Transcript – How Re-Modelling A Swimming Pool Business Led To A 7-Figure Exit
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John Warrillow: Hey guys, next up you’re going to hear from Tommy Berretz, @Berretz on all the big social platforms. Tommy started a company called Texas Aquatic Enterprise, was the name or TAE. They were in the business of maintaining swimming pools, which on the surface is a relatively commoditized business. But have a listen to the way Tommy differentiated the business through his safety policy, which is a key way that he built a sellable company. He also went about hiring sales people that sold the key value proposition, or the point of differentiation. He had a CFO in place to handle the numbers, he did a whole myriad of things to get the business ready to sell. He was essentially taking himself out of the equation which is, as you know, the first ingredient to building a sellable company. He got five offers for his company that ranged in value; one was very high, one was very low and he ended up going with one slightly less than the highest and he’ll tell you why he did that. Here to tell you the rest of the story is Tommy Berretz. Tommy Berretz, welcome to Built to Sell Radio.
Tommy Berretz: Thanks for having me.
John Warrillow: You own a swimming pool business, tell me about that. What kind of company do you guys have?
Tommy Berretz: So, we had a commercial swimming pool company and basically… It’s based in Houston, Texas and every neighborhood in Houston has a swimming pool, because it’s so hot in Houston. And they hire companies like us to… They contract us out to take care of their swimming pool, their lifeguard needs, their cleaning, their chemicals; we do pool constructions, renovations – so basically, anything that dealt with a swimming pool, we would do on the commercial one. Even Rice University was a customer of ours, so we dealt with universities, municipalities, HOAs, all those types of swimming pools are the ones that we dealt with.
John Warrillow: Okay, so you had residential pools on one side and you were not dealing with those guys. It was the commercial, local community school, university, hospital – sorry – high school, et cetera.
Tommy Berretz: Correct. We did do some residential stuff but it was all friends of friends, like “Hey, do you mind taking care of my stuff?” But for the most part, 99.9% of our business was all commercial.
John Warrillow: And what was your business model? How did you make money?
Tommy Berretz: Like I said, HOA would contract us out for an entire year.
John Warrillow: I don’t know what an HOA is.
Tommy Berretz: Homeowners Association.
John Warrillow: Oh, okay. Got it!
Tommy Berretz: So Homeowners Association would contract us out, and we would sign a contract for a year. So obviously during the summer months, we were extremely busy because you’ve got everybody wanting to use the pool, you’ve got a lot of pool repairs, you’re doing a lot of construction work, and then you’ve got the life guarding aspect, taking care of the pool. So they would contract us out on an annual basis; and sometimes the bigger contracts would sign us for three years, or a five year deal to where we would have the longevity of the contract for longer duration, which was awesome for us. And there was an out in the contract by way of if they weren’t satisfying our needs, or we weren’t satisfying their needs, there can be a cancellation clause in there.
John Warrillow: Got it, okay. So you got these contracts, these service contracts that you were working with. How did you sell your service? Did you have a sales force? Did you personally do some of the selling? What was your model?
Tommy Berretz: Yeah, so when we first started, I did all the sales. My business partner and I did everything like every entrepreneur does on a start up; you do everything under the sun, you wear a bunch of different hats, but over time we started getting a sales team involved and it was probably one of the most imperative game changing decisions we ever made. Because if you’re the one doing the sales and you have an issue in the operations, so then you go focus on it to rectify whatever issues you have, then all of a sudden you have no more sales coming in. So then you’re trying to play this balance between operation and sales, and it’s just never ending and you’re pulling your hair out by the end of the day.
John Warrillow: Yeah. What’s the secret of hiring good sales people?
Tommy Berretz: What I would recommend is always hire somebody who has experience. There’s a bunch of personality tests that you can give to people – I think we gave the Winslow profile and it’ll actually tell you before you even hire the person whether they’re actually going to be good at sales or not. I think what a lot of people do, the mistake that people make whenever they are going to hire salespeople, is they want to train somebody and put them in that position because it’s cheaper to do that. But from my experience, I always like to get somebody who’s smarter than me and hire them, and put them in that position. That way I don’t have to babysit them and overlook everything that they’re doing; and they’re telling me what they’re doing and what they need from me to help them perform their positions. So experience-
John Warrillow: Was it a competitive bidding situation? Would an HOA go… Did you have direct competitors that say, “We can either go with Tommy’s company or to other providers.”?
Tommy Berretz: Yes, absolutely. It’s a small community but it is competitive; whenever you bid on something, obviously you’re going to have three to five other people you’re bidding with. And the struggle is everybody does just about the same thing that you’re doing, so you have to be competitive with what you’re offering and your pricing has to be within the market rate to be able to actually win over a bid.
John Warrillow: How did you guys differentiate yourselves?
Tommy Berretz: One of the biggest differentiating factors was our safety policy, because drowning kills a lot of kids in the United States every year. It’s a huge, huge statistic. You know, back in the 70s you could drive a car without a seatbelt on and a beer in your hand, and nobody said anything to you. It was all of a sudden that people started looking at statistics and saying, “All these people got in car accidents, and these are the ones that died, and they weren’t wearing a seatbelt. So we need to make this mandatory because, as human beings, we’re not always that smart.” And so they mandated that we needed to wear seatbelts and you can no longer drink and drive.
Tommy Berretz: So we started looking at the statistics, and we said, “You know what? What are the cause of all these drownings?” Well, you’ve got kids that are going into swimming pools that don’t have any type of safety policy besides their parents and a lifeguard sitting on a stand. So what we did is, we created a child safety policy that if anybody who came into the facility under 42 inches of height, they had to wear a life jacket, and they got a red wristband that indicated to the lifeguards that this kid can’t swim, and the parents also got a red wristband.
