About the Host
Ryan is an entrepreneur, podcast host of the show Life After Business and the co-owner of Solidity Financial. Having personally experienced the hazards of selling a business, he joined up with his friend Brandon Wood to educate others on the process. Through their business (Solidity Financial), they provide a platform for entrepreneurs called Growth and Exit Planning that helps in exit planning, value building and financial management.
About the Guest
Michael Kaplan spent most of his 20s thinking he would go into some sort of law practice. However, he found himself partnering with a friend to purchase ZeroRez. After a few stumbles and lucky economic breaks, Michael and his partners were able to scale the carpet cleaning business to 18 million dollars. He currently works with Red Hook Investments, a firm that specializes in turnarounds, private equity, and cash infusions. Tune in for the second part of this interview to hear Michael’s complete story.
If you listen, you will learn:
- Michael’s early experience in startups, law, and how he wound up in the carpet cleaning business.
- What the purchase of ZeroRez looked like and why it was a bad deal.
- The mistakes that Michael and his partners made early on.
- How the 2008 housing crisis worked in ZeroRez’s favor.
- The radio budget and how it transformed the business.
- The things Michael thinks made the company successful.
- The hiring mistakes that ZeroRez made early on and how they corrected them.
- Why investing in good people can help you fix outgrown SOPs.
- How Michael shifted his mindset to a value-based one.
- The cliffhanger for part two.
Full Transcript
Announcer: Welcome to Life After Business, the podcast where your host Ryan Tansom brings you all the information you need to exit your company and explore what life can be like on the other side.
Ryan Tansom: Hey everybody, and welcome back to the Life After Business podcast. This is episode 135 and the next two episodes are a special two part series because usually when I interview entrepreneurs who have grown and sold a company, I have about an hour to interview them and to dive into what they do for their business, their journey, some struggles, and some key highlights about their exit. And it's very difficult to really dive into how they grew the business and then the complications and or successes through the technical exit. So as I was having a conversation with Michael Kaplan, who is the guest today, and on the next episode who took Zerorez, which is a carpet cleaning company from 300 grand in revenue to $18 million in sales and revenue over the course of a little over a decade. I was like, you know what? I have to understand for my own curiosity and for the listeners how he and his partner scaled that business successfully like they did.
Ryan Tansom: And then the second part, which is next week's episode, is the technical complications and tension and really in-depth story that he was more than comfortable sharing about his partnership and his exit that he eventually had from the business. So today's episode is the growth and the scaling of Zerorez that might go and his partner did, how they did it, why they were able to take some radio ads in the financial crisis, and then blow the roof off of their business. And then next episode, next week will be all about how he and his partner and their complications and their disagreements turned into Michael's eventual exit. So if you're really curious on how you can take a carpet cleaning company from 300 grand to 18 million and some of the technical things that Michael did to actually scale his business, tune in today. And then if you want to know more about his exit and how he ended up using a shotgun clause, which is called a Mexican standoff, in order to exit his partnership, then tune in to next week. Without further ado, here's Michael Kaplan's story and how he grew Zerorez.
Announcer: This episode of Life After Business is sponsored by GEXP Collaborative. Their proven process gives you clarity on all of your exit options and how those options impact your financial success, timing and future happiness. Sell your company on your timeframe to the buyer of your choice at the price you want.
Ryan Tansom: Morning, Michael. How are you doing?
Michael Kaplan: Fantastic. How are you Ryan?
Ryan Tansom: Doing good and looking forward to this show. We got introduced through a mutual friend, I think it was Lucas, wasn't it? From Bank of the West.
Michael Kaplan: Oh yeah, it's always a banker.
Ryan Tansom: Yeah, right. They're all in. They're always out hustling and that. And so what I wanted, you know, what we're going to be doing here is a couple, a part series because you have a awesome story about how you grew the business and then you also have a very interesting exit story that we'll be covering in the second round. But you know, as you and I were talking, I think you know, what you did in the services businesses to actually scale is unbelievably interesting because I think you and I have both been in can peer groups and you know, these uh, uh, the round tables and everybody is always wondering how do I grow? And I just did a recent episode with a gentleman that was really diving into sales. And I think it's really interesting because I think there's so many people, especially in today's world with digital marketing and all the different ways that these, that entrepreneurs want the silver bullet to grow. And I think your story is going to be fun because a lot of people gonna learn a lot. So maybe give everybody a little bit of background. How did you become an entrepreneur? How did you jump into it? Because your story about how that and how you jumped into it as interesting as well, and then we can hit the ground running.
Michael Kaplan: don't oversell what the word interesting, but I'll, I'll do what I can. I think from an early age I knew I wanted to be in business. I didn't quite know exactly what that meant. And I just, you know, I was the guy buying baseball cards and you know, reselling them to friends and you know, bringing in packs because I could go to the store and I'm trying to, I had a side hustle before there was a side hustle, I guess. And I just, you know, from thinking about starting up a screen printing company in ninth grade to kind of explored it more in college. I just knew that I wanted to go out and build stuff. And so where that took me, did I tell you about Jimmy John's?
Ryan Tansom: I don't know if you did actually. Huh.
Michael Kaplan: Okay. So every time we talk we'll peel back one of the onion that, let's assume that I'm a pathological liar. So in college, um, I, I spent a summer working in Boston and I worked at a sandwich shop, uh, kind of cool area of Boston, a while I had a non-paying internship at Tufts University. Uh, which was the reason I was Boston. And, um, were you at that sandwich shop? I realized what I really love Jimmy John's. I'm kind of a sandwich junking at that I could open up the Jimmy John's in Boston. So pick a, the city with, you know, top five highest rent, um, in, uh, one of the dumbest industry stacks Uh, plan on with the highest failure rate. Of course. It's a great idea. So I ran toward that, bring in four years. A buddy of mine was a partner, Huh? Partner. I did air quotes and realizing we're just doing audio, but Ryan got to see my air quotes. Sexy air quotes. So I ran toward it and I kind of lucked out because contemporaneous with me realizing that it was a horrible idea that I was underfunded and destined for failure.
