Maybe Earnouts Aren’t as Bad as You Think

Introduction:

This week, a new regular, David Barnett, joins the podcast along with Jaci Russo and William Vanderbloemen. David, who has been a guest on the podcast before, helps people buy and sell businesses—but, as he explains, he’s not a business broker. He’s found a different business model. David, Jaci, and William discuss why it’s so hard to sell a business, what owners can do to make their businesses more attractive to buyers, and why it can be in everyone’s interest for sellers to accept an earnout. Plus: Jaci talks about why she used a recruiter to help her hire a business development person and why she ended up choosing someone who checked none of the boxes she initially thought most important. “I thought I needed some hotshot East Coast, West Coast, big city dude who came in with all the slick talk,” she tells us. Instead, she found her winner in rural Alabama.

— Loren Feldman

Guests:

David Barnett helps people buy and sell businesses.

Jaci Russo is CEO of BrandRusso.

William Vanderbloemen is CEO of Vanderbloemen Search Group.

Producer:

Jess Thoubboron is founder of Blank Word.

Full Episode Transcript:

Loren Feldman:
Welcome Jaci and William and especially David, the latest addition to our podcast team. It’s great to have all of you here.

Jaci Russo:
It’s good to be here. Welcome to the newest victim.

Loren Feldman:
That’s exactly where we’re going. David, I spoke with you for a one-on-one episode at the beginning of the year, and you had a lot of interesting things to say. There were a couple in particular that I wanted to start with today and see if we can get some reactions from William and Jaci. One was that you told us about why you consider the business of selling small businesses to be a very bad business for the people who try to do it, which helps explain why it can be so hard for people who want to buy or sell a business to find a good broker. It’s also why you ended up changing your own business model. Can you tell us about that?

David Barnett:
Yeah, sure. Well, it’s simply that it’s a contingency-based business, and so it means people get paid when they successfully do a deal. And there’s just so much that can go wrong on the journey, from when you try to convince a person to list their business for sale with you as a broker to finding the right buyer to then that buyer has to go through due diligence and arrange financing a lot of the time. And there’s a lot of back and forth, and all kinds of different advisors are giving their opinion and looking at different things, and so it’s very easy for a deal to fall apart. I’ve told many business owners that getting an offer on their business is like winning the lottery. And then successfully closing the transaction a few months later is like winning the lottery again. There’s just a lot of stuff that can happen. And throughout that entire process, most brokers are not getting much or any compensation or cash flow from their dealings with that particular business owner, and so this is what creates the stress.

I mean, in my own experience, I went a little over three years as a business broker, and in each of those years, I had a stretch of seven to nine months with no closings. And so you’ve got all your overheads you’re covering without any great deal of cash coming in. I actually recorded an interview for my own YouTube channel the other day with someone who had sold their business. And this gentleman kept statistics, and he had conversations with over 60 people, and it turned out that 45 of them had no money available—yet they were still out looking for a business.

And this has to do with the proliferation of this buy-a-business-with-no-money, get-rich-quick kind of content that is now everywhere online. But it highlights some of the frustrations that brokers deal with. Because, of course, brokers are dealing with this kind of thing all the time and huge volumes of inquiries, most of which are from people that aren’t able to ever put a deal together, regardless of how much they want to.

Loren Feldman:
So tell us about the business model that you chose instead after your years as a broker.

David Barnett:
So today, we basically have two streams: one for buyers, one for sellers. We do some other work for other people as well, in the valuation space and consulting on business transactions, where we help people like bankers and stuff like that. But for the buyers, we basically have a series of steps. We have free content we put online. We’ve got some books that I’ve published. We also have an online course, which kind of answers all the same questions that every buyer has. We kind of package that together in an online course people can do.

We have a group coaching program, which is a group of people that are all trying to buy a business. We meet three times a month, and I coach them, and they share with each other about their conversations with sellers, with bankers, with brokers, etc. So that’s another avenue that we help people with. And then we do these consulting packages called buyer-insight analyses where we will look at a business that someone has found, and we’ll go and do the research on past sale transactions and show the buyer what we think that it’s worth, what some reasonable offers are, will it cash flow, given their resources? Etc.

And then for sellers, it’s the same kind of thing. We have this step-by-step approach. We start with a valuation, which leads to a recommended asking price, and if people want to proceed past that, we’ll do a packaging. We create what’s called a business profile, or a sim, which is the document that someone would share with a prospective buyer who wants to look at buying their business. So we’ll make that for someone.

For each of these steps, we charge people a fee for the work that we do. And then if they want our help to find a buyer, we will run an online ad campaign for people. And we will be the recipients of all those inquiries, and we have a method for filtering the serious from the not so serious and getting them to complete NDAs. And then we coach the sellers on how to have conversations with those people and ultimately lead them to a successful transaction. And we break it down step by step, charge for each step. And I liken it to the fact that we are helping people in the way that a business broker might, but we’ve adopted the business model of other professionals like an accountant or a lawyer, where we’re just charging people for the work that we do each step along the way.