Tommy Berretz: If the parent opted out of wanting to put the kid in a life jacket, the parent had to stay within arms reach of the kid at all times, and they had to get in the water with them. They both had a red wristband and if there was an incident where the kid struggled at any point, and the parent wasn’t there, then it was mandatory they got put in a life jacket. Then we also had – if they didn’t want the kid in a life jacket – we had them fill out a waver saying that, “Hey, we told you the risk of your kid not being in a life jacket, and we want you to assume that risk by knowing that we explained what could possibly happen if they didn’t wear a life jacket.”
John Warrillow: How did that safety policy help you in selling your service?
Tommy Berretz: It was awesome. We would tell people about it – and that was on the life guarding side, there were some other things we did on other sides – but people loved it. You know, at first there would be a little bit of a pushback; I don’t know how the community’s going to react because as a parent, you don’t want somebody else telling you how to parent your kid. You know, “Well, my kid’s going to be fine.” And so there’s that little bit of a struggle. But we’re the experts, we’re the ones who see the statistics, and we’re the ones who are trying to make your facility safer. So when you sit in a meeting and you show them that you’re investing safety into their facility, then people start to trust you a little bit more. I mean, obviously when we first kicked that off there was pushback; people would not want to have their kids in a life jacket. But overall – and I can say this while I owned the company – I’ve never had a drowning and it worked out excellently.
John Warrillow: Fantastic, fantastic. That’s got to be the absolute worst nightmare. Tommy, I want to get into the sale but before we do, I’d be curious… Was there part of you that… I guess part of the challenge with a lot of business owners is that there’s always this sort of concern in the back of our minds that something’s going to go wrong. Some customer’s going to be unhappy, something we deliver is not going to work; and we can go to bed at night and be totally fine but there’s a little part of our brain, whether it’s 5% or 3%, that’s still churning through that concern or worry that something… It sounds like in your case, someone drowning was the catastrophic thing that you worried about. How much did you worry about it?
Tommy Berretz: Yeah, so that was always in the back of my mind and there’s a gentleman by the name of Dr. John who’s in the industry, and he’s like the guru. And he says owning a business like we owned, you’re probably going to have a drowning every seven years – that statistically is what it shows. And so we owned that company for twelve and that was always in the back of my mind. So there’s kind of like a push and pull; you want to get out and sell the business because you don’t want that to happen, but the other part of you doesn’t want to sell it because you want to make sure you’re there to implement the safety policies to ensure that it becomes an industry standard. Yeah, it was always in the back of my mind, for sure. And that’s why we always wanted to take care of the lifeguards and make sure that they were well trained, well taken care of; because if you have an employee that you take good care of, they’re going to take good care of you.
John Warrillow: And was that wanting to be alleviated of that stress of one day having to deal with a drowning? Was that in any way part of your decision to sell the company?
Tommy Berretz: That definitely was a part, that was a part of it. When we initially started the company, we always wanted to sell it; that was kind of our initiative, like, “Hey, let’s start a company, let’s build on it and see if we can do it.” But then as time went on, that was definitely a factor of, “All right, we’ve had the company for twelve years, so far we haven’t had any real incidents. So maybe it’s time to bow out before something catastrophic were to happen.”
John Warrillow: And if something had happened, I’m assuming you had insurance that would have covered you for that?
Tommy Berretz: Oh yeah, we had insurance.
John Warrillow: It was more of the psychological burden of that as opposed to the financial, it sounds like.
Tommy Berretz: Yeah, for sure. And it’s because… I’m a new parent right now, I can’t even imagine having to go through something so detrimental and so devastating. So when we owned the company, that was always in the back of our minds, like, “Man, you don’t want… Not on my watch, I don’t want that to happen on my watch.” I don’t know how you move on from that and continue to own a company if something like that were to happen; because at some level you would have to feel like it was your fault. You’re the owner of the company and that happened when you’re the owner of the company. I would take responsibility for that, like, where did I go wrong with training my employees or making sure they had what they needed to make sure that this didn’t happen?
John Warrillow: Yeah, I think it’s so underestimated and not talked about a lot; there’s this sort of psychological tax that business owners pay in being a business owner that, at the end of the day, you are where the buck stops, right? And if the product breaks, somebody gets hurt, an employee gets injured in whatever capacity – it’s on you. And I think after years, as it did with you, it does weigh on you. Anyway, let’s get onto happier topics because-
Tommy Berretz: Yeah.
John Warrillow: So, chatting with Shawn, our producer – she tells me that there was a period where you decided to sell and you had a valuation come back and it wasn’t what you were hoping for. Maybe talk us through that a little bit.
Tommy Berretz: Like I said, originally we wanted to sell the company, so we were building it, building it, building it, and the owners were involved on a day-today operation aspect of the company. I actually went to our CPA and I got a book value of the company. We’ve been working this thing – I think we’re maybe eight years in at the time, seven years, eight years in – and I go and get a book value of the business, and I’m super excited because I’m thinking, “Man, it’s going to come back, it’s going to be millions, and we’re going to sell.” And she gives me a book value of less than 100 grand. And I was-
John Warrillow: Do you want to define book value for folks who may not understand that terminology?
