When a Valued Employee Departs

You’ve invested thousands of dollars in training for a key employee who decides to leave. What do you do?

Good Morning!

Here are today’s highlights:            

• Ben Clymer turned a blog into a watch empire—and then the market collapsed.

• Michael Girdley analyzes a $4.6 million listing for an ecommerce business that sells blue-collar workwear.

• Ami Kassar offers some advice on structuring a sales agreement.

• Small businesses could lose an important bankruptcy option.

PUBLISHING SCHEDULE

The 21 Hats shop is closing for the long weekend. We will resume normal publishing on Tuesday. 

MANAGEMENT

In this week’s video, Lou Mosca talks about responding to the departure of a valued employee: “I spoke with a contractor who shared a story about an employee who handed in a two-week notice. This employee had been with the company for more than 10 years but cited a lack of growth as the reason for his departure. This decision blindsided the contractor. Per the employee handbook, the contractor informed the employee that he was required to reimburse the business for two years' worth of training and educational expenses. This key employee was now expected to pay back several thousand dollars.”

• “Business owners invest in their employees by developing their skills, operational experience, and abilities. This is a necessary expense to provide better services and enhance our credibility with clients and within our industries. Is this contractor justified in demanding such a substantial repayment from his departing employee?” CONNECT WITH LOU

PROFILE

Turning a blog into a $100 million watch empire: “Ben Clymer, the founder of the watch website Hodinkee, is the closest thing that the wonky watch world has to a celebrity—the sort of guy collectors would stop on the street to take a selfie with. His personal Instagram is peppered with gold watches, vintage Porsches, and photos with celebrities like Lenny Kravitz. A former project manager at UBS, in 2008, Clymer turned his passion for watches into a chatty blog where he could spotlight watchmakers and opine on the latest Omegas. The site blossomed over its first decade. It published a glossy print magazine and launched a successful YouTube series featuring famous watch collectors like Kevin Hart, Aziz Ansari, and Andre Iguodala. Soon, Hodinkee was hosting champagne-filled parties with Omega and collaborating with John Mayer on collectible watches that sold out with the speed of rare Nikes.”

• “By 2020, Clymer said Hodinkee was generating around $25 million through ad sales, events, a watch insurance program, and a small online shop. The next stage was driven by a question: Would people who read about $50,000 watches on Hodinkee buy them there, too?”

• “When online luxury shopping boomed amid the pandemic, Hodinkee rode the wave, pocketing $40 million from investors including Mayer, LVMH Luxury Ventures, the Chernin Group, and Tom Brady. At that point, Clymer said, the company was turning a profit and the investors valued it at more than $100 million.”

• “‘I don’t want to say we were chasing it,’ said Clymer, during an interview in Hodinkee’s Manhattan office last month. ‘But again, we’re looking out the window and I see it’s sunny, I’m not going to put on a raincoat. It’s no different than that. We saw what was happening in the market and we went for it.’ In December 2021, the company set a goal of $141 million in revenue, according to a board presentation.”

• “Then, in early 2022, the rains came. Prices of pre-owned watches started declining: After hitting a peak in March 2022, they fell nearly 30 percent by the end of that year, according to the WatchCharts Overall Market Index, which tracks resale prices over 60 high-end timepieces. It has since only dipped further.” READ MORE

BUYING  A BUSINESS

Michael Girdley analyzes a business listing for a workwear brand that claims $4 million in revenue and is asking $4.6 million: “First, this is a great market to tap. Rural America gets ignored by a lot of ecommerce, and that makes for an underserved market. And 38 percent net margin is great. Obviously, I’d want to make sure that’s sustainable, but it’s a pretty fun place to start from. The numbers look good right now, and I like that they’ve been around a while. Seven years is pretty long in ecommerce time. For someone with other ecommerce going on (read: not me), this seems like a pretty good business to roll up into your existing operations!”

• “‘I’m wary of anything that costs ‘price plus inventory.’ As Heather pointed out on the pod, the price you pay should include the things you need to run your business. And the elephant in the room: if you’re coming up with cute sayings and graphics, how do you protect that IP? This is TikTok we’re talking about here. Your stuff is going to get ripped off.”

