How a $20M Home Health Business Fails: Joe Odell's Search Fund Story
The one thing to remember
Do not finance a rosy growth story with heavy debt until you know which revenues, margins, and prices you actually control.
What happened
Joe Odell and a partner raised a traditional search fund and bought an unnamed home-health IV services business in December 2021. The business appeared to have about $20 million of revenue, $3.5-4 million of EBITDA, and strong growth, but after closing the buyers found overstated patient growth, a lost sales rep, severe cash pressure, and heavy debt service. They stabilized the business for a period, but in January 2023 a reimbursement benchmark change erased about $2 million of annual EBITDA from a key product line. Joe and the team spent roughly another year and a half rebuilding revenue and cutting costs, but the business could not support the debt and shut down in August 2024.
Who's telling it: Joe Odell, the buyer and co-CEO/operator This is primarily Joe Odell’s buyer-side account; the seller, lender, employees, patients, and other investors do not give their side of the story.
Timeline
- Sourcing
Joe and his partner raised a traditional search fund in March 2021 and found the target within about two months.
- Due diligence
They spent about six months in diligence and believed the home-health IV business was growing strongly with roughly $3.5-4 million of EBITDA.
- Financing
The deal used about $12 million of bank debt plus a seller note, at roughly a 6x EBITDA purchase price.
- Closing
The acquisition closed in December 2021.
- Integration
After closing, the buyers discovered the business was closer to break-even, had cash collection problems, had overstated patient growth, and had lost a sales rep tied to about $2 million of revenue.
- Operations
By Q4 2022, the company had recovered to around the EBITDA level the buyers thought they had acquired.
- Operations
In January 2023, a manufacturer reduced a pricing benchmark used for reimbursement, removing about $2 million of annual EBITDA from a highly profitable product line.
- Operations
The company laid off nearly half the team, pushed AP, improved collections, automated processes, and built a new specialty IVIG line to about $7 million of annual recurring revenue.
- Exit
By August 2024, Joe concluded new investor money was too risky, walked away within days, and the business shut down while a small team stayed to collect AR and handle assets.
stage where a mistake was made
What went wrong 6 issues
Reimbursement shock killed EBITDA
In January 2023, a manufacturer changed the benchmark price used in reimbursement, causing a major product line’s economics to collapse overnight. Joe said this removed about $2 million of annual EBITDA and became the beginning of the end.
Mistake made at Due diligence → showed up at Operations
“we're going to drop ours by 90%”
Warning signs
- The business had a highly profitable product line whose economics depended on an external reimbursement benchmark the company did not control.
- Joe later said the recurring specialty line had only about 20% drug profit, showing not all recurring revenue translated into cash flow.
How to prevent it
- Before LOI, have a healthcare reimbursement specialist identify every major drug/product line where revenue depends on manufacturer AWP/MSRP or payer formulas.
- During financing, run a downside case where the most profitable product line loses 50-90% of reimbursement and confirm whether payroll and debt service still work.
- Before closing, require board approval of a product-line concentration report showing EBITDA by product line, not just revenue by product line.
Patient growth was overstated
The buyer believed the company was growing 20-30% year over year, but after closing found that many census records were duplicates. Joe said actual patient count was declining around 10% year over year while costs had been scaled for growth.
Mistake made at Due diligence → showed up at Operations
“actually 40% of that total was duplicates”
Warning signs
- The reported growth metric was census-based, and Joe said there was no obvious numerical identifier to remove duplicate patients.
- The 2020 home-health bump made it hard to distinguish real recurring growth from temporary or distorted growth.
How to prevent it
- During diligence, require patient-level census files and reconcile growth using unique patient identifiers, not only management’s census summaries.
- If the target lacks clean identifiers, have a diligence analyst build duplicate tests using names, dates of birth, addresses, payer IDs, and service dates before closing.
- Make patient-census quality a specific diligence workstream for healthcare targets, with a written sign-off before final investment committee approval.
Leverage left no margin
The acquisition was financed with heavy leverage, creating roughly $200,000 per month of debt-service pressure when cash flow was already unstable. Once EBITDA fell, the debt burden limited the company’s ability to recover even after revenue was rebuilt.
Mistake made at Financing → showed up at Operations
“it maximized the opportunity for returns and maximized the opportunity for default”
Warning signs
- The deal used about $12 million of bank debt plus a seller note on a business whose EBITDA quality was uncertain.
- Joe described the debt choice as strategic for returns and said it did not account for not doing well.
How to prevent it
- Before signing debt terms, the buyer and board should approve a downside debt-service model that assumes the business is flat or declining, not growing.
- Set a maximum leverage level that can be serviced after losing a key salesperson or one major product-line margin shock.
- At closing, reserve more cash or reduce debt so the company can survive at least six months of covenant waivers and delayed collections.
Sales rep left during diligence
During the pre-close period, a sales representative left and took roughly $2 million of revenue with them. Joe said the departure was not clearly disclosed and was not caught before the acquisition closed.
Mistake made at Due diligence → showed up at Integration
“they took about $2 million of the business with them”
Warning signs
- The departure happened during the six-month diligence-to-close period, when the buyer was relying on continuing growth assumptions.
- A single sales rep was apparently tied to about 10% of the business.
How to prevent it
- During diligence, review revenue by salesperson and referral source for the last 24 months, including current-month changes through closing.
- Add seller representations requiring disclosure of employee departures, threatened departures, and lost referral relationships between LOI and closing.
- Before close, meet key salespeople and create retention agreements or transition plans for anyone tied to material revenue.
Cash cycle was worse than expected
After closing, the company’s cash position deteriorated quickly, falling from roughly $1 million to under $100,000 within a month or two. Payroll alone was about $250,000 every two weeks, forcing AP deferrals and emergency cash management.
Mistake made at Due diligence → showed up at Operations
“close to a million in the bank to less than a hundred K”
Warning signs
- The business was paying bills immediately as they arrived, which created avoidable cash pressure.
- Healthcare payer collections were slow and difficult, especially in the first quarter.
How to prevent it
- During diligence, the CFO should test monthly cash receipts and disbursements for the prior year, including first-quarter healthcare collection slowdowns.
- Before closing, negotiate a working-capital peg based on actual cash needs, including payroll timing and payer collection delays.
- In the first week post-close, implement a weekly 13-week cash forecast covering AP, AR, payroll, FedEx/logistics costs, and debt service.
Buyer lacked sector control
Joe said he had minimal healthcare experience and later concluded he did not want to own businesses where he could not control price. His sales skills helped rebuild revenue, but that did not solve the margin and reimbursement problem.
Mistake made at Thesis → showed up at Operations
“I had very minimal health care experience”
Warning signs
- Joe’s background was go-to-market and sales strategy, but healthcare reimbursement limited his ability to control price.
- He later said industries where he cannot control price are an uphill battle for him.
How to prevent it
- At thesis stage, require at least one operating partner, board member, or advisor with deep industry experience in any regulated or reimbursement-driven sector.
- Before LOI, write down which value drivers the buyer can control directly—price, volume, cost, labor, collections—and avoid deals where the main driver is outside management control.
- If the buyer lacks industry experience, require a lower purchase multiple, lower debt, or both to compensate for the learning curve.
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Thesis
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Closing
Integration
Operations
Transcript 870 lines · 14280 words · human-made captions
All right. Hey, everybody. Thanks for joining us this Thursday morning. Even more impressive
when people join us on a Thursday morning. I know everybody's got work and other commitments,
so I appreciate you taking the time to join us. Let me go ahead and make sure we've got
the recording started and we're good to go. All right. So just a quick heads up. This is
going to be recorded. When it's done, it's going to be sent to everybody that's registered
as well as posts on YouTube. So that way, you can always go back and watch the recording
later on. But this morning, we have the pleasure of Joe Odell joining us. I'll let Joe kind
of do a little bit of an introduction to himself. But just to get started, Joe is a Navy veteran.
He is a graduate of the UC Berkeley high school business. He conducted a traditional search
with a partner where they raised a search fund and then acquired a business that was doing
quite well until it wasn't. And I'll let Joe kind of walk through his story and kind of
talk to his search process. But the main things we want to touch on are going to be what it's
like once you're in the seat, once you're an operator, especially when you feel like
you've made a good acquisition and then things just don't go your way. And Joe is going to
be able to talk to us a little bit about that. Bear with us, this is very fresh. I think
remind me if I'm wrong, but August, I think is when your business went under, right?
