How To Quadruple An Offer For Your Business

Transcript

John Warrillow:

Once a year you go to the doctor, they take your blood pressure, maybe they prick your finger and they take a little blood and they give you a sense of your cholesterol level. Maybe if you go to one of those fancy healthcare facilities, they get you to run on a treadmill for a little while, see how your heart’s doing. You get a checkup. The same thing should be true of your business. When we look at your business through the value builders score, we’re going to look at it through eight key drivers that acquirers care about, whether you want to sell your business immediately or in 10, 20 years from now, these are the eight factors that business buyers care about. Knowing them now will help you maximize the value of your business going forward. Just go to valuebuilder.com and take the questionnaire.

John Warrillow:

You know those weight loss shows where they show the picture of the person before they go on the diet and the bootcamp exercise and then six months later they show you the after, well this next episode is the Built to Sell Radio equivalent of that in that Gary Nealon sold his company, RTA Cabinet the wrong way in the beginning and ultimately got a couple of low ball offers which he decided to ignore. He kinda licked his wounds and went back out to market, making three fundamental changes to the way he positioned his company and almost quadrupled the value he got for his business. Here to tell you the entire story and the three things he did to jack up his valuation is Gary Nealon.

John Warrillow:

Hey, Gary. Welcome to Built to Sell Radio.

Gary Nealon:

Hey, thanks for having me.

John Warrillow:

It’s great to be with you. You guys kind of own the internet, at least the business of making cabinets online. RTA Cabinet Store. If you just Google online cabinets, RTA seems to pop no matter where you are in the world.

Gary Nealon:

Yep.

John Warrillow:

Tell us about this company. What did you guys do, for people who don’t know RTA, give us a description of the company.

Gary Nealon:

RTA, it’s actually an abbreviation for Ready to Assemble, it’s a category of kitchen cabinets. We just brought it to mainstream. We were one of the first to really figure out how to sell online, because prior to that, it was a sort of antiquated industry. Most of the companies, they would have a website, but you’d have to call and talk to somebody or you would have to go into a showroom and I wanted to circumvent that so we essentially created an online platform that allowed people, regardless of their experience, whether they were pro, an amateur or whatever, could actually shop online and be able to do the same things that you would do with any other retail store or office.

John Warrillow:

I kind of break out in sweats thinking about this. I’m the least technical guy you could ever imagine so the idea of getting a bunch of boxes on a pallet and okay, ready to assemble, would be not my wheelhouse. I’m assuming it’s not people like me who buy this, I’m assuming it’s people who feel a little bit more handy and … consumers.

Gary Nealon:

It’s interesting. We actually have about a 50/50 mix of professionals, contractors, builders, and then the rest were just homeowners. We hit the market right when DIY Network and HGTV were really starting to become popular and we actually got in with some of the TV shows. We were doing roughly 40 or so shows per year. We were donating the cabinets and then we would get all the marketing exposure out of it. We become, even though our name was a generic term, RTA Cabinet Store, it was more for SEO purposes. We actually sort of became trademarked as the company for RTA cabinets, just because of our association with the TV shows and everything else that was going on.

John Warrillow:

Wow. How did you get them to choose you? I imagine that those, obviously those home improvement shows are huge, I would imagine they’ve got lots of choices of cabinet makers to partner with. Why you guys?

Gary Nealon:

It was interesting. I was trying to get as much free exposure as possible. Back then I writing a lot of articles, I was doing a lot of press releases on my own and we actually caught the eye of one of the producers for one of the shows, it was the original producer for Trading Spaces. He went off and did this show called, Carter Camp. They reached out to us because they had a supplier who actually dropped the ball for them and couldn’t get them the cabinets in time for the show so they randomly called us and they were like, “I know this is a big ask, but we need cabinets in seven days in California. What can you do?” I was like, “I can do that.” I just wasn’t really sure how I was going to do it, I just knew that I was going to end up doing it just for the TV show.

Gary Nealon:

We actually worked all the details out, was able to get them there in time and they loved it because it was easy for them to assemble, the contractors were familiar with them. Then they called us for the next show and the next show. And then what ended up happening is, with any of those TV shows, they have a run rate of a couple of years. After a couple of years, all those producers then went to other shows so we started picking up another show, another show. And we just made it so easy to work with us that it was a no-brainer for them. Every show they would just come to us and be like, can we get this, this, this.

