John Kelsey came to understand something when he neared his 60s — whether by death or decision, the day will come when the person whose blood, sweat, and tears built a business out of nothing will no longer show up for work.
It was an important realization for Kelsey, who, with his wife, Pam, started the Kelsey Group — known to many as TKG — from their dining room table in Princeton in 1986. They built a company that researched and analyzed data on print and electronic Yellow Pages, local search, small-business marketing, and local media. They had weathered the days when they made no money, scored big during the Internet gold rush of the 1990s, and lost most of it in the fallout. But until recently, the thought that he might not be at his desk one day had not seriously crossed his mind.
Kelsey had considered a variety of options for his business in the late ‘90s, including an IPO launch and buying a company. But that was before the dot-com market came to collect his shirt. In the early 2000s he started to wonder what many entrepreneurs-turned-established businessmen often do — what do I do with this company I’ve made?
He never found a particularly good answer, and slowly he built his business back up. Just in time for 9/11 to sucker punch it again. Then he started building up again.
Enter an old friend by the name of Craig Allsopp. Two decades ago, Kelsey and Allsopp worked together at Dow Jones, and a few years after the Kelseys started their own firm Allsopp did some consulting work for TKG. The two lost touch over the years, Kelsey going on with his work studying the impact of technology on media; Allsopp building his own businesses in media and, later, commercial exit strategy.
Then about two years ago, Allsopp’s daughter, Emily, a conference planner with the Newspaper Association of America in Washington, D.C., called her father to ask if he knew the speaker from Kelsey Group whom the NPAA was hosting at a function. Allsopp didn’t know him, but he did remember John Kelsey and decided to drop a line.
After a few E-mails Kelsey and Allsopp ended up talking business and learned that while Kelsey was looking to sell his interest in TKG and plan for retirement, Allsopp had founded Strategic Exit Advisors in Hopewell, a firm specializing in making such transactions happen. Last month SEA completed the merger of Kelsey Group with BIA Financial, making the newly united company BIA Advisory Services on Executive Drive.
And that is the highly truncated version of what actually went down. In reality, says Kelsey, the logistics of moving a company from your hands into someone else’s are extraordinarily complicated. Think, he suggests, of buying a house from a willing seller and multiplying the degree of difficulty by some number in the low millions, and that’s a little of what it’s like. Getting into business, with its forms, start-up capital, and professional advice, seemed far less daunting than getting out of it. Put simply, “I couldn’t possibly have done this without Craig,” he says.
Like a will, the exit plan is something few new business owners consider. It is understandable, of course. New business owners worry more about making things work than closing things down. And experienced business owners, ground in the day-to-day , often do not consider what their company will be like after they leave.
But Allsopp believes that exit planning is as important to a business as finding the right name, making the right hires, and drafting a solid business plan. The ideal businessperson, he says, knows this going in; the wise one before it is too late to make the proper adjustments and preparations.
Kelsey, who graduated from the Lawrenceville School in 1965, earned a bachelors in economics from Brown in 1969, and, after a stint in the Army, earned an MBA from the University of Virginia in 1973, did not go into his business with an eye on his last day. He did, however, see the future.
Having worked in strategic planning and new technologies at AT&T, he came to understand the effects that technology has on traditional media. It was shortly after the federal break-up of the AT&T monopoly in the mid-1980s, and Kelsey saw the promise of the “Talking Yellow Pages” and started a business to promote the idea.
He was, in reality, “trying to figure out what to do next,” when he held a conference on the technology at the Hyatt in Dallas/Fort Worth.
To his delight, 219 people showed up for it, and he had the idea that there was a living to be made studying the effects of technology on media. And in holding conferences.
Starting out with little more than hopes and dreams, Kelsey and his wife made almost nothing in their first days. “When we started, Pam and I just wanted to survive,” he says. But they stuck it out and started to grow, trying to keep their business as family-like as possible all the while. “A business, like a marriage, is a partnership that evolves over time based on circumstances,” Kelsey says. “Pam’s organizational skills made her a natural business partner. There is no one whose advice I trust more than hers.”
As the company grew, so did information technology. The Internet was a natural extension. In the early 1990s, as the Internet became a virtual appendage, it profoundly changed business. Traditional companies timidly found a lane on the Information Superhighway and soon learned that if they didn’t hit the gas they quickly would be overrun. Virtual versions of traditional enterprises — think of Pets.com, a pet supply store that existed only online — sprung up all over the web. Times were good.