Michael Kaplan: Jimmy Johns changed there, uh, financing requirements. They wanted me to fully collateralized eight stores before opening first because they had run into a guy, I think in Austin, Texas. Who, he, he opened one store and you couldn't open the second because, you know, uh, no bank loans. So we came up couple million bucks short. But what, what I realized was, and the, you know, it's fun telling a story where you know, it's going to be edited out of the podcast is a boring. Um, but, uh, the fun part was, you know, I realized that I was ill-equipped to open a Jimmy John's because yeah, it was, it was a 20 year old and uh, undercapitalized but I got stuck on the question, what if my tomatoes don't show up? And I'm sitting there thinking, well, I'd probably have a contract to buy a certain type of tomato from a certain vendor and I probably have a contract saying I need use a certain type of tomato with an approved vendor. If they don't show up, you know, how do I, my breaking my franchise agreement, am I breaking my distribution agreement with the vendor?
Michael Kaplan: You know, how do I want to put tomatoes on my damn sandwich? So the tomato question stumped me, which led me to law school. Um, I looked at should I get a JD or an MBA where JD MBA and just be in school forever, uh, decided on a JD as an alternative to an MBA, not to practice law and because that would be a horrible, um, but I, I come from a family of attorneys. They're the good type. They, they work on fun stuff rather than go chase an ambulance and suing people, my dad was in M&A for years, bought and sold cool things. Uh, uh, my brother closest in age is the, the tax attorney, not income tax but international reach and you know, dealing with, you know, Abu Dhabi and like crazy… he's the ssmart one. And then the other brother does real estate in general practice stuff. So I kind of knew, okay, these are smart guys doing cool things and they're really in tune with the business community. Maybe I could get that Mojo and just apply it for good rather than evil. So that led me to law school. Um, and I kind of had a sense of, you know, I thought I wanted to build something. I thought I wanted to do a startup, not entirely knowing what a pain in the butt that was. And I in writing a handful of business plans and destroying a handful of business plans on the, uh, one of the more successful things that we never did was bite squad. Um, we called it, bring me some candy dammit.com. Um, it was delivery of anything anywhere, anytime, but it was pre drones. So it was uh, not by so realize okay to heck with startups.
Michael Kaplan: Let's, let's get into m and A. Um, let's, um, let's start in private equity. Even though I, I probably didn't have the verbiage or the, the full on sense of what that was going to look or feel like, but had a partner and his brother was a carpet cleaner. Um, and he had gone hunting a guy in real estate too. They found out a couple of weeks later that he was looking to buy a carpet cleaning company. So I looked up, uh, my friend's brother and said, hey, you know, can you help needs that? This company, they got this cool water technology, want to see if it's the real deal. This company called Zerorez cleaning, very few carpets in Minnesota. They had three trucks to employees and maybe doing about 20 to 25,000 bucks a month. So they were losing just a little bit of money, but the business model was completely upside down. So they send the carpet cleaner, not the business guy out to vet the opportunity. And he says, oh, it's the best thing ever, right? Business model.
Ryan Tansom: Who cares about money?
Michael Kaplan: Cares about money, and you know, are these structures, sturdy and shit. So he says, well, the real estate guy says to the carpet guy, will, do you want to run this thing? I'm going to buy it. And do you know anybody who would want to invest or help operate or whatever? And he said, well, my, my brother and his idiot friends, uh, are looking to buy something. Maybe we'll bring it in. And so we talked about in, uh, over many, I happy hour, uh, decided we were going to take over the world in the carpet cleaning industry. So one one carpet at a time. So success for us was going to be know let's get to five trucks, we'll get 10 or 15 employees.
Michael Kaplan: And I wanted to operate for maybe three years because if I'm going to go out and do turnarounds, buy distressed assets, I probably should figure out how to run a business first. Right. You know, add some credibility and authenticity when I say, Oh, you should go left instead of right. You know, because I've done it. So going into my last year of law school, we bought the company. We had those two employees, three trucks and inherited a radio budget. Uh, they were buying local radio for maybe 3000 bucks a month and on one station,
Ryan Tansom: One sec, Michael. I'm curious cause I want to definitely go into the radio stuff, but I'm curious like, so it was you, the real estate partner and then so what was the actual partnership structured set up?
Michael Kaplan: Sure. So there were four of us. The carpet cleaner, Ryan, you're in good company was a sweat equity partner. He was going to be the general manager. His brother who I was trying to start a business with, Sean was a sweat equity partner and I came in as a capital partner, uh, as well as uh, getting a little bit of sweat equity and I took a discount on my cash day one because I didn't have to personally guarantee anything. Jim, uh, the guy who found the opportunity and kind of spurred the investment, the real estate guy, he had a development company, so he's doing big housing projects. He had a flipping company, he had a rehab company and a residential real estate company and a title company. So he was in really deep and real estate in 2006. We'll, we'll put an asterix by that one because, uh, things changed a little bit and note that my equity took a discount because I didn't personally guarantee anything in 2006.
Ryan Tansom: We'll be getting to that too. What did you pay for a business that was 25 grand a month in revenue and losing money?
Michael Kaplan: Hundreds of thousands of here was the concept. And it's got this, it's a free charge. That's right. So you think of a franchise, you think of subway, they're going to tell you how much you need to put on the sandwich. I'll tell you how much you know where to put your location, where to buy your tomatoes, where to buy your names. Maybe they're going to give you a business in a box because in theory they've made a lot of sandwiches, right? They've done this before. So these guys that started Zerorez, they were very well intentioned, very upstanding citizens I think. Um, and yeah, there's water company that made this cool, had this water technology, these machines that took water and salt and electricity and broke it down into component parts.
Michael Kaplan: Repackages, NACL and h20 with electricity. So electricity, the molecules and the scientists listening can please excuse this explanation, but this is how many scientists are followers and listeners of the show line my pants off. And so you take this Nacl and h20, you repackage it because you've zapped it with electricity and you get two products. She get hypochlorous acid and sodium hydroxide. Hypochlorous acid. That's all that comes down to this machine. Two streams of water. One is like organic bleach, the other's like organic soap. So one is low PH, one is high Ph, good at killing stuff, good at cleaning stuff. They were trying to figure out what verticals can we sell this water into. And one of them had property management experience and said, well, you know, I met you. It cleans the heck out of carpet. So they started a carpet cleaning franchise.
Ryan Tansom: I never knew the background of that.