Yep. All right. So with that, I'm going to turn it over to Joe. I'm going to let him
tell his story. And then towards the end, if we've got time, we'll open up for some Q&A.
Go ahead, Joe. Well, first thing, there's one thing I have to correct with your introduction,
which is I'm a coast guard. But so as a vet yourself, I know that that might have been
on purpose. I know, Jed, you might have been just mess with me. So all good. I didn't want
to stare at you by saying you remember the coast guard. Okay. Yeah, I am taller than
six foot. There's some jokes there. But anyways, yeah, so I got out in 2013 from the coast
guard and was doing search rescue on fortune. I was enlisted too. So seems slightly rare.
It feels like in a search space to be enlisted. So I started getting consulting back then,
worked for free to get my foot in the door and consulting firm and did that for about
three months. And I started paying me $10 an hour. I had a wife and two kids just grinding,
working at my undergrad at night. And within a handful of years, I had my undergrad. I was
running a team of about 60 at that firm, signing contracts with Google and Red Hat, a bunch
of other big tech firms in the Bay Area in California. So I did that, realized I spelled
some GI bill left and wanted to get my masters. And I've always been a great test taker, like
Azvab wise, crushed it. And then GMAT just kind of took it on a two week limb cram session
and crushed that too. So it was, it's kind of like, Hey, I'll just take it to see how
what I need to study on and then got a really good score. I'm like, Oh, I might be showing
the business school soon. So end up applying to UC Berkeley, got in and off school of business
and end up graduating 2018, 2020 is when I graduated while in school learned about search.
And I'd been in the VC world with all my consulting in the past. And the one thing as sales go
to market strategist minded person, the problem of VC is product market fit. Doesn't matter
how good the salesperson you are, doesn't matter how good your funnel is. If your market
and product don't fit, you must have quit. I think that's it. I don't know. So I went
through that process. And when I learned about search, I'm like, you're so I can actually
step into a business that should have that already figured out, right, they have revenue,
they're profitable. And I can just work on scaling it. Yeah, that sounds cool. So went
through the process of, of trying to raise or build my PPM and start to raise took on
a partner because my background from a finance side is lacking. So I took a CFO, a classmate
of mine, and we both started raising capital, took us about four or five months to actually
raise and start to finish. There were a few dry months where we didn't think we're going
to make it. Eventually got there, just kind of kept working on top of funnel, adding more
people to the list. You know, one of the questions that generally come up in the story is why
not self funded? I am married. My wife is extremely risk averse. So the idea of taking a personal
guarantee is off the table. So if I wanted to do this, I had to do a traditional work.
I want to stay married, of course, which was a priority for me. So 2021 March is when we
end up raising the capital for the initial fund. Within two months, I had found the business
we'd eventually require. Had about eight interns, random machine, had everything running really
heavy on throughput when it came to top of funnel for regeneration and for these new
deals and sourcing. And we closed the deal within six months of finding it. So a total
about eight, nine months of total search. The business itself, and I'll stop there, was
about three and a half to four million in EBITDA, you know, ADBACs that whether they were real
or not are tough. It was a healthcare business focused on home health services. So really
the IV portion of home health patients. And the ADBACs that made it really tough is there
was the 2020, you know, healthcare bump for home health. And so really trying to tease
out what was the real EBITDA of the business versus what was the inflated EBITDA of the
business from 2020 was really difficult. And, you know, years later, you can kind of piece
it together. But in the moment, it's tough. And then on top of that, you know, we strapped
about about four X debt ratio on it. So about $12 million in total bank debt and a seller
note on top of that. So, yeah, it was about six times EBITDA as what our purchase price
was. Yeah. So that's kind of the quick intro to up to that point, I thought like all my
dreams had come true. And there are a lot of pain, sweat and tears. So that was December
21.
Wow. So the first big takeaway, other than the fact you went the traditional route, two
things. One, you decided to go the traditional route mainly because of the personal guarantee.
And I think this is something that is either discussed way too much or not enough at all.
And what I mean by that is, you know, especially in the search world, you have people like
yourself are thinking about, you know, is it worth it from a risk perspective to take
on the personal guarantee? You know, and a lot of times that's a personal decision. That's
a family decision. Really interesting to hear how you had that discussion with your wife.
But on the flip side, I think a lot of people, especially those who are not in the ETA community,
they don't even think about the personal guarantee. They're just cool. No problem. Sign away.
So what was the real concern that like, you know, especially like from a, from your spouse's
perspective, that if this all goes negative, what's the worst case scenario and that would
be like losing your home, losing everything you have?
Yeah. And we don't have a ton of wealth. You know, that's why search is exciting to people,
right? It's not generally because you have millions of dollars in the bank that you decide
to go do search, right? Like if you do, there's probably other ways to make money that are
less stressful. So, you know, for me and my wife, we are opposites, complete opposites.
And we've learned and married 14 years, learned early on that I'm 37, so I married in like
early to mid 20s, like 23, I guess. So we learned earlier to marriage that we're complete opposites
and somewhere in the middle is probably the right choice. So we have a lot of negotiation
that we've had in our marriage to get three kids now. So it really came down to, okay,
like I can do this, she's never going to hold me back, but we're going to mitigate as much
risk as possible. And I'm very optimistic, she's pessimistic. So our middle ground is,
okay, how do we, how do we achieve this without risking everything? You know, we do have, we
did have a house in California at the time and now we have one in Texas. But yeah, I
think it's a really sober way to look at it. And this is something I tell everybody, you
know, the risk analysis is very personal. You know, some people, you know, they're much
like, like you, I'm kind of opposite for my wife. So, you know, if it was up to me, everything
would be on the table all the time. And then I suppose up to her be the exact opposite.
So finding that middle ground is really important. But the second thing I noticed is that your
search was actually really fast. You know, I think the Stanford study, especially for
traditional search, you know, tells us 18 to 24 months is the norm. And that's if you
have those and we know like 40% of those search funds never actually acquire. So the business
you found, was it just looking back, do you think it was just pure luck? I mean, did you
have a buy box that you were kind of looking at and it just kind of checked all the boxes
or how do you think that came about? Yeah, we were really systematic with a few different
things. One, you know, my background is good a market strategy for about a decade. So search
from a sourcing perspective is all funneled, right? Now getting into due diligence on the
LOI stage, I had very little experience with that's where I had my CFO partner that came
into work and crush that section of it. But and we'll talk about the issues ran into and
what misses occurred in due diligence and if they were even catchable, right? And like
that's a whole different discussion. I still haven't made it my mind yet if we were able
to really figure that piece out. But from the search perspective and finding businesses,
we had a machine running that was highly effective, one of the coolest businesses. So I really
searched for two months before we kind of locked in an LOI. One of the coolest businesses
I found was Proprietary Deal. That was, you know, from a divorce, which is sad, but they
were selling, you know, a really cool business in Hawaii, which my wife is actually from
Hawaii and, you know, had a bunch of stuff. So we had some really cool deals we were looking
at really early on. Part of that was before I even started searching, I'd built out our
website, I'd built out a process, you know, I had an onboarding doc for all of our interns.
We started eight interns and cycled them every 10 weeks. Had an MBA intern that wanted to
search at some point that's running the teams. I really just built like a SDR, the AE model.
I was the account executive, they're splitting stuff in my calendar. So five to six bookings
a day on my calendar, I was talking to somebody, either a broker or a natural business owner
that was willing to give me advice. One of the biggest things I can say is if you're trying
to book time with a seller, asking them to buy their business over emails, probably not
going to be effective because everyone puts that out there. So I would, I took the approach
of advice and saying, Hey, you know, I'm really interested in your industry. It's something
that we might look at investing in your future, but really would, you know, hope that I could
get like 10 minutes to ask you a few questions so I can learn more about what you guys do.
Really focusing on the advice aspect rather than, you know, can I pay you a couple million
dollars and get married to you for a long time? Yeah, I think that's an excellent quick breakdown
of search. And one of the questions I get a lot is, you know, how do I find a business?
