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What to Do When Your Partner Is Not Ready to Sell

December 18, 2020 |  

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Tyler Jefcoat co-founded Care to Continue, which provides in-home care for seniors, in 2012. Jefcoat built the company to more than 100 employees when he got an offer from a private equity group for more than five times EBITDA. Jefcoat was thrilled. The only problem? His partner wasn’t ready to sell, which kicked off an acrimonious battle ending with Jefcoat selling his shares back to his partner.

Jefcoat tells his story with humility and passion and drops a collection of knowledge bombs, including:

  • How to switch from a negative to positive cash flow model.
  • How to leverage the simplifier subscription model.
  • Why you should discuss debt before you enter into an operating agreement with a partner.
  • Why your “training wheels business” may be a prerequisite for a more significant exit down the road.
  • How to structure the buyout of a partner.

Jefcoat’s original offer was from a private equity group, one of three types of acquirers John Warrillow discusses in his new book The Art of Selling Your Business: Winning Strategies And Secret Hacks Exiting On Top. Pre-order your copy and receive a collection of thank you gifts.

About Our Guest

Tyler Jefcoat is the Founder & CEO of Seller Accountant where he exercises his passion for helping sellers maximize their businesses. Tyler provides financial coaching for sellers totaling more than $100 million per year in e-commerce sales. Tyler also leads the Sellers Roundtable, an exclusive mastermind group for seven- and eight-figure sellers. Before founding Seller Accountant, Tyler was the Co-Founder and Managing Partner for Care to Continue, a home health care company that grew from zero to 100 employees in four years.
Twitter – @SellerAccountan
Facebook – https://www.facebook.com/SellerAccountant
YouTube – https://www.youtube.com/channel/UCfIH3Puf4jXhT1F1EcTIVBg

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Transcript

John Warrillow:

Before we get into today’s episode, I want to take a moment and describe a little project I’ve been working on. I’ve had the opportunity to sit here and talk to you through the voice of almost 300 guests now on Built to Sell Radio. And it’s been an absolute privilege, I’ve learned an enormous amount. And I’ve tried to distill those lessons into a new book called The Art of Selling Your Business: Winning Strategies and Secret Hacks for Exiting on Top. It comes out on January 12th. And what I’ve tried to do is distill all of the strategies and negotiation tips used by the best performing guests, the guests that have had the most spectacular exits, and put them into a bit of a game plan that you can follow.

John Warrillow:

It’s divided into three unique sections, the first, everything you need to do before you put your business on the market. The second is really about drumming up multiple offers, which gives you negotiating leverage in the sale of your company. And the third section is all about punching above your weight in a negotiation to sell your business. If you like the show, I think you’re going to like the book, January 12th, it comes out. You can pick up a copy and learn a little bit more at builttosell.com/selling.

John Warrillow:

So how’s your cash flow these days? My next guest, Tyler Jefcoat, built his business using, in the beginning, a negative cash flow cycle, meaning he paid people before he got money. And the faster he grew, the more cash his company sucked up. He built it to 100 employees but almost went bankrupt along the way because he had a negative cash flow cycle. Well, he made a significant change, I’ll let Tyler describe what change he made, and flipped the negative cash flow cycle to a positive one, and the rest was history. He ultimately built a successful company and you’ll learn how he did that. Lots of great lessons for an aspiring value builder in this episode. Listen in particular for how they moved to a subscription business model. They leveraged something called the simplifier model and it didn’t lead to any churn whatsoever. So listen for that.

John Warrillow:

Also, I loved his explanation of the training wheels business. I think you’ll find that thought-provoking as a concept. And then finally, Tyler does a great job of describing some essentials to any partner agreement. If you’ve got a passive or in fact, an active investor in your company, some real hard won secrets from Tyler on creating an operating agreement. Here to tell you his entire story is Tyler Jefcoat.

John Warrillow:

Tyler Jefcoat, welcome to Build to Sell Radio.

Tyler Jefcoat:

Thank you. Thanks for having me.

John Warrillow:

So Care to Continue, what do you guys do? What did you guys do?

Tyler Jefcoat:

So Care to Continue was basically a home health care model. And still is, has been sold and rolled up to a large national franchise now. The pain point was that I had two grandparents that had terrible kind of nursing home experiences, if you can imagine that. And we were just frustrated. I was a finance guy and joined a business partner who also had a kind of a heart for senior citizens. So we built a company around how can we provide a better experience to customers. I think that was our big aha early on was that we had a senior citizen customer, and we had a caregiver nurse, CNA customer, and both populations were being underserved. And so, Care to Continue existed to serve them better.

John Warrillow:

Got it. So what was the business model? What did you provide?

Tyler Jefcoat:

We were basically an hourly care in your home. It was a kind of imagine the extreme side of a staffing nightmare, right? We ended up with 120 employees, most of which were actually coming to your mom’s house and providing care. So, tremendous amount of responsibility. Great ministry, yeah.

John Warrillow:

It’s so timely right now because we’re recording this in the depths of this pandemic. And here in Canada, at least, I’m not sure what it’s like there, but these health care workers that are, first of all, so much of the devastation is happening in these retirement homes. And equally the people who are working in these retirement homes are getting sick. And so, it’s causing a national reckoning in Canada about the way we are dealing with older citizens and the people who care for them. Is it the same in the US? Are there huge issues around this?

