An Acquisition that Worked
Alan Pentz explains what Chris Williams did right in buying a financial services firm that serves small businesses. Plus: When do you hire your first salesperson?
Good Morning!
Here are today’s highlights:
It’s gotten a lot harder to raise prices.
Both employees and employers value the flexibility of part-time work.
We were told the big real estate settlement would change home-buying forever. Maybe not.
Ben and Jerry still say corporate activism is good business.
BUYING A BUSINESS
Alan Pentz analyzes Chris Williams purchase of System Six, a financial services business that offers bookkeeping, payroll, bill-pay, and invoicing: “Chris acquired the business in July 2021 when it was doing $2.5 million in revenue with 18 employees. He was the textbook searcher. Chris came from a finance background in investment banking and private equity and got his MBA before going out to buy his own business. It’s the dream that has launched a thousand MBA acquisition ships, and in Chris’s case the dream has been realized. As of early 2024, the company has almost doubled to $4.5 million in revenue with 38 employees.”
“He has also done a good job of cultivating a nice customer niche. Seventy-five percent of System Six’s clients are from the small business acquisition community (search funds, independent sponsors, self-funded searchers) otherwise known as the Entrepreneurship through Acquisition (EtA) community. Their average client does $5 million in revenue and has 30 employees.”
“Systems Six does something all companies need but few want to spend a lot of time doing. Being 10 percent better at bookkeeping isn’t going to make your Heating, Ventilation, and Air Conditioning company or marketing agency that much better so you don’t really want to do it yourself, but you absolutely need it. As long as the price is competitive, you’ll keep outsourcing it. That makes it steady recurring revenue with no real customer concentration.”
“Chris hired a dedicated sales person at $3.2 million in revenue and a full-time HR person at 25 employees. These are tough near-term decisions. Those kinds of employees reduce margins in the short-term but set the stage for further growth.”
“I think it works at System Six for two reasons. First Chris has a robust marketing channel so he isn’t relying on a sales person to generate leads, just to close them. And second, many bootstrapped owners have a sales background. Chris is more of a financial guy so I see the justification for a sales person early on.” READ MORE
PRICING
Until recently, it’s been pretty easy to raise prices: “Americans are increasingly intolerant of price hikes. Anecdotes from corporations suggest that consumers who were once unfazed by price hikes are now resisting them — and businesses have to do more to entice shoppers in a way not seen since before the pandemic.”
“The resurgence of fast food price wars tells the story of a more price-sensitive consumer. For value meals, it's a race to the bottom: McDonald's has a $5 value meal. Wendy's announced a $3 breakfast meal. Sandwich chain Subway launched a $3 ‘sandwich dipper.’”
“Several national retailers have announced plans to lower prices on certain items, and there is increasing evidence that higher-income shoppers are trading down to discount stores,’ Fed governor Lisa Cook said in a speech yesterday.
“‘My forecast,’ Cook said, is that inflation ‘will continue to move lower on a bumpy path, as consumers' resistance to price increases is reflected in the inflation data.’”
“‘I have gleaned from recent earnings reports by publicly traded companies that lower-income consumers are pulling back from their purchasing and that firms are responding by moderating price increases or, in some cases, actually cutting prices,’ Fed governor Adriana Kugler said last week.” READ MORE
HUMAN RESOURCES
One pandemic hiring trend has continued: “Part-time job listings soared during the Covid-19 pandemic and have yet to recede — a potential sign that both workers and employers see benefits in the arrangements. Beginning in early 2022, the share of part-time jobs posted on job-search engine Indeed grew 10 percent before leveling off in 2023. While the job market has cooled since then, the share of part-time jobs has not retreated to its pre-pandemic levels, according to research from Indeed's Hiring Lab.”
“That’s because regardless of the state of the job market, part-time work brings with it a flexibility that many workers want — and many companies realize that flexibility could also serve them well as the job market softens, according to Daniel Culbertson, outreach economist at Indeed Hiring Lab.”
“‘This could mean that employers are determining it remains necessary to offer more flexible work arrangements to meet employee demand. It could also be a sign that employers are pulling back on the amount of hours they require from employees as the labor market continues to cool,’ wrote Culbertson in an analysis provided with the Indeed data.”