Michael Kaplan: It's, it's a, it's pretty sexy. So we come in and we're valuing, you can't value the revenue stream because it's all blue sky at that point, you know, they're not doing anything that's noteworthy. So we value the assets and we worked to secure most of Minnesota and western Wisconsin. So we bought territory to make it exclusive that we didn't need it to be exclusive, which was dumb awesome Mistake number one. Dumb because we paid way too much upfront. Awesome because once we blew up, we didn't have to renegotiate to carve out our turf. And two, we bought these massive silly trucks that the industry was cleaning with probably, you know, $40,000 trucks a week. We had $140,000 130,000 hundred trucks. And the concept, it's all because of the water, because we had to buy a bigger truck because we had to carry more water because they use this water.
Michael Kaplan: I said it's because of the water, because of the cleaning wand, the tool that spritzes down and sucks up the water. One of the pet project. So one of the founders was he wanted to use this special technology that would create like a tornado effect. So as the jets, this is also going to be edited out or your podcast. The jets, instead of spraying water outside of the vacuum chamber it, the jets were inside the vacuum chamber. So every ounce of water going down was pulled back up. So you had to spray it down harder, right? You had more pounds per square inch of pressure. So typical carpet cleaners use very little water because they would spray down at maybe 150 200 psi. We're spraying down at six, 600 plus Psi, like three, four times the rate because there's resistance, there's vacuum flow against the water. So we had to bring 400 gallons of water with us everywhere. So we needed these massive trucks. These trucks like literally were out cleaning a club in the middle of the night. The part of the truck, just fell in the alley. These trucks would catch on fire. I remember my partner, Sean's wife had a baby and I was on the phone with [unclear] and I hung up on the lady because the truck's parked outside of a window. I was sitting back and flames are just shooting out the top and I walk out and like four employees and one of the owners just standing out there and I said, guys, get fix it. No, you just got to let it burn.
Ryan Tansom: We got insurance.
Michael Kaplan: So, yes, we paid, we paid, you know, probably, um, 130% of the revenue for the thing. We went… Another brilliant move. We went back to the owner, um, prior owner who sold it to us because he had a note, uh, on, uh, part of, uh, the, the purchase price because the seller, uh, when we called him out on some misrepresentations, he fessed up to it and was like, okay, I'm not gonna Fight Ya. Yup. I lied. So because we found out pretty quickly in a turn, it was that we had bought vans and yeah, I mean it just paints all. So we go back to him and we said, listen, we're not going to pay you part of this suit. He said, okay. And we said, and the rest of it, we're going to pay you via a royalty. And he said, okay. And what that did was it freed up cash flow day one, but it increased the payment down the road because instead of paying them a fixed fee, we paid him a 2% royalty for a couple of years. And when we, you know, he sold us a company doing 25,000 a month when we're doing 250,000 a month, uh, we did not get the better end of that. Right, right, right. Um, but you know, it, it wasn't the dumbest thing we did spend money on dumber.
Ryan Tansom: I was going to save a little. So let's get into how you, how you got to those revenue numbers and we can go back to the radio because I think what you guys did with the radio in the time and the, the, the leverage that you had and what you pulled off is amazing.
Michael Kaplan: Well, thank you. Um, we, it required that the world collapse. Um, so, um, if when implementing this strategy, be sure to do it right after all liquidity in the market dries up because of a massive housing crisis. So when writer on that, just wait for it. So what happened was we, we inherited this radio platform buying talk radio station that wasn't really producing results. The average job acquisition was probably the cost was close to 200 bucks. So we had to have a 400, $500 job average. So we're out doing very expensive carpet cleaning for very few people to, uh, facilitate not firing a broken radio platform that we were on. So, um, what happened was we got some good press. We had pushed the, um, I'm sorry, my wife is texting. Did, can you still hear? Yeah. Okay, good. Glad she could make it into the podcast. Heidi says hi. So we, um, I pushed for about a year to get a PR piece put into the, um, the Star Tribune, the Minneapolis's big newspaper and um, finally, um, broken down, uh, a business writer named Dick Young blood who is kind of a heritage… He was the business section, uh, for many years and he, he did a piece on us that published September 11th, 2008.
Michael Kaplan: We bought the company September 18th, 2006 or two years in, I spent about a year trying to get the press out there and it was front page below the fold of the business section. I don't know if it was because it was September 11th or what happened, but we blew up. We had just moved a week prior and so our office wasn't really set up and we had one computer terminal that you could actually schedule a job on. It wasn't web-based. Um, it was, you know, we had software on that desktop and the phone started ringing and I was like, oh cool, it's 6:30 in the morning and you know, this article came out, maybe we got to this Mojo. Well, seven lines were lit up for probably seven weeks straight, seven days a week.
Ryan Tansom: That's so crazy from one piece of newspaper.
Michael Kaplan: It's a newspaper, like it's just one piece of press. So we, I thought the scope of the opportunity and the market was going to be, you know, we could run a couple of trucks and be cute. The biggest player was doing four and a half million bucks was Stanley steamer and we've all heard their commercials, they've got a jingle and all that fancy stuff and we're just as little carpet cleaning company, but we're, you know, it's green. Before green was really a viable thing. Like, there were plenty of green products out, but you, the assumption was you had to sacrifice quality to get green. And so we didn't lead with green. We said, "Oh, by the way, we're green, but we've got bad ass carpet cleaning that actually works." And people piled on and people just went crazy. So our business tripled overnight because all of a sudden, you know, we, we were recognizable. We've had a little bit of press.
Ryan Tansom: What did you do with your vehicles, I mean, did you have like seven more, $140,000 burning vehicles or what was the?
Michael Kaplan: Oh, it, well, at this point, the housing crisis and that happened, this is September, you know, the markets were skittish, but I will, I was a mid October, early October, Lehman fails and the world collapses. Um, so fast forward a couple of weeks and the world falls apart. We're still getting all these calls. We've got five vehicles and there's no credit anywhere. I mean, nobody's gonna lend anybody any money. Meanwhile, my partner had the housing company, the real estate brokerage, the title company. He was joint and several liability on $22 million in property development and it was 70% pre sold and went down to 0% presold because everyone backed out, because nobody could qualify for a mortgage for three weeks after, our company starts blowing up. So, um, so we, we realize, okay, Jim's going to be in some doo-doo because his world is collapsing, our world's blowing up. But what are we gonna do? How are we going to keep the momentum? And we had, we finally had some money in the bank and we said, well, look around the world, uh, this is probably October or November or December of '08.
