How to Attract the Acquirer You Crave

Transcript

Disclaimer: Transcripts may contain a few typos. With most episodes lasting 60+ minutes, it can be difficult to catch some minor errors.

John Warrillow:

I had a conversation over the holidays I thought I’d share with you. I was describing the pros and cons of a professional education with a friend of mine, and he was making the argument that the really amazing jobs come from going to a great school and getting a great job at a big company, or a great job and a big professional services organization. One of the big four accounting firms or the big consulting firms, the big investment banking houses. I was making the point that I actually don’t think that on a risk adjusted basis is the best way to create wealth. I think first of all, that income is obviously, usually taxed as income, so at 50% rates, and furthermore, I think there’s actually a whole lot more financial independence to be gained by finding a quiet little corner of the world and owning the majority of a profitable company.

John Warrillow:

My next guest, Anthony Fracchia did just that. He built a little benefits consulting business. These are companies that sell insurance effectively to small mid-size businesses, not a very sexy business. A dozen employees, two and a half million revenue, but it was run really, really well. As Anthony will tell you, he built it up so that his EBITDA margin were in the neighborhood of 60% on that two and a half million. He ultimately went to sell the company and got around eight times EBITDA. You do the math and you let me know which you think is the better way to financial independence. Here to tell you his entire story is Anthony Fracchia. Anthony Fracchia welcome to Built to Sell Radio.

Anthony Fracchia:

John, how are you doing? It’s a pleasure to be here.

John Warrillow:

Yeah, it’s great. Altruis Benefit Consulting, how did you get into this business? It sounds like it was a family business.

Anthony Fracchia:

Yeah. There’s a story about that. It was an insurance brokerage group that I started with my father Robert back in 2002. Previous to that, my dad had Italian… I’m 100% Italian. I was born in the ‘70s. My dad had Italian restaurants, his whole life. If your listeners know anything about two groups, right? Greeks and Italians with restaurants is they start their kids working at an early age. My dad started me working at about 10 years. I’ve been working nonstop since I was probably 10 years old in the restaurant. When I graduated school, I worked in the consulting world… for now called Cap Gemini. At the time it was Ernst & Young. My dad got out of the restaurant business, got involved in this as a broker. He was a lifetime entrepreneur.

Anthony Fracchia:

He’s always been so health employed. He figured it out. When I was tired of the corporate world, he was like, “Hey, you should check out the model in this market,” which I did. I joined forces with him in 2002. We initially focused on the personal or individual market and primarily health insurance. We grew that client base substantially over the first five years. Then around that time, one of the major carriers here in Michigan was pushing some state legislation that if passed, would’ve impacted our revenue numbers by about 40 to 60% in the wrong direction. That was a bit of a wake up call for us. We had all our eggs in one basket, so to speak so we diversified the markets we participated in to hedge against future legislation in any specific market. That’s when we spread it out to Medicare based products, as well as employee and employer group sponsored coverage as well.

John Warrillow:

You shifted the model to then start working with businesses to sell them effectively health insurance programs is that right?

Anthony Fracchia:

Correct. Basically consulting and structuring employee benefit packages. We started in the small group space, which would be like as low as 10 employees, maybe as much as 50, the, and then gradually built that up once we got our feet wet in that market. I think our largest group client now is probably around 700 employees. We’ve got all ranges of staff size there as clients.

John Warrillow:

What’s the business model? Do you get paid a consulting fee like hourly? Or do you get the commission when you sell the program? Like how does that work?

Anthony Fracchia:

It’s a great question. Our model, I guess, is kind of a hybrids of sorts for this specific sector. Here’s what I mean by that. There’s a few paths to follow in this business. First path could just be an individual producer, right? That means you’re a one man show. You go out, you get a license, you contract with the carriers of your choice, you write business, you get paid a commission, that’s set by the carrier. That’s entry point, right? You can then become an agency. It’s similar to the individual producer path, but now you might have a small all office with a few staff members helping you do outreach, marketing, maybe some bookkeeping, and maybe you have another licensed agent or two that all write underneath one agency contract. Then you have what we are, which is a general agency.

Anthony Fracchia:

This builds up that agency model on a much larger scale. We would’ve a larger internal office. We’ve got an internal staff of about 12. Some of those are licensed some are not. We’ve got a captive agent staff of about 10. This allows us to go to these carriers and actually demand and get higher commission rates, because we’re aggregating that production and we’re providing more value to the carrier. Then what we do, John, is we take that higher commission and we can essentially operate as a wholesaler. This allows us to go out and recruit independent agents all across the state, across the country, really, because we can take that delta.

Anthony Fracchia:

If you were an individual agent, just John Warrillow and Associates making, let’s say 5% commission, we get nine. I can go to you John and say, “John, hey listen, I see you’re doing this all on your own. We can offer you some sales training, some marketing, some leads, some back office support. If you hit certain numbers, I can actually split that difference you. If I get nine, you get five that leaves me with four. I can share with you a couple more points and actually give you more commission than you’d make on your own.” That’s where we’re at. We’ve now got about 300 agents in that channel, just in the state of Michigan alone.

John Warrillow:

Your revenue source then is solely commission based. You’re not also charging the client, the business itself. I just want to be clear.

Anthony Fracchia:

Correct.

John Warrillow:

A consulting. It’s 100% commission. And those commissions, as I understand them in insurance, there’s a tail to them. It’s not just a one off commission, it’s an annuity stream as long as that client holds the policy. Am I getting that right?

Anthony Fracchia:

Absolutely. It’s a residual revenue business. Every time a client pays their premium, a small portion of that goes to us. We have a captive book of clients internally, and that’s our Medicare under 65 and our employer clients that we have directly. But then we also aggregate the sales of those 300 other producers across the state and generate revenue that way.

John Warrillow:

Got it. You mentioned before we hit record that you bought your dad out. Can you talk a little bit about what precipitated that?

