Today’s podcast features John Crabbe, Founder of Vermont Tent Company. John started the process of transitioning his business to his employees well over ten years ago. Today, he’s actively in the process of not only having new management take over but having his management buy him out.
We’ll learn about why John decided to do an internal transaction as well as some of the things he’s learned along the way. Some of the take aways from today’s podcast will be:
- Why it’s more satisfying to do an internal transaction where you sell to managers instead of an outside third party.
- Why playing bank for a transaction to your mangers might be a good financial planning move.
- Why you need to act like a bank when you sell your business to your managers.
- How John decided who the next owners of his company would be.
Selling to your managers is one of four main says you can leave your business. For many business owners this is a very satisfying way to leave your business. It certainly is for John Crabbe.
Narrator: Welcome to the Sustainable Business Radio Show on podcast where you’ll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. The Sustainable Business is all about creating great outcomes.
Here’s your host, certified financial planner, student, entrepreneur and private business expert, Josh Patrick.
Josh: Today’s podcast features John Crabbe, the owner and founder of the Vermont Tent Company. Several years ago, John started down the road of setting up his company to be bought by his managers. He is now ready to leave his business and John is going to tell us how he created a team, tested his team, and put the deal together for his managers to be the next owners of his company. Let’s get right to it and find out what John did.
John, welcome to the show. Thanks so much for joining us today.
John: Well, thanks Josh. I appreciate it. It’s been a great run for 38 years of doing this business. I’m very excited about exiting actually and trying to do other things now.
Josh: Okay, so let’s talk about this. When did you start the exit process?
John: Well, I did other businesses at the same time I was doing Vermont Tent in the startup. I always thought, “Oh, this will be a summer time business only. I’ve got to keep doing my other things and catering and such.” And then, in about ’85, it started really taking off a little bit more. And ’86 and ’87, it grew even more.
I decided that I was going to put all of my effort into this. And to do that, I needed to hire for the first, a year-round employee. And so, I hired my first year-round employee back in ’87, who is still with me. That person really made us grow another leap. And then we ended up hiring another person. After the first person, I realized that if I’m going to keep this person – I couldn’t afford back then to pay him the big wages that he would’ve. Really, he could’ve gone out and get it. He was a college graduate, a smart guy – that I realized I needed to do something to keep this person on and keep future people on.
I just read a book about Springfield Manufacturing. They were one of the first companies to do an ESOP and I thought, “Okay, maybe if we offer stock to him.” So, I went to the two guys that were with me at the time and I said, “Listen, how about if I give you a share of stock?” And I started at 1% a year, for five years to get them—and then they were going to get vested. And at the time, we were small enough, I couldn’t afford to do an ESOP. Back then, an ESOP was expensive just to startup and we were still a startup company so I couldn’t do it. So, I offered them that and sure enough it worked. They jumped at the chance to earn some stock and they’ve been with me ever since – the key employees. So that’s how it started, in the very beginning.
I did it mostly to keep the employee on. It wasn’t really so much the exit strategy at the time. But over the years, as we got mature and we were growing, I said, “Listen guys, at 65, I’m ready to quit. Let’s start planning that.” And then that year, when I turned 65, which happened to be last year, let’s start the—well, we started the process before that but let’s finish it up when I turn 65. So we’ve been working toward it for many years.
Josh: When did you decide you wanted to just sell to your managers versus selling to a third party?
John: Well, I think, in the very beginning. Again, I’ve tried to do socially-conscious things. I give a lot to non-profits. I really try and work with my community and stuff. I really thought that I wanted to sell it to my employees because they would take it on. Well, a couple of things happened.
I’ve done a lot of reading over the years but one of the things I read was Jim Collins books both the “Built to Last” and “Good to Great.” And I said, “I’d like to be one of those companies that is there. A hundred years from now this company is here and they’ll look back and say, “Wasn’t that John Crabbe, the smart founder back there 100 years ago?” And so, that was one of my ideas that I’d love to be one of those companies. When you read those books, you think about it. He gave us good advice about getting the right people on the bus. It was one of the things he talked about a lot. And so, I got the right people. They were trained.