As a result, our clients, our sellers, end up paying us far less than what they would pay a traditional business broker. From our perspective, we get a more even cash flow. And from the perspective of buyers that we work with, we’re able to help them in a way that isn’t conflicted, because we don’t have a monetary interest in them actually doing the deal. Our only interest is in serving their immediate need and having them be happy customers, right? And so it allows us to really work in our clients’ best interests and not have to worry about the constant cash flow pressure.

Back a long time ago, when I was in commission sales, I had an older salesperson say to me once that money very rarely motivates people. There are a lot of people out there who, once they reach a certain income, they’re pretty happy. Another $5,000 or $10,000 is probably not going to get them to do much more or act in a way outside of their character, but the lack of money can really get people to act outside their character. When somebody doesn’t have money for a car payment or a mortgage payment or something like that, then that’s when people will stretch the bounds of what they perhaps normally consider ethical. And a lot of business brokers face tough times. They starve a lot of the time. And this is why you have such a high turnover in the industry. People come into it, and by the time they learn enough to really become effective, they’ve been starving so long they need to go off and do something else.

Loren Feldman:
Jaci and William, correct me if I’m wrong, but I think both of you have told us on this podcast that, from time to time, you’ve had thoughts about growing through acquisitions. I wasn’t familiar with David’s business model that he just described. Have either of you run into it?

Jaci Russo:
I have not. I fantasize about it daily. [Laughter]

Loren Feldman:
About the business model? Or about growth through acquisition?

Jaci Russo:
Growth through acquisition.

Loren Feldman:
Are you just fantasizing? Or are you actively moving in that direction?

Jaci Russo:
Well, I’m active to the point that I’ve had conversations. I’ve got someone who’s put a fund together, so there’s money there to do it. And then I went off and, built a co-working space and then did this other thing. And now I’m launching this other thing, and so I haven’t gotten back to it, but it’s sitting there waiting for me. I just haven’t gotten my head around it yet, and I hoped we’d talk about it with David today. Because my challenge is: Everybody that I talk to says that you go in to buy the business, and then the buyer makes changes to the business. And then they haven’t really bought anything of value, because the thing that was most valuable was the original founder who just got kicked out of the business.

Loren Feldman:
Is that a question for David?

Jaci Russo:
I don’t know. It’s what I hear. These are things I hear on the street, Loren.

William Vanderbloemen:
How often do you run into a business that is either trying to sell or you’re trying to buy, where the founder’s personality is not a value that’s essential—if that makes sense?

David Barnett:
It’s a great question. There’s actually a tool we developed. We call it the “locus of goodwill tool,” and it’s a tool that’s meant to try to figure out where the positive feelings from the customer base actually point. And there’s kind of three places it can point. It can point to the brand. So lots of people enjoy Coca Cola. Probably very few people could name its biggest shareholder, right? So that would be an extreme example of people being focused on a brand. And then you’ve got a small business where the owner is the number one salesperson, and maybe it’s in a profession where they’ve won awards for their capabilities and things. And so that would be the other end of that spectrum, where it’s solely on the owner as an individual.

And then the third pole is the location. So there are some businesses that are successful because of where they happen to be—real world businesses that have a prime location. Or you can think about, “Oh, there’s always been a used furniture store on that block.” If that place ever closed and somebody else opened a used furniture store, they would benefit from the fact that everyone just knows there’s one over there. And so you have to kind of measure between these three poles and figure out: Where does the goodwill reside? Because if it is entirely focused on the individual person, then you have to manage that through the transaction.

And the way that it often gets managed is through some sort of period of transfer where the seller remains tied to the business. And in some cases, this could be for years. A lot of sellers, they don’t like to hear that. But from a buyer’s point of view, Jaci, what you mentioned about how when the seller leaves, what did you get? When we look at businesses that are being sold, we typically look at their past performance. When people analyze the stock of a publicly traded company—I’m going to say Coca-Cola again—people will look at what they’re doing, but they also look to the future. What are the expectations? What is the growth that we expect? All that kind of thing.

Because when you buy stock in Coca Cola, the entire management leadership team is intact. It’s part of what you’re investing in. And when you buy a small business, all of that leadership knowledge, etc., departs, because it’s in the head of the owner. And the buyer often is the one that steps in and has to fill that role. And so, this is one of the big reasons why small businesses tend to always be worth more to their sellers than to buyers, because the sellers understand all the risks. They understand the market. They know the customers and all that kind of stuff.

