Podcast: Shotgun Clause Exit and How to Get the Terms You Want, an Interview with Michael Kaplan
When and where a shotgun clause works and what to do when everything goes wrong and forces you to use it.
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.
After erosion of partnership agreements and some company culture issues came to light, Michael exited ZeroRez. He credits the use of a “shotgun clause” for diffusing the situation and teaching him something about his business expectations moving forward.
He currently works with Red Hook Investments, a firm that specializes in turnarounds, private equity, and cash infusions.
If you listen, you will learn:
- A quick recap of part one of this interview.
- How the original partnership began and the initial agreements.
- How Michael protected himself when other partners left.
- How they handled the first departures,
- What is a “shotgun clause” and why do you need one?
- A change in capital structure.
- A new Omaha location and the lessons learned from the experience.
- An offer to purchase equity in the franchise.
- Why they didn’t just buy the franchise.
- The beginning of agreement erosion and the issues that developed.
- The launch of new locations and the success and growth rate.
- Addressing the problem of “meddling” with the technicians.
- A change in company culture and Michael’s view on it.
- Why he left the leadership team and the fallout.
- The last straw that led to Michael’s exit from the company.
- The Mexican Stand-Off that got Michael out of the bad situation.
- The lessons learned from the experience.
- How Michael vets business relationships now.
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 136 and you're in for round two episode two of the two-part series that I did with Michael Kaplan. If you listen to episode 135 you'll hear Michael's growth story, how they purchase Zerorez, a franchise of Zerorez, for 300 grand and then scaled up to $18 million. He shared all of the inner workings about how they used radio ads in order to absolutely blow the roof off of the growth of the business and if you're just dialing in. The reason I did two episodes with Michael is because a lot of times I don't necessarily have all of the time to get into the inner workings of the business, how they grew, how they scaled, all the things that they did. Really, really interesting on the operational side as well as the intricacies of the exit and the things that are really, really interesting as far as it relates to the technical things.
Ryan Tansom: So after I heard Michael's story about how ridiculously fast they grew and with what means, I decided to have two episodes. So on 135 is his whole growth story and it was specific about how he actually scaled the business with his partner. And then on today's episode we went all the way back on how the company was formed, what was the partnership dynamics, how they bought out a couple of early on, uh, partners and investors and then how him and his current ex partner ended up growing the business. But then all of the different complications that happened behind the scenes and Michael was so transparent, so authentic, and even was able to really self reflect. And some of the things that he had done, his partners had done. And I think that this is really the true essence of what business is. Because how many times have you been to a conference and every single entrepreneur business owner you meet like how are you doing?
Ryan Tansom: And they're like, great, we had 1 million, 5 million, 10 million. And they never talk about the real stuff behind the scenes, which is how cash flow is going or how their partnerships are going or what are the different dynamics that are happening in the business that could literally blow it all up with one a ticking time bomb. And so Michael shares his whole story about the dynamics that they had with his partner and how one little issue that started with real estate, it took a wedge and then slowly grew in between him and his partner that led to his eventual exit, which they did a Mexican standoff. And you'll hear all about what that is and how, how Michael eventually got his payout in what he's doing now. So I really, really hope you enjoy this episode because this is the stuff that really matters and these are the things that you want to start planning ahead for before partnership issues happen or before the random buyer comes, get your stuff in order so that way you've got to rip cord for winning.
Ryan Tansom: However your exit will eventually happen. If you want to know how well prepared you are to maximize the value of your company and control your exit with a ton of different exit options, go into the show notes. We'll have a link to our growth and exit planning survey, which is 25 questions five and each one of the five principles. So that way you can reflect on where are you today, what should you be thinking about so that way you can maximize the value of your company and your exit? So without further ado, here's round two with Michael Kaplan.
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: Mike, how you doing? Round two.
Michael Kaplan: Fantastic. Glad to be here sir.
Ryan Tansom: So for the listeners that did not listen to the first episode last week, we were chatting a lot about your scaling of Zerorez and the crazy things that you were doing as you were juggling with the shell game and making sure that you had the trucks and the people and the sales. And um, but I think what's cool about what you're willing to do for us as a, as you and I were chatting a lot of times, I don't have the whole, I don't have enough time to be able to get into what people do in their business and how they actually did it and the whole dynamics and the technical stuff of the partnerships and the exit and all that stuff. So this is awesome that you're able to, you know, and willing to share both sides, you know, so listeners go back, listen to the episode one.
Ryan Tansom: You want to know how Michael took it from 300 grand in revenue to 18 million carpet cleaning. So there's a lot of gold nuggets there. But you know, maybe Michael as we take this kind of the technical partnership side and I, you know, maybe you had a little bit more detail. You were talking about your partner who was in the real estate space and had a big challenge along uh, the Oh seven or eight or nine. How did, how did the whole structure start and then what was kind of the, some of the things that you guys did to kind of kick off technical partnerships in the shares and who owned what?
Michael Kaplan: Sure. Well, you know, a lot of partnerships are developed with a handshake and a we'll figure it out. And um, I entered into this business being my, my first private investment, uh, via law school. And so I was not comfortable with, oh well we'll just wing it. We'll figure it out. Actually have an attorney, a friend of mine from law school, he called me is his law firm, was breaking out those small firm and a partner was leaving. They said, okay, I'm kind of screwed up. I don't have partnership agreements. We don't know what the score is, know how to on a plan this out. It was like, if my attorney is in that spot, I'm glad I, and mapped it all out. And, and we, we did benefit by having a strong agreements and I always look at partnership agreements like playing monopoly. Do you play monopoly? Mm.
Michael Kaplan: Okay. You're an entrepreneur. Of course you play monopoly. So, um, do you put money into free parking when you land on taxes and you have that sort of stuff?
Ryan Tansom: Oh, I know where you're going with this.
