In The Trenches

This episode is brought to you by Cayne Crossing. Cayne Crossing helps prospective SMB purchasers with all aspects of financial due diligence, including producing the Quality of Earnings report. I have personally read though, analyzed, and relied upon several of their actual QofE reports in my capacity as an SMB investor, and can personally attest to the quality of the work that they do. Unlike any other QofE provider that I’m aware of, Cayne Crossing also co-invests alongside their buyers, aligning their interests with yours in a way that I simply haven’t seen anywhere else.   Cayne Crossing is offering a special discount to listeners of In The Trenches: Just go to caynecrossing.com, and scroll down to the “contact form” on their homepage. Enter the offer code “trenches”, and you will get a full $2,000 off of your QofE engagement with them.  _______________________________________________________  Episode Description: Relative to its importance, capital allocation seems to be a relatively under-discussed subject among SMB CEOs. The subject is at least as important as more common day-to-day issues like hiring, culture, or compensation, though it rarely seems to occupy the same share-of-mind. Though capital allocation isn't a discipline that CEOs consciously or explicitly deprioritize, it often loses the battle for their time and attention when competing with more common day-to-day issues like those mentioned above.   As a CEO you’d be wise to regularly look at your business through the lens of an investor to ensure that you’re allocating your company’s scarce financial resources towards their highest and best use. In today's episode, I discuss some relevant lessons that I’ve collected over the years related to capital allocation, some of which I hope are helpful to you.

My guests today are Steve Lau and Rameez Ansari, co-CEOs of AutoLeap, a software company that services auto repair shops, that counts Bain Capital Ventures among its investors. Prior to founding AutoLeap, Steve and Rameez purchased, operated, and sold D'Esco (later renamed FieldEdge), a software company that helps entrepreneurs run their HVAC, Plumbing, and Electrical Contracting businesses. Steve and Rameez purchased the company from its original founder in 2015 at 5X EBITDA, when its product was entirely on-premise and its revenue was generated solely through the sale of perpetual use licenses. After successfully transitioning the company to one that sold a cloud-based product and generated revenue on a subscription basis, they sold the company to a private equity firm for 8X revenue in 2019. For the past 5-10 years, investors have salivated over the return potential inherent in transitioning a sticky enterprise software product with low customer churn from on-premise to SaaS. Though returns like those generated by Steve and Rameez certainly illustrate that such transitions can be successfully made, the headlines often ignore how brutally difficult this transition tends to be, both operationally and financially. Though software investors and operators will find this episode relevant for what are probably obvious reasons, I’d also suggest that any CEO, in any industry, ought to pay attention to the lessons that Steve & Rameez learned, especially if they’re considering a transformation of any sort within their own companies. We talk about shifts in organizational culture, changes in salesforce compensation, how to communicate the need for change within a company, how to respect the history and legacy of a business while still keeping an eye towards the future, how non-technical CEOs can run a technically-oriented business, and much much more.

Unfortunate at this reality may be, I would argue that firing (specifically knowing who, when, and how to fire) is a required core competency for any CEO, and is arguably as important as hiring, communication, capital allocation, and other tools within the CEO’s toolkit. The extent to which this is an unpleasant (and perhaps even unpopular) topic to discuss doesn’t negate its critical importance in building and sustaining a healthy and vibrant company. Some may associate the idea of firing with toxic, authoritarian, or fear-based work cultures. While firing can lead to these types of outcomes if done in an arbitrary, thoughtless, or fear-inducing way, if and when done correctly, it can actually become one of the CEO’s primary tools in building a healthy, inclusive, fair and meritocratic culture. It’s important for me to note that this isn’t because firing itself is value-creating. It clearly isn’t. Being flippant or cavalier with the professional lives of your employees represents the surest path to destroying your company. Instead, one of the primary reasons why firing is so (unfortunately) important is because of how difficult, error-prone, and subjective most hiring processes are.

Today’s episode is for anybody who ever plans to sell a company. Most entrepreneurs will sell a business once in their entire careers (if they’re lucky), and as a result many understandably don’t have a lot of context or experience in the finer points of exiting, specifically when it comes to how to select an M&A advisor. Most advice that I’ve come across in this domain is frankly too high level to be useful, so today I wanted to get really detailed on how to select an M&A advisor, how much you should expect to pay them, what’s included & excluded from the fees that they charge, and other critical contractual terms you should be aware of before hiring one of them. To help us answer some of these questions, I’m joined today by John Carvalho. John is the President of Stone Oak Capital, an M&A advisory firm that focuses exclusively on middle market businesses, with a specific focus on transactions between $10 and $100 million. John is also the Founder of Divestopedia. Since its inception in 2012, Divestopedia has become THE place to go for anybody contemplating selling their company: It contains a dictionary of more than 500 M&A related terms, thousands of articles on the exit process, and is now one of the world's leading online resources for selling a mid-sized business. In addition to his experience advising CEOs, John is also an entrepreneur himself, having co-founded Wolverine Energy Services Inc. in 2012 with an initial acquisition of a $5 million revenue oilfield services company. From the first acquisition to 2020, John and his business partner acquired 16 more businesses, grew revenue to $240 million and took the company public.