John Warrillow:

Were you able to tie back appearance on XYZ show to direct sales or was it one of those, you know it’s working but you can’t directly attribute which show-

Gary Nealon:

The only thing that we could directly attribute was, in the beginning, it shifted over time, as the shows became more popular, they gave you less marketing exposure and they actually started buying the cabinets so the dynamic changed a bit. But in the beginning, we would get the rights to everything that they produced so we could actually take that show, turn it into TV commercials, turn it into video ads, whatever we wanted and leverage the high quality production that they had for our marketing purposes, so in that respect we could take a clip showing the homeowner super excited about their new cabinets, reference the show and tie that back to the sale. But the actual TV shows, it was hard to do.

Gary Nealon:

Randomly we’d ask. We’d always ask, “Hey, where did you hear of us?” Occasionally we’d hear, “We just saw this show that aired.” And we could actually, in some cases, depending on which TV show it was, we could see a spike when they actually aired the show so it was some correlation but it wasn’t direct.

John Warrillow:

And the actual cabinets themselves, I understand you resold other people’s brands and you also manufactured your own. Is that right?

Gary Nealon:

Originally it was just a drop ship model. The industry is kind of unique in that there is wholesale distributors that import them from China, in the United States they are big guys. They might have $30 million, $40 million worth of inventory but they mostly deal with retail. When we were approaching them, it was kind of a new concept, sure, we’ll sell you some and we ended up keeping the drop ship model for a long time and then I started figuring out which cabinets were selling well and I started importing them myself. But then I realized I’m not really a warehouse guy, I’m really a marketing guy so I didn’t know how to manage the inventory and everything else so we shipped it back to a drop ship model before I ended up selling the company.

John Warrillow:

Got it. Got it. So you were taking the order, finding the supply, shipping it to the customer or whatever. What kind of margins are you working on? What would a good year be in terms of EBIDA margin at the end of the year?

Gary Nealon:

It was pretty thin. We went for high volume, lower margin simply because we knew we were competing with Home Depot and Lowe’s. We could crush them on price and that’s what we really wanted to do. We wanted to be able to market to those people that were going into Home Depot and say, “We can save you 50% off what Home Depot just quoted you.” I’d say on average year we were anywhere from 10 to maybe 8% at the end of the year. It wasn’t massive, we had thinner margins. We were just going for velocity and driving as much traffic as we could.

John Warrillow:

Got it. And speaking of traffic, how big did you get this company before you decided to sell, in terms of either number of employees or revenue or whatever?

Gary Nealon:

Revenue-wise we were doing about $40 million a year, the last year. Employee-wise, we kept it really thin. I always want to be cautious and I didn’t want to overgrow the staff just in case sales went down or whatever. In-house I think we had a total of maybe 18 and then we used subcontractors for everything else so we probably had another 18 to 20 people subcontracted.

John Warrillow:

Got it. Got it. Was there a trigger that made you think, now is the right time to sell?

Gary Nealon:

I’ve always looked at it as, I wanted to make sure that if I was going to pass it on to somebody else, that A, it was on a growth trajectory so that they were able to get some fruit of my labor out of it. I never wanted to be on a downward trend were somebody would take it over and suddenly they’d feel like they got jipped or anything else like that. I think the trigger point was when I realized that my skillset is the marketing side. I’m really good at strategy, marketing, all that good stuff. When we started growing and I started doing more of the day to day managing people and everything else like that, I was getting pulled away from marketing and I knew that my skillset was probably going to be not enough to keep it going. The way I looked at it was, if I can bring somebody that’s really strong operationally and build a company, and they can just follow my marketing plan, they can continue to grow and then they can streamline that operation. That was my thought process when I was thinking about selling.

John Warrillow:

That’s thematic. That was something that was purcolating in the background. Do you recall if there was a specific straw that broke the camel’s back, a day, a moment in time where you’re like, “Oh my God, I really need to sell this company.”

Gary Nealon:

There probably was. We were hiring at that point. We were looking to hire a bunch of kitchen designers and build out a kitchen team and I realized that for an entire two weeks I hadn’t focused on any of the marketing and I was like, “Hold on.” What my core skillset is, I’m not even doing anymore. I need to figure out a way to either pass this on to somebody else or hire somebody that can take over all that and let me just focus on what my core skillset was.

