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:

We last spoke with Season One guest, Nick Wheeler, in June of 2024, when he was only a few months into his new role as president of Tra-Cal, an accredited calibration lab that calibrates, repairs, sells, and leases test and measurement equipment. At the time, he was, as he said, “drinking from a fire hose.” We're going to check in with him today to see how things have gone over these past fourteen months. Nick, we last spoke when you had just acquired your company and you were in the midst of both learning it and running it, and so what more perfect searcher-CEO could we find than someone who is now more than a year into owning the business to find out what's changed since those early days.

Nick Wheeler:

Well, I'm sure we'll get into the details, but a year makes a huge difference. We're in a much better place than when I last spoke with you both.

Rick Ruback:

Just by happenstance, I was talking to another searcher who has a firm with a dozen and half employees, and they've lost a few since transition. And I remember from our first discussion, when you bought the company, you had nine employees and two of them were abducted by aliens or otherwise let go or quit within the first couple months. So, when we talked to you, your workforce was down to seven. What's the workforce now?

Nick Wheeler:

Yes, so did not anticipate having the turnover I had coming in. Granted, no one's quit. These are all my call to terminate some of the people that were here. Of the nine that I inherited, only four remain.

Rick Ruback:

Wow.

Nick Wheeler:

But I've added head count, particularly in our lab, I've more than doubled the technician head count. I've built out a sales team. We have two really great, young sales managers working for me now that effectively are doing probably 95% of what the prior owner was doing. We had some really difficult growing pains in the first year. It was clear that we did not have the right people on the bus. The biggest risk was the small head count and the dependence upon the owner in this business. And to have to learn everyone's job and turn a lot of folks over was difficult, but sitting where I'm at right now, was absolutely the right move and, you know, I'm in a much better place today in how this business operates, and it's frankly no longer dependent upon me. I really am not too involved in the day-to-day, kind of in-the-weeds stuff, like the owner was.

Rick Ruback:

Tell us about how you replaced the people and how you were able to grow, because people talk about a real difficulty hiring quality people. Did you have to pay more than people had been paid previously or go for a different kind of person?

Nick Wheeler:

Well, both. There's a lot of operating expenses that you will inherit as you try to grow this business and scale it, and part of that is hiring the right people, and so I have certainly brought on people at a higher pay than what the prior owner was paying people. I've rolled out healthcare for all my employees, 401k – but by doing that I've been able to attract much better talent, win over some phenomenal technicians from large competitors of mine. So, it was a short-term expense, for sure, and we rode a little bit of a J curve, but we’re in a much better place for it. But you obviously have to be very deliberate about knowing who the right people are to let go of and what you need to bring on, and oftentimes that doesn't become apparent, you know, until you've been operating for a few months.

Royce Yudkoff:

Was there something different about what the prior owner expected from people or how he interacted with them that caused him to retain these people, but when you came in to run the business many of them were not a fit?

Nick Wheeler:

When you pay people very low rates and you're having them do professional work – you know, account management, customer service, marketing – you're paying for what you get. That was very much what I inherited in our back-office employees. My lab manager was truly the critical kind of MVP in my business. I've kept him – he's been great – and kept all the technicians, and we've grown that out. And then I think the other thing searchers have as kind of a superpower is your ability to attract really phenomenal talent that otherwise would not want to come work in one of these small businesses. If they're talented, they probably have better options at a big company with better benefits and so on and so forth. But as a searcher with a new vision and energy, you can attract people who want to join a growing company and have the opportunity to learn and grow with that company. We've definitely been able to do that here and that's probably the best thing I've been able to do in running this business, is bring on people that are great and better than me at the task that they're doing.

Royce Yudkoff:

Looking back at the Nick Wheeler CEO in the first ninety days and the Nick Wheeler CEO now, what's changed about the way you do your job? What’s the difference?

Nick Wheeler:

The first ninety days, I was in learning mode, right? I had to ask questions. I was learning everything the prior owner was doing, which was almost everything but the actual technical service that we do. And I just inserted myself in every single micro process within this business so that I knew everyone's role as much as I possibly could in a short period of time – with the exception of I didn't learn how to become a calibration technician. I've learned enough about their jobs to kind of understand it but thankfully I did not need to do that. But it made it clear to me pretty quickly what roles I needed to hire for, what processes I needed to build out so that I could get myself out of the day-to-day and really build a true business. And I'd say we accomplished that within the first year. I could take the week off and the business would run just fine without me. I enjoy my weekends now; much more oriented on growth, both organic growth and pursuing M&A. That keeps me busy. But a lot of the tasks that I do, I don't need to be in the office for, so it's a much better balance now, for sure. But I can assure you the first few months, that was not the case. I was involved in everything.

