Transcript – How One Bad Boy [Clause] Landed an 8-Figure Deal
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John Warrillow: So, really excited to have this next episode with Erik Van Horn, who started a Sola Salon franchise in an area. He built it up to 12 franchises and sold it and it is a really, really fascinating story. Listen out for what he calls the bad boy clause, and how to structure an agreement with partners. He talks about the danger of using a multiple as a way to value your business and sort of clinging to a multiple as a valuation metric. He’s a bigger believer in something he talks about being a dream number and identifying what your dream number is to sell your company. One of the gotchas in the sale of his business was assigning leases and getting landlord assent, so he does a great job describing the gotcha there and some of the things to look out for. He talks about TI dollars, and I’ll let him describe what that is. And also, if you’re getting money to build out your business, if you’re borrowing money, watching out for pre-payment penalties.
John Warrillow: So, lots of great stuff in this episode with Erik Van Horn.
John Warrillow: Erik Van Horn, welcome to Built to Sell Radio.
Erik Van Horn: Thanks, John. Great to be here.
John Warrillow: So, you’re in the hair salon business. How does one get into the hair salon business?
Erik Van Horn: That’s what I tell my three little girls, that I’m in the salon business, and they think it’s the coolest thing. But anybody who knows me knows I don’t know anything about the salon business.
John Warrillow: Awesome. How did you get into it?
Erik Van Horn: I’ve been in franchising since my mid-20s. I’d bought and sold different franchises, and then I started to help people buy franchises. The reason I started to help people buy franchises is because I was always looking for my next deal. I found myself in a meeting in Scottsdale, Arizona in early 2014 with the founders of Sola Salon Studios. They had come from a different business and had success in that, and they founded Sola Salons. I was fascinated by their story. I found them at the bar, which is a good place to find these two guys, and I drilled them for about two hours, question after question about their business and kept buying them drinks. And they just kept telling me more.
Erik Van Horn: These guys were not salon guys at all, but they had stumbled into this business of salon suites, which is more of a real estate business than it is in the salon business, meaning that what we would do is we would take about 7000 square feet of retail space and we would put about 40 individual suites in there. We would lease those out to salon professionals like hair stylists and estheticians and massage therapists. We would lease it to them on one to two year contracts, and they would pay us on a weekly basis. It was more of the real estate business than a salon business, but my daughters still think I know the salon business.
John Warrillow: There you go. So, you’ve been in and around franchises. Did you buy the physical territory from the Sola Salon guys?
Erik Van Horn: Yes. They had basically just sold to friends and family, and whenever you’re buying a franchise and they’re early on, they are more generous in what they give you. I and my business partners, my soon-to-be business partners, we purchased the rights to develop all of Orange County, California. We purchased the rights to develop 12 stores there, and they couldn’t come in and develop any more until we reached our development plan. Yeah, we locked down that whole market.
John Warrillow: And so, in your purchase agreement, did you contemplate what the exit options would be for you down the road?
Erik Van Horn: Yes and no. We knew that there’s leverage when you own an entire market. We did go into it wanting to … Whenever you buy a market like that, it’s offensive and defensive. We wanted to grow to 12 locations if the plan was going to be successful, and if it is what we wanted it to be. But we also knew if we were only going to get to five or six or seven locations, we wanted to block out as many people from coming to develop as possible. It was an offensive and defensive move at the same time, and later on we ended up buying three more territories just for that reason, to block other people from coming in and maintaining exclusivity within the market.
John Warrillow: I know that in some franchise agreements, there is a stipulation that says, “Look, you can’t sell this without us approving who you’re going to sell it to.” Did that exist in the early franchise agreement?
Erik Van Horn: Yes, it did. I think that’s probably in pretty much ever franchise agreement, like you said. There’s kind of that, “We can buy it out before anybody else” clause is in there. I’ve never run into that issue in a franchise that I’ve been in, and this was no exception. We eventually sold it to the parent company, and it was actually a private equity group that bought it, but that was the intention all along. When we made that decision to sell it, that was the intention.
John Warrillow: Excellent. Now, who’s the we here? You mentioned you and your partners. Maybe just give me a sense of who are the equity holders in your Orange County business?
Erik Van Horn: There is four of us total, and we each own 25% of the business. When we got into it, we’d known each other from other franchises that we’d been a part of and knew each other’s strengths and weaknesses and just who we were. I needed partners at the time to come into something like this, because these things were about a million dollars each to build out, and I didn’t have 12 million dollars in the bank to do that myself. So I brought three other partners into the partnership group and that’s what we started with. It was Dan, Ryan, and John.