By the late 1990s online companies, and TKG, had hit their zenith. Established companies leapt at the chance to do initial public offerings, or IPOs, based on the theory that the dot-com age was a limitless day in the sun. Kelsey considered this avenue as well. His company had grown from two to about 45, and it seemed a good time to look into doing an IPO. In 1999 Kelsey spoke with investors, did some homework, and figured he would close a deal.
And then the bubble popped. “It was the hardest week of my life,” Kelsey says. He had to let go of half his staff, and he didn’t even have the money to pay them off. Rough going for a guy who had early learned that “the most important element of success is the people you hire.”
Sufficiently downsized, Kelsey Group started regaining its footing when 9/11 came along and upended the American economy yet again. Kelsey had built and sold what assets he could, tried to go public and found he couldn’t after the tech crash, and now started really thinking for the first time about his exit plan.
For Craig Allsopp, Kelsey’s path to enlightenment is typical news. A fair amount of owner/operators, he says, think they can take their company public whenever things are looking good for them, only to meet with a bucket of ice cold reality. About 90 percent of business owners looking to cash in their chips believe they will one day be able to sell off their assets, either to an outside party or to the employees or their own family, he says. The remaining 10 percent plan either to “go public or die at their desks.”
Perhaps TKG could be forgiven its zeal. When it considered going public, it was at a time when not doing so seemed crazy for any type of tech company. But with its IPO hopes long-ago dashed and 9/11 having taken its toll, Kelsey started wondering whether a management buyout (selling the business directly to his employees) was his answer. Before he hired Strategic Exit Advisors a buyout seemed like the right thing to do.
The popular fantasy that you have built your company into a huge moneymaker and can sell it off to finance your full retirement can happen, yes. It just isn’t likely to happen without a lot of work. And outright selling, to employees or not, might not be the best answer. The amount your company really is worth is not the amount you want or expect.
This is where an advisory firm such as SEA comes in. Exit advisors can help sort through options, offer perspective, and help build plans when an immediate sale of a company isn’t the ideal. Perhaps what is needed is a sales pro to bolster the bottom line and increase profits. Sales go up, value goes up, and the company can be sold for a heftier price in five years than it can now.
This can be a tough lesson to get through to entrenched business owners. A lot of owner-operated businesses survive by the work taken on by the owner himself. And often that work is diluted by various responsibilities. “The owner has been a half-time salesman,” Allsopp says. “Or even a quarter-time salesman.” The result? Basic operations are neglected to provide for sales; sales are neglected to provide for bookkeeping; and the list goes on.
John Kelsey was willing to extricate himself and was aware that he needed help navigating the options of any eventual deal. He just wasn’t aware that it was really that complicated. But it is.
The process begins with basic inquiry. Either someone has a business to sell or is looking to buy one. Allsopp says SEA focuses mainly on the former type. The reason for focusing on sellers is simple — “Buyers don’t have to buy,” Allsopp says.
Sellers not only need more help than buyers, they are more serious. An owner who comes to realize it’s time to consider moving on is aware that his business is his retirement, not something to simply browse. SEA does do buyer-side transactions, which come with their own sets of questions — what market sector are you looking to expand into? What size company are you and how big are you looking to get? Where, geographically, do you want to buy? What attributes do you want to acquire through another company? — but it seeks out these types of transactions with considerably less zest than seller-side deals.
Once a seller shows interest, the first thing Allsopp does is provide an objective overview of the company. As even John Kelsey admits, “everybody thinks their company is worth a lot more than it really is.” SEA’s job is to look at real numbers and real scenarios to ascertain real value.
A simple example is this: You add up your numbers and conclude that your business is worth $5 million, and that’s what you would want to sell it for. But you didn’t factor in market changes and sales projections. You didn’t factor in the fact that you still owe $500,000 on your business. And you didn’t factor in things like the capital gains tax. In the end, your $5 million baby is worth about $1 million. Not bad — but not really what you wanted. So you have to ask yourself — will $1 million provide you with the money you need to achieve your goals?
After the reality check, Allsopp says, a seller faces three main options — rethink everything, begin the transition process, or set up a plan that will help you get to your goals (in our example, the $5 million mark). This last part is what Allsopp like to make a strong case for. Exit planning, he says, is not just about the now, which is why he wants younger business owners to think about this stuff early. If you want to retire with $5 million, it can happen, but it might mean that you have to hang on for another few years; possibly bring in someone to help you increase the value of the company overall.
About half of SEA’s business is in the arena of consulting, Allsopp says. It is what he says makes SEA different among exit strategists — the willingness to help clients build a feasible retirement plan, rather than just trying to unload to the highest bidder. The company’s owners include two CPAs — Curt Cyliax and Rob Waring — and Allsopp himself is a certified business intermediary.
