New Year’s Resolution? Make. Some. Money.
Introduction:
This week, Shawn Busse, Paul Downs, and Laura Zander talk about why 2023 was so challenging for them and what they plan to do differently in 2024. “Last year was a year when I knew I was going to be making a bunch of investments and didn’t expect to show much or any of a profit,” says Paul. “And I absolutely nailed that goal.” Shawn, meanwhile, thinks his new marketing scheme is working, and Laura is addressing her issues by going shopping — shopping, that is, for businesses. She’s now bought a total of six, and she offers a step-by-step guide to how even a relatively small business can grow through acquisition, including what she’s looking for (mostly companies in distress), how she sets a price (she aims to recoup her cash outlay pretty quickly), how she finances the deals (not with a bank!), and how she integrates her old and new operations (that can be a bear).
— Loren Feldman
Guests:
Paul Downs is CEO of Paul Downs Cabinetmakers.
Shawn Busse is CEO of Kinesis.
Laura Zander is CEO of Jimmy Beans Wool.
Producer:
Jess Thoubboron is founder of Blank Word.
Full Episode Transcript:
Loren Feldman:
Welcome Shawn, Paul, and Laura. It’s great to have you here for our first conversation of 2024. I want to start today by asking you some basic questions, just to get a sense of where your heads are at as we head into the new year. For starters, did any of you make resolutions?
Laura Zander:
Hmm, no.
Paul Downs:
I did.
Loren Feldman:
What did you resolve, Paul?
Paul Downs:
I want to make a lot more money this year. [Laughter]
Laura Zander:
Seriously. Can I piggyback on yours?
Paul Downs:
Yeah, but the context was, last year was a year when I knew I was going to be making a bunch of investments and didn’t expect to show much or any of a profit. And I absolutely nailed that goal. Laughter] And this year, I want to see some payback on that. So I’m going to be concentrating more on cost-cutting and efficiency and making sure that we’re profitable all the way through.
Loren Feldman:
Are you thinking about achieving that more by efficiency and cost-cutting or by growth?
Paul Downs:
Growth. And the thing is that we did a bunch of expensive projects and had one change to our basic fixed costs in 2023. The change was just that my rent went up, because we renewed our lease and then took over another 15,000 square feet. So my rent bill went from about 11 grand a month to 23 grand a month. And that’s a significant jump, but it’s still much, much cheaper than trying to move into a different facility.
So whatever the difference is there, let’s call that 130,000 bucks. And then we bought a new spray booth and put it into service. And that was about a $140,000 project. And then all the marketing and the new website I did, let’s call that 100 grand. So whatever that is, almost $400,000. Now, we’re gonna show an accrued loss of about 100 grand. So we would have been in pretty good shape if I hadn’t done those things. But those are the things I needed to do to get to the next level in the next few years.
Laura Zander:
How much space do you have, Paul?
Paul Downs:
Right now, about 45,000 square feet.
Laura Zander:
What did you say, $23,000 a month?
Paul Downs:
Yeah, it’s still cheap.
Shawn Busse:
Paul, I’m curious, because I was listening to Loren’s recap episode, and one of those shows was you talking about your two salespeople—the one who was drastically outperforming the other one, and the other one who you were not sure about his future.
Paul Downs:
Well, in September, I believe, I brought the underperforming one into my office and gave him a formal write-up, saying, “What you’re doing is not acceptable and your job is in danger.” And I told him that I actually didn’t want to fire him. But I would, and neither of us will be better off the day I do that. So get your shit together, more or less. And he agreed to do that. And he did. And he turned it around. And the last three months of the year, he was selling at a pretty good pace. And then yesterday, he came into my office and told me he was leaving.
Laura Zander:
[Laughter] You’re kidding.
Paul Downs:
Everybody is a winner in this scenario, I guess.
Loren Feldman:
Sorry to hear that, Paul.
Paul Downs:
Well, it’s forced me to confront something that I should have confronted a long time ago, which is that, of all the different types of employees we have—and we have shopfloor people, we have finishers, we have logistics guys, we have engineers, we have project managers—I’ve been able to successfully hire when I needed to for all those positions. And I’ve never even tried to replace either of my two sales guys. And I knew I needed to supplement them sometime this year, because we do anticipate more inquiries coming in and just need more horsepower to do it. So the thing I’ve been putting off and dreading and avoiding has now been dumped in my lap. And it’s just time to put on my big boy pants and figure out how to hire a salesperson.
Loren Feldman:
The other reason you did not want to have to fire him, you told us when we spoke about this over the summer, I think, was that you were acutely aware that if he was gone, you would have to take on his responsibilities until you did find somebody. Is that what’s happening?
