Measure Value, Not Revenue

Tom Heaviland: They were pulling out, they were done. That contract went from 70,000 down to I think 2,500 a month that coming Monday. So it was a huge hit and kind of a wake-up call to make sure that we didn't have one large account where if we did lose it, it could sink the ship. Kory Mitchell: You're either the smartest guy in the room or the luckiest, but as we say in poker, I'd rather be lucky than good. So that's Tom Heaviland. He went from one truck in 1985 to selling his business to a public company for millions of dollars. Getting there? He lost his biggest contract overnight. His dad died suddenly. And all of a sudden he was splitting his profits 50/50 with his stepmom. Tom Heaviland: Unfortunately, it took an event like my dad passing away for me to move into that role and really find my footing. Kory Mitchell: The crisis that almost sank him, the loss that freed him, and then the sprint that tripled his value leading to his exit. Tom Heaviland: We finally agree on the multiple. Ed stands up and he reaches across the table and he shakes my hand and he says, "We have a deal." Kory Mitchell: Welcome back to The Turn. I'm Kory Mitchell of Iconic Founders. The Turn is where blue collar founders talk about the businesses they've built, the value they've created, and what comes next after they sell. Tom wasn't even looking to get in a landscaping business. One trip to California, a round of golf with his dad, and all of a sudden their partner's in a landscaping company with one truck. Tom Heaviland: We started cutting grass and trimming shrubs, pulling weeds, and doing all that early on. So my dad, myself, and his wife, my stepmother, went in as equal shareholders, bought the company. We each put up $11,000. The owner carried back a $100,000 note for 10 years- Kory Mitchell: Wow. Tom Heaviland: ... and we chipped away. I think that first year we closed out 1985 with about 150,000 in sales. Kory Mitchell: Awesome. Tom Heaviland: We were a tiny company then. Kory Mitchell: So how long did it take you to pay off the business? Tom Heaviland: We paid it off in 10 years. My dad and I worked in the business. My stepmother handled the books. We just had our heads down for, I don't know, the first five years or so, just doing the work. My dad could cut grass like nobody's business. And I started to do a little bit of sales, trying to grow. And then we slowly picked up a large HOA, then we picked up a large office industrial park, which opened our second branch, and continued to grow and learn the business from there. Kory Mitchell: Tell us about some of the challenges that you faced? Tom Heaviland: Good question, Kory. This big industrial park was a few hundred acres, big industrial manufacturing and warehouse buildings up there. We did all the common area, all the slopes. We did some of the buildings in the park. The developer was out of Canada, a company called Cadillac Fairview. Well, the recession hit mid to late '90s, and Cadillac Fairview called us in on a Friday morning. I'll never forget, it was kind of Black Friday for us and said, "Hey, look..." And this contract at the time was around 60 or 70,000 a month. It was a big contract for us. Kory Mitchell: Oh, wow. That's a huge contract. Tom Heaviland: Yeah, it was enormous. And that contract went from 60, 70,000 down to, I think, 2,500 a month that coming Monday. Kory Mitchell: Holy moly. Tom Heaviland: So they were pulling out, they were closing down the operation and they were done. And so we had a massive layoff of workforce, just a skeleton crew just to do the basic maintenance for this park for the next few years. I tell you, it was, "How are we going to survive this?" And fortunately, we had enough business. We could kind of stabilize and make the necessary cuts to weather the storm, but it was a huge hit and kind of a wake-up call to make sure that moving forward, we didn't have one large account that dominated our portfolio where if we did lose it, it could sink the ship. Kory Mitchell: Did you ever have a crisis like that, that ended up having a silver lining for you? Tom Heaviland: Without hesitation, I can tell you it was December 20th, 1997. My dad passed away suddenly of a stroke. Kory Mitchell: Awful. Tom Heaviland: And get that call late at night. And the next morning you wake up and you're like, "Wow, what just happened?" Dad was no longer there. So my life changed significantly. I mean, we were equal shareholders, the three of us. My dad was the president just because he's dad. But after he passed away, I had to move more into that back office and more the business... Because I was