For many business owners, few things are as exciting as receiving a Letter of Intent (“LOI”) from a prospective purchaser. Beyond the sense of validation stemming from the fact that a sophisticated counterparty sees an asset worth paying for, many business owners likely view an LOI as a just reward for decades of hard work, sacrifice, and illiquidity.  Understandable as these reactions may be, I would argue that they are premature at best, and misleading (or even incorrect) at worst.  This audio blog attempts to speak to prospective sellers of small or medium-sized businesses about what LOIs are (and more importantly, what they are not), and to review how experienced buyers may strategically utilize them as tools to further their own objectives, sometimes at the expense of those of the seller.

Today's episode is all about the finance & accounting function: My guest is Nicholas Andrews, who is the Founder of Aspen Consulting Group, a company that performs finance, accounting, and operations consulting for a wide range of small and medium sized businesses. Aspen’s services include technical accounting, corporate finance, valuations, operations planning and M&A due diligence, among others. Our conversation begins with several questions about how to manage cash and other sources of liquidity amid all of the macroeconomic volatility & uncertainty we’re currently witnessing. We then discuss the topic of employee financial literacy, including the question of how transparent CEOs should be with company financials, and then move to questions of capital allocation and how CEOs should think about spending the cash that they generate, and finally we conclude with several considerations related to hiring, specifically focusing on the question of how CEOs should think about hiring a senior finance & accounting leader, which I suspect many listeners are attempting to do for the first time. Please enjoy!

In this episode, I attempt to debunk a common misconception among prospective acquirors, particularly those looking to purchase a business for the first time. This myth states that the smaller the business in question, the easier it is to purchase and operate. In the material that follows, I will attempt to explain why the exact opposite statement is likely true: That smaller companies are actually much harder to both purchase and operate when compared to their larger peers. 

My guest today is a particularly personal and a particularly special one for me: I have been fortunate to call Jim Sharpe a mentor and friend for over 10 years now, and I am thrilled that he agreed to join the podcast. In this week's episode, we discuss the realities of running a business during high inflation environments, including the risks and opportunities that may present themselves during such times. We also discuss how CEOs should think about pricing their products and services in response to inflationary pressures, and finally how they should deal with vendors who attempt to pass through price increases to them. Jim has been at at the Harvard Business School since 2009, holding positions as a Senior Lecturer in the MBA and Executive Education programs, an Entrepreneur in Residence, and now serves as a Visiting Executive. In 1987, Jim purchased Extrusion Technology, an aluminum extrusion fabricator that he ran as CEO for over 20 years. In 2008, Jim sold the company to a private equity firm, having grown the company from $4MM to $32MM in revenue throughout his ownership tenure. Jim is now an active investor in small and medium sized businesses, holding ownership positions in more than 50 entrepreneurial companies.

In his book, The Five Temptations of a CEO, author Patrick Lencioni discusses five areas in which CEOs tend to inadvertently prioritize the wrong things. These “temptations”, as he calls them, can lead to poor decision making at best, and can risk the very survival of the company at worst. My experience leading a software company taught me that there is a sixth temptation, unique to software, that seemed to present itself on a near-daily basis. More specifically: The biggest temptation of a software CEO is to throw bodies (specifically engineers) at problems. It is this sixth temptation that I struggled with most frequently. With the benefit of hindsight, I’ve come to a few realizations that I’d like to share with fellow software CEOs in hopes that they’ll do a better job of managing this temptation than I did. Among other lessons, I share how the following realities should shape the decision of whether or not (and by how much) to increase the size of the company's engineering team: Communication channels grow non-linearly as team size increases Work expands to fill the time allotted for its completion The development team will never be big enough One unit of additional capacity often doesn’t produce a unit of additional output When CEOs add more developers, they’re often attempting to solve the wrong problem It’s much easier to add than it is to take away Hiring engineers can be a very difficult hire to quantify  Please enjoy!

My guest today is Carin-Isabel Knoop, Executive Director of the Harvard Business School Case Research & Writing Group. Carin has spent decades writing cases on managers and leaders all over the world, across a wide array of functions and industries. In 2019, alongside co-author John Quelch, she published Compassionate Management of Mental Health in the Modern Workplace, a book that dove deeply into the relationship between work life and mental well-being, and suggested in which managers can and should act as the "chief mental health officers" of their respective teams.   In today's episode, we dive deeply into the following questions and issues:  Link between employee burnout and turnover Signs for leaders to look for that may be predictive of turnover Prevention strategies, for both the CEO and her employees Can CEOs maintain “high performance cultures” while simultaneously managing the risk of employee burnout? How to detect emotional depletion within yourself Personality traits that are positively correlated with burnout risk  Separating your own sense of happiness from the success of your business at any given time How acquirors of businesses can and should perform due diligence on the employee base that they're acquiring Please enjoy!