John Warrillow:

Right. One option would have been to sell the company. It sounds like that was one option on the table. I guess another, perhaps you considered was bringing in someone to run the business. Tell me, did you consider both?

Gary Nealon:

I had a team member that was actually a really good friend of mine who, he actually was with me from the start of the company and he kept working his way up and I actually put him into an operations manager role. What I started to realize though was that A, marketing was my skillset and I was starting to run out of options in terms of new platforms, new things to discover. It was more just a management side of it for me at that point. But then I also knew that there were other things that I wanted to do and I couldn’t focus on both at the same time.

Gary Nealon:

I started a software development company, because we were creating mobile apps and other things that went in with the cabinet company. I realized at some point I was going to spread myself too thin and if I did that revenue might start dropping for the cabinet company. My passion started to shift more towards helping other companies and the tech side than it was running the day to day operations of the company.

John Warrillow:

Tell me about your ops manager because it sounds like this friend of yours, someone whose been in the business from the beginning, why not sell him or her the business or transition it over time to them?

Gary Nealon:

I didn’t really think of that route, really what i thought was, how could I maintain the livelihood of the employees and bring in somebody that already has some experience in running a company like this versus trying to pass it on to somebody that’s just coming up. He was great and he learned really, really quick, but he still needed somebody to do a little bit of mentoring process and I’m not good at that. I knew that me being the mentor for somebody wasn’t going to be the good fit so for me, selling was a better option than that.

John Warrillow:

Got it. What did you do next? When you’d taken this decision to sell, what was the next step for you?

Gary Nealon:

For me, I reached out to my network and just, “What is the process?” Because I had never gotten through the process of selling a business. I didn’t know what to do. I had a couple of guys that had internet-based companies. I reached out to them. Who did you use? What was your experience and just did that due diligence on different companies. First go around, I went with basically an internet-based business broker as my first approach.

John Warrillow:

What did your peers in these other internet-based marketing companies tell you about the process of selling? Take me inside your inbox. What did they say?

Gary Nealon:

To backtrack a second, I went through two iterations of selling the company. One was an internet-based broker and then I went through an M&A firm. The mistake I made was that my company wasn’t just an internet-based company, it wasn’t like an Amazon business, it wasn’t just a true eCommerce business, we had a physical location with a warehouse. We had all these different complexities that a lot of these companies didn’t deal with, which I didn’t recognize in the beginning so I was thinking it was just a true eCommerce play. We went through an NF broker and it’s a very different process than going through an M&A firm.

John Warrillow:

What’s the difference in your mind?

Gary Nealon:

With them, it’s almost like a real estate transaction. They come in, they value the business based off EBITDA, they set a price and they just go to market. With an M&A firm, what I discovered was that they actually do a forecasting model, a five-year forecasting model. They will actually project all that out and then they will go to market and ask what the market wants, not what price we want to dictate. The difference for me, I went through a couple of buyers through the regional broker. Everybody was coming in just like a real estate transaction. They were looking for imperfections so that they could beat down the price.

Gary Nealon:

The second process, going through an M&A firm, when you’re going and you’re saying, this company will be worth X in five years, what would it be worth to you now. They are now setting the price. So when they do their due diligence, they are trying to justify why they set that price versus why you set the price and it’s a completely different conversation where there are like things within the financials. They’d be like, this is a little different, but you know what, we’ll overlook that because we see the potential versus somebody coming in and being like, hey, this number is off by $10, we want to deduct XYZ from it.

John Warrillow:

Right. In the first go-round where you listed the business, you put a price on it?

Gary Nealon:

The broker did just simply based literally just taking the bottle line EBITDA, putting a multiple on it, what the average was in the industry and went to market.

John Warrillow:

What did he list it at, if you don’t mind me asking?

Gary Nealon:

I don’t even remember what the price was. I think it was $1.8 or $1.9. I was like, this thing is worth way more than that. But it was based off of revenue and everything else. And then the buyers were trying to beat it down on that. I ended up backing out of the last deal. The first two fell off, the last one I was like, you know what, I’m just going to pull it off the market. Then we went with the M&A firm, we actually got it up to a much higher multiple simply because we did all this forecasting and we repositioned the company to no longer be just a eCommerce company. It was a tech company that happened to sell kitchen cabinets.