And the first thing I tell people is like, just get off biz by cell, you know, but usually
it's proprietary search and broker outreach. And for all of us, I remember when I was first
searching, figuring out how proprietary search is done is an art of its own. And it's really
interesting like how right from the beginning, you took that before that proprietary approach
very seriously, had an intern, had a process, had systems in place. And in a lot of ways,
it speaks to how, you know, as a searcher, you're, you know, building a startup, essentially
a lead generation startup. Yeah, no, completely. And it's a sales process, right? Getting investors
to the sales process, whether you have to do that pretty like I did and post for someone
like you on, you know, the self funded side, like you're still going to sell yourself in
the deal, right? And so then when you actually acquire a business, you've got to sell yourself
to the employees and to the partners. And to like, this is an entire, you know, sales
is permeates through search 100%. So, you know, having a background in it, either before
going into it is wildly helpful. On top of that, if you don't yet, you probably you haven't
got to this point in your life, probably without being a good salesperson, you just haven't
codified it yet. You don't know what it is and how how and why you're good at it. And
that's something you should spend some time discovering. And I'm happy to help people
with that too. Because I do a lot of that coaching actually like, Hey, introverts are
actually the best salespeople, for instance, and why you might ask that? Because they are
active listeners, they will actually think before they speak. And so if you think because
you're an introvert, you're not a good salesperson, you actually probably the best. That is my
tip of the day.
Solid tip. All right, so moving forward, you had your search, you identified the business,
and like you said, you went into due diligence. And this is something I can tell like you've
already said this, I would say this for myself. And for the eight or nine business owners
I've met in the last three or four weeks, whose businesses have gone under? You know,
we all look back and we think, Oh, my goodness, what did I miss in due diligence? And there
are definitely things that you miss. But most of the time, and it's not all the time, but
most of the time, you look back and you realize that those are things that you never could
have caught. Or like, you probably would not have found. And so looking back on due diligence,
obviously, you know, hindsight is 2020 and you can see things like you missed. But is
there anything in the moment in due diligence where you're like, man, you know, I could
have done this, but I didn't. And I think that would have been an extra step that would
have made sense.
Yeah, I think there's some really good, like, verbiage you can use and to really describe
this problem. For me, it's like, I could have caught it, but should I have caught it? Those
are the two things, right? Like, when someone's doing due diligence, should they catch this?
Like, and chances are probably like, you know, yes, I could have, but should I have, I don't
know, like, I wish I would have for sure. But there, there are multiple layers, like
you have to go, you got eight or seven layer dip, you know, beam dip, and you got to get
all the way down to the bottom. The problem due diligence is like, you're usually looking
like the three or four layers deep, right? Until you find smell of problem, then you got
to keep going. And if there's no, if there's no like sign of problems in the first couple
layers and stop digging, right? Because they're just wasting everybody's time most of the time.
And if you drag on your complete sales stage. So for me, one of the issues you ran into
right away when I came into the business is we were under the impression the business
has been growing year over year by 20%, both in top line and in EBITDA. Obviously, that's
exciting. And when we started the due diligence phase, it was a six month period till we actually
closed. During that six month period, two key things happened. One, we had a sales rep
leave. And we weren't able to catch that. Wasn't clearly disclosed. And they took about
$2 million of the business with them. So that was hefty, about 10% of the business. The
other thing that happened was we had a misunderstanding of growth of the company. So for whatever
reason, there was a process that was put in place that appeared to make the company look
like it was growing in census, which is the amount of patients that it has on record,
by 20% to 30% year over year. They're, you know, talking about that seven layer dip in
a seventh layer. When you look at that, there was about all, actually 40% of that total
was duplicates. So in actual, it was decreasing by 10% a year over year. And that was a huge
miss. However, from hindsight, I don't, I still know how I was going to catch that.
There was no numerical identifier to cross cancel. And I did a lot of that work to try
and do that. Is there duplicates here? There wasn't any obvious way to erase duplicates,
whether through patient numbers or through even social security numbers. You'd have to
assume every name that was the same on, you know, potentially thousands of patients was
a duplicate, which you can't do that when you have, you know, Tom Smith, and you have
several of those and which ones are duplicates? I don't know. Did they just move? They have
a different address. So there's stuff like that where you'd have to really, really know
and be looking for. So bottom line is we walk into a business we thought had that was continuing
to grow at 20 maybe 30% this year, year over year to a business that was decreasing by 10%
and costs for the business, you know, whether they're cogs or labor or whatever had been
trending with that 30%, which made sense to us until we walked in realize it's actually
decreasing and our costs are increasing. So we walked into a business that was almost
break even from day one that was having a hard time collecting cash. So we're looking
at a hefty hefty $12 million payment for our debt and like 200 K a month and no cash
within a couple months. So immediately in the grinder, so you thought it was growing
by 30% and on day one, well, within the first month or so, you realize that not only you're
not growing by 30%, you're actually declining by 10%. Your costs are going up in reverse
of that. And at the same time, one of your top salesmen has left and taken 10% of business
with you. So you find yourself stepping into a fire pretty quickly. Right. And you made
a point there about how you're having trouble collecting cash. And now you've got this,
you know, you got all this leverage that you have to cover. And so I want to touch on this
because regardless of the business, whether it's doing well or not doing well, or what
the situation is, managing the cash conversion cycle is always the number one problem, always
and getting your hands on that. So I'd love to hear you talk about like, obviously you're
stepping into this fire, but let's talk about the cash conversion cycle you're in and the
issues you're running into and what you did to try to mitigate and, you know, plug the
holes. Yeah. And your, I mean, I don't think we've talked about that before. So it's, it's
a good question that, you know, our, my CFO is awesome. She was actually the CEO for us.
I was a co-CEO and CEO, but a little kiddo. Nice. But yeah, I got a hand to her. She did
amazing. You know, the business when we walked in was paying bills as they came in the door
where they'd immediately write a check and send it out. That was their processing system.
So for us, when it came to AP, we just hold back, pushed everyone, hey, we have a net
30 rule. So we immediately get 30 days back of cash once we realized what was wrong. It
was somewhere going to work on, but as soon as we realized, hey, cash is drying up, we
literally went from, you know, close to a million in the bank to less than a hundred
K, like within a month or two. It was wild, extremely wild. And so we're pulling back
cash as much as we can. Someone that manages cash and business said, this is normal in
January, February. This is, you know, always goes like, that's not a big deal. In the past,
the owner just put money in or like, we just put crazy amount of money in. Like, no, that's
how this works. And so, but it obviously wasn't. That was what we had to, we kept digging to
find out, no, that actually isn't true. You know, just what they were saying to make us
feel better, I guess. But, yeah, bottom line is we pulled back hard on AP, pushed out as
many people as we could to that tune. We had a lot of overtime. So I was working. I was
driving late at night due delivery. So all of our medications would go out via FedEx.
And then if we missed the FedEx pickup at like 8pm, because, you know, we maybe were
overworked or have too much or we didn't have good process over the end of the day, we would
have to drive it. But then I'm paying overtime, big time for people. And so I started driving
almost every night doing deliveries all over Texas and Oklahoma, hours at a time coming
back in the morning at 6am. Like, it was a complete grind. I was heavily focused on operations,
not so much sales at the time and my, my partners focused on finances. So there's just a lot
of different pieces and parts that are not pretty of that initial process. You know,
when it came to our cash collection, we dove in as fast as we could on RCM, you know, if
you guys have never been in healthcare, healthcare, getting payers, specifically insurance payers
to pay you in a timely fashion is a complete pain in the butt. And there is, there's a
cash, sick cash issue in the first quarter. And that's kind of what the person in the
business was talking about. The first quarter is always tough with cash, but it wasn't as
tough as we were, like we were at a whole 'nother level due to another issue. So, so yeah,
that's, that's really having to focus on APR, right?
Wow, that sounds pretty grueling because you've got the, obviously the cash crunch happening
in the business. You see 10, they see a million dollars and they're gonna drop to 100k, that's
frightening.
And then beyond that.
Our payroll was 250. That's the scariest part. Every two weeks.
