Royce Yudkoff:

Welcome to Think Big, Buy Small, a podcast from Harvard Business School about entrepreneurship through acquisition. We’re your hosts, Royce Yudkoff…

Rick Ruback:

…and Rick Ruback.

Royce Yudkoff:

Rick, today we're speaking with Nick Wheeler, who has recently bought a small but very promising company, which tests laboratory equipment to make sure it's properly calibrated. It's one of these little niche businesses where getting it right is so important and the cost to the customer is tiny. We're going to see how Nick responds to the takeover process and what problems show up and opportunities show up and how he's feeling about the business he so recently bought.

Rick Ruback:

Royce, let's get to the conversation.

Royce Yudkoff:

Nick, thank you so much for joining us. Rick and I have been looking forward to our conversation with you, in part, because you've just recently closed on your acquisition, which is the result of your search.

Nick Wheeler:

Well, thank you. I've been looking forward to it as well. It's the least I could do since you're the ones that exposed me to this route. And so I'm appreciative of that.

Royce Yudkoff:

Nick, maybe a good place to start is if you tell our audience a bit about your personal background, for instance, where you grew up, what your family was like, your own family now…

Nick Wheeler:

Sure, yeah, I grew up in the Philadelphia area. My dad was actually a small business owner, very small business, pretty much one employee. He was in the print industry. So, I learned which industries to avoid because that was a challenge in the 90s, as you might imagine. My mom worked two jobs as well. Was fortunate to go to some great public schools in the Philadelphia area. That segued into a desire to join the military, even though I don't come from a military family. So, I went to West Point for college and spent ten years as an army officer, began in the infantry, which was great training ground actually for what I'm doing now. My first job at 23 was leading a forty-man grunt rifle platoon of infantry men, which is a great experience. And then had the opportunity to go serve in the ranger regiment and be a platoon leader with the Rangers. So, I led a sixty-man ranger platoon. And then, when I was eligible as an army captain, you can go into the special forces and become a green beret. And so went and did that and got to lead a detachment of green berets for a few years. And then my last position in the Army, I was an aide de camp, kind of like a Chief of Staff for a general of ours. So, going from the very tactical level of leadership for a while to seeing a first a bird's eye view into the more kind of 10 to 30,000 foot leadership. And next thing I went to HBS, used my GI Bill and got my MBA, and went and pursued this path. I'm currently married. My wife has been with me now for eleven years and we just recently found out we're having a son. So, a lot of life changes going on this year.

Rick Ruback:

Congratulations, congratulations.

Nick Wheeler:

Thank you.

Rick Ruback:

And Nick, you searched right after HBS and I believe you got one of the search fund fellowships, right, that we have at HBS?

Nick Wheeler:

Yes, which I'm super grateful for. And yeah, I pretty much moved down to DC the month after HBS graduation. And I launched, in earnest, the beginning of July. But I kind of set the groundwork the last semester there at HBS to begin my search.

Rick Ruback:

And tell us about the search journey a little bit. As I recall, you had a few LOIs that got really close and didn't make it over the finish line. You searched for a couple of years, right? Between graduation and closing?

Nick Wheeler:

It was nineteen months from start to closing. I'd say the search went generally as advertised, as we discussed in your class, and from talking to people who've walked the path before. I had a DC area-focused search, so kind of drew like an hour bubble around the DC area, where my wife and I live. So, I was geographically constrained. Therefore, I felt I had to be more agnostic in terms of industry and the size of business that I was looking for. Reached out to over 6,000 businesses through an automated e-mail drip campaign and the help of a lot of interns. I put in twenty-seven offers throughout my search. Of those twenty-seven, seven were LOIs. Most were IOIs. Of the seven LOIs, really went under LOI three times, had two broken deals, one early, one post Q of E phase one, which was quite painful. And then I guess third time's a charm, and it was not easy going from signed LOI to close. There was some anxious moments, but we got it done.

Rick Ruback:

Not to start with sad stuff, but tell us about the broken deals, because one of the things I find is that many people who are thinking about search are terrified of broken deals. They're just like, “Oh my God, I could just be walking down the street someday and a broken deal will appear.” So how did they break and, in retrospect, could you have predicted?

Nick Wheeler:

Yes, they should be fearful, especially if they're self-funding their search, of broken deals, but you can't let it debilitate you either. I mean, the one was a commercial landscaping company, which had some really nice characteristics, like mostly maintenance revenue, about a million of EBITDA, but anyway, some of the red flags were it had actually had private equity buyers try to buy it and it fell through for a variety of reasons. You never know the full story, of course. You just hear the seller story. But the clear obstacle early on was the seller's wife, who owned 51% of the company, even though she wasn't really involved with the business. So, she was the real gatekeeper. And he was ready to retire. At 62 years old, he was tired of waking up at 5:30 in the morning to go run a landscaping company. But she had it pretty nice. They were bringing home close to a million bucks a year and she probably worked five to ten hours a week in the business. So, she wasn't a motivated seller like he was, and she ultimately was the decision maker. The working capital discussion is always difficult, I found, but especially in a landscaping business, where they don't have good representation and there is a very seasonal component to working capital. I think we even talked about it in your ETA class. So that also threw a wrench in it. In hindsight, we did have those conversations early on but I think we should have really like set the peg at the LOI phase, pre-Q of E. And you know, that probably still would have just killed the deal, but I wouldn't have eaten a $7,000 Q of E fee. So, that was the biggest lesson learned. If you can negotiate working capital at LOI, or just after it, I would encourage every searcher to do that before they engage with legal and accounting providers.

Rick Ruback:

It's so hard because that is a very contentious conversation between sellers and the buyers. And so many people want to postpone that until there's a bit of a relationship built.

Nick Wheeler:

Yeah, there's always like this balance. You know, your first phone call, for example, you want to build rapport and develop a relationship and trust, but there's also very important things you're trying to elicit from a seller. And so I feel like your entire journey to closing a business is like that. There’s just tough questions you have to ask, and it might upset them a little bit or might get contentious at times, while trying to still maintain that trust. Like that's kind of the art of this whole journey, I think.