John Warrillow:

Interesting. Let’s talk about the difference in the experience. You go back out with a M&A firm, one of the things that they do for you is they forecast out the future revenue and profitability of the company over a five-year period. Is that right?

Gary Nealon:

Mm-hmm (affirmative)

John Warrillow:

What else do they do? You mentioned position the company as opposed to just an eCommerce company. How did they change to positioning?

Gary Nealon:

What we did was we really looked at, when they do the forecasting, they are essentially saying, if you were to keep the company for the next five years, what did you have planned or what new strategies or anything were you going implement. We did this deep dive strategy session and we figured out what we were going to do if we were going to keep it for five years and then they bring in a professional accountant to actually forecast that so it’s not like fictitious numbers, it’s actually based off of true numbers. One of the things that we discovered in the process was that we were building all this tech. We built apps for, like you were saying, you couldn’t imagine 1,000 pounds showing up at your house of kitchen cabinets.

Gary Nealon:

Shipping was a big issue for us because a lot of customers didn’t know what to do when they get 40 boxes that weigh 1,000 pounds. There is a whole process. You have to inspect it, you have to do all these things and if you don’t, there’s no way you can file a claim. We started creating technology around that, that would walk them through the process so that it was fool-proof. It allowed us to cover our butts in case there was a claim and even creation of bill ladings and stuff like that when you’re using trucking companies. All this tech was built and they are like, wait a minute, why are we not selling the tech versus the cabinet company. Your margins on cabinets are eight percent. Your margins on tech are 20, 25%. We just took it off the market, went back trademarked as many of the technologies that we had created as possible and packaged that up as a bundle and just said, you can plug any physical product into this business, it’s not necessarily just the cabinets, but that’s just a bonus on top of it.

John Warrillow:

Wow. So in the future, in the second round, you packaged the technology and so the acquire was to get not only the company but also the technology that supported it.

Gary Nealon:

Right.

John Warrillow:

Got it. Did you guys run a process? How many companies did the M&A firm go to to gauge interest?

Gary Nealon:

I’d say total, they probably went to 40 or 50. Some of them were strategic, some of them were just people that they know have been buying businesses like that. The company we ended up with happened to be in the home improvement niche so they were already selling products that were complimentary, so same customer base. But then they could take our platform, which is our shopping cart solution and everything else and literally dump all those other products into it and make it a more streamlined system versus using standardized platforms like Shopify or Magento or any of those kind of things.

John Warrillow:

Got it. You go to 40 or 50 different companies, what was the reaction? How many of those companies raised their hand and said yeah, I think we’d be interested in taking a closer look.

Gary Nealon:

We had probably about six or seven initially and the interesting thing was that price was all over the board. It was anywhere from what our original listing price was all the way up to eight figures. Each one, the deal structure was a little bit different so we really had to sit down and analyze it and be like, how much equity do we want to keep on the table, how much do we want to take off, how much are we willing to earn-out versus cash out front. What’s the potential if Company A takes it versus Company B takes it. We had a lot of variables in there that we had to look at when we were actually figuring out which company we were going to go with.

John Warrillow:

I’ve just written down a couple of those things, so some of the offers included an earn-out, which was one variable, another was they were asking you to carry forward some equity into the new entity. I’m assuming the private equity buyers were doing that.

Gary Nealon:

Yep.

John Warrillow:

Got it. And then clearly that all predicated on the quality of the acquiring company, how good their management was and how confident you were. Were there any other things that you were, it sounds like reverse due diligence, you evaluating those offers. Were there any other things that made an offer even more or less attractive for you?

Gary Nealon:

For me, I was really wanting to make sure that they didn’t just eliminate the staff because it did come with a physical location and if one company was, let’s say in Florida, and there only other entity was in Pennsylvania, would they really want to keep the staff and the warehouse and everything or would they eliminate that and just shift it all to another location. I really wanted to make sure that was factored in there, that the employees weren’t just going to be suddenly cut the next day or anything like that and we were going to be able to keep that moving.

John Warrillow:

You had six or seven companies that, of the 50 that expressed interest. How formal was the interest? Did you actually get letters of intent from them or were they more just verbal?