Rick Ruback:

So, what was the hardest thing to get off your plate?

Nick Wheeler:

I think the pricing and quoting, which the owner still did all of that. So, I've hired two sales managers. One handles our equipment sales, which is pretty consultative and it takes a lot of time to put those quotes together. And then he actually recruited one of his friends – and I wasn't planning to hire this role originally – but he's my account manager and he handles all of the calibration customers and all the quoting and pricing for that, which is really time consuming. You know, we weren't doing a great job of that beforehand because the owner was so inundated that he couldn't keep up with the customer. So, now we have this really great customer service, where they have a dedicated person that answers all the questions and can get them a quote quickly. So, I handed it off after about five or six months. But learning that – because a lot of it was in the seller's head – was very difficult. So, I had to learn it first, document it, systematize it, and teach it to the guy I brought on. And when I did that, my time opened up immensely. It was the best hire I could have made in the first year.

Rick Ruback:

Do you have daily emergencies or no?

Nick Wheeler:

Not too many, thankfully. When I came into the business, I felt like there was always emergencies, but it was self-inflicted. If I had an HVAC or plumbing or a truly field service business, where I had a fleet of guys out every day, I think there would be more emergencies, but we do on-site work so our emergencies are relatively few and far between. There's not many fires for me to put out anymore. I bought a highly technically nuanced business, but the business model itself is actually quite simple because most of the work either comes to my lab – we pick it up or it gets shipped here – or we might have a technician but they're on-site for a day or two and, you know, we're not managing a fleet, so it makes life a little easier for me.

Royce Yudkoff:

Rick and I hear from a number of searchers who take over companies that the first few months are so difficult, in part, because they don't yet know what's important, and their hours are long, and they're constantly under stress to get things done. And, over time, they get a clear read on what really matters and therefore, you know, they can narrow their focus. As you look back on your journey, is there truth to that?

Nick Wheeler:

Yeah, you learn over time what's important. There's some things that are kind of smoldering fires and you just have to walk by them and know that you'll get to them eventually. And then there's like the actual dumpster fire that you know needs to be put out sooner than the others. And that's where the judgment comes in as an entrepreneur. For me, obviously, personnel is super important, making sure you have the right people. Focusing on how you're collecting cash early on, I spent a lot of time on that because our day sales outstanding were crazy high when I did the Q of E and financial due diligence. So, I spent the first few months with my lab administrator – she sends out all of the invoices – and I physically did them with her to see how we do it, where we're sending it, and why it was taking so long. And what I found was it was mostly on our end. You know, we'd sent it to the wrong place, or we didn't have our accounting online, so we made it more difficult to pay. So, I focused on a few things early on that were more important, and then I kind of figured out the stuff that's less important. And I think a lot of people struggle with that. And there's still things like that that need improvement, right? Nothing's ever perfect in any business. Just focusing on the few that are highest priority, highest value – it's critical that you just spend your time on that, and that's a judgment call on what those things are.

Royce Yudkoff:

Nick, as you reflect on the work you've had to do over the last year and, in particular, you know, what you've done that's really contributed to the success of the business, what advice would you give prospective searchers on the kind of skills that are going to be most important to success and running the small business that you acquire? And maybe I could just remind you of what you told Rick and me a little over a year ago, when we talked about a similar subject, which is that a few months in you felt like leading a team of people was the most important skill, the ability to sort of step in and get people to perform under your supervision. You’re now a little over a year in – what do you think? What would you advise a prospective searcher are the skills that are most valuable?

Nick Wheeler:

Yeah, I'd still say leadership number one because your success is predicated upon your ability to win trust and rapport, and that's so important in these companies where you're coming in as an outsider. It's probably even harder when you buy a bigger business, in many respects, because you have to win over maybe thirty or forty employees, and you have to influence mid-level management. Your ability to lead people and build trust and influence them is the number one thing. I'd say the second is selling – and not necessarily just in the traditional sense of how to sell a potential customer, but selling your employees or your potential employees. So, for me, the big bottleneck to growth is recruiting technicians. Selling the business and your vision to potential employees is a really important skill. Perhaps a close third would be – this is probably more music to your ears – financial management. It's nearly impossible to make data-informed decisions when you don't have good accounting and good financial management. I would say that's the third skill that's required in running one of these small businesses.

Rick Ruback:

My question related to that is, what is it that you wish you knew when you closed that you know now?