And a lot of the times when I meet with a business owner and I do an evaluation of their business, and I show them what we think it will sell for, largely the response is something like this: “Well, if I just kept it for the next few years, I’d have that money and still own the business anyway.” And they would be absolutely correct. It’s not cash-out Mark Zuckerberg-style that people get to enjoy when they’re talking about selling a small business. The buyer is going to look at that business, and they’re going to start discounting all these risks of all these what-could-happens in their mind. And they often are going to borrow money, which means that they have to take part of the cash flow that the seller currently enjoys and use that to service the debt that they’ve taken on. And so the buyer sees it as a much more risky proposition, and the debt has to be paid from the cash flow that’s coming out of that business. And if the buyer is going to step into the seller’s shoes, they’ve got to be able to take a salary out of that, too.

And when you start to take all of these necessary things out of the cash flow—you know, debt service, manager salary, capex expenditures, because everyone adds back depreciation and amortization for this stuff—then you have to take into account the tax burden that’s still going to be faced on the profits. Oftentimes, there’s a hard limit to what someone can afford to pay for a business, and that number is often disappointing to the seller just because they have that different point of view. And so, unless somebody needs to sell one of these small businesses, they usually don’t. They look at the number and they go, “Geez, I don’t want that amount of money. It’s worth more to me. I’ll just keep it.”

And so, that’s why we often have to wait for one of the five big things. I group burn-out, boredom, and fatigue together into the mental basket. Like, I’m tired or I need to move on, kind of thing. And then there’s divorce, poor health, the need to relocate, and retirement. And of those five big reasons why people want to sell a business, retirement is the only one really planned for, and people usually plan for it with sort of a flexible timeline. People will start to consider it at one point, knowing that they have the flexibility to hang on for a few more years if they have to. So, really, you need to have a good business that is profitable, that is transferable, meaning you’ve got the systems and processes and things down so that a new owner can take over and run it. And you need a seller that’s sufficiently motivated, where they’re willing to accept a price that they might think is low or or isn’t worth what it’s worth to them.

All those things have to line up together for a transaction to occur. And then you have to get everybody else to agree: the bankers, CPAs, the lawyers, the other people you might have involved in your due diligence. And so everyone’s got to give their stamp of approval. And then you get a transaction. And so this is just a lot of moving steps, moving pieces that have to align. And it all starts with the seller’s expectations. One of the biggest problems I see in the world of business brokerage is that brokers will get excited about signing up a business owner because they say, “Hey, here’s an opportunity for me to sell a business,” but they won’t properly set the seller’s expectation. And then you end up with a business on the market for a price that’s too high, that nobody could really afford to pay. And it just creates this trap.

It’s almost like a leg-hold trap for time, because the broker will spend time on it. The seller will spend time talking with people. The buyers will spend time. But when it gets down to the end, that seller will never agree to a deal that makes sense for the other parties, because they’ve never had their expectations set properly, as to what the transaction could realistically look like.

William Vanderbloemen:
Well, just to follow up, all of us are interim owners, at one level or another. So what should business owners that are sitting here—I’m 55. I’m not tired. I don’t have to move or retire. We’re in great shape. I would like to keep all options open for whatever that day is that one of the big five, or a cluster of them hit. So what should I be doing over the—let’s call it the next 10 years—to position my small business to be highly appealing?

David Barnett:
So, the value of the small business is always tied to the cash flow. So you want to try to have the highest possible earnings that you can. And when a buyer looks at the business, they’re going to say, “What’s this cash flow, and what’s the cash flow worth to me, given the risks of this industry?” And then the next question they will ask is, “What is the likelihood that the cash flow will continue under my stewardship?” And that’s when they start to look at things like the goodwill question that we talked about earlier. You know: Where are the relationships? Are they with a series of sales people that are employees of the company? Or are they with the owner, for example? And what are the processes? Am I going to be able to run this business?

We think of processes and procedures like the manual that someone gets when they buy a McDonald’s franchise—which I’ve never seen in person, but purportedly tells you everything from how to mop the floor to how to make the hamburgers to how to sponsor the Little League baseball team. Well, it doesn’t necessarily have to be as detailed as that, but you have to be able to say to someone, “Here’s our plan every year for our marketing. This is how we advertise. And here’s the folders that have all the ads we’ve run for the last 10 years. And this is the person who we go to when we need design work done.” And you actually have it documented where different things can be found. And if that buyer sees that you are organized in such a way that it’s not just all in your head, that’s going to cover a lot of distance in answering this question.

And then the last part is that the buyer knows that the connection to a lot of the history is with you, the seller. And so, they’re probably going to propose a deal structure that gives you a good reason to continue to be available for them well into the future. And that often means a deal structure that has some kind of earn out, or seller finance note, or something like that, so that you will be receiving payments from the buyer for quite some time into the future, which gives you a reason to want them to succeed.