Tommy Berretz: She gave the book value based on what the position of our books currently… You know, how much cash, how many assets we had; and a lot of times you’ll get a book value based on… Like, if you want to buy a partner out, people will get a book value to go, “Hey look, this is what we’re currently worth right here at this time.” And they don’t take anything into account, like contracts. If we have five years worth of contracts towards $7 million, they don’t put that into account; just basically what your books are showing, current date and that’s it.
John Warrillow: Yeah, generally book value is the value of your hard assets, right? So, the trucks, the life jackets – all the stuff that you own bring that worth at auction or market rate, and it’s usually a fraction of what the company’s actually worth if you want to sell it; presumably if you’ve got it under a profit contract and so forth.
Tommy Berretz: Yeah, you’re right. It’s like at auction at a deep, deep, deep discount. When that happened, I was super distraught; I was depressed, I was like, “Man, here I have been busting my butt all these years, just to find out-” Because I didn’t understand what book value was, so I didn’t get the concept at the time. So, I was like, “Okay. [inaudible 00:15:58] sell this company, what I’m going to have to do is I’m going to have to build it to where I don’t have to be here.” So, the book value being as low as it was, was actually a blessing in disguise. Because now we’re starting to position it to where, “All right, we need to start getting the right people in play so we don’t have to be here on a daily basis, and we can turn this company into a passive income asset.” And so that’s what we started doing.
John Warrillow: Your accountant told you, “Look Tommy, as long as you’re deeply ingrained in the operation, it’s certainly not worth anything without you; so you sell the life jackets and the trucks but there’s nothing there. What you’ve got to do is get it to run without you personally, and then you’ll be able to sell it for more.”
Tommy Berretz: Right.
John Warrillow: Essentially what she said, okay. So what was that process like? What was the process of de-Tommy-izing your company? What does that look like, what did you start with?
Tommy Berretz: We just started looking at each department and understanding what we needed to get, who we needed to get involved in each department to make sure that it could run on its own. You have your operations, you’ve got your sales, you’ve got your accounting; so one of the first things we did – this is so funny – we used to cut cheques and we would go look in our bank account, “All right, so we’ve got this much money in the bank account, we can cut the cheque for this, we can cut the cheque for that.” We weren’t actually using our books. You would go in our books and you could see some stuff, but it wasn’t very accurate.
Tommy Berretz: So we initially were like, “All right, we need to get this under control to be able to understand to where we can read it off our-” So we hired a CFO to go through our books and she completely revamped everything we were doing; she laughed as she was going through it, like, “I can’t believe you guys were running this this way with all your employees.” And we were like, “We didn’t know any… We’re new at this. We’re new entrepreneurs.” So we started with the accounting, because the accounting is such a cornerstone of your business, and I think that’s something that so many entrepreneurs neglect.
Tommy Berretz: It’s kind of like, “I just do accounting because of tax reasons,” and that’s the only reason they do it, and they’re not looking at the future thinking, “At some point I might want to be able to sell this, and I’m going to have to submit 3-5 years of accounting data to whoever wants to buy this place – and then I’m going to have to answer questions based on the data that I give them.” And so we started with accounting.
John Warrillow: To be clear Tommy, did you hire a fractional CFO or a full-time, forty hour a week CFO?
Tommy Berretz: Full-time. Full-time, forty hour a week CFO.
John Warrillow: Okay.
Tommy Berretz: Yes. So as it transitioned, it turned into, like, I’m an owner of the company and I’m asking her, a few years later, the stuff that I can buy and what I can do; and she’s telling me, “Tommy, you can’t buy that equipment right now, it’s too expensive, we’re on a cyclical downturn; you need to wait till March of next year, you can buy it then, we’ll have this much money to do that.” So she was giving me the information to be able to run the business, which was completely different than the way it was running before; you know, looking into the bank and going, “Oh yeah, I think we can buy it!”
John Warrillow: Right, so you professionalized your forecasting, your bookkeeping and your financials. What else did you do to pull yourself out of the operations?
Tommy Berretz: I want to say the biggest thing… So that was huge, the accounting, because then you could actually see what the business was doing. You could make decisions based off of that. So the other thing that we did was we started hiring a sales team; that was absolutely enormous, because now the company was generating income on its own. I think a lot of business owners struggle with hiring a sales team because they feel like, “Well, nobody can sell like I can, nobody can do it like I can.” And the truth of the matter is, if you have competitors there’s people out there who can do it just as good as you can.
Tommy Berretz: To be honest, if you hire a sales person, in my opinion, and they can 80-85% of what you can do, you’ve got a winner. You’ve got someone who’s going to produce income for you and you don’t have to worry about it. So that was a huge, huge game changer, hiring salespeople; whenever I talk to entrepreneurs and they say that they’re going to do all the sales, I’m like, “Man, you need to really reconsider that. You really need to look into getting someone who’s experienced and who can sell for you.”
John Warrillow: Great stuff, great stuff. So anything else that you did that people listening might… Because I think a lot of people listening, Tommy, will be right in the same, right there. They know their company is a little too dependent on them personally; maybe they’ve done some work on the books, maybe they’ve pulled themselves out of the selling. Is there anything else that you did that really got you out of the day to day?
Tommy Berretz: Yeah, so, hiring people who were in charge of the different departments of operations to where they would go run operations, they would go deal with all the issues; and it transitioned me from working in the business to working on the business, to where I’ve got this macro view of everything that’s going on. And now I feel like I can actually maneuver and give a vision of where we’re headed, and what we need to do to get to where I know we can be; versus being stuck inside the business, working day in and day out in the operation and the sales, where you have no time to look at anything else, and you’re just kind of floating along. You don’t have a one year, or a two year, or a five year plan of where you want to be; you’re just trying to make it to the next week and trying to keep your head above water.
