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:

Today we're going to speak to Jenn Braus. Jenn is a former process engineer who decided that she wanted to be a general manager with a big economic stake in her own company. She searched and found a business that Rick and I have always thought of as a wonderful, model business for what searchers ought to be looking for: High recurring revenues, non-economically cyclical, no customer concentration, and an opportunity for growth that has not been fully exploited by the prior owner and is consistent with the fact that customers, once they become customers, are sticky. Most interesting to us is that when Jenn was examining the business, in addition to all the normal due diligence of reading contracts and checking the books, she looked at what the owner did and asked herself, “Can I do that work? And do I want to lead that life?” She answered “yes” to both those questions and I think has carved out not only a remarkable career success for herself, but a great life as an entrepreneur and a human being. We’re going to listen to Jenn’s story and you’ll judge for yourself. Hey listeners, just a head’s up – Rick and I are investors in Jenn’s company and we wanted you to know that before we proceeded with the interview.

Jenn, you have searched for a business to buy and bought one and have been running it successfully for a number of years, as our listeners will hear. But maybe a good place to start is well before that. Could you take a few minutes and just walk us through your journey? What was your family like? Where'd you grow up? Navigate us through your jobs and education and, particularly, what made you decide to search?

Jenn Braus:

First of all, thank you for having me. I'm happy to be here. So, I grew up just outside of Indianapolis, in the Midwest. And my parents were both engineers and they told me all growing up, “You know, we know what engineers do. Don't become an engineer. It's not for you. You're going to hate it.” And so then, of course, I went to a small private engineering college and I got two degrees in engineering. And then I got a job as an engineer. And, lo and behold, I figured out that I hated it and I didn't want to be an engineer anymore. So, turns out I should have listened, not that those were necessarily bad choices but, you know, my parents, they knew what engineers did and they said, “Jenn, this isn't for you.” And it turns out that they were right.

Rick Ruback:

What part of it wasn't for you?

Jenn Braus:

Yeah, I just don't think I'm nerdy enough. It gets very technical and there's a lot of details and at some point I just didn't care about the details and I just didn't have a passion for getting all of those details right. And creativity really wasn't my strength and that really seemed to be a necessary skill. So, as I worked as an engineer, for a large company, I ended up getting kind of a leadership process improvement role within that company, and that was slightly a better fit. And that's where I realized that general management was a good fit and that I liked that. And I wanted to be able to affect change more easily. But doing it in a large company comes with kind of a large company bureaucracy and seeing how long it can take to get where I wanted to go, I just didn't really think I had the patience for that. So, it all kind of started in engineering and becoming an engineer and then realizing that engineering wasn't really for me. I did meet my husband, who's an engineer, and we were married before business school and he's a great engineer. He gets into this stuff and he loves it and seeing how much he's good at it and passionate about it really highlighted how much it was not for me.

Royce Yudkoff:

You know, Jenn, you mentioned one thing along the way that Rick and I hear a bunch from people who work in other people's companies and then decide to pursue ETA, which is that moment when they look ahead at their bosses, you know, one or two rungs higher than them, and they say, “You know, all things considered, I don't want to be that person.”

Jenn Braus:

That was exactly how it was. It was, you know, looking at one or two levels above and seeing how long it took to get there, and then realizing that wasn't even where I wanted to go, really thinking about wanting to be in a true leadership role where I can affect change and set my own direction. Kind of took a left turn to go to Harvard Business School, and that was in the fall of 2011, and really didn't know what I wanted to do but I kind of got it in my head that I didn't want to work for a large company. I didn't want to work for a public company that has this, you know, quarterly focus. And it wasn't until the start of my second year that I even learned what entrepreneurship through acquisition was, that you could go and buy a small company and run it. That was all new to me. And everyone said, “Oh, you should definitely take this great class taught by these two professors, Rick and Royce. You're going to love it.” And I thought, “OK, that sounds great.” And so I signed up for the class and then learned all about ETA through that financial management of small firms. That was in 2012, and then graduated in 2013, knowing full well that ETA is what I wanted to do. I knew I was good at general management. The idea of being in a small company and being able to lead and affect change the way I wanted to, with as little bureaucracy as possible, was a really good fit. So, I decided, when I started the search, I gave myself two years to commit to it. And I was searching from Portland, Oregon but really didn't know where I was going to end up. You know, I looked at businesses all over and at the time I was married but, you know, we didn't own a house, we didn't have kids. It was easy to have that flexibility at that point in life, and at that time I was in my late twenties. That's kind of how everything got started.

Rick Ruback:

And I remember when you started searching, you really wanted to buy a business that had some mission to it.

Jenn Braus:

Yeah, I did an internship with a nonprofit orphanage in Honduras and actually lived in Honduras for the three months between first and second year of business school and then took some time off before searching to do that as well, and really just wanted to do some good in the world. And so I get that a lot of the businesses I was going to be looking at were some niche, boring businesses, but at least it could be a niche boring business that could do some good for humanity or society or something that builds something up. And I think I found that in the company that I have. So, Systems Design West, my company, which I'm sure I'll talk more about, does EMS billing. So, we provide medical billing services for ambulance providers throughout the Western United States. And we're part of the EMS system and so we're providing a critical service and revenue to EMS services, and then also we're dealing with patients and their money, and so we're able to do that in a caring, compassionate, effective way, just to make the system better. Even that aside, I do think now, especially looking back on it, is that being a small business owner, and just the job creation and job security you can provide people, is a good social mission in itself. You know, how many people depend on the income from a stable company is, I think, really important.

