Ayo Phillips – Turnaround to Exit

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(3:50) – What’s the high-level overview of taking over this company and how you rebuilt the business in order to make the acquisition possible?

(23:16)- What revenue streams did the acquirer value most?

(24:47) – Is there some value is approaching potential acquirers to see what would make your company more attractive?

(28:03) – How much more helpful was it that you had a replacement ready to take over your role?

(29:10) – How has your thinking changed around working in a business or industry that you aren’t passionate about?

(31:27) – What factors into your thinking now when you evaluate an industry?

Alex Bridgeman:  Well, it’s good to see you again. Maybe I want to chat all about our previous episode and how some of the journeys you went on have gone since or went since the episode came out. So kind of building your turnaround within the business, but then also kind of the preparing for your exit and how you thought through that and some of the things you did leading up to your exit I think would be really fun to talk about. But maybe not everyone has heard our first episode, but we’ll link to it so folks can find it. But what’s the- can you give us the five minute overview of like getting into the business, and then let’s start with how once you found out everything that was going on, how did you start to rebuild your team and rebuild the company a little bit?

Ayo Phillips: Sure. Well, Alex, it’s always fun to kind of chat with you, whether it’s on a podcast or otherwise. I’m excited to be on again. So let’s see. So first of all, I acquired an apartment turnover services business. And what we do or did, at this point, was we’d go into apartment complexes or apartment units and paint, perform handyman services, resurfacing services in between when one tenant leaves and when the new tenant is coming in. So that’s kind of primary what we’d do on a day in and day out basis. And when I acquired the business, there were kind of several challenges that I came to discover, largely surrounding some of the customer acquisition practices that I could not continue to maintain. And you can go listen to my previous episode to kind of learn what some of those were. And so obviously, kind of walking into a business and realizing that roughly 40 to 60% of- well, 40% of your customers and almost 60% of your revenue was tied to kind of customer acquisition processes that were, at best, unethical, and at worse, maybe bordering on illegal, that kind of sends chills down your spine when you start to kind of work through it. And so, I would say, pretty quickly, I realized that I was the turnaround CEO, this wasn’t going to be a thing that I could just sit back and relax and focus on growth. A lot of my time and energy early on was focused on digging out versus growing the business, which is what you’d expect. What I like to tell people is there’s this term that people talk about, the J curve, when you first acquire a business, which is in most cases, you are taking actions that will, on purpose that would cause your profitability to decline with the intention of setting the foundation for what would be a very strong business going forward. And that’s kind of how you’d like to approach it. In my case, those actions were already being taken for me, and they were not actions that I was taking in order to kind of get the business foundation where we’d like it to be. So obviously, the first actions were ones of kind of assessing the team, who should be here, who shouldn’t be here, what’s the culture, and is it a culture that we could maintain. And it was pretty obvious that it was a culture that we couldn’t maintain in the long term. And in the long haul, over the course of the first 18 months, we ended up turning over our team two times, completely twice and with the idea that we needed to reset culture. And instead of bringing in people who were within the industry, from the industry into the business, we needed to get people in that we could train our ways but came with a level of ethical standing that we would expect out of the people that we wanted and the personality capabilities and traits that we believe would set us up for success. So, that was the first big thing was kind of evaluating the people and starting that process of changing the team to fit kind of what we could be proud of, a business that we could be proud of. Something that we did was really assessing the customer profile really to understand, okay, what percentage of our customer base is customers that we couldn’t maintain because of the prior way that business was done? And like I said, I mean, it was pretty significant; it was roughly 40% of the customer base. And these were highly sticky customers because of how they were maintained over the course of the years that they were in place. And so quickly realized that okay, this is not- this is turning into a startup versus something that we could build on. The industry was in a place in which highly competitive, switching costs from our service to someone else was pretty low. And so made the decision after kind of visiting with multiple different customers and realizing what the reputation of the business was in the market that we needed to pivot from that customer base, and we needed to kind of like essentially find new customers. And we were most likely to find these customers not in our industry just because of the brand image that the business had prior to us acquiring the business. And so that’s what we did. I tried many different things as I tried to search for new revenue. We started a roofing business, which was kind of not part of our