Podcast: Building a Culture of Accountability Is Vital to Family Business Success, an Interview with John Garuti
John Garuti talks about the two-year sale of his family business and what happens during negotiations and after closing.
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
Growing up in Queens, New York within a small family business, John’s experience begins with 15 years of leadership which successfully ran a manufacturing plant. After experiencing the sale of his family’s business, he became hooked on the process of M&A. Combining this with a passion for digital marketing he found his calling as an online business broker. John is always thrilled to discuss ideas and strategize solutions with clients.
If you listen, you will learn:
- The history of John’s family business.
- How he got involved with the business full-time.
- The family dynamic that led to a lot of frustration for John.
- How John dealt with an uncooperative atmosphere.
- Why John finally decided to leave the company and ask his father to sell.
- The main problems the company had on the basic level.
- Why location is important in a sale.The headaches of due diligence.
- Why egos can delay a sale.
- The two-year selling process that led to employee relation issues.
- John’s earn-out deal.
- How the company changed and why John felt it was worse.
- How the relationship to his dad held out.
- When John knew he wasn’t staying on with the new owners.
- What he would have done differently.
- John’s reflections on the situation in hindsight.
- What John is doing now for Digital Acquisitions.
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 140 today's guest's name is John Garuti and I really enjoyed this episode because John was in a family business and there was a lot of different experiences that he shared that I could totally relate to and so anybody that's in a family business where they are the parent who wants to know what is it like in the perspective of potentially their kids. Great episode to listen to. If you are a second gen and you're going to be taking over the business, this is also a great episode and anybody that just wants to know what is it like when you don't have great communication and a crystal clear vision because there can just be things that are not optimized. And what John is on the show today to share is what it was like having a disconnected dad and aunt who were running the business to him, what it was like having stagnant growth and really just dealing with the drama of having little communication and understanding and then getting dragged through a two year process to sell the business.
Ryan Tansom: And eventually when the business ended up selling, John had to work for the buyer for 12 months before getting so sick of it that he just had to leave. So I just really love this episode because the authenticity that John portrayed in how challenging it was, just the emotional turmoil that can bubble at the top when there is a ton of family, emotions, relationships. And if you don't have crystal clear accountability and expectations then everybody only knows what to do. And that is emotions and fending for themselves and having conflict. So I just really hope that out of this episode, your big takeaway is this is the reality of what a lot of businesses experience if they don't have good communication and line up exactly what everybody wants. So that way everybody can have very clear expectations of what to expect from each other. So with that being said, I really hope you enjoy this interview with John.
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: John, how you doing?
John Garuti: Hey Ryan, how are you?
Ryan Tansom: I'm doing good. I am pumped for this episode because you and I had a lot of stuff in common as what it was like selling family businesses working in them and then working for the new employer and just all the trials and tribulations that you put yourself through in the torture that you saw, that you self-select for in a family business.
John Garuti: A lot of parallels in our, in our past.
Ryan Tansom: So let's go back. Um, and you and I were even a rally and when we first met I bought like what, how did you become an entrepreneur? What was the, where did you get hooked on business and, and what was the kind of the origination story of the family business?
John Garuti: Yeah, so the origin is, we, um, my father and his father started the business together back in 1978 and they got into the business because my grandfather was a tile contractor, so he used to do work all around New York City, Queens. And eventually he started his own tile store right on northern boulevard in Queens. Like the main thoroughfare. Did that for a while. And that was, um, you know, my father like grew up in that business. I think when he was younger, maybe 13, 14 working with my grandfather selling tile and at the same time they still had a contracting leg of their business. So, uh, you know, they did that for quite a while. I'm not sure how long, maybe 10, 15 years. And I know my father, when he became maybe 25, 26, he just kind of got tired of them lifestyle. Contracting work. It is obviously very laborious and um, put some wear and tear on the knees and it's hard work even though it's a great business, so they were trying to figure out, well what, what can we do that's different? And I guess they came to realize like they had such great connections and already knew so many contractors in the area. They came up with the idea to start making the setting materials. So they bought a little shop that's actually right across from where City Field is where the mets played back 78. And, um, they started making a proxies for cause that was the, that was the studding material of choice at the time. And from there, you know, they actually right out of the bat did very well due to all the connections they have. And um, from there it grew into, you know, the big business we have before we exited November of 2017.
Ryan Tansom: When did you start getting involved in the business?
John Garuti: Oh Man. Even, you know, even high school I'm sure. Right. But I was always coming in and just, cause I was always trained in, so my father would like be picking me up from wherever he'd bring me back to the office so he could finish work and for the day and I would help out do whatever. So even in high school, just so you know, the normal office tasks like filing and doing some computer work maybe, but, um, I really got started getting involved in college. Basically every summer, you know, every summer I worked, um, at the business and you know, I first, I think the first job I really did was customer service. I helped a with like the logistics, the scheduling and the trucks and taking borders. No, I'm turning them into the best part of everything. Right. Yeah. Um, so really just the front end. Yeah.
Ryan Tansom: How big was the business then John.
John Garuti: Okay. When I, back in my college days, yeah, I think we topped out at around 45 employees. You know, our best year we did 13 million in revenue.
Ryan Tansom: It's a good good says. What did you like when you're, what, what were you going to college for and then did you intend it to join the business or was it just kind of happenstance?
John Garuti: Yeah, it was happenstance. I went to college originally for, to learn engineering. I mean I got into Virginia Tech, which is a great engineering school, but I learned that engineers work too hard and I couldn't party as much. So I gave that up for business.
Ryan Tansom: A business degree. That is the catch-all of someone that likes to be social and do some work.