It worked out so well that besides being great managers and helping me grow the business, they were there so that I could take the time off. I went and I did a lot of work for our association – The American Rental Association. I was an officer and then I became the president and then the chairman of the board. I got the time to be gone 120 days a year to do that, for three years. And then after that, I started slowing down. For the last five years now, I weaned myself of everybody. I’ve let them run everything. I started weaning customers off of me. I stepped away from the banking and let them deal with the banks all the time. So, nobody saw me over the last five years. They saw me less and less and less.
In fact, last summer, last winter, the last two years, I’ve been taking one week a month off, being gone completely out of town and I golfed 100 rounds of golf so it made it really easy. These guys, now they’re hungry and they can’t wait to get rid of me because they’re paying me for, they realized, doing nothing. So, it makes them even more eager to finish the deal and get me gone.
Josh: One of the things about sustainability which I think is important is asking the 100-year question, “What does the business look like 100 years from now?” And more importantly, “What will I be doing differently today if I’m thinking about a 100-year business versus a ten-year business?” Did you ever think about that in a conscious manner or was it just sort of something that came up?
John: No. I did think about it. In fact, I made all the guys read Built to Last and Good to Great so that they would see “here’s my vision of where we’re going to go.” And over the years, we hired a lot of consultants to come in. At one time, you helped me do some things. And then I’ve hired other consultants that helped us form the team, to do coaching for us and mentoring. And so, over the years, we’ve been really working on this for a long time, to make everybody fit into the right place and get the team together.
Yes, I really did think long-term. Like, I really do want this company to be here 100 years from now and for people to look back. And hopefully, this next generation that’s buying me out is going to continue doing what I was doing. I think that we’ve been so close. I mean, Lon my CFO’s been with me 28 years. The other two guys, Mike and Mike, have been with me 24 years. So, they’ve got longevity. They think like I do in some ways but yet they’re a good counter balance to each other. One’s a CFO. He wants to do all that. One’s operations and he loves to just run the operation. He doesn’t like to be the public guy. And then there’s a public guy who loves being the customer relations, sales and manages the team upfront. They’re a perfect combination. The best thing I did was to hire those three and get the team together. Hopefully, they’re going to continue doing that for the future.
Josh: Are those three thinking about what their strategy will be when it’s time for them to leave yet or is it too early for them?
John: I think it’s too early for them. I think they’re concentrating on getting rid of me first. I mean, their goal right now is working on – all right, let’s get this done first. They’re all 20 years younger than me. And even more than that, there’s someone more, 22. So, they’re all in their 40’s. They’ve got a lot of time to build the business up, pay me off and then go to the next level. I think that they know exactly where they’re going. They have plans for the growth. We see this industry continue to grow. We’re in a small market so we can’t grow huge like some of my guys in Boston and New York and the big cities but we dominate in Vermont and that’s what we want to do, is dominate in our market.
Josh: I can say, for a fact, that you do dominate in Vermont. What have you done as far as discussing financing or, more specifically, have you guys decided specifically how those three are going to end up buying you out?
John: We have. In fact, we’ve spent extensive time with both our camps. They’ve hired their own accountant and attorney and I’ve retained my attorney that was our corporate attorney but I did go with another. We went with a third accounting. I’ve hired a new accounting firm, somebody different that did Vermont Tent’s accounting just to get a different view of it all. We did a valuation. We had three different accountants do a valuation. They all came up within a few dollars of the same amount of money so we knew our valuation was correct from all of the opinions of everybody.
And then it was just a matter of how to structure it. Of course, I wanted it 100% stock sale. They didn’t want that so we’re trying to do—we compromised and went half of it as stock sale and half of it as deferred compensation which works out fairly good for both of us, I think. I think that it’s fair. We knew the number and that was just a matter of the accountants going back and forth saying, “Okay, what’s the best way to work this?”
Josh: Why would the buyers care if you did a stock sale or deferred comp?
John: Because if it was 100% stock sale, I make out better. I’m in the 22% bracket rather than the 42% bracket as a deferred comp. But what happens for them is, if it was the stock sale, they lose all the depreciation. They get taxed more by being 100% stock sale, they‘ll end up paying a lot of taxes over the next 10 years. So, it is a compromise for them because they are still going to pay a little bit more. So we kind of split it down the middle. But being deferred comp doesn’t kill me as bad as it seems because they’ll keep me on in a management position and I’ll get deferred comp and I’ll put the maximum in my 401 for the next 10 years or five years. And then at 70, I start drawing that out. So, I can defer some of it for a time anyway.