Royce Yudkoff:

You know, Jenn, that last point you made is really interesting because Rick and I talk to people all the time who are interested in going into entrepreneurship through acquisition and they talk about the things which excite them, that you've also talked about, like making decisions that matter, all these sort of things that immediately come to mind. But one of the things they rarely talk about in advance but frequently talk about after they’re CEOs is that feeling of taking care of a flock, a flock of employees whose lives are made better by the jobs you create. And it's a very moving thing for many entrepreneurs.

Jenn Braus:

Yeah, and I’m able to see that. So, we've got about 100 employees right now and have shepherded everybody through a pandemic, which was wild. And, you know, there's a lot of decisions to be made about how you keep the business going and make sure that people are taken care of, not just today, but that they're still going to have a job in six months. And the business decisions that one makes as a CEO are what provide that job security or, in a bad case, lack of it. So, I take that responsibility very seriously. I'm a person that gets excited and interested by having a lot of responsibility and I would think that providing job security for my staff is like the number one responsibility that I feel toward them and as a CEO.

Royce Yudkoff:

Jenn, maybe let's take this in sequence. You led us through your professional and personal background through business school, why ETA and, of course, the first step in ETA is searching for a business to buy. Tell us a little bit about how you experienced your search. How did you go about searching? What was hard? What felt natural? And then how did you come upon Systems Design West?

Jenn Braus:

I started searching, naively optimistic, I'd say, and then I realized in looking back on it, I really did not like searching. I really disliked it, mostly because it's very defeating in the sense that every day is kind of a “no”. Like most days are a “no”. And some days are a “maybe”, and then that maybe turns into a “no”. And so it's either, you know, the business isn't the right fit or the price isn't the right fit, or both, and there's just a lot of that. And it's the repetition of not winning. For somebody who likes winning and likes having things go well, it's, you know, can be very defeating. I did a brokered search and so a lot of daily deal flow was reaching out to brokers and generally, business brokers have a lot of incentives to get their businesses sold but they're not necessarily responsive or thoughtful in their working with people and, you know, as somebody who was still in their 20s saying, “Hey, yeah, I want to buy a business with a high recurring revenue that's in this size range.” You know, they don't really either want to understand the story or get the story, but they're also these gatekeepers, in a way. And some of that was a tough nut to crack. So, I didn't really enjoy cold calling brokers all day. I didn't enjoy looking at a bunch of businesses that I never wanted to buy. And that's the name of the game in search. You just turn over these rocks. And what I always suggest, and I think somebody said this to me, is that, “You know, if you really love the search and you really love looking at these businesses you should go work in private equity because you can do it all day long”, and that’s when I knew that this operating the company was the end that I was going for and the search was really the means to an end. And, you know, people think, “Oh, do you want to sell and go search again?” I was like, “I never want to search again. That sounds terrible.”

Rick Ruback:

So, Jenn, you searched, you said, in 2014. Do you think some of the reason the search was frustrating was because you were one of the early women searchers? What did you say to me earlier today, Royce? About 25% of the searchers were women?

Royce Yudkoff:

Today.

Rick Ruback:

Today. But in 2014...

Jenn Braus:

…it was like me and one other person.

Rick Ruback:

Yeah.

Jenn Braus:

Not a lot of people were searching then, but they certainly weren't women. And do I think I faced more challenges because I was a woman? It's hard to know if it's because I was female or because I was young. But I think both being young and being female can invite some of the same kind of patronizing behavior that I received, especially from business brokers. I actually never had an issue with business owners. You know, at the end of the day, they just care that you're competent and have money to buy their business. But business brokers, you know, I do remember receiving comments, like I remember one broker said, “Does your husband know what you're doing right now?” You know, as if I needed some permission to be working. Having been an engineer previously, which is also a male-dominated field, this wasn't necessarily a new experience for me, to be a lone female in the room. But I don't think it made the search more difficult. It probably just made it more frustrating and made my search experience, you know, less fun than other searchers where I've heard have really kind of enjoyed it. And I didn't enjoy it. It's probably because of some of the comments and behaviors I had to tolerate along the way.

Rick Ruback:

So, you found SDW through a broker?

Jenn Braus:

Yes, that’s correct.

Rick Ruback:

And, as I recall, SDW was a little small.

Jenn Braus:

SDW was very small and I found it through a broker that I had worked with previously. The story goes that I actually went out to lunch with an accountant in Portland and I said, you know, “Hey, this is my story, this is what I'm doing. Do you have any avenues that I could pursue to find businesses that are for sale?” And he says, “Oh no, you know, I don't. But do you know this guy, Eric? He's in town. He sometimes has businesses. You should call Eric.” And I had regularly called Eric. I think I had probably called Eric once every three months to see if he had a new deal. And I just reached out to Eric that night after this lunch and said, “Hey, Eric, you might remember me. I'm Jenn. I'm looking for businesses like this. And I met with so-and-so and he wanted to say hello and that I should check in with you.” And Eric says, “You know, I actually do have a new business and I was going to bring it to market tomorrow. Would you like to see it?” And I said, “Sure.” And then I looked at it and it was really small. And I thought, “Not sure if I'm interested in a business that's this small. But yeah, we'll take a look.” And then I read through his information, which was actually really well done and really well presented, and thought, “Wow, this is a really nice niche and they've got a great recurring revenue, but it's really small. So, I'm not sure if it's too small. I'm going to have to think about that.” So, there was some hesitation on my part about the size at first.