John Garuti: Yeah, exactly. So I did business and then at that time I graduated in 2006 in May and I worked in insurance for a year, which I just, I really did not enjoy it at all. And um, that was down in DC. I moved back to New York after that. Um, cause I wasn't sure what I was gonna do. So I started looking for a job once I moved back. And you know, in the interim I was just working at the family business because I needed something to do. And that's actually the time when like the recession started hitting and it was just impossible to find a job at that time. And unfortunately I didn't really take my, my life and my career too serious when I was 22. I mean I never did any internships or whatnot. I think all of that detracted from my ability to get a good job. So I just kept working at the family business and no job came along, you know, the recession hit and then it just, at that time I was full-on in the business and I said, let's just continue this. And my father agreed. That's how it kind of worked out.
Ryan Tansom: So w w would any other family members that came, I can't remember exactly there was you, your dad, and what are their family members? Was it, what was the ownership structure like and what was the, what was the, the inner workings in the, the dynamics?
John Garuti: Yeah. So my, when my father and his father started the business, they were 50, 50. And then when my grandfather passed in '91, he left half of his shares to my dad and half of it, yeah. The other half to his daughter, my aunt. So when I was in the business, yeah, my dad owns 75% my aunt don't 25%. My aunt was entirely in charge of the sales and marketing. My father really, you know, looked over all of them, all the manufacturing, all the product development, the operations, and, you know, family... Ex wives were interesting. Was, um,
Ryan Tansom: What was the biggest [unclear]?
John Garuti: yeah, it was for me. I, you know, I always wanted to just work on growing the business. And I think that's where I kinda got in a lot of, you know, stalemates with my father is that the business the whole time I was there from 2007-2018, I mean, we didn't grow at all, no new revenue. It was like we just basically flat lined for 10 years straight. Um, you know, the first few years I was getting comfortable in the business and learning it, so I wasn't really pushing it, but by year four or five, I was like, hey, you know, it's time to switched things up here, obviously. Right. We're not growing. Something's gotta change. To me, um, it was very hard to work on the sales and marketing end because my aunt and my father's relationship was very strained, especially in the business.
John Garuti: They just, I don't know, they didn't work well together, that's for sure. In my opinion. You know, my father was very, I don't want to say let's pick a dictator, but it was like, know when he wanted something. It was just he would demand it and that would be yet. And you couldn't really ever get him to change his opinion. And I think for my aunt, like that was very tough for her because she wanted to do things with the sales and marketing. And if like he did in agree, he would just flat out tell her no. And so I think her feelings were always like being touched. It was very, you know, and that it was always emotional for her and for him. And I think a lot of that contributed to like the us not really growing because she had complete control of over sales and marketing. Like she did what she wanted to do and he had complete control over operations. And it was just always like this divided line between the two, right. Sales and marketing was always saying, oh, these operations people are messing up the operations people are saying, oh well the sales and marketing people aren't doing shit. So it's just, you know, it's kind of like, I referred to it as like the wheel of a, the wheel of death. You know, we were just like spinning there, going nowhere with the same bullshit.
Ryan Tansom: Like what were the conversations like with the people and like, I mean was it like a clear divide that people were just kind of almost taking sides and like where were you stuck in it and like how did... where was your head at?
John Garuti: Yeah, honestly my head at certain times, but just like almost wanting to give up. I mean I practically did give up. You know, we had, we had a few key operational people, maybe three or four and then the rest were really just factory workers. Um, and then sales. We had, you know, my aunt and then she had three or four sales guys the whole time. So it was really... the top people in the, you know, when we had like our executive meetings, that would be me, COO and my father, my aunt didn't like the guy in the, who was kind of in charge of the factory operations. So those meetings, oh my God. I would come in and I just, I, I, most of the time I would days out because my aunt would, oh, always fine with the, uh, the COO. Like they were just, it was like a chicken fight, dude. They were going back and forth squawking at each other and it was all about like trying to, I guess be like impressive to my father. Who would just eventually sit there and then like, you know, snap and be like, shut up, go to the next point. You know, our culture was really, it just wasn't the right culture. At least I didn't appreciate it because a lot of just in-fighting and too much, you know, too much of people pointing the finger or blaming each other for what's not going right in the company.
Ryan Tansom: What was the conversations that you were in, your dad were having? Like what, I mean, did you, was there any intentions of you buying it with their conversations about like what the company's worth or how to buy out your aunt? I mean, was, or was it just like this future hope that that conversation would happen?
John Garuti: We had those conversations. I mean, know I didn't even want to, that's a sound bite on my aunt. I just, my whole stance with Pharaoh is like, you know, she's, she's not the right person to be managing our sales team. That was always my quip and he would agree with that, but you know, the actually acting upon that was too emotional for him and he could never pull that trigger. Um, you know, the whole intent. You know, my father only wanted me to take over the business and I did for a long time. I really did. But I felt like, you know, if he couldn't get over this one issue of like figuring it out, something to do with her that wasn't running the sales, you know, like how am I ever going to be able to take this company and change it?
Ryan Tansom: Um, so you, were you actually running the bit, like were you getting to the point where you running a lot of the business then? Or was it just the conversations of like, you had your mentally were like, I could do this but then the hurdles were too big?