Gary Nealon:

We’d go through, initially it would be a verbal offer, soft offer. Like, would you entertain this if we included these factors, like I said, equity or whatever. There was no very specific numbers mentioned. And then once we got into that, we had exclusivity on the LOI. We narrowed that down and we narrowed it down to the one company and gave them the opportunity-

John Warrillow:

What was attractive about the company that you ultimately got engaged to in the exclusivity agreement.

Gary Nealon:

I think it was the fact that they knew the space, because home improvement is different than some of the other niches. Our company, much longer buying cycle, we can go anywhere from next day purchase all the way to two years later so you really have to understand that and if you’re dealing with physical products that you’re used to instantaneous buys or impulse buys, you’re not going to really understand the management of that process. I also want to see synergies of can they overlap, are there opportunities for them to cross sell, use their list to build the list for the company that I have. Those were some of the variables, just making sure they understood the niche, that they had some consistency in terms of customer base that would overlap that would help grow the company. And I knew if they had that, then there is exponential growth potential simply by synergies of merging the companies.

John Warrillow:

Got it. Did you automatically go to the highest bidder? Were these guys the top-

Gary Nealon:

We actually had somebody that came in at a higher price, higher dollar amount, but I don’t know, something to me just didn’t seem like it was the right fit. The management staff, I had very specific questions that I wanted to make sure they understood. I ran on marketing, I wanted to make sure that they really understood how that marketing strategy works. That other company, it was something about it, I don’t have a lot of confidence in the fact that they are going to be able to continue to do what I’ve been doing. That’s why I ended up going with the company I went with.

John Warrillow:

In a multiple of, it sounds like the ultimate offer that you ended up going with was kind of a multiple of what you were originally listing it for, three, four times more. That’s staggering.

Gary Nealon:

Yes.

John Warrillow:

It’s life changing numbers for sure.

Gary Nealon:

It absolutely is and when I look back, I think I was willing to accept the first offer simply because I was getting burnt out, but once I stepped back and really looked at the value of the company, I was like, it’s worth a lot more.

John Warrillow:

Yeah. That offer, I’m assuming, had some sort of proportionate risk. Was it an earn-out or were you asked to take some shares in the acquirer’s company or mixture of both.

Gary Nealon:

Originally, yeah. The original offer was 80/20 cash versus equity. I wasn’t comfortable keeping 20% on the table, so I kept 10 because after talking to a couple of people that had high dollar value exits, I was really just told, whatever you don’t get on the front end, just assume you’ll never get it and consider it a bonus. I was willing to leave 10% on the table. I wasn’t willing to leave 20. That was just my personal preference.

John Warrillow:

The 10 rolled into a new entity, I’m assuming.

Gary Nealon:

Yes.

John Warrillow:

Was there an earn-out on top of that?

Gary Nealon:

No, those were the only two variables.

John Warrillow:

Got it. Got it. That’s helpful, for sure. As you went through the diligence process, I’ve heard it described by entrepreneurs, the most crude would be the entrepreneurs protology exam. I think that’s probably as bad as I’ve heard, but it runs the gamut. What was your experience like in diligence? Was there anything surprising about it?

Gary Nealon:

I had two very different experiences, actually. The first one, I would equate to exactly what you just said. It was almost like a second full time job because you’re being asked a lot of questions. You have to produce a lot of paperwork and everything else. When we had pulled out the table and the M&A firm came in, they actually built a data library so that we took six months, got every document that you could imagine into that library so that if there were questions, they didn’t have to bombard me with them. M&A firm managed as much of that as they could and then I would only get maybe one or two questions per week. So for me, I can still run the company and not have to have all my focus on the actual sale of the company, which was great. It was exactly what I needed at that time.

John Warrillow:

You pulled that stuff together in advance so you didn’t have to furnish it. How did you know what they might ask?

Gary Nealon:

I had no concept. The M&A firm actually since they had sold so many companies, had a general idea of what questions were going to be asked so they did a really good job of grilling me ahead of time, getting all that information together and then they were able to answer most of those questions. But it runs the gamut, they would ask, what was this expense from five years ago. I was like, I don’t know. I barely remember yesterday, but I’m sure I can dig up some information on it. It ranges, and I think it also depends on whether it’s a private equity firm or an independent buyer. If they are savvy and they’ve bought multiple businesses, they probably have an entire checklist, whereas somebody that’s an independent buyer or maybe a group of people that never bought a business before, they are not going to go as in depth as a private equity firm would.