Josh: Yes, you can. And there’s two things that is important for everyone to think about when they’re doing this is (1) when a buyer uses a stock sale to buy you, you’re making it more difficult for them to pay, so there’s a higher probability of default. And second of all, when you do deferred compensation, it’s not marginal tax accounts, this was called average tax rate. And often, the average tax rate and capital gains rates are not all that far apart which is probably true if I’m not mistaken.
Josh: At any rate, that’s just one of those fun things. I’m assuming that you’re going to be playing bank for your buyers. Is that true or are they going to be able to go to the bank for a loan?
John: They could go to the bank for some if it but we really—they’re fortunate I’m leaving them in a position where we have very little debt in the company. They don’t want to borrow more and I said I would finance it over the time. Because of the deferred comp I’m going to get, I’d rather take that over a longer time. So yes, I’m just going to take it over time. I still will retain ownership of the building. I’d be the landlord and they’ll pay me rent. We’ve got a 10-year lease in place with an option to buy at the end of ten years. Now, if I let them buy the building. I’m 75, if I finance for 20 years, then I’m good until I’m 95 so I’m planning the long-range life here, too.
Josh: So what you’ve done is you basically layered what you need for living money for the next 30 years?
Josh: That’s a pretty cool thing to do.
John: Then I set down and my wife has a great job too that she’ll keep for at least five years. And then when I turn 70, then I’ll start collecting social security. Then I’ll have to take out money from my 401 at 70-1/2 and on all those things. So, at that time, that’ll be more income at a time. And so, I think we have a great plan. I think it’s going to work out great. You’ve got to knock on wood, I’m very healthy and I feel good so we hope to live a long, healthy life and enjoy it. My wife and I like to travel. We’ve done a lot of that every year. We have a daughter getting married this year so we’ll be staying home this year to do that, this June, and for the traveling. Life is good and I’m very happy with this situation and I trust them.
The thing about it is if I was selling to somebody outside the company, I would want all my money up front. I don’t want to trust somebody else. But these are guys that I’ve grown up with. They’ve been with me since they’ve got out of college. They’re smart guys. I know that they know how to do it. They’ve been doing it. We had our best year ever in ’14 and I was completely out and didn’t do anything. They did budgets. They did everything. I stepped away completely and they just managed it to the best year ever. Not just top line best year ever but bottom line, by double our best year ever because they were efficient and managed it really, really well.
Josh: Wow. That’s really impressive. When you finance for these three guys, are you going to require them to treat you as if you were a bank with guarantees and all that kind of stuff?
John: Yes, we will do that. Our lawyers insist on it. We will have the personal guarantees. We’ll have the same type of covenants on the loan as they would with the bank. In fact, we’ve made them give us a budget for the next 10 years so their capex can’t exceed a certain amount without going back to me. They can’t take raises, bonuses or anything like that without me approving. So yeah, we’ve put all the covenants in that the bank would put in.
Josh: It sounds like you really thought this whole thing through pretty darn well.
John: Well, we’ve had the last five years of planning. The nice thing is we’re close friends enough that we were able to talk about it. We talk about it quite often. We meet. We haggle but there was haggling back and forth about some of the structure and things like that, some of the perks and what I’m going to keep. But overall, we end up being very friendly about it and there’s trust. They trust me to keep my word which I’ve kept after having them here all these years. And I trust them to keep running in an efficient and proper manner. So yeah, it’s a lot of trust between us. That wouldn’t happen with an outside buyer.
Josh: It seems that time is a really important factor if you want to do a successful internal sale.
John: It does because I’ve seen a lot of people wait too long. I have other friends in the industry that I’ve been consulting with that waited too long. They waited until they were in their 70’s and then it’s too late. There’s no chance to do the deal. I mean, to sell it when you’re too old.
We planned far enough ahead while I was young enough that I think that that was it. That’s a very important thing to plan ahead. So, like you say “Okay, we said when I turn 65 I want to be done day-to-day job. I don’t want to be working day-to-day anymore.” We really structured everything to end at that time. And so, I guess, it really was a long‑range plan that this was the plan.