John Garuti: Yeah. Mentally I was there. By then I was running the business. I mean that was by the time we sold, I was involved in every area. I was doing sales, I was running the marketing. You know, I built the new websites we had. I'm still in operations and I, and I grew up in the factory. I mean, I learned how to make all the products. I've learned the chemistry, I built our quality control systems. I learned how to run all of the machinery. I did everything except drive the delivery trucks. Never got a commercial license. So I certainly have the skills, but it's, um, you know, that emotions of telling family members like, hey, you're not the right person for this job. It just... We could never get asked that. I find that wouldn't admit to me like, yeah, your aunt is probably not the right person to run the sales. So my reply was like, okay, so what do we do about this? I, you know, she's family. We would obviously not going to kick her to the curb, but this same work. And so what, so what do we do? But you know, that was where it ended up with, uh, you know, that conversation. It was just way too emotional. He couldn't get past the emotion of, of changing for role, um, and sticking to it.
Ryan Tansom: So then in that sequence of time, like what you wouldn't, you know, you're, you're probably dealing with some fatigue at that point and going, okay, what in the hell's the, the situation and the and the solution for this. Did you guys talk to consultants, family, business consultants, or was there anybody that you, you're reaching out to? Or, and what was the whole triggering event to entertaining an offer?
John Garuti: So, well, the whole offer came down to me eventually go on to my father and saying, I'm sick of this shit. You don't want to change anything in the business. And you know, for me, I felt like part of the reason he wanted me to take it over with so that like he could still like kind of be in the business, which I appreciate, but like you can empower somebody to take over a business and then, you know, make them kind of keep their arms handcuffed. That's what I felt like he wants to empower me while keeping me handcuffed. Empowered. Right, exactly. And that's not empowering again, I think even in as well to my aunt, like at times tried to empower her, but you know, at the same time he's giving her the direction or authoritative direction. So eventually, yeah, I was, I just felt like there was no out. I felt like there was nowhere to go. And so I went to him and I think August, 2015 and I was just like, you know what, if you can't change the things that you know that need to be changed in this business and I don't want to be part of it.
Ryan Tansom: What was his reaction and how did you, how did you feel going into that conversation?
John Garuti: It was like the toughest conversation of my life at the time. And I think he was very hurt by it. Um, cause you know, I think for him he built this whole thing so one day I could take it over and continue, you know, running it and so the entire family could continue benefit from it because it was a great business and it did make great money. But it just a, you know, that wasn't me. Honestly. It wasn't even about control for me. Like I didn't need to be in charge of the business and making all the decisions. Like I just wanted to have a team that was out there kicking ass, taking no prisoners and growing this and you know, putting us on the right track to continually grow because there was certainly opportunity to do it, but you know, we, we needed a lot of change. That's where that was like the sticking point.
Ryan Tansom: Was there in your dad's or your not wanting to change. Was there, was there any challenges that you guys had about like them not wanting to reinvest in the business or was it more just like challenges on the vision?
John Garuti: Well, we didn't even have a vision, number one. And reinvesting, yah that was another thing. Because I think we all realize we were doing a lot of manual processes at the company. If you look at it now, the company that took over, they've automated with business and you know, they've already dropped about 30% of the labor force. So we were always looking at doing those investments. You know, we needed that because we were making commodities. So we always have to find ways to cut down the costs and now it's the next step. But you know, my father never wanted to go there because he never felt like he could get the return because we weren't driving the sales. You know, the investments we needed in our business for, at least from a factory and automation perspective, we're probably close to $10 million to do it the right way. So the payback on that, he just, he didn't see the payback ever.
Ryan Tansom: In his life, in his span of his timeline. Right?
John Garuti: Yeah, exactly. And, or with the way the sales was going and us just flat lining here after a year.
Ryan Tansom: I think you said circle of death, right?
John Garuti: Yeah.
Ryan Tansom: So what was it like, what was the, actually before, like you went down the process of actually explaining to you that she had this conversation with dad. Was there anything like hey, you know, I don't know if you guys didn't heard of the book traction or Eos that point or like reached out to family business consultant. Cause I remember I tried everything and so like my dad and I, we did, ours was more on the tactical stuff of which is why I've got the business grow it sell. But it was more tactical, less, I mean trust me, there's plenty of emotions and tons of yelling and manager meetings. But then that kind of worked itself over time. But is there any family business consultants that you've brought in or any of these other resources that you would want it to go down the route of before deciding to sell?
John Garuti: Yeah, I tried to bring in EOS twice. We met with two different guys who were certified. Both guys, my father liked and I liked and I think even my aunt liked and we were all in agreement, we should do this, but my father wouldn't pull the trigger. I think too, I brought a guy in, I think very close to that. I think I brought a guy in right after I told him I didn't want to stay. And then what happened was he just, he wouldn't commit at that time because we had already found the buyer and the negotiations had already begun. And so he's like, I don't see the point in...
Ryan Tansom: Walk us through that, John. What was the, what was that process like? Did you guys hire an investment banker? Did you guys start making phone calls? What was the kind of the setup for that?
John Garuti: You know, it was actually kind of lucky we, after I had that conversation with my father, first move was like, all right, you know, this is your decision. Let me hire an investment banker so I can figure out what my options are and the best way to proceed. So he, yeah, he hired a guy out in New York. And then...
Ryan Tansom: How did you pick them?
John Garuti: Um, I'm not sure. My father was introduced to him through a mutual friend. So that's how we found him. And then oddly enough, the buyer pulled us out of the blue because we had a mutual customer out of Brooklyn and I guess, you know, this company that bought us, they were going on an m and a tear just trying to find and you know, anybody they can to increase their market share. And we had a very strategic position being inside of New York City. I'm not a single competitors of ours, was inside of New York City. And nowadays to go invest in trying to build a factory in New York City, it's, it's not worth it for anybody. Yeah. So I guess through, you know, there my, my uh, client, then you know, the buyer through their mutual conversations, they were talking about it and our customers said, oh, well you should talk to the group because they've got a great business and the buyer did the same exact things. Were making the same exact products we were. So he literally called them like, it was literally like one week. I tell him my father, I don't want to do this. You have an investment banker. And then the week after these people called out of the blue to be like, hey, what's going on? Uh, would you be open to selling? So yeah, all that kind of, you know, that had to be a fake just coming around. I'm very lucky that it all happened so fast.