core competence, but we started one because we needed to kind of fill the revenue really quickly. We started an HVAC business, that one ended up not being very successful. But the way I thought about pivoting the business was to think about what assets we had. So, for us, most of the assets were intangible. They were the people that we had in place, and what skill sets they had. The roofing business, as an example, we started that because one of our project managers had been a roofer in his prior life and had done project management and roofing. So we said, okay, well, we’re losing all this revenue, let’s find a way to kind of fill it with that, with something else. And that’s how we started that, and it ended up being kind of a low cost way to kind of get something going profitably and kept us kind of good from a financial perspective. We ended up kind of making a small acquisition in another market that ended up paying for itself pretty quickly, within six months of making that acquisition. And then I would say, kind of the biggest pivot that we made was instead of looking at the multifamily market, which was a core market in Houston, we started to think about who else uses the services that we do and how can we sell to them. And for us, that was moving from apartment complexes to single family rental owners. And so, we literally went door to door knocking on some of these property managers for the single family rental homes and said, hey, listen, we can offer you these same services, and we would do it professionally. We had learned over the course of time that in the single family market, it wasn’t as developed as the multifamily market. And so, we really focused in on helping those new customers professionalize the service that they were currently getting. And that ended up taking off pretty quickly before the pandemic, sometime in 2019. And we finally started to grow the business again after what felt like we were on a ski slope heading towards a tree at the bottom of the hill. We had lost really north of 50% of our revenue, we had lost even more of our profitability at that point. And we essentially ended up pivoting to this new market, and it took off extremely quickly for us. Within a few months, it was a six figure per month income or a revenue earning business, and then it just started to really grow and skyrocket from there. And so, we really focused in on that, built our processes around that, built an organization to support that business. And that, in addition to some of the other small bets that we had made, the roofing business, entering into a different market, we started a driveway business for a period of time in order to also to kind of support us from a revenue perspective. All of that together, ended up with us with this hodgepodge of different kind of startups within our business that ended up sustaining us for that period and allowed us not to completely break all our bank covenants and kept us in good standing. So that was kind of the nature of the turnaround. So, culture, changing the culture, changing people, figuring out what assets we had in our people and utilizing that to find new businesses that we could be a part of. And then, obviously a huge- there was a huge luck factor there too of just knocking on doors with this new customer base and then finding that the opportunity is bigger than we thought and really doubling down on that, and that ended up kind of getting us to a place where we felt like, okay, we now have a sustainable business. After that, though, we had the pandemic, and the pandemic kind of took us down this journey of almost no business again and trying to figure out a way out of that period of time, and managing cash flow and a lot of things that we did there kind of maintaining what I would call our producers, our revenue generators, so that we could be ready when the pandemic was over. Obviously, no one knew what the future was going to hold, but we knew that we had a business that could be significant in the future. And losing those key producers or revenue generators was something that I think was a key strategic decision that really enabled us to come out of the pandemic extremely strong and hitting multiple months of record revenue and being able to meet our customer needs when others weren’t because they had laid off their teams. So that entire journey of digging out of the hole, starting a few different businesses back up, the pandemic and coming out of that got us to a place where we were like, okay, now we’re really stable now. We’re starting to kind of generate some good profitability. What’s the long term status of this business? And where can it go? Where do we ultimately see it going? And what I realized personally was a few things. One, from an industry perspective, there was a ceiling around how far we could go. And this is kind of a key lesson for this from me. I think sometimes, when evaluating an industry, it’s easy to look at the high level numbers about what the size of the market is and think about the size of the market and assume that that is the size of the opportunity that exists. But one thing that’s important that I learned is that as you get deeper into a market, you realize that you really have to segment the market into the portion of the customers that you would be willing to serve with the values that your company brings to the table. And what we realized is that even though we were in this big market for both apartment complexes and single family rentals, we realized that the portion and segment of market that will be willing to pay the amount of- pay the price that we believe that we had earned based on the service that we provide was just not big enough