The Anatomy of a Successful Exit
Stephanie Breedlove started Breedlove & Associates in 1992 as
a way to pay her nanny. The big payroll processors weren’t interested in
dealing with one person’s wages and doing it themselves was complicated and
time-consuming, too much for the then overwhelmed Breedloves.
Breedlove saw a business opportunity and started a payroll
company for parents who needed to pay their nannies. By 2012, Breedlove &
Associates had grown to $9MM in revenue and then she received a $54MM
acquisition offer.
To give you some context of how incredible it is to sell a $9MM
business for $54MM let’s look at the numbers. At The Value Builder System™,
more than 25,000 business owners have completed the Value Builder Score
questionnaire, part of which asks about any acquisition offers they may have
received. The average multiple offered is 3.76 times pre-tax profit. Even the
best-performing businesses, those with a Value Builder Score of 80+, only get
offers of 6.27 times pre-tax profit on average. Breedlove got close to six
times revenue.
What did Breedlove do right? We’re going to look at the five
things Breedlove did—and that you can do—to drive up the value of a business.
1. Sell
Less Stuff to More People
When Breedlove hit $30K per month in revenue, she quit her job at
Accenture (formerly Anderson Consulting) and devoted herself to Breedlove &
Associates full-time. To grow, she had a choice: sell more to her existing
customers (e.g. busy couples often need lawn-care, house-cleaning, or
grocery-delivery services) or stick with her niche of paying nannies. Most
consultants and experts would say it’s easier to sell more to existing
customers (and they’re right), but it doesn’t make your business more valuable.
Breedlove decided to stick to her niche and find more parents who needed to pay
their nannies, and that decision laid the foundation for a more valuable
business.
Investors from Warren Buffet look for companies with a deep and
wide competitive moat that gives the owner pricing authority. When you have a
differentiated product or service, we call it having The Monopoly Control and companies
with a monopoly get significantly higher acquisition offers.
Rather than selling existing customers generic services in
commoditized markets, Breedlove focused on selling one thing to as many
customers as she could find.
2. Strive
for 50%+ Net Promoter Score
One feature that interested acquirers look for is your customer
satisfaction levels. Increasingly, they are turning to the Net Promoter Score
(NPS) as a measure of this. NPS was developed by Fred Reichheld and his team at
Satmetrix, who discovered that your customers’ willingness to refer you to
their friends or colleagues is highly predictive of your company’s future
growth rate.
The NPS approach is to ask your customers how willing they would
be to refer your company to a friend or colleague, on a scale of 0 to 10. They
are then categorized into Promoters (9s and 10s), Passives (7s and 8s) or
Detractors (0–6s). The NPS is calculated by subtracting the percentage of
Promoters from the percentage of Detractors. Most businesses achieve an NPS of
10% to 15%, while the very best companies (think Apple and Amazon) get scores
of 50% or more.
Breedlove obsessed over her company’s NPS and realized the key to
driving it up was perfecting the first few interactions with a new customer.
When you call a big payroll company looking for a service to pay your nanny,
the response can be underwhelming. With only one person to pay, you are often
relegated to the most junior staff member and even they would rather be dealing
with a larger client.
When you call Breedlove, by contrast, you get a team of
professionals totally focused on setting you up. You’re not an afterthought.
You’re not passed on. Instead, you get the best onboarding talent the company
has to offer.
This set-up team was a big part of how Breedlove achieved an
astonishing 78% NPS.
3. Create
Recurring Revenue Streams
The third thing that made Breedlove’s company attractive was
recurring revenue.
Regardless of what industry you’re in, recurring revenue models
give acquirers more confidence that the business will keep going strong after
you leave.
By 2012, Breedlove & Associates had grown to $9MM and, given
the nature of the payroll business, 100% of their revenue was recurring.
4. Reduce
Reliance on Customers, Employees and Suppliers
Breedlove’s company was also attractive to buyers because she had
a highly diversified customer base with no single customer representing even
close to 1% of her revenue. If more than 10% to 15% of your revenue comes from
one buyer, you can expect prospective acquirers to ask a lot more questions.
Customer concentration is one of three factors that make up The
Switzerland Structure Module. The Switzerland Structure measures your business’
dependence on a single customer, employee or supplier.
5. Find
an Acquirer You Can Help Grow
By 2012, Breedlove & Associates was growing 17% per year,
which is good but not blow-your-mind good. So how did she attract such an
incredible acquisition offer? The trick was showing her acquirer how they
could grow.
In Breedlove’s case, she sold her company to Care.com. Think of
Care.com as the Angie’s List of care providers (e.g. child care, senior care,
etc.). If you need someone to care for your kids or an elderly relative, you
enter your address into their website and Care.com will give you a list of
vetted caregivers in your area.
At the time of the acquisition, Breedlove had 10,000 customers
and Care.com had seven million members. Breedlove argued that if just 1% of
Care.com’s members used Breedlove’s payroll service, it would equate to 7X
growth in Breedlove & Associates almost overnight.
In 2012, Care.com acquired Breedlove & Associates for
$54MM—an outstanding exit made possible by Breedlove’s focus on what drove her
company’s value, not just their top-line revenue.
*** Richard Kranitz (Wisconsin) is an experienced attorney and business consultant in the areas of corporate, securities and tax planning for corporations, partnerships, joint ventures, limited liability companies, multi-unit enterprises, and a variety of different non-profit entities. In addition, he has counseled their owners and executives in compensation planning, estate plans, and asset protection. Attorney profile at: https://solomonlawguild.com/richard-a-kranitz-esq