Michael Kaplan: And we realize, well, all these other companies are pulling out of their radio spins because I had, you know, I'm staying in touch with the radio stations and what if we leveraged that? And so we got all the radio stations. I mean, Frito lays back and out and coca cola is backing out. Chevy's not buying their ads. Northwestern mutual. I mean, we sat all these radio sellers down and said, listen, we know you've got inventory. You could drive a truck through. We're an awesome carpet cleaning company who's probably not able to buy any of your awesome radio. However, if you gave us a job, we can pay for it. And they said, what do you mean? I said, well, the unsold seat flies with the airplane. Give Up. Don't just not run an ad or don't just give it to you know Bells or Ford because they've always gotten freebies from you and always been a good customer.
Michael Kaplan: Build us into a good customer. We'll just backdoor it will pay after after it worked. And they said, screw you, screw you. They going all throughout there and everybody told us where we could shove it. It's sad. The biggest station in town. And they said, tell us more. And they said no, but they said we could do a hybrid of that. We do part pay for performance and part really, really, really, really like a third of our normal rate for the best menu or radio in town. We had never bought something for hundreds of dollars on the radio. I was used to buying like $40 spots on the crappy talk station. We signed up to buy $600 spots that were supposed to be close to $2,000 spots. And we came up with a philosophy working with this joker out of Utah, who was a pathological liar.
Michael Kaplan: He was our media buyer, but helped us put this platform together and where, okay, we're, we're going to buy this really extensive radio. We're gonna, we're gonna cut our price by 30% and we're going to do some razzle dazzle. And so I wrote really bad ads that the talent read really poorly. And originally we hadn't covered price two or three rings for 189 bucks. And then we realized, wait a minute, let's try to just get in the door and sell as cheap as we can. We'll do a loss leader on the first three rooms, 120, 119 and I'll be the talent. So we did book ends where the radio talent, Terry train on your ass said, Hey, I'm here with my good friend Michael, some Zerorez, carpet cleaning and what's going on? I'd tell him BZ carpet anecdote for you know, 40 seconds. And then she wrapped it up with some jazz hands, probably seen and you know, razzle dazzle and give a call today for the great November special or whatever season it was.
Michael Kaplan: And so we could do probably 450 jobs per month across the company. We launched the platform on Kq when everyone else told us, you know, to buzz off, uh, on early February of 09 and it was like 10 below. And we were begging them to cancel the ads because it was 600 bucks a minute. And they said, nope, you signed in ink in blood in, you know, with your first-born child, you shall not cancel, you are screwed. And so nothing happens. No, no calls, no nothing. And then we made the changes where we lower the price by 30% I came on as the talent and three weeks later, the month that followed, we booked about 400 jobs just on that radio station when we go, and these are, these are at the time, $350 per job. So Holy Shit, we can't execute on any of this capacity. I mean demand way out-outpaced supply. So we go, all right, we're not running seven days a week, which, and we had never done, we're five or six jobs per truck instead of three. And let's talk about bias and vehicles. We're not buying the truck said breakdown and catch on fire. We had been talking with the goofball Steve Polis with hydro master and we basically worked out that he was just aligned to his boss. He was engineering a truck for us because we've got this magic water. We couldn't just use it off the shelf truck because our water eats metal. Small little problem, right? So engineering one that's stainless steel, so he's making stainless steel pumps and parts and nuts and bolts and whatever. And he went to his boss and they said, so they're going to buy 20 of them, right? Said absolutely So we had committed to buy one, but you can't do R&D and reengineer a vehicle and make money.
Michael Kaplan: They would have lost $2 million. He said, oh, they'll definitely by 20 and we bought one and we still didn't really have full-on permission from the franchise order to execute the model. But they said, you know, we'll, we'll talk about it. They didn't, they didn't believe the laws of physics. Um, small little problem. So we're trying to teach them physics while getting approval to buy equipment, where the manufacturer's rep had lied to the manufacturer. So it says great shell game of moving the parts along. Meanwhile, my partner had just filed for bankruptcy, so they shut down the credit card, freeze the bank accounts so we don't have a bank and pay for, and the, and the phones are blowing up. We've got hundreds of thousands of dollars booked down our schedule that we could clean if we had trucks that we could buy if we had a bank account.
Ryan Tansom: Oh my God, it's, so how did… [Michael interjects: what question ask next. Right?] Right, right, right. I'm curious on the, what was the agreement with the radio show? So like how much, like, so you know, for the listeners that apply for, you can, you know, in the world of digital marketing these days, you can track all that stuff, get an affiliate commission. So one is how did you determine those 400 calls came from the radio show and then like what was the actual spiff agreement or how did that all work?
Michael Kaplan: So the radio, uh, platform required a level of visibility. So we had, there's hundreds of softwares out there that it'll do it now, but we had one of those, first to my knowledge web-based tracking platforms, it was all user driven. And in the office we need, Sally would take down notes and say, how'd you hear about us? And they'd say, Oh, we've heard John ABC station. Great. So they would put in to the system. But you literally couldn't schedule a job without answering the question. How'd you hear about us? And the radio reps would have the ability to log into the software from their office and see all the results from all of the stations. So that visibility with huge, we told them we fibbed just a little bit. We said the most we could ever possibly pay to acquire a customer is 50 bucks. And so we paid the first, you know, 10,000 bucks or whatever it was that was agreed upon with the radio station to get on air. And then after $50 at a time that had been gobbled up, we'd pay him another 50. Eventually the goal was to get rid of that post-pay model and just say, we've seen what normalized results look like and now we'll just pay you that up front.
Michael Kaplan: And if we do better, great. If we did worse, well that's our problem. But the real secret to success, uh, I think in our business was one, we came up with an awesome service model and we killed them with kindness. We followed a raving fans, uh, philosophy and, and just gave big, sloppy kisses and hugs to everybody on with the intention of, of trying to not buy their love next time they're in the community. We don't need to reacquire them. We can just reengage them through really cheap media, emails, postcards, etc. Number two, we came up with a service delivery model through the equipment that didn't catch on fire or cause us massive pain. We realized in 2007 that per job it costs us $89 just to get our trucks to the job.
Ryan Tansom: How did you figure that out?
