An Entrepreneurial FATFire Story
Obligatory data: 45m married with four kids in LCOL Midwest. NW of 11m. Up from 6m 2.5 years ago when I exited my tech service company. No YOLO bets involved (Not that those are bad).
There is always some level of curiosity on the journey each of us is on to (or already at) FATFire. So I thought I would share my story so far, hopefully to reiterate that the American Dream is alive and well for those willing to pursue it. I’ll do my best to share lessons learned at the end. I would love for the result of this to be for others to share their journey, and inspire those on a FATFire journey right now.
Be warned…this is a long ass post. I enjoy reading long detailed posts…so those of you who also enjoy that…this is for you!
TLDR: Started with nothing, worked hard, caught some lucky breaks, FATFI…still working on the RE part.
Childhood / Young Adult
I grew up in a family of six, where I was the middle of three boys..with a younger sister coming along later. We relocated to the Midwest when I was 10…and some of my first memories after moving were jobs. I immediately wanted some spending money for baseball cards and ultimately a Nintendo. My family was not the kind that had money laying around, so anything I wanted I had to earn. By time I was 12 I had two paper routes, mowed lawns, and sold Current (stationary) door to door in the neighborhood. Working was something that came naturally. I worked a variety of jobs through high school and college…never working less than 20 hours a week and full time in the summers.
I was an average student in high school and college. I loved my high school history classes, so I progressed to a History major in college, eventually choosing the route of History Teacher over going into Law School. In school I was always socially middle class. Combine that with my middle child syndrome of just wanting to be liked, and it was an interesting journey through school. I picked up a love of computers through high school (first computer was a C64) and college…at one point teaching computer classes to little kids and senior citizens. That became critical later. I graduated and off I went to my first job teaching.
I was convinced I wanted to be a high school teacher…and proceeded to be just that. IT SUCKED. I was not prepared for the challenges that classroom control (behavior) would present. Lacking a high level of self-confidence at that point, and lack of mastery that a seasoned educator would have…I got ran over. Stuck with it for three years…and those were three very long years. Towards the end of year three, I saw an opportunity to transition into a Helpdesk IT job at a local company and jumped at it.
My IT career spanned two years, as an in-house IT person for two local healthcare companies. I learned a TON about IT support, and really enjoyed making people’s day by fixing their issues. During those two years, I had my first two entrepreneurial experiences that would fuel my long term desire to make that my career calling.
So in college I got sucked into computer gaming, and that continued during my time teaching. Everquest was the first MMORPG that I really fell in love with, and I played that game WAY too much. Ultimately was in a big guild where everyone shared accounts, and had access to a lot of dormant accounts. I began to notice that there was a real economy in the game, and people bought a lot of virtual things with real money. My mind was always working to figure out ways to make money…and this one hit a sweet spot.
My first time dipping my toes into selling things was when there was a particular NPC in the game (Lodizal) that took a group to kill, and no one could figure out how often it spawned. But the item it dropped 100% of the time was worth about $500 in the real world. Since I had access to dormant high powered accounts, I decided if I could figure out the spawn time, I could pop $500 each time. So I setup three computers side by side, and camped a character at the spawn point and started logging every spawn in an excel spreadsheet. Eventually, I figured out the timing and would literally be at my computer every potential spawn time. After a month or two of this (and making 3-5k), I got tired of getting up in the middle of the night, or running home from work to be there for a spawn. So I setup a log parser and had a super loud alarm go off every time the NPC spawned and said its specific text in the chat box. Bingo.
As I learned more about the market, I realized that people quitting the game would sell their characters for about 30-40% of what I could sell everything individually for. While online auctions for virtual items in Everquest were banned on Ebay, they were alive and well on a site called Playerauctions. So as my first REAL business, I would buy people’s characters (typical purchase was between $500-1500), strip all the items off, sell them for in-game currency, then sell the currency for real money. Eventually even had a website (www.lootpal.com). Over 18 months, sold 360k of virtual things, for a profit of 160k. Sadly…all good things come to an end, and the Chinese farming companies moved in and devalued the currency so much that it no longer made sense to do what I was doing. Sold off the last of my inventory and closed out that little entrepreneurial journey.