Tyler Jefcoat:

Oh, totally. Even we saw this almost 10 years ago where the baby boomers were aging quickly into the population set that needs care. And the facilities weren’t up to snuff that’s kind of what you alluded to there, the ability to deliver quality care. And then you mix that with the reality that frankly, baby boomers just had a lot of the world’s wealth. I mean, there’s so much disposable income, they’re like, we got to do something different, something different needs to change.

Tyler Jefcoat:

And to your point, though, about the pandemic, man, I could not be more thankful to not be managing 100 CNAs that are responsible. Think about that conflict of interest that that manager has to feel to be like, no, you have to go to work or we’re a danger of committing some kind of an elder abuse because we’re not serving Mrs. Johnson. While at the same time, you’ve said that you think that you maybe kind of have COVID-19. How do you manage that dynamic? And so, the fact that I don’t have to is-

John Warrillow:

A good thing.

Tyler Jefcoat:

Yeah.

John Warrillow:

You refer to an acronym called a CNA, what does that stand for?

Tyler Jefcoat:

Yeah, so sorry, the certified nursing assistant. Part of the medical litany of different certs that you could get that allow you to do certain things for a patient.

John Warrillow:

Got it. Again, in Canada, I think we refer to PSWs or personal support workers. Would that be sort of akin to-

Tyler Jefcoat:

Sounds like that’s very similar. I think that’s a similar model.

John Warrillow:

Got it. Okay. So a certified nursing assistant is someone who would go in to Mrs. Jones’ home and help her in whatever ways she needs help on that day, and she would go on to the next home. I’m assuming that person would work by the hour? Did you pay them by the hour, how did that work?

Tyler Jefcoat:

That’s exactly right. And so if you think about, at least in the American health care model, insurance, and therefore, hospitals, are really good at kind of a break fix model. If you break a hip or have an issue, they will pay to fix it. But all the other stuff, bathing or making sure you can stand, sit, buying groceries, preparing meals, cleaning up. Even at some point when you’re really at the end of a disease process, maybe even need an adult diaper, that kind of thing, that kind of assistance that actually, frankly, keeps you out of the hospital is a different insurance model. You might have a long term care insurance product that would take care of that. And you’re exactly right. The economic model, so to speak, is where’s the price per hour? In other words, depending on your customer, that you can charge. And then turn around and pay the caregiver and still cover the nursing and other kind of regulatory elements that are involved in the business.

John Warrillow:

Got it. And so, who paid your bill? Was it the insurance company or the private citizen Mrs. Jones or her family members?

Tyler Jefcoat:

A little bit of both. But none of it was health insurance. Although I think that’s changing in the market now. I think the US health insurance world is starting to wake up to the reality, wait a minute, if we just paid 20, 30 bucks an hour to have somebody prevent the hip break fall, that would be kind of cool. I don’t think that’s happened quite yet. And so, the prevailing business model is either private pay or you have one of these specialized long term care insurance policies that was bought specifically to cover kind of non-medical care being in an assisted living facility or having someone like a caregiver come into your home.

John Warrillow:

Got it. And so, you would charge, for intents and purposes, what would a CNA earn an hour? What would you pay on an hourly rate?

Tyler Jefcoat:

Yeah, so the business model was basically, kind of imagine like a 50% model. So if I could charge $22 an hour to the customer, to the insurance company, I’m going to be able to pay the caregiver about $11 an hour. You can kind of think about it like that way. The numbers make sense, I can pay the nurse to go and do the care planning, I can keep the shingle up. And here’s the challenge of the business model, it’s not a great margin per hour kind of business. And when you think about the kind of responsibility that the caregiver has, man, you’d love this to be a $35, $40 an hour business. But because it’s not being covered by the insurance company, that’s just not realistic.

John Warrillow:

Got it. And it’s all in-home care as I understand it.

Tyler Jefcoat:

That’s right.

John Warrillow:

Got it. So you charge basically twice what you pay but you’ve obviously got all the overhead and you’re running a company so that people will get that totally. Tell me how the cash moved. So, I get the margin, but how did the cash move? So, you pay the employee first or you got the money upfront first? How did that work from a cash flow perspective?

Tyler Jefcoat:

Well, it shifted really critically about two and a half years in because we almost went kaput. Woke up one day and had $150,000 in accounts receivable, and we were toast. So we were always paying our teammates every Friday, so it was a weekly pay cycle. Where we had to change, and I found this even with other businesses is, I only want to negotiate the price once, I want to negotiate it upfront, and I want to be able to control the pay cycle. And when we didn’t do that, we ended up with a ton of accounts receivable and we were in trouble.

Tyler Jefcoat:

We went back to all of our customers, somewhere along, maybe it was 2015 or something like that, went back to all of our customers and said, hey, we’re going to not increase your rate if you’ll just go ahead and give us a credit card or an ACH checking account kind of credentials where we can just draft the payment. And so, we moved and we were worried we were going to lose a bunch of customers, and we lost none, we didn’t lose any customers.

Tyler Jefcoat:

And so, all of a sudden, we got a model where our teammates that were out in the field, would submit time, say on Saturday night. The accounting department comes in Monday morning, go ahead and just run the billing. That’s in our account by Wednesday, Thursday, payroll comes out Wednesday, Thursday. It went from being a really bad cash cycle to being a fairly favorable cash cycle where we could just turn it each week.