Paul Downs:
Yup. I’ve still got him for another six weeks or so. And he’s leaving to open up a tree-care franchise, which is sort of a risky move in my mind, but everybody’s business idea sounds like a risky move to me. So he’s a good guy. And he’s done a difficult job for 11 years, and it’s fairly easy to get burned out on sales. And so I don’t fault him, and I just wish him the best. And yeah, I’m gonna have to jump in and do his job. But that will certainly incentivize me to figure out a way to replace him as quickly as possible.
Loren Feldman:
How about you, Shawn? Any resolutions?
Shawn Busse:
Yeah, I’ve never been a big resolution guy. I mean, the data shows it’s not a very good strategy. But like Paul, I would like to make some frickin’ money this year. That would be great. Last year was just the worst year on record for us. And so, outperforming that? I should be able to do it.
Laura Zander:
Wow.
Shawn Busse:
It was tough. Yeah, it was really tough. I mean, I think the Fed’s push on interest rates has had this sort of wet-blanket effect on everything. And we felt it. Just a lot of slow decision-making in the buying process. A lot of folks hemming and hawing, hemming and hawing, and dragging their feet. So I think they’re done jacking up interest rates. I think they’re going to start to go down. But yeah, I would like to see more opportunities. I mean, one thing that has changed is our marketing and business development strategy is just totally different now.
Loren Feldman:
I was going to ask you about that, Shawn. In the fall, the last time we talked about this, you told us about your 100-day-march strategy of getting your people out of the office and making connections and trying to drive business that way. Has the 100 days passed? And how’s it going?
Shawn Busse:
Let’s see, we have four days left. It’s going great. It’s been a wildly successful effort. I couldn’t be more delighted.
Loren Feldman:
What worked? Tell us.
Shawn Busse:
Well, so, prior to this initiative—for folks who don’t listen to every show—most of business development was on my shoulders. And then, I had a person about a year ago who, like Paul, left. They were kind of like one of my key salespeople, and replacing her was very difficult. I really wasn’t able to do it.
So we just re-examined how we did business development. And we realized that we can’t just have it on the shoulders of one or two people in the company, that we need to really have multiple people in the company active out in the community. So yeah, we’ve just really activated the team, and folks are doing different things: participating in nonprofits, volunteering, going to networking events, just being far more active.
Laura Zander:
Hey, Shawn, can I ask you: What metrics do you kind of put on your people? Like, do they report to you weekly? Do they report monthly, quarterly? I really struggle with how to manage and assess people who have discrete roles, like creative and marketing.
Shawn Busse:
I mean, this initiative of getting people active in the community is newer. And so I don’t have, at this point, individual metrics for folks to hit, but we do have a collective metric. So we were trying to have 100 meaningful conversations in 100 days, essentially asking for referrals. And you know, we’re really close to hitting that number.
And I think my quote-unquote mistake was, I set this initiative right smack dab in the holiday season. So it’s really tough to get people’s attention. But nevertheless, we did. And with those, we hit about 75 conversations that yielded 42 referrals that yielded four new clients. I’m just looking at my dashboard here. And then that resulted in probably $400,000 in new revenue in the coming year.
Laura Zander:
Wow.
Shawn Busse:
Yeah, so for a company of our size—you know, we’re just a little under 2 million—that’s huge. And then we had a meeting yesterday that could be another $150,000. So, I think we’ll get at least a half a million dollars in new business as a result of this effort.
Laura Zander:
God, it’s too bad you didn’t do it earlier. Just kidding! [Laughter]
Loren Feldman:
What happens when the 100 days end?
Shawn Busse:
We’ve got to keep going. And I think, to Laura’s point, I think we need to start to have individual goals. You know, not everybody needs to do the kind of level that I’m doing or some other people in my organization, especially since some of these folks are servicing clients. So, we’ll find the right balance there.
Laura Zander:
Or a cadence. Is it five conversations a month or 10 conversations a month?
Shawn Busse:
I think the real challenge, Laura, in a business like ours—and I can’t really speak to yours—but you talked about these intangible roles of measuring people’s performance.
Laura Zander:
Yeah.
Shawn Busse:
So much of the success of a business like ours is a collaborative effect. It’s not just one person. It’s multiple inputs and variables. So I’ve found, at least in my business, activating people around a shared goal tends to be more effective than one to one. It’s more like, you can take a basketball team and look at one star and go, “I need you to score 50 baskets in the next game.” Or you can look at the whole team and be like, “We’re going to win.” And I tend to think the latter’s a little more effective for our team and the culture we’ve built.
Laura Zander:
Yeah, that’s super interesting. My team does really well with a super hard goal like that. But they don’t do as well as I would like with higher-level goals that aren’t quite as discrete. If we say, “Okay, I need you to go make $200,000,” or whatever, then the whole team comes together. They know their part. They know they’re going to battle. They figure it out. They work it out together.