Anthony Fracchia:

Yeah, absolutely. Between probably 2014 and 2015, our focus meaning my father and I, we had had a different focus, right? It was quite different with respect to where I wanted to take the business. I had been in at that point for gosh, 10, 12 years and I was in this aggressive growth mode. My father was in his early 70s at the time was more comfortable. I mean, the business was doing good. Nothing to complain about. We were making revenue, we were covering our expenses. We were pocketing basically all of our commissions. And the business that we were generating, the revenue we were generating from the agent channel was effectively paying our expenses. It was doing well and he didn’t really have… He wasn’t incredibly motivated to go on that aggressive growth journey with me. We had a number of discussions around this challenge and eventually agreed on a buyout where I would purchase 100% of his shares to take full control of the business back in 2015.

John Warrillow:

How did you structure that buyout Anthony?

Anthony Fracchia:

At that time the multipliers in our business were much, much smaller and really my father’s agreement and our agreement was we always own our own personal production, and we split revenue that the agency develop 50/50, right? So whatever my father developed in his personal book, whatever I developed in my personal book, those were off the table. If there is any ever a point where he bought me out, or I bought him out, we’d always walk with our clients and the full revenue that that generated.

Anthony Fracchia:

When we took that out, my father’s and my production was easily 60 to 70% of the total revenue of our company. It was really just a buyout of that remaining 30%. The way we structured that was a lump sum upfront payment. Then he wanted me just to for tax purposes, pay him a set amount over the next eight years as just a residual revenue coming in on a monthly basis.

John Warrillow:

Got it. That makes sense. What multiplier did you use for that 30% that was agency revenue? Did you use a multiple of revenue or a multiple of profit? Like how did you place a value on that?

Anthony Fracchia:

We used a multiple of revenue back then. I think it was about two and a half. That was quite a while ago, but I think it was about two and a half to three multiple on revenue.

John Warrillow:

Got it. That makes sense because it’s recurring revenue and it’s got a tail to it as you referred to it. Got it. You’re applying multiple two and a half to three. You paid him out over eight years. He kept his share. Now, interestingly, what did he do with his share? Because I’m assuming as those clients renewed, he would get this annuity stream. Did he leave the business entirely or did he just wind down slowly?

Anthony Fracchia:

No, man, this guy’s still selling day in day out today whatever, six, seven years later, he’s still helping clients. He’s focused mainly on Medicare, because he’s obviously a Medicare beneficiary himself and it’s one of those… This is one of those industries and those businesses that’s very well suited for a retirement business. He can work as much or as little as he wants, he can throttle up or throttle down as he chooses to. He and my stepmother love to travel, so they can both work remotely wherever he’s at. He’s loving life, man. He’s put in probably and on the down time 20-ish hours a week. When open enrollment comes at the end of the year, he is probably working more full time. It keeps his brain working. It keeps him active. He loves it.

John Warrillow:

Back in 2015. If you can cast your mind back there, what impact did this buyout, have and the conversations you wanted to grow him wanting to take it easy? What impact did that have on your relationship personally?

Anthony Fracchia:

We were toying around with that conversation, John, for years leading up to that. I think it was getting to the point where had we not been able to come to an agreement on that, I was getting courted by colleagues in our market here in Michigan to come, not work for them, but work with them. Meaning take an equity position because of some of the work I had been doing. I had become very involved in the Affordable Care Act. I was doing a lot of speaking engagements at the time. I was digesting every piece of information I could. That was the leverage was, “Hey I’d love to do this right, but if it’s a no meaning you won’t let me buy you out, then I’m going to have to entertain maybe making a move myself.” We were in completely different phases of life. Neither of us were wrong. We were just in different phases of our lives, where I was in my mid 30s looking to grow, he’s in his early 70s looking to chill.

John Warrillow:

Yeah. It’s one of those things that we talk a lot about in particular with less father and son relationships, more partners in a business. Especially if there’s a shotgun laws in place where it’s a good idea that both of you are at reasonably the same points in life, reasonably the same wealth brackets, so that one doesn’t have disproportionate leverage over the other in a shotgun. Now, to be clear, you had a preexisting approach to valuation. You did not have a shotgun with your dad. Am I getting that correct?

Anthony Fracchia:

Not at all. No. I want to also preface by saying working with family, especially when it’s a parent, it poses its challenges. I’m not saying that he and I didn’t butt heads from time to time, or pull the dad card on me when there’s a decision that needs to be made. But at the end of the day we were 50/50 partners. I think we did a good job respecting that component of our agreement, and everything went very smoothly. There were no hiccups, there were no challenges. He’s my day I love him. I’m his son he loves me. We worked out a deal that worked out great for both of us.

John Warrillow:

Let’s bring it forward then to the ultimate sale that you just consummated. What triggered your decision to sell after having reasonably recently bought your dad out?

Anthony Fracchia:

Leading up to that sale I did… The years between buying my father out and getting to the sale, we did some serious, serious work on this business. I was just like aligned. Once that happened, strategically and aggressively over the next three to four years, we just went at the market. I enlisted the help of a business coach. His name’s Dr. Fadi Baradihi. This guy have a tremendous amount of respect for in our area. He came from this industry, and with his guidance over those next three to four years, John, we grew our gross revenue by over 85%. We grew our gross profit by 100%. Most importantly, we grew our bottom line revenue by 600%. I wasn’t even focused on prepping the business for a sale at that point. I was just very emphatic about making the operation more efficient and reducing expenses as much as possible.

John Warrillow:

What did you get the business up to when you decided to sell? Where were you kind of revenue, profitability, that kind of stuff?

Anthony Fracchia:

Yeah. Revenue right before the sale, bottom line revenue was between, I think about 1.3 and 1.5 million.

John Warrillow:

When you say bottom line, you mean profitability?

Anthony Fracchia:

EBITDA. Yep.

John Warrillow:

Got it.

Anthony Fracchia:

Yep, net revenue.

John Warrillow:

Somewhere in the 1.3 to 1.5 range?

Anthony Fracchia:

Yep.

John Warrillow:

Got it. Got it. That’s helpful. On the top line?

Anthony Fracchia:

Top line, I think we were just at about two and a half, about 2.5 million.