Rick Ruback:

I think you and I had a conversation soon thereafter about how small is too small. And as I remember that conversation – funny, I remember where that conversation took place. I happened to be in Indianapolis, your hometown – and I remember you saying, “Well, shouldn't we look ahead and see what the anticipated revenues are going to be?” Because I think some customers had been signed up but not brought onboard. And if we added all those customers, it looked better.

Jenn Braus:

Yes, like if you had looked at the last three months EBITDA versus the last twelve months of EBITDA, the last three months were really promising. And if you took that and extrapolated it forward, because of the growth and kind of on a run rate basis, then it wasn’t so small. It was still small but it wasn't scary small. So, there was this question about whether we could prove out that the run rate was real and whether their customer retention was as high as they claimed it to be. And so we thought, “You know, if we could do this on a run rate basis, that seems fair, if their customer retention is as high as they say it is.” And that, you know, would be like the first thing in due diligence, to have the confidence in that. And so, you know, what we ended up deciding was that the recurring revenue and the lack of cyclicality in this niche industry was, you know, some of the best that I had seen in businesses that I had looked at. And if we could believe the run rate was a good measure of where they would be going forward, then we could probably get the deal done. That was my recollection of the conversation and the outflow from it.

Rick Ruback:

And as I remember as well, the seller was unusual in the sense that he had a well-defined asking price and he just wanted his number. He didn't care how you got it. He just wanted his number.

Jenn Braus:

Yes, and he did that on a few different points, where he just had a number and he didn't ever share a basis for the number. It was just, “This is my number.” I remember you and I back-calculated his number as a multiple of EBITDA and it came into a drop zone of five or less that we could do as long as we factored in this run rate. And so he thought he was really happy because if you looked at trailing twelve months EBITDA, his number was a very high multiple. But if you looked at it on and run rate basis, the multiple was in a number that we wanted it to be.

Rick Ruback:

More manageable.

Jenn Braus:

It was much more manageable. And for a company that's really high quality, we didn't feel like we were overpaying or taking a big risk with that. I think the other thing that helped in this deal was that the owner wasn't the founder, in that he was the second owner. And founders get really married to very specific particulars about the business. Sometimes I found that founders had more unreasonable price expectations than other owner types. And so the fact that he was the second owner, it wasn't his baby that was, you know, of course, the most beautiful in the whole world and deserved all this thing. He knew what it was, and so I think that helped, along with having a good sell-side broker, really helped him keep the price expectation reasonable.

Rick Ruback:

And my recollection is that he was on the younger side for a seller, not in his 60s or 70s, but was, he was motivated by changes in his personal life.

Jenn Braus:

He was getting married to someone that he had met through the company and was ready to kind of move on and just begin a next chapter of life without what he called the elephant on his back.

Royce Yudkoff:

The elephant being running the business every day.

Jenn Braus:

Yes. I do think he was there most days, but I don't think he was putting in quite a nine to five. The company, it turns out, had a really strong management team and I think that's another benefit of the fact that he wasn't the founder and that he kind of slid in, kind of created the lifestyle that he wanted, realized that he could cash out, make his money after seven or eight years, and move on.

_____

Royce Yudkoff:

Jenn highlights something that I think is interesting, which is the difference between the searching for a business part of your life as an entrepreneur through acquisition and the running part of your life. And there are, I suppose, a blessed few searchers who delight in both parts, you know, that somehow they have interests and personalities where both of those tasks are great. But I think you and I more often see people who end up being great managers of their own businesses not really liking the searching process very much.

Rick Ruback:

Well, it's hard for me not to project, right? I would not enjoy the searching process. My personality just doesn't align well with that.

Royce Yudkoff:

You've said this once, I thought it was really true, which is that, you know, searching as an activity where until you finally close on a company…

Rick Ruback:

…you fail every day.

Royce Yudkoff:

You fail every day. And that way it's unlike most projects, where you're sort of getting closer and closer to the mountain top every day. What we can certainly say is this is one of the attractions of running your own business, is that you have the possibility of creating the world you want to live in. Whereas when you work in someone else's larger company, you have no possibility of doing that.

Rick Ruback:

No, no.

Royce Yudkoff:

You know, if you think about what draws people into being a CEO and general manager, they want to make decisions that matter all the time. They want to have executive control over a business. They want to feel like they're directly being rewarded for their decisions. These are not feelings you get when you're sort of cold-calling brokers and business owners.

Rick Ruback:

No, but in some sense, those are the most important decisions you're making because you're saying, "I'm going to follow up on this company.”

Royce Yudkoff:

Yes.

Rick Ruback:

“I'm going to follow up on that company. I'm not going to follow up on this company because it's too small. It's got this, it's got that. I don't like it. It's in a place I don't want to live." And all of those are such important forks in the road, and there's probably no bigger decision that a searcher makes than which companies they're going to pursue.

Royce Yudkoff:

Right.

Rick Ruback:

That doesn’t seem apparent during search. It’s one of these things where you need to develop good habits to develop deal flow, to analyze potential deals, to communicate with sellers, with brokers, with banks, with equity providers. You've got to develop all these skills and habits, and you've got to pursue them almost daily. I think she just didn't like the outreach part. You know, you have to keep on pursuing things and going through these steps, and the individual steps don't provide great rewards.