John Warrillow:

Yep, yep, for sure. What kind of retraining did you have to deal with?

Gary Nealon:

In terms of training their staff or-

John Warrillow:

No, I meant retraining, like did they, after the due diligence process, did you get a haircut in terms of the original offer? Did they try to lower it?

Gary Nealon:

No, it was an interesting timing. It was coming down to, the LOI expired in like November, I think, which is right when our peak season hits. Ironically enough, kitchen cabinets, Thanksgiving and Christmas, we sell more than we do in an entire month and a half. It was a big payout coming in terms of sales so there may have been a little bit of negotiation back and forth, but I was like, okay, you can drag this out and you’re going to miss all the holiday revenue or you can take it now, get all that holiday revenue and I was out. It was a good timing for me in terms of that respect where it was almost like a deadline for us.

John Warrillow:

What are people doing buying cabinets over the holidays? Here honey, I bought you cabinets.

Gary Nealon:

The first couple of years I was shocked. I was like, that is the last time I’m thinking about buying a new kitchen.

John Warrillow:

Right. Yeah. Anyways it benefited you because you got the pressure to close and a bit of leverage over. Interesting. What did you do, of course when you sign a non-compete or no shop clause at that letter of intent stage, you’re obviously giving up a little bit of leverage because you’re sort of getting engaged. What did you do to do reverse due diligence on the buyer? How did you know they were legit?

Gary Nealon:

That’s a good question. I don’t know that I had a good process for that, because even when I first took it to market, there were a couple of guys that I didn’t know how to valuate whether they were serious or not. And everyone of them wanted a locked in LOI for at least 30 days so you’re literally taking it off the market for 30 days and you can’t do anything with it. The first two actually fell through. They would go to the last day and they would just back out. My only process for doing that was if they were in the same niche, I wanted to make sure they weren’t just trying to get data about us by doing the LOI. If they were outside the niche, I just started grilling them, like, how are you going to grow this, really make sure that they had a strategy. Because if they are looking at the business, they should already have some sort of strategy if they are going to incorporate it into what they already have. If they don’t then I know they are not going to be a serious buyer. I wouldn’t say that I had a good process, because we went through five or six different buyers so it wasn’t like we honed in on the first one.

John Warrillow:

What was it that the ultimate acquirer saw as strategic in acquiring you guys?

Gary Nealon:

We were, if I’m not mistaken, we would have been the equivalent of what their entire portfolio was. We were going to become the biggest chunk of it. I think it was the fact that we were bringing in high dollar buyers with the propensity to buy online. Our average order size could be anywhere from $3000 to $10,000. That type of buyer is significantly different from somebody that’s buying a $12 product on Amazon. You know that you can sell them high dollar, high risk items online and they don’t have an objection to spending it on a credit card. The number of people that would buy our cabinets sight unseen, I’m still shocked. Myself personally, I don’t think I could ever do it and yet people are coming on our website, wouldn’t even get a sample, they would just order cabinets and love them.

Gary Nealon:

That type of buyer has the propensity to buy just about anything and I think that’s what they were looking for.

John Warrillow:

Got a platinum card that works and if they buy cabinets, they can also buy a number of other things.

Gary Nealon:

Sorry. I was going to say, some of their other portfolio looked like fireplace mantles, heating registers and those types of things. If somebody spends, say for argument’s sake, $6000 on a kitchen, it’s really easy to understand that they are probably going to remodel something else in their home and as long as they have a portfolio of other products, they can continue to build that lifetime value. I think that’s what they were missing is that lifetime value aspect.

John Warrillow:

Got it. Got it. Makes sense. And that was what was strategic. As you think about this exit, is there anything that might do different had you to do over again?

Gary Nealon:

The one thing, I wouldn’t say it’s a mistake, because I don’t look back and say anything was a mistake, it got me to where I’m at, but after the closing there were pieces of technology that we had created that I rolled in as thinking of creating value and that they would want, but at the end of the day, they could care less about it. I actually ended up taking some of that back, and some of it they kept. I think I would have spun it off into a separate entity and offered them the option of leasing it and if not, I could have continued to use it and sell it to other people. But in my mind I was trying to create as much valid value as possible, so it was hard to argue with whatever valuation they came up with. I think that’s the only thing I would have done differently. It was like, spun off some of that tech and said, hey, if you want to keep it, I’ll lease it to you. If not, I’ll just keep it myself and I can do something with it.