Royce Yudkoff:

Sure, and working capital can often be a fight between the buyer and the seller as to how much working capital ought to be left in the business, particularly for the first-time sellers you deal with in search who have never thought about that issue before.

Rick Ruback:

And particularly seasonal businesses, which make it even more difficult.

Royce Yudkoff:

That's right, Rick.

Nick Wheeler:

Yeah, for sure.

Royce Yudkoff:

Exactly.

Royce Yudkoff:

Rick, I'd love us to spend a moment on Nick's decision to be a self-funded searcher, the fact that he had to be very sober in thinking through how he deals with broken deals. Maybe I could kick this off with the pluses and ask you to pick up on some of the minuses of this path?

Rick Ruback:

Oh, so I can be the negative guy.

Royce Yudkoff:

Hahaha. Exactly.

Rick Ruback:

I don’t like that.

Royce Yudkoff:

Next time you can deal the cards.

Rick Ruback:

I want to be more cheerful in life. Go ahead.

Royce Yudkoff:

Well, you know, when you are a self-funded searcher, you will likely end up with a much larger percentage of company ownership than if you do a funded search. It is very common to end up with 60 to 80% of the company. And there are two implications to that that are obvious. One is you're likely to make more money when you own more of the company. And two is you absolutely, totally control the destiny of that company. You don't have a board. There's no one's permission you have to ask. You are in complete control.

Rick Ruback:

Yeah, as you like to say, you do the board meetings while you're brushing your teeth in the morning. “Hey, mirror! Who's the right CEO for the business? How’re they doing? Oh, they're doing just fine! Let's move on.”

Royce Yudkoff:

Exactly. And the one last positive implication of this that's a little less obvious is because you're going to own more of the company, you can look at smaller, small companies and make the same amount of money as if you bought a bigger, small company but owned less of it. And when you look at smaller, small companies, you realize first, they're just a lot more of them because the population of companies is a gigantic pyramid and as you get smaller, to the bottom of the pyramid, there are just more and more shots on goal that you get. And also they tend to trade at lower multiples than bigger small companies, so you can buy something a little cheaper. So, this is the cluster of benefits in a self-funded search. There are others to a funded search, but one of the concerning challenges when you self-fund the search part and raise money for the acquisition, is broken deals, where you've submitted a letter of intent, the seller has signed it, and now you start spending money on diligence, and something blows up. Rick, what thoughts do you have about the whole issue of broken deals?

Rick Ruback:

First of all, I think broken deals are the biggest concern in the self-funded path because I think they have two consequences. One is that the searcher will sometimes avoid a deal where the due diligence is sufficiently complicated that it could result in a broken deal. And so they'll just avoid and therefore miss out on what might be a fabulous deal. On the flip side of that coin, and maybe worse, is they might well close a deal because they can't afford another broken deal. So, they'll be well along their way in due diligence, discover something which normally would have had them walk away, but they'll say, “We're going to try to make it work. We're going to close anyway because, you know, a completed deal, even a bad deal, is so much better than no deal.” And by the way, I don't think that's right. I think no deal is a lot better than a bad deal. But I think self-funded searchers, to avoid these broken deal costs, can both skip good deals and close on bad deals, and those are two terrible things associated with self-funded searches. That said, the trade-off is really unbalanced, in the sense that I get that Nick was very sad about spending $7,000 in a Quality of Earnings study that he ended up not using because he didn't close the deal, but that's $7,000. I mean $7,000 is a lot of money, but it's not the sun and the moon and the sky up above, relative to the cost of buying the whole company. It's pretty small. We don't know what the size of Nick's business was, but let's guess it was, I don't know, would you guess five or 6 million bucks, Royce?

Royce Yudkoff:

Purchase price? Yeah, I would guess that.

Rick Ruback:

So, what's $7,000 over six million bucks?

Royce Yudkoff:

Well, it's like one tenth of 1%.

Rick Ruback:

Yeah, it's a really small thing, right? So, I get feeling bad about it but, you know, it's a small transactions cost relative to the total deal. The other thing, by the way, I will just say, is that there are circumstances where you can gauge the likelihood of a broken deal. Royce, you know, because we've talked about this before, that one of my deal phobias is multiple equity owners. And the story Nick told was a little bit interesting. So, the guy's working really hard and he owns 49% of the business and his wife, and he didn't say ex-wife, so let's assume they're still married, she owns 51%. But she doesn't work very hard and she's making a lot of money. So that's the first thing I find very interesting is he's working hard. She's not. He's making an OK living. She's making a lot of money. I would have thought they would think about it as, “How much money are we making?” That would be my first question. And second of all, what do you think their dinner was like? “Hey Dear, I know you've been negotiating this sale for six months and I've just decided not to sell my 51%. Please pass the sour cream for my baked potato.” How does that go? So normally, if they weren't husband and wife, you would have met with both sellers individually and said, “Look, I'm about to spend some money. I'm investing serious time. I just want to know that you're really committed to this.” And you ask each seller individually. And, you know, I probably wouldn't have signed an LOI in that deal because I'm terrified of exactly that situation because too often it just blows up.

Royce Yudkoff:

Right. I think this broad lesson that comes from that is you sequence your due diligence to try and raise the likelihood of closing with the cheaper to do due diligence questions before you do the more expensive ones, like bringing in an accountant to do Quality of Earnings or having your lawyer read all the contracts. You ask the things like, “I'm talking to each equity owner and making sure they're all enthused about selling at this price” or the work that you can do directly as a way of raising the odds before you spend money.

Rick Ruback:

Right, we always recommend this in class, but we also recommend this as investors, that the entrepreneur spend the first two weeks post-LOI in residence, if they can, at the company they're about to buy, and do as much intense on-site due diligence as they can, absorb like a sponge and learn everything they can about the business. Have a careful list of important questions and answer that short list of important questions in those first two weeks, those things that would cause you to say “No” and walk away. Answer those questions before you spend any money.

