’m not going to call one out, but there’s many of them now, and I never could have started my business without that.
Nick Gray: We hired a bookkeeper from day one. There was an online system that we found. It was called Bench, and they just handled everything for us. They took all our receipts and everything, trying to outsource as much of that stuff as possible. And then we also made use of a lot of virtual assistants, so setting up a system to handle customer support and things like that really helped.
John Warrillow: What sort of systems did you have around customer support? Was there anything novel that you did because I mean, dealing with the public, you must have any number of crazy customer complaints. Not complaints, but you know like customer issues. Did you have any sort of systems? Did you give them any guidance that could help?
Nick Gray: I’ll tell you, one of the first things that we did that helped us grow in sales was we would give a 100% satisfaction guarantee. And because we’re selling a weird product, that takes a risk, right? Who’s ever heard of a Renegade Museum Tour? Most people don’t even pay for museum tours, right? They’re used to free tours. And so I think that’s kind of customer service or support. I don’t know if you think it is.
John Warrillow: Sure.
Nick Gray: But that promise to people, for me, was really helpful. And I think we’ve heard from a lot of people that during the sales process, it really, really helped. I would estimate in all my years, tens of thousands of sales we refunded easily less than 20 people total.
John Warrillow: Wow!
Nick Gray: Yeah.
John Warrillow: That’s unbelievable. So it was basically, it didn’t cost you anything, but it accelerated your sales tremendously.
Nick Gray: Yes. Yes.
John Warrillow: Fantastic. So let’s get into the actual sales. So you have this retreats blow up if you will. Not blow up, but you know, this moment where you’re like, you know what? I’m not the right guy. What next? Did you have a buyer in mind? Did you hire a broker to find you a buyer? What was your next step?
Nick Gray: My next step was basically to work myself out of the business entirely. I hadn’t thought about selling the company at that point, but I knew that I wanted to be … And not that I wanted to be, but just that for the success of people working for me, it was better that I wasn’t involved. I think this is especially helpful to know that we have a tendency to hire those with less experience that are on the fast track, that are making major strides in their career, and being able to give them the support that they need wasn’t in my skillset.
Nick Gray: I had been very lucky to hire what was like a staff manager, then a chief of staff, and then eventually, she became my CEO. And that transition of her going from chief of staff to CEO was really the moment, she’s in charge. She can do this so much better. Her name is Tasia, and she is so much better at those things than I was. That, for me, was like the beginning of my removing myself from the business. And ultimately, it was the beginning of what led to the sale.
John Warrillow: So you make Tasia the CEO. She’s running the staff. You’re continuing to, I guess, what, take the checks? What is your role at that point? You’re basically cashing the money, cashing the checks.
Nick Gray: Yeah.
John Warrillow: Okay.
Nick Gray: Still had 100% of the business and it was all mine, so I was reaping the rewards. But also, I would like to think I had a really great job and workplace opportunity for them. And we had had light discussions about profit sharing or something, but nothing solid yet.
John Warrillow: And how were you paying Tasia? I’m sure you can’t share her exact salary, but I’d be curious to know was it just a salary? Were you paying her a bonus based on some attributes? What were the attributes, that kind of stuff?
Nick Gray: She really wanted to have the bulk of her pay in a guaranteed salary, and that was important to her at the time. And so she received, I could say in the low six figures, as a salary to really lead and drive the company. And it was her and Michael Alexis, who are our marketing director that were the highest paid individuals in the company, and were arguably driving the largest returns. He was responsible for a lot of our sales, and Tasia was responsible for making all that product work.
John Warrillow: Got it. And so again, I’d be curious. So you’ve got Tasia in place. You’ve got Michael doing marketing and sales. When does it go to the next step from businesses running without you to, okay, I’m actually going to sell it?
Nick Gray: Well, we had been thinking about for them, because it probably was about a year that they both had been running the business. I had stopped showing up for our weekly managers’ meetings. I really wasn’t needed anymore. Sometimes we would go days if not weeks of speaking to each other because I do have a tendency to be a micromanager and that sometimes it’s just better if I’m not involved in things. Right? There’s that fallacy of adding too much value.
John Warrillow: Yep.
