Sometimes late at night, I like to watch Marcus Lemonis in The Profit. I am always amazed at his ability to turn around a failing business within a 42-minute episode. Since it took us nearly 4 years to turn around Peterson’s, I’m frequently left wondering what he knows that I don’t. “Reality” television aside, the purpose of this long and somewhat meandering post is to try to distill some of the lessons we learned along the way with the hope that it would be helpful (or at least entertaining) for others contemplating this path.
(If you’re new to the story, I suggest starting here to understand the backstory of how we came to acquire the company.)
The night before we were to assume ownership and management of Peterson’s we flew into Denver, grabbed dinner at a Vietnamese restaurant, and crashed at an Airbnb near the office. The morning of January 2, 2018, was cold and sunny. Both Mo and I had forgotten to pack toothpaste. We ended up stopping at a Dollar Tree and brushing our teeth in the parking lot before heading to the office for a 9am all-hands meeting.
With the Denver-based team crowded into a conference room and the remote folks dialed in, Nelnet’s leadership announced to the employees of Peterson’s that the division had been sold to Triangle Digital Ventures. The Nelnet folks couldn’t have been more gracious. Mo and I introduced ourselves as the new CFO and CEO of the business, respectively. I remember nervously stammering platitudes about investment and growth but honestly, I can’t really remember much about the conversation other than the fact that I was terrified.
Following this meeting, we helped the team move their stuff from their Nelnet cubicles to a coworking space upstairs. Everyone was friendly and welcoming but it was clear that they didn’t know what to expect.
It was also clear (at least to me) that Mo and I had no idea what we were doing.
But before we get too far into the turnaround story, it’s worth talking about a bit about how the business was performing prior to its sale. Not well - is the short story. Topline revenue was down roughly 50% from the year prior. Digital sales were de minimus. Ad sales had slowed. And a major government contract was up for renewal (subsequently lost, but that comes later). At its core was a terrific brand with wonderful content, but the business was in need of reinvention.
One of our board members likened the company to a house with “great bones” that needed a gut renovation. That’s spot on. In keeping with this metaphor, left alone this house would continue to fall apart before it is condemned, sold off, and bulldozed to make way for condos.
Switching metaphors, this same board member described the challenge before us as “rebuilding the plane while flying.” Turns out, this would well characterize the next few years of our lives.
Flying (or, not crashing)
There is no question about it - the future of the business was in jeopardy. Uncorrected, it would fail within ~2 years. We came into the situation with our eyes open about the risks.
Given this trajectory, we would need to move quickly. But where to start? Sequencing is probably the most important than management does for a company. There is one universal truth as it relates to business: there’s a 100% chance of failure if you run out of money. For this reason, one of our first steps was to make sure we didn’t run out of money along the way.
Prior to closing, we overfunded the transaction. That is, we raised more than we needed to complete the acquisition. We supplemented the equity raise with mezzanine debt and a bridge loan from our equity investors while we worked to secure a term loan and revolving line of credit. The loans were pricey. Our goal here wasn’t to optimize profitability but to survive the initial transitional period. We knew, generally, it would take us over six months to really understand the real cashflow of the business. We wanted to maximize our margin of error. Given the compressed timeline of the transaction, we could not line up a bank for the close. We had no idea how long it would really take to secure a bank loan given Peterson’s existing dynamic. Liquidity was paramount, regardless of the cost.
Through a connection, we were introduced to Joe Short and Matt Cassell, Denver-based business bankers who are now at First Western Trust. Matt and Joe immediately understood what we were trying to accomplish and moved quickly to help us secure bank debt and a line of credit. Even though Joe and Matt were (and still are) good partners, the loan did not appear until April. This was a huge relief as it meant that we wouldn’t run out of cash during seasonal lulls in the business. But it was also quite scary - as Mo and I personally guaranteed a portion of the debt. In layman’s terms, this means that we, individually, would potentially have to pay back some of the loan in the event of default. After much consternation, we each signed on the dotted line.
That problem solved, we then turned to the work at hand.
Where to start?
Our strategy to turn the business around was in no way novel. Peterson’s had too many disparate lines of business and not enough scale to support its breadth. We needed to focus the business on its areas where it had a competitive advantage and high margins, and find a way out of lower margin, commodity offerings. The jewels in the crown were the test prep and data businesses. We would invest heavily in these product lines and try to optimize the other lines of business.