for us to sustain a large enough business over the long haul. And that was a realization of, wow, this market has a ceiling. And we’ve come all this way, roughly three and a half to four years into this, we now recognize what is the truth about the marketplace. And so, what decisions do you make from that point on? And so, I started having conversations with my family office partners about this and said, hey, guys, you’ve seen the journey that we’ve been on, we understand the marketplace that we’re in, we have all the customers that we would want within this marketplace. And the next step of growth would require different capital structure decisions, I mean, much less debt on the balance sheet, potential additional investments into more risky, lower potential ROI projects, which is not what we set out to do. We set out to build a business with a large cash flow from which we could invest in more. And so, at that point, I kind of, I started to think about my future and how much I had enjoyed or not enjoyed the journey. That could be subject for a whole podcast in and of itself. And one of the things I realized is that I did not love the industry. The way things operated within the marketplace, yes, there was a portion of the industry that I could excel in. But there’s this significant portion of the industry that our approach to the market was not receptive to. And so, I said often to people that in your due diligence process, one of the key things to make sure that you are going to be doing is that you are making a business better, not trying to make an industry better. The first path will make you money. The second path is a suicide mission, essentially. And I think trying to really tease that out in the diligence process is critical, in order to make sure that you’re setting yourself up for success in the long haul. And so, I thought about kind of my path, and I felt like I had done all that I could within my power without kind of radically changing the capital structure of the business and kind of inviting my investors to go on a journey with me on what would be really a more risky adventure, potentially require more capital at that point, that I wasn’t sure that I could deliver the returns that would be expected. And I decided at that point that it would make sense for me to kind of step aside as the CEO of the business and give the opportunity to someone else who could run this business from a maintenance perspective rather than a consistent pursuit of growth, which is kind of how I ran the business. Well, pursuit of growth, digging out of a mess and then pursuit of growth. And so essentially hired my replacement and began an individual development planning process with him, which he really excelled at. And I felt comfortable at that point having a conversation with my investors about my intention to step aside from the role as CEO. And so, I did that. I did that after six months of having my replacement start to kind of really drive some great results. And so that conversation was very interesting, obviously. I picked my family office partner because we both went into this thinking of this as a marriage in that we were going to own this thing forever. And here I was sitting in front of them and saying, well, guys, I think we’ve done all we can with this and in the market that we’re in, and we’re now in maintenance mode. And I did not sign up to be in maintenance mode. And I think this could be a good challenge for someone else, but not me. And my intention at the time was not to exit the business by selling it. My intention at the time was to step into an advisory capacity. And in conversations with my family office partner, one of them said something extremely- that resonated really well with me. And that comment was, it’s difficult to be accountable for something and not to be in charge. And that statement there caused me to think about what life would look like in an advisory capacity. So yes, I’ve hired this individual who’s going to take on the reins going forward. But it was a job to him. Running this business was a mission to me. It was life in many ways, which in some ways, you could say it was not the right way to think about it. But that’s how I thought about it. I had taken money from investors to partner with me on this journey. And I thought it to be my utmost responsibility to ensure that I returned that capital back to them. And so, at this point, I was saying, well, I think we’ve taken it to the ceiling of where we could take it. And it’s time for me to step aside. I would serve in an advisory role. And after that comment of being accountable but not being in charge is difficult and thinking through it, we jointly talked about what it would look like to exit the business. And so that was the point at which I started to take that more seriously. I had had interest over the years of me operating the business of people that wanted to potentially acquire us, four potential acquirers. But at the time when the interest was high, the business was not worthy of selling, quite frankly. I mean, we were in a significant mess and trying to clean out of it, and I entertained the conversations, but I knew that I would not be proud to sell the business at that point because of kind of where we are, where we were at that point in the lifecycle of the journey that we were on. But now, at this point, we were stable, revenues were at an all time high for us. We had a great team in place, great processes in place, had a culture established, it made sense to explore. So what we decided to do, me and my family office partners, was to explore conversations with these strategic acquirers who previously indicated interest in buying us.

