When Private Equity Comes for Your Industry

When PE got interested in veterinarian businesses, Dr. Randy Spencer decided to reject the offers and sell his business to his employees.

Good Morning!

Here are today’s highlights:            

• Those companies relentlessly promoting ERC tax credits are making a fortune.

• Gene Marks says Intuit needs to explain how its use of AI will actually help its small business customers.

• The owner of a travel business has been devastated by extreme weather, but now he’s trying to make it work for him.

• Bass Pro Shops understands something other retailers seem to have forgotten.

THE 21 HATS PODCAST

In this week’s bonus episode, Dr. Randy Spencer talks about the changes that have been roiling vet businesses: For one thing, that pandemic puppy boom has brought additional stress to veterinary workers who had already had more than their share. For another, there’s been a wave of corporate money and private equity flowing into the industry. That sounds as if it could be a good thing, and Spencer says he’s been dodging a constant series of acquisition inquiries for years. But the big money has engendered considerable turnover and disruption, and in response, Spencer decided to sell 100 percent of his business, 1st Pet Veterinary Centers, to an employee stock ownership plan in 2021. The transition to an ESOP remains something of a work in progress, in part because veterinary people tend to be more focused on pets than they are on profits.

• “Veterinary medicine,” Spencer says, “is just the best profession in the world. In a way, it's a service industry, but we get to serve pets. That's why veterinarians get into it.”

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

TAXES

The Wall Street Journal weighs in on the ERC sales industry, a modern day gold rush: “Congress designed the ERC, a less-well-known cousin of the Paycheck Protection Program, with a focus on keeping workers attached to employers. The ERC expired in late 2021, but the window to claim the credit by filing amended tax returns is open until April 2025, fueling aggressive marketing efforts, often from firms that didn’t exist a few years ago. Emails, texts and broadcast ads trumpet promises to help employers secure up to $26,000 per employee. Whether employers actually qualify under the law is what’s tricky; the answer depends on each situation.”

• “The IRS doesn’t comment on specific companies but has warned about fraud and overstated claims. ‘The amount of misleading marketing around this credit is staggering,’ IRS Commissioner Danny Werfel said in July. ‘This was not how the law was intended to work.’”

• “Bottom Line’s founder, Josh Fox, 46, has promoted his ERC business with the help of online videos that mix motivational speeches and the prospect of wealth. ‘You would make $1.3 million if you can bring 100 clients to us in a two-year period,’ Fox said in one video as an off-camera aide punched numbers into a calculator. ‘This is your opportunity.’”

• “Another video shows Fox fanning a thick stack of envelopes that, he said, contain IRS letters confirming clients are getting the ERC. ‘This is the modern-day gold rush,’ Fox said in a third video. Bottom Line’s affiliates don’t need to fill out tax forms or persuade customers to shell out cash. The rep connects the client with Bottom Line. The firm collects its portion only after the IRS sends a refund, then it pays commissions to the affiliates.”

• “Bottom Line typically keeps 15 percent to 25 percent of IRS refunds, then passes on roughly 10 percent of its fee to affiliates who make client introductions. Affiliates can generally earn an extra 5 percent of Bottom Line’s fee on deals made by other affiliates they introduce to Bottom Line, according to an online video.” READ MORE

POLICY

A proposed rule would make millions more workers eligible to receive overtime pay: “Restaurant managers, store supervisors, and millions of other salaried workers would be eligible for time-and-a-half pay if they log more than 40 hours a week, under a rule proposed by the Biden administration. Workers who make around $55,000 a year or less would be eligible for overtime by default under the plan—extending eligibility to 3.6 million more workers, the Labor Department said Wednesday. The proposed rule would raise the annual salary threshold from the current $35,568 a year, set at the start of 2020.”

• “The department also said it wants to start automatically raising the overtime salary threshold every three years to reflect current earnings data.”

• “In the first year, the rule will cost employers $1.2 billion to implement, the Labor Department estimates. In addition, the rule will boost wages by $1.2 billion. ‘It’s going to raise the cost of doing business,’ said Michael Layman, senior vice president for government relations for the International Franchise Association.”