John Warrillow: And the money that you needed, it was to build out these locations. My understanding is they cost about a million dollars in leasehold improvements to get them into the structure that you want?
Erik Van Horn: Yeah, that’s it. At the time, SBA was loaning on the build out, so we went to SBA for our first two-
John Warrillow: SBA being Small Business Administration, yep.
Erik Van Horn: Exactly. And they were basically the backers of the loan. We went through the normal bank, they were backed by SBA, and we thought we were great, that’s how we’re going to do all of these things. Because we got two loans approved at the same time, which isn’t always easy. We had that, and we figured, “Well, when it’s time for three, four, five, and six, we’ll just do the same thing.” And then what happened is, other salon suites started to come into the market and SBA thought, “Well, these things are not really that active, the owners are not active in the business,” which is true. I mean, we were not that active in the business, and SBA likes to loan to more active owner participants. That was not the salon suite business, so SBA completely shut down lending in anything that was a salon suite.
John Warrillow: So the four of you guys, you and your three partners, you’re kind of the entrepreneurs, the money guys, but you’re not in there swiping people’s debit cards, making appointments for their next hair visit. That’s not, you’re not operating the business, you’re really–
Erik Van Horn: Yeah, the four of us really came from a place of, we want to work on the business, not in the business, very much that emit mindset.
John Warrillow: Sure.
Erik Van Horn: And all the businesses that we’ve owned in the past were what we call semi-absentee, so we were not very active. We wanted a business that we could put managers in place and it wasn’t employee heavy, and that’s what made this one so attractive.
John Warrillow: So the people part of the equation here is, you have to recruit a full-time manager of each location, I’m assuming. Is that right?
Erik Van Horn: I’ll dive into that. That’s what you would think, and some models are like that, but this one, the structure … And this was at our peak, when we had 12 of them open. We had one director of operations, and then underneath them we had three managers that would oversee four locations each. And then they had a full-time maintenance person and a full-time bookkeeper. So that, there was about six employees at our peak.
John Warrillow: Got it. And who’s job is it to recruit the individual stylists and convince them to set up their little store within a store, if you will, in a Sola Salon as opposed to one down the street?
Erik Van Horn: The owners had a lot of say in the marketing and how we did it. It changed throughout the life of the business. Early on it was, we’d throw up a Craigslist ad for next to nothing, and they would answer that, we would show them, and they hadn’t seen anything like it before and they were sold. So it was really easy at that point, in the early days. And then more competition started coming in and it wasn’t as easy, and Craigslist just changed in the way that it was being used. It got to be a little bit more difficult, we started to do more online advertising and just a lot of referral.
Erik Van Horn: We wanted to make the environment inside the salon just like, the best thing that they’ve ever seen. Their business starts to increase and they start making more money, having more freedom, and then they start referring more people. So a lot of it was referral. At the end of the day, we got a lot of referrals.
John Warrillow: Is there any consistency … Franchises, generally there’s, you go into a, pick a franchise, McDonald’s, the cup size is always the same regardless of whether you’re in Arizona or you’re in Toronto, it’s always the same. What elements of the Sola franchise were identical versus what was at the discretion of the individual stylist?
Erik Van Horn: The stylists had a lot of individual discretion on what they could do, because they’re very creative people. Once they’re inside their suite, they could pretty much do anything that they wanted. From our standpoint at Sola, there was a couple different color schemes that we could choose from, a couple different packages that we could choose from, so it did have a consistent look and feel throughout the country. We wanted that specifically in Orange County, so they go to one, they’re going to get the same feeling and look at another one. The stylists had a ton of discretion. We as franchisees did not have nearly as much.
John Warrillow: How did you make money? I’m assuming you’re making money off of the fees that the individual stylists pay to rent their small cubicle within the overall building. Is that, or are you also taking a percentage of whatever they sell?
Erik Van Horn: No, we kept it really simple, and they did not want to be micromanaged. That’s why they would move from their traditional salon to Sola, because they wanted to get out of the drama, they did not want to be micromanaged, and they wanted to keep more of the money that they’re actually making. So it was a transition between, either they have a choice to stay at their salon, which most of them hated, or go and start their own salon, which most of them didn’t have the stomach to do. So this was a nice middle ground for them, to be owners of their own business.
Erik Van Horn: For that, we wanted to keep it real simple for them. We would give them the keys, we would paint it for them, the color that they wanted, and in return, they would pay us every month. So we’re paying the landlord one dollar, and the stylists are paying us two dollars, and the gap is where we’re making our profit.
John Warrillow: How was your accounts receivable? Because stylists, love them or hate them, they’re not known to be the best business people. So I’m assuming you had serious AR issues where you had stylists not paying their bills. Was that an issue for you guys?