Michael Kaplan: Do you, do you put money on free parking? Do you, do you put money into free parking so that uh, when you land on free parking, uh, somebody gets a windfall and gifts, you know, all the money that's in that pot.
Ryan Tansom: Why would you do that?
Michael Kaplan: Oh, well see some people do, some people don't. It's not in the rules. It's not how you play, but when I land on a luxury tax, when I landed, when I play, uh, we always put money into the middle when you land on luxury tax or you, you've got fees and things like that. And so it puts more money into the game rather than taking it out of it so then when someone lands on free parking, they get this windfall. Now, if you and I were sitting down to play and didn't talk about that in advance, if we didn't figure out free parking or not first person to land on luxury tax, we're going to have a conflict because we didn't plan out the rules in advance the game.
Ryan Tansom: First of all, I'd never heard anybody do that second. Well that's an amazing analogy. Totally thought you were going a different direction with that.
Michael Kaplan: Uh, it, it, it kind of makes sense. I mean, whatever game you're playing, you got to, you got to figure it out. I mean, cribbage there, there's a handful of rules that people play different ways and...
Ryan Tansom: Each other's cards, right? You play up or uh, or knots.
Michael Kaplan: When is it, there's some with, uh, uh, if you, if my grandpa used to always play, if you get the opponent to cut the deck, you get to move forward. I don't know if that's a totally a play, but, but if we didn't figure that out in advance and we never played together, there's room for conflict. And so mapping things out in a control document before you get married and partnerships and marriage, it's really important. So we, we started with four partners, two of them exited, I guess three of them now. Then I laughed. But to them exited, I think the issue in hindsight, you know, there were some personality clashes and expectation differences, but the real difference, the real challenge was the game we were playing was different than the game we signed up to play. We signed up to buy a little carpet cleaning company and see if we could grow it. It turned into a high-paced, uh, leveraged, run hard 24 hours a day kind of deal. And I don't think that was consistent with everyone's expectations. And, um, so the way we execute on the game was different because, uh, some parties evolve differently than others to the new game we were playing.
Ryan Tansom: I think it's huge because like, um, another quote that I've heard from someone is like, when you, when you don't address something and there's, there's a void, people fill the void whether they're, whether it's there or not. And so if there's a void there and you don't address it and don't set the expectations, people fill it, it's usually one of the worst stuff than actually use is normally in the actual reality of it. Anyways.
Michael Kaplan: Yeah, I totally buy that. So we, I mean, we started running hard and as you said, uh, my partner, the lead investor who found, uh, the, the cleaning company we bought, he, uh, he filed for bankruptcy. And the deal we had early on, we ended up restructuring a little bit because I took a discount on my cash. I didn't get a pro rata share dollar-for-dollar day one because we had an agreement, I wouldn't have to guarantee any debt. So I de-risked the situation, um, and said, okay, I'm going to put cash in, I'm going to get some sweat equity, but my dollars won't go as far as his because you know, he's, he was the big, he was the lead investor. He found the deal and he was going to take on all the burden for all the trucks, all the equipment, all the stuff, well files for bankruptcy. We're blowing up and it becomes clear that no one wants his guarantee anymore. They're going to want mine. So I just went back to him and said, listen, there, there was a time and a place where this deal made sense and we were close friends and really had alignment. He said, that's fine. Um, so he sold me a little bit of equity to true up the situation for very cheap and ah, it, it just leveled the playing field and kind of unwound that discount that I had taken.
Ryan Tansom: Did you have bought the other two partners that when that happened? In your operating agreement, your... Did you have by cells that were saying, hey, like here's how we're going about as a company, how did you guys end up like getting them out of the business?
Michael Kaplan: So, um, it was very clear in the agreements that management, uh, you know, employment and ownership were totally different boats and we said, listen, it's not working from an operational perspective. You can keep your equity or you can sell your equity. And both parties wanted to sell their equity, uh, at when their time in operations ended, we had, um, a handful of provisions that I think are probably pretty standard in operating agreements. We had drag-along rights and tag-along rights. So if the majority of the company sold, minority investors could tag along with that purchase price and exit. If a majority of the company was selling and there was a requirement to bring the smaller investors along, you could drag them with you, if you had a super majority. And we also in our buy sell, we had 'em, I don't know what the formal phrase is, but I always called it a Mexican standoff where [Ryan interjects: shotgun clause.] So mmm. And that, that's how I exited.
Ryan Tansom: Can you explain that for the listeners because I think it's, it's a huge deal that a lot of people don't know and, and there's so many people that get getting some super screwed up in situations because they don't have it.
Michael Kaplan: Yeah. And so, I mean, you can, you can value your equity in any number of ways, but at the end of the day, a really fair way to do it is to let the market decide. Now bringing a third party in to be a buyer is really tricky because they're taking on your asshole partner. Or whatever baggage there is, right? It's tough to have a fair valuation at that point. And you can say on paper what it would be worth if it's third party were to buy. We said, you know, it's more fair to, hey, what are you willing to pay and what are you willing to buy it at? Let's have that be the number. So partner A, being me, can say we are at an impasse, we are not making decisions in a manner that uh, uh, we're both comfortable with. We're going down the wrong road, we've got 30 days to cure it. If we don't fix things and have me call off the dogs within 30 days, I have the right to make you an offer and that offers going to list out the price and terms for buying this company. You get to choose whether you're the buyer or the seller. So I set the terms, you're the buyer or the seller and it's super fair because it, it just puts the pressure on, uh, the other party to say I know exactly what the deal is and I can pick whichever side best suits me. So, a shotgun clause.
Ryan Tansom: So, and we'll get into how that actually went down for you, but it's a little, let's kind of go back to the, the sequence of the story. So as you then short up where you 50/50, and like what was kind of the timeline or did you say you had one other investor at that point? So like kind of walk through like the, the, the timeline of the...