Royce Yudkoff:

Partly because there's a huge element of chance in that activity, right? You either collide with a business whose owner wants to sell at a reasonable price or you miss that one and you're colliding with another business where none of those are true.

Rick Ruback:

Right, and there's a time dependency to all of this. Is it at the time where you've got enough experience so you'd even recognize that it's a good target firm or is the seller got enough experience in the marketplace, so the seller has a sense of what a market price is and what market terms are, and what the process needs to be like to make it work? So, you need lots of things to line up.

Royce Yudkoff:

Let’s go back to our conversation.

_____

Royce Yudkoff:

Jenn, tell us a little bit about the takeover. You know, you've already sort of described that, you know, you were young relative to many business owners. You were probably young relative to the workforce. And most importantly, like most searchers, you were new to the business itself. You had never done ambulance billing. Draw us a picture of what Takeover Day was like.

Jenn Braus:

Sure, so Takeover Day, it's pretty nerve-wracking. You know, I was still in my 20s and the management team was all in their 50s. It took some time to earn credibility for being a competent, capable person. And so it was nerve-wracking, in that sense. And I wasn't sure upon takeover, you know, what the sentiment was with the previous owner, you know, if this was going to be a big void that I was trying to fill or not. Prior to the close, we spent a lot of time negotiating this transition plan and how much he was going to be available, and all of this. And then, after like three days, he was like, “I think you've got this.” And he just like was off. And, you know, I think the transition time – I'm not being sarcastic – was about two weeks, where he was actually in the office. And then he was like, “Actually, you know, I think things are good. If you need me, just call me.” But the management team was very gracious in bringing me up to speed. And I spent the first six months just learning about the business. This wasn't a turnaround situation. This is a business that was already retaining its customers. It was already cashflow positive. If I did nothing, it was going to be okay. And so for the first six months, I really just spent learning how the business made money. What was the secret sauce that kept all these customers there? What were the operations like? How did they operate? I spent that first six months learning so that when I did affect change and make adjustments here or there or broad sweeping changes, I knew what the downstream effects would be and I didn't feel so nervous changing things. And so change really started to come after six months and it's changed, you know, drastically. Like almost every facet of the business has changed at this point and if it hasn't, I've got plans to change it. And so, change came but was a lot more confident, was a lot more decisive, knew it was going in the right direction, and knew I wasn't going to break anything in the process. Because the last thing I wanted to do was be a first time CEO, with my first business, and then all of a sudden I take this great business, that's been in business for twenty-five years, and then screw it up. And I didn't want to do that.

Rick Ruback:

Yeah, you wouldn't do that.

Jenn Braus:

I don't think that I would do that and I would never want to do that, but I do think the humility of knowing that I don't know what I'm doing on the first few months was really helpful.

Rick Ruback:

As I recall, some of this run rate that you anticipated was coming on board during that first six months as well. And so you were very busy in operations. Has that been characteristic of the last decade or so? Are you more involved in operations or in business strategy? How do you think about what you do? Are you a person who works in the business or on the business or a little bit of both? Talk about those ratios.

Jenn Braus:

So that I think is a function of size. And so the company has grown very nicely over the last nine years. And when the company is very small, every $10,000 is kind of a big deal. And so I think I spent a lot of time on the business, of doing the operation stuff, but I also knew I needed to grow my way out of that problem. And so spent a lot of time on the business development, which in this business looks like spending time with customers, and making sure that they're happy, and making sure that they know to think of the company. And so we had a ton of organic growth, really in the second, third and fourth years and on. And then, as we got bigger, it allowed me to hire more management, get a Vice President of Operations who could really manage operations. And now my job is far more on business development and strategy, and so making overall kind of forward-looking operational decisions as opposed to the day-to-day firefighting. But, you know, you start in a small company on Day One, that day-to-day firefighting was really on me. So that's definitely been an evolution of the last nine years.

Royce Yudkoff:

Jenn, one of the characteristics of Systems Design West that you've mentioned a few times is the high customer recurrence from year to year and, over your more than a decade running the company, that recurrence has even increased from the high levels that you've bought it. I mean, almost no one ever stops being a customer once they start. This is interesting to us, because, you know, Rick and I are often...

Rick Ruback:

We love this. We love this. We love this. It makes us so happy.

Royce Yudkoff:

We love this. Yeah, Rick and I are often asked by searchers, like, “What's really important when we look at companies” and tops on our list is always…

Rick Ruback:

Recurring revenue.

Royce Yudkoff:

…recurring revenue. So, tell us, tell the audience a little bit about why do your customers find it in their interest to stay with Systems Design West? If we talk to a bunch of customers – which we don't, but you do – what would they say are the reasons they don't want to switch?