John Warrillow:

Two and a half million. Great. This is a profitable business.

Anthony Fracchia:

It is.

John Warrillow:

I’m just looking at your EBITDA margins against your revenue, I’m like, okay 60%.

Anthony Fracchia:

Yep. I think with a little bit more conditioning, I think when we got through final financial diligence with my parent company, I think our margins on EBITDA were just under 60% with some recasting and some things of that nature.

John Warrillow:

Got it. That’s super helpful. You must have been running pretty lean in the office to have total expenses like around 800 grand. With 10 or 12 employees it was pretty lean in the office. Am I getting that right?

Anthony Fracchia:

Incredibly lean. I had a colleague in this space who was around the same revenue number as me working with a broker to package his business and start to do some diligence. He was telling me at about the same size we should have the theoretically had about four or five more employees based on revenue than we actually had. But my model was always, I’ve got a great… My team here is family to me, I’ve got a great relationship with them. Our method has always been, we’re going to work and we’re going to bust our butts.

Anthony Fracchia:

If we get to a point where we’re of getting exacerbated or feel like we need help you guys come to my office and tell me, because I have a very strong work ethic and my team does as well. I just put it on that. I’m like, “Hey, if you need help, let me know and we’ll go there.” But I think the culture here is one of trusting each other, working our tails off and growing, and everybody embraced that.

John Warrillow:

Got it. You’re two and a half million top line, a million three, a million five, somewhere in their bottom. Again, maybe you were getting at it, but I must have missed it. What triggered you to want to sell?

Anthony Fracchia:

Well, it got to the point… There’s a couple reasons, right? First reason is time. I’ve been doing this work for almost 20 years. It’s an intensely competitive market here in Michigan and I wanted to have an outlet where I could maybe take a step back focus on specific things and not the entire business every day, all day. That was one thing. I guess the other, I’d have to say, John was the regulatory environment. This business was a lot of fun before the Affordable Care Act came into place. Our industry has now become one of, if not, the most overly regulated markets on the planet.

Anthony Fracchia:

I’ll tell you, my political affiliation is that of a conservative libertarian. Increased government involvement, for me, is always just a huge turnoff, and it just… as you know, when the government gets involved, they don’t just get involved and hit the pause button. They grow and grow, their reach grows and grows, and it just became just more work for us and for our team. Revenue got cut. That was one thing that was really frustrating to me. The other reason was the acquisition market was hot. I observed acquisitions in our market going from about three to four times EBITDA, around the time I bought my dad out, to eight to 10 times within the span of five years.

Anthony Fracchia:

I think that’s due to a few reasons. I think there was a growing agency to agency acquisition appetite over the past three years, meaning agencies that have set up or brokerages that have set up successful and efficient processes. They realize they can find these underperforming agencies, purchase them at a discount and tune them up by incorporating them into a more efficient model. It’s a simple turnaround. If you’re really good at what you do, and you’re running very efficiently, that’s a really easy path to grow. Interest rates have also remained relatively low over the past decade, which has attracted private equity.

Anthony Fracchia:

Private equity, as you probably know, they love these residual revenue model businesses. The insurance model is probably on the top of that list, specifically with health insurance and specifically in the environment we’re in now with the COVID pandemic. People are more reluctant to drop their health insurance than they are their HBO Max subscription. They’re much more sticky.

John Warrillow:

Got it. That’s super helpful. There’s an internal and an external motivator. Internal, yeah, you’ve been in the business for 20 years, regulatory environment was getting worse and you saw it getting worse on the horizon still. Then there was the external factor of, it was just a hot market. I’m assuming you were getting approached then. What was that?

Anthony Fracchia:

Yeah.

John Warrillow:

Were you getting unsolicited reach out?

Anthony Fracchia:

Yeah, man, my phone was ringing. As I was explaining to you earlier, it’s a small world here in Michigan in this market. Once you start to inch up to the top of the food chain in terms of revenue in a specific sector, people start calling. Our growth from 2014 to 2018 positioned us as one of the top producing brokerages in the individual market so my phone started to ring.

John Warrillow:

How was that? Because I think right now, a lot of our listeners are having unsolicited pitches on LinkedIn, on their cell phone and on email. They’re getting approached. I think, as we’ve talked about on the show before, getting too far into the conversation without being proactive can be a bit of a mistake. How did you handle those first few phone calls?

Anthony Fracchia:

Well, I’m not going to lie. I was super pumped about it. I was like, oh, my god, someone actually wants to buy what I’ve built. This is awesome. That’s the first thing when you get that first call, and you get excited. You don’t really do a whole lot of homework. You just start talking to these people. Next thing you know, you’re going down the rabbit hole. I’d say before I ultimately [crosstalk 00:23:43]-

John Warrillow:

Did that happen to you?

Anthony Fracchia:

It did. It absolutely did.

John Warrillow:

When you say “going down the rabbit hole”, what do you mean by that? What exactly do you mean by that?

Anthony Fracchia:

Yeah, you’re being guided down a path by a much larger organization that’s done this 10, 20, 30 times over, so this is old hat for them, and you’re just being guided down this path, sometimes without really knowing where you’re at. You think you’re just having conversations, but they’re gathering strategically information from you. We start talking, they become more interested. I provide more information and all of a sudden we’re two or three months into this conversation, and we hit a wall because basically, their intention was to dissolve everything we had done, basically grab our clients, wrap them into their model and the name was gone.

Anthony Fracchia:

The brand was gone, and my team’s livelihoods were in jeopardy. I was like, that ain’t going to happen. I’m not going to do that to my team. We’ve spent a lot of time building this brand. After that stumble, which was the first call, I decided we probably have to have some non-negotiables in place from that first conversation, so we’re not wasting anybody’s time going forward.

John Warrillow:

Got it. I want to get to what those non-negotiables were for you, because I think that’s a great idea for everybody to have. But before we go there. You got reasonably far down the path with one acquirer. How much information were you sharing with them? Were you sharing your top line revenue, your net profit margins? Were you getting into that level of detail with them?