So this is an alignment of interests. So this causes you to pick the right buyer that you think is going to be successful. But it also gives you a reason to pick up the phone when they call eight months after the sale and say, “Hey, I’m having an issue with that big customer that we have. And these are the things that are going on. I’m wondering if I could talk with you for a little bit about how you used to deal with that customer?”

And you’re going to be happy to take that call, because you know that if they lose that customer, then the business will be in jeopardy, and so will the balance of your payments. And so that’s the big advantage for buying a business, is that you’ve got that resource available in the experience and history of the seller.

Loren Feldman:
David, William started by asking the question about the importance of the owner at the time of sale, and you said you have a tool that does an analysis to figure out how important the owner is and would be, going forward without the owner. I’m curious, is it a plus or a minus if the founder’s name is in the business’s name as well?

William Vanderbloemen:
What an interesting question, Loren. [Laughter]

Loren Feldman:
Just a random hypothetical.

Jaci Russo:
You pulled that out of the air!

David Barnett:
It can be more easily a negative, I think, if one particular business is renowned for a certain thing, and that name is synonymous with that service. You know, I’m thinking about Wrigley’s and chewing gum. Is Wrigley’s a negative factor for that brand today? Probably not. But if it’s John Smith Plumbing in a little town, are people going to ask, five years after transition, “Where’s John?” I’ve seen family-owned businesses that were named after the founder, who maybe lived 80 years ago, and they’ve always just used that brand. And the current generation is almost taking that persona of that original founder, and they’re turning that into a marketing persona—sort of like if you want to think about it as a mascot kind of thing.

And so, you can use brands that have people’s names in them. I think that you really have to have an interesting marketing strategy around that. I see this here locally with law firms. Once upon a time, every law firm I ever saw had names of people. The founding partners were the name of the law firm. And now I’m seeing more and more law firms giving themselves these more branded kind of names, and I know why they’re doing it. It’s because they’re trying to turn their business into some kind of more saleable asset that the lawyers who might want to retire one day are going to be able to sell that to someone else—and that the brand hopefully carries some degree of goodwill in the market.

Loren Feldman:
William, are you thinking of changing the name?

William Vanderbloemen:
Nope, nope. Nordstrom did just fine. Smuckers did just fine. I’m kind of hellbent on breaking the rules on all that. My last name is screwed up. You know, the only advantage to our company having my last name is the SEO. It’s literally the only thing. I am just not client-facing anymore, except for this kind of thing and for writing. And maybe for brand new big deals, I’ll come in and wave and do more of an ambassador role, but hopefully we’re building an experience that is synonymous with that name/brand. And I may be delusional, but people don’t ask me to do their searches.

David Barnett:
You know, this can manifest itself in a lot of different ways. There was a Netflix series, or a special, I guess, that I watched a couple of years ago that was all about Burt [Shavitz], the guy who started Burt’s Bees—you know, the beeswax lip balm and other products. And he had sold that company a long time ago, and then the company he sold it to got acquired by a big company—Unilever, maybe. But part of his sale deal originally was that he had to be available a certain number of days a year for marketing events, like to go up here to make a celebrity appearance. You know, “Here’s Bert, the guy with the beard.” And years and years and years after the sale, he was still bound by that contract and still being flown out by Unilever to go do marketing events.

And so, that’s the kind of thing that can happen if an individual is highly tied to the business. The buyer may be very afraid that the person’s unique character, their presence, their relationships that they’ve had, are critical to the business’s success. Even in the world of small business, I’ve seen deals where buyers have wanted to compel the seller to be available, for example, to attend trade shows for several years after the transaction, just so that seller would be around to make introductions from people in the industry to the buyer, to help move that goodwill over to the new person.

There’s even instances where businesses have been sold, but it has not been publicly revealed that the business has been sold, but rather it’s revealed to the public or presented to the public like a partnership. You know, “I’m going to retire in a few years. So I brought on this younger partner, and we now work together while I go into semi-retirement, slash retirement.” In reality, the business has been sold, but they want to be able to present to the public and the market that the old owner is still involved in the leadership.

Jaci Russo:
When you talk about owner names in the titles, obviously, I have one of those companies at BrandRusso. And we didn’t start off that way. Originally, we were OEJ Marketing. I was a freelance media buyer—

Loren Feldman:
Wait. OEJ?

Jaci Russo:
OEJ, correct.

Loren Feldman:
What does that stand for?

Jaci Russo:
Well, actually what it stands for is “one-eyed jack.” When our oldest was born, he did not sleep for 24 hours. He’d be lying in his bassinet at the hospital pretending to be asleep. A nurse would come in because they like to check vitals every 15 minutes, because they don’t think anyone should sleep at the hospital, even if you’re not sick. And so the nurse would come in, he’d be lying there perfectly still, as if he’s sound asleep. And then as soon as she got close to the bassinet, he’d pop one eye open and watch her, whatever she was doing. So the nurses talked about it constantly, and they called him one-eyed Jack. His name’s Jackson.

