Acquisitions Anonymous - #1 for business buying, selling and operating - Wait... what? You laid-off 90% of your staff?!? - Acquisitions Anonymous Episode 92

Episode Date: May 5, 2022

Bill D’Alessandro (@BillDA) hosts this incredible episode with special guest Peter Erickson (@smbpete). Pete walks us through his incredible journey, starting as an apprentice in the physical therapy business, going through his transition into a business owner, leadership challenges, layoffs, getting things thrown at him, overcoming disease to returning to a lost business, buying mistakes & what he’d do differently.This is a packed episode, buckle up!-----Thanks to our sponsors:* https://Cloudbookkeeping.com - Cloudbookkeeping specializes in bookkeeping solutions for everyone from start-ups to mature businesses. Check them out & mention our podcast.-----* Do you enjoy our content? Rate our show!* Follow us on Twitter @acquanon Learnings about small business acquisitions and operations.-----Show Notes:0:48 Cloudbookkeeping.com1:59 Pete Erickson - The Summit Physical Therapy, CEO3:34 Transitioning from employee to owner. How did you finance your acquisition?4:24 You bought a Clinic. What happened next? 5:45 Let's dig into those pushbacks, why were they so pissed off? How did you handle the situation?7:03 You mentioned maintaining people that weren't culturally fit for too long, what happened?10:42 Wait what? You laid off 90% of the staff?!?13:02 How does a captain handle a mutiny on the ship?15:48 Buying too small & buying a job: What did you learn about the business size that you're going to buy?17:56 One of the huge traps of buying a business 19:31 How to avoid a confusing marketing message?22:24 Growing and developing team members: When should you do it in-house and when should you invest in training? - Peter Principle24:48 How do you build processes and systems that help people to be autonomous?-----Links:* https://www.thesummitpt.com/physicaltherapy* Connect with Pete-----Additional episodes you might enjoy:#90 Move over Elon - Here's what we'd do if we acquired Twitter#87 Yelp is not evil! Building a business using digital CAC - Featuring Johnny Robinson from Orange Window Cleaning#Subscribe to weekly our Newsletter and get curated deals in your inboxAdvertise with us by clicking here Do you love Acquanon and want to see our smiling faces? Subscribe to our Youtube channel. Do you enjoy our content? Rate our show! Follow us on Twitter @acquanon Learnings about small business acquisitions and operations. For inquiries or suggestions, email us at [e-mail]

Welcome back to another episode of Acquisitions Anonymous. I am your host, Bill Dallessandro. And this week, I talk with Pete Erickson, who owns several physical therapy clinics in California. And Pete takes us through his war stories, specifically an incredible up-and-down ride of three years of being away from his business while he was medically sick, only to return and find the culture was entirely different. how we had to reboot that business from scratch and then immediately got it knocked all the way back down again when COVID shut down the world

and physical therapy practices. So a heck of a war story journey with Pete Erickson this week. I think you'll really enjoy this conversation. But first, a word from our sponsor. Hey, guys, Michael here. I want to talk to you about one of our sponsors in our never-ending quest

to make Acquisitions Anonymous break-even. And that sponsor is CloudBron bookkeeping.com. It's actually run by my neighbor, Charlie, who's a great guy, and he has been our longest tenured sponsor, and we're super grateful for him to support the podcast. So what Cloud Bookkeeping does, it is a set of cloud bookkeepers that if you're a small business person, help you get out of the business of doing your books and let you focus on the business of taking care of your customers. So they do all the complexities, bookkeeping, payroll, and they come across, in our very client service first.

That's their phrase, but I know that's true because I've spent time with Charlie and dug into their business. So full suite of accounting services, sophisticated reporting, QuickBooks Software Solutions, and full service payroll options.

So definitely talk to Charlie if you want to get out of doing bookkeeping and outsource that to a trusted third party, and you can find them at cloudbookkeeping.com. So thanks again for sponsoring today, cloudbookkeeping.com. Okay. I am here with Pete Erickson of the Summit for another episode of Acquisitions Anonymous.

Pete, nice to have you here, man. Hey, it's great to be here. Thanks so much. Awesome. Very cool. Can you tell our listeners, you know, in 30 to 60 seconds what you do? What is the summit? Yeah, the summit is physical therapy and personal training.