John Warrillow: Got it. So at what point did you decide that you were ready to sell this company? Once you’d made some of these changes, was there some event or some straw that broke the camel’s back?
Tommy Berretz: So, here’s what happened – it started out where the hours that I actually worked on the business started to diminish. So I wanted to get out of the industry and once I realized, I’m like, “Wow, I’m still showing up to the office but I’m really not working on the business that much. I’m spending about ten hours…” Some months maybe ten hours a week, but most months was like ten hours a month. And I was like, I removed myself; at one point, I went away for like six weeks, I went to New York for six weeks, and when I came back the business had grown. And I was like, “Wow, this thing is actually moving forward and I don’t have to be here.”
Tommy Berretz: And so I just… I told my business partner, I said, “Hey look, I’m going to get the company valued, I just want to see what it’s worth.” And I said, “If it’s actually worth selling, then I think we’re going to move forward with it. If it’s not, if we still get the same ridiculous low value, then we’ll just keep pushing forward and we’ll keep growing the business, and we’ll make it to where it’s just a completely passive income entity.”
John Warrillow: So what’s your relationship with your partner? Are you the majority shareholder and can tell him, or her what you’re doing? Was it something you had to discuss with your partner?
Tommy Berretz: It started out to where we were 50/50 partners. And then I think after three or fours years, we ended up hiring a vice president and we gave him 10% of the company. So I then owned 45%, my other business partner owned 45% and the vice president owned 10% – and he was the one who was really running the place, he was in there making moves on a daily basis. And we even got him to where he really didn’t have to work that often, which was great. I was the one running the business, I was on the business side; he was doing some other stuff, so pretty much the decisions… He wanted out anyway, he had wanted out for a while. The guy – his name is Chris – owned 45%, he had been wanting out for, like, four or five years. So when I called him, he was like, “I have been waiting for you to make this phone call for five years.”
John Warrillow: That’s funny. So did you go get it valued? What did it come back as?
Tommy Berretz: Yeah, we went and got it valued, and we did it through a separate valuation company; when we got the value back, it came back over seven figures, low seven figures and I remember calling him and I was like, “We’re selling this thing. The time is now, let’s do it.” So he was definitely on board and the other owner was on board, and I started looking for brokers. I was like…
John Warrillow: How were you valuing it in your own mind? Did you have a formula you were using to get a sense of what it would be worth? Did you have any sense in the way companies like you were being valued?
Tommy Berretz: I did know a little bit. I knew that we had added up all of our contract values and, you know, we’re a multi-million dollar company.
John Warrillow: When you say, “Added the contract value,” you were talking about a three year contract at over $100,000 a year would be valued $300,000. Is that what you mean by valuing the contract?
Tommy Berretz: Right. We would take… Whatever the expenses were, we would generally take that stuff out; because they’re not going to pay you for that, they’re not going to pay you for the expenses, they’re only going to pay you for the profit. And then I looked at all of our assets and I kind of understood how it would go, and it actually came back more than I thought it was going to come back at. It was pretty exciting, you know, getting-
John Warrillow: Was the valuation company using a multiple of your profit, or your income, or your revenue; how did they approach the value?
Tommy Berretz: They valued it based on discretionary earnings; discretionary earnings, for people that don’t know, is based on what the company’s profit is and then any of the owner’s salaries, anything that the owner would pay for or buy. Like, if we would go on a trip every year that was $20000, that would get added back in to the bottom of what the value of the company’s worth. I’m saying that, discretionary earnings, where they add the owner’s salaries back on whatever they spend. The problem with it is if you’re in the business, and you’re doing a job, they don’t add your salary back because they know they’re going to have to – once somebody buys it – they’re going to have to put somebody in your position and your salary’s a wash. So that’s why it’s so important to get yourself out of the day to day operations to where you don’t have to be there; because then all the money you make actually goes back to whoever the new owner who’s going to buy the company. It’s imperative to get yourself out of the business.
John Warrillow: What multiple of your discretionary earnings did you think it was worth, ball park?
Tommy Berretz: I thought maybe 2, but it came back a 3.4; so I was happy with that.
John Warrillow: That’s fantastic. So, you had a valuation done, you had it done and you were happy with the number – then what was the next step for you guys?
Tommy Berretz: Then the next step, I started interviewing brokers and I started talking to people – read your book.
John Warrillow: Good! Didn’t totally screw you up then, did it?
Tommy Berretz: I read your book and I was like, “Man, I don’t think I’m going to do this now.” I’m kidding. So then we started looking for brokers and I don’t even know how many brokers I called, left messages. I think I had five or seven call me back and I did a little interview process with them. First of all, I wanted to know if they had ever sold a company like ours; and I went through broker, after broker, after broker. Some brokers would talk to me for five minutes, other brokers would talk to me maybe for ten minutes; but then I had one broker talk to me for thirty or forty-five minutes, went through the entire process with me, told me everything that she was going to do and I felt comfortable.
Tommy Berretz: The only caveat was that she had never sold a business like ours, and there was another broker that I talked to that had. So I was kind of going back and forth, which one do I want to work with? And so I called the other one back, and he didn’t give me the time of day, so I went with the one who gave me all the valuable information over the phone. I didn’t know this whenever I got the initial value; I didn’t know when you hire a broker, generally they’ll also value your company. They won’t utilize your valuation that you got because they want to do their own. I guess in some cases they will, but in this specific case they wouldn’t.