John Warrillow:

That’s awesome. That’s awesome. So you switched from a negative to a positive cash flow cycles, we talk a lot about. That’s fantastic. And interesting, have you been able to reflect on or were you able to kind of glean from customers what their reaction to moving to an ACH or credit card model, why you didn’t lose any customers effectively? Was there some hidden reason that it was more favorable for them?

Tyler Jefcoat:

I think we did do a good job of positioning it to them as a win. Hey, you guys are having a stroke a check every week. Whatever any business would do. This is a headache. It’s happening every week, it’s predictable. And then to be honest with you, they needed us to not apologize for it. I think we just had to go and just be honest. Say hey guys, this is the only way we can operate and safely provide the care. If you think about it, a lot of times our customer would have been the 45 to 65-year-old child. So we’re saying hey, Susie, we’re taking care of your mom, we want to be able to continue doing that. And we want to make sure the caregiver gets paid, you want to make sure the caregiver gets paid because that needs to be an issue that is not on the table at all.

Tyler Jefcoat:

And so, we just had to come in with no exceptions and just say, hey, we really need you to get on board with this. And I guess probably inpart in hindsight because it was the more middle aged son or daughter that were often stroking the check each week on behalf of mom or dad, they were a little bit less resistant. They’re busy, they’re at the height of their careers also. Their kids are going into college and they’re thinking, oh, god, this is one less issue on my plate.

Tyler Jefcoat:

But I just say this, we were anxious. We were getting ready for a 5% to 10% dip because we knew how frustrated just kind of anecdotally some of the clients had been. We were like, hey, we’re thinking about going this direction. They’re like, ah, we’ll never do that. They all did because the service was still great. Anyway, I’m thankful, but yeah, that’s what happened.

John Warrillow:

That’s fantastic. You must have had an incredible insurance package because I’m thinking the liability you would have to be going into all these old people’s homes. I mean, stuff happens, right?

Tyler Jefcoat:

Oh my gosh.

John Warrillow:

You bump into the rocking chair. I just can’t imagine all the stuff that would potentially happen when you’ve got hundreds of CNAs, 1000s of customers. That must have cost you a fortune.

Tyler Jefcoat:

I have a feeling that the insurance company, they either loved us or hated us. So yes, yeah. One thing we did early on is we partnered with a really, really good HR company because there are going to be not just workers comp and unemployment kind of claims that you have to deal with, that was not our expertise. I’m glad we made the choice to outsource that early.

John Warrillow:

Is that a PEO? I’ve heard of that acronym before, PEO.

Tyler Jefcoat:

That’s exactly what we did here in the States was we just said, hey, we’re going to ahead, and there was a bit of a debate happening back in 2012 about whether this caregiver business model should be 1099 as a contractor versus W-2 employee. And we really believe that the prevailing winds were heading towards W-2. So we went ahead and brought them on as employees but under a PEO that was really, really well situated to handle any issues to be that kind of conduit of keeping things smooth.

Tyler Jefcoat:

But to your point, not only is there a danger of hey, am I going to hurt my back when I lift somebody, there’s also the, hey, under the nurse’s direction, I’m going to be giving medications to somebody who might not completely have all their mental faculties. You’re exactly right, I’m sure the insurance companies were either scared to death. If I’m not mistaken, I think we had an insurance company fire us a few years in, and we hadn’t even had any claims, they just literally had a policy, we’re not going to do any more home care. Here’s three phone numbers you can call. They’re done with this.

John Warrillow:

So I’m doing the math here and I’m saying, okay, you’re paying 11, you’re getting 22. You’re paying 11, but then you got to pay the PEO a percentage. And then you got to pay on top of that insurance. I’m just doing the math and I’m thinking, this is a relatively low margin at the end of the game. What would a good EBITDA margin from year over year have been for you guys?

Tyler Jefcoat:

If you think about a contribution margin on the direct labor. I would say that number is probably, believe it or not, it’s about 40%. We would still come out okay. We had a fairly lean, even the PEO arrangement was fairly clean. We didn’t have the ability to, and we were never quite at a point where we had to offer health insurance. I believe health insurance would have destroyed the business model the way we had it situated. So 38 to 40% kind of gross profit on the labor. And then, you do have to have a couple of nurses on staff, those are much more expensive office staffers and the other administrative piece and the regulatory hurdles of the state. So at the end of the day, our target was always to reach about still 15 to 20% EBIDTA.

John Warrillow:

Okay. That’s not bad.

Tyler Jefcoat:

And let me just say, I think that would probably be an adjusted EBITDA. I think because we were paying not just me as the operating CEO, but we were actually paying the passive partner a small salary also. We never finished a year at 20% EBITDA. It would have been 7%, 8%, 9%, but that was after paying us.

Tyler Jefcoat:

I do you think that the industry, and here’s the problem is I don’t know what the pressure on the industry is now. There has to be just unbelievable pressure on wages. Kind of in a good way, like you and I, would day wow, we want to make sure we’re taking care of the people that are in mom’s home, but in a terrible way because the market can’t support the increase. And so I think that’s one of the reasons I was interested in getting out to be honest with you. And I still think there’s a ton of strength in the industry but it’s going to have to be at tremendous scale in order to be able to centralize all of your functions and still make a good living doing this model.