Yeah, I know exactly what you mean. So you've got that payroll coming every two weeks. And
you know, your cash collection is barely covering it and you're like holding your breath wondering
if that payroll is going to come. Every person who's operated business completely resonates
with that peer. To your second point, though, as you're trying to deal with the fires of
the business, you made a point of mentioning that you're taking on an operational portion
here because you're like, Hey, you know, if we don't meet these, you know, these deadlines
of getting to FedEx, now I'm the one driving all over state. And I just want to highlight
that real fast that as someone who bought a business that was doing well, brought top
line $20 million revenue, you know, cash flow, even just over three, you know, you're very
much operating in the business. I just want to underline real fast that like, you know,
for the listeners who are looking at buying a business that's one, two or $3 million in
top line, and 100 to $300,000 cash flow to think that that's going to be passive is completely
ludicrous.
No, it is. It's crazy to think that. And part of the reason is, even if I didn't have
to do that, I would be doing that at times. You know, and that's, you know, Jed, you're
you're a vet also, you know, part of leadership, especially in the militaries, you do, you,
you learn the lowest person's qualification when you come to a new unit, all the way up
to the top, and you might have someone that's, you know, training you, that is the lowest
paid person in front of you, right? Even though you're going to, you are their boss, right?
And so you go through that process, every new unit you go to every two to three to four
years. And so you just really take that mentality and come to the business. So even if you didn't
have to, like, you still have to. And that's key takeaway. On top of that, I, you know,
if you don't do those things, you have very little respect from the team. And then on top
of that, in my situation, I'm like, I'm just trying to conserve cash as much as I can.
You know, I'm not, I'm not putting in my mileage. I'm not, you know, I'm just doing whatever
I can to eat it personally as best I can.
Yeah. Yeah, that's a really good point. And right there, what you mentioned is one of
the things that I've seen. It's why a lot of veterans are drawn to search and why they
tend to, and this is completely anecdotal, I don't have data for it, but it feels like
they have disproportionate success, because they very much know what it's like to show
up at a new station, where they basically have to relearn their job, and they do it every
three years. And you're right, you have to start the bottom. And otherwise you lose the
respect of the guys on the front line. And yeah, it gets tough.
So all right, so you step into this fire. And how long did it take for you to plug the
holes for your like, okay, I can breathe.
It was, we started seeing improvement in April, I think. So we bought in December, April,
we're starting to see, okay, we broke even on EBITDA that month, instead of lost money,
which was a huge win, and cash was coming in. My business partner took us from a cash
to a cruel within three months, we plan to do that over a year, like, it's like, no,
we got to do it now. So that was a huge project by her that she crushed. And then by the end
of, I guess, the start of Q4 of 22. So it'd be just about nine months later, was when
we hit an EBITDA back on par with what we thought we bought the business at, which is
three, give or take 300k in a month. And I was like, holy crap, we're back. It took us
like, we're a year delayed. But we're right back where we thought we were. During this
period, and we immediately went on waivers with our bank, we're communicating with them,
we're trying to do a basic restructuring, they're telling us we got to put money in,
our investors like, no, we're not putting any money in, which, you know, to their credit
is the right move of the banks willing to work with us, which they are. So we're going
back and forth and negotiating. You know, I thought by summer, actually of 22 was the
first time I thought they, you know, the bank might take the business. So within six months,
you know, I'm in that place. You know, I thought before that, especially when when everyone's
like, we're no one's touching it right now, we're just going to give you some waivers
and hope this works out. But back, yeah, we hit a level of stability in Q4 of 22. And
that was, I remember there were a few weeks in that where I'm like, okay, we're doing
this. And rolling into Thanksgiving and Christmas, I was very thankful that year had a Christmas
party all excited. And that didn't last very long. Yeah, I remember you telling me how
you rolled into Christmas, had the holiday party, and things are feeling good. And then
it all went right back to, you know, we're like right back to terrible when January rolled
up. But I have to imagine as you're running into Q4 of 2022, you're thinking, all right,
that was a lot. That was a stress. I've aged five years in one year. And but this is what
I signed on for. You're probably thinking that you're like, Hey, this is everyone told
me this small business operation was really tough. Headwinds were going to come. We saw
all those headwinds head on. And now we're ready to, we achieved, we pulled through. Now
we're ready to move forward. Yeah. And the investor base was re-energized. Everyone's
excited, you know, the reports that were pushing out, or, you know, we can, we look like we're
in the service are dead. You know, I think at that point, everyone had rallied to the
point of being excited again about the business rather than waiting for the other shoe to drop,
right. And that was a very sweet moment in time. Well, I'd love to dwell on that, but
let's move on to January. So you have your Christmas party 2023 comes in. What happens?
So we, we were more exposed than we thought in a product line. So because everyone overlaps
in the service of our business, we have a lot of labor tied up in producing our medications.
We had a clean room with all those pieces. Bottom line is we had two legs of a stool.
We're missing a third leg. We're working on building that at the time. And one little
legs had a $2 million hit to our EBITDA annually, at least. And that product line, the reason
why that happened was one of our, think of like an MSRP, it's called the AWP in healthcare,
but an MSRP got changed by the manufacturer, which helps set the insurance reimbursement
for us. And so what happened, they said, Hey, a lot of our competitors have a much lower
MSRP. We feel like we're not as competitive because of that. So we're going to drop ours
by 90%. And so literally no, no announcement overnight. Get the alert and our income from
that goes away immediately. And we still have the same amount of patients, same amount of
labor and our, you know, just drug margin, not even gross margin that trickles down,
but drug margin is 10% then at that point. So poof $2 million off the books.
And that one line of business was what, 80% of your revenue?
Not our revenue. It was, it was so profitable that it was only like a quarter of our revenue.
But the other side of our business was like our loss leader, right? It was antibiotics
focused. So it was near break even had really good months, but it would swing wildly because
you have no control over, you know, what bug the person has that got them the antibiotics
that they need. And on top of that, they're only on service for three months at a time
or sorry, three to four weeks at a time. And we cut, and so with the other side, they're
only $5 million of that, but it's, you know, highly profitable like $2 million out of the
five, right? That actually hit our EBITDA line. On top of that, though, they were highly
predictive because they were two to five year patients. So the most predictable part of our
business just went poof. Wow.
Yeah. And so this MSRP drops their reimbursement amount 90%. And just like that, you see, you
know, correct me if I'm wrong, but you said you're even at the time, you've gotten right
back to three, three and a half. And just like that in January, two of it disappears. Yep.
But of course, your costs don't disappear. Right. Same amount of labor, all that, right?
So over the next few months, we do a big layoff. Yeah. It was near near half the entire team
probably should have done more than that first time. We reinvested in sales. We had built
up some cash at that point. Thankfully, in key four, we immediately went back to the bank
and said, Hey, we can't start making payments now. We need, we need to do inter-stolenly
when they worked with us after some hand ringing. But we, and at this point, we're still not
taking any more money from investors. So we're talking right now, 23, so this is January
23 when that hit. So year and a half ago, I guess, or almost two years ago now, wow.
And to be completely transparent, like that was the beginning and the end that that was
the straw that wasn't in the straw was, it was such a big, you know, anvil that broke
the camel's back, I guess. We just didn't know it yet. We just had hoped that we would
be able to climb out of it. And so we doubled down on a new leg of the stool and focused
on more specialty IVIG immunoglobulin product line. That line is highly predictive, but
only 20% gross profit or sorry, drug profit, excuse me. So it doesn't trickle down a ton,
but at least it's recurring every month. Whereas the antibiotics is, you know, roller coaster
of losing money or making money. So with that launch, we had a huge win, you know, in relative
statement, relatively at least in our business. We were built from zero to like 7 million
annual recurring revenue over a year and a half, which by small business standards is
a, you know, astounding growth with zero budget, you know, on fumes the entire time and just
continuing to push out our AP and accelerate AR as much as we can. So continued to work
on efficiencies, built this awesome spreadsheet for pricing that, you know, helps people figure
out their insurance payments and all that and automated all those pieces were able to
decrease our staff even more. It went through another riff. And, you know, when we look
at the top line of the business, we bought it 20 million. By the end of the first year
when we dipped and came back up, we are at 20 million. And by the end of the year, 2023,
we're at 20 million. So we had like all these struggles that we had, we kept building back
up through this process. I mean, as the sales go to market strategists, I'm like, "Yay!"
Except for our e-bit, I was just disappearing, just completely going away. So yeah, there
was, I never gave up on hope for the business. But until literally the last week when everything
shut down. And that was in August of '24. So we went from January '23 to August '24
on fumes, building that other business line, trying to get value for it, seeing if we could
even potentially sell the patience to recoup, looking at all different options, whether
even to refinance somehow, even though our EBITDA was, you know, we'd fluctuate from
100K in EBITDA one month to negative 200. We would go back and forth, back and forth.
And so, yeah, that's the next question, Jed. I'm crying a little bit inside.
Yeah, no, I understand. That's really difficult. You get to the point where you're basically
trying to, you're rebuilding revenue if you're not seeing an EBITDA side. And so cashflow
is just leaking away. And you get into 2023. And like you said, that other leg of the stool
gets knocked away. And so you double down, and you build out a whole new revenue line
that goes from 0 to 7 million with basically no investment. And so that says a lot about
your go-to-market chops, building something out of nothing. And like you said, especially
on the small business side, I mean, we're looking at, you know, SVA limits are $5 million
if you want to buy. And you build out a revenue stream that was, you know, bigger than that.
And so you're doing everything you can to save the business, but it's just not turning
into cashflow. Yeah, and that's what it came down to in the end, right? When it comes down
to decision-making on what we do next, you know, we had finally dried up the cash. We
had moved all our vendors to 90-day payments for these longer-term payments, you know,
when we knew we were running out of payrolls. That's what it came down to. And so we went
to the bank, put together a deal, and got to the investors, put together a deal with
them to inject some cash back into the business, because the new business line is interesting.
But when we really crunched the math and kept going back over the performer again and again
and again, the question kept coming up, how are we going to service the $12 million debt?
And we had no -- our best guess was that it would take three years to start making payments
again. And that means any cash we put in right now is at risk. And so how do we -- I literally
was the one to say to my board, hey, we need to talk. I know we have this plan. Everyone
actually had committed pretty much to the raise. And I called the board and said, I don't
think your money's safe if you put this in. I think it could get scooped within six months.
And we decided on that call that we were going to be done.
A couple of things to touch on there. Right before we get to your discussion with the
board, you talked about, you know, once this hit that EBITDA happened in January 2023,
you said almost immediately, within a month or two, you had a 50% layoff of your staff.
And you're just cutting costs. And then beyond that, your automating processes, you're putting
systems in place. You're putting that spreadsheet together for patients to understand their
insurance reimbursement. You're doing everything you can to lean out the business. And this
is on top of all the work you've done the first year to try to recoup, you know, the
loss you had from, you know, the lack of growth as well as the lost business from the original
salesperson. And so what I'm getting at is one of the things the HBR guy talks about
is when you buy these enduring businesses is what we hope to find, right? When you buy
these enduring businesses, you know, especially that first year, the most -- what you want
to do in a perfect world is do nothing, do no harm. Yeah, don't break the business. Yeah.
But what you find, and with a lot of the owners I talked to who -- where it doesn't work out,
and some of the do, is that they find themselves stepping into a wildfire. And everything may
-- and since they've never been in the seat before, they think, okay, just do nothing.
You know, do nothing. Don't break the business. But then you very quickly realize that, hey,
it's your business, you're next on the line. No one's coming to save you. Am I really going
to sit back and watch this fire burn down the business, or am I going to get to work and
make some gutsy calls? If I didn't do what I did, I would have been removed by the board.
And understandably, right? Like, it's a miracle, frankly, that me and my partner never did.
We were there for two and a half years, and completely, you know, survived the board deciding
to hook us out, right? Which is wild, frankly. But thank you. I appreciate it if anybody sees
this. I learned a lot, although it might have saved me a lot of pain. But no, I -- you
know, there's -- yeah, I obviously -- the goal was to not change anything, right? And
as you run initiatives -- you'll see this on search funder, right? People go on search
funder and post, you know, how do people feel about turnarounds? It's like, you don't want
to go looking for a turnaround. It'll find you. There's no -- there's no need to go hunting
for that. Because, you know, one, you want to avoid it if you can, but, you know, it's
coming. So, anyways, it just cracks me up when I see that. But, yeah, that's what I ended
up in, right? I immediately went from thinking we were buying a solid business, a solid financial,
solid growth, a team that has already scaled it, right? You know, year-over-year, $10 million,
$15 million, you know, $20 million over the last several years. Super exciting to see.
Super great growth. And just bought it at a point in its cycle where it was done.
So, here you are. You're in the seat. Tell me what's going through your head. Like, when
you're facing these things, like, in the face, especially January 23, and you're thinking,
am I about to fire half my team? Like, you, obviously, you know, there's people in that
business who have been there for a long time. They've all got their own opinions. Your investors
and board have their own opinions. The bank definitely has its own opinion about that $14
million debt that's hanging around your neck. How -- like, what's going through your head
when you're thinking, man, am I really going to take a hatchet to this business?
Yeah.
What am I going to do?
Well, you know, I can't speak for 100% of the people that do search, but no one gets
in the search to lay people off, right? Like, we're here to grow things and, you know, create
value. You know, there's definitely people that need to be fired, but it's not half
your staff, right? That needs to be laid off. That's -- yeah. So, it is -- it's -- you know,
my brother's one of my best friends, and he's like, you've not been any fun to be around
for the last three years, right? Like, it's just been a shell of my normal self at home.
And it sucks. But, frankly, all of those pressures are -- you know, they're just beyond anything
you've done. You know, I think it's really rose-covered glasses to look at search and
say, yeah, this was me. Like, I'm not talking trash about anyone else, but I'm talking about
my experience. When I was fundraising, I was like, man, this is the hardest thing I've
ever done, which is the stupidest thing I've ever said in my life. And then -- and then
I'm searching. I'm like, you know, I was like, this is really hard, even harder than raising
money, you know, because you're like -- you're picking your destiny, and it's really scary,
right? Because you don't want to pick wrong. That's what you see people search forever,
right? You don't want to make the wrong choice. And, you know, I'm not going to tell you that
I made the right choice by any means. But it's scary. And then operating and the type
of things you walk into when you're operating, which there are great stories out there. I
know a crew that acquired when we did and just crushing it. Their stress level is crazy
low. Like, those are those stories out there, but they're also my story. And there's other
like me, you know, Jed, we've talked, and there's several other people we've connected
with, too, that have stories like mine, where, you know, the information is imperfect.
Yeah, I think that's why it's even more important to highlight people like yourself and talk
about like, hey, you know, sometimes it doesn't work out. And sometimes, you know, you can
struggle for three, four years, and you can put your whole heart and soul into it, and
you can build multi-million dollars of revenue stream, and it still doesn't work out. And
it's really important that people have a -- you know, if you're going into search, you have
a clear-eyed view of, like, what you're getting yourself involved in. And so here we go. We're
getting towards summer of 2023 -- excuse me, summer of 2024. And you've built this extra
revenue stream that, like you said, it's recurring, but the profits are pretty marginal. And I
see this a lot in industries, especially service-based industries, where, you know, we all want the
recurring revenue. But what we don't talk about is outside of SaaS, that recurring revenue,
the profit margins are very slim, you know, and your actual profit margin comes from the
project work. And so a lot of people, they try to have the best of both worlds. Unfortunately,
you know, like you said, the antibiotics for your project work, and that's super unreliable.
And so you're trying to build the recurring revenue, it's just not spitting off enough
cash to keep the business running. And so you're working with the bank, you're working with
the investors, you're coming up with a plan to save the business, to really find a new
way forward, especially since you just built out this seven million of recurring revenue,
you want to, you know, make that happen. So, like you said, you ultimately decided that
it wasn't a good investment, but what was it -- what was that conversation like, you
know, with the bank, with the investors, when you finally decided to pull the plug?
You know, it was somber. You know, I actually got several questions from investors during
that, you know, cycle of talking to everybody and getting ready to pass the hat. They're
like, why are you still here? That was actually the most common question I got. And I said,
I just refused to quit. Like, that's it. Like, I'm not going to walk away. Eventually, you
could say I did, but I only did it for the investors. I did not want to be done. But
I think the risks were way too high for them. I had no plans. I didn't find anything great.
I'm going to get paid to do something else. And so, for me, that was the only way -- and
I have two rules, which is don't go to jail and sleep at night. That's it. And so that's
kind of what's guided me the last three years of really, you know, doing my best, even if
it's not enough. And that means not quitting. And I have been able to sleep pretty well
the last few months, which has been great. But that's been the driving force of how I
conducted myself during the operation phase of the business, especially when things are
really rough. I had to make really hard decisions with employees and stuff. And, you know, there
were definitely times where it was really hard to sleep, but I at least could rationalize
sleeping. That was the big part, right, where I didn't hate myself afterwards.