John Warrillow:

Right. Because although in the early days, when you were packaging the company up, it seemed like that was going to drive value, but ultimately it was the lifetime value of your customers and what initial products this PE firm could sell to them was really the secret sauce.

Gary Nealon:

A good example would be our shopping cart solution. We had a custom shopping cart solution because of the way, the number of pieces that go together and how it all fit and everything. After I sold, I actually got approached by a couple of other companies and they are like, hey, we would love to just take your shopping cart solution and use it because you created something that Shopify and everything else can’t do, but at that point I didn’t own it anymore so I referred them over to them. But I was like, shoot, if I had owned it, I could have leasing that to other companies or doing something like that. But at the end of the day, I was happy with what I got. So I’m not complaining.

John Warrillow:

Sure. What scope of non-compete did you have to sign? It’s interesting because clearly you couldn’t have started another cabinet company, I’m guessing. Ancillary technology companies, did they lock you up and force you not to start any of those or what was that-

Gary Nealon:

Obviously they wanted as broad as possible. They wanted it to be anything in home improvement niche. I was like, listen, I have zero interest in starting another cabinet company. Why don’t we narrow it down to exactly what our company did versus the potential for if I wanted to sell hinges or something like that down the road. We did a three-year non-compete on kitchen cabinets specifically, but honestly, I had no desire to go back into the space. I just wanted to make sure that it wasn’t so broad that I can get categorized if I ended up selling something different.

John Warrillow:

Right. Right. My experience is they ask for the world and then you have to whittle it down a little bit to what’s a little bit more reasonable. What did you see, you had 50 potential buyers, six or seven of which were serious and sort of bedded in. Did anybody try to pull the wool over your eyes or pull a fast one, anything slimy that a would-be or potential acquirer did that you were able to-

Gary Nealon:

I can’t verify it, but I think one of our competitors tried to come in just to get data on us. What we would do is have sort of a little due diligence. Let’s make sure we know who actually owns the company and that kind of stuff and there was one company that came in, it was a Delaware corporation that was then sub entities underneath it and you couldn’t really identify who actually owned any of them. Those kinds of things, I was like, we’re staying away from that, because if it is a competitor, we don’t want to give them all of our financial information and all of our secret sauce, if we don’t have to.

John Warrillow:

It was a bunch of hold cos and shell companies, you couldn’t get underneath, the acquirer wasn’t willing to share who the-

Gary Nealon:

Yeah.

John Warrillow:

That’s really interesting feedback because for a lot of folks, any offer is a good offer. It gives you leverage, et cetera. But as you point out, if it’s a direct competitor, maybe not.

Gary Nealon:

It’s not uncommon for a competitor to do that, what I found out.

John Warrillow:

Yeah. Yeah. Yeah. Yeah. Did you celebrate in any way? Did you go out and buy a fancy car or a trophy of some sort to mark the occasion?

Gary Nealon:

I took a really nice vacation and I’ve taken my parents on vacation. Didn’t do anything crazy. I’d almost worked myself out of the company anyway so I was doing a lot of traveling and kind of experiencing life anyway so there was no sort of grand aha or big thing that I did that I could say is directly related to that.

John Warrillow:

Yeah, yeah. How did you handle things with the friend of yours who was operations person?

Gary Nealon:

My personal belief, whether it was right or wrong, I can look back on it and say that either, but I kept it private because I didn’t want the employees to find out I was selling, especially after the first one kind of backed out. None of them were guaranteed and the last thing I wanted to do was have all the employees think we’re going to be sold in a month and not happen and I’ve got to try to explain that and everything. I tried to keep it as quiet as possible. I ended up having, since he knew so much about the company and he was sort of the brains at that point because I was backing out, I had to bring him into the sales process part way. In hind sight, probably should have brought him in earlier, but it was my belief that I wanted to keep it as secure as possible until I knew it was going to sell.

John Warrillow:

You mentioned he was a friend of yours, were you guys able to maintain that friendship through the process?