Nick Wheeler:

Thankfully, we did not get anything majorly wrong with our due diligence. All of the risk I identified in my PPM turned out to be the right risk to identify, but I wish I knew just how difficult it is to grow a highly-recurring B2B service business organically, which we've grown quite a bit this year, but it takes a lot of effort. If you're enjoying sticky recurring revenue from your customers, there's a likelihood that your competitors have that same dynamic. And it's a relatively small TAM. There's a finite group of customers for whom we're a critical service. So, we've tripled the capacity in my lab over the last nine months. Now we're looking to really grow and bring on more major accounts, now that we have the capacity for it, and that's proven to be a challenge. We're growing pretty significantly this year, but to continue that, I'm going to have to really be creative about building relationships and figuring out how to get in front of the right people. Yeah, if I had learned how to do, you know, B2B, recurring revenue sales in a service business before this, that probably would have been a helpful thing to have a background in. But I'm finding is it's just consistently doing the little things right every day across the whole business. It's continuing to follow up and getting quotes back quickly; setting up an outbound B2B e-mail campaign; improving your SEO; putting in a newsletter; figuring out what your customers really care about and what they want. I mean, it's just little things and you keep chipping away and chipping away. We've had some really big wins this year, while keeping all of our top twenty-five customers I still have, that I inherited with the business. Yeah, you don't win new business easily. You've got to really work for it. It's just generally a lot of little things done really well over and over and over again, and then hiring people who can execute on that for you.

Rick Ruback:

So, what I find really interesting about your answer is you have a background in the military. You're a Green Beret. You didn't spend time doing Excel models for an investment bank or a private equity firm. And one of the things I'm intrigued by is so many of our students say, “Well, I can't go out and do this. I need to get more experience. I need to learn something more.” And many of those have had consulting or banking or private equity experience. And yet they still feel like they need to know more. You had none of that pre-business school experience. I know you went to an excellent business school and had outstanding faculty, but beyond that you're largely self-taught and you didn't feel like, “I really wish I had another accounting course” or “I really wish I had some more Excel modeling.” You figured that stuff out as you needed to.

Nick Wheeler:

That's the crux of being an entrepreneur, is you figure it out as you go. You're never going to be fully ready, and it's ultimately kind of a leap of faith in yourself to be able to figure things out when you come across roadblocks. There's still things that I’m, you know, figuring out and will continue to figure it out as we grow. Your business looks fundamentally different as you go through different stages of growth and I'm going to have to figure out what running a bigger type of these businesses looks like or “How do I do integration and M&A?” if I find another one of these labs that has similar characteristics? To me, that's the fun part.

Rick Ruback:

And what do you tell the veteran, the Army veteran, who says, “I just don't have any business experience so I can't do this”?

Nick Wheeler:

For veterans, in particular, the financial management aspect is the area where we are typically most lacking. So, for me, going to business school and taking my finance curriculum very seriously was really important for me. I mean, I don't think you need an MBA to learn that, but I don't think anyone should buy a business that doesn't understand the three financial statements and can't build a basic model. You know, this is not for the faint of heart. There's real risk involved, so I think you need a basic level of financial management. And for anyone from another background that doesn't feel like they have the proper training or prerequisites, well, learn those things the best you can, but know that ultimately most people that go down this path are first-time CEOs, and anyone that's advanced in any sort of career field, you're always like a first time at whatever that job is. You're never really properly trained completely. A lot of it's on the job and it's a matter of, “Can you figure it out when you get there?” I think you just have to have the confidence in yourself and kind of thrive in that environment of uncertainty.

Rick Ruback:

Yeah, I think confidence is really a big deal. If you don't believe in yourself, it's hard to convince others, to sell the vision to all that you encounter.

Royce Yudkoff:

I agree, and I think that very few people become a CEO who have had experience in every functional area that they're now responsible for, right? People usually come up through some functional area and therefore are new to big parts of the CEO job.

Nick Wheeler:

And that's one of the things I've loved the most about this, is I get to dip my hands into all of those different areas. I've learned an incredible amount doing that. On any given day, I could go from recruiting, which is an HR function, to finance, to marketing, to sales, to operations. I love that. If you like to do a little bit of everything, that's what's cool about being a CEO, and you learn so much while doing that.

Royce Yudkoff: 17:01

That’s great.

Rick Ruback:

Are we going to let him ask a question?

Royce Yudkoff:

Sure.

Nick Wheeler:

So, my question is, you know, you've seen hundreds, at this point, of search-acquired deals, invested in several. How much of the value do you think is created by the operator versus the quality of the business they buy and the way they structured it from the onset? Said differently, is most of the value creation occurring before you even step in on Day One?

Rick Ruback:

You know, it's really interesting, Nick. I spend a lot of my time, particularly in the middle of the night, when I can't sleep, thinking about the opposite question, which is, “When a business does poorly, is it because of bad luck, a bad industry, something we missed in due diligence, or a bad operator?” And I've never come to a firm conclusion. I can, on any given day, convince myself any one of those stories are true. And usually when things go sideways, really great managers are able to pivot quickly and effectively, and have executive control that's sufficient to overcome whatever that hurdle is. But I haven't thought that much on the flip side, which is when things go really well, is it because it's a great business or a great operator? Royce?