Michael Kaplan: We had another partner, Oh, who he had the carpet cleaning experience. He was kind of the lead who brought the parties together and the thought was he'd be the general manager. His, I won't say his pedigree was inconsistent with expectations, but he was, the way he executed just was inconsistent with, with our value system.
Ryan Tansom: Mhm.
Michael Kaplan: We were all about building people up and giving big hugs, his experience in the cleaning industry had him, uh, more of a top down approach and it just, it just wasn't a good, good fit. Uh, so, you know, I think there were some hard feelings and some frustrations and I think he, uh, had a big smile on his face for many years when he left because he got a big check. Um, so at that point, um, uh, when he exited, I was still, I had put less cash in. Uh, so I was 43 and a half percent of the Minnesota operation. We decided we'd go 50/50 on all future ventures. So we bought a building and sold it. We bought a second building, 50/50 partners, we set up a company that scraped a royalty off of several of the businesses, 50/50. Um, so I'll walk you through kind of the capital structure that we have.
Ryan Tansom: The entity structure cause like, um, even before you get into that, I'm curious when I go, did you write a check for that other than the owners, would you finance and we just kind of curious cause as as people are wondering like, okay, how do I, what's the best way to do this? So maybe kind of address that and kind of get into the entity structure and the capital structure.
Michael Kaplan: So we, we did a seller finance terms, um, and it was uh, both personally guaranteed and guaranteed by the equity. So they had kind of a, what do you call it, a trust set up where um, Z, and that's not the right word, but...
Ryan Tansom: Almost like a double-back to guarantee where you're like, it's almost like you're the primary lender. Like a bank for the most part, right?
Michael Kaplan: Yeah. So the, the equity that he, the individual sold, secured the loan. So if we stopped pain within the 36 month period, uh, that we had in terms for, he could take back the portion that hadn't been paid for.
Ryan Tansom: Got It. Okay.
Michael Kaplan: So, uh, secured by the equity as well as secured personally, um, through, you know, just guaranteed. So, um, in 2013, we opened another location, we opened in Omaha and it was kind of by accident. We thought, okay, it'd be cool to, is that a new market? But there was a former employee who had a ton of cleaning experience and my partner was really excited about investing in him and I said, you know, I understand the business and understand the model. Yeah. I don't believe necessarily in the guy, but I feel like the risk isn't that great. So we went to the franchise owner and said, you know, hey, here's what we're looking at doing. We got some good terms and we put some money in. We brought in an operational partner who was our general manager as an investor. And because we were opening an Omaha, we've asked the owner of the Des Moines franchise if he wanted to come along because we thought it'd be fun and it was kind of his natural next step to open another market. And, and we didn't, we were more about making friends and making money.
Michael Kaplan: Both were important, but friends first. And we said, hey, we don't want to step on your toes. Are you interested in doing this with us? And if you have any hard feelings you can do it yourself. He said, nope, I'll come along. And he set up the company with his dad Tim Best. And so we actually put cash in. Um, and we brought along, we were supposed to be minority investors. Uh, and the former employee who, uh, had the concept to open Omaha, uh, you know, he said he had a lot of money and it turned out he had very little money. So he came in with about a quarter of the cash and we picked up the rest. So he, most of his value was on sweat equity anyway, so not a huge deal. I think I had, um, at the end of the day, 23, 24% of that business. We then decided, well, okay, Omaha's working the model, we've vetted it, it makes sense. We know how to buy the media, run the trucks and organize this thing. Kind of using a hub and spoke where the Minnesota operation was doing the administrative stuff and the field ops just had to make sure that the, the guys in the trucks were working. Um, so in Minnesota....
Ryan Tansom: Quick question on that, Michael. Did you, when you had different entities and stuff like that, I know a lot of people when I look at their books, they get, they don't have like bill twos or like where like you know, the Home Office is billing so that way you've got like a standardization of like, okay, if this is a standalone operations, like this is exactly what the P&L would look like. Did you guys do that?
Michael Kaplan: I'm not entirely sure I understand your question, but where, what I would say the organization looked like is we had a operating agreement, a service agreement that said, here's what the Minnesota operation is going to provide and here's the fee it's going to charge. That's exactly. So it was, it was contracted out and it gave you each of the members unilateral right to kill it with 30 days notice. So yeah, you don't like the way we're answering the phones are like the fees or whatever. No, kill it. But we're going to be without phones in 30 days. Nope. Yep, Yep. Okay. So it was customer service, marketing and finance and procurement. And truthfully it was management as well. So the Minnesota Group through that contract was taking the burden of running the business. We had a general manager in place and that person was in charge of making the trucks and the people run, ah, out of state.
Michael Kaplan: So we said, you know, this model makes sense. Let's do it again, but let's do it a little smarter. Thus the unwinding of my, uh, my business relationships. So it was the beginning of the end. Um, we said, um, we met with a group called platinum management. Uh, they do turnarounds and growth strategies and a really good firm of investors and business professionals in the twin cities and not with them. My partner knew, uh, their managing partner through church. And we sat down and we rolled out the big ideas. We're going to keep 50% of the equity. We're going to bring on an investor group that's going to take 40% of the equity putting up 100% of the cash and 10% of the cash raised will go two. The company, uh, the platinum management group, for finding the investors, uh, because we didn't have investor networks, uh, that were robust.
Michael Kaplan: And we also said, no friends, no family because we wanted it to just be business. Didn't want to complicate things and you can't see me on this podcast, but I'm winking because that's not what happened. So we also said no waterfall distributions. Um, we're not going to take a backseat just because we didn't put up the cash. We're bringing expertise and we have a real opportunity across, we're doing this instead of something else that can make us good mom. We thought we were going to open 10 franchises. We went to the franchise owner, and they said, Yep, you can sign a contract open 10. They had brought on a third party, uh, to negotiate the deal. And he said, nope you get one. And we said, that's not at all what we had expected.