Nick Gray: And so I knew, I was savvy that these are two very smart, hardworking individuals that are on the growth track. And they’ve kind of maxed out within my business. I have nothing more that I can add to them. I can’t really challenge them. I didn’t know what to do. And so as the year was coming up where we would negotiate what the compensation plan was for the next year, I was really struggling with how to incentivize them to continue to stick around and not just for another year, but for many years to come.
Nick Gray: I couldn’t figure it out, and we had played some ideas. But ultimately, they were the ones who came to me leading up to these negotiations and said, “Hey, we just want to float this idea. We know we’ve talked about a lot of different things. Would you consider selling the business to us?” And I had never thought about that before. But so yeah, so that’s how it started.
John Warrillow: Wow. So it came from Tasia and Michael. And so, at this point, did you have any sense of what you thought the company was worth?
Nick Gray: A business like ours is so weird, right? It’s a service based business, but it’s also tech enabled. It’s really not. But you know, there’s a marketing side to it, so does it get valued like an advertising agency, which is maybe closer to like a one X revenue? Does it get valued like a software company, which could be 10 X revenue? No. I didn’t really have an idea, but I knew for me, what I would be willing to trade as far as revenues go in a longer term handover. And for me, that figure was about five years.
Nick Gray: And so I thought if I could lock in the profits that this business is making right now for the next five years, if I could guarantee what was our best year ever for five more years, would I be willing to walk away from this business and give it over to them? So that’s where it started essentially.
John Warrillow: Got it. And so that’s how you calculated your number. If you can give me five times profit, the pretax profit I guess your company was making, then that would be something that you, if you could guarantee me five times profit, you were ready to walk away.
Nick Gray: That was the number that I started to think about. And there may be people listening to this that are thinking, that’s ridiculous, that’s stupid. Why would you give away the golden goose that could continue to just print money for not just five years, but 10 or 15 years? And I knew that if I wasn’t going to be able to incentivize Michael and Tasia that maybe they’d stick around for another year, but eventually they were going to leave. And what that would require at a very deep level would be me to hire their replacements, which is not something … I knew that I’d have to get very involved in the business. It would take at least a solid year. That’s assuming that I got it right the first time, which I wouldn’t have. And so I was making a series of trade-offs in my mind of what is it worth to be able to one, lock it in and two, walk away.
John Warrillow: Awesome. And I think those trade offs are brilliant, and it’s certainly something that we would recommend people do. So you came to five times profit. Okay, so that’s of the numbers sort of bouncing around your head. Is that something you shared at some point with Tasia and Michael, or did they come up with a number first? How did that sort of work out?
Nick Gray: Those negotiations were difficult, and I’d be lying if I said that there weren’t some heated moments during that time. I’m thankful that I had very reasonable and rational buyers of the business that allowed us to think through things. The way that we ultimately structured the deal perhaps was less than that five X multiple, but I kept 15% of it. And I’m still involved on an occasional basis to help think about strategy and some new growth ideas with the business.
John Warrillow: Got it. And so they pushed back on the five times, but you agreed to stick around for a period of time and held a little bit of equity. I guess I’m trying to put myself in Michael and Tasia’s shoes because-
Nick Gray: I can share some ideas, or just one thing I’m thinking of.
John Warrillow: Go ahead.
Nick Gray: One of the first numbers that I shared to them wasn’t me selling them 85% of the business. In fact, I wanted to sell them 35% or sorry, 70% of the business. But because it’s two buyers, then they would each only have 35% and I would have 30%. And I heard from them. They said, “At 70% it doesn’t feel like our business. It feels then like we’re almost equal partners. And you’ve said that, for you, this is walking away.” And so that for me was, well, okay, if it’s not 70% what about 75? What about 80%? And so some of that going back and forth. How much, before we even come up with a price, what’s the percentage for you that will truly make you feel like an owner? And for them, they said that was 85%. got it.
John Warrillow: Got it. And what was their reaction to the idea of five times profit?
Nick Gray: Their reaction initially was not … I don’t know because I don’t want to put words in their mouth, but I would imagine that if I were in their position and I was doing all the work and I would feel, at least I would feel like I was doing all the work and I would feel like I could walk away. I think they would have felt like your numbers wouldn’t be this without us. And so to wrap up this valuation assumes that you’re wrapping us up as well. And we’re saying that’s not on the table. So I can’t say and can’t think for them what was going through their head. I want to say I’m thankful for how things worked out, but it wasn’t an easy negotiation.