Michael Kaplan: So that we just add up all the blown tires, all the mechanics, fees, all that, the towing expenses, all the, the fuel. And that didn't even insure, you know, fixed costs like insurance. But on a per job basis, we were so aligned, it cost us 89 bucks to get the truck there. And so we took that to the franchisor and said, and we typically, it should be in the 30s. We need different equipment. And even though they didn't really understand the physics of it, um, we, we worked on them to help them understand why you didn't get a better cleaning product with their truck or what, why it didn't matter as much that it was a bigger badder truck and that they were selling. And the third thing that, uh, change our business was two parts. One was, uh, how we bought media and how we packaged it and messaged it. And two I really think was how you, how we looked at client acquisition. So a typical business is saying, well, you know, I know I half my morphine doesn't work.
Michael Kaplan: I just don't know which half. We said that's not going to fly. We need to track the shit out of it because I'm going to be a hundred years old trying to figure this thing out. That's not going to work for me. So we were impatient, so we became diligent. And then number two, we, we started to look at acquisition cost as the real driver. And I think a lot of businesses are, are doing that now that um, uh, ad words and bing and online platforms are as prevalent as they were. But you know, 09 it was, it was more about impressions and how you felt about it, than can I really get analytics and we said, listen, cost of good soul is, you know, call it 40% it came down as we scaled, but 40% to do the job. If we spend 50% to acquire the job, we've got 10% left behind. So 50% to acquire the job, that means I need, if I spend a dollar, I got to get two back. So my acquisition costs for my Roi is two oh one. So spend $10,000 I need to get $20,000 back for a program to not suck. And we changed the metric from how efficient can I get at buying media to how can I buy as much media as possible without losing money? So rather than trying to make money on a particular radio station, and I said, how do I scale it if I'm getting a four to one ROI, great. What happens if I spend 20% more? I don't care if the ROI is four to one, as long as it's above two to one. Because today I'm in scaling though with the philosophy. Let's go out and clean as many houses as we can. Put those people on an island, dig a moat around them, puts some alligators in it, kill them with kindness and hope they repeat.
Michael Kaplan: We're, we're buying trucks like crazy because we wrote an RFP to bunch of banks. They couple came back. One said, okay, we're going to, we're going to partner with you.
Ryan Tansom: What year is this?
Michael Kaplan: This is right as the shifts happen and this is 09 and my business partner is filing for bankruptcy. Bank accounts are frozen. Credit lines, frozen credit cards cut up. And we said, but look at our bookings. We have hundreds of thousands of dollars flowing in. If we could cater to more of these customers, we'd be able to buy the trucks in cash. And they said, we'll let you buy a truck. Well, we bought five that year, um, you know, 09 and then we bought 9-10 a year for years on down the road.
Ryan Tansom: So that, that the manufacturer's Rep was, he held true to his, his, uh, quote unquote word, right?
Michael Kaplan: Yeah, yeah. Not necessarily on purpose, but he's still, you know, maybe hundreds and hundreds of these things to Zerorez now. So we, our job at that point was let's scale this thing. We've got the media model, we've got the service model and we've got the uh, delivery model. But then we realize, well, crap, we don't actually know if these customers like us, they paid us, but is that evil scheme of making them love us, putting them in the moat or on the island, digging the open the alligators in and getting them to call us again, we don't know if that's going to happen because people don't, they're not engaging a carpet cleaner quarterly. Typically it's every couple of years. So we said, well crap, we need to actually find out if this thing's going to work. Otherwise we got to shut her down because we're taking on millions of dollars a debt buying the $75,000 pieces of equipment and all, all this training and all of this crap. So we, we started, uh, we found a company called listen 360, they were called Cistino know at the time and they did a net promoter score survey.
Michael Kaplan: Oh, cool. Um, so I'm sure most people know, but those who don't, it's uh, it's one question. On a scale of one to 10, how likely are you to refer me to your friends, family, colleagues, whatever? Do you like us? Are you willing to go out on a limb for us and to get a nine or a 10 they're a promoter. They're actively out. Yup. I'm all over it. I'm going to tell everybody. Seven or eight. Okay. They're, they're passive. They're not, they don't hate you. They don't love you. It takes an opportunity equation, right? Yup. I'm not going to say I've got nothing bad to say, but I'm not inspired. And then if it's a zero through six, it's Oh crap. You know, these people actually have a, you know, they weren't thrilled or they were actively on the net promoter score, net promoter score and takes the percentage of promoters, nines and tens minus the percentage of detractors sevens and eights. And in the service business having a 40 or 50% net promoter score is deemed, you know, average or, or maybe even good. Um, before we started managing it, uh, when we first implemented, we were in the low seventies, we worked our way up into the 80s and you know, it was Minnesota Nice. We're killing them with kindness. We're out actively trying to get people to like us.
Ryan Tansom: What are you then tracking Michael? Um, how like these people, you know what that's, I don't know if you're still doing the intake form of how often these people were repeat buyers and what the lifetime value of a customer was.
Michael Kaplan: Yup. And so the lifetime value is kind of tricky. We had to make, we had to fudge it a little bit, but repeat customers spent more, customers who the listen 360 platform tracked all this stuff. Customer satisfaction based on what they bought overall and what they were sold on site, what they were sold over the phone. And we started to get analytic with it and realize that, you know, people who had a better experience bought more and people who bought more typically had a better experience. And I don't know which way it went, but people who said, okay, I'm going to turn and burn. I'm just going to clean and leave. Those customers, uh, didn't see the razzle dazzle. They paid less, but they got less value. They felt less good about it. So we started to realize customers really don't remember what you did for them. It's how they felt after you did it that sticks with them. And so we became very, you know, service focused, bringing the groceries if Mrs Johnson's empty in the car, you know, play with the dog, wipe down the base board, show them you're sweating. It became less about the steak and more about the sizzle.
Ryan Tansom: How did you, so with, with the fact that you're scaling, you figured out the media platform, you got the trucks and how about the, I mean, today's environment a little bit different than 10 years ago, but like the people and the infrastructure systems, like what, what did you do to like not just be able to deliver this but then also build the infrastructure, be able to handle it from the people in the processes?
Michael Kaplan: So you knew that I was glossing over the real shit show, right? You're good at this. I know you're wily ways, Ryan. And so it was, it was a hot mess because I mean, you remember the millions of people who became unemployed and the world changed in 08. So we were, you know, not the only people in town, but we're hiring like crazy. And we initially made the mistake of saying, okay, let's hire the best resume for, you know, someone who would go out and do a professional white collar gig.
Ryan Tansom: You can probably go to every single a real estate brokerage and… .