So Michael did some freelance graphic design, and so he named his freelance graphic design thing One Eyed Jack Creative. I was working at another agency. That’s how we met in the first place. And so now here we are. That infant is now a year and a half old. I’m pregnant with number two, and I’m going off on my own as a freelance media buyer, and I needed a name for whatever this thing is that I’m doing. And so Michael says, “Well, if I’m One Eyed Jack Creative, why don’t you be OEJ Media?” And I was like, “Okay.” And so hence it became.

But people would ask, “Well, what’s the OEJ stand for?” And I didn’t like being a solo practitioner. I thought that made me smaller than I was, because I’ve always believed in my own greatness. And so I said, “Oh, well, it’s Oliver, Elizabeth, and Jaci.” Oliver was my college debate partner, and Elizabeth was the maid of honor in my wedding. And so they were now, without their knowledge, partners in my new company.

Loren Feldman:
And what prompted the change to BrandRusso?

Jaci Russo:
Well, so nice of you to ask. It changed because people thought that the Russo was one thing, and the OEJ was another thing. And so one of my clients would be talking about their awesome media buyer. “Who does media buying for you?” “Oh, it’s the Russo girl.” Well, that doesn’t show up in any SEO. And so my clients didn’t register the OEJ. They registered the Russo. And so Michael said, “What do we do about this?” And I said, “Well, I guess we probably need to change the name of the company.”

We’re a couple years in at this point. And so we evolved, and we became Russo Ad Group, the Russo Group, and then it’s been BrandRusso for about 15 years now. And so I see the benefit of having our name in it, just like William does. So we’re kind of locked into that. We fortunately have a next generation also named Russo, who will take over. So that works out well, and it’ll be his problem to kick that can down the road later.

Loren Feldman:
Would that be One-Eyed Jack you’re talking about?

Jaci Russo:
That would be the original Jack of the One-Eyed Jack. But I’m thinking about, as we talk about names, we’ve had a lot of clients who grapple with this, strictly from a marketing standpoint. Because when their company is a cult of personality—it’s about them—and the company isn’t named after them, they get that disconnect. When the company is about them and the company’s named after them, they’re handcuffed. And so you’ve got pros and cons either way.

There’s a really, really great ophthalmologist. His name’s Ryan. He has a solo practice in the town one town over. That town’s name is Scott, and so he named his practice Scott Eye Care. How many times a day do you think people walk in and ask for Dr. Ryan or Dr. Scott? Scott’s winning about 75 percent of the time. And so that’s a challenge when it comes to names. Before we even talk about selling, it’s just existing. From a marketing standpoint, names matter.

Loren Feldman:
All right, I’ve got some things I want to ask William and Jaci about, too. But before we move on, David, can you give us some sense of how big your business is?

David Barnett:
Yeah, so right now we’re a team of five. We have someone who helps with our social media, and a receptionist/EA for myself. And then we have two other fellows that are on the analysis team. So we’re a team of five, and we work with people all over. Probably about three quarters of our clients are in the U.S., and we work with people in Canada and all the other English-speaking countries as well.

Loren Feldman:
And do you know how many transactions you tend to do a year, or how many you expect to do this year?

David Barnett:
We we call them files because—

Loren Feldman:
I know you don’t get paid by transaction.

David Barnett:
Yeah, and here’s the other sort of rough part of this calculus, is that a lot of the time when we do insight analysis for a buyer, we uncover things that lead to no deal being made. And a lot of the times when we work with a seller and show them what their business might realistically sell for, we also end up with no deal being made. You know, the person will decide to do something else, or keep the business and try to work on it, or decide that just closure and liquidation is a more effective way for them to exit.

And so we open two or three files a week on average. And so we work with a lot of people. Part of this leads into some of the statistics about small business sales that some people get surprised with. It’s generally said that about 80 percent of small businesses don’t sell. BizBuySell, one of the big online platforms, puts out a report every quarter about their statistics, and the majority of businesses listed on there do not sell either. And we also know that the majority of businesses that do sell don’t go through any kind of intermediary. So it’s a very opaque market. There’s no sort of central data like there might be with real estate—you know, with home deals, for example.

And even the government doesn’t even know, because a lot of businesses are sold through what’s called an asset sale. And when you do an asset sale, really, you end up with a private contract between two parties and a bill of sale. And the buyer typically will create a new legal entity to do the purchase. And if the seller is being paid over time, they may, for example, have to keep their entity going while they collect some of those payments.

So over at the government, depending on where you are and what branch of government takes care of business formations, they could record someone creating a new entity to do a business transaction. And they would record it as a new business startup. And the business being sold, they legally continue, and they might continue to file their annual returns for a few years. And then, once the note is paid, maybe then the entity gets wrapped up, and at that time, the government will record it as a business closure. But there’s no real accounting for these transactions. And so it’s interesting, because it means that it’s a market with very little transparency.