Tommy Berretz: At first, I was kind of worried again, like, “What if she comes back with a value and it’s way lower?” But she did a value and I think her value is within, like, $80000. It was super close of what the original one was. And then I told her, “Hey, by the way, I got another value and here’s how close they are.” And she was like, “Well, can I see it?” I was like, “Yeah, here, you can see it.” And I was really happy that it came within such a close number of what the original was.
Tommy Berretz: The process was from there, you sign the listing agreement and anytime I have to sign something, I send it over to my attorney. I’m like, “Hey, can you look over this?” Because something that I didn’t know, that I know now, is that when a company makes an agreement, they call it the “Standard listing agreement,” or the “Standard agreement.” So in your mind, you’re like, “Oh, it’s just a standard agreement.” But then when you go through it, there’s nothing standard about it. It’s their standard agreement, it’s not the standard.
Tommy Berretz: And so my attorney calls me, he’s like, “Man, there is nothing standard about this agreement.” And so we go through it line by line, he’s like, “Hey, you need to change this, this, this-” There was quite a few notes. I told her, I said, “Hey. I’m going to send this to my attorney, let him have a look at it.” And she was like, “Yeah, that’s great.” And so I sent it over to her with the revisions that he was suggesting, and we jumped on a phone call and she was like, “Here are the things that… I will change this, no problem. I’ll take this out. This is a non-negotiable.” Because my attorney wants to try to get the best contract possible for me, and she was like, “This is non-negotiable.”
Tommy Berretz: So there were things like, if we sold the business within three years of hiring her to someone who was within her network, and she wasn’t representing, we still owed her commission – which makes sense, you know? If you introduce somebody to the buyer and then things fall out for a little bit, and then you’re not representing them anymore but the same buyer comes back. So I didn’t have an issue with that. I’m like, “Yeah, I get it. You probably deserve the commission since you introduced me to the person who’s going to buy it.” So there’s certain things within the document that we had to change, and that’s why I always tell people if you have a standard agreement or an agreement of any kind, send it to an attorney to have them review it and give you some insight of what’s actually in that document.
John Warrillow: Can you give us an example of a term that you asked her to change that she did go ahead and change?
Tommy Berretz: Trying to remember. Something that she did change… Because all the owners owned some assets outside of TAE, there was some terminology-
John Warrillow: Texas Aquatic Enterprises, yeah.
Tommy Berretz: Right. So there was some terminology in there that was kind of convoluted, very ambiguous about if we sold some sort of assets that we would owe a commission; which was especially scary for… One of the owners owned a lot of real estate, he honed in on that and he was like, “Man, if we sign this and I sell a house, she can’t tell me I owe her 10%.” So it was something that she conceded on and… I forget exactly… We changed the wording to where it would just be applicable just to the business, and it wasn’t to where… You know, if we sold other assets or outside that business venture that she would actually get a commission. So that was one thing that she changed – and in the beginning, she didn’t want to change that. But then after we explained it, she was like, “Okay, I can see where you’re coming from.”
John Warrillow: Got it. So you did a deal with the broker and then what happened? Did you get offers? Where did you go from there?
Tommy Berretz: So, you did initial listing agreement, and people always ask… I get so much advice about a broker, there were so many people like, “Don’t use a broker, you’re paying them for nothing!” And I’m like, “Yeah, but I don’t have the network that they do to introduce me to people.” So when people ask me, “Would you recommend using a broker?” I’m like, “Well how fast do you want to sell your company? If you don’t care if you sit on it for the next five years, you can try to sell it by yourself all you want. But if you want to sell it quickly and it’s an actual sellable business, then you’re going to want to get a broker involved.”
Tommy Berretz: And so the process went… We did a listing agreement, we had to send her a bunch of documents, a bunch of financials and projections and everything, so it was over the course of a few months. And then what happened is that before she actually listed the company, she had a select list of potential buyers. Before she listed it she sent an email out, “Hey look, I have this company. It’s a viable company, it runs on its own, its got absentee owners.” And she got approved for… I forget… Someone wanted to buy it for a loan but I forget who it was through.
John Warrillow: It’s probably called SBA Lending, is that what-
Tommy Berretz: Maybe it was SBA Lending.
John Warrillow: SBA Lending is within the United States, where the government will guarantee a bank loan for a buyer to buy a business; it makes it much more marketable as a small business because the buyer can get financing to purchase it.
Tommy Berretz: Right. And you are correct, it was SBA Lending, that is correct. So she sent out this… One of the other caveats I had when I spoke to her – and I think this an important thing to talk about – is I told her I don’t want to do an earn-out. I was like, “I don’t want to do an earn-out, I want somebody with the cash upfront. I don’t want to stick around and work in the business and have to meet these stats that they’re expecting to be able to get my money. I’ve worked the business, I don’t want to do that.” And basically an earn-out is where you stay within the business and you have to meet whatever is in their contract; a revenue number for them to pay you a percentage of wherever you say the revenue’s going to be for the next two to three years. And I didn’t want to do that because what ends up happening is in an earn-out, if you don’t meet those, then you sell the business for a fraction of what it’s actually worth. So I was very-
John Warrillow: What was your broker’s response to that? When you said, “Look, I don’t want an earn-out,” what did your broker say in response?
Tommy Berretz: “Understandable,” she’s like, “I don’t think you have to. You have an actual sellable business, so I don’t think an earn-out would even be on the table.” And back to the email; she sent out an email on a Friday night and within five to seven days, we had five offers on the business. People that were interested.