But then as soon as that goal is over—and if we’re like, “Okay, for the year, this is the goal,” they can’t really figure out how to get there on the sales and marketing side. Jay, and I have had so many conversations about this, and that’s my struggle. And do you get frustrated? Like, before you set this 100-day goal, or 100-conversations goal, is there a moment of frustration where you were like, “Why do I have to figure this out? Why can’t you guys just figure this out yourself?” Like, it’s not that complicated. Have meaningful conversations.
Shawn Busse:
I don’t know. I mean, I just try to give people the benefit of the doubt that everybody has good intentions. And not everybody is a business development expert. So I have to have a little bit of grace and kind of see how it goes. And some people clearly are not good at it. And so, part of our reset in the coming year is to identify, “Okay, how can you contribute to this effort if you’re an introvert?” And so, that gets us thinking about things like content. Like, “Oh, you’re a writer, so let’s get you creating content,” or other ways you can contribute to empower those who are having those business development conversations.
Laura Zander:
Yeah, totally.
Loren Feldman:
All right, before we get to Laura’s big news, I just want to run through a couple other quick questions with you guys. We know Paul’s hiring a salesperson. Are any of you making other hires?
Laura Zander:
Yeah, I think I am. I mean, if you want to recap last year, it sounds like I had a very similar experience to Shawn and to Paul. This was one of the worst years that we’ve had. On the Reno/ Jimmy Beans side, we didn’t hit our sales—we did end up hitting our sales goals, but we hit them in very low margin areas. And so we ended up losing money. So the team drove toward the goals—so, yes, they did a great job, and they drove toward the goals, but you know, it’s easy to sell stuff at half off, right?
Loren Feldman:
I’m a little surprised to hear that, because you had told us that you had kind of altered your business model to try to improve your margins by focusing on selling stuff with higher margins.
Laura Zander:
Yup.
Loren Feldman:
Why didn’t that work out the way you hoped?
Laura Zander:
Yep. That’s a great question, Loren. That’s a really great question. And that’s where I’ve been struggling this year. You know, in Q1, our sales were way down. And on the manufacturing side, we figured out why. It was because we had a person who was tasked with reaching out to every one of our customers and checking in and making sure they were doing okay, and blah, blah, blah. And they didn’t do it. And we didn’t know. They kept telling us that they were doing it, and they were doing it, and they didn’t. So we solved that. And we fixed it. We found out what was going on.
But then on the Jimmy Beans side, our sales were down. And that team collapsed, and I think just kind of froze. And we had a lot of emotional issues. A lot of crying from a lot of different people over a period of six months. So we hired somebody really high-level to come in and to help. And it turned out that this person was a thinker and a strategist and not as much of a doer. And it just caused a lot of friction. And so I mean, this year has just been a mess. I mean, it was just a mess—the most emotionally exhausting year that we’ve had since 2016.
So back to: Why didn’t we get the margin that we had thought? Well, when our sales were down hundreds and hundreds and hundreds of thousands, obviously, that affected our cash flow. And this is my fault. I mean, I had forecasted and budgeted and everything based on sales goals that we had all committed to in high-margin areas. And when we found out that some things weren’t being done to drive those sales goals, the team pivoted. We needed cash. So I don’t know if you guys are familiar, but section 174 of the tax law wasn’t revoked or went back into effect. And so our tax bill ended up being double. We needed to put a ton, like hundreds of thousands, into our tax bill unexpectedly.
Shawn Busse:
Is this the R&D provision?
Laura Zander:
It is.
Shawn Busse:
Oh, man. Maybe you could explain that a little bit more.
Laura Zander:
If I understood it better, I probably could. I mean, in essence, for the last five years, or eight years, or something like that, we get an R&D credit. We’re a manufacturer, right? And we’re a software company. So we’re developing our own software. So we have hundreds of thousands of dollars each year—there’s a percentage of that that we spend on R&D. So it’s salaries, it’s testing, it’s sampling, all these things. So hundreds of thousands of dollars that are eligible for this R&D credit. And then there’s, I guess, a percentage of that we get an actual tax credit each year.
Shawn Busse:
It’s really hard, because it’s a credit. A lot of people don’t understand a credit is like dollar for dollar, as opposed to a deduction. It’s like all of a sudden, you get this massive tax bill that you didn’t see coming. Who’s your tax advisor? Because I mean, this has been known for a while.
Laura Zander:
So we had a bit of a heads up, but we didn’t realize it was that big. And there were always fingers crossed and hope that it was going to go away, and it was not going to be a problem. But fair point. It would have been great to have more notice.
So we needed cash. So the team put together, “Let’s do $200,000 in sales this weekend,” or whatever it was, and put a bunch of stuff on and get rid of some inventory at really low margin, or no margin at all. So that was one big hit. And then the other way that we still hit our sales goal was to hold these retreats. So we do two annual retreats right now. We’ve got 300 people who come and visit us between the two retreats. They pay thousands of dollars, but we basically make no money on them. In a good year, if we’re doing well, we’ll make maybe 10 or 20 percent on it, after the cost of food and the travel and all that kind of stuff.