Ryan Tansom: Walk us through the proess, then, John. Are you guys pissed at you and hired the banker because of the commissions or like what was the, I mean, did you get other buyers involved and what was your expectation and your role in that whole process?
John Garuti: Yes. Well we don't weren't pissed we hired the banker cause I think, you know, we didn't know obviously just that one person calling out of the blue, we didn't know if that would work out. And you know, we realize we can do this. We have to be serious and go out and find multiple buyers. So we weren't concerned about that. And, but at that time, you know, we got into conversations right away with that initial buy here. So, at first it seemed like we were going to do a deal in like two months. We were getting, and we wouldn't be part of this new company law of Kosher, but then once we got into the due diligence and obviously the disagreements came there on the asking price, I mean they wanted us from the get go. They were clear about that. Um, they had already showed that hand, uh, you know, then it was, you know, coming to terms, um, and I guess you know, are even though wasn't where they wanted it to be, meet the price. My father was looking for the business. So that happened all super fast. Like it was like we were going to sell in two months and then, then I remember being like January, February, and it's like, okay, the deal's off. And I'm like, Shit.
Ryan Tansom: So walk us through that because um, you know, a lot of the listeners in, especially as we get to like what you're doing now, but, um, due diligence cannot be underestimated. It like literally is a full colonoscopy. I mean it is like something that people explain what that process was like and then, and I'm in even before you go in and that John, like how did your dad come up with the value of the company that he wanted and then how did that change as due diligence happened and what were the red flags happening?
John Garuti: Yeah. You know, I'm not sure how he came up with the number. I mean I'm just, I think he knew what he wanted and um, I'm sure he spoke with the investment banker to get a feel. I mean, we knew this that buyer, we should be able to get a premium for multiple reasons, not just that we did everything they do, but um, you know, we were a perfect strategic fit. That location we have in New York and that distribution in New York City. I mean, you can't really put it price tag. And I'm sorry, what was the other question?
Ryan Tansom: I was just saying then in the due diligence because so many times people are like, okay, we got this, we got this letter of intent. Okay, we want, we want, you want to go down this route and then due diligence starts. Um, so explain what that process was like. What was your involvement in that and it honestly, I'm just curious man. Like what did you like where was your headache is when I was going through my dad and I had to have some very hard conversations about, because I technically, I had no equity, but like I was running the business, so like we had to like sit down and work out how I was going to get paid. And so we ended up working that out. But it was a lot of hard conversations because it was, you know, I was bringing significant value to everything and, in a normal circumstance I would have had equity, you know, have we gotten down all the right things? But yeah. So how did you guys do an, or was it something where like you were so ready to be done that it was just like, I'll just get this done and then I'll just go work somewhere else? So, and how did that impact your head as you were going through the due diligence process?
John Garuti: Yeah, as we're going through it. I mean I was just looking for the next opportunity. Truly all I was concerned about. I mean I would come during the day and the due diligence was like so deep man. We, I just remember pulling down report after report after report, financial report, inventory reports, you know, customer reports. You know and the crazy thing was I felt like I had to Redo the reports time after time in different ways for different people in their company. It was a lot of work for sure. Um, and at the same time we were very cautious about what we showed them. So like they wanted to see like the top 10 customer reports. So we gave it to them but we left out the customer name cause we were like we don't want to show you who these people are. There. Yeah, exactly. And at the time we are, we're competing with you guys.
Ryan Tansom: So we did the same thing John. Like, and it's
John Garuti: yeah,
Ryan Tansom: so crazy cause like they're talking about a fine dance that for the listeners like when you're selling to a strategic competitor, I mean like even though they might be great people, there's just the nature of all of a sudden now and they have your customers and like we, I swear to God man, like there was like people popping up under our accounts while we were going through the process.
John Garuti: Yeah us, too. The big thing was, so we had two main product lines. We had the tile setting and then we had the stucco. Um, so our, our buyer was big into stucco in the New York city, but they had no presence whatsoever in the tile setting. Um, and I remember in those early stages of due diligence, they wanted to go out and they went down with the sales team, met a few customers and then, yeah, sure enough, next thing we know one of our customers is buying from them. We were like, really? Are you, are you, is this a joke? But, um, that does happen and we certainly got to be wary of it. If it's a, if you are going to sell it to like a competitor or...
Ryan Tansom: What were some of the things that happened in the due diligence that caught you by surprise that it's impacted their, their terms and conditions and price?
John Garuti: It just, you know, the negotiation was arduous. It just was back and forth, back and forth. Um, the person who was responsible for the m and a on that side, he was, um, you know, just to give you a little more context, the company bought us as a global company. Um, they do business in 25 countries and now over a billion dollars in sales worldwide. So he, he, this guy's in charge of north and South America, right? He's, he's like literally one step removed from the worldwide CEO. So this guy was like such a tough negotiator. Um, but at the same time, I don't think you tough my father was. They would add the back and forth, back and forth. I'm just like every single point had to be like argued out, revisited multiple times. Um, cause my father, you know, God bless him on this, he did not give him an inch. I think these people, you know, they just thought they, if they've got this air about them that they think they're just like, I don't even know how to describe it. Very big egos. Right. Um, and
Ryan Tansom: I'm just picturing your dad, some guy, first, you know, first generation entrepreneur from Queens. Man.