Allsopp actually got into the job of exit panning by default. The son of an insurance man and a reporter by design, Allsopp grew up in Chatham and graduated from Davis & Elkins College in West Virginia in 1973 with a bachelor’s in English. He then earned a master’s in financial planning from Penn in 1975. From then until 1985 he worked as a reporter in Florida, then served as an editor at Dow Jones and as vice president of Dow’s news service in New York into the mid-1990s.
Taking the entrepreneurial route, Allsopp developed Internet Publishing Group, which delivered news and information to professionals, in Pennington in 1998. When IPG was acquired by Argus in 2002, Allsopp was the one who facilitated the deal. “This is a business you learn by doing,” he says. “It might not have been the smartest thing for me to sell IPG, but it was the most expedient.” He then became a certified financial planner through Boston University in 2004. He now lives in New England with his wife and travels to Pennsylvania and New Jersey regularly. SEA has offices in Hopewell, Doylestown, and Vermont.
Once the seller decides to go set the process in motion, the hunt begins for a compatible company. In Kelsey’s case, he had been talking things over with a number of companies on his own. But he soon found that he had done a lot of work, thrown a lot of numbers around, and made no headway. He also learned an important lesson: There are two kinds of buyers — strategic buyers looking to find a company that fits with their own, and private equity buyers who follow a chum line to an easy meal.
As a man who had built his business with his wife, on the principle that a work family is far better than a set of drones, Kelsey is offended by private equity investors. Existing, as he puts it, to gut a company by buying and selling it as a piece of property, private equity investors would likely view his employees as chattel and simply add TKG to a growing conglomeration that epitomizes the corporate nightmare. And that was the last thing he wanted.
Allsopp isn’t a fan either, though he does not use the colorful verbiage Kelsey uses to describe them. “You don’t want to match an owner with a buyer who won’t do good by the company,” Allsopp says. “Most owner/operators feel this way.”
Buyers, of course, whether they are sharks or compatible enterprises, want to know the business for sale is in what he calls “the red zone,” Allsop says. “Nobody’s looking to buy a problem.” Buyers want something that will make them money, and they are looking for realistic value, a working business model, a solid management team, a good growth plan, and the ability to survive due diligence — environmental issues, lawsuits, et cetera.
Finding a good buyer, Allsopp says, is done by any means necessary — from searching the web to seeking advice from trade organizations as to who might be a good fit for a company being sold.
When Kelsey hired SEA, Allsopp and company started by comparing size, philosophy, and business type, in search of a compatible mate for TKG. Allsopp and Kelsey narrowed their list of potential buyers to three — Gartner Group, Forester, and BIA. These three companies were not actively in the market as buyers per se, but were receptive to the idea and deemed good candidates for what they and TKG could each bring.
BIA, a Chantilly, Virginia-based financial research firm that provides competitive revenue data and analysis on local radio, TV and newspapers, struck the biggest chord. It is a company similar to Kelsey Group in that it was started and owned by a husband and wife team not long after John and Pam Kelsey entered business themselves. Kelsey says the business models were very close, and offered just enough to each other to make a great fit — Kelsey specializes in conferences (which make up about 40 percent of its business), Internet, mobile, and Yellow Pages; BIA specializes in radio, television, and consulting. BIA also brought in a bigger sales force — 10 to Kelsey Group’s lone salesperson.
When a good fit is found and real interest is shown, things get serious. Lawyers and accountants are called in. Documents seem to somehow start multiplying on their own. A web of calculations is made. Value, determined by a lot of speculative mathematics (such as the fall-off principle, in which a company’s earnings fall off by 10 percent a year for a set amount of years — $100,000 this year becomes $90,000 next year, which becomes $81,000 the year after, and so on, for, say five years) is then offered. The buyer makes a bid and the negotiations start.
A caveat? “No point — no point — is too small to negotiate,” Allsopp says. In fact, it is this stage of the deal, in which a buyer offers a number the seller isn’t fully happy with and the seller comes back with a price higher than the buyer wants to pay, that is the most dangerous. “Every offer,” he says, “invariably contains some unsatisfactory element.”
Has he ever lost a deal when he had a clear field to the end zone? He admits, with a heavy sigh, that yes, he has — an owner who, like many, was entangled in her business. “She had two bid offers,” Allsopp says. “She just couldn’t pull the trigger.”