Alex Bridgeman: Had you kept some of them kind of in the loop over time as well, too?

Ayo Phillips: Well, no, actually, I hadn’t. So, no one knew what was going on in the business except really me, my family office partners, and the Think like an Owner listeners.

Alex Bridgeman: Excellent. Glad I got the exclusive.

Ayo Phillips: Yes, you did. So but yeah, the strategic acquirers, they didn’t know what had been going on in the business. I think one of them had some inkling of it, but the other three did not. And so, we went back to them and said, hey, listen, now we’re ready to kind of talk about exiting. All four of them came to the table. One of them quickly dropped out because they were engaged in some other pretty significant activities within their business. And then we got really serious with two of them and ended up closing the transaction with one of them. And so, this acquirer really was the one that we would have wanted to be- we thought would be the perfect acquirer for us because now they very large company,  several 100 million dollars in revenue. But they were starting to kind of enter into providing the services that we currently do. And obviously, we had built kind of the skill sets and, obviously, the market intelligence around how to do this well, and it made sense for them and made sense for our team. The entire team is still here and operating. And it’s just a lot more resources to do the same stuff that we were unable to do based on kind of what our capital structure was like under our ownership of the business. And so, there’s something to be said for that, something to be said for an acquirer that has the financial wherewithal to take the business to where it needs to go, the industry relationships that might be more difficult for us to build over time. And then even just the little things around benefits that the team gets to get now. In fact, there was one benefit that they had that really scared me a little bit. So we’re a lean team. And every time someone takes time off, it’s felt by the rest of the team. And this acquirer, they are such a great employer that people get four weeks of vacation in the first year of working at the firm, at that company. And initially, I saw that, and I said, okay, yes, that’s a great benefit for our people, but we need to think about what that looks like from a staffing perspective. If everyone is all of a sudden able to take four weeks off, how do we backfill those roles, things like that. So it’s been a great strategic move for them, to get them into a market that they previously didn’t have a lot of insight into, and providing some of our capabilities and skills and processes that we have to them. And also it’s been great for our team as well, to kind of be part of this larger organization. And so yeah, so that’s kind of the story of the journey up until this point.

Alex Bridgeman: Yeah, I’d be curious to hear a little bit more about- actually, I’m quite curious,  within the acquirer who eventually closed with you, what revenue streams did they value the most? Did it turn out that the single family was what they were looking for? Or did you just have the right mix of that multifamily? Like of the moves that you made to eventually exit, like which ones turned out to be the most important when you sold?

Ayo Phillips: That is such a great question. And amazingly, so this is an organization that buys- they typically try to buy companies that are 20 million or more in revenue. We were nowhere close to that. And so, in the initial evaluation of the business, they had to make the case of why we were the right fit to their board, even though it was much below the size of business that they’d typically acquire. And literally the single family business that did not exist when we bought the company was the linchpin in selling the board on the acquisition because it represented a completely new market opportunity for them to enter that they’re currently not in. And so, most of their business is in the multifamily space. They have basically no business in the single family space, except for us now. And so yes, that business that we entered ended up being one of the linchpins to kind of essentially get the board over the hump to make the decision that we would be a good candidate for an acquisition.

Alex Bridgeman: Nice. We had an episode with Bradley and Logan a couple episodes ago. And one thing they did early on in the business is they went to a local acquirer, a local strategic acquirer, and just asked them like kind of what do you look for in these companies so that I know what to build in my own company to make it more valuable to you one day? Do you think there’s some of that that could have been useful? Like, early on, would they have told you- maybe they wouldn’t have told you or they wouldn’t have known what they would have wanted in a couple of years. But do you think you would have gone to those acquires and asked them, hey, what would make my company more valuable? Do you think that would have worked and helped you?