Erik Van Horn: Well, we love them. We don’t hate them. They were great, and I think it’s the type of stylists that you bring in, because you’re right, they’re not known for what you just mentioned. We were picky on who we brought in. We didn’t let just anybody come in. We wanted to make sure they had a booked up business, and they were actually doing better. I think that’s one of the reasons stylists are used to paying every week. Believe it or not, we did not have many challenges with that. I think at our peak, maybe a handful a week, which, if you let it get out of control then it becomes a challenge, but if you don’t let it get out of control, you go and work with them and you set things up right away, then it doesn’t become an issue. It was never really a big issue for us.
John Warrillow: How did you and the three other partners navigate your partnership agreement? How was that structured, and how did it sort of play out for you guys?
Erik Van Horn: I’ll give you the end of the story. We’re all still friends, so that’s a good thing. We all call each other up, and some of us have been and are partners in other businesses currently. Early on, for the outcome to happen the way that it did, all being friends, we knew we had to have lots of uncomfortable conversations early on on what it would look like. We hired a really good attorney who had done a lot of partnership agreements, and some of them within Sola Salon Studio, other partnerships that they had. We started to engage with him, and over a lot of discussion and a lot of money and a lot of rabbit trails, we have a really robust operating agreement that has pretty much everything written into it. We had to go back to it at different times through the partnership, because we would look at it and be like, “Okay, this is what the agreement says, and this is why we did it, and this is what we’re going to follow.” Whether one of us likes it or doesn’t like it at the time, that’s what we set up early.
John Warrillow: Can you give me an example of an issue that came up that you had to refer back to the agreement?
Erik Van Horn: Even during the sale of the business, we had to … Because at different times, different partners were ready to sell, and others were like, “I’m not so sure, because we think it’s a great business,” and we all kind of flip-flopped around at different times. That was one of the things that I look back and I’m like, “I’m glad we had this in there,” because it basically, as long as three of the partners agreed on a sales price, one partner couldn’t hold up the entire sale for whatever reason. That was one of the things that I look back and I was glad that we had in there. It proved to be helpful towards the end. Everybody was on the same page, but as you can imagine, selling a business with four different people at different stages in their lives and different reasons for wanting to sell and wanting to keep it and different goals, that could present a challenge. We were able to work through that with the help of the operating agreement.
John Warrillow: So, the operating agreement stipulated that three of the four of you had to agree to sell the business and the other four would have to basically go along with it.
Erik Van Horn: Yes, the other one that didn’t agree with it, they would have to just go on with it. And I’m glad it was written that way, whatever side I was on, because I wouldn’t want to be the guy that was holding something up for three other people, and I wouldn’t want to have to have that on me. The agreement spelled it out for us.
John Warrillow: So many guys and gals get into business with sort of the best intentions, three musketeers, all for one, one for all, but then find out that they forgot to paper some of the more detailed things. So what advice would you give a new partnership group going into business for the first time? I’m looking for something here, Erik, if you could think of something very specific that, of course we’re going to contemplate the major things, like what if one of us dies or one of us gets … But what are some of the kind of niggly little details that often get overlooked in a partnership agreement, that you guys did a good job papering, beyond just what happens in the sale?
Erik Van Horn: The one that comes to mind is the bad boy clause. Have you heard of that one?
John Warrillow: No.
Erik Van Horn: So, basically, if something happens to one of the partners, there’s a felony and it impacts the business, or they do something where they’re not able to participate in the business like they could have previous to that … Really what it comes, they get thrown in jail or into prison, and you can never reach them again, it triggers the bad boy clause which triggers a sales price that is not the highest valuation. We talked about that at different times, and what would trigger different valuations of the business if someone needed to get out for whatever reason or someone wanted to get out, or if someone did something stupid and we needed to get them out. The valuation triggers that we used for those different purposes were different. If someone just wants to get out of the business just because they’re tired of it, they’re not getting full valuation for it. It comes at a cost, and that might be a price reduction … Well, absolutely a price reduction, but also terms of the sale. You’re not going to get a bunch of cash right away.
Erik Van Horn: So those were some of the things that I had never heard about, never thought about before, but especially if you’re in a franchise or you’re doing something that … In a franchise, if you do something wrong, there’s a felony or it impacts the franchisor, they can terminate your agreement. If that happens to one of my partners and the franchise agreement gets terminated, well, there goes my cash flow, there goes my asset. The rest of the partners can’t have that because of someone’s actions. So we started to talk about that, and that was something that was unique, I had never heard about before. But also, if it ever did happen, I’d be happy that we have it in there.