But this year, the contract that we had signed with the hotel for the food and beverage, we made the mistake, apparently, of not locking in those prices. And so the estimate and the figure that we were charging our customers was based on the previous year’s food and beverage costs. And they went up like 30 percent. That was a big number. I mean, that’s a $50,000 to $100,000 difference. So you’re talking about in the retreats, I mean, we could do $400,000 or $500,000 worth of sales, and we made no money on it at the end of the day, or very, very little. It certainly wasn’t the high-margin stuff that we’re looking for by doing manufacturing.
So we had a couple big hits where, again, we hit our sales goal, but at the end of the day, our cost of goods and our gross margin was just significantly different than it was the last two years. And then, kind of what happened is, as the shit’s hitting the fan, and I’m seeing that we’re not hitting our sales goals in Q1 and Q2, I start to dig. And it turns out that our sales coming from our social media channels are down about $300,000, and our marketing manager didn’t tell us. And she knew.
Loren Feldman:
Do you know why that happened, Laura?
Laura Zander:
No, I do not. Yeah, it’s a sensitive subject right now. So, I’m digging into that. I’m digging into looking at our traffic, compared to our competitors’ traffic. And we have a competitor that’s only been around for maybe five or eight years, and their traffic is starting to exceed ours. And I’m just like, “Nobody’s watching this.” And it is somebody’s job to watch that. And it wasn’t being watched. And I didn’t realize. I mean, I’m not looking at that information. And so, Shawn, that’s where I was kind of asking, like, metrics-wise, how much do you look at that?
Shawn Busse:
It seems like you would want—because you’re so heavy with direct sales and so forth—to have a dashboard with just a few key numbers on it that your manager is responsible for and talking to you about on at least a monthly basis.
Laura Zander:
Great point. So we have basically the two companies. We’ve got the one in Texas, and we have the one in Nevada. In Texas, I have a team of four people who report to me, and so we meet every other week. I have one-on-ones once a month. I’ve got a pretty clean dashboard that I look at.
But in Nevada, I have one person who reports to me. I have a general manager. And her job is to manage all of these teams. And they do have these dashboards, and she sees all these dashboards, but I’ve been so focused on the Texas business for the last four years that I’ve just been hands-off. So it’s just turned into this kind of mess because I’ve been hands-off. But then all of a sudden, I go over and I’m like, “What the #@$! are you guys doing?” You know, like, “Oh my God. This is down, and this is down, and this is down.” And then, that doesn’t go over really well. [Laughter]
Shawn Busse:
Sounds like good management to me.
Laura Zander:
Yeah. Yeah.
Paul Downs:
They weren’t inspired by that?
Laura Zander:
Yeah, I tried the Sopranos approach.
Shawn Busse:
Flip some tables over.
Laura Zander:
Yeah, exactly. I’m watching Slow Horses, right now, and I’m just like, “That’s who I want to be.” You know, “You guys are idiots!” Like, “You’re so dumb!” You know, but then they rally behind him. It works for him.
Shawn Busse:
Oh, no, I’ve seen the outcome of that show. [Laughter]
Laura Zander:
I’m just kidding! I’m totally kidding!
Paul Downs:
Yeah, I read all the books. You don’t want to be there.
Laura Zander:
No.
Loren Feldman:
So Laura, all of that makes your news of the day a little more surprising, I think. Given that background, you have chosen to address it by going out and buying another business. Correct?
Laura Zander:
We bought two. [Laughter] Yeah. Let’s go shopping. Let’s go shopping. You know? I’m not gonna do drugs. I’m not drinking anymore. So, let’s just go shop and gamble.
Loren Feldman:
What do you do?
Laura Zander:
So, actually, what I did was, when sales were down this summer, I decided to put a bunch of money on building a certain product for our team at Jimmy Beans. So really diving into clubs. So I went and hired some extra people. I’m like, “If we can hit this, if we can get a certain number of subscribers, then this solves all of our problems.” We really calculated everything. We did it, we’re making it profitable.
Loren Feldman:
What do you mean by clubs? What exactly are you doing?
Laura Zander:
Like subscriptions. You know, somebody pays 30 bucks a month, and they get a box from us that’s got some yarn and a pattern.
Loren Feldman:
And you have different clubs, meaning different types of products.
Laura Zander:
Exactly, yes. Like, you could knit a shawl. There’s a shawl club, and then there’s a blanket club.
Shawn Busse:
Okay, so this is your recurring revenue model?
Laura Zander:
Yes. So I put a bunch of money and effort into that, and it didn’t turn out the way that we had hoped it would turn out. It’s better than it has been in the past, but it wasn’t the panacea. It didn’t solve everything. So at the same time, there’s a brand that we used to carry that went out of business last January. And in fact, we hired two of their employees, and that’s gone really, really well. So I finally was able to convince the owner of that business to let us buy the rights to their brand.