Jenn Braus:

So, I think the switching costs in this industry generally are squarely medium, which is great because you don't want them to be too high or else it's really hard to grow because then people aren't going to switch what they're doing elsewhere to come to you. But you also don't want it to be too low, where they can just leave every time they get slightly frustrated. But if you were to talk to customers to say, you know, “Why aren't you leaving Systems Design West?” and, you know, “Why is the business grown?”, it really has to do with that we are highly responsive to our customers and we put customer service at the forefront of what we do. And I think, just generally speaking, you've kind of seen an erosion of customer service just all around in the last several years, and we've worked really, really hard to not have an erosion of customer service. And so we stand out as like this unicorn that answers the phone when you call, and that we respond to your emails within one business day, and we'll answer the question that you're not even asking. And so this high touch, highly responsive customer service focus, as well as getting the job done so that they don't have to think about us ever is really, really important to our customers. They just want their admin staff to be happy. And so I think that that is one, the reason that customers don't leave. But I also think that's the same reason that we've grown, because these customers are happy and then their neighbor calls and says, “Hey, you know, we need to find a new ambulance billing company. Our current one’s just not cutting it. Who do you recommend?” And they say, “Oh, we use this company out of Poulsbo, Washington, and we've just been nothing but happy with them. You should give them a call.” And that has been our growth story for the last nine years.

Rick Ruback:

And compliance is also a complicated part of your business, right? The way you're describing your business, it sounds so easy, right? That an ambulance comes, they take the person to the hospital or wherever they need to go, and then you just process the paperwork. But it's more complicated than that because when people are taking a ride in an ambulance, they're not at their best selves, generally.

Royce Yudkoff:

They might not have their insurance card on them.

Jenn Braus:

They may not be conscious to even sign for the transport to authorize billing of the insurance. Right. So, the reason that Systems Design exists is because navigating medical insurance in the United States is a complicated task. And our clients, which are primarily fire departments and fire districts, county ambulance services, are really good at saving lives and they focus on patient care and all these life-saving things, and what they're not focusing on is “What's Medicare's billing manual for this type of transport and this level of service?” - the coding, and the modifiers, and the destination types, and electronic enrollments. They're not messing with any of that. And so, that's a really complicated, highly-technical burden that they're happy to offload to us. And so we take over, you know, all the technical billing and coding, all the enrollments for the payers – of which there are thousands – and do all of this for them while, you know, depositing their money, resolving denials, doing appeals, all of that. And we've got to get that right because, as you mentioned, compliance is a huge part of it. We're dealing with federal funds, with Medicare, and then also we're dealing with state Medicaids, which are also highly regulated, all of which come with audits, and we've got to do this right and our clients really trust us to be thoughtful and do a careful job. And if you were to think of, you know, larger billing companies, you know, maybe they're not getting that same time and attention or they wouldn't have that trust, which is again why I think our company being the size that it is, and in the niche that we are, has done so well.

Rick Ruback:

I mean, it's such a cool company. It's a great company.

_____

Royce Yudkoff:

You and I see a lot of businesses, a lot of them are great businesses, many are okay, many are not so okay. This business has a lot of the qualities that searchers should be looking for to maximize their chance of success. And we've talked about a bunch of them, right? Recurring revenue, low cyclicality, low customer concentration, you know, that customers have very good reasons for not wanting to switch if they're getting fine service, that it's in their interest not to switch. And I think that that's hugely helpful to an energetic young manager in taking over a business smoothly, and having enough time to learn it, and then finding ways to do wonderful things for their customers. You see that example here in this business, that's sort of an inspiration for why you ought to care about those qualities.

Rick Ruback:

Royce, one of the things I find so remarkable about this business is how recurring these revenues are. This business is like the perfect recurring revenue business because every time a fire station sends an ambulance out to pick somebody up and take them to the hospital, they either lose that revenue or need to find somebody to bill that revenue. And when they have a contract with Systems Design West, what happens is the computer systems are integrated and the forms are standardized, and so it would be so hard for these fire stations to imagine switching that they almost never do. Something would have to be egregiously wrong for them to switch, and Jenn manages the business at a high level of service. Her customers are very happy with the quality of SDW's work. And so this is sort of the perfect business. You know, we talk about the difference between repeating revenue and recurring revenue, and I've been looking for an episode where we have the poster child of recurring revenue.

Royce Yudkoff:

So we can point to it and say, “This, this is what we're talking about!”

Rick Ruback:

Yeah, this is what we're talking about! We're not talking about the guy who goes and gets a cup of coffee at the same coffee shop on Charles Street when there’s three other coffee shops on Charles Street. No! That's not what we're looking at.

Royce Yudkoff:

One hallmark of recurring revenue that's different from repeating revenue is in true recurring revenue businesses, the customer is no longer making a decision every time the product is used and paid for. Like the Fire Chief, once he signs up with Systems Design West, and as long as the service is good, is not revisiting that decision, he or she is going about the job of a Fire Chief. And in the coffee shop, that customer, at some level, is making a decision every day to turn left into that coffee shop. And that's an important difference.

Rick Ruback:

That's right. And, in addition, if I go to another coffee shop, I might not like the coffee but there's no cost to me. I don't have to do anything. I don't have to explain it to fifty people, about how I changed coffee shops today and here's why. And I don't need to incur the systematic cost of dealing with something else. You know, in this business, if they decide to bill with somebody else, if they were to make the very, very unusual decision of leaving SDW, it would be a lot, a lot of work for the Fire Chief, and why do it when things are going well and the service is price fairly? This is a remarkable recurring revenue business and for everybody listening who's shopping for a business to buy, look for one like this. Every piece of this business is nearly perfect, from a searcher's standpoint.

Royce Yudkoff:

Yeah, Jenn did a good job in picking this out.

Rick Ruback:

It's an excellent business and, you know, to her credit, she's also had the patience to work really hard and grow it and make what would've been a good business to own, just as a lifestyle and as a job, to transform it into a great company that, you know, if she ever decides to sell, will be fabulous for her.