Ryan Tansom: Did you have the money yet?
Michael Kaplan: We did not have the money yet. Um, but we were making plans. We're spending money. We brought on, uh, uh, from that did market analysis in a 10 or 12 locations helped us try to identify if the magic in the twin cities, uh, and what we thought the drivers of that magic word could be duplicated in Pittsburgh, St Louis, Cincinnati, Charlotte, Tampa, Seattle, a handful of others. I'm really trying to quantify, okay, here's the Mojo. Where else does that same Mojo exist from demographics, psychographics, et cetera. And so we're spending a little bit of money franchise or some tomfoolery. We said, we're not going to negotiate with that guy. And we flipped the table and we said, listen, you the franchise owner had been trying to raise capital for growth, uh, for a couple of years unsuccessfully. They had tried the debt markets, they had tried to sell equity, nobody wanted to play. So we said, how about we be your lender?
Michael Kaplan: We will, uh, buy equity in the Minnesota operation, the Omaha operation and future franchises that will open. We won't pay you, we'll stop paying you a royalty. And they said, Huh, that works. So we bought equity in our business, assuming that we're able to make a cash flow. And we gave them 1.2 and they said, that's great. Everyone wins. And I think they were laughing all the way to the bank and our bankers laughed all the way to write us a check so that we could do the deal. Because within two months we were cashflowing from having not changed the relationship where we didn't have to pay them a royalty.
Ryan Tansom: Yeah, surplus. So curious in that negotiation, Michael, did you guys ever, you kind of almost stepped right into the direction I was going to ask you. Did you guys ever think about buying just the franchise, the whole thing? Because with how much...
Michael Kaplan: We did.
Ryan Tansom: Yeah, with the machine that you were running. Like why wouldn't you just go for the whole thing?
Michael Kaplan: So we looked at it first. Their self confidence was a little higher than their balance sheet and so they wanted too much money. But second we started doing the deep dive and I met with some people in Franchising and came to terms with the notion that your customer is very different as a franchise. Your customer is the Franchisee. And I realized I was great and really enjoyed working with a team who obsessed about the homeowner and developing a team that was going to obsess about the Franchisee was a very different game. And I didn't pick the existing lot of franchisees and um, there some great ones and there were some...
Ryan Tansom: How many were there at that time?
Michael Kaplan: Probably 25, 30, somewhere in there. Um, it just, we realized it was a different sport and uh, it was not the sport we wanted to play because we could have an easier path to making. Great money and having fun by opening more franchise. So we worked out with the franchise owner, we set up a company that, um, would sign the franchise agreements and that's really all those companies did. Those companies raised money and signed franchise agreements and management agreements and contracts with other entities to run their business, which was the Minnesota operation. And they agreed to pay a below market royalty to an entity that my partner and I owned because they didn't have to pay a royalty to the franchisor. So everyone agreed and it just shifted the relationship. Then we became kind of a defacto franchise owner...
Ryan Tansom: You're taking over the ride instead of the franchisor.
Michael Kaplan: Right, because we, we paid it forward upfront. Yup. Yup. And it's a 40 year agreement that we have with the franchise owner. So, uh, that's uh, a little bit unique in franchising. Um, as long as those don't go out of business, um, uh, we're pretty happy and I have exited the operations and exited the equity, but I still get an override on every dollar that is processed. So I have basically a parking meter, uh, until, until I don't.
Ryan Tansom: 35 years, whatever you signed it. Another 30 some years.
Michael Kaplan: So where, things went sideways with my partnership. Um, we bought a building in Saint Louis Park, a suburb of Minneapolis and I think that there were some challenges. Um, we bought it from a friend of my brothers, um, and the deal shifted a little bit. Um, it looked less and less like a super friends and family deal and more and more like a retail deal. And it's what we signed up for. But I think there was some, I got some sideways looks from my partner, turns out where the market has gone since 2014 when we bought the building, we've done very well. We bought the building for a little over 6 million. We think it's worth probably seven and a half or eight. So it, we're doing just fine. But I think it started a rift where in spite of having been a trusted team mate, I think there were, uh, my partner had some questions about, was this above board, et cetera. And you know, I was in the same lot as him. I got the same deal he got, it didn't go the way we expected. So, you know, we kind of paid the price together, but I think he still uh, had some questions that.... yeah. And he dug deeper.
Michael Kaplan: I think he have understood that the guy who has had his back and treating him like family still had his back and you know, paid the Piper just the way he did on the real estate transaction. But contemporaneous with that, the deal to open our next locations, where where we got that royalty discount went sideways and I will take some of the blame for it, but of the provisions that I mentioned to, you know, waterfall distributions or preferred distributions to investors, no equity split amongst the way that I talked about and no friends or family, those three provisions, we adjusted as my partner's son came on as the lead investor. He had made a ton of money in real estate in a couple of states. Um, he had a great cash flow and millions of dollars and my partner really wanted to bring him in. Okay. So no friends and family.
Michael Kaplan: We changed that one and he started negotiating the deal, which we had said we wouldn't do. We had said there's plenty of money out there from plenty of people who want to play the game we are trying to play, but it wasn't worth standing my ground at the expense of possibly screen up a partnership that was working really well. So we gave his son a little bit more equity. We gave them preferred distributions.
Ryan Tansom: Can you explain the prefer dude cause you know the waterfall, first money out. Yup.
Michael Kaplan: Yeah. First money out. So it, he put in into the first business, you put it in, you know, a couple hundred thousand bucks when distributions we're going to start happening. He would get his money back first and then other investors would get their money back and then we would be caught up. So what it did was change the timeline on cashflow for people in my shoes.