John Warrillow:

Makes sense. You mentioned a passive investor. So, maybe talk a little bit about the capital structure. So you were the CEO, and I assume part owner, but there was someone else, tell me about that.

Tyler Jefcoat:

So, literally, from day one, the business partner approached me and he just said, hey, he was kind of, we had both had some connection to senior services, and never in this business, and we’re just like, man, we’re pissed off at the problem. Here’s the problem, we’d like to solve it. He has some capital, I was a freshly minted MBA with zero experience and no business leading a company in the healthcare world. I was just like, yes, always wanted to start a company, got some capital, let’s go get it.

Tyler Jefcoat:

He owned the majority of the company, I owned 25% of it, and I was the active partner, I was the managing partner. We had a great run, and you haven’t asked me about a key lesson yet, but I’m just going to say this. I avoided some conflict that needed to happen in probably 2014 that really came back to bite both of us in 2017, 18. I think that’s one of my biggest learnings is, you know what, we had some issues with our balance sheet, we had some issues with the way we worked together. I felt weak. My family was young. I didn’t have a ton of capital myself. And I allowed that fear to just let me not have a couple of hard conversations. Hey, man, love you, respect you, here’s an issue with our contract that we should just deal with. Let’s just put it in front of us now while we’re at 50 employees.

Tyler Jefcoat:

And I think what I believed falsely, and this has become so clear to me now, is I believed that scale in and of itself would solve our problems. That we could take whatever we’re doing, and if we just scaled it, there’s enough pie for everyone, everyone’s going to be happy, that kind of thing. What I’ve realized now is scale only magnifies or amplifies what you’re doing. If your products have great margins, scale is going to amplify or magnify that. If your balance sheet has systemic challenges or cash flow structure has systemic challenges, then adding fuel to the fire in the form of cash or scale or employees only magnifies those challenges.

Tyler Jefcoat:

So anyway, if I could give anybody one piece of advice, don’t wait and don’t believe that just getting bigger is going to make it better. I always say, if you could sum up our strategy in 14, 15, and 16, it was like, let’s scale so quickly that we can outrun these problems. We outran about half of them, but not enough for it to really be a great scalable business.

John Warrillow:

What was the balance sheet issue you guys were struggling with?

Tyler Jefcoat:

So for us, it was a lot of once we inked our deal, we ended up bringing I guess what I would call some arbitrary debt on the balance sheet. To be honest with you, I wish that I had had an attorney look at it again and say, hey, the way this thing’s getting negotiated, there’s some tripwires here that are going to add a tremendous amount of burden payable to the investor that are going to handicap your ability to grow well in the future. I was just like, wow, I’m going to own 25% of this company, let’s go.

Tyler Jefcoat:

And so, I just wasn’t as diligent at really reviewing the contract. Nothing fishy, there’s no accusation. The reality is, it was very, very one-sided in the way it was written. And I don’t think either of us could have foreseen this, but because only 25% of the equity was active, we needed a healthy balance sheet so that we could invest heavily in the personnel and the systems that would allow us to scale profitably. And instead, we were kind of in constant bootstrap mode because there was so much demand on our limited cash flow. I don’t know if that makes sense. I would say that’s basically what it was.

John Warrillow:

It does, but I skipped accounting class. So, you got to go slow with me. I’m good on profit and loss statements, I get really confused by balance sheets. The whole thing is just a, I don’t know, maybe I got to go back to school.

Tyler Jefcoat:

Here’s the thing, another way of, you were talking about the cash cycle earlier, this is a simpler way to say it. Think about those two years where we had 150, $180,000 in outstanding receivables. We were like, please pay us. We just need to make payroll this Friday if you please pay. And at the same time, we had created, not to like a bank but to one of the partners, significant debt payments each month that needed to go out to satisfy.

Tyler Jefcoat:

So think about, that’s a tremendous amount of pressure on the cash. Doesn’t matter how much capital you start with. If you’re waiting for us and being close to 60 days to get paid at the worst point, and you have this constant need to satisfy not real bank debt, but partner debt, I think that’s probably, I probably over-complicated early, but that’s just it. We just had a lot of debt on the balance sheet that wasn’t going to be sustainable with the cash flow model that was broken.

Tyler Jefcoat:

And it did get, excuse me, did get better when we fixed the cash flow model. That was great, it got positive. But it was almost never quite positive enough to keep us over the next hill as we were growing. I think that was the big learning model for me is okay, any business I run from here on out, including the one I own now, we get paid first, that’s the first and foremost thing. I do not work behind money ever.

Tyler Jefcoat:

And then the second thing is, I’m going to be very, very, very intentional to only take on debt or leverage if I know for a fact or I feel very confident that that leverage is going to help me build profit scalability into the future. In other words, I can’t just be at the table saying, hey, I know what we’ll do, we’ll add a back salary owed for you from four years ago. Do you see what I’m saying, that kind of thing, that’s bad debt for a business trying to scale because it doesn’t give you any additional new leverage. It’s just paying old bills and just kind of dispute between the two of you and let’s just throw it on the balance sheet, we’ll figure it out later.