John Warrillow: I love California, I’ll just put my cards on the table right out of the gate. But I have this image of four swashbuckling entrepreneurs driving around in convertibles, not wanting to do any of the work. Am I getting the image at all right? Were you guys sort of … When you used the word semi-autonomous business, I had this visualization of guys that don’t want to get into the details, they don’t want to do the work, they just kind of want to be entrepreneurs. Was there any of that sort of vibe among the four partners, where you had to kind of say, “No, actually, you gotta actually do some work.”
Erik Van Horn: No, [crosstalk 00:19:57].
John Warrillow: Do you know what I’m, sort of the stereotype I have in my mind?
Erik Van Horn: I think you’re absolutely right, that’s how we all were. That’s how we all are. And we knew it about each other. The nice thing about all of us is, if the work needs to get done, we’re able to get it done. But the goal is not to work in the business. To that point, early on, we were having to do work, and we’re like, “Holy cow, this is a lot more work than we signed up for,” because we’re not signing up for a bunch of work. What we did is we had some employees that we had hired early on and they kind of got the job done, but they just weren’t able to take a lot off of our plates as owners. And then we realized they were one person making 50, 60 thousand dollars a year, was reporting to four different people. We’re like, “This isn’t working either.”
Erik Van Horn: So what we did is, we said, “We need to hire a district operation manager, hire someone that’s really high caliber that can be the voice of the four owners to everybody else in the business, including the corporate office,” and be our voice and be that person. So we took that really serious, and a couple of the partners took that on and spent quite a bit of time to find that one person, and we found them the first time, our first hire was the person that we were looking for. They really helped take the business from, I think it was three stores at the time, to 12 stores when we sold it. They drove the development, they were loved by the corporate office. We loved him. He knew he was herding cats, with the four of us doing all kinds of other things, really smart, knew a lot, knew how to grow, knew what to do, but owning 25% of the business, it just didn’t move the needle for any of us. So that was probably the best thing that we did was hire our main man, Mairco 00:21:55.
John Warrillow: How did you incentivize him to stay? Did he have shares or some sort of agreement that-
Erik Van Horn: We paid him a lot of money. And hindsight, we would have given him equity. Because eventually what happened is, he started his own Solas. We’d get the phone call … So, before that, we knew he was just super smart. We would be on calls with the four of us partners, and we’re like, “Mairco’s so smart. He’s not going to stay with us forever. Should we do something about it, or just wait another six months?” And we never did anything about it, and we got the phone call. He’s like, “Hey, everyone, I need to talk to you.” And he said, “I’ve loved working for you guys. I’ve learned a lot, I think this thing’s awesome. So awesome, I’m going to buy some myself and I’ve got some investors backing me up because they’ve seen what I’ve done for you in Orange County, herding a bunch of cats like you guys. So if I can do that, I can do it on my own, I just need the money,” and he went out and raised money and has some very successful salons himself.
Erik Van Horn: We had conversations with him throughout that whole thing. Our initial reaction, at least my initial reaction was, “This is horrible. We should have given him equity, all the, we should have done this,” but we were all mature enough and had mutual respect for each other, he stayed on as kind of an advisor, paid advisor, to the very end. And he was critical during the selling point of it as well. He has been fantastic through this whole process, but hindsight, if we would have given him equity in the business, and we talked about this with him, he’s like, “Yeah, guys, you should have given me equity and I would have taken it, and we would have built more faster and sold it for even more money.” And that’s what we should have done, 100%. It’s changed the way I structure my businesses today.
John Warrillow: In what way? What do you do now?
Erik Van Horn: I have three Pilates studios that I’m building out in Denver, Colorado, and I have a manager there who’s paid a good amount of money, but she’s also earning 5% equity. I have some weight loss clinics in other states, and we brought on a 20% equity partner that they are the face of the business, and they pay 10% and they earned, earning 10% equity into the business. I have another partnership in some yoga studios that, it’s a 50/50 partnership, and I’m there for advice and money, but he’s the face of the business. So definitely using equity, whether it’s partnership, whether it’s manager, but it’s to give ownership to the key people running the business.
John Warrillow: What’s the down side? I mean, I can see tons of up sides for sure. What’s the down side of giving an operator a little bit of equity? What do you need to watch out for?
Erik Van Horn: The down side for us at Sola, or what we saw as the down side is, we’re just giving up cash flow, and we’re giving up a sales price at the end. But we didn’t equate it to value and how much more value Mairco could have added to the asset versus, we would have given him 10% equity, we would have earned probably 20% of value in the company by doing that. So it was kind of short sighted for us. But that was it. We’re like, we thought we would lose capital injection into our pockets on a sale, and then just distributions. We didn’t want to give up distributions.