Ayo Phillips: I think it’s possible, but also you can kind of read the tea leaves from how they’re acting, what they’re acquiring, what they’re looking at, as well. So, one of the other acquirers, they liked a very different portion of the business. So, the very first- the thing they liked about the business was the resurfacing, which was the very first service that we started with, which is the service that we pivoted away from pretty quickly after I got into the business. So, we kind of knew what those guys were after. And that would have been how they would have valued the business. Now, for the one that ended up acquiring us, they only just started on this journey of acquiring other businesses over the last year or so. Maybe early on, their mergers and acquisitions department would not have had the wherewithal to say, okay, well, yeah, this is what we’re looking for in an acquisition. The acquisition program really just started over the last year. So, I consider ourselves a pretty fortuitous kind of pairing. The timing worked, some of the gambles that we had taken, just stumbling around trying to find something that worked, ended up resulting essentially in an exit. And so, I think, yes, there’s definitely some of that that could work. I think you’d have to look at that on an industry by industry basis. This industry doesn’t tend to be one in which a lot of acquisitions get done within the industry, or roll ups or that kind of thing. So, I do think that approach could work, asking strategic acquirers, hey, what do you want? What do you want to acquire? If there’s a lot of acquisition activity that goes on in the market, it certainly could be a path to determining how you build your business. I am a very big fan of creating optionality for yourself. In fact, one of the things that I didn’t do on entry into the business, which I think I should have done a better job of, is think about multiple different options from an exit perspective. I went into this journey with the intention of we’re going to be in this for life. There’s no reason to think about potential acquirers or anything. We’re just going to build cash flow, we’re going to split cash flow, and that’s kind of how we’re going to operate our business going into the future. But I think walking into an acquisition with, even if your intention is not to sell to someone, but with clear thoughts around okay, these are the potential acquirers within the industry and this is how they would value my business potentially, I think will give you a better sense for how you should be building your organization in order to be ready for that potential thing, potential exit to occur if you have to.

Alex Bridgeman: So you also talked about coaching a replacement for you in the business. How much of an impact did that make in your discussions where, in addition to having this revenue stream that your eventual acquirer didn’t have, like how much more helpful also was it that you had someone who was already taking over your role and there’s some element of like kind of building your business to sell that it sounds like you took some inkling from?

Ayo Phillips: Yeah, so I would say it was important in that I knew that I did not want to stay on long term. So it wasn’t so important- I think they would have acquired the business anyway, if they knew that there was going to be some leader in place. Whether it was me or someone else, I don’t think it mattered, particularly. But I knew that I didn’t want to be with the business long term. And so, I built the business in that way, that ensured that I would not be required to be in the business long term. And so, I think that’s how the acquirer viewed it too was like, okay, as long as we have someone that’s in the market, able to lead the business, we’re fine, we’re fine making that acquisition.

Alex Bridgeman: And since making the sale, how has your thinking evolved or changed on working in a business where you’re not nearly as passionate about the about the industry or business as you came into it? Because we talked a little bit offline about how there’s some element of if you’re not interested in the industry anymore, it’s unlikely to provide you a really high return going forward, just both financially but personally as well. Now that you’ve sold and exited, like do you think that was in hindsight for your time spent, like has that been a good decision so far do you think?

Ayo Phillips: So, I think I could have grown to love the industry. I think what makes any industry interesting or not interesting, I mean, I think it’s going to be different for every leader, but obviously, you want the financial metrics to be in place, you want some standard- a level of ethics to be associated with the business, and you want to see a path to clear growth long term. Obviously, every business is going to have some headwinds, but you want them to be headwinds that are about growth, not headwinds about digging out of holes constantly and having to consistently completely reinvent yourself in order to stay in business. And so, I think that, yes, I think careful evaluation of an industry going in, maybe not for its personality characteristics, but maybe for its financial metrics, standard levels of ethics. Certainly, do you enjoy working with blue collar workers or not? I’m sure that that stuff will play into a person’s decision making process. But yeah, I think for me, the lack of love for the industry, going in, I wouldn’t have thought that, oh, you’re not going to like working in this industry. I think what essentially me figuring out, okay, this is not the right industry for me, what were the things I came to learn about the industry after I was in it? So I think it’s important. I think it’s certainly important to a leader, especially if you expect to spend your life in it. But I think for me, personally, I think there are many things that could have made up- that could make for a good industry, and this one just happened to not have enough of those characteristics that I felt would make for long term success in it.

Alex Bridgeman: So in evaluating industries today, what factors would you look for to avoid industries that have some of the things you mentioned, like low switching costs or it’s maybe a limited market and there’s not as much headroom for growth as you expected? How would you try to figure those things out today in a new industry?