John Warrillow:

Got it. What do you mean by work behind money? I’ve never heard that expression before.

Tyler Jefcoat:

I heard a guy here in Georgia say that a few years ago, and I thought the same thing. And then I had that moment where we had 150 grand in accounts receivable, I’m like, oh, that’s it.

John Warrillow:

Oh, this is what he meant.

Tyler Jefcoat:

I might be reversing it, but I want to make sure money’s right here when I start working. I don’t want to work and have money trailing me. Maybe that’s a better way to say it. I’m going to go do the work, do the work, and say, would you please pay me? I would love it if you pay me.

John Warrillow:

Got it, got it, got it. Back to the whole cash flow AR and the fix that you made. Awesome. That’s great. It’s funny, I just did an interview earlier this week with a guy who built a successful company with his partner, and they reached a point where they pulled up and said, hold on a second, we’ve been fairly rewarded for the business we’ve built, because they were able to pull out some cash along the way, and they were starting to feel a little bit guilty. They’d been fairly compensated. And they’re like, we need to sell this business. They ended up doing an ESOP, we need to sell this business because the next tranche of growth, the next sort of S curve, we want our employees to participate in that more.

John Warrillow:

And it was a sense of like, a little bit of just this weird kind of, not weird, I shouldn’t say that, but it’s a bit of a guilt that they were benefiting disproportionately from somebody else’s labor. And I’m wondering if, on the other side of the coin, you’ve got a passive investor around 75%, leave it up with a bunch of debt, not doing anything in the company necessarily. And here you are busting your ass. Did you ever feel a little bit resentful? Like, hold on a second, I’m busting my ass here. Did that feeling ever arise?

Tyler Jefcoat:

Oh, totally. I wish I could say that the motives were always never that. But of course, yeah, I think you look at, like any other fast-growing business that’s fairly labor-intensive, a couple of 80 hour weeks in a row, and you’re like, what is going on here. And again, I think this was my rose-colored goggles to begin with, where I said, well, and I’m an accountant dude. This is not like I shouldn’t understand these balance sheet concepts.

Tyler Jefcoat:

But I was delusional in thinking that we could scale to such a point where I wouldn’t care about what I knew was not really equitable to begin with. And then again, once we were a few steps in, there were a couple of opportunities where it just would have been easier to deal with it, then what ended up happening, which, was I wanted to bring an investor, another investor in that would give us some more active equity so that we could really take this thing, talking about the next S curve, the next growth trajectory. And my business partner wasn’t ready to do that. And I think it was made harder because we hadn’t dealt with some of these things early. Yes. So all that to say, you look at it and you’re like, wow.

Tyler Jefcoat:

Now in hindsight, I’m objectively grateful. Think about this, I’m a guy that’s just finishing grad school, I was a middle manager in a huge bank. And I had the opportunity to build a company at 29 on someone else’s dime, are you kidding me, I say this with no anything other than gratitude. But what I’ve learned is, okay, great, be grateful, but also make sure that things are equitable, make sure they make sense, because if you don’t, you’re not going to be able to hide that lack of pleasure in the situation for long. And it will end up driving a wedge in your partnership.

Tyler Jefcoat:

And so, I would say that in addition to that, though, I mean, this business model is a tough one unless you’ve really got a nine-figure vision for it. I really want to build some significant scale. And so, the other thing I would say in hindsight, is I’m so grateful it didn’t work out. I know that sounds crazy. I exited, happy ending, I made a little bit of money. I’m so thankful for that. It was kind of training wheels on building a scaled company, where I can make some mistakes, and now build a company where we’re not making those mistakes anymore. I love my company, whether we ever sell it or not sell it, it’s an incredibly different ride and different experience that I don’t think I ever would have had the guts to say no to that old identity. I don’t know if that makes any sense or not but I was the guy right in that business. That’s another thing I’m just thankful for, the ride has been so interesting.

John Warrillow:

The training wheels business concept I think is so important because I think many of us, as owners, we get to a point where things are okay, things are good, and we kind of go into a false sense of sort of complacency somewhat. Yet, if you could bottle up those learnings, sell what you’ve created, and then go and create something that leverages all that wisdom, you’d have a much bigger more successful business. I love it.

John Warrillow:

So let’s get into the actual transaction itself. So, you mentioned you brought a PE firm to the table, a private equity firm to the table who you thought would essentially buy you out of the business or buy some of your equity. Maybe walk me through the thinking.

Tyler Jefcoat:

So what I had envisioned, and I was really, I developed a relationship with an investor who had significant home care experience, and was part of a fund where they had lots of resources. And he had actually been the operator of the $120 million version of what we were doing several years ago. And I liked the guy. We had kind of hit it off, we had several meetings, grabbed lunch a few times. And he just approached me and said, hey dude, my 30-ish year old son is now living out of state running one of these for somebody else. I’m in the twilight of my investor career. I want to buy something that’s scalable and your model is the best one I’ve seen in our state. Help me understand how I can join what you’re doing.

Tyler Jefcoat:

And so what I’m thinking is, wow, this sounds awesome. This is going to be great. We were delicate about it, we did not need my business partner gone. We were just hoping to buy him down to maybe 5%, 10%, keep a seat on the board, and give us the act of equity to then go open five or six new markets because we’d have the strategic power, the capital power. And then frankly, just have another operator that would be active, in this guy’s son. And so, that was the plan.