Royce Yudkoff:

Well, first of all, it's true – Rick not only thinks about this during the middle of the night, but he and I end up talking about this a lot. And it's a really complicated question, right? Because it's tough to tease apart. My opinion, after a lot of these discussions with Rick, is that the types of businesses that highly-trained searchers, like yourself and other graduates of our program, buy are all businesses that are anywhere from pretty good to really good, and so we're dealing with a population of businesses that have quite a range but are pretty good. And I've come to think that in that population, the different outcomes are due to the quality of the manager. And the way I've finally gotten there is I've tried to think back to businesses on Day One that had challenges and businesses that have done really well and proven to be fine businesses. On those opening days, we couldn't tell, was that a really fine business and the other one not a fine? They both kind of looked alike but they performed differently and the managers were different, in our eyes. And I've just come to the conclusion that it's the manager, when you're dealing with any business that's reasonably good and better.

Rick Ruback:

I also think there are some businesses that present unusual opportunities from technology or technological change or societal change that turn out to be really great. I'll give you an extreme example. There are some businesses that benefited enormously from COVID. For example, domestic property management businesses, you know, did great during COVID. I don't think you could have sat down and modeled that and say, “Well, you know, if we have a pandemic, we have this really big upside” because it's like such an unusual and hopefully once-in-a-lifetime event. So, I think there's luck involved. I also think that you could be in a situation like that and a manager choose not to make the decisions that allow them to capture the value that circumstances have created, right? So, you need both. You need reasonable circumstances and a manager who's really willing to work hard and is creative and nimble enough to pivot. And I will just say, there are some businesses that have key employees or seem to face HR challenges and those HR challenges become crippling over time. HR challenges, customer concentration challenges, those are the kinds of things where I find people really struggle to get around.

Nick Wheeler:

I was curious to get your feedback on that. I was just having that conversation last week with another searcher. So, there are definitely some businesses that I have, you know, friends that are running, it seems like they've got to push a heavier rock uphill to make things work. It's usually non-recurring revenue businesses.

Rick Ruback:

And remember what happens is the businesses don't line up so that, you know, you now have the six LOIs that are all signed and you can A-B test and decide which one's the best for you. It comes sequentially, and so sometimes people end up with businesses which are not the ones they wanted, but it's that or no deal and they can make it work.

Nick Wheeler:

Makes sense.

Royce Yudkoff:

Well, Nick, we're really happy with this catch-up because it's a wonderful story, not only of how you went out and bought a really high-quality business, but then powered through the initial learning phase and have gotten it to a place where the business is more professional and successful, and your life as CEO is better. It's kind of a nice model for people thinking about search to look at and see that it can be done.

Nick Wheeler:

Yes, well the story is still being written but so far so good. It was challenging the first few months – I think that's the case for everyone – but we've grown our recurring revenue, more than I probably could have expected or hoped for this year, and hopefully that will continue, and life’s gotten a little bit easier. And I would double-click on the power of high-quality and ideally recurring revenue when you buy one of these businesses. I think I underappreciated that when I would hear you guys talking about it, but my business is a phenomenal case study in that we have a recurring revenue line of the business and a more cyclical line of the business, and the one that's cyclical and subject to economic swings – which we've seen the first half of this year, with kind of the economic uncertainty – that part of the business has not done well. But, you know, we're on track to double the recurring part of the business. And, the critical nature of it, we keep seeing the same customers with the same equipment coming in, so, you know, that grew within the first year, as I was learning the business, and it's growing significantly this year. So, if you can find something with that right mix of revenue and hopefully recurring revenue, it allows you to make mistakes and learn all the things you have to learn in those first six months. So, thank goodness I found one of those types of businesses.

Royce Yudkoff:

Great news. Nick Wheeler, thank you so much for joining Rick and me in this episode.

Rick Ruback:

You’re going to do great because you’re a great manager in a great business. 

Nick Wheeler:

Well, thanks.

Rick Ruback:

That was such a great conversation with Nick. I so much enjoyed learning how his role and the business has evolved and how what seemed so difficult and frustrating has become manageable, and the challenges have become really strong opportunities, and the initial problems are far behind him. It seems to have been a great evolution over that first year. It's just thrilling to see the success. And listeners, stay tuned for Season Three! It launches September 8th. It's going to be a great season, and we have some fascinating conversations. Our first episode of Season Three features Jeff Homer. Jeff has done a roll-up of music schools in a very creative and interesting way that I think will intrigue you all.

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, all one word, at hbs dot edu.

Royce Yudkoff:

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