IT Support Company (Try 1)
While in my second IT job (and at the tail end of my Everquest business), I really wanted to start my own IT Support business. I just had no real good idea on how to do it. So, I got a separate phone number, and put an ad in the newspaper! $25/hour IT support. I got one customer. Did his IT support for about a year…but never got more than that. Eventually, cancelled the ad and the phone number. #fail
After doing IT support for two years, and having the successful Everquest business, I decided to try my hand at sales. So I got a job as a pharmaceutical sales rep. Little did I know that job was much more marketing and much less sales. About six months in I realized that hard work did not equal results in that industry and started looking for what was next. Here was one of the first BIG luck moments in my life. In that industry, you give physicians big “speaking grants” to come tell other doctors to write more of your medication. Its all one big circle jerk, but everyone got money out of it..and it wasn’t my money so whatever. I met this physician on Thursday who was doing a Dinner, then we were traveling to do a breakfast presentation and a lunch presentation the next day. We talked about technology in healthcare (which I had prior experience in), and had a great time. At the end of the last presentation, we sat down at a coffee shop…and before we know it he asked if I was interested in starting an IT Support company with him! BOOM! Within 60 days, I had quit my job and I was off on a wild entrepreneurial ride.
IT Support Company (2nd Try) – 28yo
This worked a lot better than the first time. We had a built in customer (my business partner’s physician practice). We also had great timing / luck, as we started the business in 2003…the dawn of the Electronic Medical Record. Physician practices, which I had strong knowledge of, were transforming from companies that used technology sparingly to needing technology every. The government was ramping up requirements, and physician practices were a perfect customer…they had the money and they pretty much had to implement the technology. The IT Support company grew from just me, to me and two full time employees. The only problem was that I was always going to be a minority partner to the physician. The larger more stable the company, the better chance I had of being voted off the island in the future. I knew that long term this wasn’t going to work.
Fortunately, I met a very entrepreneurial guy who ran his own solo IT company..and he also specialized in healthcare. Over the next 90 days, we decided we would make good business partners. I bought out my physician partner, and we started a new business with the combination of our two. Up until now…my total yearly income had never eclipsed 60k/year.
IT Support Company (3rd Try) – 31yo
If at first you don’t succeed, try…try again. Third time was the charm. My business partner and I started this business with about 450k in revenue. Year one we grew to 1.5m, then 3m the next year, and 4.5m the next. The keys to growth were a combination of a phenomenal engineering / tech team, excellent tailwinds from a growing industry, and a strong sales team (my specialty). There is a glass ceiling in the IT support industry at about 3-5m in revenue…mostly because these companies are started by engineers who aren’t strong at sales. So they cap out due to a lack of being willing / knowing how to build a sales team. We blew through the glass ceiling because we committed to building a sales team…and got lucky with some really talented sales people early on.
We also learned some important lessons about cash flow early on. We were so focused on top line revenue growth…and lacked the business sophistication to know better…that we neglected our bottom line. We convinced ourselves that investing in growth was why we weren’t making any Net Income…but it brought us close to death from indigestion. The year we booked 3m in revenue, we booked…$3,000 in net income. Whoops. Because of how we handled our invoicing and procurement…we ran dangerously close to running out of money, despite being a rapidly growing company. If it wasn’t for my business partner’s grandma (who lent us $50,000), and a community bank who eventually gave us a 300k LOC, we may have missed a payroll. Lesson learned.
A key move for us during this time was getting involved in a peer group for IT companies. This was a HUGE factor that gave us access to companies that had the same challenges…and were where we wanted to be (larger). We soaked up every bit of information we could…and implemented countless things learned. Things really started to gain steam. Now we were one of the larger companies in the area…and the flywheel was really starting to turn (Jim Collins reference).
We grew constantly, year over year, for the first 9 years in business. At one point we had a streak of 8 years in a row on the Inc5000 list of the fastest growing companies. That was pretty cool. There were always challenges, but we had a great team that was constantly up to the challenge. In 2013, someone recommended a book to me that included the concept of “start with the end in mind.” It made me think of what the “end” looked like for me. I knew 100% of my eggs were in one basket, and I had seen many a business owner go from dust to dust. What did my end look like? I decided that I needed to determine that, and came up with the three things that would signal the “end” for this entrepreneurial adventure. (1) The business had to have a leadership team in place so that it would be successful without me, (2) I wanted to sell my 50% internally either to my business partner, the leadership team, or ESOP, and finally (3) it had to be worth my number…mid seven figures.