And we call it pro recovery. It's like a stretch bar, massage, cupping. So recovery, and we've bundled those all together in one location, and we're starting to grow now. Okay, cool. And did you start the business or acquire it? Yeah, that's a great question. I acquired a couple physical therapy practices, and then we also started this. So we've done a little acquisition, and we've also done a little just de novo startup.

Cool. Can you kind of take us through how the heck do you get here? Are you a physical therapist? Are you a business guy? take us through the progression that led you here today. Awesome. Yeah, so I started out as an engineering major. I was a chem major engineering major,

working in kind of the land development, civil engineering space. And during a large crash in oil and land development, I realized I wasn't going to make it there. So I shifted gears over to physical therapy and started to work for a physical therapy practice. Okay. And so you were a physical therapist for a long time. How did you transition to ownership? Correct. So I purchased a clinic where I was working, which that could be, for some people, that could be a really great situation. It's almost like an apprenticeship and then purchase and that's how I did it. Okay. So you, was it the owner wanted a? get out or did you raise your hand? How did that go down? Yeah, that's a great question. I actually was

looking at several different practices and talked with the owner and he was ready to start easing out. So the timing actually worked really well for both of us. Okay. Awesome. And did you use an SBA loan or seller financing to do that deal? Yeah, so that was seller financing. And I can't speak highly enough about that. It was great for me. Okay. Awesome. So that was the first clinic you bought, kind of take us through what happened after that? Yeah, that was the first one that I bought. That was kind of tough because I started out as a kid there, and so all the staff knew me as the kid,

and then I transitioned into leadership, and pretty quickly started getting a lot of pushback. It was really tough because at the time that I took the clinic, there were a lot of big changes in healthcare. And I thought, to myself, I thought, hey, let's just rip the Band-Aid off real fast. So I made a number of changes to accommodate the changes in health care. And that was tough.

That was really tough because some of the staff had been there over 20 years. And so they'd been doing things the same way. So now for me to ask them to change for the clinic change, and then also the changes in insurance, it was tough. It was really tough. So Snottnows kid comes in and he's the new boss and wants to do everything different right away. Bad call, right? Yeah, it's funny, Bill.

Actually, I would say probably 20% of the changes were things, just preferences on my part, 80% were things being done to us. And so it was just kind of a, you know, perfect storm. I was the scapegoat for the changes. Okay. Yeah. Can you pick one of those changes that was really the hardest that people pushed back on, you know, and kind of take me through, why were the same? they so pissed off and how did you handle it? Oh, dude, for sure. I would say that the biggest one was a

change in the way the financial team needed to do their reporting. And so I was trying to get my finger the usually when these things roll out from Medicare or insurance companies, most of their staff don't even know how it's going to roll out yet. So it'll usually be two, three months of going back and forth and not able to get things all dialed in, not to be able to get them tight. And I really like tight processes. So I'll be asking, hey, what do you think about this? How's this working out? And I think some of the staff perceived that I thought the problem was on their side rather than

coming from the outside. So I got a ton of pushback. We had some fits. We had things being thrown. We had, yeah, it was a tough, it was a tough season for some of the staff. Because really a number of the changes hadn't even, a number of things had not changed for a good 10 years. And so for all of this to change all at once,

created a lot of turmoil. Yep, I'm sure it did. So this is a war stories episode. So you gave us a couple, you gave me a couple places to push before the episode for war stories. And if you mentioned that, you know, there are people throwing fits or throwing things, you know, that kind of says you might have experienced some culture problems in the past.

One of the things you mentioned is that you might have held on to some folks, for too long that weren't culture fits. What happened with that? Oh, man, it was tough. So this is something that people can think about as they're going through acquisitions. Frequently, the reason a seller is interesting, because the seller's got several buyers to engage, right?

So oftentimes the seller will engage with you because they want to remain a pillar in the community and they want to provide jobs for the staff they have. And so the seller didn't twist my arm and say, hey, you have to keep these people, but they did express really strongly. I'd love it if you'd make a way for these people to stay on long term. And so being the good guy that I was, I agreed.

I said, hey, I'm going to do everything I can to keep them. And I think that's where the problem came in. Okay. Yep. I think every business buyer has felt this, right? Because a lot of times, sellers really care about their employees and it's you know that's awesome and so you are you can be very tempted as a buyer to try to differentiate yourself from other buyers by kind of promising to

take care of the people because it can be perceived that's very important to the seller so it sounds like you fell into that trap uh and and kind of made a verbal not a contractual i assume a verbal promise correct correct right um so you kind of agreed to keep these folks you bought the physical therapy practice, and I assume you found out, oops, I might have committed to something I don't want to do. For sure. Yeah, and it was the entire thing. The systems were outdated.