Michael Kaplan: And on top of that we had set a plan out. We're going to raise $2 million, we're going to take the money in three chunks and we're going to have some extra money, but we're going to be overcapitalized so we don't screw up and we're going to have the ability to play some consolidation within a dysfunctional franchise system. Well, that's shifted to let's raise on a case-by-case basis, dramatically less and do it on a budget and have to beg for money when we want it to go do another project. So yeah, because I mean, you know, how hard are you going to negotiate with your partner's son when he has a completely different vision of the type of deal? Uh, and, and frankly, you know, my partner went to the cabin and had a bunch of beers and worked out the way it was going to work.
Michael Kaplan: So his son went into the conversation expecting something different than had been arranged by myself and my partner. So it's not that I didn't negotiate, it's not that I accepted all of the revisions, but a version of change happened that was not on the table, uh, when we set out to do the deal. So there's a bit of a rift, right? Um, there were some challenges and we're working through them. It got a little hot and heavy. His son said, all right, let's exit. You know, I probably, I don't want to do it. Talk to him off the ledge. We were already pregnant. We were already running forward. We had people hired, we had locations picked out. We said, all right, I'll suck it up. I, I'll make it work. So we're running forward. That was end of '14. Beginning of '15. We launch in Pittsburgh.
Michael Kaplan: It blows up, it goes gangbusters. Day One, we've got four trucks, one employee and a 30, a $25,000 media spend with no revenue. Month two, we cleaned somewhere in the 60 or $70,000 range. So we turned on the lights on radio and it just took off. I mean, it went better than pro forma best case scenario and we're just running like crazy hiring people and it did 1 million bucks in it's first year and nobody could spell Zerorez. Um, so we're, we're winning all over the place. Um, so we decided in 2016 we're going to open up St Louis, we're going to acquire Savannah and by part of Charlotte. So we take on more things are going okay. There's some challenges, some confrontations. I had a couple conversations with my partner about our core values and how we're making decisions. Uh, a conversation topic had consistently been twofold.
Michael Kaplan: One, stay out operations because an owner of a business that has management below them when they step in and talk out of turn to... Say you go into the garage and you've got a mechanic and you start coming up with ideas about, well what if we did this and what if we did that? You have undue command influence you. They take it as the law. The boss is telling me to do this, but the, the, the, the mechanic has a boss who has a boss and they set out his quarter and his priorities, his KPIs and all of a sudden he's got, you know, he thought he was going right, but now he's going left. And so it screws up the system. We had consistent conversations about the difficulties and challenges. And then my partner would say, you know, I'll stop mettling when people start doing it right. I said, well, you've got to give them enough leash and authority and autonomy to be able to succeed. And so nobody's right or wrong, but where the rubber hit the road was that it was disruptive. I call it whiplash. Everyone's supposed to be looking left partner, walks in the room, whispers some sweet nothings, and they're looking right. They get whiplash and the team, it leads to dysfunction.
Ryan Tansom: Were you doing traction or eos or anything like that?
Michael Kaplan: Yeah.
Ryan Tansom: And during that process, were you?
Michael Kaplan: In name but not in job description. So as the owner of a company and my partner had a real hard time having a job description, and on the job description it said, stay in your fucking lane. And it, you know, but he saw himself as chief disruption officer. He's supposed to take systems and break them and reorganize people. You can do that, but that's why you have an integrator in traction terms or a CEO. The CEO has this great vision and they need to run it through the person who's going to implement and make the trains run on time. They don't get to go and metal in that same way because it leads to this function. So that was issue number one for me. Issue number two was there was always a group of employees that was close to my partner who would call him Jim's guys. There are gym guys cause they drink beer in the back of the shop with him. He, he had a level of trust with them, uh, that extended beyond business. And the conversation was basically they would have to murder someone to get fired. And even then it's unclear if they would get fired. Um, which made it very difficult for the operators of the business to make business decisions about, uh, the team.
Michael Kaplan: So some, some crap went down, um, at the end of 16 where, um, a decision was made that preferenced certain individuals at the expense of the team - under cut the team to take care of a guy. And I get why you take care of the guy and why you would give them the hug that you give them but not if there's collateral damage that sets back the whole trust level of the rest of the organization. Called him out on it and said, listen, I've done a lot of thinking. We're kind of co visionaries, Co Ceos and I'm gonna step back and I don't, I, I'm going to exit operations. I'm going to hand you the keys because uh, one I think I've got lots of other fun things I can do. I can add value in the business sitting in my role on the marketing team, on the finance team, and as a person who has the job of helping position the business and you know, thinking five years out in figuring out what business lines we needed to get into.
Michael Kaplan: But, but I'll stay out of the, I'll stay out of the eos meetings. I'll exit the leadership team, but it requires a handful of things. One that we operate traction in its purest form where you have a job description and you stay in your lane two, you deputize our chief operating officer or integrator to really do his job. And he's running the company day to day and three that the rest of the leadership team holds everyone accountable and doesn't let bullshit slide through the cracks. And, and I said, listen, I don't want to move your cheese. I'm not trying to screw up your game. I'm not trying to break up. I'm trying to find a reasonable way for us to execute better because what we're doing is dysfunctional and not working. So it got a lot worse and then it got a whole lot better. And we've, we hit a groove, we hit a rhythm where we're making good progress and I think everyone was feeling really good. And then at the beginning of 2017, uh, excuse me, 2018, um, so 2017, we're implementing this new system where I'm on sabbatical.
Ryan Tansom: I was gonna say, so you were kind of like almost a board member for almost a year then while that was all going on?
Michael Kaplan: Active, but yes. Um, so, uh, I was meeting with all the players, but I was clear to not give direction. I was just, you know, listening and giving advice and, and uh, I had a role on the marketing team and the finance team and uh, with visionary, owner operator, visionary integrator owner meetings. So I was meeting with the COO and with my partner once a week to help make sure that the big ideas are going the right direction and their job was to figure out how to execute.