Erik Van Horn: I think the biggest thing now is, what happens if they just don’t turn out to be nearly as good as we think they are? How can I get out of that, out of a bad situation? I’m not the expert in that yet, but again, how I went about it with the partnership agreement and the operating agreement for the partners, having good attorneys, listening to a lot of people who are farther ahead than me in this whole thing, and taking advice from them, talking to the attorneys, and then talking to, having very open, honest conversations with the people that I’m doing business with whether it’s a true partner or it is that equity person. I love having very open, honest conversations with people and if they respond to that and they’re the same way, then it’s usually going to end pretty well.
John Warrillow: Awesome. So, let’s get into, speaking of endings, the actual sale itself. You guys are building up, you’ve got 12 stores in various stages of development. What triggered you guys to want to sell?
Erik Van Horn: We were at a crossroads. It was either … We had built out our development plan and we were nearing our 12 units that were going to be open, and we had purchased the rights to buy three more. We did that, because we wanted to protect the area, like we said earlier on in the podcast. We knew that corporate Sola had their eye on the Orange County market, because they sold it early on to us to develop, and there was a lot more room to develop than what we had developed. So we knew we were a target for growth for them. They wanted to get more people, more stores open up there. So it was either going to be us, we’re going to have to double down, or it was time to look at selling it. And that was-
John Warrillow: Was keeping it an option, Erik? Did your franchise agreement allow you to just basically ride it out and keep it as a cash cow?
Erik Van Horn: 100%. We could have ridden it out and developed three more for a total of 15. The challenge is, if other people started to come in, they would definitely feed off of what we had built, and if they start doing things to drive prices down, or just cannibalizing the stores, then our asset value would decrease. It might increase, but the chances, we were not in full control of that, so that was definitely a factor.
John Warrillow: Okay. When you say other people coming in, I’m assuming your franchise agreement with Sola forbid anyone to come into that Orange County region that you’d owned. They couldn’t have had somebody, a Sola franchisee.
Erik Van Horn: No, we could have built out our 15. Once we’re done with our 15, we could either continue to build out a lot more faster, maybe eight in two more years, and that would have been a lot to build out and taken on leases that were not as favorable and just starting to cannibalize some of our own stores, or they could sell it to other franchisees who were dying to get into the Orange County market and they would have built out, let’s just call it eight stores in two years. And that still would have had a negative impact, and we wouldn’t have had the control that we had had for so long.
John Warrillow: That’s helpful, for sure. Head office wants this kind of territory back, or whatever, so that was kind of one influence. Was there a straw that broke the camel’s back that actually accelerated your discussions to sell?
Erik Van Horn: No, we … There was rumors of private equity coming in and buying out some of the owners, or some of the owners’ shares so they could cash out a little bit at Sola corporate, Matt and Stratton, who are, they’re the founders of Sola, great guys and friends to this day. But we knew that they were probably going to take some of the chips off the table themselves, and we did not know what that private equity group was … It was an unknown. And whenever there’s an unknown, it causes me to kind of re-evaluate everything. Sometimes, those unknowns are the greatest things that happen, and sometimes they’re not so great.
Erik Van Horn: We started to do this dance with corporate, because we wanted them to know that we were still gung ho on developing, which we were. But we also wanted them to know that we were open to selling. We just started talking to them about valuation. “How do you value these businesses?” And they would give a generic answer, and we would come back with something else. But at some point, I don’t know how or when, I think it was at a dinner that we were all at in Austin, Texas with some of the higher-ups at Sola and a couple of the business partners, and we said, “Well, what would you guys want to buy it for?”
Erik Van Horn: And they were like, “Well, are you interested in selling?”
Erik Van Horn: “Well, we might be if the price is right, but we want to continue to develop more.” So there was a dance that went on for a while, and then we came to the conclusion that they were serious about buying and we were serious about selling. And it was interesting as well, because they weren’t desperate to buy and we were not desperate to sell. Even throughout the whole sales process, there were times when we said, “Do we even want to sell?” Even to the eleventh hour, there were times when we said, “Screw it, let’s just keep it. It’s a great business. We don’t need to sell it. Let’s not sell it.”
John Warrillow: So when you guys are back and forth on, “What do you think it’s worth? What do you think it’s worth?” Are you throwing out a number, like x million dollars, or are you throwing out, “Well, we think it’s worth five times earnings,” or one times, or whatever? Were you throwing out a valuation number or an actual sort of offer?