So that was really tough. And so we had to change systems. We had to change several the ways that things were being done, plus things were changing in Medicare and in the insurance system as well. So it was the whole package, and immediately they thought, man, Peter's the one doing all this to me. So that's where we got all this pushback. There were a lot of tears. There were days people were stomping up and down through the office using my name like a swear word, things being thrown.

And I realized pretty quickly, this is not going to be a culture fit for us. So I assume then you figured out that you were not going to be able to keep your promise to seller and retain. a lot of these people. So how did that go down? Dude, broke my heart. You know, honestly, I would say, you know, I've always looked, I always believe that there's got to be a way to find a win-win. You know, that's in me where I think there's got to be some way to find a win-win.

And pretty quickly, I realized it wasn't going to work. There was not going to be a way to make the seller happy, keep the current staff happy, grow, keep new staff happy. So then we had to make some determinations. I sat down with a couple of the people that were causing trouble and started to lay out, hey, what do we need to do to correct action? And one of them stormed out during that meeting. And really challenged me.

It was that thing, just like you said, here's the snot-nose kid telling us what to do, and I'm not going to take it. And so they started just demonstrating all these behaviors to try and get control. So you said in the show notes that you had to lay off 10 people, which was everyone in step or two. Is that how it ended? Yeah. So what ended up happening there, I got viral encephalitis and it took me out completely paralyzed. I was actually blind for a season.

Every major system in my body shut down. I was so confused that I even thought, My wife was trying to kill me. I was out of it. I'm giving you the Cliff Notes version, but I was an absolute disaster. One of the lead therapists, one of the lead PTs, stepped in to manage while I was out. And what ended up happening is the culture that we built and everything we'd really strive to develop, that began to erode. Three and a half years later, when I was healthy enough to come back.

into the office and see what had happened. I'd heard from a number of people that things weren't going well. It didn't look like I'd left it. And sure enough, that was the case. When I got back, none of the systems were in place. It wasn't operating the way we'd left it. And so we had some tough meetings with the staff. Yeah. So you, and that sounds like you had an intense health experience. So you had kind of done all of this work to get through all of the, you know, the whaling and asheny teeth and the change management only to be struck down by viral encephalitis. And you had to go away for three years. Yeah, three years. I was totally out. It is really not many people recover from this. So I was so grateful to be alive and to be healthy and to

be back. I went into the office and really tried to rally the troops and bring some order back. And that's when I realized they'd gone without me for so long. They were pretty sure they didn't need me. Of course, they were operating in the red and things were starting to really slide. It was getting ugly. So we needed to make some changes rapidly. So when I came in to bring that change and to reinstitute our culture, there was basically mutiny on the ship.

Yeah. Wow. So what happened? You came back here for three years away. And you said, hey, it's going to be just like it was three years ago. And they kind of went, hey, man, three years gone by, things are very different now. Maybe we don't need you, but you still own the practice, right? So I would resolve that conflict.

Yeah. So we sat down individuals and tried to coach them, gave them some parameters for change. And then the coaching, you know, when things are that tough, you need almost a daily coaching rhythm, right? you can't just spread it over a week or two weeks. So we got them on a daily coaching rhythm, and there was a lot of pushback. And so we did this for a number of weeks. After about three and a half, four weeks,

I realized we're not, they're giving me lip service. They'll play the game so long as I'm watching. So we sat down, we sat down the different production, the production group, the finance group. We just talked to each group. and what I realized is they had all talked together. They weren't going. So this was actually Christmas, which is wonderful timing as well.

So we all sat down the day after, a couple days after Christmas and said, hey, we have to close the practice. We're not going to be able to go on like this. And that was a tough day. Let me tell you. So we actually laid off the entire team. We let go of everybody except for one key. team member. And then did you actually shut down the practice or did you just kind of take a pause and then and try to rebuild? Yeah, what the heck do you do, right? So we already had all of these contracts.