Tyler Jefcoat:

I approached my business partner, my investor with it. In hindsight, I can’t remember exactly how the conversation went in detail, but I really hurt his feelings. I didn’t mean to. And in hindsight, I can see how it would have. It’s like hey, we don’t need you gone, but mostly gone, and we’re going to buy you out. That kind of thing. May have been a little bit of, hey, this is how a 34-year-old handles this conversation poorly. It could have been it. All that to say, the conversation didn’t go very well. It became pretty apparent within a month of that one that it was probably time for one of us to go ahead and exit. And so, I just said, Hey, buddy, let’s go ahead and let’s do this the right way. I know that this deal didn’t work out but let me go ahead and help you transition. And so that’s what happened.

John Warrillow:

Got it. What was the PE guy that was potentially going to be an active investor, what kind of multiple were they thinking of buying the business for? What was the offer on the table?

Tyler Jefcoat:

And to be clear, we didn’t have a signed LOI. So I deal with enough deals now where I’m like, okay, you got to take with a grain of salt what the investor say. They were offering us five, five and a half times annual EBITDA, which in this kind of services business, I thought was extremely generous, I thought it was a really strong recognition of what he saw as being strength in our brand and strength in our processes. And the fact that we weren’t encumbered by a franchise agreement. We were our own baby, so to speak, we can do our own thing. And so yeah, that five to five and a half, contingent on it, me being a roll-up partner and staying with it, they needed me to stick with it. So yeah, I felt pretty good about that.

John Warrillow:

How were they going to lock you in to stay with the business? What was the model that they were proposing?

Tyler Jefcoat:

I don’t know if we got all the way down that road. I think what he heard me say in our first meeting was that I’m not looking to go anywhere. At that point, I didn’t have any inclination of leaving. And I think for him, he just said, this deal is only happening if you’re in and you’re in for the foreseeable future. And so, I don’t know that I had the wisdom to even ask.

Tyler Jefcoat:

Now, I’ve gone through so many exits with our clients in this newer business, where I’m like, oh, that would have been a really intelligent question to ask them to be like, what happens if our new partnership doesn’t work out and I need to leave. It never even occurred to me at the time, and we didn’t get far enough down that road, because I felt like I got to a certain point where like, okay, hold on, I need to actually engage with my investor partner before I start talking details of structure with this PE group, and then we just never really got any further.

John Warrillow:

So, if I understand, you rock up to your legacy partner or traditional, your original partner and say, hey, we’ve got an offer of five, five and a half times. We want to buy your equity out, we’ll let you keep a little tranche of it, but most of it, we want to buy. And the reaction was not favorable. How did he feel about the valuation of five to five and a half?

Tyler Jefcoat:

I really don’t know that he had a concept of what the valuation should have been. So, this is a guy that’s coming from a very, this is like, I think when someone hears investor, they’re probably thinking, wow, this guy’s a pretty sophisticated business investor, and he’s a super-smart guy, good businessman. But he just owned a couple of other small businesses and had some money.

Tyler Jefcoat:

And so I think for him, and this is what I underestimated prior to this meeting, for him, this thing was still his baby. This had been my dream of having this kind of side, although passive, not completely, but mostly passive income. And so, I don’t know that there would have been a price unless it was just outrageous, that would have made him feel super compelled to move. I don’t know if that makes sense. But for him, he was in an emotional place where he was like, no, no, no, this is my thing, this is my thing. What are you talking about? Sell. You just want me gone.

Tyler Jefcoat:

I don’t think his dissonance was as much rooted in a four versus five versus six x multiple. It was more rooted in a, it was the principle. It’s like, whoa, what’s happening here? This is just starting to get good, I’m making a killing over here as the owner here. What do you mean you want me out? That answers the question. I don’t think it was a value issue, it was an internal perceived emotional value kind of issue.

John Warrillow:

Yeah, I think so. A lot of our listeners would have a lot of the same issues. It’s deeply tied to who they are and so forth. So you kind of came to the conclusion that one of us needs to probably part ways here. Did you guys have some sort of agreement that stipulated how and if you could sell your shares back to the passive investor?

Tyler Jefcoat:

We did. We had a pretty solid operating agreement. Although it didn’t really, in hindsight, I’m not sure that it really helped us in this scenario as much as we wish it had. We ended up in a position where, I’m assuming here, but I think he really felt fearful. And I’ll give you one more step in the journey that will help give some color to the listeners here is, we have this kind of tough investor conversation. It was about three weeks later that one of our core operating leaders, I believe she needed to go, I believe that she was destroying the culture of our company.

Tyler Jefcoat:

I think he looked at that and said, whoa, the kid’s going to come to me and try to get me out, and then three weeks later, try to fire the one person that I think could take over for him. This is clearly Tyler trying to leverage a deal here, which in full transparency was never my thought. I’m a big culture guy, it’s critical to me to make sure we have a team that’s operating in sync. And so, I think that set off in his alarm bells we are in trouble, Houston, we have a problem.

John Warrillow:

If I’m clear in your comments here, by letting go this person who you felt was a detriment to your culture, that would amplify or enhance your negotiating leverage, because now you’re the only game in town, and he’s weakened at the negotiation table? Am I getting that correct?