And we did that in December. So I bought the rights to their brand, relaunched that brand under the Texas side of things, and have already paid for—I mean, just cash, not profitable—but we’ve already doubled what we paid for the business. So, win. It was very little work, because I already had two of their employees. They already knew everything about the brand. It was something that there was a lot of brand loyalty out there. And then I had somebody—
Loren Feldman:
Laura, if I could stop you for one second, just to make sure it’s clear: Your Texas brand is a manufacturer. You make Madelinetosh yarn. It’s a high-end yarn, I believe you’ve told us.
Laura Zander:
It is.
Loren Feldman:
And your acquisition here is another brand that you’re going to make. Are you going to make it in Texas at the Madelinetosh factory?
Laura Zander:
Not the Shibui one. So the Shibui one that we just bought is already dyed, and we get it from a mill in Japan. So basically, what we’ve decided to do is: Jimmy Beans is one thing. So we’re gonna handle that in another way. But on the Madelinetosh side, the Texas side, we have decided to form the MadiTosh Group, which is a wholesale distribution and manufacturing group of brands. That contains Madelinetosh, which we manufacture in Texas. It contains Simply Shetland, for which we’re the North American distributor of that brand in Shetland. It now contains this Shibui brand. We do the creative side, and that’s our brand.
Loren Feldman:
This is the one you just bought?
Laura Zander:
This is the one we bought in December, yes. So that comes from Japan, so that’s kind of a pass-through. And then we just bought, four days ago, another manufacturing hand-dyed company that’s in Tucson, Arizona, and we’re going to move that brand and that manufacturing to Texas this month.
So now, because we already have a space, we already have a kitchen, we’ve already got all of the bones and everything that we need. We’ve got this brand called Dream in Color, which can go through the same processes that Madelinetosh goes through, but it’s different yarns. It’s different colors. We’ll have different dyers. But we’ve decided to expand the Texas business and the wholesale arm of our business by creating a group that has multiple different wholesale brands, with the goal of being in every yarn shop in the country. So we’re doubling down on the wholesale side of the business as opposed to the Jimmy Beans direct-to-consumer side of the business.
Loren Feldman:
Wow.
Laura Zander:
Yeah.
Paul Downs:
Would you be willing to wholesale to your big competitor?
Laura Zander:
Yeah, we do. They’re one of our best customers.
Paul Downs:
Sounds like a good strategy.
Laura Zander:
Yeah. So now we went from the brand that we bought a couple days ago, this Dream in Color, they have 414 customers. Only 165 of those are crossover with Madelinetosh. So these are two different hand-dyed products. So imagine two different brands of jeans.
Loren Feldman:
Laura, when you say customers, you’re referring to retail shops?
Laura Zander:
Retail shops, yeah. And then Jimmy Beans, obviously, is a customer, and is probably going to be the biggest customer of all of these brands in the MadiTosh group. So that’s where we’re hoping we get a little of the extra margin bump.
Loren Feldman:
Laura, at a certain point, I think we heard you resolve that you were not going to buy any more businesses. You were already concerned about the time and the strain and the travel. How are you thinking about those things now?
Laura Zander:
That’s a great question. On the Tosh side of things, on the Texas side of things, it’s taken four years, but the team is so solid and so strong that I basically don’t have to do anything.
Loren Feldman:
Are you not going to Fort Worth as regularly as you were before?
Laura Zander:
I’m still going once a month, but not every other week, like I was before. So no, I don’t have to go nearly as often as I did. And now the customer service team, they’re just taking over. Like, I have a team. It’s almost like this is the way it’s supposed to be. You know, we do this acquisition. We have a transition team. Kerry’s taking on the customer service side of it. Julie’s taking on this. Luke’s taking on this. Ophelia’s doing this, and bam, like all I had to do was pay the bills. And I’m involved, but I’m not responsible for day-to-day tasks.
Before I do these, we ask everybody, “Do you guys want to do this? Can we handle it? Are you guys okay with it? How is this gonna look?” And they all want to do it. They want to grow. So as a result of doing this, a couple of people got promotions, and they’re able to take on more and do more stuff. So, yeah, so it’ll grow the business a couple million this year.
Loren Feldman:
But, as you said to us before, you’re still kind of struggling with unresolved issues, it sounds like, from last year, maybe mostly at Jimmy Beans. And now you’ve added a lot more on top of that.
Laura Zander:
Exactly.
Loren Feldman:
Would you say that the acquisitions—are you making them despite the ongoing issues that you’ve had, or as your response to them?
Laura Zander:
Probably a little of both. What I have discovered and accepted, I guess, is that these two businesses, Texas versus Nevada, are completely separate businesses. They just are. I’ve tried to merge them together. I’ve tried to leverage social media knowledge. Let’s just have one person that understands social media and advertising and can help all of the businesses and all the brands. And it just hasn’t worked. It doesn’t work. So the Texas side of the business is very healthy right now and has a very healthy team, and they want to grow.