Loren Feldman:
Jaci, I believe you recently made an important hire, a business development person. Why did you need one?

Jaci Russo:
Well, we’re doing a decent enough job. We’ve talked often in these podcast [episodes] about sometimes it’s feast, sometimes it’s famine. But overall, when you look at the course of a year, we do a decent enough job of bringing in new clients—a lot through my speaking engagements, our podcast. You know, we built up a good reputation, so there’s a nice, steady flow. And if we’re going to continue to grow the way I want us to, then I want to increase that flow. And so it cannot just be through our organic efforts. It needs to be some new strategies on top of what we’re doing.

And so to me that seems like it’s time to go hire an adult, have a real adult in the room who has a real program that’s only focused on that—unlike everybody in this building who’s focused on doing it for our clients and then also does it for ourselves when we have time. And so I follow the advice that we keep talking about, and I hired an expert in search, specifically sales. And as I’ve joked before, I gave them a checklist of what I wanted. They gave me back someone who checks none of the boxes but was exactly who I needed. She has hit the ground running—she’s just now about to the end of week three—has already gotten us a really impressive meeting that’s gone to proposal, that looks like they’re going to sign in two weeks, once they get the final approval from their board.

So we’ll have our first client within a month through her work and a few other opportunities that she’s lined up. She’s revamped our CRM system. She’s added a couple of layers of data that we were lacking that has really amped up our efforts in a better, more targeted, specific way. And she’s just a general delight to be around, which is great. But I am so excited that we did it, and I’m so bummed that we didn’t do it a year ago. But she wouldn’t have been available, so I guess it all works out.

Loren Feldman:
Have you used a search firm before?

Jaci Russo:
Never. And I just recently made two new hires, Loren, and I was not the decision maker—I mean, I was the final decision, but I wasn’t the person who decided who we were really going to come down to the nitty-gritty on for either one of those. And not surprisingly, both of them are the two best hires I think we’ve ever made. And so I think we’ve fully removed me from that process. It’s not my skill-set.

Loren Feldman:
How did you find the search firm that you chose?

Jaci Russo:
They were a client last year. I did some consulting work for them, and I believed it when they talked about their process and how they work. You know, it’s a lot like the way William talks about his. He’s really good at this faith-based niche that he’s carved out for himself. And so he knows the space, he knows how to read the people, he knows what to ask. And they do the same thing but with salespeople. And they’ve worked with—her name’s Robyn. They’ve worked with Robyn on some other engagements in the past, so they knew her well enough to know it would be a good fit. And gosh, they were right.

Loren Feldman:
Well, what were the boxes that this candidate didn’t check for you? What were you looking for that they didn’t find?

Jaci Russo:
Well, I’m about to show that I can sound as small-minded and ignorant as anybody else on any given day. I thought I needed some hotshot East Coast, West Coast, big city dude who came in with all the slick talk. And so I have a very nice lady who’s in rural Georgia, who is, when I tell you, killing it—I’m not giving her last name because I don’t want anybody to try to poach her. She’s mine. But again, sometimes we tell people what they actually need and not what they think they want.

Loren Feldman:
William, what do you think of the practice of giving someone who’s completely different from what your client has asked for?

William Vanderbloemen:
Well, that’s such a good question. I guess what I’m learning, for me, a search is—I’ve used this metaphor before—but it’s akin to an organ transplant. You’re bringing an outsider into the body to run a major system. That’s a transplant. And so what really separates the best transplant doctors from the rest is not finding a good donor list. It’s finding the tissue match. And in our world, what I’ve learned the hard way over 17 years is people have aspirational goals for what they think they want, and oftentimes their eyes are bigger than their stomach, if that makes sense.

And they want someone who can get some new growth and make these things happen, XYZ, bring in some younger families, bigger endowment, whatever the thing is. But bringing the person in who can actually catalyze those results is going to rock the boat harder than they’re ready. So we spend a lot of time on the front end, and we’re in a very unique position. We’re not positioned as, “We’ll find you some people you don’t know.” We might find you people you don’t know, but you’re hiring us as a trusted advisor.

I mean, you can’t always use this word, but like a Sherpa. You’re going up Mount Everest. This is hard. We’re the no-name people who stay off radar, that have gone up and down this hill many, many, many times. We can show you where to step and where not to, and part of that is a little bit of a self assessment on the front end to say: How much change can you guys tolerate? How much new is needed? Are we breaking an S curve and really do need a turnaround person? Or do we have a really great system, and we just need a software upgrade, if you will?