Anthony Fracchia:

Absolutely. We stopped short when they wanted to know… In our business, they want to make sure that you’re not getting 30%, 40% of your revenue from one group client-

John Warrillow:

Sure.

Anthony Fracchia:

… because if that group client goes away, that’s a huge impact on your bottom line. We got right up to the point where we were packaging our client information to show how that revenue was broken down over the three markets that we were participating in, individual, non-Medicare, Medicare and group. We were right up to that line where we were packaging that information up, where we had that conversation, and that’s where we hit the pause button.

John Warrillow:

Had they shared with you, before you hit pause, any valuation metrics that they were prepared to pay?

Anthony Fracchia:

We were discussing multipliers at that point. This was easily three years before I sold my business. I think we were entertaining around between four and six times EBITDA-

John Warrillow:

Times EBITDA.

Anthony Fracchia:

… and that’s where the talks were. But obviously, as you know, and I’ll tell your listeners the same, before you firm that up… You can give a range, but before you firm that up, you’ve got to get a bit more detail on where that revenue’s coming from.

John Warrillow:

Got it. You’re having verbal conversations in and around the four to six times EBITDA. Your reaction to that presumably was reasonably positive, or you would’ve hit pause earlier. I’m sorry.

Anthony Fracchia:

Oh, absolutely. No, it was very positive. Like I said, I was excited about it, but once the emotional reaction to that journey subsided and the brain kicked in, I was like, okay, I think I see where this is going. Had a very upfront conversation… These are good guys. They weren’t devious by any means. They were always upfront. I wasn’t asking the right questions and decided to start asking those questions. That’s when I realized we had to pull out.

John Warrillow:

What are the questions that you were not asking, that you should have been asking?

Anthony Fracchia:

I was not paying attention to what their intentions were with this business post sale. That was not on my radar.

John Warrillow:

Got it. What questions would you… or what questions did you miss? As you think about it retroactively, I get the fact that you were not necessarily asked, but I’m trying to think what questions do you wish you’d asked?

Anthony Fracchia:

I would’ve asked, number one, when you’re going… and this was an agency to agency, or brokerage to brokerage purchase. It was a much larger player in the market, predominantly heavy on the group side. Revenue was probably 10 times mine. I would’ve asked, are you looking to basically acquire our client base, keep on key people and subject the remainder of my staff to redundancy? Is my staff going to lose their jobs after this? You may have people…

John Warrillow:

Because I presume a lot of the private equity value proposition, and you alluded to it earlier. You’re like, a lot of private equity groups look at this and say, “If we can buy this book of business… First of all, there’s recurring revenue, but second of all, with our expertise and our scale, we can probably squeeze out more margin.” I’m looking at your business, and just the work you did with your business coach. A lot of those efficiencies would’ve already been captured, I’m guessing, because you’re so efficient already. But still you had taken advantage of some of those benefits, or some of that juice, if you will, even though they were still interested in what you had to offer.

Anthony Fracchia:

Yeah. When it came down to it, they couldn’t give me a definitive answer on that with respect to my staff. I was like, “Listen, if they’re not safe, and that’s not documented, and we can’t come to terms on that being in the agreement, then I’m not going to move forward.”

John Warrillow:

Got it. It sounds like you had a number of non-negotiables that you came up with as a result of this failed conversation. What were the non-negotiables?

Anthony Fracchia:

Yeah, absolutely. I’m like, okay, if I’m going to do this again, I’m going to be very upfront and honest with the terms of how we can go about this, and if I’m going to engage in a conversation. The first one was I wanted to keep the brand. We had been doing this in the state of Michigan for 20 years. We’ve developed a great brand, great brand recognition. We had thousands and thousands of individual clients primarily in Southeast Michigan. I wanted to keep the brand. I wanted the ability to stay on and work as long as I chose to. I didn’t want there to be like, “Hey, you’re high overhead. You have to go after we figure out the magic, or whatever you bring to the table. Once we get that code, we’ll put you on a path of retiring you out of it.”

Anthony Fracchia:

I wanted to be able to stay on at my discretion. That was the second one. The third one was my staff had to be safe. I had a great argument for that, too, John, based on what you just said, and what we discussed, is we’re running incredibly efficient. I had a good argument to make that case. Quite frankly, I’m like, “This business doesn’t run without this team. If your intentions are to gobble up our clients and slowly edge out the team, it’s not going to serve you well.” Then finally, after a couple years and paying more attention to the market, knowing people that have gone through the acquisition process and seeing these multipliers go up, I had an EBITDA range that I wanted to be in. That was my fourth one, is I wanted to be somewhere between seven and 10 times EBITDA, and I was pretty firm on that.

John Warrillow:

Got it. Keep the brand, you wanted the discretion to work or not, keep the staff safe and EBITDA in the seven to 10 range. That became your upfront, these are the non-negotiables so let’s make sure we’re on the same page before we go too far into this conversation. Is that right?

Anthony Fracchia:

100%. Taking that step, it saved me a lot of time. It saved people who were calling me a lot of time, and it really started to… after I think I had maybe… I had one more conversation after that, John, where upfront, I had that discussion. We started to go down. In theory, they were okay with it. I’d say maybe a few weeks in, the component of the brand was a problem for them, so we dipped out. I had another conversation after that, so a third one where it ended after the first conversation. They again were like the original one where they just wanted our client list and they had no intention of maintaining anything that we had built. Those were probably three conversations I had within a year, I’d say, within 12 to 18 months, about two years before the company that I ended up selling to gave me a call.

John Warrillow:

Fantastic. I guess some people listening to this would push back and I’d be curious to know what you would say, which is by being so demanding, if you will, “If you want to buy me, you got to keep my brand. You got to let me work or not, depending on whether I want to work,” double digit, multiple. A lot of people probably would hear those up front in a first conversation and get turned off, and say, “Well, this guy’s totally unreasonable.” Do you feel like you walked away from some good opportunities because you were so firm upfront?

