8
The Number
Alex felt a rush of satisfaction as he piloted the Range Rover back into the city. The big V-8 engine easily handled sixty miles an hour and hardly sounded like it was working at 2,000 RPM. It was still early, so after a quick stop for a Grande Bold, Alex headed directly to Ted’s office to drop off the keys to the beach house.
Ted was getting off the phone and gestured to Alex to wait for him. The call ended and Alex handed Ted the keys.
“Thanks, Ted. Your place is fantastic.”
“Glad you liked it, Alex. How did the planning go?”
“Good. I’m going to try to hit $2.5 million of revenue this year, and I’d like to improve our profit margin to 15 percent pretax.”
“Those would be significant improvements over where you are today. Did you open the envelope?”
“I did.”
“So, what’s your number?”
Surprised by Ted’s bluntness, Alex paused.
“First I came at it from the point of view of what I thought the business was worth. Then I looked at our goals, and then ...” Ted listened patiently as Alex tried to explain his rationale. “I thought about the work I’ve put into the business to date, how much more work is left to get done over the next two years, and . . .”
Alex was nervous about revealing his number to Ted. He looked up, hesitated a moment, and then said, “I want to get $5 million for my business.”
Ted didn’t flinch at hearing Alex’s number. Instead, he offered a simple directive.
“I want you to do something for me. It may not be immediately clear why you need to do this today, but trust me, it will become clear down the road and you’ll be glad you did. Take one of these recipe cards”—Ted handed him a card like the one he had used to write his question for Alex at the beach house—“and write down $5 million on this card. Then put it in this envelope and seal it.”
“Sounds cryptic. Why do I need to write it down?”
“That will become clear later. Just write it down and put the envelope where you’ll be able to find it in a couple of years.”
Angie and Seamus continued to sell well through December. Despite the holidays, Angie sold six logos and Seamus sold five. Alex asked both Angie and Seamus to recommend salespeople they knew from their previous jobs. One of his friends had heard Seamus bragging about his new company and had expressed an interest in joining. Alex hired him after a short interview. Angie recommended a friend who was returning to the workforce after taking a couple of years away to start a family. Alex got the word out among his contacts and found the fifth sales rep he needed.
They helped their new colleagues get familiar with the selling system they had designed. In the meantime, Alex put the word out to his network that he was looking for a new account director. He interviewed six people, looking for someone with Rhina’s attention to detail. He hired Belinda Carter away from a rental car agency where she had been thriving as a branch manager. Rhina and Belinda hired a coordinator to help with some of the details.
Alex contacted his alma mater where he had attended art school and let the professors know he was looking for designers who could freehand sketch and use the latest computer design programs. He asked Chris to meet with a few designers and collectively they picked out one who met their criteria.
The Stapleton Agency was growing: five salespeople, two account directors, two designers, one coordinator, and Olga managing the office and the books.
The snow fell all night, making the morning drive to the office slower than usual. Alex parked in his usual spot, trudged through the slush to the building, and stepped inside. He shook off the snow and salt as best he could and made his way to his office. Angie was waiting for him leaning against his doorway. She stepped aside to let him in.
“Alex, can we talk for a few minutes?”
“Sure, Angie, let me just get my coat off . . .”
Angie didn’t waste any time.
“I’m glad we brought in three new sales reps, but I’m getting stretched thin. They have a lot of questions, and I want to be helpful, but I’m getting to a point where my sales are starting to suffer. I know Seamus feels the same way.”
Alex tried to ease Angie off the ledge. “Angie, I know you’ve been really helpful at bringing the new guys up to speed, and I appreciate all the extra time you’ve invested.”
“That’s great, but I think we’re at a point now where you need to decide if you want me to sell or manage. I can’t do both.”
Alex agreed to get back to Angie with a resolution to her concerns next week.
The last Tuesday of the month started as most other Tuesdays had in the past six months, with Alex offering Ted the week’s numbers.
“February has been a good month so far,” Alex reported. “Angie closed four logos, Seamus is at five for the month, and the new sales reps each sold their first logos.”
“Alex, that’s great news!”
“Yes, but our growth is starting to create some problems. Angie spends a lot of her time teaching the new sales reps our process. I know Rhina is feeling stretched as Belinda gets up to speed, and Chris has already said we need a third designer.”
“Good,” Ted said. “It’s about time you built a management team.”
“Sounds like something MNY would have.”
“If you’re going to sell your business, you need to demonstrate that it can run without you. You need to show a potential acquirer that you have a management team that can keep the business running when you’re gone.”
“Are you suggesting I bring in outside managers?”
“Not at all. Sounds like Angie, Rhina, and Chris are already your managers. You just need to make it official.”
“I guess you’re right. But isn’t that going to be expensive?” Alex protested.
“Not necessarily,” said Ted. “You need to align their compensation with your goals. You can do that with a small bonus and give them a chance to share in the growth of the Stapleton Agency.”
“Are you talking about sharing equity with them?”
“Sharing equity can get messy. It’s time-consuming, and why dilute your equity and complicate things when you don’t have to?”
“So if not with equity, how else can I let them participate in our growth?”
“There are a lot of options,” Ted explained. “You have to decide if you want to reward loyalty, in which case you might create a stay bonus tied to them being employed at some date in the future. Alternatively, you could create a performance bonus for achieving certain targets.”
“What did you use in the businesses that you sold?”
“I used a long-term incentive plan designed to reward my managers’ performance and their loyalty to the company.”
“How did that work?” Alex asked.
“I gave managers targets and a corresponding bonus for achieving their personal targets. I paid them their bonus at the end of each year and put aside the exact same amount into a special pool of funds earmarked for them. Three years after launching the plan, and each year thereafter, they were allowed to withdraw one-third of the pool. That way, their pool grew in value each year corresponding with their personal achievements, but they could not access the extra money until three years after earning it. If they ever decided to leave, they would be walking away from three years’ worth of bonuses sitting in the pool.”
“I thought acquiring companies wanted to see that management had real equity . . .”
“In my experience, an acquiring company wants to see that there is a management layer in place and that the management team has some form of long-term incentive plan that will encourage them to stay after the business is purchased. One way to do that is with equity, but equity and stock options are complicated to set up and may cause you all sorts of headaches down the road. If I look at it from Angie, Rhina, and Chris’s collective point of view, a long-term incentive plan like the one I used in my businesses has a lot of benefits over equity. In a small service business, equity is only worth anything if there is a market for the shares. Assuming the Stapleton Agency will never go public—and I think that is a safe bet—then you may decide not to sell, and then their shares are not worth
TED’S TIP # 12
Build a management team and offer them a long-term incentive plan that rewards their personal performance and loyalty.
much. As an employee, I’d much rather have an understandable cash bonus plan than a few shares in a closely held small business.”
As they wrapped up the meeting, Ted asked Alex to spend the next week considering how he wanted to structure the compensation of his management team.
Alex promoted Angie to vice president of sales, Rhina to vice president of client services, and Chris to vice president and creative director. His new management team was thrilled with their new titles. He gave them each a 7 percent pay raise and introduced a long-term incentive plan similar in design to the one Ted had described at their last meeting. Alex explained to his new management team that they were still a small business, they would each need to continue to do their jobs as before, and their promotion was designed to recognize them for the extra management tasks they were being asked to take on.
Alex left the office on Friday with a sense of satisfaction. He’d created and focused on a standard process that others could deliver, built a sales engine that produced excess cash, and established a management team with a long-term incentive plan.
He was close to having a sellable business.