John Warrillow: Yeah. Again, I can hear people listening to this nodding their head and going, yeah. Because for those who are lucky enough to have a second in command, or general manager, or president that they’ve brought in and had them in place for a number of years, that president could take the view that, yeah, but the reason we’re even talking about this business selling is because of me. Right? And now you’re turning around and putting some gargantuan multiple, how dare you?Don’t you value what I’ve created? I can’t believe you’re doing this to me. I can see it getting really emotional.
Nick Gray: Yeah. Yeah. Absolutely. Also, from my standpoint, right, from your listeners who own and operated a business, they’re saying, “You wouldn’t even be here if it wasn’t for me. This is my business. I invented the damn thing.”
John Warrillow: Yeah. Yeah. So how do you find the middle ground between these two ideas because you guys did it?
Nick Gray: Yeah. How did we find the middle ground? I talked to a lot of people. I think they talked to a lot of people. We came from the place of wanting success for both. They had some things that they wanted. I had some things that I wanted. We were ultimately able to structure the deal frankly because they didn’t have … By the way, I haven’t said this yet, but they had no cash. They did not want to put down any money for this deal. And so that, by its nature, raises the multiple and raises the value because I am assuming a certain amount of risk that things are going to work out.
Nick Gray: Now, I had worked with them for many years, but if you ask my lawyers, this was the dumbest idea ever. These people could have driven the business into the ground and then handed me a set of keys that were worthless. Right? I know they’re not going to do that, I’ve worked with them for so long. But that is a risk that had to be compensated for. When there’s no cash up front, the valuation and the multiple inherently will be higher.
John Warrillow: And so how did you structure that piece? So they didn’t write you a check per se. Did they borrow money to buy you out, or are they basically doing it over time?
Nick Gray: That’s correct, they are doing it over time. And so through the next three to five years, depending on how the business goes, they are writing me monthly checks to pay down a debt and a note that they essentially took out from me almost like a personal loan in order to pay for this business.
John Warrillow: Got it. Now, some listeners are going to be saying, “Okay Nick now, now you lost me because I was with you right up until the point you talked about structuring. But if you weren’t going to get the money up front, then why not continue to hold it, and you were going to get your profits over the next five years anyways if you hold it?” In this scenario, you were getting your profits, but it’s still a little bit at risk. So help me. What would you say to someone who’s having those thoughts? What was your calculus around that?
Nick Gray: My calculus was that I had hired two individuals who drastically helped me grow my business, and if I didn’t incentivize them in some way to stick around, I knew with almost certainty that I wasn’t going to have them there. And to replace them was that risk that I wasn’t willing to do. Frankly, I’d been doing this business for seven years, and I was ready to walk away. I wasn’t willing to invest the time and the effort that would have been required to hire those replacements. Okay, I would be at a certain number. Yeah.
John Warrillow: Yeah. And how has it affected Michael and Tasia’s relationship to the business post-sale now that they’re owners?
Nick Gray: Massively. Really, this has been a story of win, win, win in that it’s a win for them because they now have a sense of ownership. It was a win for me because I got to get what I wanted and also still be involved. And it’s a win for our clients, and our customers, and our employees because the business is running much better than it was before. Michael and Tasia, with that sense of ownership, that unlocked within them, I think, a sense of fire or creative energy that maybe had been reserved in the past. And they’ve come up with all these new ideas and initiatives that are truly taking the business, frankly, somewhere that I could not have taken it to.
John Warrillow: And you’ll benefit, of course, because remaining a 15% shareholder, you’ll benefit from those ideas. The formula you guys worked out that paid you out over time, does that improve as the performance of the business improves? Is that percentage of future profit, for example?
Nick Gray: Great question. No, that formula was locked in at the time of the sale, and I think that’s fair because it’s now their business. And the things that they are doing, they need to be incentivized.