more on the operation side of things at the time. When that happened, it was like, "Wow, okay, I kind of like this. It feels better." I'm not an operations detail punch list. I'm a horrible account manager or project manager. Kory Mitchell: I'm the same. I'm more of a sales guy than an ops guy. Tom Heaviland: Yeah. Exactly. But it was like a breath of fresh air. It's like, wow, this feels really good. And unfortunately, it took my dad passing away for me to move into that role and really find my footing. Fortunately, I have a wife that I've been married to for 37 years who was a huge rock. Kory Mitchell: What a wake-up call to get. I'm sure it was awful. Life insurance retired his dad's shares, and now he was in business with his stepmom, 50/50. For every dollar they made, she got half. He reinvested in the business. She took half out. He endured that for seven years, but by then, he'd had enough. Tom Heaviland: I went to her and said, "Hey, look, either you're going to buy me out or I'm going to buy you out, but we need to value this company and figure out that strategy moving forward." So we got the business valued. I ended up buying her out. And not that we had a bad relationship, Kory, we had a good ... I mean, she's grandma to the kids, but it was stressful. Once that happened, I could focus on continuing to grow the business. Kory Mitchell: Tom was 46 when he bought her out. Five million in revenue, nice lifestyle business, but he started thinking to himself, "What's this thing worth?" And that changed everything. Walk us through how the growth of the business took place and then how your son joined you and what his role was? Tom Heaviland: Yeah. So as we grow, we started to professionalize. I'm hiring a CFO or a controller. I'm hiring a director of operations. I will say this, most of the mistakes and the hardest part for me and why I struggled or the company struggles because of poor hiring decisions, being slow to fire. But I think once I got that equation figured out and straight and I really got quality people, we tried to hire people that had horticultural degrees and really new landscape because my dirty little secret is I don't have a love of landscape. I'm not a horticulturalist. I like the business, but my dad and I could have bought a plumbing business or electrical. I mean- Kory Mitchell: I don't love asbestos that much either. Yeah. But it helped me build this house. Tom Heaviland: Right. Yeah. That's good. Kory Mitchell: So when your dad passed, I'm just curious on some of the milestones of the business in terms of the size. I don't really have a good sense of the size of your company. How large was the business from a revenue standpoint when your dad passed and then maybe when you bought it out fully from your stepmother, all the way through the time when you transacted in 2019? What was that transition? Tom Heaviland: I mean, when my dad passed, we were probably about three million. When I bought my stepmom out, we were probably about five million. When we transacted, we were 15 million, which for San Diego, we were one of the bigger companies. We had a great brand and a great reputation. But for me, for a long time, it was lifestyle. It was- Kory Mitchell: Oh, sure. Tom Heaviland: ... spinning off nice cashflow and we took a lot of trips and we did a lot of nice things. And yeah, it was a lifestyle business, which is what it is for a lot of family run companies. And it wasn't until, it was probably five, six years before our exit where I really started thinking about... And again, another lesson learned is I wish I would've started thinking about value of the company earlier on in my career, measuring, okay, what's the value today? And once we started doing that and measuring it, then we really saw the impact and really made decisions. Everything centered around how do we build value? Kory Mitchell: Yeah. I mean, you're speaking my language. This is a huge amount of the work I do now is work with founders on figuring out how to maximize value in their business. Tom Heaviland: Yeah. Kory Mitchell: Curious, what are some of those key needle moving things you did over those five years pre-transaction that moved the needle and made your business more valuable? Tom Heaviland: I'd say one of the biggest ones was we shut down the construction division. Kory, we weren't built for construction. It was just the margins were lower. It took our focus away from our core business, which was commercial maintenance, recurring revenue with ancillary or enhancement sales on top of that. So I made the decision to shut that down probably two or three years out of exit, and we