Royce Yudkoff:

Yeah, this is the picture that's becoming clearer, hopefully, to our listeners about the sequencing. You know, you learn a bit about the business, just a bit, and you put out an indication of interest, a short one-page letter offering a price range, and you discover whether the seller's price aspirations overlap with yours. If not, you're gone. Then you do a little more work, and you put in a more detailed offer called a letter of intent. And you've raised the likelihood that they'll say “Yes” because you know you're sort of in the same drop zone with the seller. Now you've gotten more specific about the offer, there’s going to be a seller note, there's going to be a transition period, whatever. And then if that's accepted, you sort of roll into a couple of weeks living at the company and, without stroking any checks but just investing your time, you raise the likelihood of success because you absorb so much about how the business works. That's what a smart searcher does to avoid broken deal costs.

Rick Ruback:

Right. It's not that Nick didn't do that. It's just that there was a red flag, these two sellers. It sends shivers up my spine.

Royce Yudkoff:

Excellent point. Let's return to our conversation.

Rick Ruback:

All right, so let's move beyond the sad stuff. Tell us about the business you bought and how you found it.

Nick Wheeler:

Sure, so I bought technically two companies, NSCA Technologies and Tra-Cal Lab. NSCA is a test and measurement equipment sales business, so we sell test and measurement equipment. I'll get into what that is. And then Tra-Cal Lab calibrates and repairs the equipment. So, there's an equipment sales kind of distribution component of the business and a service component. I found the business actually in my second month of searching. Had a conversation with the seller. He was clearly in the early phases of getting ready to sell or thinking about it and, well, it didn't really go anywhere. And then a year goes by, I keep searching, I have a couple of broken deals. And after that pretty painful broken deal, I scoured the earth of all my old deals, which I would highly recommend everyone do that’s searching. I think Jim Sharp calls it the Phoenix seller, they rise from the ashes. So, this one rose from the ashes. I shot him a message on LinkedIn because he wasn't replying to e-mails and the LinkedIn message worked. We got lunch like two days later and it went from there. So yeah, it was something I found early on and we reconnected a year after my search.

Royce Yudkoff:

And what was motivating him to sell? Was he retiring?

Nick Wheeler:

Yes, this was a unique one. He had been doing this for 35 years with his father. So, his father actually founded the business, but he had been side-by-side with his dad pretty much from the beginning. Sadly, his father left the business in 2017. He had Alzheimer's and actually passed away while we were under LOI. That was part of the motivation, was just how things were getting handed down to the rest of the family and that can always cause ugliness with family members inheriting parts of the business and so on, and they were not part of the business. So, I think that was a motivator. I think after 35 years of doing this, probably pretty tired of running this business. This was definitely not a seller that was working 20 hours a week and hanging out at the country club. He was very involved operationally and working more than 40 hours a week. So, I think the opportunity to have a succession plan that didn't involve him staying on for several years was probably pretty enticing.

Royce Yudkoff:

Nick, tell us a little bit about how you financed the purchase of the business.

Nick Wheeler:

Yes, so as lots of self-funded searchers, I used an SBA 7A loan. And with that I got a 500k line of credit, which I haven't had to draw from but it's nice to have if you can facilitate that with your purchase. And then I brought on equity investors. They all have preferred equity, so I owe them their money back, plus an 8% pref. And then we had some seller financing for about 11 or 12% of the deal. We had a unique structure to that where it's on a five year standby, where it accrues interest but you don't necessarily have to amortize it or pay it monthly, which helped me raise a little more SBA debt. We had an escrow in place as well for working capital true up, and any other situations the first year where there's a breach of the reps and warranties. So, we have a small escrow in place.

Royce Yudkoff:

And I assume, because of your use of SBA debt and a seller note and the fact that it was a self-funded search, you own the majority of the company, you're the majority owner right now.

Nick Wheeler:

Yes.

Royce Yudkoff:

That's great.

Nick Wheeler:

80% of the company.

Royce Yudkoff:

That's the truest form of entrepreneurship, when you totally run the business. What do you like about the business? What is it that drew you to the company, in particular? Because you looked at a lot of businesses so you really had fine-tuned your taste in small companies.

Nick Wheeler:

Yeah, so this one early on was, of all the businesses I looked at, seemed to check the boxes that you both trained us on when we were at school. But it also was a personal fit. It was just super niche. Like I honestly, when I first reached out about it, I thought it was a rental company. They do do a little bit of equipment rentals, so that's what showed up on my NAICS code search. But it's got an amazing customer base. There's over 200 companies and they're large companies and government customers. We serve NASA, the Air Force, Lockheed Martin, AT&T, biotech companies. So, you know, low customer concentration. I love the kind of blue-collar trade aspect to it. So, I have all veteran technicians who provide a really highly technical skill set that very few people can do. So, I thought that was really cool, just from a personal fit as a veteran. You know, high barriers to entry, it really costs a lot of money to build one of these labs and then to become accredited, which we are. That's very difficult. There's a lot of regulatory and macroeconomic tailwinds that I thought were compelling about the industry and, you know, kind of just fit the boxes of this, you know, enduringly profitable business that's been around for 35 years and had a technical founder, and, you know, had a lot of opportunity to be scaled to the next level.

Rick Ruback:

So, there must not be contracts but there must be a lot of reoccurring revenue.

Nick Wheeler:

We do have one contract with the DC Metro, which is five years. So, we calibrate everything for the DC Metro, from the torque wrenches that are used to fix the escalators and elevators to some of the high-end electronic equipment that's helping fuel the locomotives. But most of our big customers, we essentially have these like blanket purchase agreements. I'm trying to think of an example. Lockheed Martin. We probably do hundreds of pieces of equipment for them. This equipment has to be serviced annually. Depending on the regulation, it could actually be more than annually. In some cases, it's once every two years. But generally, once a year, that piece of equipment is coming to the lab or we're doing it on-site. And so there's definitely an annually recurring revenue nature to it. Even though these aren't contracts, the switching costs are really high. There's just very few people that have the technical capability to do what we do, much less go do it on site or pick up and deliver like we do in our region. And we're such a low expense item for our customers that I don't think the CFO at Lockheed Martin is, you know, getting that far. I don't even know where we'd fall in the P&L, somewhere under maintenance expense or something like that. But we're a pretty small blip on the radar for these big companies, so I think it's a good place to be.

Rick Ruback:

I love it. Another demonstration of the principle that it is important to be unimportant, to be an unimportant part of the cost structure. Important in what you do, the service has to be valued by the customer, but it's important to be unimportant so that when they look at cutting costs, your name is pretty low on the list.