Ayo Phillips: Yeah. So I think, first, I will try to understand the segment of customers that the business that I’m trying to acquire serves. So one of the people that I kind of look at today and has acquired a great business is Chris Williams. He acquired a business in the fractional CFO space. And there’s different segments of that market where you have folks that are just going to care about accounting and tax and are paper based, they do everything on paper. Or those that are maybe larger firms, have cloud based accounting systems. Now, every business needs an accounting system, but it’s only a small percentage of that market that fits the business type that Chris has. They’re already on a cloud based system, professional- potentially have some professionalization in their accounting processes and systems, do accountant reviews, that kind of thing. And so, I think that’s the first thing is you want to understand the segment of the market that the business that you’re acquiring is filling. That’s certainly one. I say too, things like switching costs and low barriers to entry. And I’m open about this and say that those things were misses for me in my due diligence process. Those are things that I should have identified clearly before I walked in to acquire this business. I should have known that like there’s a bunch of mom-and-pop shops that are willing to do things that I’m not willing to do in order to acquire business. I should have known that property managers always have that doors open, and they welcome anyone, and if someone’s willing to give them a $5 discount, they’ll switch from you in a second. And so, these are things that I probably should have done a better job of understanding, and I encourage everyone to do prior to acquiring business is to understand kind of how those things work. And that will definitely help you. Another thing I’ll say is relationship moats, relationship moats are kind of the worst moats to have in any kind of business. So they’re not based on the product or service or pricing that you are providing. They are based on this guy knowing this other guy. When that is the case, and when those relationships are not transferable, or in my situation, when what is being done to maintain those relationships are unethical in your eyes or potentially illegal and you can’t actually do those same things, then you’ll run into a pretty significant problem. So, any business that has relationship moats I would diligence heavily how those relationships are maintained, who exactly within the businesses are maintaining those relationships, and can you replicate the way those relationships are being maintained going into the future? I think every business, at least for me, I want to be measured on the quality of the service that we provide, how competitive we are in pricing, and- yeah, quality of service provided and how competitive we are on pricing and metrics like that, rather than do I know this guy and is he willing to give me the work or not. I think those are some things that I would, going back, I would look at and be more diligent about to make sure that I don’t run into some of the same issues. I do think, I will not call this ironic, but it’s somewhat ironic, that when I was going into this process of acquiring a business, in addition to wanting to be in it for the long haul, I think one of the things that kind of irked me about what you call kind of the search fund ecosystem at the time, was I felt like searchers were all looking for the exact same kinds of businesses. And now in hindsight, there’s a lot of wisdom behind looking for those types of businesses. You are a rookie CEO, you want to walk into a stable ecosystem that allows you to kind of get your sea legs under you and build your leadership capabilities, to really be able to dig in, spread your wings over the course of time, not something that’s a turnaround or has shifting market dynamics in industry, non recurring revenue, and complex operating systems. And my business had all of those things, non recurring revenue, complicated operating structure, bad culture and ethical problems, just several things that you don’t want to acquire. And I will say that one of the things that is also important is, and this is important for running your business as well, is checking your mindset. And in this case, there is kind of like a subconscious hubris that comes along with this journey to acquire a business, which is that you’ll look at a business and you’re like, oh, they’re using fax machines, oh it’s like good old boys club, or you make some of these subconscious assumptions about this business and about how you can change it for the better. But I can guarantee you that the seller of that business, who has been in that business for decades, there’s a reason why they’ve done things the way they’ve done it. And so, one has to come in with a humility about them to understand why things were being done the way they were. And not quickly start to think about, okay, well, this is how great I am from an operational perspective and how I can kind of pivot this business in XYZ ways. Yes, you want to think through those things, but you want to respect what was there before you. Because respecting what was there before you will enable you to quickly realize, is this something that I can continue, or I might have go start from square one or square two in order to kind of be able to get the business to kind of where the seller, who I am buying from, had taken it. So I think managing your mindset around your capabilities as a young CEO is critical. There’s no rewards for doing things the hard way. You might as well buy something that has tail winds behind it, then buy something that’s chock full of headwinds. And I think that’s really important. And that’s something that kind of the traditional search fund metrics and things to look for in the business have done a good job of helping young CEOs think through in order to be able to kind of set themselves up for success.

Alex Bridgeman: That’s a great place to end with, there’s no points for doing it the hard way. Thanks again for coming on and sharing a little bit more. I do love our chats and I’m excited for the next one. But thanks for putting one on the podcast. This is a fun recap from our first episode. So this was fun.

Ayo Phillips: Thanks for having me, Alex. Always fun to chat.