John Warrillow: Got it. Yep, and that makes sense. So you’ve got your number, you’re getting that paid out over time. They’ve got some incentives to innovate and create, and you’ll also participate in a smaller way, but it’s still going to be a way if they go on to … Fantastic. Well, it sounds like a fantastic outcome for you. I’d love to know what you’re up to now in addition to the blog. I understand you’re doing some writing. You’ve got a new book coming out. Tell me about that.
Nick Gray: Yes. I have a book. Before I talk about the book, which I want to talk about, I want to say that the way that this deal was structured legally, in order to securitize that note and securitize the business to guarantee for me, for example, what if one of them were to get hit by a bus and die? These are very real things when you’ve poured your life into the business. That process was very complicated, and it was expensive. And I spent more money than I’ve ever spent on lawyers figuring out how to legally lock down a sale like this.
Nick Gray: And I just want to note and acknowledge it. I haven’t spoken about all of the details and intricacies, but if someone is thinking about the sale and going down that road, maybe we could have a follow-up chat or something like that.
John Warrillow: No, do it now, Nick, do it now. I mean, can you summarize the issue? So you summarize, you explain the issue that, God forbid, Tasia or Michael would be hit by a bus, the business was compromised, and the stream of your payouts would be in question. And you said the word securitize, which immediately sends my mind to 2008 and the big short, and I know nothing about securitization. So explain to me what that word means and how you did it.
Nick Gray: Here’s why this was important, and not all of your listeners will want to do it like this. They may want to sell their business through time, giving away a percentage each year to their first in command. It was very important for Michael and Tasia that from day one that the deal was signed, they owned all of the business. For them, that’s what it would take for them to feel that sense of ownership. And that was part of the negotiation, by the way. That affected the valuation of the business, that they weren’t going to earn it out over three or four years. They really wanted to hit the ground running.
Nick Gray: And so how does that get structured? Right? Literally, I’m signing away my whole business with no money, with nothing. What happens, right? And so the way that that was structured was a series of legal contracts, debts that were filed with certain state institutions where they lived and resided, things that affected their scores and credit rating scores. Actually, we thought that their scores would go down because they were assuming all this debt, they actually went up because it was adding a sense of credit history to them. So that was something that’s very real that you can do that can be securitized with the help of lawyers, and it gave me much more of a sense of confidence. How do you trust these people? And it was backed with some legal documents.
John Warrillow: And so the downside for them, if they’d walked on their obligations to you, it would impact their credit score. Did you have recourse against their personal assets?
Nick Gray: Yes. No. The short, yeah, which some people are like, “That’s crazy.” If they miss a single payment, then the entire business is handed back to me.
John Warrillow: Uh-huh (affirmative), okay. Got it.
Nick Gray: So that was another point of debate. What if we miss a payment? What if we’re in a cashflow crunch one month? How do we start from day one? How much money is going to be in the bank? And so there were many of these intricate details that were not obvious to me that needed to be negotiated. One, to protect myself, but also to set them up for success.
John Warrillow: Got it, got it. That’s helpful. And where you landed was missing a payment equals you essentially get your business back.
Nick Gray: Yes. Yeah, and I thought that that was fair because if they had been investing and growing the business, then they should have full confidence to be able to go out and beg friends and family to say, “Hey, we got something great here, but this is one particular cash crunch.” And since that time, while they were very scared of it at the time of the deal, they’ve since built up a very healthy cash reserve, so that’s never going to be an issue.
John Warrillow: Got it. And just to be clear, how long have they owned the business? When was the actual transaction?
Nick Gray: The actual transaction closed, I believe, on April 1st, 2019. That was almost, by the time this comes out, almost a year ago. Yeah.
John Warrillow: Fantastic. Fantastic. Okay, now we should talk about what you’re up to now.
Nick Gray: I’m super pumped about this, and it’s not a BS book promo. This is something that actually helped me as a business owner. Many people told me, as a business owner, you’ve got to host dinner parties, you need to do a mastermind, things like that. I found something totally different, and that’s just host a cocktail party. Whether it’s for your customers, or your employees, or something else, cocktail parties, for me, became the formula that allowed me to unlock those relationships.
John Warrillow: I find this so fascinating because for me, cocktail parties are this kind of awkward middle ground. Right? You’re not serving a meal, so there isn’t this big crescendo leading up to everybody sitting down for a meal. And you’re kind of like, “When are the appetizers coming out?” And what do you do if people don’t drink? So explain what’s your formula for hosting your good cocktail party.
