10 Principles for Driving Growth After You Buy the Business

By way of intro, Kona Group is a collection of companies centered on multi-decade alongside small business excellence, as we call it. We're self-funded, so our holding company has sometimes been described as a boutique holding company or a lifestyle holding company. We have quite the diverse portfolio that I'll speak to as we get into talking about growth today.

We have Taylor Cooperative. It's great to see a lot of you came over and spent time with us in the shop. We acquired a fine art studio that teaches art classes and has a ceramics program back in 2021. Then we made the very natural progression from fine suiting and fine art into general contracting and bought a construction company. It's a very common ETA path. We're a builder of custom homes and one of Utah's leading builders of ADUs, accessory dwelling units, so micro housing. The thinking there was we loved the idea of running a builder, due to naivety primarily, and the thinking was also proximity to trades companies. We acquired their largest subcontractor, Northern Electric, back in 2021 as well.

It's sometimes hard to describe Kona's model because we're not the traditional holding company that acquires established businesses, throws on a bunch of debt, drives a little bit of growth, and just holds on while we pay down debt and create equity value. I spent the beginning of my career in the zero to one space, and typically ETA is focused on the one to ten space. I kind of think we acquire in the 0.75 space. We look for companies that are absolutely ready to sell. They have product market fit. There's something of interest in it. They have an owner ready to retire. Second, we look for companies where we can be a good owner, where we're uniquely positioned to help bring this company into its second chapter. And finally, we look for unrealized opportunity, and that's been our biggest driver of acquisition criteria to date. We almost look for companies where the seller's trash is our treasure, or maybe what a searcher might turn down, but we feel like we have unique capability or capital or vision to take a company into a bold second chapter.

Driving growth is pretty integral to our business model. Kona companies have grown an average of 65% in our first year of ownership, and that's been really good to us as a holding company. We've been primarily growing through driving organic growth. Obviously we've made inorganic growth through acquisitions, but once we own the company, we really focus on driving growth. So that's what I was asked to speak on today. It's a very broad topic, so my plan is to fly at a 50,000 foot level, cover a lot of topics quickly, and then open it up for Q&A.

Before I get into our playbook on growth and stories from driving growth inside of our portfolio, I want to talk about whether to grow and how to think about growth in an ETA context. First and foremost, we've learned, and I've experienced this throughout my career, that it can be very challenging to serve both masters of EBITDA and revenue growth. In order to drive revenue growth, you have to break a lot of things. You have to be innovating, you have to be experimenting. In order to drive earnings, you need stability, you need to be optimized and driving process efficiency. Sometimes they're at odds with one another. Especially in ETA, where there's a J curve, and that's not just on financials. There's a J curve on you learning the business, on being able to operate well, being able to run it efficiently. Typically there are multiple phases before it might make sense to even think about growth. The first chapter is really just learning the business. The second is figuring out how to run it about as well as the seller did. The third is being able to operate it in new and better ways. I've seen some searchers where each phase takes one or two years. I've seen some searchers where they're able to get into growth at the tail end of the first year. Your mileage may vary.

I also hear a lot in search, maybe you don't really need to focus on growth. Go buy an established durable business that has strong earnings, throw some debt on it, just try not to screw it up, white knuckle it for ten years, pay down that debt and create equity value that way. My typical pushback is, while that might be the appropriate strategy based on how you're financing it, learning how to drive growth is essential because sometimes you can lose a key client, get competitive pressure, salespeople leave your organization, marketing evolves and old channels stop working. You have to keep up with inflation, which has been quite the thing over the past few years, and macro events you can't control. So even if your strategy may not be fully aligned with the way we think about ETA and growth, knowing how to grow is pretty essential as you start your journey as an owner-operator.

Let's get into how to grow. I distilled it down into ten principles, ten things we've found to be true in our experience.

Principle one: get clear on the exact pain point you're solving. We've seen companies or lines of business within a company that are providing a vitamin solution to a problem. It's a nice to have. You don't need it to get throughout your day, but it augments your day to day. We've seen some companies that are true painkillers, solving a very acute pain point. The greater the pain, the greater the opportunity for you to align your value proposition to that pain point. Sometimes it's not what you think it is, and oftentimes it's more than just one pain point. One of the things we do post-acquisition is sit down and document buyer personas. Often there are a handful, two to five different personas. What good looks like is you have very discrete personas that you're selling into and an understanding of what they truly care about and how they make their decision. If you don't know it or don't have one hundred percent confidence in your value proposition, customer interviews can be really powerful. We jump on phones in the early days and try to talk to customers and really get to know why customers hire us and why us versus a competitor.