did that and man, we just saw our ... I mean, it wasn't hockey stick, but it was pretty significant and that helped. And it increased the value of the company, certainly, because our margins were higher. And once we just narrowed it and focused on it, we got really good at it. Kory Mitchell: Where did you margin go from before you got rid of the construction division to the point where you transacted, from a percentage standpoint? Tom Heaviland: I would say it jumped probably a minimum of five points. Kory Mitchell: Sweet. Net? Tom Heaviland: Yeah. That's big. Kory Mitchell: Oh, sweet. Tom Heaviland: Yeah. It's good. Kory Mitchell: That's sweet. Tom Heaviland: And because we're bidding, competitive bid stuff, we're bidding in the 30% range. Our maintenance is generating minimum of 50. Our enhancements are generating north of 60. Sub-work, we're getting 30% on it because we subbed our tree and spray chemical applications. So all blended, we were in the mid 50% range on our gross margin, which in our industry is really good. Kory Mitchell: Revenue, 15 million. Gross margins over 50%. Net income, 20%. This thing wasn't just profitable, it had become valuable. I live in Colorado. It's super dry here, and for years I put an electrolyte in my water. It just makes me want to drink it more. I tell all the businesses I work with, keep your guys hydrated. We talk about hydration as one of the number one points of safety. I've been using Salt of the Earth. This stuff's great. It's got great flavor. You can just throw them in your bag and wherever you go, just throw it in the water bottle. It'll keep you hydrated, and they taste great. The grapefruit's my favorite flavor. They also have this four pack that's pretty sweet. You can try them all. And now they've introduced the creatine, which is also awesome because it's one of these things everyone's talking about now, you got to get your creatine in every day. So try Salt of the Earth. For all the listeners of The Turn, you can get a 15% discount. Just use code Iconic or click the link in the show notes. Tell us a little bit about the experience of selling the business? I'd be curious to know what it felt like. Tom Heaviland: When I made the decision to sell, I was in three NDAs with national companies. I was ready. When I met the CEO of BrightView, which is the largest player in our space, that conversation went well. Their M&A guy came out, Ed Bates, great guy, VP of their merger and acquisition team. We had dinner, my son and I, and we hit it off. We were posturing and all that goes with that. And then got the P&L out, trailing 12 and started arm wrestling over add backs and finally came to an agreement on an EBITDA number, and then started discussing multiple. And my whole philosophy, Kory, was like, "I'm going to shoot really high. And if they say no, I don't care." Kory Mitchell: Yeah, you're doing great. You're making a ton of money. Tom Heaviland: And so we finally agree on the multiple and a purchase price. And Ed stands up and he reaches across the table and shakes my hand and he says, "We have a deal." I don't know if my son was kicking me like, "We should have gone higher." And it was a good number for us. Yeah, it was a life-changing event and we were happy with that. We bought a house on Lake Pend Orielle up in Sandpoint, being able to walk out your back door, onto the deck, onto the dock, into the boat. That's a good lifestyle. Kory Mitchell: What was it like going from having a cash flowing business to kind of a lump sum amount of money in the bank? Tom Heaviland: I mean, surround yourself with great advisors. I had a terrific M&A attorney who really managed the process for me. Well, because you can't do this alone. You need help. And it is a big lift. And again, you got to keep the business running. And I'll never forget... Because I had an earn out as well, which I was going to crush, and unfortunately, COVID came along that March, which kind of put the kibosh on that. It's like, hey, anything can- Kory Mitchell: So you missed your earn out? Tom Heaviland: I barely crept across the finish line to the original EBITDA that we had agreed upon. My M&A attorney Patrick said, "Listen, be happy with this price here because this is not guaranteed." But my wife and I put a lot into a donor advisory fund because we want to give away a lot of money. And I bonused out our key team members. They got some nice checks. I wanted to share them, because really they're the ones that got me there. Kory Mitchell: Yeah, that's right. Tom Heaviland: So I wanted to share in that success with them as well. So I would say having the good wealth