Nick Wheeler:

Yeah, definitely. We're unimportant until things go wrong. In this industry, if things go wrong, I mean, you could one, be breaking equipment, but they're not measuring properly, which is really important when, you know, our customers are putting satellites into space. So, you need to make sure they're emitting the right radio frequency. Customers are testing the F-35. To even like little scales that weigh drugs for pharmaceutical companies, you can't be a milligram off on that. So as long as you do a great job and pick up and deliver on time and basically make the compliance part easy for them, I think the customers are generally satisfied. It's when you fail on any of those aspects that they might look elsewhere.

Rick Ruback:

Makes a lot of sense to me. Sounds like a great business. How long have you owned it now?

Nick Wheeler:

Just over four months, so I'm still very much in the thick of it, drinking from a fire hose.

Rick Ruback:

So, what was the first day like?

Nick Wheeler:

Let's see, my employees did not know I was buying the company, minus the top two. Very small head count, by the way, only nine employees. There was two individuals, I said, “Hey, I have to meet them before closing.” And I didn't meet them till the week prior. One was the Lab Manager and one was the Quality Manager. The Quality Manager is a mandatory role in these accredited labs and the Lab Manager is the technical expert that runs this lab. And so I came in the first day and my seller told the employees five minutes before I came in that I was the new owner. And so, as you might imagine, there was some wide-eyed shock in the business when I came in and spoke with them.

Rick Ruback:

What'd you say?

Nick Wheeler:

I kept it short, “Really grateful to be here. I bought the business because of the great history and great team that you all have. Even though I haven't got to meet most of you, the fact that like it's been around for 35 years and you have all these great customers and this clearly high-end technical capability says a lot about you all. So, I’m looking forward to learning from you and really just trying to observe and learn the business over these next few months and not make any changes”, which was all sincere, by the way. But I ended up having to make more changes than I expected. But I kept it short and sweet and, you know, just mostly let them know I was excited to be there and a little bit about my background.

Rick Ruback:

Were you excited at the end of the day? Or were you exhausted at the end of the day? Or were you pensive, worried? Maybe all of the above?

Nick Wheeler:

Frankly, most of the latter. I was exhausted and definitely anxious and wondering, “What have I done here?” But I think most searchers probably feel that on the first day. You can only learn a business so much while you're doing diligence. So, you're going to be walking in on Day One and, you know, you're going to be learning a lot and there'll be some surprises, hopefully no shocks, but yeah, I mean, I think any searcher is probably pretty anxious after the first day as to what they're getting themselves into.

Royce Yudkoff:

Since the business had been owned for 35 years by this family, I'm imagining that just about every employee had only worked for that family. So, this was a bit of a shock to them too. Did employees approach you over the next days or weeks with questions or anxieties about their future? Or did your opening comments sort of put that to rest?

Nick Wheeler:

My opening comments, I think, helped put it to rest, although I'm sure not completely. I said, “Hey, you know, everyone still has their jobs.” And that was part of what was attractive to my approach to the seller as well. Cause this is a very hot industry with private equity and he had probably other offers that would have looked different than mine. But no one approached me about, “Am I going to be fired or can I get a raise early on?” And frankly, I had a great reception, with me stepping in, I was very well received and I thought it went better than I could have hoped for.

Rick Ruback:

That's fabulous. What was your first big surprise?

Nick Wheeler:

Hmmm, first big surprise. Well, it wasn't a shock but there was two, and again, I only had nine employees, so there was two employees who I had terminated in the first two months. So that was definitely not my game plan going in. I did ask during diligence, you know, I asked the seller, “Hey, who are your two MVPs on the team and who are the two that need the improvement the most?” And that became abundantly clear. So that was a surprise that I had to, unfortunately, put people on a pip early on and then end up terminating two folks. I've had some surprises with the inventory that I inherited. There's been a lot of inventory that doesn't work properly. So that's, I think, tough with some of these very niche technical businesses, to take the time pre-LOI to go through every single piece of equipment. So, there's been some surprises there, but I was expecting that, just based on looking at how old some of the stuff was. So, there hasn't been a shock where I was like, “Wow, I completely missed this.” I think I under-appreciated how difficult it is to take over a business where the seller's heavily involved. That was the biggest risk that I assessed in this deal. And the personal toll it takes, I will not sugarcoat it to future searchers. This entrepreneurial path is hard, but especially if you have a very involved seller.

Rick Ruback:

Say more about that. Were you working a hundred hours a week? I mean, you work hard. I’ve seen you work hard. That's not intimidating. So, what is it? Is it just that the owner was into all the details and you had to catch up?

Nick Wheeler:

Yeah, I mean, he priced every quote. He looked at every single invoice going out and did a lot of his own invoices. Never really empowered and delegated a management layer here. So, things have changed a bit, but the Lab Manager wasn't fully empowered. Even the IT system, we have a server in the back. We've since transitioned to the cloud, but he ran all the wires. I mean, he was a very handy guy but, you know, didn't have his own bookkeeper. He would do that stuff himself. So just the day-to-day tactical tasks that I'm still doing, it’s a lot. It's non-stop. When you run a business, it's really hard to turn off. So, you go home at night and you're thinking about the business and the never-ending list of things that have to be done. So, it's just different than times in my life previously where I had to work very hard for weeks, months at a time. There was always like a light at the end of the tunnel where you could unplug for, you know, a few days or a week. I mean, it's tough to unplug as a small business owner, but it's gotten better in the four months since I started. But I don't think I took a day off for probably a good eighty days. But now I try to at least take one day off on the weekend. So, it's definitely improved. We've made some changes that have definitely made hopefully the business better and my life a little better.

Royce Yudkoff:

This usually does get better as you have more time in the CEO's seat, where you learn these things and become more efficient and you gradually pick off the less important task that your predecessor has held close to him and find someone to delegate that to or outsource it. So, Rick and I have seen this before and it's a journey, but it changes a lot over your first year, year and a half, for the better.