If I talk about Northern Electric, our electrical contractor, we have at least three very different buyer personas. We provide a lot of EV chargers to EV dealerships, and what they care most about, we learned, is not necessarily price point. They want someone who's fast to dispatch. At a dealership, they want their sales guys to be able to sell a customer an EV even if they don't have a charger at home, and promise them we can get out within 24 to 48 hours. That's their number one pain point, which is very different from homeowners who have a problem with their electrical wiring at home. They care about excellent reviews, and if their power's out, they want you to come quick. General contractors care about thorough estimates and they want you to be cheap. So if you're servicing multiple different lines of business, you need to really understand what that pain point is and speak to each buyer persona in their language.

An example we use from time to time: if you think about Mint, the now retired Intuit product, you could accurately describe their value proposition as use our app to track all your financial data in one place. But if you're trying to align it to the real pain point Mint was solving, perhaps a better value proposition speaks to financial peace of mind. It is critical to speak in your buyer's language and address their pain points consistently across all of your touchpoints, from your website to your interactions with customers over the phone. Your sales team should be exceptional at understanding buyer personas.

Principle two: identify where your customers are most likely to be found. If you're not sure, spend some time on the front lines. Ask your customers how they heard about you, how they made a decision, and what mattered to them in that decision. Also ask your team on the ground. What are the main questions and objections in the sales process? Don't hesitate as the owner to jump in, especially early on post-acquisition.

For our custom home builder, Built by Design, we had a theory on who our customers were and where they spent their time. The buyer persona we came up with was Jeff and Jane, highly affluent homeowners wanting to add additional rental income. They had a lot size big enough and an interest to go build a structure behind the structure, a mother-in-law unit, and didn't know where to start. That was the thesis. What we found is we were wrong. The best way to find Jeff and Jane is not directly to them, but actually pursuing a demand funnel with architects and design firms. So our go-to-market motion, our sales funnel, begins by selling into architects. It might not be exactly where you think it is, and it's essential to know where your prospects spend their time. It might be digital marketing, old-fashioned direct mail and door hangers, an outbound sales motion, or trade shows.

Sometimes I hear a business owner say, I don't need to grow, that's why I bought this business. We have an excellent reputation. We don't need to invest in sales and marketing. Of course, we have to remember that knowing how to grow is essential based on what comes and punches you in the mouth. Also, if you have a solid organic track record, you're actually really well positioned to perform well in either paid marketing or an outbound sales motion.

Principle three: evaluate whether your growth is going to be more sales-led or marketing-led. Some of this is industry by industry, company by company. In general, a sales-led organization has a higher average sale price. You're selling something of a higher ticket item with a much longer sales cycle where the prospect needs a consultative, hand-holding process to make a decision. Marketing-led is typically the opposite, more of an impulsive decision, smaller ticket price, shorter sales cycle.

At Taylor Cooperative, our custom clothier, the way we drive demand is spending an ungodly sum of money across different digital marketing platforms. That's where prospects make their decision. They're searching, looking at Google reviews, comparing one clothier to the next. Our job is to drive traffic to our website, convert that traffic to a scheduled fitting. The sales motion is very inbound-led. Our sales team is kept fed one hundred percent of the time from our marketing organization. Built by Design, on the other hand, is the opposite. We have an outbound sales team. Their job is to drum up pipeline. They're attending trade shows, networking with architects, sending outbound email, placing cold calls, doing lunches with architects, and we're managing a more professionalized deal progression process. Often, though, it's best when they work hand in hand. Marketing drives awareness and interest, helping generate unqualified leads, and your sales team helps qualify those leads, progressing them to close.