Nick Gray: I’m so glad you mentioned that. What do you do if you don’t drink? Because for the first few years I hosted, I didn’t drink alcohol, and still to this day, I don’t know how to make a cocktail. But it’s not about the cocktails, the secret is that it’s about the people. And that phrase cocktail party, for me, encapsulates a short time period where the goal is to have conversations and meet some new people.
Nick Gray: I tried so many different titles for this book, and I’m still messing with it, but I can’t find anything better than something that happens after work where you get together and you meet some people. My cocktail party is what’s totally different. It’s just there’s a lot of structure. There’s name tags. There’s rounds of introductions and it only takes two hours, so I’m very excited about it.
John Warrillow: What’s your secret for getting the introductions out of the way because that’s always an awkward? What do you do? Well, I run Museum Hack. It’s an awkward sort of thing. How do you get people talking in a different sort of way?
Nick Gray: Number one thing is to set the expectations. In all of the pre-event communication, you know that there’s going to be name tags and icebreakers. I think the introductions are awkward when people don’t expect them. And so when we tell people, “Hey, this is a cocktail party. There’s going to be name tags and icebreakers because I love to meet new people. I moved to a big city for the people, and so please come hang out.” That really alleviates 99% of the sense of weirdness. But the second thing is actually asking easy, easy questions.
Nick Gray: Well, my favorite one is, and your listeners might think that I’m crazy, but the first one that I ask is, what’s your favorite thing to eat for breakfast? Now, that’s not the only thing that I ask. What I ask is, what’s your name? What do you do for work? And then what’s your favorite thing that you have for breakfast? The reason I do that is because we need to warm people up. You can’t ask a question like what’s your favorite book, Built to Sell, by the way. You have to ask them because that very question of what’s your favorite book is subjective. It’s distinct. People will judge you for it. Everybody’s like, “Well, I want to say something that will impress people.” And they get trapped inside their head.
John Warrillow: Right?
Nick Gray: But that’s not breakfast. Everybody knows what they eat for breakfast. In fact, they probably ate it that day. And if they do intermittent fasting, then they can show off and tell everybody that they do that too.
John Warrillow: Yeah. I love it. I love it. So when’s the book coming out? What’s the title? Where can people buy it? All that stuff.
Nick Gray: The book is called The Two-Hour Cocktail Party. Look for it on my website. Who knows when it’ll come out? NickGray.net. If any of your listeners want a free copy or something, I’m sure I’ll set them up. I’m not doing this to make money. It truly is something that totally changed my life. It’s just a formula that just makes it easy.
John Warrillow: I love it. I love it. And I’m just so grateful for you sharing today. One of things I’ve always been impressed with about your blog is the candor and how revealing you are about your life. And you’ve done the same for us today, so I really appreciate that. It’s NickGray.net, is that right?
Nick Gray: Yes, NickGray.net. I know it can be lonely to be an entrepreneur, and so listening to podcasts like this and connecting with other entrepreneurs who have been there, done that is something that you don’t know how valuable that is.
John Warrillow: Yeah. No, for sure. And if people want to reach out to you directly, NickGray.net, are you also on social? Is there a Twitter feed you want to throw out, or Instagram, or whatever you use?
Nick Gray: I love using all the social media as I probably share way too much that’s not appropriate, but I’m @NickGraynews, but just find me on my website. I try to write back to all my emails. And at the time of recording this, I even include my phone number on my website. I’ve had it there for like eight years. I’ve probably gotten only two or three phone calls. They’ve all been awesome phone calls, but nobody calls.
John Warrillow: All right, there you go. It’s an invitation. Go call Nick, don’t email him. Call him. All right, Nick, it was great to be with you today. Thank you so much for everything. Best of luck with the book. Thanks again.
Nick Gray: Thank you very much. And if you haven’t, re-read Built to Sell lately, reread it because even as a business owner, I read it once, and rereading it, you get new things out of it all the time.
John Warrillow: You’re the remedial class.
Nick Gray: I am. I know.
John Warrillow: Thanks, Nick.
Nick Gray: Thank you.