In 2018, I realized that I had hit all three of my factors that had signaled the end. But much like many of us on the FATFire journey…how much is enough? Can you really leave a company when things are going smoothly, and you are growing? Then I read this blog post. (https://www.becomingminimalist.com/jump/). I knew I had to jump. My wife was critical at this point in giving me the confident reassurance around that move.
In July 2018 I sold my 50% to my business partner for 6m.
Seeing the dollars hit the bank account was almost a little anticlimactic. Five minutes of euphoria, followed by “Well, what next?” LOL. One of the key things it DID do for me, was improve my overall stress. When 95% of your net worth is tied up in a business that could be broadsided by who knows what…that’s stressful! Removing that stress was incredible. Leading up to the sale, I had been researching investments…as I felt a strong desire to invest in SOMETHING so that I wasn’t negative cash flow until I figured out what was next. On one of the due diligence calls on a real estate deal…I met a guy who had sold a number of businesses, and he told me “The most important thing I can tell you, is to not make ANY big decisions for six months.” He went on to talk about how I would THINK I knew what I wanted to do…but give it six months and it is almost guaranteed to be different. Great advice…that I ignored at the time.
During the run at the IT Company #3, one of the key things we had done around 2015 was to implement a system called Traction (Book by Gino Wickman). We hired a professional who helped us implement it, and it had a profound impact on our continued growth and maturation as a company. As my wife and I considered what we were going to do next (she had left her job in public schools as a psychologist), we thought we may enjoy helping other leadership teams / companies implement Traction. So we did. We quickly clients…and still work with most of those today. That has been an incredibly rewarding pursuit, seeing each of these companies accomplish things they wanted to through the implementation of Traction. Highly recommend to any business with 10-250 employees.
Finding The Next Entrepreneurial Journey
The consulting scratched our itch for something to do with our time…but not what to do with our money. I’ve always been horrible at passive investing. I like to invest where I feel like I can use my passion and skills to impact the investment. At first, we thought we would just purchase some commercial real estate and collect the checks. But the more we looked, the less we liked that. It was hard to find a return better than 10%, and I didn’t have any particular skills in that area. So by early 2019 we abandoned that idea.
We took some time to analyze the combination of (1) what were we good at, (2) what were we passionate about, and (3) what could we make money doing. We emerged from that with the clarity that buying companies and working with their leadership teams to grow companies would be a great fit for our next entrepreneurial adventure. It also would contribute to being diversified, through owning multiple companies. So off we went.
Baby Private Equity
So the best term for what we are doing is Private Equity…but we aren’t taking on other people’s money…and we’re smaller than typical Private Equity. But if I don’t call it that, its hard to explain quickly what we do.
Since I had never bought a business (Only sold), I had a lot to learn. I started reading, and consumed a massive amount of information on acquiring a business. My background in running a number of businesses also gave me a good playbook for what to look for through a due diligence process, and there is a lot of information available on the interwebs. Ready to rock and roll, it was time to find business #1.
I started combing through online business listings looking for a company that would be a good fit. We knew what type of business we didn’t want (daycares, gyms, hospitality, automotive)…so that helped a bit. After reviewing hundreds of listings, I realized that in the size of businesses I was looking at (2-6m purchase price), replacing the active owner was the really hard part. So I switched gears and started looking for absentee owned businesses…and BINGO. Hit on a Flooring company based in the SW. Price was a bit high, but the company was well-run, good GM in place, and had consistently grown revenue year over year for their entire 12 year existence. The factors that I took into account to buy this business:
- Critical Mass – Enough revenue, staff, customers that it wasn’t fragile or owner-centric
- Growth – Growing year over year top and bottom line revenue
- Market – Located in a city where we can 3-5x the company
- Team – Solid leadership team in place
- Transition – Almost no transition risk because the previous owner was absentee and completely disengaged from the business
- Industry – No real disruption on the horizon for that industr
We closed on the purchase April 1, 2019 for a purchase price of 4.5m. For those of you who love details, revenue was 8.5m with EBTIDA of 950k in the previous year, so paid just over a 4.5x multiple. I put 1.5m down, did an owner carryback note for 20% of the purchase price, and financed the remaining 50% with a community bank I had a solid relationship with (and now is my primary financing partner). The day of the sale I injected an additional 150k into the business for cash flow purposes.