Principle four: document and track every step of your funnel. You may hear terms like ToFu, MoFu, and BoFu, acronyms for top of funnel, middle of funnel, bottom of funnel. Top of funnel is how you drive demand, how you get people thinking about your industry, your product, considering you. Mid-funnel is the attempt to convince them to do business with you. Bottom of funnel is figuring out how to get to closed-won. We laboriously sit down and map out our sales process. It's an important thing to do post-acquisition, look at it from a bird's eye view and see what steps are occurring from the moment they express interest to the moment they close. Know your conversion rate overall and where your various drop-off points are. We think of our funnel as a bucket, and every bucket has a leak somewhere. The job of someone driving growth is to go patch where the water's leaking. Then water's going to start leaking out of another place in the bucket. You're going to patch it, and it's a constant process of optimizing your conversion funnel.

A story from Built by Design: we found as we mapped out our sales process that a significant drop-off point was, if a prospect comes to us interested in building a custom home or an ADU, the first step is to draft plans with an architect engineer. We would send them to an architect engineer and hope that in that 8 to 12 week process, they circled back around with us. Due to being busy, we didn't monitor that very well. Once we realized that was a major drop-off point, we implemented weekly calls with our architectural partners to review all the leads we'd been sending them, talk weekly about strategy, where the client's at, and how we can work together to bring the customer across the finish line. Often the solutions to fixing leaks in your funnel are quite obvious, but a lot of people just don't sit down and look at it from that bird's eye view.

Principle five: you've got to invest to grow. You've got to spend money to make money. Across our portfolio, the amount we're spending on sales and marketing as a percent of revenue is quite different from the typical small business we look at acquiring. Most of the companies we look at in this main street size are boasting that they have such a great brand and reputation that they haven't spent a dollar on sales and marketing. That's great, but what that means is the business does not know how to effectively grow in a sustainable and repeatable way. That's our opportunity.

If the company hasn't historically been investing in growth and marketing, our attempt is to get all of our businesses into what we call the virtuous cycle of SMB. It begins with providing great product and service so you can charge a price premium so you can have strong margins to reinvest in growth and hire great people who can deliver a high-quality product and service, and so on. Our goal is to find ways to improve the product and service so we can elevate our price point and use that margin to reinvest in growth and hiring. The goal of your customer acquisition process is to build a vending machine where you can put a dollar in and get ten bucks out repeatedly. You've got to utilize technology to track that investment. We use a variety of technology products across the portfolio to make sure we're tracking from lead all the way to closed-won.

Principle six: know your unit economics. The five metrics we look at most are CAC (customer acquisition cost), ASP (average sale price), contribution margin (the profit contributed to the business after COGS and your sales and marketing expense), LTV (the total profit you can reasonably expect from a customer over the lifetime of your relationship), and payback period (how long it takes to recover that CAC investment). It's important to note initial investments in growth are not efficient. That's true for us as we're experimenting with new channels. We're not experts in all the channels, and every new channel comes with its own set of difficulties. In sales, that can look like over time honing in and improving your sales team, training them, helping them learn how to close efficiently, driving up your average sale price, improving your sales enablement, and optimizing your sales process. The same is true in marketing. Over time you'll learn how to write better ads that prospects click on, you'll create better content, you'll fine-tune your website.

For Taylor Cooperative, this has been one of our biggest competitive advantages. In year one, we had a very inefficient customer acquisition process. Our cost to acquire a customer on average was about $400. Our average sale price was $1,400. Factoring in cost of goods and customer acquisition cost, that contributed about $650 to our overhead, our contribution margin, which meant our CAC percent to revenue was insane at 28%, not sustainable. We would try to offset that with return customers, organic over time, blending in to get a more tolerable blended customer acquisition cost. Today, on average, we're spending about $220 to acquire a customer. We got really good at figuring out where our customers are, how to get in front of them, what ads to serve them, how to retarget them. Our sales team is much better today than they were eight or nine years ago. They're selling at an average sale price of $2,100. With those two tweaks, our contribution margin more than doubled, getting our CAC percent of revenue down to a more reasonable 10%. Our sales and marketing as a percent of revenue dropped almost in half over the past few years.

A sales process can become a moat, and it has been for us. Our average sale price is about $2,200, which is quite higher than most of our competitors. That means we have a much larger budget we can invest into acquiring customers. We're outbidding our competitors, kind of strong-arming them in the market because we can afford to spend more than they can.