• “Overall, I’m really concerned about the durability of a business like this. It seems like it’s going to be a race to the bottom against Chinese knockoffs copying my every move.”

• “What I’d ask: First, I’d definitely want to know the mix of apparel vs sticker inventory. Stickers are easy to store, easy to ship… but apparel can leave you with a lot of dead stock in weird sizes. Next: what are these sticker designs? I’d want to be sure they’re not trampling all over copyright with stuff like Disney or Simpsons characters. That’s a nightmare waiting to happen.” READ THE LISTING

SELLING A BUSINESS

Ami Kassar on structuring a sales agreement: “I think it’s crucial to consider any payments that don’t come in the form of cash at the closing table as a bonus. While the note or the equity may seem enticing, it’s important to remember that there is no guarantee the payment will ever come. When you sign the sales agreement, you relinquish control of your company and are now at the mercy of the new owners and their judgment. Or to be blunt, the new owners could mess up your company and the promised upside may never come—no fault of your own.”

• “If you agree to accept some of the purchase price in a note that is paid over time, this loan will most likely be subordinated to the primary lender. So if the company gets into trouble, the primary lender’s rights will trump your rights. We have seen instances where these notes get extended or eventually forgiven because things change, and the company can’t afford to pay them.”

• “If you are selling to a public company (or, in some cases, even a private one), they may try to offer you their stock instead of cash. Remember that there are no guarantees about the stock’s future performance, irrespective of how tempting the buyers make it sound.” READ MORE

POLICY

Small businesses will lose a bankruptcy option if Congress doesn’t act: “Small businesses will be left without a useful Covid-era bankruptcy tool when it expires in the coming weeks — a development occurring just as bankruptcies are on the rise. The program, called Subchapter V, was created to enable businesses with less than $2.75 million in debt to go through the Chapter 11 bankruptcy reorganization process in a streamlined way. In March 2020, as the pandemic took hold across the country and worldwide, Congress raised that benchmark to $7.5 million, allowing many more businesses to use the Subchapter V option. The upper limit reverts to $2.75 million after June 21 unless Congress once again extends it. It's been extended twice previously.”

• “The cost, speed, and efficiency of the Subchapter V process compared to a traditional Chapter 11 filing also allows smaller businesses to continue to operate during the process — something that is harder through the standard Chapter 11 process.”

• “The deadline looms as the Subchapter V bankruptcy option has seen more takers. In fiscal 2020, there were 1,118 Subchapter V cases. That number increased to 1,986 in fiscal 2023, and there have been 1,502 in fiscal 2024, according to data from the U.S. Trustee Program at the Department of Justice.”

• “So what happens if the deadline lapses and more small businesses have to go through the standard Chapter 11 process? ‘Either they will struggle through a Chapter 11 process and spend more time and money than they should have, or they will end up liquidating in Chapter 7,’ Carson said. ‘That's a bad result. That means a business went away.’” READ MORE

A bill that would have required non-bank lenders to disclose APRs died in the Illinois House: “Known as SB2234, it had strong support by a large coalition of advocates representing more than 250,000 small businesses and it passed the state Senate on May 2 by a vote of 36-19. But on Monday, the House Financial Institutions Committee didn’t call the bill for a vote. The committee gave no explanation for its decision. A prior version of the bill also died in committee last year.”

• “‘No plausible reason exists for denying small businesses this basic protection,’ said Brent Adams, senior vice president at Woodstock Institute, a policy and research nonprofit in Chicago. ‘It is high time we close the APR disclosure loophole and empower small businesses with the information they need to protect themselves.’”

• “While non-bank loans to small businesses have grown rapidly in recent years, nonbank commercial lenders aren’t required to disclose APRs to borrowers. These lenders sometimes charge more than 300 percent  interest — levels that advocates say are predatory. Nonbank lenders are also not required to be licensed.” READ MORE

LOCATION, LOCATION, LOCATION

Businesses in D.C. blame the federal government for empty offices: “Almost all U.S. cities have been hit hard by workers turning away from downtown offices, but few have been hit harder than Washington. The International Monetary Fund recently identified Washington as one of the three American cities with especially weak commercial real estate sectors. But unlike the other two, Seattle and San Francisco, Washington is not a technology hub but a company town that relies on a single employer to a degree not seen elsewhere. The local economy is powered by about 160,000 federal workers in the district, who are only now slowly returning to their workplaces from their suburban home offices. Last fall, an annual survey of 625,568 federal workers found that more than two-thirds were still working remotely some of the time.”