Right, where you know you're, you know, leaving it all on the field metaphorically. And even
in this case, like you said, you'd come up with a plan where the bank was on board and
the investors were on board. They were willing to put another $2 million in the business to
keep you going. And which must have sounded like, you know, a huge break for you after
you've been just struggling for years trying to keep this thing moving. But then ultimately,
you're looking at the numbers, you're looking at the risk, and you come back and you tell
the investors, "Hey, guys, I know that you've already committed to put another $2 million,
and I don't think it's the right investment. I think the risk is too high, and there's
a good likelihood we're just going to set that on fire. And I would not be a good fiduciary
to you if I took your money." Right. And the decision came down to this. I got
back into the model one last pass, and I did a little more sensitive analysis, sensitivity
analysis, and I determined that it would take very little for this thing to fall apart.
And I just wanted, I took one more pass and I'm like, "This right here, which is, you
know, a drug gross profit, if we have a 1% drop in it, the model breaks." It does. And
that's been happening to us slowly over time with anything in healthcare. So that's where
it was like, I can't, like, to go through it when the last three years, but then to get
people to put more money in, and then still do it to them anyways, would break me potentially.
Yeah. Wow. All right. So August 24, you decide not to take the investor's money and you close
up shop at that point. I'm out within three days. Man, I live in three days, and then
I imagine the business closes its doors within a week. Yeah. Yeah. Same day that I walk,
most everyone else gets walked. From the, you know, we pretty much, we told the bank
what was happening. They said, "Hey, you know, give us a plan to control, you know, protect
our interests." So we, I wrote my own death plan. You know, that and my business partner
obviously did it together, but pretty much walked through who needs to stay behind to
continue to collect and deal with assets, right? And so we still have a team operating
today that's, you know, collecting on the AR. And so there's about three or four people
still working there. Yeah. Yeah. Well, I mean, I mean, that just speaks to you and the team
at the same time, because, you know, when the business goes under, it's very easy to just,
you know, wipe your hands and walk away, especially when you don't have a personal guarantee.
But then also realizing that, you know, once you realize that you're heading towards insolvency,
you have a legal obligation as the CEO to make sure that you're, you know, the members
of the top of your debt stack, which in this case, the bank, you know, has the best opportunity
to recruit, you know, whatever they can. And so that's important. I think that's another
thing, you know, well, and health, we don't like abandonment as well. So like, there's
a huge responsibility for both the staff, the licensed people and the staff, there's
a responsibility for, you know, the executives and the board to ensure that they're taken
care of and make sure that there's continuity between their care. And so thankfully, our
staff, you know, did an amazing job of that. And so far, so good.
Yeah.
Yeah, I think that's, again, important to touch on, because a lot of us, you know, we
always believe that we're going to be successful. So as a result, very few of us dive into what
does bankruptcy look like, you know, and because of that, very few of us, unless we've been
through it, and God forbid you ever do, but you don't know what you're walking in through
and you don't know what your responsibilities are. And regardless of the state you're in,
your first responsibility is make sure that if you've got unpaid payroll, that goes first.
That's a legal obligation that will get you in a lot of trouble if you don't pay it. And
then beyond that, once, and this is a gray area, but once you realize that you're moving
towards insolvency, and that's a gray area legally. But once you get to that point, as
the chief executive, you know that now the bank becomes a fiduciary. Now anyone who has
debt claim against that business, even if it's two, three levels down, now you're a fiduciary
for their claims as well. And so every decision is a balancing act between, is this the best
move to keep the business afloat, or is this the best move to protect the interests of
my debt holders? You know, we like to talk about the FedEx story about how he took his
last $5,000 and went to Vegas and gambled it to try to keep the business alive. Probably
illegal if you had that hadn't worked. But yeah, these are things that are just really
important, especially when you have a business of the scale that you that you're working
with.
Yeah, no, it's, it's, it's true. And you know, I, I, I remember skipping over all those classes
and not listening to the bankruptcy and clients. It's like, ah, that's not my problem. Yeah,
I learned. So now that you're out of business, it's been a few months now, you've had some
time to, you know, slink away into the cave and rest a little bit. Now you're emerging.
But at least you're sleeping better at night. So that's good. You know, what are some of
the big takeaways? Because obviously you're on this call, you're talking to people who
are interested in search or they've been operators, or they're just wondering, you know, what's
it really like once you're the, the guy or gal in the seat making the decisions and looking
back at it, you've had some successes, you've had some failures. You know, what are the,
what are some of the big takeaways you have for people who are interested in going down
this model, regardless of whether it's, you know, traditional or self-funded, what's it
like being in the seat and what would you like them to know about?
Yeah, I think one of the big questions I generally go, would I do it again? Right? Whether, whether
metaphorically, right, to do it all over again or to try again in the future and do search,
right? And I don't know. I think that's a fair answer. You know, I think I, what I've
learned is invaluable without a doubt. Like I'm much more sharp in a lot of different
areas and ways than I ever thought I'd be at this point in my life. I, yeah, I, I think
there's definitely a path in which I end up back in a CEO seat in a similar fashion.
But you know, takeaways wise for all listening, I would say that, you know, figure out how
many layers you need to go in your, your bean dip, you know, like there's always more, but
you know, good luck with that. But, but it's actually rare. And this is something that
I learned along the way, especially a lot of my investors that were prior searchers.
They were like, oh, I remember my first year I thought I was going to visit business too.
That was like actually a common thing that investors told me. And I'm like, you're kidding.
Like no one talks about that. You know, I had about 20 different investors and half of
them were prior searchers. And so, you know, that theme was really eye opening. And so
expect to feel like you're going to lose your business in the first year. And the first
year actually didn't kill us, right? The first year was painful and scary. And if we didn't
make the right moves, we might have had a huge issue and I might have been removed or
something like that. That would probably have been the worst outcome in the first year.
But it was an industry headwind that just crushed us in the long run. So, yeah, I think, I think
that's the big thing. You know, I think it's totally fair for me to bring this up. I had
very minimal health care experience. And, you know, I am a go to market guy. So, stepping
in and do an industry specifically alone from just health care, but where I don't have control
over price is crushing to me. So, just like I wanted to not be in VC due to product market
fit, I don't want to be in industries anymore where I have no control over the feed. I did
break quantity, but if I can't control price, you know, it's an uphill battle. So, I think
whatever I do, I'll stay out of that scenario. I definitely, you know, I have a client right
now, I'm doing some consulting with health care. So, I have no problem with that. I just
I'm not going to hang my complete hat in that arena again.
I think that's a really good insight, especially for, you know, getting an idea of what are
the things that the problems I'm willing to solve and the ones I'm interested in solving
and the ones that I don't want to be a part of whatsoever. Because, you know, the guys
and gals who are leading Novonortis are doing just fine. But at the same time, you're choosing
what kind of hard you want to deal with. And that's a question that I get a lot from potential
searchers when they say, "Hey, you know, what's the best industry to go into? You know, what's
the most economically resilient industry to go into?" And the thing I always tell them
is like, "Every industry is hard. You just have to pick what kind of hard you want to
deal with. SASS is hard. It's very hard."
Right.
I think there's something that I just remembered. I think it's something I want to interrupt
really quick, but me and my business partners in six months had a joke, "Should have bought
a landscaping company." That was our joke. And we kept it for three years of operating.
It's like, "Man, we should have bought a foreign business."
Yeah.
You know, anyways.
Well, for those of you who don't know, I had a landscaping company, and it also...
There you go.
They can fail. Absolutely can fail. But yeah, you're right. It talks about like, you know,
what's your hard, you know, what do you want to deal with? And one of the things, you know,
is that I think makes your experience so valuable. And why I personally, I do think it'll end
up back in the CEO position is because until you've been in that seat, you just don't understand.
You've never seen it. You don't know how to react in the operations. And you don't have
a track record to say, you know, "How is this going to turn out? And how am I going to react?"