John Garuti: Yeah. Yeah, it was, it was crazy. Just a back and forth and I think what just threw me off and not that even threw me off. It's just so draining was the, you know, one week it looks like it's going through and then you know, my father and this guy would get in like a tad and then, you know, the deal would be all for like another month. Um, and then, yeah, that was, it was just back and forth, back and forth.
Ryan Tansom: How long did that go on for? You said the deal was pulled off and then what? We'll run it back on. What was the total time cycle?
John Garuti: All Tie? It took two years and the whole two years we were, we were talking back and forth, back and forth. Um, now that initial, I, I'd say maybe around September of 2017 we had the, or 2015 we had those initial talks or march, my father actually made an announcement to the whole company that the deal's off for now. Doesn't mean it can't come back because a lot of people at this time, now we're getting frantic. The employees were concerned because they didn't know what was going to happen to them.
Ryan Tansom: Why did you guys tell them to be with?
John Garuti: Nobody told them. But then they found out and you know, some other stupid things happen. They came and visited the plant. And my father, um, you know, was dishonest about who was coming to visit the plant, but you know, he told the guys in the factory to shape up, make sure everything's clean and whatnot. Yeah, yeah. So they come and visit and sure enough, um, the, the chemist we hired knew the operations guy from... So he tells everybody on the factory floor and like all the managers down there now freaking out. And of course we're a small company, so now everybody, you know, all 30, 40 people know, and they're talking about this and are, you know, obviously it's certainly air for them to be concerned about what's going to happen next. Um, but then, you know, they were not trusting my father because he'd just like, you know, he didn't want anybody to know, which I, which I totally understand and get, but you know, then, you know, he compounded the issue by lying to these like these top, uh, managers in the company about the situation. So that didn't go well.
Ryan Tansom: Where, what role did you play in that? Were you, were you the cleanup guy for the drama or what was your role?
John Garuti: Yeah, I just, you know, I kind of tried to stay out of it. I just was doing what I needed to do because we needed to keep running the company regardless. So I was just, you know, focused on doing my work and, um, you know, when I was needed to do stuff with the diligence, I would get involved.
Ryan Tansom: It's tough, man. It's tough to like even be passionate when you got a two year rollercoaster. Like Dad, we went on and off a couple of years. But it wasn't a short spurts. It wasn't like the long drawn out thing. But it's just, and I think this is for any of the listeners man, like when you have your key executives, if they're not tied into like the, the final outcome, you mean it's an emotional, mental nuclear war in your head.
John Garuti: Yeah, absolutely. And um, yeah, it was just the, how emotional it was, was like the toughest part to deal with cause you decide just wanted it to be over. I want it to be done. I wanted to be out of that company and on to do my own thing. And uh, there was just dragging on and dragging on.
Ryan Tansom: Explain to closing. You finally get to this closing. What was the, explain how it was closed. What was your role going to be into it? I mean like it did, they had some sort of clause that they wanted you in the key executives. I mean like what was the, the, the next phase and the closing fee that the closing phase and the next phase?
John Garuti: Yeah, so, well one of the things that was argued up to the last point was, um, you know, keeping the executives, they are my, you know, my father, my father did not want to stay. He made it very clear that like once, once the check is signed and the, you know, the deal is executed, I'm Outta here. I'm not staying, I'm not helping you transition. I'm not doing any sort of consulting for you guys. I'm done. So then obviously going through this, they knew some people have to stay on, so wound up being me and the CEO and actually everybody in the company stayed on it first. It really my fault, I was the only one left. So, but uh, my father negotiated, did a contract for me and my aunt and the COO a year contract. Um, he didn't want us to like have nothing out of nowhere or get kind of get screwed. Like these people obviously could've come in and done whatever they wanted at that time. That was a big negotiating point. Because they didn't like that for some reason they fought about those contracts for a long time. That that probably was three or four months of the actual negotiation.
Ryan Tansom: Was it them not wanting one or all of you guys?
John Garuti: Yeah, it was honestly we were like top heavy. Um, you know, going back to some of the things I would've changed. We definitely had too many managers and you know, we had too many people who just had no value in the company, at least in my eyes. So I think they kind of recognize that coming in and they're like, well why do you have a, you know, we had a plant manager, director of operations, the COO, like I had like a weird title that was operations. Um, I don't even remember like I was like vice president of operations. So okay. You got like five operations managers in a company with 35 people. I'm sure they like this makes no sense whatsoever. And of course they also have a way they liked to structure each business cause rarely when we got rolled into them now we were just a plant in their network.
Ryan Tansom: Explain what that was like. I mean, so what was integration like? How was it like, what was the, the, what was the strategy and what was it like working for them?
John Garuti: Yeah, so I just, I remember, I think we sign the papers on the Thursday, that Friday they all came. We met with the entire company and my father just made the announcements like goodbye. Literally got in the car and drove down to Florida. And then I had to that weekend we had to do inventory, um, to reconcile and deal. And from that point on, they, you know, their director of operations was there mainly Burt work and with me. And then, you know, the sales guys were working with my aunt and even the COO, he was kind of doing a law... He was like CEO at that point, they wanted me to be the plant manager and help transition, um, you know, our company and to just like really big and operational plant in there. So it was a, it was a lot of hard work at first man cause we first, so this happened in November, the first thing to do was move to their ERP system. So this was um, and they wanted this done by January 1st so I'm sure you know how crazy ERP implementation is.
Ryan Tansom: Yep, I've done a couple myself.