Fast forward two years later, and this business is rocking and rolling. GM has really stepped up as a leader…and is focused on scaling the business the right way. Total debt paid down to approximately 2.3m from the initial 3m, and they are cash flowing significantly. Should finish this year around 11.5m in revenue with 1.2m in EBITDA. We have realized an approximate 35%+ ROI on our cash invested from post-tax cash flow and principal paydown, not including an increased valuation. The other major benefit of the transaction is the amount of the purchase price allocated to assets gives us the ability to take accelerated depreciation to drop our taxable income. Overall this is an ideal investment for us…over 35% YoY investment, with business value increase stacked on top. Looking forward to a long hold on this one
One year after adding business #1, it was time to start looking for a second investment. An early post-sale investment I had made in a REIT was redeemable (1.5m), and with the returns from business #1, I wanted to continue to buy businesses. Begun the search…and connected with a guy who was connected in a tier 2 market. He threw a bunch of things at me…but the first one to stick was a house painting franchise. It was operating smoothly, but the owner / operator was looking to move and needed to sell. I had a GM candidate who I knew personally that I believed would be an excellent GM…and this was a small / starter deal that would give him a chance to shine. So we pulled the trigger…likely without enough due diligence
Closed the deal at the end of July, 2020. 350k purchase price, with 50k being an earn out tied to cooperation and the two employees staying. Business had done around 800k previous year with 100k NI. First week, existing sales guy quits. New GM starts after two weeks, and brings on another sales guy. So now three people…sales guy, ops, and GM. Team is in place. Just execute the franchise business plan right?
Well…this one has been a struggle. We were staffed for the 8 great months out of the year…but Nov-Mar was a DUMPSTER FIRE. Tried doing interior work…got outbid. The work we did do wasn’t profitable. I injected 150k into the business because (1) we were overstaffed and (2) we were getting our asses handed to us in a variety of ways. Our Holding Company team (more on that later) has worked hard to make this one work…but feels like the franchisor fights us every move we make.
I still think this one has the potential to get to 3m in revenue and 300k in NI…but they are a long ways off right now. Good news…its our smallest bet.
THIS is where it starts getting exciting. We now had around 1.5-2m in cash, and it was time to do another good sized investment. I had been searching myself for the past 3-5 months with limited success. However I had connected with a buy-side broker who I liked, and seemed like they may be a good fit to find us a lower multiple transaction than what I had paid the first time (4.5x EBITDA). So…we engaged to have them look for a business for us.
Things got off to a quick start with the new buy-side broker. They threw 4-5 deals at us to look at, and we had a couple calls with owners…but within two weeks they had a large flooring company (we know a lot about those now, and loved the idea of another one) in north central US. The company was distressed, as they had gotten beat up by covid-related slowdown quite a bit. The owner was ready to get out after 22 years. They were doing around 14-15m in revenue with 800k ebitda pre-covid. They had a valuation of 3.6m….but as I mentioned they were not having a good 2020. Their plan was to try to break even.
As we evaluated the deal, we were able to identify some core things they were doing functionally that we could quickly rectify post-purchase. We met with the two key leadership team members, and felt great about their ability to lead the company in the future. Looked at their stores and saw stores that just looked old / stale, and needed to be updated. We knew we would need to put time…and quite possibly money into this deal. So we wrote an offer.
Slammed an offer in at 2m (basically 3.5x their 3 year average EBITDA including YTD 2020). I was sure they would tell us to F off…but they didn’t! Counter at 2.25 and we signed it as fast as we could. Due diligence was a little messy as we uncovered some more issues…but we realized that properly ran this company could be a 15m company at 1.1m EBITDA with the infrastructure (10+ locations) and upside to be a 30-50m company long term. Funny note…tried to renegotiate price down once I realized how much I would need to put into renovating the stores…and the owner almost walked away. Whoops. Finalized the deal and off we went.
This deal has turned into a rocket ship (To The Moon #WSB). The leadership team took OFF once they understood they were empowered to make decisions. We implemented Traction (Book by Gino Wickman) that gave us a clear vision, responsibilities, and values for the company. Off they went. We set a budget of 17m in revenue, and they are currently on pace for closer to 20m in revenue with 1.5m NI.
Through deals #1-3, my wife and I were the only ones at the holding company level. Our intention was to build out our holding company with a team that would work with our acquired companies to help them grow and be successful. Acquiring #3 allowed us to begin that process. We hired a rockstar marketing person who has amplified marketing across our three companies. Our second hire was a very fortunate one…a longtime acquaintance in my previous industry shook free from his company and was considering retiring. Fortunately he saw the fun / challenge in what we were doing (acquiring and building great companies), and he is the perfect partner for me to work with. He is a phenomenal coach, loves setting big goals and then working with teams to build structure to accomplish that. We have a CFO starting in a week that will work with the financial leaders in each of our companies…and help with overall financial management of the holding company. Together we can also be more thorough in our future acquisitions, instead of being a one-man-band.
We set some big goals for the next 5-10 years, culminating with the goal of having 300m in revenue and 30m in net income. We will acquire one company a year to stay on pace to do that. Our biggest question right now is whether we want to continue to acquire flooring companies to create something really unique and strong in that industry. We already have some massive competitive advantages at our size, if we continue to add flooring we could really gain steam. On the downside of that…we are concentrated in one industry (scary). No decision on this yet.
Personal FATFIRE Journey – Where do we go from here
Part of the goal of building out our team at the holding company, is to continue on a journey closer to the Retire part of FATFIRE. I’m working around 30 hours a week right now (by choice). As we build out the team, I can move out of those tactical areas and continue to focus more on vision / strategy, culture, and acquisitions…while decreasing my hours.
We are dividing up the next 10 years of our life into two 5-year chunks. First 5 year chunk is with the kids still in the house. Youngest is 13, so 5 years until they are out of high school. During that time, we only travel a week or so at a time, and have significant parental responsibilities. So this is the time to continue doing what I love…building companies. We are getting a good team in place, and hopefully can continue to find good fit companies to buy.
Second 5 year chunk is after the kids are out. The goal is to be non-essential to the holding company and subsidiaries…with all day to day at the holding companies being handled by a strong team. We want to travel more, and enjoy a kid-free (or atleast out of high school) situation a bit more. We have a second home in Phoenix, and likely will spend 2/3 our time there, and 1/3 our time in our current city. Coming back for family and friends.
Yeah…that probably happens 10 years from now. Its not really about the money to do it at that point (it isn’t now either)…its more about maximizing the RE part of FATFIRE that we hadn’t paid as much attention to previously. I’ll be 55 and my wife is similar age…so we want to go explore and continue to enjoy retirement while we still can. I don’t envision giving up the business…but minimizing my engagement to 2-5 hours a week that I can do from anywhere. I don’t ever see being full disengaged from growing things.
Keys to my FATFIRE journey:
- Always learning – It’s a strength of mine… and its returned dividends. This skill has been key to changing careers with minimal disruption (teacher -> IT person -> ecommerce -> sales -> start IT company -> private equity).
- Take CALCULATED risks – Opportunity is all around us. Some good, some bad. I always do my best to calculate the risk, understand what happens if it all goes south…and compare the upside. I constantly look for high return, low risk deals.
- Say NO to a lot of opportunities – This goes hand in hand with #2. Warren Buffet called Charlie Munger the “Abominable NO man.” Say no to everything that doesn’t check all the boxes. There are TONS of deals out there…be picky.
- Don’t hire friends or family – It never works out. Ever.
- Mentors – Constantly find people who are where you are going…their knowledge makes the road much more smooth
- Believe in people – If you constantly share what you expect, and that you believe people can perform….they so many times will prove you right. Most professionals want to do great work…show them what it looks like and tell them they can do it.
Top 5 Book Recommendations
- Traction by Gino Wickman – This is the operating system we run all of our businesses on. Gives us a clear vision, and the system to make it happen. Magical.
- Great by Choice by Jim Collins – This book has concepts and principles that I believe wholeheartedly in.
- Four Obsessions of an Extraordinary Executive by Patrick Lencioni – Great example of how you should spend your time
- E-Myth by Michael Gerber – Taught me how to extricate myself from day to day operations of my company
- Built to Sell by John Warrillow – Create a business that has value not intrinsically linked to you
- Bonus – The Subtle Art of not giving a F\*ck by Mark Manson – Taught me to let go of the things I was not energized by…and gave me clarity as to what I love to do
Alright, that’s it folks. If you’re still reading this, congratulations. You made it.
I’m happy to answer questions. I look forward to updating this once a year as we progress on our FATFIRE journey.