Royce Yudkoff:

Yeah, I agree.

Rick Ruback:

Royce, let’s get back to the conversation.

_____

Rick Ruback:

Jenn, prior to COVID, you had an occasion, I think, where you had a few valued employees that were moving and you wanted to retain them. And so you had experimented, as I recall, with a little bit of remote workforce. Could you tell that story a little bit?

Jenn Braus:

Sure. So, our Systems Design West geographic location is really close to a military base, Naval Base Kitsap. And so, as you would imagine, a large part of our workforce is somehow affiliated with the military. So, we were losing employees, you know, for no fault of our own. They would move somewhere and then we'd, you know, we’d have to hire somebody, retrain them. And it was just kind of this, “Oh, this is too bad.” And then finally, there were three employees one year who got orders to move all at the same time to California, I think. And it was like, “Gosh, you know, could they work remotely from California? Let's try to figure this out.” And so we made it happen then and kind of understood what it took to have employees remotely and also in a different state. And just fortuitously that year, we also replaced every computer in the company with a new one. And so then we had all of the old computers, you know, still just sitting on a shelf. And when COVID hit, we had all of these spare computers sitting around for people to just take home. Like, we really sent everybody home in about two days with a computer and they could set up a remote desktop connection into their computer that was still physically in the office while they were at home. And so we had this kind of remote desktop thing figured out from the few employees that we had already had in California working remotely. And being able to not have any operational downtime during COVID was just truly amazing. And then, as people went home, it really forced us to take any kind of paper, physical paper processes that we have and make those electronic, and really improved us in a lot of ways. Although the process to get there wasn't without pain, but it really helped us move some things forward faster than we would have anticipated. And now, even though, you know, we're in kind of a post-pandemic era, we still have about 70% of our workforce that is remote, and when people choose to move or have to move, we're able to retain the people that we want to retain.

Rick Ruback:

That's great.

Royce Yudkoff:

That's outstanding. Jenn, maybe you could give us a compare and contrast. You had an experience working as a professional in a very large, well-regarded company, and now you've had more than a decade of experience being CEO of a growing, mid-sized company – originally smaller, now mid -sized. Tell us a little bit about what the professional differences are that you see between working in someone else's company – a large company with endless resources – and a mid-sized company, but where you're the boss.

Jenn Braus:

Sure. So, sometimes it would be nice to have large company resources, where you just have some nameless, faceless department to just send the problem off to and then it gets taken care of.

Royce Yudkoff:

A general counsel's department, a research lab, something like that.

Rick Ruback:

1. HR.

Jenn Braus:

HR team that somehow budgets everything for the whole year and, you know, just does the strap planning. And so I miss large company resources, where there's just like a department to take care of that or a group of people that take care of that. And when odd things come up, it doesn't necessarily fall on my plate. I can just say, “Hey, you know, that's somebody else over there.” So, I miss the large company resources of like the kind of “throw it over the wall” aspect on certain things. I think it ends there. Everything else is so much better working for myself. I really find a deep sense of motivation, of growing the company. I'm a highly competitive person. I love winning and there's like no better feeling in the world than winning a new client and knowing that the person that benefits from getting that new client is me. And it's just highly motivating every day. And I also think that there’s enough responsibility of being the CEO to keep me interested to do it. Like, it feels like a job worth doing, that it's not a waste of my time and talents because truly I can do as much as I want to do. I can be as creative as I want to be. I can take on this project as big as I can handle. There's no bureaucracy, no limit to the size of mountain that I want to choose to climb. And, you know, that's come with some learning of maybe my mountains haven't been big enough, like maybe I should have thought bigger. Sometimes I think I've taken on too much and that's really striking a balance in my own professional growth. And I like that, but I also just like that I've been able to craft my role to meet my lifestyle as well. So, you know, I mentioned earlier that I was married when I started the search – still married, same person. Our anniversary was yesterday. It's been great.

Rick Ruback:

Congratulations. How many years of marriage?

Jenn Braus:

Fourteen years of marital bliss.

Rick Ruback:

Wow, yeah. “Every day better than the last”, you're supposed to say.

Jenn Braus:

Every day better than the last. That's right. And also I had two kids since acquiring Systems Design West as well. They are now five and seven but, at the time, you know, was able to navigate my own maternity leave to make sure that I was able to do my job but also have the family bonding time that I wanted and needed. And now I have been able to kind of craft my role as such where I'm home a lot. I'm home every day for dinner. I see my kids before school. I'm usually the one that drops them off at school. I am, you know, still really value being an athlete, which is, you know, a big part of my former life. And so I, you know, find time to go to the gym every day. And so I'm able to craft my job around that because you know what? I'm scheduling my own meetings. I'm scheduling my own travel and I'm scheduling everything for myself, which means that I can make it work for me and there's not somebody else who is going to, you know, tell me how it's going to be – and I really, really, really value that autonomy, so much so that it’s actually hard to imagine doing anything else at this point. And so when people say, you know, “Are you thinking about selling? Are you ready to move on to the next thing?” And I just think, “Could the next thing possibly meet all of these professional goals the way I have it now?”, especially the lifestyle and especially the sense of autonomy and responsibility, not to mention the cash flow, which is really great also. And so those three things feel motivating and would be really hard to give up. 

