Three perspectives on types of ownership transitions
Robert Kaplan Bought: Black Pine Spas
Robert Kaplan was looking to buy an existing business, but hot tubs were not on his radar. “When hot tubs first came up, my knee-jerk was [that I was] not interested in that,” Kaplan says.
Kaplan worked his way up in the television industry starting as a page, then as a writer and after business school, an executive at CBS and NBC. Then he switched gears and opened urgent-care centers in the Seattle area.
“Everybody said, ‘This makes no sense. It’s so different from what you’ve done,’ ” Kaplan recalls. “My line there was, it’s really the same, I have a budget, I have a schedule, I’ve traded a pain-in-the-ass actor for a pain-in-the-ass doctor.”
Now he has pivoted again. He sold his urgent-care franchise, saying he got out at just the right time before major consolidation in the industry, and started looking for new opportunities.
Kaplan says he was looking for an existing business with a track record. “I didn’t want to go to another franchise,” Kaplan says. “I did not want to start something from scratch.”
Then-owners Michael Nekahi and Khasha Mekanik purchased the business from its founder in 2002; Kaplan took over in June 2015. The trio not only made it through the purchase, but also became friends. Nekahi and Mekanik are still involved in the business.
“They did a great job running the place,” Kaplan says. “I was really impressed that they ran it lean enough that during the recession they were able to stay in the black. Mike and Khasha and I have genuinely all become friends. They are absolutely still involved in the business in not just a friendly advisory role, but [they] come out and help us when we have events.”
There was a learning curve for Kaplan, but with his varied business background it wasn’t as difficult as you might imagine. “Running a TV show is running a small business; running an urgent care is running a small business; running a hot tub dealership is running a small business,” he says.
He knows the basics, so at any time he can walk out on the floor and act as salesman if need be, but Kaplan has enough small-business experience that he has a different philosophy than someone who may be just starting out.
“There comes this point with any business where you ask yourself, ‘Are you working in the business or on the business?’ ” he says. “My ambition is always to work on the business and not in the business.”
Troy Derheim Sold: Tubs of Fun!
Troy Derheim wasn’t planning on selling his hot tub and family recreation retail store. He’d started the company in 1991, developing it from a hot tub rental company he started in college. But he’d fallen in love, and his soon-to-be wife lived three-and-a-half hours from Fargo, North Dakota, in Minneapolis.
“When you meet a lady, things change,” Derheim says. “I was spending more and more time in Minneapolis. Then I had a guy approach me out of the blue.”
Derheim had core employees he was fully confident could run the business in his absence, so he hadn’t been looking for a way out. But he was pursuing other interests, and he knew the sale could free up not only time, but also money to get those ventures going.
The buyer worked for a competitor and was looking to go out on his own. “They had researched the area, and when they asked, ‘Where would you buy a hot tub?’ eight out 10 people said Tubs of Fun!” Derheim says.
In addition to the retail business, Derheim was also a pool builder. Since the new owner wasn’t interested in building pools, Derheim could keep that business himself.
“They left me the ability to continue on with my in-ground pools, which was really my passion and trying to tie it into healthcare,” Derheim says. In addition to still building pools, his new company My Aquatic Services, tries to help connect patients who need aquatic therapy and therapists who want to provide it to swimming facilities. “That was really my focus — physical therapy and swimming pools and aquatic therapy. It wasn’t essential that I kept the family recreation side.”
Even though his business wasn’t for sale, Derheim says he’d worked to make sure it was sellable at any time.
“I always liked attending informational classes, and one of the things they teach you is for owners to create an exit strategy,” he says. “I’ve always had that in the back of my mind, that I wanted to make sure the business was sellable. That’s why I had the unique name: Tubs of Fun. That’s why I didn’t have a lot of stuff in my own name; everything was always ready to sell. I wasn’t totally prepared but…my customer list [and] backend structure was set up that way, where I had everything classed very clearly and laid out.”
While Derheim had purchased businesses before, he’d never sold — and he made some mistakes he says he won’t make again. The deal was signed the afternoon before his wedding.
“It was nice to get it done, and be fired up about it and moving forward,” he says. “I was excited for a new outlook. Plus, I already had another dream that I was working on pursuing.”
But in the rush and excitement, there were some things he should have gotten in writing that he didn’t.
“I was foolish, to be honest,” Derheim says, wishing that he had focused on some of the details and taken more time, which because of legal action can’t be delved into here. In the end, though, he doesn’t have regrets. “It’s a happy tale because every failure is a learning experience,” he says, “I guarantee for the rest of my career, it will never happen again.”
As Jim Van Fleet neared 65, he looked at exiting his business, Mainely Tubs, in the Portland, Maine, metro. His two children weren’t interested in taking over, so Van Fleet hired a company to help him value the business and determine his options.
“Part of their advice was that in our industry, we’re more of a niche business than we are a mainstream business,” Van Fleet says. “As with many niche businesses, there aren’t as many potential buyers who, one, know the details, the ins and outs of our industry, or two, know enough about the product category, or the services that we offer to feel comfortable.”
Van Fleet always had a philosophy of helping his employees grow with the company: Instead of commissions, he had profit sharing, and in addition to finding a way for him to exit the business with his fair share, he wanted to make sure his people were protected and cared for as well.
“They’ve created a value in this business, and they needed to share in that,” Van Fleet says. “Often times, when there’s an acquisition in private industry, the new company’s management comes in; there are jobs lost; there are management people who must move on.”
Van Fleet’s solution was to create an employee stock ownership plan, or ESOP. “An ESOP is really kind of a 401K plan on steroids, if you will,” Van Fleet says. “The only stock that this plan owns is the company stock for which you work.” And not every company is eligible: It has to be a certain size and meet certain benchmarks. Van Fleet estimates he spent roughly $100,000 setting up the ESOP.
“At the time, my company was over $9 million in revenue,” Van Fleet says. “We had almost a $2 million payroll.”
Setting up an ESOP took Van Fleet about eight months. After the initial valuation process and deciding on an ESOP, he joined a nonprofit association for ESOPs, began studying how they worked and found other ESOP companies in Maine to connect with. Van Fleet hired a trustee to represent the employees and obtain an independent valuation of the company. An attorney and accountant were involved as well. “There’s a lot of detail to it; it’s not a fall-out-of-bed transaction,” he says. Key employees were brought into the confidential process to provide information and be interviewed by the trustee and bank.
“Another important consideration was that over the years, I have established within my company a group of managers who are responsible for certain areas, sales, administration, finance, a general manager,” he says. “I had an established management group, who an evaluation company and a trustee could see would be able to manage this business going forward if I weren’t around anymore, or if I retired.”
Whether you’re considering an ESOP, an outside buyer or selling within your family, Van Fleet says it’s imperative to show that the company’s success doesn’t depend on the owner’s direct involvement.
“If you’re looking for value for your business, you must prove to somebody totally independent, who looks at multitudes of businesses for this very purpose, that your company is a viable company, whether you’re around or not,” Van Fleet says. “I would counsel other owners in our industry to carefully weigh the advantages of building a management team that allows the company to be run without the owner there 100 percent of the time.”
Van Fleet announced the ESOP to his employees on December 31, 2016. “All of the existing employees who had worked a thousand hours got their first year of vesting in 2016,” he says. Van Fleet signed an employment contract that he likens to a “ramp exit.”
“That fit perfectly for me because I didn’t want a cliff exit, I wanted a ramp exit,” he says, adding that it allows him to keep nurturing his employees.