So these acquisitions are going to help them grow, personally and professionally and all that kind of stuff. So the Nevada side of the business, that is the one that we need some new strategy and needs some new help. So, it’s almost like I’ve given the Texas team some stuff to work on, and now I can spend this next year really focused on the Nevada side of the business. And you asked, “Is anybody thinking about hiring anybody?” And yes, I’m looking at a very high-level strategy person who can handle the sales and the marketing so that everything is not falling on my one general manager. We’ve realized that it’s just too much for her.
Shawn Busse:
What’s the size of that business?
Laura Zander:
It’s about 8 million to eight and a half million.
Shawn Busse:
That’s a pretty, pretty good-sized thing for one person, especially if they’re surrounded by junior people.
Laura Zander:
And that’s what we’ve been talking about for years, is that she just doesn’t have a strong enough team. You know, they’re more middle managers. They’re not a leadership team. They’re just not at the same level. And so she has to do a lot of the stuff.
Shawn Busse:
Is there something keeping you from pulling that business back over to Texas and just sort of creating some consolidation and cultural efficiency and all that sort of stuff? Or is it like, “No, too big, too much. Gotta keep it in Nevada.”
Laura Zander:
It’s so funny that you say that, because for years, the thought was the reverse: Should we bring the Texas business to Nevada? Because Texas was really struggling. But finally, it all comes down to just having the right people. So now we have the right operations manager in Texas. She’s been there for over a year, and she’s killing it. And that just makes everything easier.
So, no, they’re two very, very different businesses. And that, I think, is another kind of moment of enlightenment that I had this year, that I think I was trying to mix these two businesses too much. And one of them, the Texas business, it’s manufacturing, it’s creation, it’s product development, and it’s distribution. And it’s wholesaling. And the Jimmy Beans business is an ecommerce business with a retail arm. And I was confusing the two. We had too much product development going on in the Jimmy Beans stuff, and I think I was just spreading everybody too thin.
Shawn Busse:
I mean, just the difference in B2C versus B2B it’s so dramatic. The type of behaviors and how people think and all that stuff. It’s not that you can’t combine those. It’s just different.
Loren Feldman:
Shawn or Paul, is either of you inspired to go out and buy a business by this?
Paul Downs:
Not today. [Laughter]
Shawn Busse:
I have zero interest in buying businesses. Hats off to you, Laura. I mean, that’s an impressive thing that you’ve done over and over again: combining cultures and getting people on the same page and having a clear vision. It sounds really hard.
Laura Zander:
Oh, it’s my favorite. Like, I love it. I mean, I really do.
Loren Feldman:
Wait, you’re not being sarcastic?
Laura Zander:
No.
Loren Feldman:
You love doing it? It just doesn’t always work the way you’d like it to.
Laura Zander:
I mean—knock on wood—we’ve been successful with each of the ones that we’ve done.
Loren Feldman:
Well, you’re successful in the sense that Madelinetosh was a mess and is now hitting on all cylinders. But you did say that you’ve struggled a little bit to combine the businesses and make them more efficient.
Laura Zander:
Absolutely. That was the big mistake, was thinking that it was all one company. I mean, it is all one legal entity, but it’s not one company. It needs to be two separate ones. I’ve got a wholesale business, and I’ve got an ecommerce business. And the ecommerce business is a customer of the wholesale business. And so making that really clear, that makes all the difference in the world. But you’re right. I mean, that’s been the part that, yeah, it’s been really, really hard.
You know, we’ve bought distressed businesses. The one that we just bought in Tucson, it’s not distressed, but it’s not like it’s growing gangbusters. I mean, it was two women who have had this business for 15 years. They’ve worked together for 30 years and had different businesses, and one of them wants to retire and the other one wants to move on to something else. And if we didn’t buy it, it would go away. And that’s very exciting to me. It’s very rewarding. Our goal this month is just not to @#$! it up. That’s it. I’m like, “That’s it.” That’s our only goal this month is, let’s just not screw it up. Let’s try not to lose any customers.
Loren Feldman:
Are those founders going to remain active in the business at all?
Laura Zander:
They are. This will be the first time that we’ve done it this way. They’re on contract to help us for the next 12 months, to be kind of advisors. So it’s very exciting.
Paul Downs:
I have a question. So you just talked about buying businesses as if you went and bought a car one day, and I have heard similar stories in my Vistage group. And I personally find the thought of buying a business to be quite complex and scary. How complicated is it to buy your average, small, struggling mom-and-pop? What do you have to do? Can you walk us through the steps?
Laura Zander:
Yeah, it’s actually one of my favorite parts. And now, how many times have I done it? Four, five, six? It’s starting to become just kind of second nature. So for me, I’m buying a small, struggling—like you said—a mom-and-pop. So these rules are very different than if we were going to go buy some strategic thing, and we’re paying 10 times EBITDA, or blah, blah, blah.