Anthony Fracchia:

It’s possible. At the time, I know that there was an expiration date, John, on how long I really wanted to do this, but heck, I’m a little over two years from the sale. We’re talking about five to six years ago. It was really kind of like when you have a house that you love and you’re like, eh, I’m going to throw out the market. I don’t really have to sell it. I don’t really need to, but I’m going to throw it on the market and see what happens. That’s where I was at, at that point. It was like, listen, I know we’ve got a very efficient business.

Anthony Fracchia:

I’ve gone to the market. I’ve talked to colleagues. I know our margins are good. I know we’re efficient. We’ve got a lot of things going. It’s incredibly profitable. I own it 100%. I really wasn’t at the point where I was like, I really got to start talking about how I want to get out of this. I think if I was further down that path, John, or maybe a couple years past that, I would’ve been much more flexible on it, but at that time it was like, hey, you guys are calling me. I’m not reaching out to anybody. My phone’s ringing. I’m going to take the line I’m going to take. If it doesn’t work for you, okay, appreciate the call, but we’ll move forward.

John Warrillow:

Got it. Okay. I want to dig in a little bit further because one of these strikes me as somewhat curious. I get the EBITDA multiple, totally understand that. Keeping your staff safe, I mean, they’re the ones who brought you to the dance. Get that totally. Stay on work, feel really understood there. I mean, you were still a young guy when you were thinking about the sale, like in your 40s presumably, early 40s. I get the desire to want to work. The brand one though trips me up a little bit. What was it about having your brand perpetuate itself beyond your tenure as its owner? What was it about that that was important to you?

Anthony Fracchia:

Well, I mean, besides being an only child and being stubborn? I think it was just… I’ll tell you what, I’ll let you know this, that if there was one of the four I would probably be more flexible with, that was it because it really depended on who we were talking to. If it was a brokerage to brokerage buy, that’s really not going to fly. If someone were to say, “Hey, listen, we want to keep you on. Your staff is safe. Your range of your multiplier on EBITDA is fair, but at some point we’re going to need to roll you into our brokerage.”

Anthony Fracchia:

That conversation never really happened. That was never the stumbling block. The stumbling block that we came up with multiple times was really the staff. I would give on that a little bit, John, to be honest, had that been the only concern from the acquirer. I was proud of what we did. I was proud of the work we did. I was really proud of the business that we built and we started to get some really good recognition, and I just didn’t… that was just one thing. If we’re going to talk about my wish list, I’m going to throw my wishes on it. That was one of them.

John Warrillow:

Yeah. It’s interesting that your business was not your surname. I’ll tell you, years ago, this goes back 20 years, I had a research company that bore my surname and I sold it to a public traded company. I remember when they wanted to have the conversation about getting rid of the name and I’m like, “Get that thing off of your letterhead. I want it gone. I don’t want my family name in anywhere in your company, when I don’t control it. That’s my name set. That goes well beyond my company. That’s now my reputation in the marketplace. Get rid of it. If you don’t own it, I don’t want to be part of it.” They thought I was going to react totally differently. They thought I was going to very, very concerned about maintaining and perpetuating the brand. In fact, I was like, get rid of it. But again, that was probably more because my name was-

Anthony Fracchia:

I get it.

John Warrillow:

… my name was in it.

Anthony Fracchia:

Oh, yeah. I feel the same way. I think if it would’ve been like Anthony Fracchia and Associates, I probably would’ve said, “Yeah, that makes way more sense.”

John Warrillow:

Get rid of the name. Yeah.

Anthony Fracchia:

Yeah, get rid of the name. But it’s just… Like I said, back then, I was being courted and so I figured I had a bit of leverage to do that, but that was never the component of those non-negotiables that was under question, that made those first three conversations not come to fruition. It really evolved around the staff and them trying to basically say in a kind way, “We can’t guarantee they’re all going to stay on.”

John Warrillow:

Yeah. I think I get the non-negotiables now. Thank you for going there with the brand. Let’s go deeper now to the next stage, because you started to have these conversations. At what point… I mean, were you continuing to act as your own broker? Did you hire an M&A professional to shop your company? How did that go?

Anthony Fracchia:

It’s funny you say that. I actually started. A colleague of mine met a great group, Marsh McLennan. They’re a nationwide outfit and they do a lot of consulting in this space because they just have incredible relationships nationwide. Not only can they tune you up for a sale, they potential suitors that are looking to acquire agencies. I had a colleague go down that path. We had a conversation. He was like, “You’re going to really like this guy.” I started talking with this gentleman and we started getting into it. We were just about to get a contract together for me to bring him on, and that’s when I got the call from my parent company that would obviously ultimately end up acquiring us, where we had a few conversations.

Anthony Fracchia:

I gave them my non-negotiables. They were like, “Dude, we’re good with all that stuff.” I was like, oh, wow. I was very cautious with that, because I didn’t know if they were just saying that to get me to sign the LOI, and then maybe gently walk back some of those, but they never did. When the gentle… go ahead. Sorry.

John Warrillow:

This company is Reliance, right?

Anthony Fracchia:

Reliance Global, yeah. When the gentleman I was talking with reached back out, I was like, “Hey, you know I…” We didn’t get too much into it in just a couple preliminary conversations. I think we had lunch once. I said, “Hey, listen. I’ve got a really good fit here that I’m going to cautiously go down this path with. If it works, great. If it doesn’t, you and I are good to move forward.” These guys, Reliance was everything they said they were going to be. I’ll tell you, two years out, nothing has changed with them from an integrity standpoint. I admire their discipline. I admire their work ethic. These guys work hard. They’re honest, they’re good human beings. I couldn’t be happier.

John Warrillow:

Okay. Let’s get into this deal. They approached you. You said, “These are my non-negotiables.” How did you approach EBITDA multiple in that initial conversation? Were you the first to throw out the seven to 10 range? Did they come up with a number first? How did you handle that?

Anthony Fracchia:

I gave them the range. I said, “This is where I’d like to be.” I think because of some of the unique opportunities that we were able to secure here, that nobody else really has, I think we had good standing to go out and make that request.

John Warrillow:

Got it.

