Case History # 2 A special summer series on select business issues that were dealt with by Lubicom Business Consulting. Some of the names and circumstances were changed to protect the identity of the clients.
The Dilemma – It was two years ago that Avi found himself in a circle of friends in his bungalow development (used to be called “colony”). In the group were several successful entrepreneurs in real estate, construction, dental supplies, nursing homes, and production of higher-end leather bags. Although Avi was not in their league financially, he was a successful manager in an office supply company and was very much in the conversation. “I have what it takes to own my own business, which has actually been my dream for almost ten years,” Avi told them.
To Avi’s surprise, the conversation took an interesting turn when Hershel, the real estate man said: “A group of us are thinking of pooling our investment dollars into a new business but we were always reticent because we were worried about who would run it?” Turning to Avi, Hershel said: “We would be very comfortable if you were to be that man.” The business kumzits soon grew into dinner in the city and then even a 2-hour Zoom session.”
The group charged Avi with “investigating” what was available and reporting back to them. After almost two months, the choices came down to acquiring a business or starting a similar business from scratch.
The Choices – One of the finalist businesses for acquisition was a business finance company that had an extensive list of clients for payroll services and was growing at a rate of 15% per annum in the last 5 years. The firm seemed to have a very competent team in place and a very skilled marketing woman “who knew how to bring in the business.” The group liked the stability of the business, its bottom line, and its steady growth. At the end of the meeting in Hershel’s house, Avi heard them say, “we’re all in but what about starting such a business without spending so much money to acquire the business.”
In addition to the savings on the acquisition, the group felt that they could start such a company in an area that Avi said was “underserved” and that they could control the pace of their growth. With lower overhead, Hershel felt that the upside in a few years would be greater than the acquisition. Avi was a bit skittish about the idea as he checked off a list of what needed to be done to start a business, from the name to hiring competent personnel in sales, office management, and account management.
Despite the daunting tasks of starting a business, Avi was rather excited with the prospects for success. He worried about taking over an existing company that he did not build. “The people there are fixed in their ways and there definitely is a built-in culture,” Avi reasoned. On paper, he would be able to take out at least as much in take-home pay as in the acquired company. Instead of travelling for almost 90 minutes each day to the acquired company, he could find space closer to his home, being more available to his family in the evenings.
The group wondered if Avi had the knowledge and experience to run such a new firm. “We can hire an assistant to Avi who does have experience in a similar business,” said Hershel. In fact, the broker who was trying to sell the business whispered in Avi’s ears that one of the key people at the firm was looking for a change. Before making the decision, the group decided to schedule a consulting session with Lubicom. Said Hershel: “Just in case we’re missing something, let us get an opinion from a skilled and experienced business consultant.
The Solution – At the meeting Avi came well-armed with the financials of both opportunities. He clearly had done his homework and his enthusiasm was beyond description. He felt strongly about having the opportunity to build a business. What made me comfortable was the availability of capital which is so often lacking in many similar situations. I was also taken by Avi’s clear focus and ability to analyze each situation without sugarcoating. He was a realist about what lay ahead.
The numbers validated the asking price of the company looking to sell. The client list was impressive in that the majority were with the firm for many years. The CEO was a charismatic 45-year-old or so who had a very salesman- like personality. It was easy to see how he attracted clients. Although he also had a great deal of charm, at the moment Avi was no match for the experienced CEO.
How would Avi build a client base? The group seemed well connected and eager to use their network to help Avi build that base. Daniel recommended a saleswoman who worked for him for many years and would likely do wonders for the new company. The more we discussed the options, the more it seemed that the balance was shifting in favor of building the business from scratch.
It was interesting that when we did get around to reviewing the financials and the terms for the acquisition that enthusiasm seemed to wane not only by Avi but by other members of the group. A good deal of the discussion shifted to the terms for the group’s investment and Avi’s conditions for employment. Hershel vigorously advocated making Avi an equity partner in addition to a salary. They wanted Avi to have skin in the game and to have the potential for an upside in his mind.
It was clear that the group had decided to start a new business that they could call their own. It was also obvious that Avi was leaning in that direction. One of the members of the group felt that it was safer to buy the existing business but most of the group felt like kids in a candy store talking about their new business. They suggested names and locations and after a while, the dye seemed to be cast.
PS. It was not long after that Avi began planning for the business. He left his current job and aggressively pursued the saleswoman and another key staff member. Within a week, the group had exchanged names of potential clients, a bank account was opened, and a lease signed for the office. The lesson here is that having capital counts for a lot but so does the enthusiasm of the investors and key management.