advisors that can manage that flow of funds when it hits the bank is critical, and where you place that and how you manage that because I don't want to touch that. I just want to let it ride, and we live comfortably. Kory Mitchell: Tom sold in 2019. He started with one truck and he sold for life-changing money. Four months later, COVID hit. He had an earn out on the business, he wasn't going to hit it. He took his attorney's advice who told him, "Be happy with the number you get at close because nothing's guaranteed." But he'd already won and he knew it. You sold at the peak. You're either the smartest guy in the room or the luckiest, but as we say in poker, I'd rather be lucky than good. Tom Heaviland: I'll tell you what, in our business right now, I mean, the multiples just continue to climb. I tell people there is no better time right now to sell. And back when I sold, the guy that had sold the [inaudible 00:15:58], he said, "I don't know how long this window's going to stay open, but you were cranking. Now it'd be a great time for you to sell." And of course, that window has stayed open. And there was so much activity. There was so much dried powder on the sidelines as capital that needs to be invested. And private equity loves our space. I mean, they love the- Kory Mitchell: They do. Tom Heaviland: ... the consistency of it, the recurring revenue model, and there's just so much more competition. It's crazy. Kory Mitchell: Yeah. There's a lot of cash chasing, not a lot of deals. So I'm seeing the same thing in your space. The multiples are fantastic and there doesn't seem to be any end in sight just because there's so much dry powder. Last question. One of the things that we're starting as a tradition is just to ask about any carve outs that you may have had. Anything recently that you found that was cool, AI, a new book you read, an app that you found, an idea, anything that has been kind of cool lately in your life? Tom Heaviland: Well, for me, Kory, being that I'm 68, it's all about health and wellness now. Kory Mitchell: Yeah. Tom Heaviland: And I want to ski into my 80s and I want to live a healthy lifestyle, both my wife and I, and do those things. For me, I got a personal trainer I see three days a week, try to exercise, eat fairly healthy. And so it's about spiritual wellbeing, mental wellbeing, physical wellbeing, and developing the relationships in my life. My dad died at 65, and he was in great shape. People thought we were brothers. I mean, he looked great. And I mean, it was a compliment for dad, but not so much for son. Kory Mitchell: Yeah, right. Tom Heaviland: That's important for me now. And the other thing I will say real quick, I spent the first 50 years building Tom's Kingdom, right? Kory Mitchell: Yep. Tom Heaviland: All about Tom, Tom, Tom, Tom, Tom. Now, it's time to build his kingdom. I'm a Christian and I feel like I want to give back. I have the resources. I've got some time. I feel like I've got some talents somewhere that I can use. Yeah, time to build somebody else's kingdom. And not that I need this big legacy, but just what can I do in my world? Kory Mitchell: Amazing. Tom Heaviland: Yeah. Kory Mitchell: Well, you've had an incredible life, incredible career, and there's a lot more to come. Tom Heaviland: Thank you. Kory Mitchell: Tom, I'm grateful that you were able to come on the show. I learned a ton from you. Next time you're in Colorado skiing or next time I'm out in Carlsbad, I'll look you up and buy you a cup of coffee. Tom Heaviland: Please do, Kory. Thank you. It's been a treat to be on your podcast. Thank you. Kory Mitchell: Awesome, Tom. Tom Heaviland: All right. Kory Mitchell: All right. All the best. Tom stayed on for three years. Then Verde Equity called. They needed a CEO for a landscape roll up. He's 68. He says he plans to step down next year. But after meeting Tom, I'm not so sure. One thing from Tom's story, measure your value early. Not revenue. Value. Tom wishes he'd started at 40, not 57. Because those last few years, when he started building it to sell it, that's when the real money got made. I'm Kory Mitchell. Thanks for listening to The Turn, a podcast by Iconic Founders Group. Make sure you follow and subscribe to The Turn wherever you get your podcasts and visit us at iconicfounders.com. We help founders like Tom sell the businesses they care about and protect the legacies they've built. The Turn was produced by Nate Tower and Chief of Staff at Iconic Heidi Heckler, with Executive Producer, Aaron Macandu Sproule, video editing by Jeremiah Flo Flores, sound design and mixing by Ben Crannell at Lower Street Media. Let's win.