John Warrillow: Were these emails sent to people who owned pool maintenance and service contract businesses? Or were you just asking investors who wanted… Who was she selling the team off to?
Tommy Berretz: They had a qualification process to where if you want to look at a business you had to qualify, you had to show them that you had the cash to buy a business. And there were some acquisitions firms that were interested in buying the business – they just buy different kinds of businesses and they diversify their business by buying different kinds of businesses. I want to say there was three of those that were actually interested in buying the business, and then there was some serial entrepreneurs. She had a list of people she had already qualified; so she knew, “I’m going to send this out to the people that could actually pull the trigger,” because I wanted a cash buyer. I didn’t want a… I was okay with financing but I said, “I would rather go through all the cash buyers first; and then if somebody can come up with the down payment and then can get the rest in a loan, I’m fine with that too.”
John Warrillow: Got it. So what was your reaction when you read the five offers?
Tommy Berretz: I was blown away over how quickly… Because initially she told me, “This is not a fast process, this is going to take twelve to eighteen months minimum. So I don’t want you to lose hope if you’re in this thing for eight months and nothing’s really happening. It’s going to take a little bit of time, it’s not like selling a house.” So I already had it in my mind, eighteen months; it’s going to take eighteen to twenty-four months to sell this thing. So when she came back and she said, “Look, we already have people interested,” we started setting up meetings to start meeting with everybody.
John Warrillow: Tommy, did she put a price on the business when she sent those emails? Or did you invite people to-
Tommy Berretz: Yeah, I believe she put the sale price of the business… Actually no, she didn’t… Yes she did, she put the sales price of the business and she put the revenue – but they had to inquire to get anymore information. They couldn’t just go in and see any financials or anything like that. I had to approve whoever we gave the financials to, like, “Hey, yeah, you can send them the financials. That way they can look at the business.”
John Warrillow: I know we can’t talk about the specific numbers that you sold for, but… She had a listing price on the business where she said, “This is the price that we want for the company.”
Tommy Berretz: Yes. Similar if you were to buy a house, you go and look and see the house “Oh, this house is $350000.” You would know going in.
John Warrillow: Okay, that’s helpful. So you get these offers, and what were their price points like? Did they all say, “We’ll pay your asking price.” Did they offer less, more?
Tommy Berretz: There was a combination of… One person offered me more than asking price, which I thought was weird. It was an acquisitions firm. Oddly enough, the lowest offer came from a competitor, who is in a bunch of states all over the United States, and they wanted to do an earn-out. And their offer was actually so low and so ridiculous, that the broker was like, “This is embarrassing that they would even send this. I have to show it to you.” I think I took a call with the CEO just to tell him he was ridiculous. But funnily enough, the competitor was the one that wanted to do an earn-out, and I was just completely uncomfortable with that. So the pricing was all over the place, the offers were all over the place; right at, one was over, one was a little bit under. So then the process started to where we got to actually go and meet with the people that were giving the offers.
John Warrillow: And what was that like?
Tommy Berretz: So they – and this is where it gets pretty interesting – because they’re looking at your business based solely on financials. And that’s why it’s so important for people to get their financials in order and what they have in their asset column, what they have listed as an asset versus an expense. I told my CPA at one point, I was like, “Hey, I want to list my website in the asset column.” And she’s like, “Well, you can’t do that.” I was like, “Well, why not? It’s an income producing asset, I want to list it in the asset column.” And she was like, “You’re going to pay more taxes if you do that.” I said, “I don’t care, I’m trying to sell my company. I want to make the value worth more.” And she was like, “Okay, if that’s what you’re trying to do, then we’ll list it in the asset column.”
Tommy Berretz: So it’s kind of important to understand what you’re going to put in your asset column, what you’re going to put in your expense column; because when you go to sit down with these people who want to buy your business, they’re going to pick your accounting completely apart. They’ll ask you questions. There was a $77 car rental fee somewhere in what we gave them, and they were like, “What’s this for?” I’m like, “Yeah, I went out of town. I put the rental car in the business.” But they drill down and they ask you. “Why do you have this listed as an asset? Why are you listing this as an expense?” And they’re going through all your accounting first because they want to make sure that you have tight accounting that’s giving them accurate information so they can give you a real purchase price.
Tommy Berretz: Because they’re going to tell you, “I’ll offer you your full asking price,” but then when they sit down with you, that’s where they’re going to start going, “Okay, well you did this, this and this within your books and we don’t agree with that. So we’re going to lower our asking price to whatever it may be.” And then they get into your business, like how you run your business; and it felt very, very personal to hand over… It would be like if I’m asking you right now, “Hey, let me see your bank account.” You’d be like, “I don’t want to show you my bank account.”
Tommy Berretz: But you’re exposed, you know? You’re in a vulnerable position. They’re going through your books, seeing all the mistakes you’ve made over the years and you’re embarrassed about that. “Well, what’s this? What’s this right here?” “Well, I hired someone to do the accounting, they didn’t really know what they were doing and I thought they did. And they didn’t pay the $80,000 worth of pay roll taxes, so the IRS came back and they fined us.” So you’re re-living all your mistakes over the years; it’s funny to talk to you about it now but at the time you’re just like, “Man…”
John Warrillow: I’m only laughing because I’m dealing with it myself.
Tommy Berretz: It’s very vulnerable. Like I said, they get into the operation, “Who runs stuff? Who are you key employees?” I thought this was kind of funny, I asked my broker, “Okay, so when do I tell my employees?” And she’s like, “The day after you sign the paperwork.” He’s walking in the office and I was like, “Yeah, that’s a good idea.”