So depending on the size of the business, and how well I know the founders, and how long I’ve worked with them, and how familiar I am, one, they’re all in our industry. So there’s a lot of stuff I don’t have to learn, because I already know it. I mean, I know how hand-dyed yarn works. I know what the margins should look like. I know how much their cost of goods should be. I know how much advertising should be.
So, typically, what I do is we have a conversation. I have already kind of done some due diligence on the brand. We go and we do some research on: Have these guys opened their mouths in really bad ways? You know, are they serial killers? Are they super right-wing fascists? Have they done something that has damaged the brand in some way? So we put some feelers out, and we talk to people, and we do some social media research, just to make sure they haven’t created anything really inflammatory.
Loren Feldman:
Which is a bigger problem in the knitting world than some might think, correct?
Laura Zander:
Yeah, it is. It’s a big problem. So they’ve got to, I guess, have a clean reputation. And not be too far polarized on one side or the other. And then, I go into the financials, so I get their financials for the last three years, sometimes more. And then I throw those into a spreadsheet. And, first of all, most of these businesses in our industry either aren’t profitable or are relatively, you know, 5 percent. It’s not like some huge kind of profit margin.
So I take a look at everything. And what I did in this case, is I put together two different scenarios in the spreadsheet. One is, if somebody off of the street were to buy this business, which of these expenses need to stay? So, rent. They’re going to need to pay rent. Salaries. They’re going to need to get insurance. They’re going to need to get all this blah, blah, blah. So if somebody off the street were to come in, buy this business, this is what the profitability of this business would look like.
And then I do another scenario of: If we buy it, what does this look like? We’re already paying rent. So we don’t have to pay any additional rent. We already have insurance, so we’re not gonna have to pay any additional insurance, blah, blah, blah, right down the line. And then I look at the profitability if we buy it. And then I talk to them. And I just kind of say, “Look, here are the two different versions of what profitability looks like. And the value of the company is based on these two versions.”
If I was a real asshole, I would probably press—I mean, I probably am a real asshole—but if I was more of a jerk, I would probably press and say, “Look, if I were just somebody walking off the street, the value of your business is very low, because it’s not really profitable. But we have all of these things and can scale, so why don’t we meet in the middle somewhere?” So you know, then I make them an offer. And I say, “Look, here’s the math. Here’s how much I think the business is worth.”
And it usually is: Can I pay this back in two to three years? So you take whatever that net profit number is, and I multiply it times 2 or 2.5—somewhere around there, depending on, has the business been growing? Has it been shrinking? Is it stable? And what that looks like. So then, we talk about that. We’re like, “Okay, does that work for you?” We go through that process. Once we’ve settled on a number that we feel comfortable with, then we write a letter of intent, and say, “Okay, we’re serious. We will buy this from you for this price.” We talk about timing. And then we go into quote-unquote due diligence.
And that’s where, okay, now, after we’ve signed, obviously, a confidentiality agreement early on, then it’s, “Okay, now send me your customer lists. Now send me your more detailed books, so that I can really look through this.” And this is where the trust comes in. How much due diligence do you need to do? How well do you know this company? So if they send me their customer list, it’s not hard for me, because I know our industry, to validate or verify that their customer list is accurate, and they’re not just blowing smoke up my ass.
In this case, I went around to a bunch of yarn shops, and I go look and I see: Are they carrying this product? Where do they have it displayed in the store? How do they feel about this product? You know, blah, blah, blah. And I do it kind of quietly. How do they feel about the owners? So then, once I do all the due diligence, and I feel comfortable, then we put a purchase sale agreement together and run it by our lawyers. And then that’s that. Then I will wire some money over.
Paul Downs:
Okay, that was great. Thank you. But I have a couple of follow-up questions. What does the lawyer/accountant team look like that’s backing you up while you’re doing this?
Laura Zander:
So my accountants, I send the LOI. So once I’ve got that in place, I send that over to my accountants. And I say, “Look, one, do you see any red flags? Two, can you give me any advice on this?” And they’re gonna tell me the same thing every time. You know, let’s say I pay $100 for the business. They’re gonna say, “As much as you can get, as much as you can pay for assets versus goodwill, the way you split it affects whether or not you can expense it immediately, or if you’ve got to expense it over a number of years.”
Because these numbers are relatively small, I don’t sweat it too much. Like, I would rather have a good deal and have good relationships with the sellers. So there’s that back and forth. And obviously, the seller, their accountant is telling them to do it one way and the buyer, their accountant is telling us to do it the other way, exactly the opposite way. So you just have to find something in the middle. So I just send the LOI over to the accountant, ask for any advice, let them know. Because then, obviously, it’s got to go on the balance sheet. So it’s actually really pretty light.