Erik Van Horn: We were throwing out valuation numbers. In our past businesses, we were used to a certain multiple of EBITA, and that’s how we were valuing it. We knew our numbers very well, and so we thought, well, with a passive business, you know, six employees in a business that was probably producing six million dollars in revenue and very strong net profit margins, very strong, what do we want to do with that? So we think it’s a higher multiple because these things are kicking off a bunch of cash. What else are we going to do? The partners, at this time, John, we’re spending about two hours a week max on the business, and that’s a two hour conference call with our team, that’s it. And so, very little owner involvement from us during the last few years.
John Warrillow: No wonder Mairco’s going, “Okay, guys, I want a piece of this action. I’m working 80 hours a week here for my salary, and you guys are jumping on a call once a week.”
Erik Van Horn: Yeah, Mairco … Well, maybe he’s not as smart as we thought. Maybe he was just like, pretty average.
John Warrillow: I’m sure he’s pretty smart.
Erik Van Horn: And he learned from us. We were thinking high multiples. We were like, “This thing’s worth 10x or 12x,” and so we were thinking about that, some of our just cash cows, because we don’t want to sell something that’s producing a bunch of cash flow for 3x or 4x. And they’re looking at some of our dogs, and they’re like, “We don’t want to pay hardly anything for this thing, because this thing’s not to profitability yet, or slowly … “
Erik Van Horn: We had two of them that were much slower growth.
John Warrillow: Two of the 12 units weren’t performing as well as the others? Two of the 12 units weren’t up to–?
Erik Van Horn: One of them was not performing very well, and it was a slow start. And the other one had been a slow start, but was performing, but not to the point where … Some of them were performing ten times what the under performers were doing.
John Warrillow: When you express the profitability of this company, when you talk about EBITA, are you talking about operating EBITA or kind of normalized or adjusted EBITA? Like in theory, when all the stores are fully up and running, we should be generating x amount of profit? Or are you actually talking about what you are generating profit?
Erik Van Horn: A little bit of both. We’re talking about what we are generating in profit, but that was some of the challenge, because it was adjusted. What’s it going to look like for a store that had just opened up in three months, they’re not full. 50% occupancy is kind of that break even point. If you’re not full, and you’re not going to be full for another six months or 12 months, there’s a run weight there. So they started to look at that, and they were like, “Well, you’re not going to be full for two years at this rate.”
Erik Van Horn: And we’re thinking, “We’re going to be full in three months,” and, you know, the truth is somewhere in the middle. But that’s where were just going back and forth on that, on some of the old ones that were not performing very good, some of the new ones that didn’t have a chance to perform. They didn’t want to pay super high multiples on the ones that were performing incredible, because then it sets the standard for other people. They wanted to be able to kind of have the standard multiple that they pay. It became clear after a month or so of trying to come to an agreement on multiple that we were just getting nowhere, because we were coming at it from two completely different angles. And again, we weren’t desperate to sell and they weren’t desperate to buy.
Erik Van Horn: So we ended up, the partners, we just got together for a couple hours and said, “What are we going to do? There’s a price, I think that the day a buyer is willing to pay what a seller is willing to sell it for. What’s our sales price?” And we came up with it and we said, “Guys, here it is.” And we started out high, because it gave us some room for negotiation, because we knew that they would want to negotiate, of course. We settled on a price shortly after that. They worked it the way that they wanted to work it, and we worked it the way that we wanted to work it.
John Warrillow: How did you guys come up with the number?
Erik Van Horn: Basically, it was, “Is it worth it to sell at this point? Can we take this money that will hit our bank account on the day that we sell and can we deploy that to make as much or more money that we’re making today without a bunch of headache?”
John Warrillow: What’s the set-up for the other three partners? Are you guys all at similar life stages? You mentioned you got three young kids. Is everybody sort of at the same stage of life, or is it disparate?
Erik Van Horn: Yeah, we are. I mean, we look at … Sometimes we’re on the phone with each other and we just laugh at how far we’ve all come. Because none of us came with this big boost of a bunch of money early on. We all are, we’re entrepreneurs and we hustled and we built over the years. We’ve done well, and our lifestyle now, we just pinch ourselves. We’re like, “Can you believe this?”
Erik Van Horn: One of my partners just accidentally bought a million dollar house the other day.
John Warrillow: Accidentally? How does that happen?