Nick Wheeler:

A lot of this is just like faith and trusting the process. You know, people have gone through this before. You have to trust the process of searching and knowing that you're going to have your broken deals and it's going to take a lot of no's before you get to yes. And I think it's the same when you're operating. The anxiety is you never know how it's going to end. You don't know if you're going acquire a business. You don't know if it's truly going to go well in the years to come, but you have to trust the process. And it has gotten better. The other thing that I think a lot of searchers, myself included, have concerns about is how long do you need a seller to be there and how critical were they? I actually, you know, asked my seller after about two months to just work from home and he's no longer involved with the business. And that's nothing against him. I just found that for me to learn the business, I had to like just start doing everything he was doing. And there was definitely some risks there, especially around the pricing. But the quicker I felt like I pulled that bandaid, the quicker I was able to learn. And the team kind of coalesced around me as the new leader. So, it's going to vary in every single business, in terms of how long that transition period should be, but mine was quicker than I realized I was going to need.

Rick Ruback:

So, you threw yourself in and started doing everything about two months in.

Nick Wheeler:

Yes, even about six weeks in, I started having him come in for like half days. And then at about two months, I said, “Hey, I'll call you when I need you.” And it was usually a call every day or two, but it kind of subsided over time. Instead of calling him, I would be like, “Let me see if I can figure this out myself” before just kind of pushing an easy button and calling the prior owner.

Rick Ruback:

What was the hardest thing to learn?

Nick Wheeler:

The pricing. We service over a thousand different pieces of equipment and then we also sell all this equipment. You know, learning the technical aspect of selling and how you price this piece of equipment versus this piece of equipment. There's a lot of technical nuance there. That was the critical thing I felt I had to learn those early months. I was concerned about relationships handing off, but I found that he wasn't really going out and meeting with customers very often. Some of them, I don't even know if they know there's new ownership yet or not. But definitely the technical aspect around pricing was the biggest risk, I felt, with me coming in as someone with no industry background.

Royce Yudkoff:

And was the seller helpful to you in this transition period? Was this a sort of successful relationship?

Nick Wheeler:

Yeah, he definitely wanted me to succeed. I think that's super important, that you find a seller that cares about the future of the business and your success. So, you know, he did a great job in trying to teach me and train me on all the tasks that he was doing. So, definitely grateful for that. Stylistically, we're probably very opposite. It became difficult at times. He did everything on paper, nothing was done on the computer. He was kind of a, you know, come-in-and-react-to-the-chaos-of-the-day, but he could do that because he'd been doing this for so long and everything was kind of in his head. But yeah, he was super helpful with teaching me everything that I thought I needed to learn and would ask of him.

Royce Yudkoff:

Searchers, or people considering search, often wonder about this. They ask themselves, “My goodness, I'm going to take over a business. I've never been in that business before. I know nothing about it, other than what I've learned in due diligence. How does this work out?” But it sounds like it's been hard work for you, but it's gone smoothly in the sense of the business has continued to operate fine. You've been learning more and more of the job. Am I misreading that or…?

Nick Wheeler:

“Smoothly” is probably a better adjective than what I would describe it. But yes, it's continued on. We're generally on track from a profitability perspective as the business was historically. Our customers are continuing to be served. And so yeah, I guess maybe from the outside looking in, it might actually appear as smooth. It certainly doesn't feel like that on the inside. But yeah, I think it’s gone about as well as can be expected.

Rick Ruback:

Nick, some people who are thinking about search think they need to acquire some skills that they don't have in their portfolio before they go out and search. “I need to learn something about sales. I need to learn something about operations. I need to learn this. I need to learn that.” So, first of all, was there anything you really wish you had learned that you didn't learn by the time you bought the company?

Nick Wheeler:

Yeah, there's probably a never-ending list. I wish I learned how to, you know, do ISO 17025 calibrations and all the equipment that we do.

Rick Ruback:

Hahahahaha! That's like me saying, “I wish I learned something about auto mechanics in high school because when my car breaks down there's nothing I can do”, and people point out I learned other things in high school that sort of worked out okay, but okay…

Nick Wheeler:

I wish I learned more about pricing and there's so many things that I would have liked to have learned, but I think that the biggest thing I personally needed to learn as a veteran coming to business school was the financial aspect, which is why I took your classes. I took private equity finance. I think you have to understand finance and you should be able to build your own basic model. Rick, I'm sure as a finance professor you would agree with that.

Rick Ruback:

I do, but I think everybody should be able to build their own model of everything, but anyway, I get that. How about HR? Do you wish you had learned more about managing people? Now, you had a lot of that in the army.

Nick Wheeler:

Yeah, that's the one thing I felt most comfortable with. Coming into an established team as a new leader, I’m very comfortable with that. I mean, like I said, at 23, I stepped into a forty-man infantry platoon. Sadly, my predecessor had been killed in combat. So, took over a Ranger platoon when I was in Afghanistan. So, I was used to stepping in as like the outsider, new guy and having to earn respect. But granted, HR is very different in the military because there's more of a hierarchy and there's a structure. If there's pay issues, right? Like I wasn't in charge of payroll. But you learn how to manage people, manage talent. So, I felt very comfortable with that but I wasn't comfortable with “How do you put someone on a PIP?” and “How do you terminate someone?” I just gave one of my techs a raise last week, just building performance reviews, because we weren't doing that. There was a lot of HR aspects that I'm just learning as I go because, as I imagine with a lot of these businesses, there wasn't a formal HR function and there certainly was not an HR person. I am the Head HR Officer at my company.

Rick Ruback:

As a finance professor, I always think, of course, that finance is most important, but through time I'm learning that sales is probably most important and soon thereafter is HR. If you don't have sales and HR right, it's really hard for a business to thrive, I think.

Nick Wheeler:

Yeah, the number one thing that I'm glad I did have experience with was just managing and leading people. That aspect of my background has been certainly more applicable now that I'm operating than when I was searching, where there is an aspect of managing relationships when you're searching, but it's largely a kind of finance, private equity kind of function you're going through while you search. So, I think, yeah, being able to lead and manage people is the most important attribute. The other attribute is just resourcefulness, just being able to figure it out. You asked about what I wish I had learned. I think to be successful as an entrepreneur, you have to have the type of personality, whatever it takes, whatever the problem is, you just figure it out because there's so much about running a business that you won't know. I mean, I didn't know how to operate QuickBooks. I didn't know how to operate an old-school server that wasn't in the cloud. You just have to figure it out. When you hit those roadblocks, just figure it out and you'll be successful.