John Garuti: So we had to take our whole system and you know, transplanted into theirs and two months, right? You were working, I was working like 12 hour days those first a few weeks. Um, just cause there was so much to prepare while at the same time trying to get people up to snuff on their systems while trying to reorganize to how they like to run the plants. Um, it was a lot of the work and it was interesting at first, you know, for me, I had never really worked in any company outside of the family business. So, you know, I did enjoy that part. And we made a lot of progress. We actually got that implementation done on January 1st oh my gosh, we were there. I'm not really like that first week in January. I was there like yeah and like 14 hours a day cause we hadn't made sure everything was running, processing correctly. Double checking everything and wall and we were, we were always running the factory at that time about 10 10 to 12 hours a day. So it was a lot.
Ryan Tansom: What was the, what was the culture like? You mean, did they have any major layoffs and was there a fallout and resentment happening to you?
John Garuti: Yeah, I mean everybody in the company blamed me for the business being sold. But I think honestly like you know, I looked at the factory workers. I don't think they really care because at the end of the day they just wanted their jobs, which they got to retain. There's more of the upper managers some people have been with my father for a long time, like 20-30 years I think because they realize like they were probably the most likely targets to get. That's actually what happened. They weren't wrong. I think at the same time though, they thought a lot of those people were super comfortable where they are working with my father and but you know, so those are like the people I want to get rid of it cause I didn't see the value they were bringing me.
Ryan Tansom: Yup. So did, at any point in that time, Jen, did you have any regrets of not wanting to take it over?
John Garuti: Uh, to be honest, no. I felt bad for a lot of people because, you know, eventually we did wind up laying off some of the workforce as we introduced the automation. And um, and I, it was tough for some of the people who had worked there for, yeah. I had to lay off a guy had worked for my grandfather and my father for like 35 years. That one sucked. Um, you know, that guy probably he hates my guts now and will probably never talk to me again. And I felt bad for some of the fact that you work with most, I would say most of our factory workers were like my ignorance, you know, living here on these, those and it's not one of those factory jobs. So me, they were able to work here and you know, make money live and still send money back to theie families. And honestly we had pretty good boiler with our employees. I mean everybody, I'd say 90% of the company at the time and working with us for at least 15 years.
Ryan Tansom: Jeez.
John Garuti: Yeah.
Ryan Tansom: Um, it's tough.
John Garuti: Yeah. That's not fun. That's for sure.
Ryan Tansom: I mean I get a stomach ache even thinking about it cause I had to go through the same thing. What know, where was your head and like how long did you stay with them and what was the new culture like? What was it like being uh, an employee for someone else?
John Garuti: Yeah, well I stayed with them for the year cause that was one of my contracts. It was four and you know, I wanted to obligate that cause I still have that relationship with the company. Um, culture wise, that was hard feel for it at first because now they had a core team of people who was, have a plan. I mean literally the first 12 weeks equal from the headquarters there working with us every day to get this transition. So you know, working with some of those people was, it was nice cause they were like the top people in the company and yeah, it must have dental pretty sharp. But as time went on and as we kind of aesthetic zone alive, that's when I, you got to feel free to call us or, and there was um, you know, I felt like the culture, their company was like worse than my culture. My, my own family had.
Ryan Tansom: In what way?
John Garuti: Um, it was just very unorganized people what drove me nuts. We were there, all these people in high level positions and we're just lazy and like didn't work, get the job done. I mean I'm working my ass off every day for them. Yeah. Cause my mom too. And as plant manager now my role is to be like a liaison, the plans and the headquarters. So I had to work with every day I'm director of every different department, the director of HR and director of operations, the director of R&D, you know the various sales departments, you know, the CEO would send the stuff to do as well and just, you know, these people were made, these directors, I coordinate all their work across eight plants in the U. S, while I also had to coordinate now with plants on the east coast because I was pregnant, outgrown materials from some of these other plans on bringing up finished goods now working with the plan I'm in judge was actually pretty easy. But then when you get these like directors involved, it's just like communication just broke down. And I saw a lot of people just styling information, you know, poor executing and then it's like, I felt like everything, they, they threw it back to the plant manager. Like, you know, why did this go wrong? And then it's like the directors of just sitting up on the podium and it's hard to gauge what's going on because you're not, I, you know, I never even went to the head office in California. I don't know what's going on there. And, but you hear stories from people, right. Um, so overall I think they just, uh, you know, the culture just was not high-performing or it's not dynamic. And then we had this influence of the, you know, being a global company based out of France, we had all this influence from like the main guys in French. So, you know, they would come down to the plant, the New York and just see things until, you know, say I want this, this and this fixed.
John Garuti: The rest would be like, you know, they would just, you know, a piece of and say, yeah, we take care of, you know, want to say, we'd be like, don't tell, probably don't do that. I'm just going to listen to my direct bosses. I mean, you know, that's the kind of stuff that was going numb up and running and was just like, you know, how can this company go anywhere bro? I mean that whole strategy was like M&A, which is of course a great strategy if you've got the cash. But then you know where to see organic growth. I didn't see them growing that way just because of all this. Um, you know, the core culture they have.
Ryan Tansom: And it's funny, there's actually a couple of interviews that I've done where when they'd say that the integration isn't done correctly and I could kind of, what you're just describing is most people, they like most people that acquired companies don't get the return on investment and that's above and beyond their cost of capital because they have no idea how to integrate into the actual big machine. What was your dad doing? Like what was your conversations with him like afterwards? In a little bit of context, as I remember when I, I quit the company cause I lasted like I think a little 60 days at the acquirer and he's like, I'm just so happy. I don't have to talk about our industry anymore. He's like, he didn't even want it. Even though he loves me and we're friends and he's like, I just don't want to talk about it anymore. What was the dialogue going on with you two and like we're cordial. I mean you guys like what was the old relationship?