Royce Yudkoff:

I have to say, first of all, congratulations. I mean, that's really a wonderful story to, you know, build a business that's so successful for your clients, creates a lot of good jobs in your community, and we're able to sort of sync it up with a larger life that works for you.

Rick Ruback:

Right – a lifestyle that she's really happy with.

Royce Yudkoff:

I have to say that – and Rick, I'd be interested in your view on this too – that most of the CEOs of small and mid-sized firms that I meet feel more harassed than you describe yourself as being. So, you must be a very organized person.

Rick Ruback:

Well, she's Jenn, you know, she's Jenn. So, while she didn't maybe like being an engineer, she has a lot of engineering DNA in her.

Royce Yudkoff:

Like being highly organized.

Rick Ruback:

Like being highly organized but also engineering her life in a way that both simplifies and gives her time to do what she wants to do. So, she's really a committed cross-fitter, right? So, you're not just at the gym, going on the elliptical for twenty minutes. You're taking your gym times seriously. And you've done that by simplifying your world. You know, I feel like I've known Jenn well, both as a student and in her company, and I'm jealous of this organization. As you know, I aspire to be all the things Jenn is, and I never get there because I don't have the discipline Jenn does. But boy!

Royce Yudkoff:

I admire that, too. I really respect picking and choosing where you want your life to be complex and where you want it not to be complex and acting accordingly. I think that is a great way to...

Rick Ruback:

Right, and I'm the opposite. I find...

Royce Yudkoff:

Everything is interesting!

Rick Ruback:

Everything is interesting and everything's complex and I can find so many things to do. It is a curse of a curious life, I guess.

Jenn Braus:

Yeah, I do think I have an incredibly high level of discipline for myself. My husband's the same way. He has that same level of discipline, so we're a really good team that way. And it does take a team. And I don't want to gloss over the fact that having two young kids and running a company was easy because it was not. It was stressful and it's a lot. But, you know, I think having two young kids, no matter what you do, is difficult. So, maybe it wasn't so Systems Design West-specific. I think it's just a tough phase of life. But we're kind of through the little kid stuff now and we have everything very well engineered, where we, you know, everything is organized and we do pick and choose where the boundaries are going to be. I find that being a CEO, people ask, you know, “What do you do all day?” And the short answer is you just make decisions. You have to make a decision at every single turn. And I find myself trying to make fewer and fewer decisions that aren't important so that I can really focus my time and energy on the decisions that are important. And, you know, as the company's grown, as my management team has grown, being able to not be the person that makes every decision has been really important, of empowering someone else to make the decision, or else I would just be completely overwhelmed. And so, you know, as I've grown professionally, have been able to delegate decisions and understand, “What is a CEO-level decision and what actually can just be someone else's?” And maybe it's not the perfect decision, but that's going to have to be okay.

Royce Yudkoff:

Well, it's all part of keeping customers happy as you accumulate more and more customers because your customers are telling other people how happy they are. So, this is how you do that.

Rick Ruback:

But I remember somebody telling me the mark of a great manager is the ability to sign a memo that he could have written better himself. And when I think about that, I think about you. You still have a super high standard for everything that's done in the firm, in terms of cost control and HR and how people are treated and how customers are treated and honesty, and all those things that are just so important. And the company culture is very reflective of your values, I think. Don't you?

Jenn Braus:

Yes, I have high standards of myself, which bleed into everything, everywhere – you know, personally and professionally. But it really sets the tone for what we expect from people. And so when we hire new people on Day One, you know, if a customer e-mails, you are writing them back, even if it's to say, “I'm looking into that, I'll let you know.” And then you follow up. And so those high standards and even just, you know, communication styles and what we'll tolerate as far as good customer service and just good quality work is high. And I think that is reflective in the recurrence rate of customers because they know that we stand out for this. And so it's a really good fit for me having those high standards, which then the company maintains as well, which then the customers really seem to value. If we were in a business where the customers didn't value this, then it probably wouldn't be the right fit – but as luck would have it, here we are.

Rick Ruback:

Jenn, we always end our podcast by asking our guests if they have any questions for us.

Jenn Braus:

So, I took Financial Management of Small Firms Fall of 2012 and there was an idea of what a good company looked like at that time. And this is really that that’s the type of company that I searched for. Has that evolved over time? Does a good company still look the same today as it did twelve, thirteen years ago?

Rick Ruback:

I think the short answer is “yes”, but it depends a lot on the CEO / the searcher, and the investors. So, there's certainly a group of investors who would not be interested in a company as fabulous as SDW because of its size. They would be looking at a business, you know, they might start with a $3 million or $4 million minimum EBITDA size and imagining transaction sizes close at a $15 or $20 million dollars instead of the size that SDW was at the time. And so there will be that group of searchers and investors, mainly in the funded search community, that are just looking for much larger companies. Everybody dreams of a company like yours, in the sense that high recurrence rate is where it's at. But other people look and value more a higher growth rate. And you've been able to grow the business fabulously. When you bought it, it was hard to tell that you would be able to get that much growth. So, I think that just that difference, that that size would be hard for certainly funded investors, even a self-funded searcher might look at that…

Royce Yudkoff:

The starting size.

Rick Ruback:

…the starting size. I think the size, as I recall, was in the range that would be a little small even for a self-funded or unfunded searcher. That being said, I think they'd be making a huge mistake if they passed this because of size, because it had such great potential. And still does.