Rick Ruback:

If you were to go back in time and just imagine the day you arrived at the Harvard Business School, if I had just plucked you out of that first year section and said, “No, Nick, you're not going to spend two years sitting in Aldridge Hall and doing all those other fun things that our MBA students do. Instead, you're going to be running this business.” Do you think you would have had an educational gap? What I'm asking is do you think you learned anything in business school that actually made it easier to run the business? I get that the finance stuff made it easier to buy the business, but anything that actually made it easier to run the business?

Nick Wheeler:

I think, especially for searching, it was extremely helpful. But also for running the business, I mean, I didn't know what a P&L or balance sheet looked like. I didn't know what working capital was and a cash conversion cycle and how critical it is to manage cash. I mean, I think I would have figured it out but, appreciating a B2B sales process. I mean, there's so much I learned in business school that I think is still applicable to today as I operate. I think from the leadership aspect, you know, more of my background leading teams, the military has been more relevant, but there's certainly a ton I learned in business school that's applicable to run the business day-to-day. But a lot of the tactical stuff, though when you run a business, you're not going to learn how to set a payroll in business school, right? I mean, there's just things you're still going to have to learn here on the fly.

Royce Yudkoff:

Nick, how about selling? Have you started selling at all? It's still early in your journey of ownership, but has that been something you've been doing?

Nick Wheeler:

I'm doing more of it now. I was a little gun shy early on because I didn't want to sell something I wasn't confident to represent. But I feel confident enough about the business and the technical aspects of it that I can go out and sell. We're also in a great position where we can barely keep up with the demand of incoming requests for quotes. So, it was not so much of an outbound and consultative sale process. It's people reaching out saying, “Hey, I need a quote for this. How quickly can you get it to me? And how quick is your turnaround time?” What I'm trying to shift to is some more strategic opportunities in sales where, you know, going a little bit higher up in some of these organizations and we can get a really large quote instead of doing a lot of little ones. But thankfully, most of the selling in this is your ability to pick up a phone or answer an e-mail quickly, will actually differentiate you in this industry.

Rick Ruback:

So, it seems like you're a business ready to grow.

Nick Wheeler:

Yes, we definitely have the demand. I'm in the process of hiring another technician. I mean, that's the bottleneck in this industry, is recruiting and retaining techs. I think that's common in any trades business in America, especially in this industry that's very niche. There's not really trade schools. The main institution that trains calibration technicians is the military. So, I mean, right before this call, I was talking to a marine who runs one of our military calibration labs about coming and working here later this year. So, recruiting is one of the most important functions of growing a business like this.

Royce Yudkoff:

Honestly, sounds like a great business, you know?

Rick Ruback:

It really does. So just hearing your description, I sort of thought to myself, “Well, it would be really good to have a CRM to manage that bid process. It would be really good to start professionalizing some of these functions.” Do you feel a big spend on IT and professionalization coming up or is that something you're resisting?

Nick Wheeler:

Already underway. I've broken a lot of your rules around or the wisdom around “Don't do too much the first six months”, which I think is generally very sage advice. Ideally, you don't have to. I mean, the business has been around for 35 years, so I didn't have to, but I like process and there was no real CRM to manage all the quotes, we had no way to follow up, and I just couldn't keep up. My predecessor could kind of, he just had it all in his head, but I need something to manage all that. So, one, I hired a sales manager, my second month. He’s been phenomenal. He has helped build out our CRM, we're using HubSpot, so we're in the process of doing that. Most of my business now is being tracked on a CRM. We switch from QuickBooks desktop to online. I'm about to spend a good bit of money on changing out the computers in my lab, some of which are 15 years old. I already migrated us from like an AOL version of business e-mail to Microsoft because we were getting like hundreds of spam and phishing e-mails a day. So, it's easy at HBS, when you're in FMSF class to talk about, “Oh, just put in a CRM”, but implementing these things is extremely difficult, you know, when you're down in the trenches, but I think well worth the effort in the long run.

Rick Ruback:

And expensive, right? I mean, it's always shocking how expensive these things are.

Nick Wheeler:

Yeah, and you know, you look at old trucks, you're, “OK, I'm going to have maintenance capex on the trucks” or “I'm going have to buy new trucks.” That's, I think, easier to estimate. On the technical aspect, I definitely underestimated just how difficult it is to operate in an environment where your computers are like 15 and 20 years old, and how expensive it is to hire an IT company to help you make that migration and/or implement the CRM, buy new computers. But I don't think you even have to build out a financial model to know there's great ROI. If my technicians and my folks down in my lab can just operate a computer faster, like, it's worth the $10 or $20,000 I'm going to spend on it this year to improve it.

Rick Ruback:

Interesting. So, new back office stuff, new SG&A stuff, that is business process stuff.

Rick Ruback:

The other thing I'd be really interested in your thoughts on, Royce, is this generational thing, right? You know, he buys this business that’s been doing great for 35 years. He sees that the limits to growth are scarce labor. And he works to find those people. I get all that. All those seem right to me. But what I find interesting is he just can't resist expenses for professionalization.

Royce Yudkoff:

Well, you and I always end up talking about this because we perpetually teach people who are about 30 years old and they seem to have that quality. And the truth is, you and I are not against professionalization, and you and I are not somehow against using information technology to make the company work better. What we're against is, gee, don't do this in your first year or year and a half of ownership because you will be a different manager one year later. You will know what information you need to know and what information you don't need to know, a year from now more than at Day One plus thirty. And so I think our argument is always about searchers who just rush into doing it because it's more professional, even if they don't yet know what they need.

Rick Ruback:

Right, so the CRM system – CRM is customer relationship management – that system that you build three months in will be very, very different from the one you would build a year in because you don't actually know the business well enough to know what it needs.

Royce Yudkoff:

And usually, because you don't know, you'll end up creating too many options in your system and spend too much money on it, much more than you would a year from now, where you know exactly what you need.