So asking those questions on the front end, we’ve found, makes for a better chance at a tissue match. And it’s taken a long time—and I don’t want to sound arrogant at all—but when I first started this work, and it was for churches only—you know, churches don’t do new ideas very well. When we started, I would walk into a room and the client would say, “We’re so glad you’re here.” And I’d say, “I’m so honored, thank you for trusting us.” And they’d say, “Let me tell you what we need you to do.” And we’d say, “Okay, fine,” and start writing things down.

Now, the more common thing is we walk into the room and people say, “Please tell us what to do.” So it’s almost a script flip, if that makes sense, where we’re coming in well before the search has ever started and helping frame out what’s actually going to work to help you reach as much of your aspirational goal as your organization will tolerate over the next however many years we’re talking about.

Loren Feldman:
Jaci, did they have to sell you on this person, or did it click for you immediately?

Jaci Russo:
Well, when they sent over the rundown, I was like, “Okay, I gave you a 10-point criteria, and she’s human, so I guess that’s one of the points, but the other nine?” But then I reminded myself that I hired an expert, and why am I paying them if I’m not going to trust their advice? I am an expert, and when people hire me, I expect them to take my advice. So I reminded myself to shut up, sit down and just follow directions, which I don’t always do as well as I could or should. And so I took the meeting, and it was 10 minutes in, and I’m like, “Oh my gosh, I’m so glad they matched us.” And we were off to the races after that.

Loren Feldman:
William, at the beginning, David told us about his business model and how he switched from getting paid by transaction. How do you get paid for recruiting?

William Vanderbloemen:
It’s a similar concept, and that is, I am not motivated to sell you a candidate. We have a fixed retainer. It’s derived as a percentage of the anticipated salary. So, if the person’s gonna make $150,000 a year, just picking a number out of the blue—and that could be any kind of employer or employee—then our fee is $50,000, a third of the first-year salary. And it stays there, unless there is a wild variance north of $150,000. It won’t go below that. I mean, this sounds horrible. You wouldn’t think this happens. But we have had people, even churches, low ball us on their estimated salary, so we can set the fee low, and then go high—

Loren Feldman:
Churches do this, William?

William Vanderbloemen:
Oh my gosh. You know what, Loren? They’re made up of these things called humans. [Laughter]

Jaci Russo:
Fallible creatures.

William Vanderbloemen:
Yeah, I’m sure glad none of us are one of those, right?

Jaci Russo:
Oof, this is why the robots are gonna win.

William Vanderbloemen:
The short answer, Loren, is it’s a very similar value proposition. You are not paying me to talk you into somebody. We had one client where a kid sent a YouTube video in of a pastor, and that’s who ended up getting hired. And we got paid just the same. And we got paid because we walked them through a process, and we vetted the candidate, and we did all those things. But I don’t want to be incentivized to close the deal, because I think that compromises my relationship with the client as a trusted advisor and not a vendor. But that’s a hard sell on the front end.

David Barnett:
We have fixed prices like William does.

Jaci Russo:
Us too.

William Vanderbloemen:
But you know what percentage of the economy is payment upon delivery? I mean, that’s every home you’ve ever built, to some extent, right? So I’m charging regardless of outcome, and that’s a tough sell. And that takes a lot of build up of brand equity over a long period of time to get there.

Loren Feldman:
Did you start with that model?

William Vanderbloemen:
I did. It took a lot of no’s and a lot of time. In my estimation, I wanted to start there and just try and make it work and say, “No, that’s the way it is.” And we were fortunate. I’ve not seen many search firms be able to start lower and work their way up.

Loren Feldman:
Jaci, back to your business development person, I think you said she’s in rural Georgia. Were you looking for someone to work remotely or willing to take someone who worked remotely?

Jaci Russo:
When we started the company in 2001, I was pregnant. And so I knew that within a month of our founding, I was going to be working remotely, at least for a few days. And so we’ve always had the tech in place for remote work—long before 2020. And over the years, we’ve had parents who needed to have some flexibility with kids. We’ve had some people who were working here as full-time, in-office employees and moved because of a spouse transfer or parent situation, whatever it was. And so, I have never cared where people sit to do their work. They can work from home, they can work from vacation—not like they should work while they’re on vacation— but while traveling.

I think that we should just get the job done, and whatever that takes, let’s do that. And we have had a copywriter—gosh, I guess she’s been with us six or seven years now. She’s actually from Lafayette, but I didn’t know her when she lived here. But she’s married and lives in Rome now, and so we just have to work the time out. We know she’s no good after 3:00 PM. Like, we’re not inviting her to a Zoom at 4:00 Central Time.

William Vanderbloemen:
So it’s not Rome, Georgia.