Principle seven: use those unit economics to quantify your funnel. An example from Built by Design: let's say we sit down in annual planning and want to drive net new incremental growth of $2 million. Our cost per lead at Built by Design is about $150. From lead to delivering a bid or estimate is 15%. Only 15% of those leads make it that far. Once they do, 25% close and select Built by Design as their builder. Overall, that's a 3.75% close rate. Average sale price for that business is about $250,000. So if the goal is $2 million in net new revenue divided by our sales price, we need to close on average about eight deals. To close eight deals, we need to do 32 estimates throughout the year. To have the opportunity to put together 32 estimates, we need to drive 213 leads. At our average CPL of $150, a budget of about $30,000 should do that. Usually we do that math and double it, assuming we'll find efficiencies along the way. That means we have a concrete plan for how to drive that incremental growth.

We almost take our marketing closeout about as seriously as our financial closeout. Every month our marketing team puts together performance across leads generated, cost per lead by channel, average sales price, so we can constantly retool and fine-tune.

Principle eight: diversify your customer acquisition funnels. A lot of folks talk about customer concentration. Another thing to think about is channel concentration. If you only have one way to find customers and that way stops working, you have just as much revenue risk as with customer concentration. Depending on the business and industry, that might look like different platforms for digital marketing or a variety of sales strategies. We work hard to add incremental channels. Every channel we figure out becomes a brick we're laying on top of one another that enables more growth. For our fine art studio business, Workshop SLC, we found a way to make TikTok work really well. As we experimented with another channel like LinkedIn, that's not going to work for that platform. Every new channel you can optimize where unit economics make sense is a new brick.

Channels have natural caps. It follows the law of diminishing returns. Especially if you're in a business with a limited marketplace, like most of our businesses, you can only spend so much on a given platform before every incremental dollar starts to dilute in efficiency. With Northern Electric initially, we went to what we knew. We found we could effectively spend about $7,000 a month at about a $50 CPL on Google AdWords before our CPL started to skyrocket. On Facebook, we reached a cap at about $2,000. That forced us to figure out other channels, which brought us into Google LSA, a completely different platform with a different playbook and review sets. We spent months figuring out how to become competitive on Google LSA, then moved to Angie, then Nextdoor. At any given point, we're testing different things, trying to figure out if it's a new channel we can add as a brick to our growth plan.

Principle nine: a major growth unlock can be new lines of business. If you feel like you've adequately optimized your core line of business, consider adding new ones. At Workshop SLC, when we acquired the art studio, they had two lines of business. They flew in moving masters, expensive and well-regarded painters, drawers, and sculptors out to Salt Lake City for very high-ticket multi-day workshops. That was the primary revenue-generating line. They did a little bit of class programming, and what we saw as the opportunity was to invest aggressively in ongoing class programming. As we got to phase two, we massively outgrew high-end workshops with our ongoing art classes business. We continued to slowly grow the high-end workshops but invested a lot more aggressively into ongoing art classes. Then we launched a ceramics program. Within the first six months, it was doing 40% of our revenue. Today, we have four primary ways we make money: high-end destination workshops, ongoing art classes, a ceramics program, and studio membership. An interesting point: studio membership actually drives about 40 to 50% of our earnings while being only 20% of our revenue. So unlock growth by considering new lines of business.

Principle ten: optimize for sustainable and repeatable. Sustainable means profitable. Can you profitably acquire this customer? Does it make sense to spend time and capital to acquire that customer? Repeatable means formulaic. You can do it in September, you can do it in December, you can do it in Salt Lake City, you can do it in Denver. You want a way you can repeatedly run that motion. If you can achieve sustainable and repeatable, that puts you in control of your business, increases revenue predictability, provides competitive advantage, and reduces revenue risk.

There is no silver bullet to growth. It really takes an ongoing process of iteration and a metrics-driven approach across your entire funnel. We've made a lot of mistakes as we've operated, and revenue has been the thing that's solved all our problems. Every time we can solve a new channel, unlock the next brick of growth, it's been a really good way for us to reinvest and keep our companies moving forward.

I'll be publishing the presentation on Local Legends. It's the newsletter I run, a focused exploration into the craft of building and enduring small businesses.