John Garuti: It was cordial. I told him all that was going down. Of course he had a vested interest in the business, we still own it as a family. So I would tell him you got a contract, you know, fulfill the contract, keep our relationship positive with these people.
Ryan Tansom: So you guys kept the building then?
John Garuti: We still own the building that they're operating out of.
Ryan Tansom: So. So then I'm curious if you don't know, it's not a big deal. I'm just curious like as you guys are going through the due diligence, Jen, and then like the different things are coming up. Do you know like the deal structure, you don't have to give any terms or actually it, was it cash? Was there like earnouts are promissory notes or anything tied to it?
John Garuti: I think we got something like 80% of the cash and then there was a 5% out 12 months, another 5% 18 months. And then I think that 24 months, the remaining balance. In terms of guarantees, though... the amount of guarantees that were written in this contract where they had guarantees over every little single thing. And this was another thing because they just obviously write anything about transferability and I think they have some previous really bad. So they probably learned from those for the most part, everything got to fill out and we didn't lose, you know, they've got no right to come at us for anything. So.
Ryan Tansom: Can you explain the transferability is the guarantees that you were talking about and like do you know if it was a stock or an asset? So, uh, we actually have to do a combination sale just for tax purposes. And this was again another thing that was argued, cause I think, I don't remember which was more beneficial for them. I think it's the...
Ryan Tansom: The asset sales usually what's more beneficial for you guys.
John Garuti: So they want a more of an asset sale. And I think we wanted more of a stock sale. So we got the term, I'm like, whoa, whoa is acid. That was another thing that tied up the negotiations.
Ryan Tansom: And for the listeners and also for as you're, as you're doing deals to like it, the, the buyer wants the stock or on wants the a, the asset purchase because they can appreciate it and all the liabilities stay with the seller, but then it's ordinary income for the seller versus capital gains if it's a stock. So there's like immediate tensions that people have off the get go. So, you know, what was the, like how did you get to the point where you're like, did you, was it like 12 months and one day or like what was the, what was your, your game plan as you were going forward.
John Garuti: I was only in for six months, I knew I couldn't stay any longer. 12 months? Literally the day they paid me was the day I put in my two weeks notice. I was going to, I'm sorry, actually what happened though was in rural regional and so I remember just being in this meeting with the CEO and the director of operations with the USA and it was like about six weeks out from my dad and my contract and they were talking about all of these great big plans they had for me, focus on Yada, Yada, Yada. So right after that was over, um, I remember the CEO went down to the hole. I just followed him right in there. And I said, yeah, I'm not staying. I don't want you making all these plans and thinking I'm going to get, you know, I'd rather, you know, so you guys start preparing. But you know when my contracts up on that and then he was actually, you know, they were upset that they did want me to continue, but he was appreciative that I approached him and told him, cause he said, especially for a plant manager, an important position, you know, he said the more time you give us the better because it can be very challenging in that role or really any role if you just stop off and leave. Right. So, so that's how it went down. But yeah, I mean the director of operations was upset cause I think he was, it made me a bit and he was a very good guy. I enjoyed working with them a lot. But you know, I, I, I kind of put a gap in his plans as well.
Ryan Tansom: So if you're, if you look back at your whole journey, the working in the family business and the, the, the, the actual exit and sale, is there, like for the listeners, like is there anything that you'd say like, this is what I would have done differently or here's, you know, now going through it eyes wide open, here's what I would look out for, or expect or you know, something to be, to be cautious of?
John Garuti: Well, you know, um, you know, maybe before wanting to leave the company, my father, uh, my, my dad bought her on, you know, well, and I think David to change and trying to get that and executing on that, I mean, I, I really felt like we could have had a $50 million business, you know, we were like right there. I always felt we were right on the line. Right. You just couldn't cross it, you know, for me, that's how I really, the only regret I think you're going to have this crazy large company, uh, this whole for even more money, then we'll be gone. But you know, looking back at it and now then, you know, in my new career so much, yeah. More into sales and trying to get people to a party and are convinced people to take actions and whatnot. It's a, I feel like I could've done that better.
John Garuti: I guess for anybody. You know, all your listeners, especially people who are in family business situation, I mean I think you need to be very clear about what you want and communicating that to the rest of your family and, and determine if it's doable. You know what? I think my situation is not uncommon. I think it's, and it's hard for me to, it, you know, I didn't realize my situation was not uncommon until I like went to school and actually, my MBA was in small and family business management. Right. So I read it on all of this, you know, like reading my own biography over and over.
Ryan Tansom: Is it therapeutic or do you get pissy? Because same thing, that's why I've been doing this for the last five years. Like what the heck happened, man?
John Garuti: Yeah. Cause I think a lot of people feel like they're trapped and like they've got such a unique situation then when reality, it's not, I actually a, I think I read something like 30% of mmm, you know, family businesses, they wound up, yeah, the kids don't want to take it over from whatever reason. Or maybe it's, um, only 30% of family businesses in, over by the next generation.
Ryan Tansom: I think it's like 30% transition to the next generation.
John Garuti: Yeah.