Tyler Jefcoat:

I think that’s right, because about six months earlier, we had moved this person into the role that just gave her more influence over the operation. She had kind of been a manager moving into more of a director role. And we just saw tremendous turnover in those two departments as soon as she took the helm. First couple, we’re like, yeah, probably just bad personnel. Third one, I’m like, we might have a problem here. The fourth one, I’m like, oh, God, we have a real problem.

Tyler Jefcoat:

And to be honest, this is my naivety. That really didn’t occur to me as a negotiating point. And in fact, in my mind, I’d kind of moved on. It’s like, okay, investor didn’t work, we’ll come back to this guy at some point in the future. Let me just keep all steam ahead. By the way, we have a difficult conversation to have about this person that is in a role that I’m not sure is a good fit. Now in hindsight, realizing, oh, yeah, this is a person that you had actually brought to the company, business partner. It sounds like funny in hindsight, oh, yeah, I should have seen that one coming, and I didn’t. I think that put him in a very defensive kind of fear-based posture. It just got acrimonious pretty quickly.

Tyler Jefcoat:

And so it was just time to be proactive and say, you know what, let me do this. If we can work through our arrangement in a way that is healthy, I’m going to be willing to stick around for 100 days, make sure there’s plenty of time to transition. Sounds like you and I disagree about this corely, but that’s okay, let’s keep her. I’ll train her. Ultimately it worked out fine. The process was pretty edgy for a couple months to be honest.

John Warrillow:

That sounds tough. So what did the agreement call for? How did you sell your shares to the passive investor?

Tyler Jefcoat:

So, this was another part of that initial contract that I just wish I had negotiated better. First of all, it didn’t clearly identify or articulate a formula. That was something was so easy to do in a good operating agreement right now. Me and my business partners now in the current business are going through this. Let’s just go ahead and define this formula now that we have a third partner to make sure we never have to debate how to value the business internally. And so we didn’t have that. He had built in 10 years to pay, owner finance for 10 years was a really long time. I felt like 10 years was unacceptable. I didn’t have to stick around for as long as I did, but I offered that, I said, hey, if we can make this a five-year deal or a three-year deal, I’m willing to be much more cooperative in the transition.

Tyler Jefcoat:

And frankly, for me, and this was I think rooted some in the fact that I just didn’t want to have a big long note to these guys, I was willing to take a little bit less to get more of it upfront, to make it a clean break, and let these guys running gun afterwards. And so ultimately, that’s what ended up working out.

Tyler Jefcoat:

So, to kind of give it to you in EBITDA form, instead of getting that five, five and a half annual EBITDA, it really ended up being closer to more of a three and a half, four EBITDAs and internal deal, which I don’t think it was entirely unfair given where we were. This kind of goes to one of the things I saw in your book, John, the fact that I had still, even though it’s a fairly large organization, 100 plus employees, I was still really important, really important as the kind of face of the company. And so, it was worth a lot less with me being the guy that was leaving than if it had been the other way around, where I’m the promise of the future is hey, let’s keep this kind of personality culture guy Tyler intact. That’s as a big learning for me to say, wow, I thought I owned a business, and I kind of did, but I really owned a big job. When I was leaving, there was some value leaving with me that I didn’t have the ability to capture. It’s just kind of the way it works.

John Warrillow:

That’s so fascinating. So, you negotiate this deal, which is sort of closer to three and a half to four. And originally, the operating agreement called for that to be paid out to you over 10 years. What did you end up doing in the way of length of time?

Tyler Jefcoat:

Where we ended up landing was five years with a pretty big chunk upfront. There was a kind of amortized portion over the five years, and then kind of a balloon at the end for the rest of it. But actually, kind of a quick appendix to the story, he sold the company again, about two to three months ago. And so, kind of out of nowhere, I got a check two months ago, John, it was great.

John Warrillow:

A balloon payment came through.

Tyler Jefcoat:

Yeah. I was like, wow, here we go. This is fantastic. In some ways, it’s a great close to the story that ended up only being about three years instead of the five years.

John Warrillow:

Let me understand, was that just generous on his part to move up or did your agreement call for any event that he went to sell the business that you would be paid out.

Tyler Jefcoat:

I think if there was a substantive asset sale or if he sold the equity of the company, he had to liquidate. I was a debt on the balance sheet for them so they had to satisfy that. Now, what was interesting, and this is to give him credit, I think he could have waited a year, in other words, because I think he’s going to have to file this year’s tax return going into this coming spring. I believe if he had any lingering expenses before he closes, I think it was an asset sale, I don’t think he sold the equity. But I think to his credit, he was like, let me just be done with this, let’s liquidate this thing and get it done.

Tyler Jefcoat:

And at that point, what he still owed me, I don’t think would have been large enough to be a significant cash flow challenge. We’re not talking about, it was less than 100,000 at that point I think because of the upfront payment. It wasn’t gigantic ending check, but versus getting essentially a large car payment each month, it was nice to get that 40-ish thousand dollar last check to kind of finish out the deal.