John Warrillow: How do you feel about that? Some people feel a little bit uneasy about not telling their employees until the cheque clears.
Tommy Berretz: Yeah, I felt really uneasy because most of my employees have been there for a long time, and they worked for me for a long time. When I spoke to every single person that was interested in the business, I would echo the fact that, “Look, I love my employees and I want them well taken care of. That’s the most important part of selling this business for me, to know that when I walk away you’re going to take care of our employees that have been there for a long time.” And funny enough, we actually took less money from a serial entrepreneur because he wrote this letter about how he’s going to take care of the employees, how he’s going to see that they were well taken care of and he wasn’t going to get rid of anybody. So we took less money because I was like, “I’m selling the business, I feel like I’m doing them an injustice.” And some of them took it really hard once we did tell them we were selling the business, I mean really hard. So it took less money to be able to sell it to the right person.
John Warrillow: What percentage off did you accept to the lower bidder? How much lower were they on a percentage basis from the highest bidder?
Tommy Berretz: I would say maybe half a percent?
John Warrillow: Okay, so not 20% less.
Tommy Berretz: No, no, no. Because it would have been hard to walk away from 20%.
John Warrillow: Yeah, yeah, for sure. So you said it was hard for some employees to hear, take us through that day; where did you do it? Where did you announce the acquisition? Who was most upset? What was making them most upset?
Tommy Berretz: I called each one of them into the office… Let me rephrase this, I didn’t tell everybody. It wasn’t like we came into the conference room, and I sent out emails and stuff. I took the key employees into my office one by one, and I sat them down. The saving grace that I had was over the years I had talked about, “Well, someday I plan on selling the business. That’s kind of what we want to do.” So it wasn’t all of a sudden – “What do you mean you’re selling the business? This is crazy! When did this idea come up?” So they already were warmed up to the idea in that aspect. But I brought them in, I said, “Hey look, I just want to tell you something, sit down. I really appreciate everything you’ve done over the years, and we’re going to go ahead and sell the business; and we have looked through the potential buyers, and we’re picking the one that we know is going to take care of you guys in the long run.”
Tommy Berretz: And I even told them we were going to take less money to be able to make sure we get the right buyer, who’s actually going to honor the… Whoever buys the company doesn’t have to honor your agreement with the employees, they can come in and change it and do whatever they want. But the buyer was like, “Yeah, I’ll honor…” Some employees have worked there for so long, they had worked up three or four weeks worth of vacation time; because they earned it, because they worked so hard and so long, and I didn’t want somebody coming in going, “Now that I’m taking over, you only get one week of vacation time now.” Because that would be a huge morale buster to do that in addition to already selling the business.
John Warrillow: Got it, got it. So what was your way of ensuring – or did you ensure that the serial entrepreneur who wrote this letter was assuring you that he would take care of your employees? Did you actually legally taper any of that assurance, or were you just taking that individual on their word?
Tommy Berretz: That was one thing that we discussed is being able to get him to sign something, but the broker’s like, “I don’t think he would.” And it’s kind of like… Maybe he comes in and he doesn’t mesh well with somebody, and they’re giving him a hard time. It would be like you buying my house but when you do, I’m like, “Yeah, but you can’t change the tile in the bathroom, I love that tile. So for the next five years you’ve got to keep that tile.” You’d be like, “It’s my house, I paid for it.” So I think it’s one of those things where you might be able to get away with it, you might be able to get someone to sign something; but in this case we didn’t, and we’re basically taking his word.
Tommy Berretz: I trusted the guy; once we picked him as the buyer, I had met him time and time… I was on the phone with him almost every day for two or three months before he stepped in. Just going over stuff, him having questions – because he had no experience in the industry, so he had questions of how to run the company and what to do. So we would go to lunches and over time I actually got to know the guy, and I trusted him.
John Warrillow: What were the deal terms that you agreed to? You mentioned that you didn’t want an earn-out. What sort of terms did you… Did you get all your money the day of closing or did you agree to some sort of terms.
Tommy Berretz: No, we didn’t get all the money the day of closing, because he ended up… He had, I want to say… Forget how we did it. We had to stick around for thirty days; once we signed we thought we were going to have to stick around for like, six months or a year but he was like, “I’m only going to need you for thirty days.” I’m like, “That’s perfect. We’ll only need to be there for thirty days.” On the day of closing he put down 70% or 80% cash that we put into our bank account, and then he was going to pay the remainder in thirty days. We were kind of uneasy about that part, but the saving grace of that is what we did. He didn’t buy our entity, he started his own entity and just took all of our assets, all of our employees, all of our customers – which is smart, because he’s avoiding any kind of liabilities that we may have as a company; and he’s just taking all the assets and dumping it into his shell corporation.
Tommy Berretz: So the deal was… At first, I was like, “No, I’m not going to do that. I want all my money upfront, that was the deal.” And he was concerned about operating capital. He was like, “Well, you know, I’m kind of stretching myself buying this all cash. I’m worried about operating capital.” So we added up all the account receivable for the following month, whatever that number was, and we were like, “We’ll just collect that money, so we’ll subtract that amount. We’ll collect that amount of money to where you don’t collect it; but if at the end of thirty days it’s still not paid, you have to pay the remaining balance of what you owe.” And he agreed to it, so I was like, “Okay, I’m willing to do that. Just because we have control of the accounts receivable for the next thirty days.”
John Warrillow: Excellent. And that was the only hold back, this thirty day hold back?
Tommy Berretz: Yes, right.