Q&A:

Q: On principle three, what about businesses in the middle, blurred between sales-led and marketing-led?

Marketing is an exceptional way to build reputation and trust with a prospect, and sales is an exceptional way to take that prospect's interest and address pain points or objections. I bring it back to how consultative the sales process is. If they need an advisor to help make a decision and they're looking at multiple options, that's an opportunity for sales to get engaged. If it's more of an impulse, marketing's a good fit. One thing we're starting to think about is, in some organizations we keep our salespeople 100% fed, so they're not thinking about how to attract business or follow up with return clients. We're trying to figure out where that dial is. Sometimes that's an important balance to strike, keeping a salesperson 50 to 80% fed so they have time to invest in prospecting and bringing in new business.

Q: Any heuristics for how long you try a new customer acquisition channel before saying it's a bad channel?

It's a hard question because essentially you're asking, how much cash do you set aside? If you have a vending machine in a couple of channels, why take that dollar and reinvest it elsewhere where it may not work? We set a fixed budget for it. We don't think about it as a percent. When we calculate our sales and marketing percent of revenue, discretionary pilot spend is almost its own line item. We'll set aside three or five thousand dollars to test a pilot and give it a predetermined amount of time. The goal isn't to get it to align with the best CPL or CAC we've ever found. The goal is to bring it within reason in our unit economics. If it's within that rough strike zone, we know there's probably room over several months or a couple years to get it more efficient. Sometimes we just accept that not all our channels are going to be as cost-effective, and we keep some lower cost-effective channels going for the sake of diversity. So primarily think about it as a fixed cost as opposed to blending it in with the rest of your budget.

Q: On the pain point principle, are you trying to move other businesses from vitamin to painkiller, or is it more framing?

There are two ways to think about it. One is using that to inform what kind of business you buy. Ideally you want to be in a kind of business where there's no question they need your service and they're going to move quickly. Power going out is a great example. There are different lines of business within your company that have different pain points with different levels of severity. Are you solving the biggest pain point for your customer and speaking in that language? One lesson learned as we acquired a bunch of companies is we like companies where there's a real compelling reason for them to hire us, where we're more of a painkiller. But within your company you can find that.

Q: In construction, do you have architects on staff? Why don't you buy an architectural firm?

That's exactly our plan over the next couple years. We have architectural partners where we represent a good chunk of their business, so we're strategically aligned. We see them in our office multiple times a week and do calls weekly to share notes. But it's not as good as having that almost in-house. In construction, there's design-build where you have that under one roof, and that's the ultimate goal, one step at a time. If you know an architect interested in selling in Utah, we'd be very interested.

Q: Can you talk a little about organizational structure across your portfolio companies, and how you use contractors or agencies?

What got us into the space of being a holding company, and for the record, we had a holding company before we used the word holding company. At the very beginning, our thesis was that shared services would be a competitive edge. All these small businesses we were looking at, and even the one we owned, couldn't afford a CMO, and if they could, they definitely couldn't afford a CFO, or they didn't have an HR function. The thinking was, let's have a shared services model and fractionalize that into our operating companies. We've since moved to a more distributed shift where we look to our companies to self-perform a lot of this. The way we think about our involvement at Kona is we make a lot of one-time capital investments and time investments into the business during that J curve process. If our thesis is that we're going to own this for 10 to 20 years or indefinitely, this is a perfect opportunity for us to get to know the business really well, get best practices stood up, and implement technology. We spend a very disproportionate amount of our time in year one compared to where we want to be in year four or five. We jump in post-acquisition and help with hiring and implementing technology, and over time we want to see them grow in maturity and become more self-run.

Q: You're very community focused. How does that augment your marketing strategy and growth?

The reason we are so community focused comes down to how we chose to structure ETA. We have no outside capital. We're not thinking about an IRR hurdle. We don't have a fund where we need to deploy cash. We're truly doing this because we're trying to build a day to day we don't have to retire from. We love working with great operators, we love tech, we love helping companies grow in maturity, we love solving growth problems. Our decision was we don't want to spend our career on airplanes. We'd rather help build our community here and make Salt Lake City a fun place to live and work. We're definitely going to limit opportunity. If there's a great business that comes for sale in Denver, that's not in scope for us. Our goal is to be embedded in our community.