We had a few hiccups, 2008 was a hiccup for every business in the country – 2008 and 2009 where we were down, but we came right back and have exceeded the numbers from the biggest year ever so it worked out. You’re going to have those blips. And even they know that. In fact, they know that “Hey, in the next 10 years, sure we can have another recession of some kind” but we’ve built in some things in their structure like we’ve structured it so that if they have one of those years that’s really bad, they can defer the comp to me for one year, if it meets all these–we have a lot of metrics that it’s got to meet. But if it meets everything, they can defer the year. So that gave them that feeling like, “Hoo, if we have a bad year, John’s going to help us out.”
Josh: That certainly makes sense. And it’s also my experience with internal transactions that have gone well. They all start early. You’ve talked about one thing which is trust, but the other part is you. You have to trust them and the fact that they’re going to be successful because you’re the guy who has the bigger risk than they do, actually. Does that make sense?
John: It does make sense because I don’t want to step back in and they know that too. I mean, I don’t want to run the company again. I’ve been out of it for so long that if I had to step back in, if all three of them – if something God forbid, anything happens and I had to step back in, it would be hard to step back in and work full time again after not doing it. I get used to a certain lifestyle and I don’t want to do it again. I’ve done my 38 years here and I’m done. I do have other things I’d like to do. I’ve got some ideas. In fact, I have a think tank some other guys that have sold their business. We’re kind of getting together, trying to do something different. So yeah, I have other things I want to do. I don’t want to step back in. So, there has to be that trust that they’re going to take it and they’re going to succeed.
Josh: And confidence, the fact that you’ve been testing them for the last five years, allowed you to examine how good they are. And from what you said, they may even be better than you were.
John: I think that’s the thing that I love best about them. They all are smarter than me in their own thing. I was the guy that might have put it together but I was an entrepreneur that did it bootstrapping and did it the hard way. I remember, we all go way back to the days of our meeting back in the beginnings when we were together as a group. It was tough in the early days. And so, I’ve been through all that. They haven’t had to do that. They haven’t had to do the same struggles but yet they’ve learned from me. They’ve excelled me. They were smarter. They all are college graduates and have exceeded my expectations about what—
I mean, for having anybody nowadays, stay 28 years with you or 24 years, that’s tremendous confidence just that they did that and loyalty. That’s a thing about these guys too. They’re not just employees. They’re loyal friends that have been there for me through divorce, through the bad times. No matter what happened with the company where, “Oh boy, this is a horrible thing.” They’ve lived through it all. They’ve done it. They’ve been with me and stuck me and I’ve stuck with them.
Josh: So John, if some people wanted to have a conversation with you about what you did, how would they find you?
John: Well, the best way to find me, I will keep my office at Vermont Tent. I’m going to help them. Most of my help now will be business development. We have a couple of areas they want to expand in. I’m going to help them with that because one of the things that I bring is a lot of connections. And so, with that, I’d like to help them with the growth. I’ll have time to go out and help them with some business development ideas and grow the business.
We’re looking at also to add another division to the business. I had had a commercial laundry in the past. And now, we sub out our linens to somebody else to do but we’re thinking about bringing it back in-house and building another laundry. We’re doing all those and we have some other things we’re doing so that’s what’s going on right now.
Josh: Cool. John, thanks so much for your time. This was enormously helpful and I’m sure lots of business owners who listen to this will say, “Hmm, this is something I need to be considering.” I appreciate your time.
John: Yeah. And again people feel free to call me. I’ve just helped a friend in Boston. I introduced him to these people and he’s just sold his business, the same thing. And so, I’m going to some more consulting like that with others. I’m helping some other guys do it. I am doing some consulting and would be happy to consult with other people that are interested in selling their business.
Josh: And what’s your phone number, John?
John: (802) 864-1015.
Josh: Thanks so much. I appreciate your time today. We’ll talk soon.
John: All right. Hey, thanks Josh. Good to talk to you. Bye.
Josh: Okay. Bye-bye.
You’ve been listening to the Sustainable Business Podcast where we talk about what you need to do with your business if it was to be here 100 years from now. If you like what you heard and want more information, please contact me at 802-846-1264 ext 2 or visit us on our website at www.stage2solution.com or you can send me an e-mail at email@example.com.
This is Josh Patrick and thanks for listening. I hope to see you soon for another edition of The Sustainable Business.