🔑 Why some employees give a sh*t (and others don't)
Welcome to The Business Academy with Sieva Kozinsky. Here's what we have in store for you today:
- Why some employees give a sh*t (and others don't)
- Making millions by hauling rocks
- A 100-year old business for sale
🔑 Magazines are a dying business. But what if I told you one man is making a killing buying Magazine businesses?
Craig buys transportation & logistics related magazines (like Flying magazine)
He can buy them CHEAP because few others want them. But the audiences are targeted and loyal, and he knows how to sell to them.
He uses his media businesses to acquire customers for more profitable companies: His Logistics data service, an airplane brokerage, and a housing community with a private runway.
I love businesses that allow employees to be owners.
It helps to align incentives and gives the team ownership of their work.
But unfortunately, it's difficult to structure this well.
A few weeks ago, I heard about a professional service company with a neat mechanism for letting employees purchase equity. Here's a post I wrote on LinkedIn about it.
More on that business in a moment.
But first, let me explain how I don't like to give free equity to employees.
While stock options are a common way to do this in the startup world, they don't really fit in the boring, cash-flowing business world. Here's why:
- Stock options work best when there's a liquidity event. But who do employees sell their shares to if the company doesn't go public or get acquired?
- Options are given away for basically free, which diminishes the perceived value of the grant
- Giving out stock for free dilutes existing shareholders. This might be okay for a rapidly growing startup, but it has a huge negative effect for steady-growth SMBs. In fact many public companies abuse this power as well because it's not required to be reported as compensation to employees. So it looks like a free cost to executives (born by the shareholders)
- Creates misalignment with shareholders. When an employee doesn't pay for their shares, they only get upside alignment with shareholders. If the company doesn't work out, only shareholders lose money. You want downside and upside alignment for any incentive.
I looked into how other non-startup companies give employees ownership.
For example, the largest employee-owned business in the country is Publix supermarkets, which does about $50 billion in annual revenue. Their employee stock ownership plan has two primary parts:
- Stock grants - Employees are automatically awarded stock after working 1,000 hours during their first year with the company.
- Employee stock purchases - Four times per year, employees can purchase additional stock.
This is probably the most common model for employee-owned businesses.
But here's a unique twist:
The professional services company I mentioned earlier has one of the most interesting private company stock plans I've heard of.
When an employee joins, they have the right to buy a certain percentage of equity in the business.
Here are the terms:
- The company is valued at 1.5x revenue at the time of any stock sales.
- The equity is sold to the employee on a seller note, with 10-year amortization & term, paid quarterly, with a minimum allowable interest rate (~1.5%).
- Every quarter they have to pay the bill on the seller note for their equity.
- Every quarter they receive distributions on their full equity grant, which is has historically been a little higher than their bill after tax.
- When an employee leaves the business, they are required to put their equity back in the "sellers pool", which then gets assigned to other employees.
I love this structure.
The business is high margin (~25%), so it can afford to pay high distributions that match or exceed the purchases.
The company, or person selling the stock receives payment for the shares, so this not inherently dilutive to shareholders.
And the business is small enough that each employee can have a direct impact on the bottom line, and therefore their distribution and equity appreciation.
We have a similar structure at Enduring Ventures:
Employees use half of their bonus to purchase shares in the company each year.
This allows our team to be owners, but they must have skin in the game (bonuses are discretionary and must be earned).
🔑 Hauling $10 million worth of gravel
When someone says 'government contracts', you probably think about fighter jets, missiles, and cybersecurity companies.
You probably don't think about hauling sand and gravel...
But this entrepreneur did.
He hauls millions of dollars worth of sand and gravel around for the government. His biggest contract was hauling 550,000 tons of rock (that's about 30,000 dump truck loads) to repair levee breaches in Missouri.
Read the full story over at Hampton's website, which is a great CEO peer group I'm a part of.
🔑 One interesting deal
This one is by far the oldest business I've covered in the newsletter. Let's take a look.
What I like
If you're read this section before, you know I like businesses that have been around for a long time. And this one is about to celebrate its 100th birthday.
I'd love to know of the story of this business and why they're selling. It would be interesting to know if it's always been in the founder's family, or if it's changed hands multiple times. Most importantly, I'd want to know how long the current owner has controlled it and why they're now selling. We prefer to buy businesses from founder owners.
I like the asking price; the multiple seems reasonable. You could even argue that if the FF&E and inventory figures are correct, you are basically buying the tangible assets and getting the rest of the business (customer relationships, contracts, goodwill, etc) for free.
Note, usually those FF&E figures are off by 60-95%.
What I don't like
While it says the current owners would be open to selling the $10.5m real estate the business operates in, I'd be cautious about entering into a landlord/tenant relationship with the previous owners. This could complicate the transition if the old owner is still around managing the building. I suggest you buy the property or move the business if you can.
One potential red flag here is the round numbers. It's possible that the broker just listed approximations in the listing and will provide exact figures to interested and vetted buyers. But typically, these listings have more exact numbers. The even numbers make me wonder if all the numbers are off...and by how much.
I can't tell if they are competing with HomeDepot or online suppliers like AdvantageLumber. For a commodity item like this, you will want to understand the competitive dynamics and why they win business. Sometimes they win business because the owner is friends with the local builders, which is a risk to you.
Have a great week,
Sieva
P.S. I've been publishing more shorts on YouTube with some of the most interesting moments from my interviews. Take a look and please subscribe on YouTube if you haven't already.
Disclaimer: nothing here is investment advice. Please do your own research. The information above is just for information and learning.