Ryan Tansom: Well, I think, you know, move forward. You can give the second part of the story where it's just second kind of see where it's going to go. I think it's an interesting pause because I'm Michael, a lot of people that I talked to and you and I both know is a lot of people think it's not possible to do that. You know, where they have to be a visionary or they have to be the integrator and they can't be a board member and still talk about the things that they want to talk about. You know what I mean? Like where I think a lot of people think that they literally had to go out to pasture where I, I argue all day long. You don't have to do that. Like you can do kind of what you just described where you talk about the interesting things and the players at B and still have an important role. So I just think it's interesting that you've actually accomplished that before things went south.
Michael Kaplan: It, it was very challenging. Uh, it had a level of humility that I had to come to terms with, but I think it could have been magic. I mean, we had an ATM, we had, uh, a business in Minnesota that had 200,000 customers in its database. Hard to screw up, but there is a lot of opportunity for improvement and prioritization and big ideas. Um, and I was still a vital player in the marketing world. Um, so I still did have some control and between that and breaking up, uh, it was much preferred. Um, it, it took a while. It got way worse than I thought it would because I think my partner felt abandoned. He felt like I was taking my ball and going home, like he was going to do all the work and you know, and I'm still getting a paycheck and you know....
New Speaker: Did you recalibrate the, the pay that you were getting compared to like what you were? Cause I think that's sometimes a struggle of like getting an actual W2 wages or was there just an agreement Like, Hey, we both get the normal partner pay?
Michael Kaplan: We had conversations, uh, and we did not make a change. Uh, and my position would be that the, the wage we took was not CEO wage to begin with. We weren't, we were taking most of our money through distributions. The other element that had me feeling very good about not adjusting my pay was the work I was doing was, uh, effectively as a media agency. And when you compare what I was being paid to, what a third party would be paid, which is typically 15% of the media buy. I was dramatically underpaid because we were, you know, across all our bases, we were spending close to 2 million bucks on radio, you know, million and a half, 2 million bucks, 15% of, that's a big number. I wasn't close to that. Yup. So, um, and you know, that that was part of the strain and strife as we were figuring out how to operate.
Michael Kaplan: But we hit our groove, we started to come to a really good spot and meanwhile I'm still having conversations with my partner about behavior and how we operate. Then the shit hit the fan at the end of, or the beginning of 2018. We always did our holiday party a little bit late. And so holiday party story. So, um, there's a gentleman who ran, uh, one of our operations and he also was the manager of managers. So he managed the guys in who ran St Louis and in Charlotte, in Pittsburgh. And he was a pretty big deal. He was on the leadership team and he did some bad stuff. Metoo had just become a thing, uh, the me too movement. And so everyone's on heightened awareness of sexual harassment and sexual impropriety and what consent means and all that stuff. And you know, the guy, the guy that fucked up at the Christmas party, he, he made some people really uncomfortable at about 2:00 AM, uh, he beat the piss out of a key team member's boyfriend like beat his face in.
Michael Kaplan: And so we sit down and we have the conversation, what are we going to do about this guy? And, um, it's pretty clear that there was some coaching that needed to happen and probably some disciplinary action. Um, the, the correct step that was taken was he stopped being affiliated with all of the other locations. And so his relationship with the Minnesota branch was largely severed because Minnesota had the contract to be the support network for all the other locations. But two things happened. One, uh, there was no discipline in terms of his role or termination or coaching and counseling that, that met any, uh, high standard. Uh, uh, in his core job and two my partner went on kind of a retaliatory tirade. Um, going through it, it came out that that this individual had slept with one of his direct reports and you know, the general manager, uh, sleeping with a technician is really hard to get consent there and it's just bad behavior.
Michael Kaplan: Now my partner would chalk it up to, he's an outdoor cat, he's got outdoor cat etiquette. You can't expect him to be an indoor cat and not chew up the furniture now.
Ryan Tansom: That's a, that's a rough, that's a rough argument.
Michael Kaplan: We had females on the leadership team. We had, you know, a ton of females and a ton of people with, with daughters. That type of logic doesn't really cut it, especially as need to is becoming like this massive interface thing where companies and individuals are being blown up all the time for behavioral like that stomachaches hearing the, I won't give you the anecdote. That was the worst thing I've heard a business person say, but there was, there was some feedback about one of the girls who had seen some stuff and the, the way my partner talked about her and marginalized her view and her just in general shit on her. Uh, just it, there was no recovery. There was, there was commentary made that just made me, made it clear that, um, I had, I had wondered about the character of the person I was working with and it became hard to get past that commentary. But what really happened that changed my game was the leadership team that I had said. One of the roles we need to have in me not being active is we need to have a strong leadership team that has alignment with our vision. And the leadership team wrote a letter to my partner and said, we're not going to work for you anymore. These are the changes that need to happen. We don't respect where you're coming from. We don't think your behavior is appropriate. And so we've got an employer that pays for my kid's daycare. And the team that largely executes on the plan is saying they're not going to take this shit anymore.
Michael Kaplan: And my partner thinks I authored the letter, he thought that I was, you know, the guy with a pitch fork and the torch and you know, trying to string them up and whatever. I, I was a sounding board and I expressed my dissatisfaction, but I was not a ringleader. I didn't push for dysfunction. I didn't want his job. And when I said to him was, listen, um, something needs to change or you're losing the confidence of the troops. And so you can take a sabbatical and I can step in for a couple of months. You can get a coach and get on a plan and show the true, you take this shit seriously or we can do anything else but the status quo, something's got to change. We can have you take a sabbatical and I won't step in. Yeah. We just let the team run and we'll be, you know, without, uh, a visionary for a little bit, let me know. But if we don't do something, we're going to break up. Got No feedback, no critical thoughts. It, the feedback was we don't have a problem. Just because they say we have a problem doesn't mean we have a problem. So I told him and the leadership team that I was using the control documents and it was on 30 day notice that we were at an impasse and we had 30 days to work it out. And I said, take it seriously now you can be part of the process and help come up with a solution. We can talk about value or in 30 days I can give you a number. Got Nothing. So before 30 days came up, I said, here's going to be the number and my partner, he's in his sixties I had thought I'd be a buyer, but I was okay being a seller. He said, I'm buying. So there we go.