Michael Kaplan: I had mortgage brokers, mortgage brokers. I had a university professor, I had six figure consultants working on my carpet trucks. Thought, you know, I can relate to these people. They're all awesome. Well, the job of cleaning carpets, I'm not going to say it sucks, but it takes a very particular, uh, set of motivations and skills to thrive at it because it's really hard.
Ryan Tansom: You got guy, that guy or gal that's been used to making six figures, I can't imagine they're taking Mrs. Jones is groceries in and being really super happy about it.
Michael Kaplan: No, we were, uh, the plan for them to not get evicted. We were not part of their career trajectory. Um, now our top guy, um, he's, I think he's part robot, but he's made six figures cleaning carpet and we've had plenty of guys in the sixties and seventies, uh, cleaning carpet. But those are people who fit in the box. So we started to realize, hire people clearly define what the box looks like, what is the job, what are the benefits, what are the pain points? Clearly define it. And then don't sell people on getting in the box. Bring on people who thrive in that box. So we hired lots of overqualified people and invested hundreds of thousands in training, uh, to watch them leave. And then we started realizing that, you know, you, you got to bring it on the right people. So we, we started, we tried everything from cattle calls, you know, bring in 30 people and who wants a job? You start Monday to uh, really selling people to try to, you know, not dupe them but sell them on the all what a great environment. We had, um, to, you know, trying to get people to sell us on why they should get a job. And it was really messy because we had misalignment for a handful of years. Um, where a bunch of the team members just weren't quite the right fit. So there was, there was a lot of turnover and a lot of challenge and we had a policy back then. We wouldn't hire anyone with experience because we thought, you know, it's, we, we want to bring on Nice people and teach them how to do it our way rather than bringing on carpet cleaners and, and trying to teach them how to be nice, nice people the way we need them to be nice.
Ryan Tansom: How w what is the, like along the kind of the, the main chunk of the growth of the years, what was the average number of, did, did you average like the 400 per radio? And so what was the typical volume and then how were you, and what are your hiring practices? What was it like? You were interviewing 20 people a week and not like what was the churn that was correlating to the growth and the numbers?
Michael Kaplan: So I'm 400 we only saw that two or three times where you got 400 jobs from one station and yeah, at some point you're buying too much on a station. Um, you, you don't want to be on every minute. If it's, if the show starts being about Zerorez, you have a problem, what we would do was trying to buy the right radio and create the right relationships with the talent that's doing the ads such that they're working you into the, the content of the show. Because buying an ad is cute. Being talked about when they're talking about, you know, Mother's Day or going to Ireland and how, um, you know, the hotel room needed Zerorez like that you can't buy. Right? But it works you in and you become part of the vernacular. So, but you asked about results. A good on a big station, top tier station. Minneapolis is a great radio market. There's probably four or five top-rated stations. Bringing in 200 jobs in a month would be a massively successful. Um, we changed the service offerings, so we were selling $300 jobs instead of 400 or $450 jobs. We were just doing a lot more of them. And an ROI on a station would typically be, uh, on a successful station at maturity would be in the three and a half to one range. So pretty cool when you can spend 20 grand and bring in 70-80,000 dollars. And that's new customer acquisition where you're still getting all the brand in with all the people who aren't buying and you're getting all of the repeat customers to get excited about you and call you up without you having to, to do anything.
Ryan Tansom: So then how many people were you hiring or interviewing on a weekly basis in order to fill those jobs?
Michael Kaplan: Well, so we in, let me talk about revenue real quick. In we bought, the company was doing about 300,000 bucks. We did 700 in 07, and then about 1.1-1.2 in 08. 09, we did two and a half million, then 5 million than 8 million than 11 million. And then we started opening up out of state. And when I left we were doing, uh, I left the business, sold it. Um, we'll talk about that awesome experience, um, in our next podcast. [Ryan interjects: No sarcasm, right?] No sarcasm. We were doing maybe 17 or 18 million last year across five locations. We had six at one point.
Ryan Tansom: How many employees, when you left?
Michael Kaplan: Probably about 180, give or take. Um, so we were hiring, it was, it was, uh, a chicken and egg. Yeah. Hire the person then can get the trucker. Do you get the truck then get the person and the answer's yes. You do both as quick as he can. So, um, they, they were building these trucks as one-offs because they, you know, they had the equipment, but no one had ever preordered. And we were just one client and you know, all of a sudden other franchises started saying, well, I want this truck too, and so there's six or eight franchises that, you know, most businesses in our franchise system, were not thriving at that time. They hadn't adopted the Minneapolis slash Atlanta model that, that we were using for buying radio. And they were charging too much and you know, all sorts of problems that we had not fixed, but, um, come to resolution with. Um, and so as people started adopting the media model and the service and pricing model, they started buying the trucks too. So all of a sudden there's this backlog, you know, they're making them one at a time out in a suburb of Seattle and we're like, well we need eight of them. And they're like, well, we don't have eight vans, we don't have parts for eight. So we start preordering hoping that, you know, we're going to actually want to buy them and then hiring, hoping that the truck will be ready. Will actually be needed to align with demand that we can't really predict, but we hope continues. So it was a real a shell game for a minute there. But um, so if we had it, if we hired, if we bought a truck and we're running at seven days a week, um, you know, we can, we can maybe get, you know who we're asking people to work five days, sometimes six days a week, but you know, best case, we're getting maybe 20 days, 22 days out of them in a month. So we're hiring one and a half people per truck and we're trying to work backward on, okay, if we're doing four jobs and it's going to work 30 days, that's 120. You know, you, you start doing the math backwards, thinking that you're smart and then it snows and you know, you have to re-schedule everybody.
Michael Kaplan: It was a hot mess. And none of this was, you know, this, um, my partner and I were, were analytics, but we weren't MBAs. We weren't, uh, as datadriven. So the systems we're using are, oh, maybe I'll, I'll map this out today on a legal pad with, uh, my, my crayons rather than let's build a spreadsheet and formulaically identify, you know, what hiring trends look like. So, and you can imagine any business, I mean, if you were on a hot dog cart or a janitorial company, the systems you run when you're doing 300,000 and then 700,000, then 2 million then five and eight, they're going to be irrelevant. You know, you're going to outgrow your systems and outgrow your training procedures. And until you start to really evolve and say, I'm going to document my systems and I'm going to say this is the way it Zerorez does it rather than this is the way Michael Does it, or Sean does it, or Jimmy does it, you really don't have a chance at getting consistency and scalability.