John Warrillow:

Yeah, yeah, yeah. If I understand correctly, and this is something that I’m trying to learn more about myself. So, you agree to a price for selling your shares, and you agree to a portion of that to be paid upfront. And then the rest, you’re essentially taking as a note or a vendor take back, you’re selling your shares, and you’re effectively lending the money to the passive over time, and that he pays that off like a banknote of some sort. You are then I guess risking that in the event that the business were to fail under his leadership as the passive investor, your proceeds may dry up, your checks would stop coming because the business failed.

Tyler Jefcoat:

That’s right. We had a formal seller note, a promissory note that was signed that put out the schedule of payments and the interest rate and everything else.

John Warrillow:

What was the interest rate?

Tyler Jefcoat:

I want to say it was 5%.

John Warrillow:

Okay. It’s a little better than what you’re getting at a bank, for example.

Tyler Jefcoat:

Yeah, it might have been prime plus two or something like that. But you’re exactly right, I think that was the reason I was willing to prioritize a bigger lump at the beginning was because, and again, I think a good operating agreement probably includes a seller financing clause because you don’t want to have a partner exit and suck all the cash out of the business. You want to build in a three or five year, I think 10 years is unreasonable, I don’t think I’ve ever seen another one that’s 10 years. But I think a three to five-year payment where they have to finance through you so you can, once they’re gone, move things the way you want to move them.

Tyler Jefcoat:

But you’re exactly right, there’s some risk there. There was a, okay, we know the cash we have, and every month when we get this check, we’re happy to get it. But we need to build our life plan assuming that this could or could not happen in the future. And so, that was another reason why just having it be done. It wasn’t really about the money, it was about the anxiety of not knowing how it was going to end, ended last month, so I’m thankful for that.

John Warrillow:

How did you celebrate when you actually sold the company, sold your share of it? Did you do anything special to celebrate?

Tyler Jefcoat:

You’re going to say this is so pathetic. My two daughters are young, my wife and I love them all. We went on a three-day camping trip. So I was officially retired in my mid 30s for three days. And I came back the following Monday and started a new company. Part of it was that I think the grieving process and the splitting process was 100 days. I knew in October what was going to consummate in January.

Tyler Jefcoat:

And so, in some ways, I had gone through this, I don’t know if any other owners would empathize with this, but man, I’ve built this thing, this has been my heart and soul. The mission matters so much to me. And now it’s going to be gone. How do I feel about that? I feel bad about it. I feel depressed for a little while. And now it’s like, okay, I’m cool, I’m through that. Now, what’s next. And as soon as I can legally do what’s next, I want to celebrate with my family, I want them to do feel Tyler is not working like crazy. But then I want to go get back on the horse and do something that matters and build my next company.

Tyler Jefcoat:

And so I think that’s where we were. And it’s really funny, we’re going to go on a little trip next year, assuming the pandemic’s better for this final payment, that’ll be great. I smoked my $40 cigar, yesterday with my brother. We had had a hard time connecting. We want to make a living, don’t get me wrong there. But the mission and the value and the transformational relationships are important to me, which is weird as an accountant to say that. They’re just important to me, and I think the value follows if you can couple that transformational relationship with systems and with a good pricing model, and that kind of thing.

John Warrillow:

Awesome. Well, congratulations on the cigar. So tell us a little bit about what you’re doing now. Where can people find out about it? What’s the new company?

Tyler Jefcoat:

So the best decision I ever made as a guy just getting out of grad school starting a company with no business being the CEO of it was joining one of these peer group, these CEO Roundtable kind of mastermind things. We met each month for a day or a half a day. And one of the guys I met through that group owns a fairly successful software company. And the only thing they do is solve problems for Amazon sellers.

Tyler Jefcoat:

And so, when I was exiting Care to Continue, I was looking for what my next venture, I knew I wanted to start another company. I just had a cup of coffee with Brandon, and I just said, man, this Amazon space is so interesting. I didn’t even realize that when you buy something on Amazon, more than half the time, it’s coming from a small business that owns the product, it’s not coming from Amazon. And so we started thinking through the different issues that these sellers have and the accounting kind of fractional CFO are the ones that came to the surface.

Tyler Jefcoat:

And I’m a big big believer, the best advice I ever received beyond getting involved with the CEO roundtable where guys can hold me accountable and encourage me, was there are riches and niches baby. Find something that you can get so focused on that you may have a chance of being the best in the world at it. And so, we open this bookkeeping and fractional CFO shop for these eCommerce sellers.

John Warrillow:

Amazon sellers mostly.

Tyler Jefcoat:

Yeah.

John Warrillow:

That’s awesome. Where can people find out about it? If they’re an Amazon seller or an eCommerce company, where can people find out about that?

Tyler Jefcoat:

So selleraccountant.com, best place to find us, selleraccountant.com, you can find out everything you want to know about our company.

John Warrillow:

Great. And if people wanted to reach out to you directly, are you a LinkedIn guy? Is that a good place to do that?

Tyler Jefcoat:

Absolutely. The nice thing about having a weird name like Jefcoat with one F, is that it’s Jefcoat with one F, J-E-F-C-O-A-T. If you google it, you’re going to find me. If you find me on LinkedIn, feel free to reach out to me, I’d love to connect with you.

John Warrillow:

Awesome Tyler Jefcoat, thank you for doing this, welcome to Built to Sell Radio. I’ll try that again. Thank you for doing this.

Tyler Jefcoat:

John, my pleasure. Thank you so much for having me.

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