Anthony Fracchia:

That’s why, John, I always wanted to keep it as a range versus a, “It’s got to be at least this.” I like giving a range because I thought it was fair. I had done my homework on them. I know that they had purchased agencies within that range prior to me. I knew it wasn’t out of bounds for them.

John Warrillow:

Got it. You gave them the four non-negotiables, including the EBITDA range, and their reaction is, “Yeah, that’s probably going to work with us.” What was the next step in the process?

Anthony Fracchia:

The next step was really coming to terms on obviously the LOI. We start talking about the LOI, the terms, what the earn out’s going to be, what percentage of that buyouts going to be in cash? What percentage is going to be debt on their end? What percentage is going to be stock? They were publicly traded on the OTC market at that time. That’s really was the next step, was starting to discuss the structure of the LOI.

John Warrillow:

Got it. Let’s just define some of these acronyms. LOI stands for letter of intent, non-binding usually, but it’s effectively an agreement of principle with an acquirer. Then OTC, over the counter. Am I getting that correct, that you have OTC?

Anthony Fracchia:

Yep, absolutely.

John Warrillow:

Got it. Cash debt and stock. I get cash. I get stock. I don’t get debt. Explain that to me. I get cash. What do you mean by debt? I’m not following that.

Anthony Fracchia:

This group had secured a line of credit from a capital group that specifically participated in the insurance brokerage acquisition market. They’re called Oak Street Funding. All they do is provide capital for insurance agency and brokerage acquisitions. My parent company had approached them basically saying, “Hey, we’re looking to do a series of acquisitions in this sector.” They wanted to basically see what they could get in terms of a line of credit, so they weren’t over leveraging themselves or depleting their cash reserves.

Anthony Fracchia:

When we say cash, that was the cash that my parent company brought to the table out of their pockets. Part of that was also debt, and when I say debt, that was the line of credit that they had to pull from, to make that. For me, it was all cash. For them, a portion of it was their money, a portion of it was from the line of credit.

John Warrillow:

Why is that important to you? In most acquisitions, whether the acquire funds it through cash on the balance sheet, debt they get from a bank, whatever, usually, it’s not part of the conversation. Was there something unique about this deal that made it part of the conversation?

Anthony Fracchia:

No, it was really on their end, John. It wasn’t a request of mine. It didn’t matter to me, like you said. The money’s going into my account. It’s mine at that point. I had no debt in it. I think that was just the way that they chose to structure it on their end, using different methods to get to that number. Really, with them, the higher the multiplier on EBITDA, the more they wanted to leverage stock. Obviously it’s a low cost way for a publicly traded company to acquire somebody. It doesn’t cost them as much as cash out of their pocket. I think it was really, they were just looking to spread out the tools that they had at their disposal to make the deal work for that as well. Yeah.

John Warrillow:

Got it. What did you agree? You’d said the range you were hoping to get was seven to 10. Where did you guys end up landing?

Anthony Fracchia:

We ended up at eight, and that was structured as 80% up. 80% upfront and 20% on a three year earn out. Of that 80% upfront, 90% of it was cash, 10% was stock, and it was immediately unrestricted, so that stock was ready to go. Then the earn out of 20% was all company stock. The way they structured that as part of the earn out was every year on the anniversary of the sale… so the sale was September 1st, 2019. Every September 1st, a third of those shares would become unrestricted for me to sell or hold, or do whatever I want with.

John Warrillow:

Got it. I am completely ignorant about Reliance Global stock. How has the stock performed over the years?

Anthony Fracchia:

Over the counter, it was effectively a penny stock. It was trading between, I think at 1.0… it was about 15 to 30 cents a share. It would oscillate. I think over the counter shares are much more susceptible to short selling and chatter.

John Warrillow:

True.

Anthony Fracchia:

There was some heavy movement there. Once they moved to the NASDAQ, which was this past February, they came in low around the $5 range. They dipped a little bit because I think coming from the over the counter market to the NASDAQ, I think on the NASDAQ, and you’ll probably agree with me here, there’s a different type… you’ve got institutional investors. You’ve got large global brokerages that are investing money for clients on the NASDAQ, not so much on the OTC market. I think trying to get a technology they were working on off the ground, I think it’s stumbled a little bit, but now it’s up. It’s up close to…. I didn’t check it today, but know yesterday it was close to $8 a share.

John Warrillow:

Great. You’ve had a nice lift in the value of that. Did you end up selling your stock or did you hold it, or a combination?

Anthony Fracchia:

Well, it’s an interesting story. When you transition from one platform to the other, from the over the counter market to the NASDAQ, all the stock is frozen. When that first year anniversary came up, we couldn’t do anything. They couldn’t unrestrict, they couldn’t do anything. The challenge that they had was when the SCC is evaluating your business for this transition, they were continuing to do acquisitions. Every time they did a new acquisition, it bumped them a few months back in terms of diligence with the SCC. They ultimately had to make a decision to freeze on that until the transition was done, because it was overshooting their target date to get to the NASDAQ.

Anthony Fracchia:

In that first year, we couldn’t do anything. The second year, however, obviously the transition was completed in February. They took the first two years of shares and unrestricted those. For the moment, right now I’m holding them. I’m going to see where it’s going to go, but I’ll sell a little bit. My goal was probably liquidate at least a third, maybe two thirds of the shares, hold a third longer term, just because I’m heavily involved in real estate as well. I’ve got a group that I work with on that, that we can do pretty good with that money in the real estate market versus keeping it in the stock market.

John Warrillow:

With real estate, are you an active investor? Are you a limited partner in a roll up essentially?

Anthony Fracchia:

A little bit of both. Post sale, I got involved in some asset acquisitions where I’m investing in different real estate opportunities as a means of recurring revenue in the future. These are properties that I can utilize when I choose to and when I’m not, I can monetize them. That’s the format I like.

John Warrillow:

Cool.

Anthony Fracchia:

Some people call them lifestyle assets with respect to real estate. For me, I’ve chosen some locations I really enjoy visiting. Many of them have a team in place already that if I’m not there, they are marketing, renting and doing all the work, taking a small split and sending me money each month.