Ryan Tansom: 8% and 2% I don't remember what it is, but it's like, it's crazy small. And I do believe you're right John. I mean it's like, it's, there's this whole big argument or like, you know, really big confusion ambiguity around, okay, there's W2 salaries, then there's ownership and those are different, right? And then there's the family estate versus sweat equity and like others, all the stuff that can be cleared up. But you have to have hard conversations. Right. I mean, so many family businesses, they, you know, whether it's your aunt or you know, other people, they just kind of slot them in over to the corner to make people feel good instead of addressing the family needs, the family businesses needs and that you're really good book for the, for the listeners. And I interviewed him the circle back or even for you John, and it's called Every Family's Business. I think it's by Tom Deans and he literally just said every single family business should sell. So like the kids, the kids should either buy it at fair market value or, and there's a lot of reasonings behind that because there's, there's lots of reasons you shouldn't do that too for tax planning. But anyways, it's just, you're right. I mean like there's just emotion, just get so, so involved and it's like almost like you said, is that at some point you're just like, screw it man. It's not worth it because I'm going to go, I'm going to go certifiably insane.
John Garuti: I think the key with family businesses, there can't be any grey area. If you give people roles, you've got to let people run with it. But theres got to be clear expectations as well.
Ryan Tansom: No one knows whether they're succeeding or failing.
John Garuti: Yeah. How are you going to get there? I mean all, you know, all these years, but they just like didn't give a shit. Basically and I come in, I'm a young kid, questioning, well, what the hell is this and why? You know, why if you look at that guy's argument, you know, he could say, well, your father isn't giving me direction, which was true. So yeah, I think important for any business, right? To have those.
Ryan Tansom: Uh, not to go down some rabbit hole, but John, when I started in the business, there was no org for 110 people. Yeah. Like what do you do at, I dunno. So till, uh, before we wrap up, what does it, what do you tell the listeners what you're doing now to help people kind of in the situations that we've both been in?
John Garuti: So I've actually moved and got my new career, I'm working in an M&A within digital brokerage. So our focus is software as a service and we also work with ecommerce. Amazon stores, rarely a online business. And you know, I'm going to keep taking my, I mean, my approach to this is constantly evolving because I've only been doing good now about five months. But for me, I'm trying to just to become this, you know, ultimate resource for business owners, even though I make the money on the exit at the end of the day, you know, I'm meeting people at all stages of business startups growth stage, maybe they're struggling. And, um, for me it's, you know, I want to be a connector, right? I want to help you find the right resource to get you out of the funk you're in or get you to the next stage. So that's where I've really been focused on building my network, meeting people like yourself and you know, other people that can help with excellent growth, people that can up with the startup phase or you know, you need an outsource sales and marketing team or, um, you know, I met this girl, this customer journey optimization, which is a great thing.
Ryan Tansom: That's fun. How can our listeners get a hold of you?
John Garuti: So that's fun. So that's where I'm, yeah, certainly, you know, you can hit me up on Linkedin, my URLs, linkedin session slash SAAS business broker. Um, you can email me a John Docker Rubia digital acquisitions.co and you're not happy. I'm happy to chuck. And really anybody that's in the online space, if you've got a business, let's talk now, because I'd started coming and giving you some insight on what you're, you know, a real valuation is, this is another thing that's been driving me nuts. So many people are out of touch of what their company is worth today. And so I think, I think kind of doing this new thing now where it's like, let's reverse engineer your exit, right? Let's look at what your valuation is today. Let's look at home. We'll start, let's look at what you want to leave the business with, right? You want to leave the business with $1 million in your pocket?
John Garuti: All right, let's reverse engineer that. Uh, you know, let's consider all the fees, the taxes, you know, who your business needs to be from a valuation standpoint and figure that out. And then this is, you know, probably a few years out, but then, okay, what can we fill in between that time to help you get there? But that number where your business needs to be. Um, you know, let's put the, let's put it, I'm happy to put together at least an overview of what the plan should be to get you that exit three year assignment road and then they can connect with somebody like you to actually implement the right.
Ryan Tansom: John, thanks so much for coming in and on the show and sharing your story, man. I appreciate it very much.
John Garuti: Yeah, I had, I had a very fun time. Appreciate you reaching out to me and let's get the conversation rolling.
Ryan Tansom: Well, I hope you enjoyed that episode. If you're in a family business, you probably can relate with a handful of those stories that we went back and forth on. My big takeaway is implement some sort of accountability in your business, regardless of your family business. Put in traction eos or some sort of Rockefeller habits or, okay. Or something where there's an accountability chart, KPIs and very clear expectations for employees regardless of whether they're family or normal employees. Because people don't know how to judge themselves or what to actually expect if they have no idea what they're going to be held accountable for. So if you have clear expectations of everybody, then the next big piece is clean up and separate the family estate from the family business. There is the difference between ownership and W2 salaries. So in the example of his aunt and his dad, there's a hundred percent easy ways if you've got the growth next to planners like us to decouple the business and the estate and ownership versus W2 salary.
Ryan Tansom: So that way everybody can get what they want and people don't just have to stay in the business because they are begging for the family estate when that business eventually liquidates, if it ever does liquidate. So cleaning up those different technical aspects will immediately reduce tension and conflict because everybody knows what's at stake for themselves and for the bigger picture for the family and for the business. So if you have any questions on this, go to GEXP Collaborative's website, reach out to [email protected] or take our 25 question five section multiple choice quiz that aligns all of your thoughts and where you're at in the five different principals to figure out whether you had the right vision, you write financial targets, the right exit options, your value drivers and your team locked and loaded and ready so you can pull the rip cord whenever you want. If you enjoyed this episode, please go into iTunes. Give me a rating, a huge pain in the butt. And I know, I know it's a lot of work when you have a lot of other stuff going on, but I appreciate it because it allows me to get really good guests on and provide you with more content. So with that being said, I hope you enjoy the day and I will see you next week.
Written by Ryan Tansom
Ryan runs industry-specific podcasts on his website which pertain to mergers and acquisitions, and all the life lessons he wish he had known then. He strives to bring this knowledge to his listeners in a way that is effective and engaging by providing new material each week from industry experts.