Ryan Tansom: So what were some of the things that you did to accomplish that, that you, you thought were, that that worked out? Whether it was a system or a dispatching thing or like certain, you know, kind of the epiphany is that you guys ended up going through that, that ended up being successful with the model?
Michael Kaplan: Well, um, it was, it was just a series of predictable accidents and problems and fires that we fought that helped us realize this ain't working because we keep running into similar crap that holds us back. And in hindsight, we probably should have predicted it would happen. So you know, it, everything from how we distributed the schedule to how we thought about capacity, all of those things needed to, uh, we started to realize because we got burned by that, which should have been obvious that we needed to, uh, to give visibility and planning a, uh, make those a priority in the business. So we started to invest in software. We started to invest in people to, you know, rather than having the phone team, uh, who, who's great at answering calls and giving great customer service, instead of having them just place jobs on the schedule, we'd have in place jobs on the schedule. And we started to hire someone to manage the schedule because, you know, if you have someone driving 45 minutes from job to job, they can't excel and do the same number of jobs or, or with the same job satisfaction as the person who's got assisting planned out route. So we started to invest first and people to fill roles in then in, uh, in people to develop systems to make those roles more efficient.
Ryan Tansom: Was there anything as you were doing the hiring and stuff like that? Like what, what worked, didn't work? I mean, it sounds like you kind of went through a couple of different hiring practices and stuff like that, but like, you know, or was it like you said, just random luck finding the right people, the right positions and stuff? I mean, like, I was going when I said earlier is I, you mean the sheer quantity of people you had to hire it has got, it had to just had to be like exhausting.
Michael Kaplan: It was really painful. Wheat in the early years, we didn't have problems signing people. We have problems finding the right people because we were not looking for the right people. When we started looking for the right people, it got easier and our problems were less about, uh, attracting them. Because, you know, 2012, 13, there were plenty of, uh, unemployment was still decently high. Now it's like two, two and a half percent of Minnesota. So it wasn't difficult attracting people, but we had to figure out the right people. Then we brought on the right people and they would still fire us because we wouldn't onboard them. I look at onboarding as not, you know, the one day event. It's like a two month process of getting them to become part of your culture, you know? And um, so we, we had a one-day orientation, we started to shift that mentality and work harder and harder to have the right culture and community and uh, make people feel like they were a part of the team and that they were good at their job, that they knew how to do what they did with, uh, a level of excellence that gave them some self-worth. I mean, when you, when you talk to people about why they have a job or what's important to them about the job, usually pay comes up. But with millennials especially, it's usually not in the top three. I mean, what am I doing work that's valuable? Do they respect me? Um, do I have some flexibility with my time? Pay? Do I work weekends? Et Cetera. Yeah. Yeah. So we ignored that. And said, let's just pay him well. Uh, and we didn't even pay that well. We got smarter and worked on culture and community and that sort of stuff and tried to bring meaning to the work and feedback to learn. Um, that helped a whole lot. But even today, a turnover and retention are major issues for the company.
Ryan Tansom: So as, or as we're kind of wrapping up the first round of this I'm curious is as you as you smell like that and then just, you know, that was the kind of the foundation of our family business too of how crazy we grew is did you, were you mind because of how analytical you were around the, the return on investment of the spend and the, the, the vans and the people and all that stuff, were you monitoring like your profits and how you're reinvesting that in like what the normalization was it, cause that'll kind of tee back into, uh, around two and we're talking about value valuations and how you guys ended up splitting up everything. But like what was the trajectory of the profits? I mean, was it, did you self-fund a lot of this stuff or did you lean on your bank a lot to continue?
Michael Kaplan: So we, we realized, and this going to sound crazy, we realized and one of the big pivotal moments that we had when we started staffing up, we realized we were too profitable for a service company because in in probably 09 and 2010 we made per employee more than was, was reasonable because we didn't have any infrastructure. We've, um, you know, per truck is maybe an easier way to look at it because with admin staff, I don't remember the exact numbers, but per truck a healthy carpet cleaning company, um, that's not a franchise. Maybe they're making 15,000 bucks per month per truck. We peaked at about 39,000 per month per truck. So that's working seven days a week. That's working, you know, and that's not what, that, that's not having a healthy dose of night work. That's, that's all 90% residential, $300 carpet cleanings. We worked pretty hard. And the problem was, um, we didn't have a support staff or a leadership team to make that work easy to, to execute. Uh, so it, it was really painful and we, we just said let's sacrifice some margin so that this thing can scale and pro and hopefully not exploded in our face because yeah, when we were doing 39,000 per month per truck, I was still getting phone calls at two in the morning when people had you know, bad tacos and couldn't come in. Um, not that I should have been in some, you know, ivory tower just working on the business. But crap, we're killing it. We're making great money. Our margins are awesome. Let's bring in some talent to make this a little easier to execute and fill in some of the gaps. Because at that point there were myself and the real estate partner where the two owners and neither of us were super awesome or super enthusiastic about being the people who made the trains run on time.
Ryan Tansom: So when you were looking at all this, Michael did you in, and then we can kind of put a, you know, a cliffhanger for the listeners, but where you monitor or like, because your dad was in M&A and you had, you know, I don't know what the circle of influences that you have, which we can talk about in the next episode, but were you like tying this to business valuation at all, were you always looking at profits because you know, when, when you look at the end, you probably realized a lot of this after the fact, but it's like the infrastructure and how value is driven out of a company. Did you have any kind of, um, foresight into that or do that kind of come into play when you're looking at the buyouts?