“Full-time work made up 62.3 percent of all job postings on Indeed as of May, with part-time postings representing 31.7 percent of all listings. The balance were jobs advertised as potentially full-time or part-time. The industries with the largest share of part-time jobs were mostly in the services sectors, with beauty and wellness at 67.2 percent, followed by personal care and home health at 54.2 percent, then retail at 47.5 percent.” READ MORE
REAL ESTATE
Brokers are hoping to avoid having to comply with the big settlement: “Right now, if you're selling your home, you pay about 6 percent in commissions, half to the agent who helped you sell and the other half to the buyer's agent. Buyer agents can see the commission sellers are offering when they look at the Multiple Listing Service, the industry database brokers use. There is a ‘compensation’ field. That field will go away, as part of a deal that the National Association of Realtors reached to settle a class action lawsuit filed by home sellers. They'd alleged the industry group conspired with real estate companies to fix prices. By August 17, listings on the MLS won't include that ‘offer of compensation,’ Mantill Williams, NAR VP of communications, told Axios in an email. The idea, per the settlement, is that buyers should be paying their brokers. That's because when sellers pay the buyers' broker, the latter's interests aren't aligned with their clients.”
“Consumers can still pursue arrangements in which the seller pays both broker fees, ‘through negotiation and consultation with real estate professionals,’ says Williams. The powerful industry group added that it's been ‘proactively communicating’ with stakeholders to prepare for the changes.”
“Brokerages are also looking for workarounds — a way to make it clear that sellers will pay a commission to buyer agents, maybe on a brokerage's website. Seller agents could also start spelling out the commission in another field in the home listing, says Steve Brobeck, senior fellow at the Consumer Federation of America.”
“They'll write out something like ‘3 percent of sales price,’ and ‘everybody will know what that represents,’ he says, adding that it's not clear if that would be permissible. ‘These issues are not resolved yet.’” READ MORE
MANAGEMENT
Ben and Jerry still believe supporting a cause is good business: “Ben Cohen and Jerry Greenfield are about as well known for their progressive politics as they are for quirky ice cream flavors like Chunky Monkey and Phish Food. Their experiment in melding business with social justice for years seemed like a model to which many in the corporate world were warming up. And then attitudes cooled. Some businesses have started to put less emphasis on the kinds of social and political issues that Ben & Jerry’s has championed. Certain investors have urged corporations to stick with what they know best. For their part, the lifelong friends, both now 73 years old, say their style of corporate activism isn’t bad for business—just the opposite.”
“Cohen and Greenfield say the brand is now at a crossroads after parent company Unilever said in March that it would spin off or sell its ice cream division, a move interpreted by some as the culmination of a failed experiment in mixing progressive politics with big business.”
“While Ben & Jerry’s has for decades worn its heart on its sleeve, some of the brand’s political pronouncements in recent years have angered certain consumers and investors. Cohen believes this is at least partly the reason for its owner’s decision to part ways. For Unilever, ‘Ben & Jerry’s creates a lot of problems,’ he says. Cohen and Greenfield, who still count as Unilever employees, say the upset is worth it.”
“The founders shared internal sales data with The Wall Street Journal that showed the brand had logged stronger sales growth than its parent’s broader ice cream business in three of the past five years. Neither side disclosed profit figures.” READ MORE
THE 21 HATS PODCAST
This Is Not How This Ends: This week, we bring you what we’re calling an Entrepreneurial Fish Bowl with Chris Hutchinson. As you may remember, we recorded one of these at our 21 Hats Live event in Fort Worth, where I shared some of my challenges trying to build 21 Hats and got feedback from the group. We recorded that conversation and turned it into a podcast episode. This time, we’re doing the same thing except it is Jaime Echt, founder and CEO of The Crafters Workshop, who explains her challenges to a virtual group of 21 Hats entrepreneurs. As you’ll hear, Jaime’s challenges are real: Her sales are down. Her customers are aging. Her lease is up. And she’s not sure what she should do next. We’re going to see if a group of 21 Hats Founding Members can offer some support and advice.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren