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Join John Bartlett from Brentwood Growth as he interviews Kevin Hsu, founder of Outstand Company who shares his journey from private equity to a successful business acquisition. Learn how Kevin transformed a small accounting firm from $2M to $11M in revenue and grew from 12 to 90 employees.
Below is the full transcript from the episode.
John Bartlett
Hey, this is John Bartlett from Brentwood Growth. I’ve got Kevin Hsu on the line with me. Kevin, thank you for spending some time with me this afternoon, the day after Thanksgiving. Did you make it through Thanksgiving? I mean, did you make it through Christmas okay?
Kevin Hsu
Yes, I did. Hope you had a merry Christmas, and thanks so much for having me on.
John Bartlett
Do you have big plans for New Year’s or are you going to stick around?
Kevin Hsu
My wife and I, we have a one-year-old son, and he goes to bed at 6p.m. and we don’t mess with that bedtime. I think we’ll be going to bed pretty early.
John Bartlett
Pretty good. I know you look forward to the New year here cranking up, so let me start. Tell us a little bit about your background, what you did post school. I know there has been a private equity stop along the way. What you learned from that background and how you decided to branch off on your own here?
Kevin Hsu
Absolutely. My company is called Outstand. Outstand is my family office. We acquire and operate small, established, profitable services businesses. In terms of my background, I grew up in a family of small business owners. I went to college, decided I wanted to do finance, went into private equity, which was very not small business, but it was a great learning experience, and I had a great time. I knew I eventually wanted to go back into entrepreneurship. About five years ago, I went out searching for a small business to buy, looking to buy a business, and I ended up acquiring an accounting firm that I thought was particularly attractive. It’s a bit funny because I’m not an accountant, I’m not a CPA. I was quite unqualified to buy that accounting firm. But it ended up being a really good business, and we’ve scaled that company quite a bit over four years, grew the business from about 2,000,000 of revenue to 11,000,000 revenue from about 12 people to 90 people.
We did a bunch of add on acquisitions as well, and I now have a partner who has taken over my day-to-day role as CEO, and he runs the business day to day, and I’m pretty much just an investor at this point. It’s been a blessing because it’s freed up sometime and capital for me to go devote time and energy to go look for another business to buy and grow. That’s how I came to form Outstand.
John Bartlett
What was it about the accounting sector specifically that interest you in that? How have you taken those learnings and leveraged off what you’re thinking of now?
Kevin Hsu
Absolutely. I think there were a handful of characteristics about the accounting firm that I found super attractive. Even now, as I’m looking for acquisitions outside of accounting, I’m still looking for some of those common characteristics. For me, what I like to focus on are businesses that provide some essential service. Essential non-discretionary, hopefully non-cyclical, service that customers need versus want. The other thing about accounting that’s pretty interesting is its very asset light. There’s not a lot of capital expenditures. You really just have your employees, your offices and your laptops. That was really attractive about the accounting space. I would say those two criteria, I knew they were attractive going into the accounting business after spending 4 or 5 years in that industry. It’s clear to me that those resonate a lot with me. Those are two characteristics that are we’re still holding true as we’re looking for other deals.
John Bartlett
Essential services, Asset light. If you’re taking those as two pillars, and you’re looking at the landscape of additional businesses that meet those characteristics, what are some other sectors that interest you today?
Kevin Hsu
There’s quite a few. I’ve been spending a lot of time looking outside of white collar professional services, that’s accounting. That’s taken me down this great path where I’ve discovered, not discovered, but gotten the chance to learn more about home services, other kinds of B2B services that I think are really interesting and fit those criteria. Just a few examples include pest control, mosquito control. We’ve talked about that. Medical billing and medical coding, water treatment. The other day I was looking at a business that printed labels that are used on medical devices. These really interesting niche businesses where you can develop a regional or a small market leader, I think are pretty fascinating.
John Bartlett
What size company in some of those sectors are you looking for? In a perfect world, what’s the perfect fit for you in terms of an acquisition?
Kevin Hsu
Sure. We’re willing to look really small. It’s a very competitive marketplace these days for deals. I find that a great way to avoid private equity or strategic competition is to just focus on a size range where a more owner operator type buyer can have an advantage. I like to stay within that 300,000 to 2,000,000 of cash flow. Oftentimes it’s less than a million of cash flow where I see the best opportunities. I’d say the best situation that I would like to get into as a buyer is it checks those boxes we talked about earlier, essential service asset light. But maybe it’s got an owner who’s baby boomer or close to that baby boomer age that’s looking to retire and looking to sell their business to another entrepreneurial owner.
John Bartlett
If they’re doing 3,000,000 of revenue and let’s say the net margins are in the 20 to 25% range, or if they’re doing a million in the 20 to 25% range, if they’re doing 3.000,000 the same margin range, the employees are going to vary between if it’s doing a million, it’s an owner and maybe three or four employees. If they’re doing 3,000,000, it’s an owner and maybe 10 or 12 employees. What business that doesn’t have enough infrastructure or would be too small. If you’re buying a business that it’s got a million or two of top line, they’ve got 300,000 of cash flow. It’s the owner. Maybe four or five employees. What role are you looking for that owner to do after the acquisition and post-transaction through that back-end?
Kevin Hsu
Sure.
John Bartlett
Transition phase.
Kevin Hsu
I’ll start with the first part of your question, which is at what point is it too small? There are definitely deals that just might be too small for what Outstand’s looking to do. I would say in situations where the owner is not just the day to day general manager, but the owner is also like the producer or the technician, the person that’s actually performing a lot of the front line work and day-to-day, minute-by-minute customer service. Those can get challenging, right? I’ve seen a few businesses where it’s a husband and a wife and one employee, and that’s going to be pretty difficult for someone to replace two thirds of the employee base. I would say situations where the owner is really doing not just management, but also actually performing the service. You tend to see that when the employee count is less than five.
That would be that would be probably too small. Now, in terms of post-sale involvement from the owner. The way I typically structure my deals is most of the purchase price is paid in cash at close. But there’s usually a percentage, and it can range based on the deal. But it’s a minor portion of the deal that’s financed by a seller note. What that means is the seller will receive that payment, but through interest and principal payments deferred over time. I think that aligns well with what I typically hope to see work out with the seller, which is that they stay on for at least a few months, maybe a year. It depends on the situation, but usually a transition period of a few months, maybe a little more is helpful and necessary to keep employees feeling good about where they’re working and help customers feel like they are continuing to receive the same service quality.
John Bartlett
Let’s say it’s a million dollars transaction because the math is easy of that million. How much approximately would a seller receive in cash proceeds and how big would that note be that you would be looking for them to take back, perhaps.
Kevin Hsu
It really ranges, John. But I’m just using round numbers. It’s not crazy to see 80 to 90% of the transaction in cash at close. 10 to 20% in a seller note. Sometimes it could be more. I’ve looked at situations where it could be a 30 or 40% seller note, but I’d say 20%, maybe a little less is that normal range.
John Bartlett
Got it. After you and the seller connect, what information do you typically review from the seller? How long is that financial review phase and what else is required from a due diligence standpoint. From a legal standpoint, from the time you guys agree in principle moving through. In order to get the deal closed. Approximately, how long is that time frame?
Kevin Hsu
Sure. Well, I’ve worked in private equity. I’ve done a number of acquisitions before with prevail, our accounting platform. We’re pretty experienced and can move pretty quickly with the basic financial due diligence. Looking at the company’s historical financial statements, getting access to their general ledger, tax returns, bank statements, once we get all that initial data, which takes a day or two. I can usually get through… My team and I can usually get through that material pretty quickly. If we have any follow-up questions, we’ll go from there. The more important and substantive part, I think is spending time on site with the owner, having dinner with the owner, meeting them one-on-one, and really understanding what is a day in the life look like. What does a week in the life look like?
What’s their working relationship with some of their key people at the business? Where are their growth opportunities that they see in the business? Where are their risk areas? It’s not like an investigation or anything. It’s really more of just learning and trying to understand, “Hey, if we’re going to come in and be the next entrepreneurial owner of the business, what is the current entrepreneurial owner of the business think day to day, and how do we make sure we learn as much of that as possible?” That process can take several weeks, maybe even a month.
John Bartlett
You get to the financial piece, and then you need to spend time with the owner and understand what his involvement is. Then there’s some additional due diligence and then there are some legal docs. The entire process once you principally agree with terms is that maybe 2–3 months in order to get the deal closed at that point?
Kevin Hsu
That’s exactly right. That’s a good range.
John Bartlett
Good. What about employees, do you want to meet with any of the key employees prior to the deal closing? When does the owner announce this to the employees? How does the owner announce this to the employees? You’ve done this a bunch of times in your prior life, and you’ve done it a couple of times since you’ve been on your own. What are best practices there?
Kevin Hsu
There’s generally a lot of hesitation around introducing employees to a prospective buyer. I also, I agree with that sentiment. I don’t think it should be done too early, but in my experience, things tend to go a lot smoother when the key employees, couple, there’s always a handful of key leaders in the business. When those key employees in the business have had a chance to meet the prospective buyer some time before closing and develop a little bit of relationship. Get some of their questions answered. It sets the company up for a much better day one post-acquisition. When you can stand in front of your employees and calmly announce the sale and introduce the new buyer, and your employees can then see that your key people are also comfortable with the change and have had a chance to get to know the buyer a little bit. That helps everything go a lot smoother. It’s really not about… I do ask for the opportunity to at least have a sit down or have lunch or dinner with the key employees.
I’m not really trying to discover anything or do due diligence on the employees. It’s actually more the other way around. I want them to get a chance to ask me questions, to understand how I operate so that they can feel comfortable before day one even happens.
John Bartlett
If you go back to that 60 to 90 time frame that we talked about. Where in that 90-day period are you meeting having dinner with the key employees, let’s say. Is there like a company-wide meeting where the whole thing is being announced? Everyone. Is it two or three weeks before closing, you have dinner and then maybe a week before closing, you’re in. This is announced to the employees. Is it something that’s-
Kevin Hsu
That’s exactly right. That’s roughly correct.
John Bartlett
What is the seller actually selling? Are they selling the business? I mean, obviously they’re selling the business. What other assets do you expect to come with the purchase? If they own the real estate in the land that they’re running the business out of, and that’s in a separate LLC, perhaps. How do you deal with that?
Kevin Hsu
We’re not real estate investors and and and it’s not a market that I particularly understand or think I bring any advantage to. But, I definitely understand that small businesses, small business owners typically own the business and the real estate together. We will definitely consider purchasing the real estate if that’s something that the owner really wants to sell along with the business. We’re also perfectly happy renting from the business owner or working with the business owner to find someone else who might would rather buy it more than we would want to buy it and work out some arrangement there, so we can be flexible and okay with real estate.
John Bartlett
What about trucks, equipment, inventory, websites, client files. What about all of those other assets?
Kevin Hsu
Those are typically included as part of the deal. In addition to the owner generally signing a non-compete.
John Bartlett
Does the non-compete is that a five-year non-compete? Is it a three-year non-compete? What’s the time frame that you usually look for a non-compete to be signed on?
Kevin Hsu
I’ve seen it range. I’ve seen it range, John. But three years, five years. Those aren’t those aren’t crazy numbers. Usually owners are pretty okay with signing that non-compete, given that they’re ready to retire, and they don’t plan on starting another competing service company.
John Bartlett
You’re buying trucks, you’re buying equipment, you’re buying inventory, all of the assets that are needed to produce that cash flow. You’re expecting all of those assets to come with the business.
Kevin Hsu
That’s right.
John Bartlett
What about the balance sheet? If there’s debt that’s on the balance sheet, if there’s an SBA loan that’s been there, or an idle loan or some other loans on the balance sheet. How does all that get cleaned up?
Kevin Hsu
That’s a great question. Our acquisitions are always done on a what’s called cash free debt free basis, which basically means in simple terms, the owner, they can keep all the cash they’ve accumulated on the balance sheet. But it’s also their job to extinguish all the debt that’s on their balance sheet. Any long term liabilities they have, they have to sort that out. But they also get to keep whatever cash they have.
John Bartlett
Makes sense. When a seller is thinking about selling his business, and we put these into broad categories you’ve got, the big private equity firms, they’re doing roll up consolidations. You’ve got smaller call them independent sponsors or smaller investors that are not the large private equity firms. You’ve got maybe strategic buyers, and then you’ve got smaller owner operators that are guys that are in the trades that that maybe want to own their own business instead of working for someone else. What would you say the advantages of selling the company to someone like you of your size, as opposed to some of the other alternatives that a seller might have?
Kevin Hsu
I really still think of myself as an entrepreneur, as an owner operator. But I’d like to also think that we bring a little bit of, of experience. I’ve actually run one of these businesses before. I’ve scaled it. I’ve done add on acquisitions. I’ve made plenty of mistakes. I can certainly appreciate how difficult it is to grow a business both organically and inorganically. There’s operational experience. I’ve already mentioned acquisition experience. We’ve closed deals. We’ve gotten it done a lot of times when you’re working with smaller owner operators, they may have never sold a business before. You’re dealing with a first time buyer and a first time seller. That can usually be pretty shaky. I would say the last is what makes me probably our firm a little different than an independent sponsor or a PE firm or even a strategic to some extent is, we really pledge day-to-day involvement in the business. If that means, I would personally take a day-to-day role in the company, sit in the owner’s seat, run and grow that business similar to what was done with the accounting firm.
John Bartlett
You’re in Boston, the accounting firm I believe is in Florida. Is that right?
Kevin Hsu
It’s funny, we’re headquartered in North Carolina, but we have six offices across the country, including up in Rhode Island and as far west as Arizona.
John Bartlett
Is there a geographical part of the country that you’re most interested in, or is there a part of the country that’s a no-go for you right now?
Kevin Hsu
Good question. I live in New England. I live in Eastern Central mass. Anything in New England is interesting and then also very interested in the South. I’ve been spending a lot of time down there, both for our other business as well as new opportunities.
John Bartlett
Well, great. Well, thank you so much, man. This has been awesome. If someone wants to have a conversation with you, specifically, about their business, how can they find you?
Kevin Hsu
Absolutely. The best way to reach out to me is you can go to my website which is outstandcompany.com, or you can email me which is kevin@outstandcompany.com.
John Bartlett
I’ll be sure that we have all that information in the show notes. Well Kevin, thank you so much for your time. It’s great to hear your background and hear your initial acquisition and some of the other things that you’re looking for. I think this information will be valuable for our sellers that are thinking about selling their business now or sometime down the road, and they can reach out directly to you, or they can get in touch with us, and we can do a valuation and have that conversation for you. Kevin, thanks a ton and happy New Year to you.
Kevin Hsu
Thank you very much for this opportunity.
John Bartlett
I have a good one.
Kevin Hsu
All right. Bye now.
John Bartlett
Bye.