• “‘It may be less important than anyone thinks because one of the things we have seen is the tightening of the labor market,’ said Daniel Bachman, an economist at Deloitte.” READ MORE

HUMAN RESOURCES

Suddenly, fewer small businesses say they have job openings: “The net percentage of small firms boosting worker pay fell 2 percentage points to 36 percent, matching the smallest since May 2021, data from the NFIB showed Thursday. That’s down markedly from a record high of 50 percent at the start of last year. At the same time, 26 percent indicated plans to raise compensation in the next three months, the largest share this year. The drop in the share of businesses with open positions to 40 percent suggests labor-market conditions are easing, though vacancies continue to hold above pre-pandemic levels. Overall, 59 percent of owners reported hiring or trying to hire this month, a decline of 2 percentage points.” READ MORE

The evidence suggests Americans really do want to work: “This summer, headlines and TikTok videos proclaimed that all Gen Z wants are ‘lazy girl jobs’ where they can ‘quiet quit’ and are allowed ‘bare minimum Mondays’ at home in their pajamas, spent messaging friends and snacking. Ignore this. It’s not based in reality. The truth is Americans are rushing back to work. More than 3.1 million people joined the labor force in the past year, meaning they landed a job or are actively searching for one. Those are historic gains — and a big surprise given most experts were predicting a recession and massive layoffs. Americans are also working just as many hours as they did pre-pandemic.”

• “The labor force participation rate of ‘prime age’ workers (24 to 54 years old) is the best since 2002. Prime-age women’s labor force participation is the best ever. Black unemployment is near an all-time low, and the number of immigrant workers is up about 10 percent vs. pre-pandemic.”

• “Labor force participation among 16- to 24-year-olds has fully recovered from the pandemic, and participation among teens in the past year has been the highest since 2009. The trend in the United States is even more notable given how China is struggling with record levels of youth unemployment.” READ MORE

SMALL BIZ TECHNOLOGY

Gene Marks says that Intuit is promising more AI transformation than it’s delivering: “Let’s take QuickBooks as the example. All of my clients suffer from erroneous data. They need help ensuring that the information that gets into their QuickBooks system is complete and accurate, updated and reliable. How will Intuit do this with AI? Better and more intuitive importing? A more reliable method and interpretation for scanned invoices, receipts and other documentation? Data entry by voice? Speaking of voice, everyone needs faster and more reliable analytics but few of my clients know how to get the information out of QuickBooks that they need to run their businesses. Most of them have to wait for that information to be available and then it’s still being delivered in very old-school ways like PDFs and spreadsheets.”

• “Future iterations of AI — like AutoGPT — should be able to use that data to automatically perform tasks — reorder inventory when low, alert when a sales rep isn’t making quota, prompt a customer for a new order, initiate invoices, create and post recurring journal entries based on past history, instinctively match cash receipts with open invoices, automatically complete and file tax returns, independently reply to requests from customers, suppliers, even the government.”

• “Right now there are some excellent third-party products that integrate with QuickBooks and aim to fill this AI void. For example, Bill, Vic.ai, ScanWriter, and Expensify use AI to systemize data entry and process transactions. Booke.ai automates bookkeeping and Grabb not only sends alerts about changes in customer purchasing behavior but provides recommendations about supplemental or add-on products that could be sold and in what time period.”

• “That’s great, but with all due respect to those companies, dealing with other parties creates complications and support issues. We want this coming from our main software provider, QuickBooks, and not through integration with someone else.” READ MORE

FINANCE

Ami Kassar says higher interest rates should not necessarily stop you in your tracks: “No crystal ball will tell us where rates will be in a year or two. We are living in unprecedented times as the world recovers from the economic shock of Covid. There is no playbook to determine what comes next. As I think about this challenge, I am reminded of the day after Russia invaded Ukraine in February 2022. An entrepreneur canceled a call with me to discuss his expansion plans and needs. The world seemed too unsettled for him based on the new war, and he decided to put everything on pause. And now, some 20 months later, the war continues, but the world goes on—except his business is still in the same place.”

• “If the numbers for your project do make sense at today’s rates, I encourage you to consider proceeding with the investment.  And if the numbers don’t pencil out the way you’d hoped, you should pause and recalibrate.”