Rick Ruback:

I think this is really generational because that's how they've learned and they just can't do anything without some basic technology. And some of that's okay but, I don't know, I think there's this goal for being orderly and systematizing and professionalizing. It's not a bad thing, you know, when it improves efficiencies, but I think you really need to be disciplined and convince yourself that if I spend a hundred thousand dollars on a CRM system, it's going to create more than $200 or $300,000 of additional revenue or cost savings that I can actually point to in a concrete way. And I should hold myself to the discipline not only of thinking about that ahead of time but of documenting that afterwards. Because if I don't, I'll overspend.

Royce Yudkoff:

Let's go back and hear what else Nick has to say.

Rick Ruback:

So no new product lines, no new things like that?

Nick Wheeler:

Well, I scaled back a product line significantly. We've been talking about the really nice part of my business, but the distribution part of the business is cyclical. There was an aspect to it that was extremely low margin, that would suck up our cash flow. And so I have aggressively scaled that down. So, I know my revenue is actually going to go down on that side significantly, but we were only making 3% gross profit. So, I thought, although some of these orders were very large, we'd have to pay our OEM in 30 days and sometimes not get paid by the government or the military customer for 60 to 90 days. And so I just didn't think it was something worth spending my time on. So, I actually got rid of a product line.

Rick Ruback:

Interesting. Sometimes that's the most important thing, you know, the most important strategic decision is sometimes deciding what you're not going to do.

Royce Yudkoff:

Nick, it sounds like you're coming up for air in running the business and feeling more confident about your knowledge about the company. As you look back on this ETA journey, the searching, the buying, and really the initial part of running the business, what are your big reflections about this experience? What comments would you offer to someone who's maybe a couple of years behind you and thinking, “Is this for me? Could I do this?” What would you share?

Nick Wheeler:

What I share with a lot of the searchers that reach out is I think if you're going to do this, you have to have a deep propensity for leadership and operations. I think a lot of folks see the financial model works and looks great in Excel, but you have to just love, I think, love operating and leading teams to thrive in this environment. I think one of the things that's not spoken about enough is the career fulfillment you can have in leading one of these businesses and the impact you can make in your employees' lives. That’s a really unique privilege in this path, to impact lives. You know, half of American jobs are in small businesses and a lot of small businesses don't have really great leaders in them, and to be able to go in there with a fresh vision and professionalize a business and take care of the people in it is a really, you know, fulfilling opportunity. And so that, to me, has been the most fulfilling these first few months, is I really feel like I'm able to make an impact on a very local level here with my team. And I’ve definitely gotten feedback about that, and that's something we just don't really talk about much in business school. There's an aspect about this career path that's, I think, really fulfilling from an intrinsic value.

Royce Yudkoff:

Thanks, Nick. That's really great.

Rick Ruback:

I think about this as the story of American capitalism, right? You're out there building a good business, building good jobs, satisfying customers, everybody's better off because you're making a profit. It's good.

Nick Wheeler:

Yeah, I mean, I think that's how capitalism was supposed to work.

Royce Yudkoff:

Nick, Rick and I usually like to wrap up our interviews by asking you if you happen to have any questions for us.

Rick Ruback:

This is the terrifying part of the interview for us.

Nick Wheeler:

Wow, my question to you would be, do you think the days of buying these small businesses at a reasonable value are gone? I mean, that was what I found very tough about this process. And we all know the magic's in the multiple, Rick.

Rick Ruback:

Great line.

Nick Wheeler:

Search has gotten a lot more competitive. I paid up, I thought, compared to the normal multiples we talked about in your class, to acquire this business, and I'm fine with it because I feel like I would have been searching forever otherwise, so I'm just curious, do you think the market has changed significantly?

Rick Ruback:

I'll take a pass at that, Royce. The answer is no, I don't think it's really changed that significantly. I think at the size of about a million dollars in cash flow, maybe a little less, I think that multiple has stayed pretty steady between three and a half and four and a half over the fifteen years Royce and I have been teaching about this sector of the economy. I think if you go much beyond that, if you get into your $2 million EBITDA businesses and three and four and five, I think those multiples have probably gone up as not only private equity firms have gone into that space but also funded searchers are competing more for those bigger companies and willing to pay more for a variety of reasons. What I also think is that the quality of the business has a big impact on the multiple and so, you know, there's so many attractive features of the business you bought, you would expect that business to sell beyond that four and a half upper range because it has these wonderful recurring revenues. It has well-established barriers to entry. It's a technical sale. As you pointed out, the revenue and profit per employee is really terrific. While you love managing teams, if you can make the same amount of money managing a team of ten instead of managing a team of one hundred, it's better, right? And so there are all those attractive features in your business. And so I would expect that business would sell for more, even if it were in that size range, because it is a higher quality business. So, quality really, really matters. Project businesses, they're going to sell at the low end. Heavy recurring revenue businesses that are great businesses to own and run that have a lot of runway potential, like yours, I think will sell above that range. Royce, what do you think?

Royce Yudkoff:

Yeah, I agree with those points about quality and this is an industry, I’d just add, which doesn't respond to economic cycles. You know, if the economy is booming or it's in recession, these laboratories are going to need to calibrate their equipment and that's a very nice, safe feature to have. And lastly, I'd say this is an industry, Nick, as you touched on earlier, that's been sort of discovered by private equity probably a little bit more at the larger end of calibration companies, but that also is a force driving up this particular sector. So, I'm with Rick. I think quality influences price. I’d also say, you know, the journey as a searcher is a funny one in this way because you knock on a lot of doors of business owners, many of whom are on their own journey of trying to figure out what their business is worth. And like any sensible business person, they will start out with a high expectation for price and as they collect market reactions, they gradually lower, lower, lower that. Sometimes they leave the market and say, “If this is all I can get, I'll just keep owning it.” But equally often, they'll keep gradually lowering price. And so, as searchers bump into these owners, depending on where you catch them in their journey, you can get the impression that everyone is sitting at a very high price. And I only say this because we hear this all the time from people in the midst of their search journey, “Rick and Royce, you guys said these businesses trade at three, four or five times. I keep bumping into people who expect seven, eight, nine.” But then we talk to searchers who actually close on a business, who found a seller late in their journey of price discovery. And their prices are usually in this lower range that we guide people to because those are people who have completed their journey.