Michael Kaplan: So when I started, I, I told you, I just thought I'd a three-year horizon being active in the business. Fast forward three years, we're just on the cusp of massive growth and we're starting to take off and we've got these bottlenecks. I started to realize, um, let's focus on seeing what this can be. Because I didn't get into the carpet cleaning company thinking it, it could scale the way that I started to realize I could. So in having the realization about where the market was going, seeing the rest of the world kind of collapsing and us growing, I stopped thinking about, well, what could I, what am I going to do next? And started thinking about where can this thing go? So being part of this massive growth thing, we didn't really focus on. My plan had been to focus on how do I make this business worth as much as I can? And the focus shifted to how can we scale this thing and figuring out how much market share it can take so that down the road we can have the conversation about how much is this thing worth? And, and that there's, there's a big mistake that we made it had I been focused on how do we make this thing as valuable today as we can. I probably would have spent a lot of time looking at a subscription model, reoccurring revenue models, et cetera. What we did instead was how do we figure out how to scale this thing up so we can, uh, bring in as many customers and make them as happy as possible and let the natural tendencies in the market have them repeating on whatever scale there. So today, as the business exists, it has, you know, without doing anything, probably 1500, 2000 people call to give 300 bucks to the company, plus all the marketing efforts bringing all this stuff. So they're, they're doing great, but, and that's just the Minnesota location, but there isn't a reoccurring revenue model where we know that, you know, uh, every month we're getting a check from each of the people in the database. So it, it's, it's largely inefficient because we didn't have that focus. It's still doing great, but it could be a slightly different, the model could be a lot sexier.
Ryan Tansom: So as we're wrapping up here, and we'll, we'll talk more about that in the next episode. Is there anything that you want to leave the listeners with for this episode as far as, you know, as it relates to growing and scaling and some of the, you know, your big takeaway that you had, or maybe just kind of highlight something that you've already said?
Michael Kaplan: Um, you know, I think the, the, the big thing that kind of blows people hear- people's hair back is when I talk about acquisition cost of a customer and, uh, encourage people to stop trying to be as efficient as possible and try to figure out what is the most you can stomach pain without losing money and run toward that. And try to, you know, obviously try to be more efficient than that. But if you, if you know that your cogs or 40% shoot for a two to one ROI and when you have a four to one ROI, great. Try to figure out what if I spend more and the Roi comes down. Yeah. The net revenue and the net income go up. So if you're in a business where you have a reasonable expectation that you can engage that customer and get them to buy again, because if you do that, then once they're a part of your ecosystem, yeah, it's a lot easier to retain them and it's kind of hard to screw up until you really screw up. So our job was to run and try and figure out how do we get as many customers as possible. And today they've got 200 plus thousand carpet cleaning customers.
Ryan Tansom: It's interesting. The stat that John Warrillow has it, um, I don't know if you're familiar to him. He wrote a book called built to sell and uh, he, he said like what the studies have shown is that if someone gives you, gives you their credit card, it's like a, I'm not, I don't even know what the hell was. It was like three or 10 times the chance that they're going to just buy from you again because they already made the mental commitment and done it and so. Yeah. I mean it's the repeat customers, it's just the, the mental fatigue is not there. Then having to decide whether they want that vendor or not, if you did most of the things right, like you said.
Michael Kaplan: Yeah. I, I think, um, moving forward in businesses I'm engaged with, I'm actively looking for how do I put in as soon as possible the subscription type model. But in terms of cliffhangers for, for your next show, that's Morsels, uh, that they already heard, but cliffhangers, um, lawsuits, um, maybe not as sexy as some of the lawsuits and that would the parties you would have expected. Uh, but there are lawsuits in the story. There's a breakup, there's, uh, there's lawyers. There's um, burning the house down and sold the business. And I'm yet still in business with my former partner. Uh, so there's irony. It's a hot mess, but you know, it all kind of makes sense. But I did a lot of soul searching and I feel like I'm in a really good place, got some money and some runway. Got a lot of love lost because, you know, my first-born child, this company is not mine anymore. Yup.
Ryan Tansom: Well, thank you so much for coming on the show. And if people want to do some digging and they're going to reach out to you between now and the next episode, what's the best way to get in touch with you?
Michael Kaplan: Um, you know, uh, there are two ways. And can I tell your listeners what I do? What my job is now my, my world, I am in private equity and I've got a couple of verticals that are fun. One is, uh, investing, uh, in turnarounds where companies are broken or dysfunctional. They need capital for growth, they need leadership, they need strategy. So I've got that investment arm, but I'm also working with companies that are stuck. So companies that kind of need, uh, to be put into the incubator so that they can grow the right way. Think of the technician who can't get off the truck or the team that can't work on the business cause they're stuck working in the business. Uh, we provide capital and buy a minority stake in those businesses. And my partner and I are on the board of directors were not running your business, but we're your unpaid consultants. Most consultants you give money to and they give you ideas and you try to run with them. We give you money, we help you with the ideas and we help you with the implementation. So it's a whole lot of fun and people can kind of request more information about it at redhookinvestmentsdotcomredhookinvestments.com and you can reach out to me at Michael's [email protected] happy to talk to people about what they got going on.
Ryan Tansom: Awesome. And we will be diving more into the next episode and uh, and also on what you're doing too, we might be able to have time on the next episode to dive more into your service private equity model, which I think is absolutely genius. So with that being said, I appreciate you coming on the show and looking forward to next week.
Michael Kaplan: Thanks so much.
Takeaways
Ryan Tansom: So who else wants to go out and buy a bunch of radio ads and a carpet cleaning company? I hope you enjoyed that episode with Michael. He had a lot of really good insights on what it actually takes to grow a company because it takes a lot of risk tolerance for ambiguity and I think about the shell game that he was playing with the vehicles, the hiring and the sales. It's really what it's all about and the adrenaline that comes with it. The biggest takeaway I have out of this section of the two part series is that it just takes balls to grow a company because you can't just sit back and let things happen and what Michael and his partner did to grow it was awesome and I think they deserve a lot of the hard work that they put in and if you want to hear what was really going on between him and his partner and why Michael would exit is such a great business tune in to next week because I believe that the second part of this is so crucial because everybody that looks at entrepreneurs and business owners and we all see each other's revenue.
Ryan Tansom: We see each other's buildings and each other's employees, but you just never really know what's going on behind the scenes. And I think it's unbelievably important to realize that everybody has their issues and their problems. And that's really where the rubber hits the road and how you handle those different situations. And Michael is unbelievably transparent and frank, you know, self aware in the next part of this episode in this two part series. So please tune in because he's got a lot of good insights that I think are unbelievably important for anybody that's in a partnership and how those partnerships can impact what you want to do, the money that comes with it, the different goals and objectives that everybody has at the table. So with that being said tune in to next week, if you have any spare time and a ton of patients, please go into iTunes. Give me a rating, suggest any guests that you think might have a great story to share on the show, whether it's an entrepreneur that you know that has sold a business and is willing to share it, or it's an advisor or some piece of technical information that you think everybody should know. That being said, I will see you next week.