Royce Yudkoff:

I agree with all of that. I also think, you know, maybe as the years have gone by, there's a greater appreciation of fit between a searcher’s skills and the company, that not every company is right for a particular searcher. In other words, we have these fundamental characteristics like recurring revenue or great free cash flow characteristics that are just truths about what makes businesses better, but there's also an element of what fits with someone's skills better. And I think today there's more of an appreciation of, “Is that the right job for me?”

Rick Ruback:

Right, and what I think I'm increasingly noting is that searchers are searching for businesses that not only work financially but work in their lifestyle. And I wouldn't have thought about that ten years ago as much as I do now.

Jenn Braus:

And that is not something I considered when searching and now, in hindsight, I look back at a few of the other businesses I considered and just think about how deeply unhappy I would have been. Like, for example, Systems Design, we just have one shift. It's a day shift. It's Monday through Friday. And if I had a business like my friend, who owned a window washing business where he was working second and third shift and he was on call all hours of the day, that would have been miserable. I wouldn't have liked that.

Rick Ruback:

For a while you were looking at addiction recovery as well, weren't you?

Jenn Braus:

Yeah, I looked at a couple of treatment centers. I don't think we want to talk about the slaughterhouse on this call, but there was a slaughterhouse in there that -

Rick Ruback:

Yeah, nobody liked the slaughterhouse.

Jenn Braus:

This would not have been the right fit for me. And so not something I thought about while searching, because really I just wanted searching to be over and get the deal done. And, in hindsight, I really, you know, blessed that it ended up where it did, but it didn't necessarily have to end that way. I'm glad that people, you know, think about that now because once you buy the business and you're in it, you're in it. You know, I often say, “I'm the only person here that can't quit.”

Royce Yudkoff:

Jenn, thank you so much for taking the time to visit with Rick and me. It's really great to see you and get a chance to talk about the career you've built and the company that you and your team have built.

Rick Ruback:

It was a delight.

Jenn Braus:

Yeah, likewise. Great to speak with you both and thanks so much for inviting me.

_____

Rick Ruback:

When Jenn was talking about the gym, I thought to myself, “I bet every day she goes to the gym, she tries to have a success. She's not just going through her workout. She probably walks into the gym with a goal in mind and I suspect on most days she succeeds.” And, like she says, she likes winning.

Royce Yudkoff:

Yeah. That's so different from my mental attitude when I go to the gym, which is…

Rick Ruback:

You hate the gym. You would love to pay somebody to exercise, right?

Royce Yudkoff:

Yeah, exactly. My mind is filled with the hope that I don't have to go through this.

Rick Ruback:

You hope that the machine just does the exercise for you.

Royce Yudkoff:

…and I'm willing to pay a premium if we can find a machine like that.

Rick Ruback:

Yeah. Right, right. But it is intriguing how Jenn's business just fits her so well and again, matches Jenn's lifestyle. She's a super organized person, but this business really rewards being super organized and being disciplined so that the billing happens in a timely and compliant way, that customers are treated with respect and are responded to in a quick and timely way. And both the customers, in the sense of the people we're billing for but also for the people who get the ambulance transports, right? Those are people who are under stress and it's really important that they be treated well. And Jenn's business does that. So, it's really remarkable.

Royce Yudkoff:

I totally believe her that she wasn't really consciously making a list of all these qualities that are important in the business and do they fit with her, but I think she was looking at this business and answering questions for herself like, "Could I see myself managing this business?” And so I, it would be hard to believe she would spend hours and hours with the CEO / owner and learn the business and not sort of feel a sense that, “I could do this.”

Rick Ruback:

Well, I think she had a sense that “you could do this” as in the sense that she could do the process engineering. But what I think has happened over the nearly decade that she's owned the business is the business has evolved to reflect her. It very much reflects her values. It very much reflects her interests. It very much reflects how she wants to organize her life.

Royce Yudkoff:

Meaning a business that's sort of very buttoned down, very professional, very well organized, on top of its clients and their needs – those sort of attributes that the business has run into.

Rick Ruback:

Right. And she's able to carve out time for her family, for CrossFit, for the things that she values. And some of that's organizing in her personal life but a lot of it is organizing the business. I mean, we've heard lots of people who say they get really burned out by the business. You don't see that in Jenn.

Royce Yudkoff:

That's right.

Rick Ruback:

You don't see that burnout and you don't hear about her having crises over the weekend.

Royce Yudkoff:

And part of that, you feel, it comes from a CEO's level of organization and commitment to being organized?

Rick Ruback:

Right, and the fact that she just doesn't tolerate craziness in the business, that everybody has to do their job, they have to do it right…

Royce Yudkoff:

And then there won't be crises.

Rick Ruback:

And then there won't be a crisis. She's engineering away the crisis before it happens. That was a great conversation with Jenn. I always enjoy talking with her. She's just so much fun and so good at everything that she does. Next week, we have Zach Duprey. Zach is a highly experienced lender to small business acquisitions. In fact, Royce and I think Zach was really instrumental in creating a national market for lending to small businesses, and so he's really changed the landscape of small business lending dramatically. We think you'll really enjoy the conversation. And Royce, I think now is 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.

Royce Yudkoff:

That’s wonderful.

Rick Ruback:

Listeners, please send your questions. Our e-mail 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:

Craig McDonald is our audio engineer. If you have any questions, comments, thoughts feel free to just e-mail us, rickandroyce@hbs.edu.

Royce Yudkoff:

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