And we talk about it in the military all the time, you know. People join, they're like,
"Ooh, Rah, can't wait to deploy." And you have no idea what's going to happen until
that bullet whizzes by your camp. And you're like, "Are you going to duck? Are you going
to charge? What are you going to do?" And you have no idea. And so you've got those
stars from being in the seat and making those tough decisions. Now you're like, "Hey, here's
some lessons learned. Here's some things that I would do and things I wouldn't do, but you
at least know what it's like to sit there and have to make those decisions."
Yeah, yeah, no doubt. And that's, you know, that's the hard-wought one, the lessons that
I was mentioning earlier, where, you know, the stuff I've learned is invaluable, the
things that, you know, I've had to decide and rationalize. You know, I think on a personal
note for me, I think the biggest win is I'm still married and my kids love me. So, like,
slam dunk. But, yeah, aside from that, like, business life was tough last several years.
So, I know it looks like your wife's concerns were very palpable and very realistic.
Yeah, not helpful. Now it limits my options going forward. She gets a win in her camp.
Good luck. You know, I'm in the same camp. Living that down is a tough one.
Yeah.
Well, another thing I want to touch on that you brought up is the fact that you said half
of your investors who felt like they were gonna lose their business in the first year,
and one of the things I really like about having these conversations is the fact that we just
don't talk about it. We don't talk about the struggles. We don't talk about the failures.
And usually when we do, we wait until we've got a string of 10 really awesome successes
to say, "Oh, look at all the struggle that I went through to get to my success." We don't
talk about the fact that, "Oh, my business went under and now I'm at home and I'm unemployed."
We don't talk at that point. So, what is really like now, actually bringing that out?
Yeah.
So, I haven't had a raise or a bonus in the three years of operating in ZEO because there
was no cash, right? And I had a daughter in college, so she has debt-free college, which
is great, but that means my cash was not existing. So, I have 401(k), but I didn't want to touch
it, obviously. So, I immediately had to start looking for something. One of my investors
and board members actually connected me with the portfolio company that I could do some
consulting with. I actually got an email this morning from another investor that said, "Hey,
I was thinking of you. I was hoping that you might be able to talk to a searcher who might
need some help with sales process and operations." Within two weeks, though, bottom line of losing
the business and me stepping out, I had four signed contracts with consulting, just doing
personal consulting with them for either operations or sales or CEO, just for actual work where
they're either process or growth-minded. First time going outbound, it's been a founder-led
sales process and the founders now stepped out. So, what do we do? Stuff like that. Things
that are all in my wheelhouse, but by the end of that two weeks, I was making more doing
that than I was with the CEO, which was not the plan. I had no plan. I was completely
just a mess coming out of it, but I got to stay married, so I got to keep a roof over
their head.
I'm glad you've got at least a short term silver lining there. Adding some cash definitely
helps move that out just a little bit. So, one final thing I'll touch on is the fact
that how you end things is just as important as how you start them. And very end, the fact
that you were honest to your investors, the fact that you told them, "Hey, we're probably
going to light your money on fire. This is not a good investment." They decided to close
the business. It helps make sure that you maintain those relationships with your investors
who have been able to be a resource in the future. You weren't expecting them to refer
you to other CEOs or management teams that you could then consult for. But it is true
that for the vast majority of us, failure is not the problem. It's not going to kill
you. It's not going to end your career. As long as you do it the right way, as long as
you're being honest about it, like you said, sleep at night and don't go to jail. But if
you put in the work, you're putting in a lot of the effort, failure ends up just being
a big lesson and it sucks. But as long as you go out the right way, it does open up doors
in the future.
I quickly agree. I think a couple of months removed, I'm a lot more stable than I was
month one. I think it's really easy for it to feel like it defines you immediately. That's
probably the palatable feeling, an overwhelming feeling, is like, "This is who I am." That's
tough. But I did a lot of therapy, a.k.a. smoking meat and woodwork and different projects
just to get my body moving and reconnecting with things I enjoy that I stopped doing.
I started playing guitar again. I haven't done that in four or five years. Just trying
to connect with things outside of what I've defined myself as for a while. It's really
healthy and helpful. If you haven't guys figured this out, going through this is heartbreaking.
It is completely heartbreaking. I moved my family across country to do this. New schools,
new friends, everything. When it doesn't work out, it is rough.
I think it's clear just from listening to your conversation. I know I can hear your
voice. You pull your heart and soul into something and it doesn't work out. It's really difficult.
Again, I can't tell you how much I appreciate you coming on and telling your story, giving
us your lessons learned. We've got about a dozen people here who have stuck out for the
whole story. I think that speaks a lot to the amount of value you're given. I'd like
to open up for a few questions here if anybody has a question they have for Joe. I think
we've got maybe 20 minutes or so if you guys have a few questions. You can either unmute
and say it out loud since there's been a huge group of us or you can just throw it in the
chat and I'll read it for you. >> Hi, Joe. I have a question. Two things
kind of stood out to me at the start when you were evaluating the deal. One was, I think
that you mentioned you paid 6XEBRA, which is on the higher side, I think, of what we
typically hear. It was kind of curious why you and your CFO felt you were comfortable
with that. Then the second piece was obviously this $12 million note just hung over your
guys' head throughout the lifetime of the business. Just curious, was the debt to income
ratio kind of normal or low, but it caught up to you guys or would you -- any lessons
learned around that and thinking about that? >> Yeah. First with the debt piece I posted,
I think, on Monday. My view of LBO and how that hung over us. So check that out on my
LinkedIn because it's a -- but the short version of it is, yeah, it's a huge problem. The amount
of debt we took was strategic for returns. It didn't account for not doing well, right?
It's like, hey, what's our maximum debt to you, but a ratio we can get? Sweet. That's
what we want. That's who our loan provider is going to be. They were a fine partner.
There was no issues from that perspective, but from a strategy standpoint, it maximized
the opportunity for returns and maximized the opportunity for default. It's a double-edged
sword. Going back to your first question, which was about multiple. One thing that isn't
talked about much in search except when they're talking about 2 to 3X or 3 to 5X on deals
at 3 to 4 or whatever, multiple -- if you're looking at smaller deals, you can get away
with that amount sometimes. And then there's industry-specific, right? And so with the
industry we were looking at, that was mid-range to low. Even with the business where we got
it to, if we could get the same EBITDA, by the time we had built up the new product lines,
the multiple had risen to like 9X. So if we could just get back to our original EBITDA
we bought out, we had an 8 to 9X multiple. So really, it's relative, I guess would be
my answer when it comes to multiples, especially when you're buying a bigger business with
3 to 4 million in EBITDA. And if you remember correctly, what was the DSCR
when you acquired? I don't know, pull it up. That's fair, we'll do some math. Yeah, do it.
I flushed that. Too many numbers between now and then. Great question, Katie.
Yeah, I've got a question. Joe, thank you so much for sharing your story. I can empathize
and know how tough this all is. I have this little strand of hair that won't go down.
It's actually from a bald spot that I got. Managing my company hasn't really grown out.
I'm still trying to flatten it down. I'm curious, so the salesperson left in due diligence
and the seller didn't disclose that to you. Did that cause, am I assuming that they didn't
disclose? I'm not going to talk about that.
Okay, yeah, I'm sure there's some sensitivity around it. My other question, I want to say
a good question. Yeah, the reason I'm asking is because I had a lot of issues with my seller
and legal and like the toxicity created in the culture and the entire company kind of
got pulled into all of the legal stuff and pointing fingers and it was really hard to
kind of like grab that bull by the horns as a newbie to the company, right? New turnarounds
like theoretically discovered mine and learned more along the way. As you were forced into
layoffs, how did you maintain culture? What did that feel like talking to the team? How
did you kind of address their concerns? Yeah, that's a great question. There was a point
in time where the original owner stepped back from the business and on top of that, within
a few months, we were doing layoffs. And so I would say we had walkouts throughout that
period of time because we're turning up the heat on certain things ahead of RCM. We're
trying to accelerate revenue cycle collection and they just walk out, right? And is it feeling
the pressure too much? And yeah, it's really tough. I would not say we had an amazing culture
through the whole process. I would say it was impressive how good it was for how tough
things were. And that's kind of like the best hope you can have when really bad things continue
to happen. I would say majority, this is like a, I don't know if I should be happy about
this or not, but everyone was pretty consistently surprised when something bad was happening.