John Warrillow: It sounds like a great deal. Is there anything you would look back on and do differently, if you had to do it all over again?
Tommy Berretz: If I had to go back and do anything differently, it would be implementing getting the right people at the right time. We held off on getting sales people; we could have grown that company so much more than we had grown it already, if we would have got the right people involved sooner and not been involved in the operation for so long- and got out accounting straight. Now that I understand the power of accounting, like how you can forecast, what you can do with the knowledge that’s in those books; from the very get go, the first person I would have hired would have been a sales person. It would not have been me out there selling, it would have been a sales person. I would have got some sort of CFO – obviously it couldn’t have been full-time, but I would have got somebody involved immediately that could take care of the books, and understand where we’re flying instead of flying blind. And just along the way getting the right people involved, getting the people that were smarter than me involved in the beginning.
Tommy Berretz: Because we always would hire people that we had to train for the position, and we thought it was easier, but there was no longevity there. So we were going through people but when we got the people that were the right people, they were the ones running with the departments. We were like, “Wow, they know what they’re doing.”
John Warrillow: Going back to people for a second – the new owner, how did they choose to deal with the vice president who owned 10%, who was running the company? Did they keep him or her on? How did they structure-
Tommy Berretz: No, everybody that owns a percent has got bought out. I think that he wanted to step in and actually run it, so our general manager was running a lot of it – running the majority of the operations – and at that point the owner who had 10%, he wasn’t spending forty hours a week within the business anyway.
John Warrillow: Okay.
Tommy Berretz: And he could step out of the business and it would still run, so there was no concern there. The other part that the owner did want – the new owner wanted – is he wanted consulting for twelve months. Which we gave him, we were like, “Yeah, if you need anything… I mean, I might not come up to the office but if you want to call me and ask me questions.” And he utilized that a few times and asked me, “Hey, here’s the situation. What would you do?” And I gave him, “Hey, here’s what I would do if I was you and I don’t know if it’s the answer you want, but this is what I would do in your position.”
John Warrillow: And is that consulting… Did you have a governor on that and say, “It’s up to x number of hours or x number of days,” or was it sort of unlimited? Did you have any sort of-
Tommy Berretz: Yeah, it was limited. It was definitely limited to a few phone calls, it was where I didn’t have to be there in person. I think that was an important aspect of it, because I was like, “Well, I don’t want him to buy the business and the next thing I know, I’m working in the business helping him get it to where he wants to be.” So yeah, we put a governor on that… It was like an everyday thing; I want to say the specific burgage was a few phone calls a month for a few hours. And he never, ever used up two or three hours a month worth of that time.
John Warrillow: What did you do to ensure that general manager was going to stay on through the acquisition?
Tommy Berretz: We took all of our key employees and I want to say we had… If you want to say key employees, I think there were six key employees. Six key employees that that place really needed. So we sat them all down one by one with him, we all had conversations, we warmed the employees up to who he was, he kind of explained where he was coming from; and one thing that he did that I thought was pretty smart, he didn’t step in like, “Hey, I’m the new owner and you’re going to listen to me!” He was just kind of like, “Okay, I don’t know this industry. I’m just going to watch what everybody’s doing, I’m going to ask questions, I’m going to be in your space asking you what you’re doing and how you’re doing it, to kind of get a grip on how the company is running. And then there’s going to be some stuff that I might implement over time.”
Tommy Berretz: So he didn’t come in and just, “All right, we’re going to do things this way.” He just got the feel of everybody and I think he won their trust over because he did that. He didn’t come in as a dictator and have a huge ego, which I thought was great on his part. And I did feel like he was really warm with the employees when we sat down with all of them.
John Warrillow: And now with a bit of time and distance, do you… Is there any part of you that regrets the decision to sell? How do you feel about it today?
Tommy Berretz: No way, that was such a learning experience for me. That was such a… So gratifying to know that we started a company with the intent of selling it. I remember I used to tell people, “I was working at a bar when I started it,” which is ridiculous. And I remember telling them, “Yeah, I’m going to start this business and the goal is to sell it at some point.” And I talked to that friend after I sold it, he was like, “Dude, I can’t believe that you actually built the company, and you actually sold it the way you said you were going to do it.” I was like, “Man, it didn’t seem like it for a while.”
Tommy Berretz: But yeah, I definitely don’t regret it. It’s very gratifying to know that we built something and that legacy is living on beyond us; and I think that when owners get frustrated with their business and they don’t want to do it anymore, the automatically just want to shut it down. I’m like, “Wait, you’ve got assets here, you’ve got things you can sell.” Yes, it’s going to take a little bit more time than you want but at the end of the day, it feels good to drive down the street and see one of our trucks drive by and be like, “We started that thing.” You know?
John Warrillow: I know people are going to want a recap, Tommy, so is there a website you want to point people to or did you link in captions? Where can people say hi?
Tommy Berretz: Directly they can find me on Instagram, Facebook… What other platforms are we on? Pretty much Instagram and Facebook are the main ones, and it’s @TommyBerretz is my handle on any of the social media profiles. And then I have a website www.sellableinc.com; it is a business that I have that… We help entrepreneurs who want to prep their company for sale; we also help them with sales and getting the right person in as a sales executive, to be selling for them the way it kind of gets them out of the business.
John Warrillow: Taking that lesson that you learned about the importance of sales people and helping people hire and train those sales people as well. So @Berretz and the major social platforms and we will put those links in the show notes at Builttosell.com. Tommy, it was great to have you here, thanks again.
Tommy Berretz: Appreciate you.