Business Partnerships: Making Them Work
Many business partnerships fail. However, since these three employees bought the time and attendance dealership they worked for, it has grown more than 400%. Here's how they've done it.
Business Solutions, January 1998
In the years prior to the trio's purchase, TimeTrak Systems, a time and attendance VAR, had experienced relatively flat growth. However, Hartman, Bonner and Albert - who all worked at TimeTrak before purchasing it - thought the potential for growth was there. They were encouraged by the fact that, at the time, only 25% of all United States companies used automated time and attendance systems.
The rest of the time and attendance market was broken into three segments. Some companies required employees to "punch" traditional time cards. Others used "honor" systems in which employees are trusted to accurately fill out time sheets. And some companies only required employees to fill out time sheets when they are late, work overtime, or take a sick/vacation day.
TimeTrak Systems was founded by Carl Albert's uncle, Vic Albert, in 1979. By 1993, Vic Albert was approaching his mid 60s and looking to sell the company. Hartman, Bonner and Carl Albert jumped at the chance.
Says Hartman, "We knew there was a big difference between being employees and business owners. But we thought we could make the company profitable." In the following pages, read how the three have accomplished that goal.
Laying The Foundation For Business Growth
Upon buying TimeTrak Systems, Hartman, Bonner and Albert knew several areas of the business required reinvestment or restructuring. These areas included:
- Sales approach - Prior to founding TimeTrak Systems, Vic Albert had owned an office supplies and office equipment dealership. When he owned that dealership, Albert tried to make as many sales as possible. He also aggressively pursued sales with TimeTrak Systems.
"With TimeTrak, Vic wasn't as focused as he should have been on making sure the product was a good fit for the customer's needs. Mike, Carl and I have been more selective about the customers that we've sold to," Hartman says. "We've recognized that if the product isn't going to work well for the customer, the end result is going to be a dissatisfied customer. And that's critical because nothing can harm your reputation as a provider faster than a dissatisfied customer."
- Marketing - According to Hartman, Vic Albert had only invested minimally in product literature. As a result, much of it was in black and white when Hartman, Bonner and Albert took over. Hartman adds, "I remember showing the old literature to a prospect. It was embarrassing. I felt like I was asking them to buy a $40,000 Lexus, and then handing them something that had just been taken off a photo copier."
Since buying TimeTrak Systems, Hartman, Bonner and Albert have hired a third-party marketing/public relations agency to jointly develop new, four-color product literature. TimeTrak now updates its literature every six months; previously, it was only updated every few years. Hartman estimates TimeTrak now spends about $100,000 annually working with the agency and having literature produced.
- Customer support - Previously, TimeTrak had only two service/support technicians. According to Hartman, these two techs were overloaded trying to service customers' systems. As a result, they could not always respond immediately to requests for service. Hartman says their high volume of work also didn't enable them to spend as much time helping customers as they should have.
Hartman says customers weren't as happy with TimeTrak's post-sale service and support as "they should have been." That dissatisfaction had a residual effect: only 20% of the company's sales came from referrals.
Hartman, Bonner and Albert have hired four additional technicians to service/support customers' systems. "Any business owner will tell you word-of-mouth advertising is invaluable," Hartman adds. "We knew better service would result in more satisfied customers and more referrals."
- Product development - Under Vic Albert, TimeTrak tended to be a "me-too" company. Meaning, the company typically added features to its time and attendance system to "catch up" to other developers. However, Hartman says the trio wanted to move away from that approach. Instead, they wanted to add features that would differentiate TimeTrak from, and put it ahead of, its competition.
Bonner adds, "The three of us had some strong beliefs about what needed to be done to turn the company around. There were some initial 'growing pains.' In the first year, we invested $200,000 in employees, literature and support systems, like PCs. We knew making a short-term sacrifice would pay dividends in the long term."
Hartman, Bonner and Carl Albert paid 25% of the purchase price in cash. They are paying the remaining 75%, plus interest, to Vic Albert over 15 years. The current owners make one annual payment to Vic Albert. If the three cannot make that payment, the company will revert back to Vic Albert. Hartman, Bonner and Albert are using TimeTrak's revenue stream to make the annual payments, which have not been a problem. Because TimeTrak is a privately-held company, they declined to provide further terms of the sale.
The three partners also established an "S" corporation upon their purchase. As a "C" corporation, the partners would have had to pay a corporate tax rate of about 25% on company income. In addition, Hartman says any salaries paid to him, Bonner and Albert also would have been taxed as individual income.
Making A Partnership Work
The success TimeTrak Systems has enjoyed since its purchase might surprise some business owners. Hartman acknowledges many businesses falter when they lose their founder(s). However, he contends the new partners made a smooth transition.
Prior to the sale, Bonner had been working as the company's vice president of operations. Hartman had been the company's vice president of sales and marketing, Carl Albert the vice president of product programming and development. All three have maintained the same roles. "We have expertise in different areas, which gives us balance as a team," Hartman says.
Upon purchasing TimeTrak, Hartman, Bonner and Albert established an equal partnership, whereby each owns one-third of the company. The partners also established what Hartman calls a "restrictive" buy-sell agreement. Meaning, if any of the partners wants to sell his stake, he has to sell to the other two. Says Hartman, "We didn't want someone with no experience in time and attendance - but a lot of money - to make one of us an offer we couldn't refuse."
However, none of the partners is looking to sell anytime soon. Hartman says he and Bonner and Albert have gotten along well as partners. "We all worked together before we bought the company," Hartman says. "We recognized the importance of consulting with each other on important matters. We know we have to respect the others' opinions. That means deferring to them on certain issues."
For example, TimeTrak has a policy related to signing contracts with new customers. TimeTrak will not sign a contract worth more than half of TimeTrak's revenues from the previous year. (For example, if TimeTrak's revenues were $1 million, it could not accept a contract valued at more than $500,000). Hartman says big contracts, while potentially offering a high financial return, are risky. "If the customer wants a customized system, you end up changing your product to fit one customer's needs," Hartman says. "It's easy to lose sight of what all end users need in their systems.
"The deeper you get into large projects, the more committed you become to making them work. If the project fails at the last minute, you basically have to start over." The three partners have had opportunities to sign contracts that would violate the policy. Deciding whether or not to accept those deals caused some disagreement.
Hartman explains, "There was one large contract I wanted to take. Being a sales and marketing guy, I thought it would be a good reference for us down the road. However, Mike and Carl are more conservative, and they didn't want to take the deal. They convinced me the potential payoff wasn't worth the risk." Adds Bonner, "We've always recognized the importance of compromise. Each of us knows he doesn't have all the answers. That's why we make it a point to make important decisions objectively - and collectively." Hartman believes three-person partnerships are easier to manage than two-person partnerships. With three people, there has to be a clear consensus, on issues. "Two partners could have differing opinions. And each might not be willing to compromise. The result is two people going in opposite directions."
The Value Of Restraint In Business
As a business owner, Hartman has learned the importance of restraint. "When you own a company, you have to make decisions carefully," Hartman says. "The decisions Mike, Carl and I make affect the lives of our 22 employees and their families. Our employees depend on their jobs to feed their children and pay mortgages. We have to take that into account every time we make a decision."