Though not the norm, such incidents (or at least the possibility of them) bother Allsopp. “You start wondering, ‘Maybe I didn’t do due diligence,’” he says. You ponder what could possibly have gone wrong. “But then you realize another business will come around again in 30 minutes. You try to close 80 percent and you take 60.”
Kelsey’s deal with BIA closed in early October, capping a process that, from first thought to final signature, took between 400 and 500 hours of actual work, Allsopp says. SEA earns its keep through a combination of up-front fees and percentages. Typically, Allsopp says, SEA collects 5 to 10 percent of the selling company’s worth up front. In our fictional $5 million enterprise, 5 percent would mean $250,000 up front. The fee varies on the size of the company and its resources. A $50 million company might only warrant 3 percent; a $2 million company 7 or 8 percent. There are also scads of fees to collect — legal, accounting, transaction, and so on.
Neither Allsopp nor Kelsey would discuss the money at stake in the BIA deal, but SEA deals mainly with companies in the $5 million to $10 million range. It’s what Allsopp calls the “emerging middle-market; owner managed and family held.” Kelsey Group at its peak was in eight figures that, after the tech crash and 9/11, nearly became a casualty. Kelsey says TKG sold for “something in between” zero and eight figures.
With the deal settled, TKG no longer officially exists. Kelsey himself is still around, overseeing conference planning and execution and continuing his role in client relations and business.
He actually gave up his CEO position to Neal Polachek last year, in advance of the SEA transaction, and in realizing the ultimate irony of the owner-operated business — in order for it to be able to sell, the person who built the company needs to be disposable. Kelsey accepted this early and has set himself up to ease out of professional life over the next several months.
Pam Kelsey, too, is still a vital part of the company, as are two women John insists have been integral to the success of TKG for years — Sheila Steinmuller, a 14-year employee who manages HR, client relations, and data base management and has worked on all 75 conferences TKG has held since 1988; and Nanci Karas, executive director of conference sales and exhibits, who has worked with TKG for 15 years .
The reason these three women are so important to him has much to do with their candor.
“Anyone in business needs people to tell them the truth, not just what they want to hear,” Kelsey says. “Pam, as well as Sheila and Nanci, never hesitated to give me advice, solicited or not. That helps a person focus on what matters. Sometimes it’s the bottom line, sometimes it’s spending more to give your customers more, sometimes it’s meeting the needs of your employees.”
John and Pam Kelsey have had a long time to learn how to work together. The couple met in truly romantic fashion — while skiing in Stowe in 1963. They married in 1970, moved to Princeton in 1973, and established TKG together almost 15 years after that.
Pam Kelsey graduated from Skidmore College with a bachelor’s in art. Besides working with her husband she has been chairwoman of the Princeton Area United Way and been on the boards of the Junior League, Family Service, Young Audiences, Princeton Area Community Foundation, Corner House Foundation, Princeton Day School, Kent Place School, and Skidmore College.
At TKG, she has done “a little bit of everything, from finance to design and marketing to data base management.” Kelsey says. “She is an incredibly thoughtful person who naturally gravitated to the personal details that make a company family-like. She never forgets an anniversary, a birthday, or any other significant (or not) detail of clients, vendors, or employees’ personal lives.”
An entrepreneur almost by inheritance, Kelsey grew up with a father who was a business man in insurance, real estate, and corporate communications. “He was deeply involved in a variety of activities, especially in the golf world,” Kelsey says. “Mom was a homemaker who was also extremely active in volunteer activities.”
Kelsey worked at Johnson & Johnson in consumer packaged goods and product management, in strategic planning and new technologies at AT&T, and at Dow Jones, where he introduced online services, software, interactive cable, and audiotext products to skeptical consumers.
With the deal for his company done, business continues as it has for Kelsey. In fact, last week, November 17 through 21, Kelsey was in Santa Clara, California, doing his 75th conference, the first since the merger.
Life continues for Allsopp as well. There are still deals to work and deals to close, despite the economy’s grip on the American jugular. On the surface, he admits, it might seem a bad time to be in a business such as his — nobody wants to buy somebody else’s problem, remember? But in reality, Allsopp-as-consummate-optimist says that there are sound investment opportunities out there. And at worstt, there’s always tomorrow.
“It might not be a good time to sell,” he says, “but it’s a good time to start getting ready.”
BIA Advisory Services, 613 Executive Drive, Montgomery Commons, Princeton 08540-1528; 609-921-7200. Tom Buono, CEO. www.bia.com.
Strategic Exit Advisors LLC, 2 East Broad Street, Second Floor, Hopewell 08525; 609-466-3100; fax, 609-466-0285. Craig Allsopp, managing partner. www.seadvisorsllc.com.