But that doesn't feel good as the owner, right? It'll make a survivor reference, but a blind
sign is effective. That's why you use it. But it is extremely painful for everyone,
including yourself. But if you, people in a big group, I think at an individual basis
are pretty trustworthy. I think in aggregate are very dangerous. And so how to message,
send a message, to take those steps is really hard. Happy to talk offline though, and get
specific about what you're dealing with. Yeah, where are you located? Should we like grab
some drinks? Dallas, Texas. No way. I left Dallas to acquire my company in Austin. I've
since exited, but it's a students' throw. One of these days I'll reach out to you. Can
I ask one more question? Go for it. How did you view partnered versus non-partnered search?
The reason I asked that question is because I felt mine was, my operations were really
lonely. It was just me. I didn't feel like there was anybody to really balance out the
leadership team. It was really hard to get people to see me as a human. They saw me more
of like as an enemy or forcibly orchestrating the turnaround, right? And so I'm curious
like how you viewed a partnered operation and whether if you do this again or not, would
you consider partnering with someone again? Whether I do search or something else, I always
prefer partners. Probably the VC background that I have, right? Where it's very normal
to have co-founders, right? That doesn't mean that, so like if I do search, I would have,
whether I'd have a partner or have someone I'm bringing in, I know from day one that's
going to be on my side. Because one of the things that takes a long time to figure out
when you walk in is how is everyone going to interact and work together? Because the
new dynamic just takes a long time to shake out. I would say it took us a year for things
to really shake out and the reporting structure to flow correctly for people to feel like
they knew each other enough like me and my direct reports knew each other enough to have
hard conversations. It wasn't perfect though. However, some of the people that I hired and
brought in from day one, it was easy with them. And so that is a huge takeaway, I think for
anyone is that if the person isn't going to be able to come around to the new ownership
structure, reporting structure, you might need to make that move. And the ones that did
stick around, thankfully, we got to a good working status, might not have been perfectly
smooth, but it was wildly effective. And we worked together. Yeah, so I think that's
a huge piece. And part of that, the partnership piece for me is I know if I'm fully in charge
of books, I need to bring someone in for the finance function that can own it, whether
a consulting group or whatever else or not, it's not my strength, you don't want me doing
that. I shouldn't be reporting to a bank. Dangerous. And I'm so glad I was right about
that, because it would have been a mess had I walked into this without somebody like that.
Thanks for sharing that. Yeah, I think it touches back on the theme from earlier that
when we're thrown into chaos unexpectedly, we often as searchers default to not making
any changes. And in these situations, changes are necessary. And it's contrary to all of
the advice that exists out there, because nobody talks about it, right? And so the more and
more we talk about how change is necessary when circumstances require it, I hope that
more and more people will hear it and realize that it's okay to make change. Yeah, and the
thing you said earlier too, Kenzo was that it's super lonely. So one of my clients actually
right now is a searcher who is a solo searcher. And they acquired maybe six, eight months
ago. And I'm helping with outbound sales. But what I'm also doing is I'm a really good
confidant, right? Like, I'm actually able to take time out of some of the stuff I'm doing
just to talk about the insanity and stress of doing this, right? It's hard and figuring
out those reporting lines and relationships and all those pieces. And, you know, I think
not having a partner in search, you know, definitely leaves a gap in need because it's not even
if you're have a board of directors, can't really go to your board directors for stuff
like that. There is a certain level of separation that you need. So even with a partner search,
though, I actually had a business coach for the first eight, nine months of search, because
I needed someone else not to dump on other than my business partner, right? Because it's
so easy just to dump on them of, like, everything and feeling, but they're also dealing with
the same stuff. And so, like, you don't want to be piling on them, and, you know, making
it even worse. So it's definitely a huge tip I'd give is to take one. I can recommend
Kirk Wayman of Icon Coaching.
I appreciate that. Thanks. Yeah, my husband was my impromptu buddy in the transaction
unwillingly, right? And I'm so glad we're still married. We learned so much about our
relationship through this whole process.
Ben? Anyone else have any questions?
You go, Judd.
Two things to add real fast. One is that you're absolutely right. Every search I talk to you
does end up acquiring. They always talk about how lonely it is being the guy or gal in charge.
And one of the big takeaways, especially from people who are coming from MBA programs or
coming from a white collar corporate environment is that if you are buying into a service industry,
HVAC, plumbing, landscaping, something like that, 95% if not more of your employee base
are going to be blue collar guys and gals. And what you don't realize is, you know, half
of them may not even have an email address, much less know how to use a computer very
well. So it is a very big culture shock. So it's really, it's not just that you can't
have a conversation about EBITDA or cashflow. It's hard to have a conversation about anything
that is go-to-market or corporate. And it becomes very lonely because you get stuck in
your head and you don't have anybody to dump on. So that is a big part of it.
The other thing though, and this is completely ad hoc, but I'm going to throw this in the
chat. This is a link on Amazon to a book called Corporate Turnarounds by Jeff Sands. He's
kind of the guy on how to do corporate turnarounds. And what I find is that, you know, we all
know that the HBR guy, we're going to buy them and build books. These are great. And there's
a million business books out there. But if you're wondering what it's like, you know,
to step into a business that's on fire and what you do, you know, in a step-by-step procedural
way, this is it, you know, cash conversion cycle, focusing on the things that matter.
And here in your story, experiencing it myself, I can tell you from experience, I read this
book as therapy. I was reading it, I was like, oh my God, this is it. So it is an affiliated
link. So if you want to not give me 50 cents for that, that's fine. Go find it on Amazon
yourself. I don't care. But highly, highly recommend this book if you plan on operating
a business in the near future. Because like you said, Joe, you know, your turnaround will
come. Your business will absolutely hit that turnaround headwind. And so there's no sense
in going to look for it. It will find you. We've got enough time for probably one more
question here, and then we'll wrap it up. All right. Well, then I really want to thank
everybody for being here. Joe, thank you so much for taking the time and everybody on
a Thursday morning, more or less, like, do you guys even have jobs? What's going on here?
So thanks for being here. Love hearing your story, Joe. Love hearing the real world analysis
of what it's like to be in the seat, what it's like to stare, you know, destruction
and abyss in the face. And really love what you're doing talking to people about the real
life scenario of what happens and giving them a clear eye view of the challenges of being
an operator. And I've no doubt that the experiences that you've accumulated over the last several
years are going to make you a killer operator when you walk into a business. And their biggest
struggle is, oh my God, our Facebook ads turned off. And you're like, don't worry guys, I
got this. I have a lot of faith that you're going to be successful in the future.
Yeah, the level of what a problem is is definitely different than when I started. I think that's
kind of, you know, someone asked me recently that a similar takeaway of like what led the
last 10 years in general, because I was, you know, 10 years ago, I was doing search and
rescue and law enforcement in the Coast Guard. And, you know, when I got into business, you
know, eventually you kind of cool off and like did all my commissions pay out was the biggest
problem I've dealt with in the first few years of being in business when I was a sales guy.
And then, you know, when I stepped into the business, you know, cash flow issues, you're
like, this thing is the biggest, ugliest monster you've ever seen. And then you're dealing
with, you know, negotiating with the bank and you're dealing with investors who are like,
what is going on? And, you know, just progressively realizing I'm more and more equipped than
I thought I was to handle this level of problem and stress. And I think that's probably the
biggest takeaway for me that I got the most out of, which is, you know, kind of what you
touched on. What is really a problem? And so, you know, whether that's now family pointed
or whatever else in my relationships and business, you know, the level of what I consider a problem
is way different than used to be. And I think that allows me to have a lot more peace and
calm and not let my blood pressure take off on me and think clearly, you know, and that's
just a muscle. And so, I'm of the personal belief, our goal, especially if you're on
this call or listening to it in the future, personal belief that our goal in life is to
take on more and more responsibility and more and more stress and normalize that stress
into something that isn't stress anymore. And if you can do that, that's what, you know,
my achievers come from is being able to manage that and get to that point. So, yeah, really
appreciate everyone listening to my story and my own therapy version of this, I guess,
was talking it out, continuing to, you know, not run away from it. And hope it was super
helpful.
Well, nothing more to add to that. Thanks, Joe. Thanks everybody for being on the call
and we'll try to do a few more of these over the next few weeks. Thanks again. Bye.
[BLANK_AUDIO]
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