Rick Ruback:

But again, it depends a lot on the quality of the business. And I think you don't want to be hesitant to go beyond that multiple range for a great business. But you want to be sure it's a great business. You know, you don't want to pay up and then discover it's actually not a great business. It's easy to fall in love, especially as impatience starts rearing its ugly head and search fatigue sneaks in and you just want to be done with it, right? You want to lean against the desire to “Make the agony stop” by paying more. You don't want to do that, but if you come across a higher quality business that's worth more? Yeah, pay more.

Nick Wheeler:

Makes sense.

Royce Yudkoff:

Well, Nick, it's been such a pleasure seeing you and speaking to you, and it sounds like you're off to a really promising start. Thank you for taking this time to share your journey with Rick and me and our listeners.

Rick Ruback:

Yeah, it's been just a delight to see and talk to you today. And I'm really excited to check back in and see what's happening a year from now. I expect really fabulous things! And congratulations on the soon-to-be-born baby.

Nick Wheeler:

Thank you, and thanks again for illuminating this path to so many people like me. I came to HBS not knowing I wanted to do this and it was reading your book and taking your classes that was a huge catalyst for me doing this. So, thank you to you both.

Rick Ruback:

So, Royce, I think the place we should start in talking about Nick is just how cool the business is. I love the business.

Royce Yudkoff:

It's one of our ideal businesses, isn't it? Because your customer absolutely needs to feel confident that their equipment is properly calibrated and if it's not, it's just a disaster, but the cost of that service is tiny. So, the incentive for a customer to go out and bid this out is zero.

Rick Ruback:

In addition, if you need that tool and it's not available because it's still at the testing lab and the testing lab is running three weeks late, it's a disaster. You have an employee who's not being productive. You have a customer who's going to be mad at you, all these terrible things. And if you have a business that will calibrate your equipment and get it back to you in a timely way and do the calibrations reliably, that's wonderful, right? Why would you ever switch? And so you get the feature of good service as being a barrier to entry, but it's more than that. These are long-term continuing relationships, and some intertwining of customer needs and expectations, and Nick's company's skill set, that all kind of combine together in a way that make customers very reluctant to leave. So, I love that.

Royce Yudkoff:

Me too. It's a special thing that someone like Nick can show up in his office each January 2nd and he knows that his testing revenues are going to be about the same as they were last year, before he starts selling any new customers. You know, the new customers he sells are net improvements. What a great business.

Rick Ruback:

Yeah, what a great business. And the only sticking point I saw, but this is sort of natural to this kind of business, is that it's hard to grow the business because your bottleneck on growth is the employees.

Royce Yudkoff:

Yes, your bottleneck on growth is the employees, and you have to pay attention there. And also, of course, the other bottleneck is that just like it's hard for someone to take away your customers, it's hard for you to take away someone else's customers. So, you have to be very thoughtful about how to find new customers that haven't already adhered to a service provider.

Rick Ruback:

Right. And that's why I think it's really interesting that Nick, in his sales cycle, is thinking about going up the chain. So instead of the person using the tool or the person who's in charge of the shop making the purchase order, to somehow get a blanket contract with the company, that you'll send all your calibration equipment to us.

Royce Yudkoff:

Exactly.

Rick Ruback:

So that's a way to kind of get out of that stickiness that they might have to competitors.

Royce Yudkoff:

One of the other benefits of a business like this, with recurring revenues and really sticky customers, is that it really does tolerate a new buyer coming in and learning the business over six months or so because the revenues are so sticky. You know, there are some businesses that tolerate this well. There are some businesses that will tolerate it less well, and this kind of sticky revenue really helps a transition go smoothly. I've no doubt that in a year, Nick will be a superb manager of this company but as he's learning, the business supports that learning.

Rick Ruback:

Right. How many times have we heard from searchers that say, “One of my concerns is that I need to transfer the relationships. I worry that the seller has all these personal relationships and they buy from our company because of the seller's personal relationships.” You didn't get any of that sense here, right? Why do they buy from your company? Because you do a good job. You pick up, you deliver on time, you are a hassle-free solution to a big problem. That's why we buy from you. Not because, you know, you take me to the Celtics playoff games – although that would be a good thing – but it's you do your job.

Royce Yudkoff:

Exactly. It's interesting because when you look at the world of small businesses, you see all different types of products and services, like Jackie Kopcho's pool company and Nick Wheeler's lab calibration company. And at first they all look very different, but if you look at them through the lenses that Rick and I always talk about, like recurring revenue, no customer concentration, no economic cyclicality, suddenly all the good businesses look alike.

Rick Ruback:

Right. And, you know, you can go back to Robin Kovitz's business as well, right? It's what's important about the gift basket? It has to be put together. It has to look great. It has to be delivered and create the customer experience. And you need flawless execution in Robin's gift basket business. You need flawless execution in Jackie's pool maintenance business. You need flawless execution here in Nick's business. And when I say good service creates its own barrier to entry, that's what I mean.

Royce Yudkoff:

Excellent point. Next week, we’ll be interviewing Greg Edwards and Jim Cumbee. Greg is in the process of selling his business and Jim Cumbee is a deeply experienced small firm mergers and acquisitions advisor. He’ll give us a walk through on what’s involved from the seller’s perspective in selling their smaller company. Tune in next week. 

Rick Ruback:

And Royce, I think now’s a good time to ask our listeners to send us in some questions. Our last episode of the season is going to be us answering the questions that we hear from our listeners. So listeners, please send your questions. Our email is rickandroyce at hbs dot edu.

Royce Yudkoff:

You’ve been listening to Think Big, Buy Small. We’re your hosts, Royce Yudkoff…

Rick Ruback:

…and Rick Ruback.

Royce Yudkoff:

Katie Zandbergen produced today’s episode. 

Rick Ruback:

Our audio engineers are Mari Shear and Craig McDonald. If you have any questions, comments, thoughts, feel free to just e-mail us – rickandroyce at hbs.edu.

Royce Yudkoff:

We’ll be back next week with another episode of Think Big, Buy Small.