Paul Downs:
Okay, so you don’t have to involve a bank. You don’t have to borrow money to do any of this. And you’re just doing it if I can write a check for these businesses. Is that correct?
Laura Zander:
Yeah, it is. The one we bought in Texas, we were gonna get a loan. So we did go through that loan process, and it’s exhaustive.
Paul Downs:
It was an SBA kind of loan?
Laura Zander:
Yeah. And they need to see, obviously, all the financials of the business we’re buying, all of our financials, you know, da, da, da, da, da. So what we’ve ended up just doing is using our line of credit or getting a PayPal loan instead.
Paul Downs:
What are we talking about, order of magnitude? Most of these businesses can be purchased for less than 100 grand? Less than 500 grand? Less than a million?
Laura Zander:
Less than 500 grand, so six figures.
Shawn Busse:
I imagine using a bank creates all kinds of problems. You’re buying these businesses that, on paper, are losing money.
Laura Zander:
Exactly. Exactly.
Shawn Busse:
The bank doesn’t want to do that. Like, no—even though you see the vision for it, how to make it work.
Laura Zander:
Yeah, so if there are other ways to get the money, I mean, yes, I understand it’s better to use somebody else’s money. But it’s also a pain in the ass.
Loren Feldman:
How does the PayPal loan work? Is that a high rate?
Laura Zander:
No. Doug would know. He does that. I don’t think it’s as high of a rate as you would expect. But you’ve gotta pay it back pretty quickly. I mean, we pay it back within two or three months. We’re not keeping these loans forever. So it’s the old school way of doing things: Like if you can’t pay cash, don’t buy it.
Paul Downs:
So how long does a transaction like this usually take?
Laura Zander:
Two or three months.
Shawn Busse:
They don’t have options, right? I mean, you’re a lifeline. They don’t have options, I’m guessing. Right?
Laura Zander:
Yeah, yeah. I mean, that’s how it’s turned out. And that’s kind of what we have become. Yes.
Shawn Busse:
These businesses were probably founded by Baby Boomers or Gen Xers or older Gen Xers, and so they’re like: There’s not a buyer.
Laura Zander:
There’s not a buyer. They’re too small for a big company, and there’s a lot of consolidation in our industry right now. So they’re too small for a big company, and they’re really too big for most people.
Paul Downs:
It also sounds like there’s rarely or never real estate involved. Like, these are just retail operations. If the rent’s over with, the lease is over, you just close the doors and you’re done.
Laura Zander:
Yep. And what I’ve found, Paul, is: Let’s take this one that we’re handling right now. I mean, we’re moving locations. We’re moving it from Arizona to Texas, and that is going to be messy. This month is going to be messy.
Paul Downs:
So is there a basic problem with deciding what state the transaction happens in?
Laura Zander:
Um, you know, that’s a great question. I’ve just always kind of done them in Nevada, because that’s what our LLC is in.
Paul Downs:
Okay, well, this has been a great overview. Because I have opportunities to purchase companies that are sort of like what you’re talking about, except there’s more equipment and inventory and, often, real estate. But I’ve just been so terrified by the whole process that it would just be too complicated. And I’m already stretched thin. So what do you think is the magic ingredient on your side that gives you the resources to devote yourself to these transactions?
Laura Zander:
I don’t know. I just like it.
Paul Downs:
But you’ve got somebody else doing a lot of the things that your business does.
Laura Zander:
Yes, exactly.
Paul Downs:
I guess, how much free management headspace, as a percentage, is required to consider doing this?
Laura Zander:
Well, to do the transaction itself, I mean, that’s 100 percent me, or I should say, 95 percent me. But then down the line, now—I mean, each one that we do, I participate less and less in the transitions, because now I’ve got a team that has gone through it as well. And they know what’s coming. So I’m actually not participating a ton at all. But the very first one I did, and the second one I did, I mean, I was 100 percent in. That was my full-time job for a while.
Loren Feldman:
Laura, I’m curious, I think the first and second ones you did, if I’m not mistaken, were overseas, in China and Vietnam, maybe? Which makes me wonder: What’s messy about moving Tucson to Fort Worth? I gather there are no employees.
Laura Zander:
There are.
Loren Feldman:
Oh, there are employees.
Laura Zander:
Yeah, there are employees, and the production is done. So with China and Vietnam, the production is still done in China and Vietnam. We didn’t change that. It was just the creative side. But in this case, the production is actually done in Arizona. So we need to train our team in Texas while still having the team in Arizona produce for a little while. So it’s just a lot of moving parts.
Loren Feldman:
Got it. Well, guys, I didn’t get to all of my questions, I’m sorry to say. But they’ll make another episode. My thanks to Shawn Busse, Paul Downs, and Laura Zander—and to our sponsor, the Great Game of Business, which helps businesses use an open-book management system to build healthier companies. You can learn more at greatgame.com. Thanks, everybody.