Jaci Russo:
Correct. Nor Rome, Texas. It’s Rome, Italy, and I’m fine with it. We’ve had and currently have people in Arkansas, other parts of Louisiana, other states, whatever. So I assumed I was going to get matched with someone who did not live in my town, much less in my state. And I’m fine with it. I think that as we grow and expand—most of our clients aren’t in this state—I should not hold our people to be. The challenge, really, is the cost of living. It’s very inexpensive to live here, and so it takes a lot of math, not my skill-set, to make the numbers work when someone doesn’t live here because they’re more expensive.

Loren Feldman:
This person is obviously a high-level hire. Did you do anything to make sure that they understood your culture and got to know your people?

Jaci Russo:
Yes, we’ve always done rounds of peer interviews, and so we did that this time. And it’s a balance, because whether it’s Robyn; or Jana, who’s in Rome; or Rye, who’s in Arkansas, it is about them knowing us, knowing our culture, knowing our business and our vibe. But they don’t sit in this building, and so they don’t have to be in on the office jokes. You know, there’s a thing going around right now where people use AI to design them as an action figure, as a Barbie, as a doll in a package, you know?

William Vanderbloemen:
Oh, my Gen Zs have already been doing that. I’m out there.

Jaci Russo:
The whole office did it. We’ve loved it. It’s been very funny. It is fascinating how much it gets things right, and then really funny when it gets some things wrong. And so the people who aren’t in this building, they still get to play with that, because it’s all in the email threads. Now, I do think every time I send an office-wide email that, “Reagan’s birthday cake is in the kitchen,” I’m like, “Oh, we’ll save a slice for you guys.” I don’t know what to tell you. “Everybody, come in the kitchen at 1:30—unless you live more than two hours away.” And so we have to be sensitive to that, because there’s some shenanigans that go on here that they don’t get to be involved with. But it does have to be a good fit in terms of personality and vibe. And I’ve talked about this, I know, a number of times: happy, humble, and hungry. You check those boxes and pretty much everything else we can work out.

Loren Feldman:
William, the last time you were here, you told us about your wife and co-founder, Adrienne, that she’d been diagnosed with cancer and was beginning treatment. I don’t want to ask you for a medical update every time you come back on the podcast, but obviously our thoughts are with Adrienne. But I do want to ask you, what have you been able to figure out about managing your time, being able to be there for Adrienne, while also running the business? How’s that going?

William Vanderbloemen:
Well, you’re very kind to ask. Thank you. And we won’t have any progress or regress reports until the end of June. Every 12 weeks they do scans, so we’ll find out. But she’s on full treatment now, and they started her at the full dosage and said, “Hardly anyone can do this for more than a week or two, so we’re just going to try until you can’t.” And this is Adrienne in a nutshell. She said, “Oh, really? No one can do it? Okay.”

Loren Feldman:
And she did it.

William Vanderbloemen:
What are we, five weeks in? She’s still on the full dosage, and so that’s good. And given where we are right now, she told me, “Listen, the best way you can make me feel normal, which will make me heal faster, is if you’ll just go do your freaking job. So, how good did I marry?

And you know, I’m not traveling on a whim or for the things that don’t matter. I’ve pared back to essential. And our client base is pretty compassionate toward these kinds of situations. Probably most people are. But if I have to cancel something, it’s not the end of the world. We’re not at a place—she’s not in bed. So for me, it’s just a balance of providing a normal, good life and then not looking up five years from now, saying, “What would I give for one more dinner?” You know? And I don’t know if I have that figured out or not.

Loren Feldman:
So aside from reducing your travel commitments, are you pretty much doing what you normally do, in terms of running the business?

William Vanderbloemen:
Yes.

Loren Feldman:
And does that mean going into the office most days?

William Vanderbloemen:
Well, I mean, as you know, I’ve been trying to work myself out of a job a little more every year. So, some yes, sometimes no. I don’t roll in early, and I don’t stay late, and that would happen with or without cancer. That’s part of me letting this thing run itself and grow itself. And I mean, to give a little context, I can just about see my house from my office.

Loren Feldman:
Oh, I didn’t realize that. That’s nice.

William Vanderbloemen:
Oh, yeah. No, my Jeep just turned eight, and it has 15,000 miles on it. [Laughter] So, it’s not a fair question. Most people don’t have that luxury.

Loren Feldman:
But it sounds like there hasn’t been a real challenge, in terms of figuring out how to manage.

William Vanderbloemen:
Not yet. It’ll come. I mean, one day, hopefully I can write something of a work-life balance lessons learned. But for now, things are pretty normal.

Loren Feldman:
Well, that’s great to hear.

William Vanderbloemen:
Yeah, thanks for asking, though.

Loren Feldman:
Of course. All right. Well, again, welcome to David Barnett. Thanks so much for joining us for the first of many, I hope. You will come back, won’t you David?

David Barnett:
Absolutely. It’s been a great time. Thank you.

Loren Feldman:
All right, my thanks to David Barnett, Jaci Russo, and William Vanderbloemen.