Erik Van Horn: I said, “How do you accidentally do that?” And he told me, and sure enough, he kind of accidentally bought it. But we were just laughing, because just a couple days ago, he was like, “Hey, I was just looking back at the first thousand dollar deposit check that I wrote to buy my first franchise,” and he’s like, “That was a big deal to me at this time, and now I accidentally bought a million dollar house.” What he’s going to do is, he’ll sell it for a lot more money and make a bunch of money off it, but that’s the kind of guy that he is. That’s the kind of entrepreneurs that we are. So we’re very much at the same stage in life. My kids are 4, 6, and 9. I probably have the youngest kids out of all of us, but we’re all in our early 40s, young families, and just really enjoy life and enjoy the time with our families.
John Warrillow: You know, it’s one of the things that we’ve heard a lot about on this show is how important it is for partners to either be at the same kind of stage in life, and particularly around your finances, because if you’ve got one partner who’s trying to get their first foot on the first rung of the success ladder and you’ve got another partner who’s obviously wildly wealthy, it can cause very different motivations, especially around the boardroom table when you’re looking at selling.
Erik Van Horn: Yeah, I can see that. And there were some, some of us wanted to continue to build because they thought this is the horse that we’re going to ride to have a sale in two years that’s two or three or four times what we had today. Others were like, “You know what? We’ve got an incredible opportunity to exit now.” And one of the things is, there were some other parts of the deal that are not related to price, but they’re as important in many ways, and that’s the lease assignments. The landlord doesn’t want to let you off the lease, and you have to stay on as a personal guarantor to the new buyer and the new buyer doesn’t have as deep pockets as you do, or they don’t have the ability to operate as well as you do, then that can come back to bite you. So knowing that’s private equity and they’re able to indemnify us and things like that, that was really important in the decision making process as well.
Erik Van Horn: I think that’s some of the things that put all the partners on the same page, and all of us, to your point, all of us have bought other businesses, even before we sold it, in anticipation of the sale.
John Warrillow: How much did the offer drop, if you will, from, you mentioned you kind of started high in the dream number and then you kind of settled on a number less than what you started out at. How much did you guys have to drop, in a percentage basis?
Erik Van Horn: It was, I think it was a couple million. It wasn’t drastic, it wasn’t a massive amount. I think it was a couple million that it dropped.
John Warrillow: And I don’t know that you can actually share the actual number. My understanding though is it was an eight-figure exit. Is that kind of what you’re allowed to say, if you will?
Erik Van Horn: Yeah. I sent an e-mail like a good franchisee and said, “Hey, can I say it was an eight-figure exit?” And they said no problem.
John Warrillow: Got it.
Erik Van Horn: So I’m imagining, you’re a whiz with numbers and you might somehow figure out the exact sales price through your questioning.
John Warrillow: I’m not that good. But I appreciate you sharing.
John Warrillow: Did you still have a lot of debt on the business? Because you’d taken on some debt to build these things out. How did you handle the debt from the leasehold improvements?
Erik Van Horn: Like I said, each one was probably a million dollars to build out, on average. Some of these, when you go into a lease and you have a significant build out like this, and this is one of the great things about having a franchise like Sola, the landlords loved us because of Sola’s track record of zero failures and just the power behind the brand. We got favorable lease terms and favorable tenant improvement dollars. Some of ours, on more than one occasion we got $50 in tenant improvement dollars back from the landlord after we built out, so $50 on 7,000 square feet is a big check to get back as a rebate.
John Warrillow: Yeah, it’s like $350 grand, right? I’m not that good with numbers, so you gotta help me.
Erik Van Horn: You almost figured out the sales price.
John Warrillow: There you go.
Erik Van Horn: Oh yeah, I mean, you get $350,000 back on some of these and it changes the starting point. You don’t have a million dollars into it, by any means. And early on, in 2014, we were getting a lot of those deals, where we were getting $50 in tenant improvement, or TI dollars. That was normal to us. And it wasn’t normal to the leasing agents working for us, because we just, we went in and assumed that, and then we got the leasing agents to believe that was normal. Pretty soon, a lot of people are like, “How are you guys getting these TIs?” And we’re like, “It’s just normal.”
Erik Van Horn: And we kept doing that until the landlords are like, “Hey, the market’s changed. We’re in more control now.” So we wish we had started signing more leases early on, because we ended up paying a lot more money later on for some of the same leases that we could have gotten much better deals on if we had signed earlier.
John Warrillow: I guess you started in, still when the great recession was starting to kind of … We were still in the sort of depths of that.
Erik Van Horn: Yeah, there was still vacancies around, and there weren’t people aggressively building like we were. We were really bullish, but the landlords were still feeling it.
John Warrillow: TI dollars, tenant improvement dollars, how does that work? Are you literally getting a check for $350,000, or is that just reducing your rent you owe over the life of the lease by that amount?
Erik Van Horn: It’s a literal check.
John Warrillow: Really?