John Warrillow:

I love that. I’ve heard of places in Utah where you basically… you buy a ski house.

Anthony Fracchia:

That’s actually where one of them is.

John Warrillow:

Oh really?

Anthony Fracchia:

That’s where one of them is.

John Warrillow:

Use it the way you want, but when you’re not they put it in the rental pool and off you go.

Anthony Fracchia:

Yep. Yeah. No, I’m a big fan of that. I’ve done a number of those. I really enjoy it. I’m getting better at it in terms of evaluating the opportunity and getting more into detail with the agreements, and especially the condo regs and the sale agreements. I’m getting better at identifying which ones are good opportunities. I enjoy that.

John Warrillow:

Are you thinking… and I ask this because I think, obviously you’re still a very young man in the grand scheme of things, and you’ve obviously become liquid, which is fantastic at a young age. I think a lot of people who get to that point, they stumble a little bit because it’s not your retirement age and you could just basically give your money to someone to buy some stocks for you and live off the dividends. Most people are still wanting to do something at your age. I’m curious to know, as you think about the real estate investing, in particular, these lifestyle opportunities, would you place the emphasis on lifestyle first and secondary on investment return? Or are you really thinking of them as business opportunities that have a little bit of a kicker? Do you know what I’m asking?

Anthony Fracchia:

Yeah, absolutely. To answer your question, I think with what I’ve done so far in that space, it’s real estate opportunities with a kicker. I wouldn’t turn down something in Detroit, for example, that is not a… not a lot of people looking to take vacations to Detroit. I happen to love it, but I’m obviously biased, but if there was a great opportunity here with the right team, then I would look at that as purely an investment. I don’t know if it’d be something I’d look to hold, but versus invest in a project, take my money out when it’s done. It’s a little bit of both, but so far, it’s mainly been the investment model with a bit of a kicker. It’s a place I like to go to that I have access to. When I don’t, it’s a revenue source.

John Warrillow:

I’m asking for very selfish reasons. Is there some sort of… I’m like, how do I get in on this? Is there some sort of marketplace where you can learn about deal flow in this area? Or is it all private? How did you come to learn about these deals?

Anthony Fracchia:

When I look in spaces, I’ll… Let’s use Utah as an example. My girlfriend and I, she lives in Oregon, I live in Michigan, and we decided that that’s a good middle way for us. We both love the outdoors. I’m a big skier. We’ve spent some time out there. We found a great realtor in that area who knew it well, and really just looking around… I mean, with the internet, you have such good access to real estate professionals and you can evaluate them and vet them before you reach out and just say, “Hey, here’s my intention. I’m looking for opportunities where there’s a team in place.” I’m not averse to managing these myself either. In fact, John, I have the option, with all these properties, to get out of that agreement after a couple years and-

John Warrillow:

Cool.

Anthony Fracchia:

… do it myself, if I feel I can be more efficient at it. I like the idea of giving them a crack at it first, evaluating how they perform and then maybe saying, hey, I’m going to give it a couple years on my own. I can always go back to that model with them. It’s just identifying those opportunities. I think it’s becoming more popular. I think… And for some of these larger developers… for example, the one in Utah, it’s a condo in effectively a luxury resort in Park City. These developers like it because they’re doing this project, they are getting a lot of capital up front. Then what they’re doing is then on top of that, they’re taking a portion of…

Anthony Fracchia:

They’re still getting rental revenue when they’re renting these things out. It’s good for them and it’s good for the purchasers. You just got to look around, talk to people that are at experts in that area, who know developers, who know that are getting into these spaces, and start doing a little bit of digging.

John Warrillow:

Super helpful. I want to go back and ask one final question about your deal and then we’ll wrap up. You mentioned your employees, and a couple things strike me as interesting. One, you were running a really lean team. A colleague had suggested that you probably should have three or four more full-time equivalent. Part of me is saying these dozen or so employees that you had, they’re working 25% harder. One way to interpret it is I’m sure they’re more efficient as well, but one way to think about it is that they were probably working really, really hard. I wonder how you handled telling them that you had decided to sell the company.

Anthony Fracchia:

Yep. Yeah, it was something that I struggled with. I didn’t really know how to approach it. When I realized post sale, I was going to stay on… and we’ve grown the business substantially. This year to date, in I think September of this year… 70% ahead of where we were last year, and we were able to take on a few more staff members post sale. I think it became more comfortable for me to have that conversation with them when I realized that I wasn’t going anywhere. To be quite frank, had I not told them that I sold it, they would have no idea. Nothing has changed. This relationship I have with Reliance, they’re looking at what we’re doing and they’re like, “You guys are doing great.

Anthony Fracchia:

What do you need from us to help? Where can we compliment the work that you’ve already done? By the way, keep doing what you’re doing. Don’t change anything. Just tell us where we can help and maybe accentuate what you’re doing.” When I realized that that’s how this relationship was going to work out, it was really just, “Hey guys, I got an offer. I couldn’t take it, but understand, I’m not going anywhere. Understand, you are all safe. That was a component of my deal was making sure you guys were protected. I am going to focus on some other components of the business.

Anthony Fracchia:

I’m not going to focus on every aspect of the business every day, but I’m here. I’m not going anywhere.” I’m in the trenches with them. I mean, no joke, John. During open enrollment, we run a call center and we field incoming calls from one of the major carriers here. I’m on the phones with my team. I’ve been on the phones with them for 60 days straight selling with them. I love it. My involvement hasn’t changed dramatically. I think it will evolve over time, but I think the fact that they see me here with them, I’m still pushing them, they’re still pushing me, I think it was an easy conversation to have. I think they were happy for me.

John Warrillow:

I’m glad to hear that. I guess some people may also hear this and wonder, okay, but why did you sell? If you were going to stay on, work the phones during open season, whatever. If you’re prepared to do that, why not… I mean, and you’re only in your 40s, why not keep it for another 20 or 30 years?