• “The business cases for expansion are tougher to make with higher rates—for capital, labor, anything else—and they should be. But this doesn’t mean that every scenario is dead. Maybe you should scale back your plans or proceed in stages. READ MORE

THE ECONOMY

For businesses dependent on summer tourism, extreme weather is the new pandemic: “For Steve Silberberg in Saco, Maine, who runs Fitpacking, a company that guides people on wilderness backpacking trips in national and state parks and forests, extreme weather is becoming a serious obstacle. National Park Service Research has shown that national parks are experiencing extreme weather conditions at a higher rate than the rest of the country because of where they’re located. Historic snowfall in March at Yosemite—followed by a wildfire—affected one hike Silberberg had planned.”

• “He had to cancel a trip to the Los Padres National Forest in California due to wildfires and subsequent flooding, which destroyed trails and made them impassable. ‘We are quickly approaching a crossroads as to how to keep the business viable,’ he said. ‘It seems that almost half of our trips are affected in some way by increasingly extreme weather events.’”

• “Silberberg is trying to find ways to make climate change work for him, however. He is thinking about starting a company that helps people visit places that may disappear due to climate change, such as Glacier National Park in Montana or the Everglades in Florida, which is threatened by rising sea levels.” READ MORE

PROFILE

Needing to heal, Marissa Engoy turned to caring for plants and building a business: “Twelve years ago, Marissa Engoy, owner of the plant business Good Morning, Cactus, suffered a miscarriage. For days, she struggled to get out of bed. That’s when a friend brought her some succulents as a gift. She’d never seen a succulent before that day, but was drawn to their adorable, chubby, cartoon-like appearance. ‘I never really cared about plants before, but suddenly I cared about these ones with all my heart,’ says Engoy, 42. ‘I needed them to survive.’”

• “She began posting photos of her arrangements on social media. Her posts gained some traction, and the Torrance resident found herself immersed in the online plant community. For a couple of years, she sold plants and arrangements on Etsy and at local markets in Los Angeles and Orange County.”

• “Engoy’s parents got married in their home country of the Philippines in their early 20s and immigrated to the U.S. soon after in 1975. They started a catering business in Gardena when Engoy was in elementary school. Engoy remembers serving punch at weddings and putting toothpicks in fruit and sandwiches with her siblings to help out with the family business.”

• “‘I remember watching my parents and having so much respect for them,’ Engoy says.” READ MORE

RETAIL

Bass Pro Shops can teach other retailers an important lesson: “The Bass Pro Shops is bigger than you think it will be. This is true of all of the outdoorsy retailer’s locations, but it’s especially true of the one retrofitted into a 32-story metal pyramid on the banks of the Mississippi River. Located in downtown Memphis, Tennessee, the mammoth structure once held an arena for the NBA’s Memphis Grizzlies. Now it houses the largest Bass Pro Shops in the world, a hunting-, fishing-, and camping-gear store that has been merchandised with Disney-level production values and expanded to encompass a hotel with more than 100 rooms, a wild-game-themed outpost of the Wahlburgers restaurant chain, several enormous lake sturgeon swimming in shallow pools between departments, and at least three live alligators, among other things.”

• “Around the turn of the previous century, well-stocked, well-staffed commercial cathedrals sprang up in American cities, delighting a new consumer class. Stores such as Macy’s, Wanamaker’s, and Marshall Field’s not only sold stuff but also positioned themselves as centers of city life, with in-house restaurants, lavish concerts and entertainment, even free child care. Today, most of these stores no longer exist.”

• “The department-store dinosaurs died out for a whole host of complex reasons: the rise of Walmart and Amazon, the economic decline of their middle-class customer base, ossified corporate management, private-equity strip-mining. The most recent tale that retailers have been spinning about their own demise is that of consumers’ widespread preference for online shopping. But that theory doesn’t exactly stand up to scrutiny.”

• “As I wandered contentedly over the wooden-plank walkways in the Bass Pro’s fake forest, alongside crowds of shoppers with armfuls of soon-to-be purchases, it was hard to ignore one problem that retailers are loath to acknowledge: Going to a store that’s actually good at being a store is all too rare.” READ MORE

Thanks for reading, everyone. — Loren