Erik Van Horn: And sometimes you have to fight for it. The lease, the landlords will say, “Yeah, you’ll get a check one month after you have CO or certificate of occupancy.” So one month later, you get your check. Well, that’s when they say that you can apply for your check. And a lot of times, it was three months later, we would get a physical check for that. $350,000. And they were happy to do it, we were happy to take it. A lot of times, the lenders, because we got some different lenders later on, we would get a million dollar loan or $800,000 loan on the build out and put in a million dollars into that build out and get a check back to us for $350,000.
John Warrillow: Amazing. So with regards to the lenders, how does it work, and again, this is just my ignorance coming out, when you sell your company and you’ve still got, like an SBA loan, as an example. Do you have the rights to just pay that off with the proceeds of the sale, or do you have to continue to honor the terms of the loan? Again, this is just total curiosity on my end.
Erik Van Horn: I don’t know what it’s like for all loans, but we had a number of different loans, and we refinanced some during the process as well. All of our loans, with the exception of maybe one or two, there was zero pre-payment penalty. So the banks were bummed that we sold, because they got paid off, and some of them had a 1% or 2% penalty for early payment, and so that was just part of the deal. That’s something that, as I am into other businesses now, but I have an … Thinking about selling before the loan term’s up, that’s definitely on my radar more than it was when I first started Sola.
John Warrillow: The kind of pre, what’d you call it, pre-payment terms?
Erik Van Horn: Yeah, pre-payment penalty. If we sell the business or refinance the loan, there’s a penalty that we have to pay. But it was nothing like, if you were getting a loan, you’re paying 6% interest, that you owe all interest or something like that. We didn’t have anything like that in any of our loans.
John Warrillow: It sounds like such a fantastic sale. If there was one thing that you might do differently, if you could do it all over again, I know one thing would be to maybe give a few shares to Mairco, what else might you do differently if you had the whole transaction to do over again?
Erik Van Horn: Well, it was pretty easy for me because my partner Dan did a lot of the heavy lifting towards the end, because we needed to have one person kind of be the voice for the group. If he was on the podcast, you’d probably have a completely different podcast, because he was in … He had to deal with some of the, just the wear and tear of negotiations. We didn’t have to deal with a lot of that.
Erik Van Horn: If I had to change, there’s some things that I had to change, it would be coming to that price agreement sooner than later, that kind of take it or leave it price. And then the other thing that we did not know was going to be as difficult, and it almost screwed up the deal multiple times, was having landlord consent. On deals like this, when you’re dealing with big landlords, they don’t like to … Some of them are just a pain. They are just an absolute pain to deal with, and it’s worse than getting a loan and having them remove you from the loan, even if you’re staying on as a personal guarantor. They’ll run credit, they’ll ask for updated financial statements. It’s just absolutely insane, how some of these landlords are. And it delayed the deal. We were supposed to close months earlier, but part of it was landlord consent, they were not in a hurry at all to do anything.
John Warrillow: There’s nothing in it for them, right?
Erik Van Horn: No motivation.
John Warrillow: Yeah, right. Interesting.
Erik Van Horn: It’s only down side. Yeah, so I would have started that way earlier than we had. I mean, today, we’ve sold 11 of the 12, today is, our 12th one is actually getting sold. We got all the releases and I see all that paperwork coming through today, so we’ll be getting another check next week for the 12th and final one. But yeah, that’s been a pain.
John Warrillow: Man. I mean, I’m so indebted for you to educate me … I can’t remember such a comprehensive episode on a retail business, because so many of our businesses that we do for this show are kind of B2B businesses, service businesses, but you’ve really shone an amazing light on some of the intricacies and the ins and outs of selling a, sort of a storefront business. I’m just hugely grateful for you sharing the story arc.
Erik Van Horn: Oh, I’m glad to be on. It’s been a lot of fun being able to relive some of this.
John Warrillow: So how do people … What’s next for you? Is there a website you want to send people to, or how can people reach out and introduce themselves to you, if you’re okay with them doing that? Is there a way for them to say hi?
Erik Van Horn: Yeah, 100%. I have a website called I Love Franchising, very simple, ILoveFranchising.com. On there, there’s different ways to connect with me. If you’re looking at buying a franchise, I still help people do that. If you want to connect with, there’s links to some private Facebook groups where franchisees, I’ve just created it so franchisees can just learn and grow together and get better. Find me on Facebook, LinkedIn. I love to help people.
John Warrillow: Erik Van Horn, I really appreciate you spending the time with me. Thank you, and best of luck with your new franchise.
Erik Van Horn: Hey, thanks a bunch, John. I appreciate it.