Anthony Fracchia:

Yep. Because I know at some point my involvement’s going to fall back a little bit. I don’t know when that is, but there’s other things I want to do with my time going forward in my life. I have a very strong passion for my charitable efforts. I started a charity three years ago called Aspire, which is effectively a mentoring charity for young adults, primarily high school students. I want to start to transition and do that work more. I don’t want to really… I didn’t want to have to worry about finances when I chose to dedicate more of my time to that.

Anthony Fracchia:

That was one of the main things. I mean, quite little sidebar, when I had the conversation with… because I work with high schools. When I had a conversation with a school administrator about what I wanted to do and just, we both lit up because this administrator was super pumped about the idea. I knew at that point, that that’s what I was going to spend the rest in my life doing. I wanted to put myself in a position to choose how and when I do that without worrying about the financial component or what I might be losing financially to do that work.

John Warrillow:

What was your dad’s reaction when you told him you’d sold?

Anthony Fracchia:

It was funny because my stepmother, who works for me as well, she just retired, she was the one… I was out in California hiking when I got this call and it was one of my sub agents, one of my independent agents who had sold to the same company reached out. When she told me, “Hey, this person wants to talk with you,” I’m like, “Well, listen, can you have a conversation and see if it’s really worth… Do I have to talk to this person? Is it an issue that he’s having?” Because her role was to manage the agent channel. She talks to him, she sends me a text. She’s like, “You need to call him,” and that’s when I found out.

Anthony Fracchia:

She knew a little bit ahead of time, and when it got to the point where we were in it, she and I were talking and I was like, “Yeah, I’ve got to tell my dad that this is what’s happening.” He was very proud. I mean, he was very happy. My dad has worked his whole life. He’s worked his tail off. He’s still working. He’s 78 years old. He’s still very active. I think when he saw what we had done after I bought him out, I think it came full circle to him. I think he understood better why I wanted to buy him out, why I was so anxious to get off and running, and to be able to bring that to fruition and tell him that, it was a proud day for me and I think it was a proud day for him.

John Warrillow:

Let’s leave it there. Fantastic. I’m glad it all worked out and you have one of the happy stories in the land of family businesses, because as you know-

Anthony Fracchia:

Indeed.

John Warrillow:

… there’s less happy ones. Good to hear you guys have a great relationship. Where can people learn about Aspire? Tell us how to get in touch with you, if there’re folks out there that wanted to reach you or learn more about Aspire.

Anthony Fracchia:

Absolutely. Aspire, we have a website. It’s Aspire, A-S-P-I-R-E detroit.org. We actually developed a curriculum from the ground up. It was in response to what we were seeing in the youth demographic, that there was just a deficiency of what we consider to be basic, but critical soft skills. The charity, we teach a curriculum in high schools. Now, obviously that’s a challenge right now because of COVID.

John Warrillow:

Sure.

Anthony Fracchia:

Sometimes we’re doing it remotely. Sometimes we’re doing it in person, but I actually go in and teach a course that revolves around three main components, personal responsibility, financial responsibility, professional responsibility. Personal responsibility deals with etiquette. It deals with managing your reputation in person, online. It deals with identifying and embracing a core value system. The financial is just basic financial literacy. That’s not really taught in these schools.

John Warrillow:

Sure.

Anthony Fracchia:

We hope that parents teach them. Sometimes children grow up in single parent households. They don’t have the time or the experience to do that. We teach some very basic financial literacy to these young adults. Then the professional is all revolving around how to separate yourself from your peers when it comes to getting a job. We teach resume writing. We teach them how to research the person that’s interviewing them, the company that’s interviewing them, how to set up a LinkedIn profile. We talk about sending handwritten thank you notes. Just doing all these things that no one’s expecting from a high school person.

Anthony Fracchia:

Quite, frankly, not a lot of people are expecting it from grown adults today. We’re trying to get at these kids when they’re younger, so they can start to develop these healthy habits going forward and really put themselves in a position where they are more marketable and have more control over what they do with their lives, and have more options-

John Warrillow:

That’s fantastic.

Anthony Fracchia:

… when it comes for them to enter that working world.

John Warrillow:

That’s such a needed organization and someone should reach out to you and take it nationally or international, because it’s such an incredible idea.

Anthony Fracchia:

We’re working on that.

John Warrillow:

Yeah. Aspiredetroit.org.

Anthony Fracchia:

Yeah. Started in Detroit and we’re looking to grow it over time into different major cities.

John Warrillow:

It’s Anthony Fracchia, F-R-A-C-C-H-I-A on LinkedIn, if I’m right in that?

Anthony Fracchia:

Yes, sir. Yeah.

John Warrillow:

Anthony, thank you for doing this. It’s been great and I’ve really enjoyed it.

Anthony Fracchia:

John, I have as well, and I appreciate you having me on man. It’s been a blessing.

John Warrillow:

Hey, if you liked today’s episode, you’re going to love my new book, The Art of Selling Your Business. The book was inspired by the cohort of my guests over the years who have been able to negotiate an exit far better than the benchmark in their industry, sometimes two or three times more than I would’ve expected. I was curious to understand the tactics and strategies of these entrepreneurs and what they do differently from average performers. The result is a playbook for punching above your weight when it comes to selling your business.

John Warrillow:

To learn more, go to BuiltToSell.com/Selling, where we put together a collection of gifts for listeners who order the book. Just go to BuiltToSell.com/Selling. Built To Sell Radio is produced by Haley Parkhill. Our audio and video engineer is Denis Labattaglia. If you like what you’ve just heard, subscribe to get a new episode delivered to your inbox each week. Just go to BuiltToSell.com.

Outro:

Thanks for listening to Built to Sell Radio with John Warrillow. For complete show notes, with links to additional resources, visit BuiltToSell.com/Blog. John is the founder of The Value Builder System™. To find out how to improve the value of your business by 71%, visit ValueBuilderSystem.com. John is also the author of Built To Sell: Creating a Business That Can Thrive Without You, and The Automatic Customer: Creating a Subscription Business in Any Industry. Connect with John at Facebook.com/BuiltToSell, or on Twitter @JohnWarrillow, W-A-R-R-I-L-L-O-W. Thanks for listening.