We already had people in place. We already had a whole ton of patients we needed to treat come January 2nd. So I had been recruiting. As soon as I saw things weren't going to go well, I recruited some staff members actually brought in friends and family just to operate, just to keep the lights on and the doors open. It was bananas. So it's like your wife is like stretching people out? I mean, like untrained? Yeah. So like my wife was answering phones and this is not her dream. My kids were answering phones. One of my daughters was doing some of the finance stuff. It was nuts. It was absolutely crazy. I had one of my girls who was in high school. She'd come right after class, jammed down to the office, answer phones while my wife ran errands. And yeah, it was not,

it's not a, it's not the entrepreneurial dream. Let me tell you. Everybody always thinks entrepreneurship is so sexy, but so often it ends up with your entire family moving boxes or answering phones. One of the themes I'm seeing coming through in a lot of your answers, and that you mentioned in the pre-show notes, was this idea of kind of buying too small and buying a job. You know, in a lot of your answers, you said to say, yeah, like, I was there spending the time with all the employees and I had to lay everybody off. And I was there. My wife was there. We're answering the phones and cleaning the shop and, you know, all this stuff. So how do you think about, you know, what size business you should buy or, you know, what mistake

did you make that you kind of felt like you bought a job more than a business? Oh, man, that is such a great question. Yeah. So the thing that I've, that I've toyed with back and forth is you don't want to buy so big that you don't have the control to, because there's a learning process. You can't just jump right into a Boeing 777. You want to learn out of fly first. So you don't want to get the largest. But you also got to be careful not to buy too small. And that's what I did. I bought too small and didn't grow quick enough right out of the gate. The intent was to grow quick. the encephalitis knocked it back. So that really, in effect, gave me a business that was just way too small. So when you're looking at viability, you need something where you can exit the day-to-day rapidly and get above and start working on your marketing, start working on ops. It's got to be at least big enough to do that.

So what does that mean? Big enough to support a kind of general manager or CEO salary. while also making all of your debt payments, right? Absolutely. And that's the magic, right? Everybody's got their own number. But I think you can look at it in different ways for us in our world. That means your top line revenue has got to be at least $3 million.

You can't look below that. So that's just an easy rule of thumb for us. Some people are looking at SDE. Some people are looking at EBITA. Pick your poison, get to know it really well in your industry. and make sure you've got that space. Yeah. I think one of the huge traps when people buy businesses is they often buy them based on

SDE or seller's discretionary earnings. And then two things happen really quick. They don't want to work in the business and they have to make debt payments. So if you have $200,000 of SDE and you slap $100,000 of debt payments on it, well, now you're $100,000 of SDE and now you want to hire general. manager and pretty quick you're at zero of SDE. And so you go, holy crap, I thought I was paying four times SDE. I've actually paid 15 times cash flow after I put debt on it and a general manager

on it. And I don't have any money to pay myself. Now I'm working for free, right? Nailed it. People go, I'm buying on SDE. I'm buying four times SDE. That's a 25% IRA if I just do nothing. is great. But then you finance the thing, debt payments, and then you want to hire a GM because

you want to get out of the day to day, which is everybody's dream when they buy a business. And before you know it, you're not making any, you're not in the day to day, but you ain't making any money either. Yeah. It's so true, so true. And I think that's, you know, as you're looking, people, you know, you hear everybody talking about, well, we're going down market, going down market. Well, they are, but they're in a spot that's unsustainable. And we're seeing a lot of that right now. Yep. You also mentioned that one of your struggles was struggling with a confusing marketing message and that confused customers don't buy anything.

How were you confusing people? And then how did you stop confusing them? Man, that's a great question. So we recognize pretty quickly that we have a number of clients that don't want to go through insurance channels. They don't see their problem as a health concern. they don't want to see a doctor. And so we had people coming to us just off the street.

And we thought, well, great. Let's just blend physical therapy with this other message, this pro-recovery message. And as we did that, we put all of that information on our website. And so people would hit our website and they didn't know, are you guys doing physical therapy? Are you doing this other weird thing? So we were chasing people off with our message.

So currently what we're doing is we're splitting our website up. We're going to have two essentially storefronts, if you will. We're going to have the physical therapy specific message online. And then we also have that pro-recovery specific message as well. Once you're inside our doors and you're in the business, hey, you can put the whole thing together. But as the storefront online, we were driving everybody away. Yep. I think this is a classic small business blunder.

because your small business, like, you want every dollar of revenue. Like, yeah, I can do that for you. Yeah, I can do that for you. Like, come on in. Like, we got a whole bunch of physical therapists. We can stretch you. We can help you in this modality, you know, et cetera, et cetera. And so it's very easy to hustle for revenue.