• “Nina Albert, the district’s deputy mayor for planning and economic development, said working with the federal government to persuade workers to return to the office was a ‘challenge.’ ‘We would like the federal government to make a more concerted effort to have people return to office because we think it’s better for the federal government — as well as better for us,’ she said.”

• “Those dynamics have put real estate companies and local businesses at odds with the federal government. The businesses said the thousands of federal workers still sitting in their suburban home offices were hastening Washington’s fiscal and social decline. ‘The federal government is now a drag rather than a benefit to the district,’ said Steven Teitelbaum, a former real estate lawyer who now teaches at American University.”

• “Muriel E. Bowser, the mayor of Washington, has a plan to invest $400 million to increase the downtown population by 15,000 as a way to resuscitate the city. The plan calls for a more pedestrian-friendly streetscape, and for easing regulations for small businesses and housing developers. Building owners are also getting creative. A vacant building on M Street was recently the site of an art fair.” READ MORE

VENTURE CAPITAL

Wasn’t Silicon Beach supposed to be the next Silicon Valley? “High atop a Century City tower with floor-to-ceiling views of the Westside, a group of venture capitalists, other investors and startup founders picked at charcuterie boards, sipped drinks and debated the future of tech ventures in the Los Angeles area. The mood was upbeat. L.A. is a sleeping tech giant, they said, home to a diverse range of successful companies, including  dating app Tinder, Riot Games and Hawthorne-based SpaceX. But when the subject turned to the once-hyped Silicon Beach, there were grimaces. ‘We don’t need to be the Silicon of anything,’ said one attendee. ‘It does L.A. a bit of a disservice,’ remarked another. It’s a delicate subject among investors and local tech entrepreneurs — for good reason.”

• “What happened? During the pandemic, tech investment surged and reached a peak in 2021, as newcomers entered the market, hyped by cryptocurrency, blockchain and the metaverse. Then reality set in. The 2022 Russian invasion of Ukraine, interest rate hikes and the collapse of the currency exchange FTX fueled fears of another tech bubble and cooled investments in startups.”

• “‘When everything kind of flips, you have many of these investors pulling back, retreating, writing smaller checks, and a lot of the access to capital that tech companies had for years gets restricted pretty quickly,’ said Alex Lee, research editor at CB Insights. ‘We’re still in the fallout period of that.’”

• “L.A. also has struggled to compete with Silicon Valley in the burgeoning area of artificial intelligence. Some of the biggest players in that space — Anthropic and OpenAI, creator of ChatGPT — are based in San Francisco. In the first quarter of this year, L.A.-based startups drew just 1 percent of all AI funding in the U.S., Lee noted. ‘L.A. has nowhere near as much AI activity as hotbeds of activity like Silicon Valley or New York,’ Lee said.” READ MORE

THE 21 HATS PODCAST

How to Waste Money on Marketing: It’s easy! Anyone can do it! This week, Shawn Busse, Jaci Russo, and William Vanderbloemen talk about a whole slew of marketing challenges. From strategizing for trade shows, to whether your logo has to tell a story, to understanding what constitutes a brand, to whether that iPad ad Apple pulled was terrible or brilliant, they discuss what makes marketing so difficult. It all starts, Jaci says, with the industry’s refusal to set standards: “I can't find another industry that treats themselves so badly. Electrician, CPA, Realtor, hairdresser, nail salon tech, everybody else has some semblance of something to say, ‘I am a legit entity.’ Except our industry.” Which is part of the reason, Jaci says, that the constant refrain she hears from frustrated business owners who hire agencies is, “We paid them all this money. And we got nothing for it.”

• Plus: how do owners get past that feeling that they need to be the hardest worker in the office, the first one in and the last one out?

• You can subscribe to the 21 Hats Podcast wherever you get podcasts.

Thanks for reading, everyone. — Loren