Gary Nealon:

Yeah, he ended up actually departing the company, started his own company. He’s doing really well. Super happy for him and he’s on his own path now. He started his own company. He’s got a couple of employees and he’s doing what I was doing 10 or 11 years ago.

John Warrillow:

Was there any sense of guilt on your behalf or envy on his that here is your partner in crime, you’re two musketeers and hold on a second, all of a sudden we’re not equal and Gary’s getting a big check and I’m not getting-

Gary Nealon:

There was a little bit of that. We had a couple of conversations after the closing. I think he wanted to be more informed of what was going on, he felt like I was hiding stuff from him. I tried to explain my mindset, but at the end of the day, we ended up working it out, figuring all that out and we’ve been good friends since.

John Warrillow:

A lot of entrepreneurs listening would have that same guilt. They consider their employees, they couldn’t do what they are doing without their employees and yet when they sell, there’s this sort of sense of what should I share, should I share any … what’s the role of ownership versus being an employee. There’s also these conflicted emotions. Any advice for entrepreneurs going through that sense of confliction?

Gary Nealon:

I’m not sure I did it the right way or the wrong way. I guess everybody has a different perspective. Since he was a friend from the beginning, I probably should have given him more information. I just didn’t want it getting out to the rest of the employees. I think if it’s somebody that you brought on later on and end up becoming friends with them, I think you have less responsibility to inform them. I guess it’s how defined is your ownership versus employee role. I treated everybody like family so I probably should have had more engagement with them and just trusted that they would be responsible with the information but I know some CEOs keep that distance and gap between the employees.

John Warrillow:

What was the reaction to the 18 rank and file employees when you told them you’d sold the company?

Gary Nealon:

I had already backed out of the company in terms of day to day operations so I was only going in maybe once a week or once every other week because I had actually moved to another city. I think they got used to me not being there. I think they were excited for the opportunities because realistically they were coming into a much larger company with opportunities to move up in their position and all that kind of stuff, so I’d say the majority of them were excited. There were probably a couple that were nervous that they might lose their job or something like that, but bringing in that management team from the other company, having them talk to them along with me, and explain we’re not changing anything, we’re not shutting down the warehouse, we’re not doing any of that stuff. I think that eased a lot of concerns. And that was, like I said, one of my main concerns when I was selling the company.

John Warrillow:

Sounds like, also, it was a bit more gradual. They’d had the chance to get used to it. Gary’s not 50 hours a week in their grill all the time.

Gary Nealon:

It wasn’t like I was doing 60 hours a week and then tomorrow I’m like, hey, I’m out of here. See yeah.

John Warrillow:

Good luck to you. Yeah, yeah. It makes sense. It’s a wonderful story. What are you doing now? Where can people get in touch with you if they want to reach out?

Gary Nealon:

Sure. I’ve got a couple of things going on. After I sold I ended up going into more of a coaching role. I had a lot of companies in the eCommerce space that are like, I don’t know what you’re doing, but you’re selling one of the hardest products in the world, how are you selling that online? I started doing some mentoring. I started doing live events before COVID at my house. I was bringing in like eight or nine companies, like really interpersonal experience in my house and I just basically dissect their company. I’m still doing that. I just can’t do live events. And then about six months ago, I partnered with the guy that was running all my Google ad words stuff and we started buying up pet businesses. We actually bought five or six brands since February, looking at probably another two or three to acquire and we’re just doing the same thing that the PE firm did, but we’re just rolling them all together under our own brand and kind of building the same thing in the pet space.

John Warrillow:

Great, have I heard of any of the pet companies? Do you want to give them a plug?

Gary Nealon:

They were mostly Amazon-based and I’m using my skillset to pull them off of Amazon. There’s a couple of brands under it. One is VetNaturals.com. The other one is Canine Nature Supplements and then if anybody just wants my brain dump, I do a brain dump on my blog for free. It’s just garynealon.com and anytime I have a new strategy that we’re using, I can literally just drop it in there and explain it and walk you through my process.

John Warrillow:

That’s awesome. We’ll link to the blog in the show notes.

Gary Nealon:

Awesome.

John Warrillow:

They’ll be on Builtosell.com. Gary, it’s a pleasure. Thank you. It was fun to hear your story.

Gary Nealon:

Awesome. Thanks for having me on.