Ryan Tansom: How did you value it? And then it was, or some mechanisms that you had to, I had to put in the document that was like, Whoa, what was it? Multiple of eva or just kind of cashflow or just you come up with a number and that's that?
Michael Kaplan: It was a standoff. It was a Mexican standoff. So I could have said it's worth $4 or $4 million or $400 million. I needed to be prepared to write the check or to sell my interest at the number. So I picked a number that was not as high as it could have been, but it wouldn't have screwed up the company's ability to operate because, you know, we build something beautiful. I wasn't trying to burn the house down and you know, all kinds of tomfoolery happened after that. Um, there were, it was, it was a painful, tough negotiation, getting everything together because we, we had other interests. Uh, we had the out of state businesses that needed to be agreed upon because I wasn't going to add, you know, play a silent role in him executing on these growth plans. We had the building, we had a lease arrangement between the company and the building. It did come together. Um, there was Tom Foolery, uh, that I'm glad I wasn't a part of. Um, and I think that if I were, I'd probably be pretty ashamed of myself 20 years from now after, you know, the cooler heads prevail. Um, so I, I, there are moments I wish I had conducted myself differently and, uh, presented arguments rather than emotion. But I think, uh, you know, uh, there's a lot to have learned from having gone through something like it. I wouldn't wish it upon anybody. It was just a messy, messy thing. But as we're, as we're having a conversation, um, the, the fact that I was trading misery for dollars became so clear.
Michael Kaplan: Uh, when I said to my partner that, listen, um, I assume you're going to ask me to, to seller finance some of this because we're dealing with pretty big numbers. Um, my willingness to do so really hinges on your relationship with the leadership team. Have you taken steps to rectify the shit show? Because they had written you a letter that said they lost trust in you and what have you done to fix it? He said, Michael, those who don't want to be here, will leave. So he's the guy who hops on an elevator, Rican and garlic and, and shit that he just walked in and he's saying, I don't smell anything. So okay, he has no role in it. Everyone else's blind. And if they don't want to be here, they'll... So be it. So when the dust settled, the handful of people left hand full of people stayed. Um, he gave a lot of raises. He cut a lot of... reorganized the company and I think, uh, uh, there's some thinking that's probably pretty shortsighted and there's some thinking that is brilliant that he's executing on and you know, they'll go where they go. But where, where I live today, um, I'm pursuing private equity investment and doing turnarounds. I've got a building that I still own a with, with my partner, and I've got a company that scrapes a royalty with my partner. So I've got two assets that I think, uh, we'll be wealth generators. I have no employees or problems and I've diminished the influence of my relationship with, with a person that exhibited some bad behavior.
Ryan Tansom: Did he write a check to you or did you seller finance it or if you weren't willing to do the seller financing?
Michael Kaplan: He brought on some, it's part of a franchise system. He brought on some uh, friends who own franchises in the same franchise group and some of their friends and associates and he wrote a check. He also, I don't know all the details, but I think he's sold some real estate and refinanced his house and his cabin and all of that to buy me out of the out of state stuff.
Ryan Tansom: But the wire was good.
Michael Kaplan: The uh, the, uh, the, the cash is in the bank waiting to go to the government on April 15th. So it all went through.
Ryan Tansom: Michael, what is the, when you look back at starting at like kind of the, the one degrees that shifted around the building and stuff like that throughout that whole journey, what's like the biggest thing you think you learned about yourself?
Michael Kaplan: Um, I think that I, I started to feel like an-- wherever your, uh, I'm going to piss some people off, but I don't know them and I'll say it anyway and I don't know your politics, but, um, I am, uh, I'd love to call myself a conservative, but I'm a conservative liberal. I'm socially liberal and fiscally conservative. Uh, so I'm not represented by anybody in politics, but there's this lady named Sarah Sanders who it feels like she's an apologist for a mad man, and she's had to openly lie. I started to feel like that. Um, as I was softening the blow things my partner had said and activities he had engaged in, and I just started to realize I was trading misery for dollars and should have left the business two or three years prior. And it's not that I didn't play any role in that misery. I got... Not complacent, but I didn't see a path to change. And I think the thing that I learned is first going into a partnership or a business, a negotiation, I need to be very principled and pick my spots differently and more carefully. And second, making sure that whatever I'm doing, I'm having fun.
Michael Kaplan: I'm working with good people and people that I want to work with is a priority. So I don't know that it necessarily means I would've done things differently in organizing the business. Maybe I would have had some different criteria in different conversations. But you know, my, my partner was never going to be active. Uh, we didn't know the real estate world was going to blow up and you know, he was going to uh, a need for income such that he needed a job, didn't have an expectation that we'd grow a business that was going to be worth millions. I think I, uh, it has changed my perspective about how I move forward in future business decisions.
Ryan Tansom: I think that's super fair and like in maybe that's a good segue as we're kind of wrap it up here. Like what's the learning of who you're doing business with? Because I think money and people are so tied together and you, when you have those two tied together, you see the truth, true nature of people. And then you put like your self survival mechanisms in place and she gets ugly really fast. So how does that impact your decisions of what you're doing now? The businesses? I know we kind of, we spend the other podcasts, but again, you know, now what the true nature of what you've gone through. Kind of explain what you're doing, what... like how do you ensure that you want?