That makes us a little more open to consumer and to things most searchers tend to avoid. Our vision is we want Main and Broadway to have a local business and not an Amazon pickup locker. Small business is absolutely on the decline. There have never been fewer small businesses as a share of the economy than there is today. It's hard to compete with Amazon and the larger multinational companies when it comes to sourcing talent and running a quick product development cycle. So our job is to help our companies run as well as they possibly can and give them a very long-term capital structure so they don't have to be sprinting at quarterly goals.

My thesis is that the advantages of being geographically focused far outweigh the advantages of having a broader scope. We have lots of conversations throughout the week and month where we're planting a seed among small business owners. Adam and I serve on a lot of community boards. The thinking is that over time, that will create a flywheel effect where we could potentially be a first-option buyer. That's the 10-year goal.

Q: How did you navigate growth at Taylor Cooperative through COVID-19?

COVID is responsible for Kona Group even existing. We felt like we had a good recipe. We had a good shop producing solid suit hangs, we had the playbook, and we were about a week away from signing a lease agreement down in Phoenix that felt like a stretch, right as the NBA shut down. We thought it would delay a couple of weeks, and it ended up completely changing our plan. Instead of going all in on expanding Taylor Cooperative, we decided to sit on our hands and see where that would take us. All this capital we had stored up for a second location, we used to acquire Workshop SLC and the real estate behind that. We were able to grow Workshop four or five X in the first year because we kind of had a playbook.

My thesis on getting into ETA is you need to give something. There's an entry price to get into ETA. Either that entry price is you have to spend a lot longer searching because you're so selective, or you have to buy a deal with a little more hair on it than you'd have liked, or you buy smaller than you'd hope to, or you have to go traditional and dilute your equity a little more. There's no more free ride in ETA. Earning our right to be in ETA was grounding out for years building Taylor Cooperative as a lifestyle business until it was throwing off enough free cash flow that we could utilize that to jump into ETA.

Revenue dipped tremendously. We dropped like 90% from February to March 2020. We immediately got into a mask-making business. Government entities were paying a lot of money to find sourcing options out in the Far East for disposable masks. We were hand-making masks, selling and donating them. It was temporary, but we bounced back surprisingly. In the luxury suiting space, a lot of wedding clients, a lot of funerals, things drive demand a lot more than you might think. We were down a little bit in 2020, but 2021 was our best year yet.

Q: Given the uniqueness of the businesses you acquire, how do you source your deals?

Every deal we've done has been off-market and kind of knocked on our door. We've yet to have the time or energy to spin up a search practice and start sending mass emails and writing letters. I would love to be in a position where we have a thesis on an industry and a kind of business we want to buy and spin up the process to find that company, but we don't do that today. We get a lot of inbound from folks who know what we do, brokers who know us, financial planners, various intermediary bankers. Our pipeline isn't tracked anywhere, but we've had probably 50 to 100 conversations over the past couple years with folks who aren't ready to sell today but expressed interest when they do sell. Over time that will hopefully pay off. I will say 60% of what we get inbound is complete junk, Mexican restaurant turnarounds in rural Utah, stuff that's just not for us.

Q: How much of this are you thinking through before you've actually bought the business versus 6, 12, 18 months after? And can you unpack the month-end close for marketing?

A part of our due diligence, I would say 30% of it, is, is there something within this business we are uniquely suited to help scale out? It's a very big criteria. We close deals out if we don't feel like we could be a uniquely good owner. To be clear, a lot of this model was born out of the fact that we had a little bit of free cash flow but didn't have a million bucks in the bank, didn't have a rich uncle, didn't want to raise capital. We just bought with what we had, so we specialized in the smaller space. It's very much part of our due diligence.

On the marketing closeout side, it's pretty simple. Our marketing coordinator puts together a simple spreadsheet of leads by channel, the CPL by channel, customer acquisition costs, the conversion rate of that month, total ad spend, total revenue. It gives us a quick glimpse on the digital marketing side. On the sales side, we do classic deal reviews, pipeline reviews. It's simple in theory, but I haven't met a single business owner that takes it as seriously as we do, and I can't understand why. It's very simple, very insightful, and leads to a lot of tinkering after you review.