And I think it works in the short term. But very quickly it makes it really hard to systematize your business. You mentioned you're a huge process guy because you're doing all of these disparate things and you can't really systematize anything. So your ops is all. bungled and also your marketing message is not clear either. And it can get you the first baby step, but then you pretty quickly get snarled on growth. Dude, Bill, that is an entire year's worth of courses right there in that one little statement. Yeah, nailed it. Yeah, I think that's one of those

things that a lot of small business owners can tell you about as trial through fire that everybody has made this mistake. It's like almost one of those things that you have to make for yourself. even though everybody tells you, you know, don't scrap for that revenue, but you're like, I got to make rent. I'm going to scrap for that revenue. And then you end up having to pair it back in order to scale. Yeah. So true. So true. And that's a really high, each time you do that, you're paying the piper for it. It slows you down. I would say more than the revenue lost, more than the opportunity lost, it's that time. You know, it slides you back a couple clicks time-wise. and so then you've got to dig yourself time-wise back out of that hole.

Yep. Yep. So the last thing you mentioned in the pre-show notes was just about growing and developing team members. And you said something in here that's very specific. You said sometimes you cannot develop within and you need to hire a leader from outside the business. Talk about the specific situation that made, you know, you don't have to use names. This is Acquisitions Anonymous after all. But talk about a specific situation.

where you try to grow someone and you just couldn't and how others might recognize that in advance. Absolutely, absolutely. There is this tendency within me, and I see it in a number of other owners to, it's almost like a halo effect where you see somebody doing well in ops and you think, man, they'd be great at management, right?

And so we'll extend people out. They'll get over their skis, beyond what they're capable of, and then they start doing damage to the brand and doing damage to the staff. It's classic, right? Peter Principal, we're going to take you just one click beyond what you can do.

I would say, what is the Peter Principle for people who may not know what it is. Basically, you're going to be promoted just one click beyond your capacity, right? And so you see that every day. but for some reason in small business, we think we're beyond that.

We think we're above it. We think somehow it's not going to happen to us, but man, I've done it so many times. And I think the other part, Bill, people need much more accountability than we're often willing to give. And so if we're not willing to give them

the accountability for the function that we've handed off, can't hand it off. Yep. One of my C.O has this phrase where he says, you can, it would be great if you could trust every single person all the time to make every decision that they should make without you in the room. But that's not real life. So if you can't trust the person, you need to build a system and a process and trust the system and process that they are working within. And so that's, you know, it would be great if you can say, hey, every single person I hire, I can promote all the way up. They can be completely autonomous. But, but, you know, just doesn't seem to work out that way. How do you build processes and systems that help people to be autonomous? That is wonderful. We are, yeah, we are a process machine, which is very rare in the physical therapy space, in a lot of the healthcare space, because people believe, oh, I've got this secret sauce, I've got this special treatment or special. And so we are very, we are very

process driven. And it begins even from the beginning of the client journey, how do they discover us? How are they welcomed? We do have a number of scripts and I know there's pushback on scripts in some areas and some areas accept it. My feeling is once you know a script, you're comfortable, you can make it your own, but you've got to learn how to connect with your client before they come through your door. So we do that at every state. We do it. When they encounter us online, when they make the phone call, when they walk through the door, we want our client journey to be very well scripted so that they know we get them. So now you don't have to hire customer service wizards.

You just need to hire people who can follow a process and then you can deliver a great customer experience. Absolutely. Absolutely. And I think, Bill, one of the things in our world is people want to know that you get them. And once you've seen 30 or 40 rotator cuffs, once you've seen a couple hundred backs, you get them. And so now it's just giving them that information, connecting with them,

giving them that experience that I get you. I know where you're coming from. Here's the next step on your journey. Yeah, awesome. Cool. Well, Pete, thank you for being with us today. This has been great to hear about your war stories, your journey through the viral encephalopathy, to firing everybody, having to lay everybody off to COVID and, you know, rebound ever since.

Very cool. Thank you for sharing. I'd love to give you just a chance at the end. Where can people find you, you know, on the internet if they want to connect with you more? If there's something you want to plug, you know, now's your chance. Thanks, Bill. Yeah, I'm on Twitter. It's SMB Pete.

That's pretty easy to remember, SMB Pete. And, hey, if you got any great physical therapists, I want to own. own their own, send them my way. Love to get them to that space. Awesome. Well, that's great. This is Pete Erickson. Pete, thanks for being out with us, man.

We will talk to you next week. Awesome.