Michael Kaplan: Well, so I'm, I'm uh, I guess a professional investor. I'm running our private equity firm and we are, uh, we've got two verticals. One, we're invested in small service companies buying a minority stake in a roofer or a window washer or a, you know, carpet installer or whatever. And we're coaching those people up. I'm sure. Uh, we have, uh, a checklist of criteria, ah, that, you know, we won't invest in someone if we wouldn't want to sit down and have a beer with them or a coffee. We want to make sure that we've got the right relationships, the other vertical we're just buying companies either as part of an exit strategy or a succession plan for someone who has built a great business or doing a turnaround with a business that needs capital for growth, leadership strategies, something like that. And picking the types of situations worth stepping into.
Michael Kaplan: We won't trade misery for dollars if it's just dysfunctional, but could be fun to fix because we're working with good people. I'm in. If, if the people are mean spirited or, um, I, I just can't see myself enjoying time with them, we'll pass. It just money's not worth that much if we're not happy engaging in the activity and perhaps just as importantly, there's the recognition that we're, uh, we're fundraising. You know, we're bringing on third party money to execute on these, his business activities and all. There's a recognition that all money has personality and I'm not going to take money from people that I wouldn't want to have a beer with. I wouldn't want to have a coffee with my partner's son. Whether you think he's a good person or a bad person, he exhibited the way he conducted himself can be written off in any number of ways.
Michael Kaplan: You can say it was his first investment deal with partners, et Cetera, et cetera. But the, the tone of the conversation was unhealthy from day one. And I had outside of the influences that had me stick with that line of investor longer than I should have, but for my partner, I would have run like hell, but to save the relationship with my partner, I said, well, we can make it work with his son even though there's all this crap going on. And Trust me, I'm, I'm guilty in some of the conversations, uh, I said some things that, uh, uh, could have easily been misconstrued or come with personality that wasn't intended, et cetera. Um, so I learned a lot about that, but I would say all money has personality and really be careful about who you get in bed with. Because I know, I know some very affluent people where I wouldn't take a dime from them because it's just no good or bad to it, but they don't align with my values system or what I'm trying to accomplish.
Ryan Tansom: So well-said, Michael, I mean I think so many times people have these stories and it just comes with the price. I mean there's the terms, but there's the unsaid terms that are really the unsaid terms and then the conversations that you're going to be having with these people that are, you don't know until you know.
Michael Kaplan: Yeah, wisdom comes with winters and you've got to go through some crap to really figure it out. And I think that I'm a pretty principled person and in going through this crap, I've realized that I got to stick to my guns and follow my principles and don't make excuses. I had plenty of conversations with my partner about, you know, we've got these values, these core values that are supposed to guide our decisions and they're on the wall and the entire leadership team and myself included and feels like you put an asterisks next to them and say, yeah, these are how we make the decisions unless. Unless it's one of my guys, unless. It's this situation. And if you're willing to veer, you just confuse people and you're a lot less productive and I think people are a lot less happy because, um, you're not, you're not following the plan.
Ryan Tansom: If our listeners want to know more about your plan, what you're doing and bounce ideas off of you, what's the best way to get in touch with you?
Michael Kaplan: So we have started a company that doesn't have a website, it's called BooYa Capital Partners and a very professional, right? Well, yeah, but we're, we've got a website called a redhookinvestment.com and it's a way that people can reach out. Uh, there's a little form that, uh, if you're, uh, if you own a business that can ask three questions and says, Hey, do you want to have a conversation about a potential investment? Even if you just want to shoot the ball and talk about a football or, um, whatever, as long as it's not talking about how cold Minnesota is. Happy to have the conversation red hook, investments.com and just say, you know, you're open to have a conversation with Michael and uh, we'll go from there. But I want to thank you for having me on. It's been a ton of fun and hopefully, you know, the dysfunction I've gone through and, and all of that pain can be relevant and help people avoid some missteps and uh, or at least be a little bit entertaining.
Ryan Tansom: Honestly man, you had to say it is like it, it's huge. And I'll, I'll thank you again because so many times on this show, people don't share this and this is the shit that really goes on, man. You know what I mean? People have a really, really great stories, but there's always people in money involved in every one of these stories. So whether they're true to the situation or not, that it's been awesome hearing how you guys built a business, but then being able to shoot this stuff. You know, people actually are going to relate a lot to this, so I appreciate you coming on the show a lot.
Michael Kaplan: Well thank you. It's been a pleasure.
Ryan Tansom: I hope you enjoyed that episode and how transparent Michael was about the challenges that partnerships can bring. And that is the real true root of what it means to own a business with someone else. Because you might be doing 18 million in revenue, but if you're not having good conversations, if you're not on the same page with the other people you own the business with, then it can be a challenge. And I think there's just a couple big, big, big takeaways that I would have for myself and for anybody else is: One is that open and honest, transparent communication with your partners, making sure you're always trying to get back on the same page. Relationships are a lot of work and life happens. Situations come up, things change. So open and honest communication, that's just kind of a given.
But if there's an actionable thing that I would say is unbelievably necessary is Michael got lucky that they had a Mexican standoff or that shotgun clause in their buy, sell and operating agreement, if not a nuclear bomb could have gone off and actually put zerorez to the ground. So my suggestion is making sure while things are good that you have an operating agreement and a buy, sell and a closet allows you to have a very frank conversation with the other people that are sitting at the table with you so you understand what it means to you if you don't want to be in that business or if you don't want to be in that business with the people that you're currently in the business with. So I hope you enjoyed this. I hope there was some actual stuff that Michael was able to share with you. Go onto the show notes and we have a link to the 25 question survey of how ready you are to grow and sell your company. So there's five questions in each of the five principles and they really get you thinking about the things that should matter and then what it spits out a score that's overall and how prepared you are to maximize the company and maximize your exit. And then there's a bunch of resources that show you what rabbit hole you can go into if you're interested in one of the specific subjects that you might be weekend or interested in. With that being said, I will talk to 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.