The first year of operations was consumed by, alternately, crisis management and standing up business processes and systems necessary for Peterson’s to function as a standalone entity.
Here are a few of the challenges we tackled, along with how we did it (for better or worse):
We had to quickly stand up our accounting system. We had options to either outsource this function or keep it in-house. We chose to keep the function in-house and went with Intacct for our accounting system. We made these choices because we had the luxury of time in this area because Nelnet was generous in its support of our transition. Peterson’s also had a large number of customers, meaningful accountant receivables and payables to manage, a more complex balance sheet. If we had more modest ambitions and less confidence in our ability to manage finances, we may have opted for outsourcing the function and stuck with Quickbooks. For most standalone simple SEM businesses, there is nothing wrong with keeping things simple by going with an outsourced Quickbooks accounting stack.
Establishing payroll and benefits for the employees. We decided to go with Gusto, for its ease of implementation and ongoing management. However, we found that their health plan offerings weren’t as affordable as those available through a broker. We were helped immeasurably by Scott Neiderbach and Jen Reigel at OneDigital who set our team up with excellent health coverage. Our strategy here was to offer coverage that was materially identical to that offered by Nelnet. We felt that reducing coverage - while better for the bottom line - wouldn’t be fair to the team. For reasons that are entirely understandable, the topic of medical coverage tends to rouse intense emotion. We didn’t want to mess with it.
Establishing expense, travel, and spending policies. In the short term, we kept everything the same as Nelet’s policies. After a few months, we got around to implementing our own controls. What put it (or me, specifically) over the edge was an instance of one employee booking a $900 advance purchase fare from Philadelphia to Denver (roughly 2x market) so she could accrue points on her preferred carrier. I lost my shit. After this, we required all travel expenses to be personally approved by me or Mo. Close supervision of expenses - more than a super-specific set of policies - was helpful in modulating spending habits.
Peeling off of Nelnet’s technical architecture over to Amazon Web Services, Gmail, etc. This can be a post unto itself. We did a “lift and shift” to AWS within the first ~6 months of the acquisition. The process itself was pretty smooth: AWS Activate offers a ton of support for companies looking to migrate to its platform. Our friend David Levy was a huge help in helping us make the leap. One of the mistakes we made in this process was not investing the time to rearchitect our cloud infrastructure along the way. This meant higher-than-normal AWS bills for about a year.
Standing up, and then killing, our own IT support. Our employees were used to hands-on, big company IT support. Toward replacing this, we hired an outsourced IT firm to deal with technical support issues. We were paying them about $2k-$3k/month to address low-level technical issues such as password resets or other “Google-able” problems. Silly. So after a few months fired IT support and instructed our employees to attempt to solve technical problems themselves. We also implemented a no-questions-asked hardware replacement policy. Got a problem with your computer? Throw it out, we’ll ship you a new one. This approach saved us a ton of headaches and money.
Meeting key customers. I can’t stress enough how important this was for us. The reasons are multifold. First, it was a chance to meet our customers and hear any concerns they had. Second, it was an opportunity to lay out our vision for the company - no matter how nascent - so customers could get a feel for who we were going to be as partners. My approach in these meetings was to listen, take copious notes, ask lots of questions, and try to learn all I could about the client and their unique challenges. Finally, and perhaps less obviously, it was a chance to get to know some of our client-facing team members outside the confines of the office. There’s nothing like a road trip to bring out an individual’s true colors.
If I’m critical of myself, this first phase of the turnaround was more stressful than maybe it needed to be. We gnashed our teeth over little stuff. We took the myriad HR issues more personally than we should have. We probably spent too much time focusing on shoring up the base of the business and too little time laying tracks for future growth.
A more forgiving view would be that, with our limited knowledge of the business, we struggled to prioritize as we simply didn’t know enough to confidently triage. It was also our first time doing a turnaround; experience teaches perspective on how to think about priorities and sequencing.
Above all, the hardest part of this first phase was managing the team. There are a bunch of layers to this discussion but I’ll try to keep it simple. First, the team was 90% remote. In our view, centralizing operations in Denver (to the extent possible) was critical to rebooting the DNA of the business. Managing remote employees is a pain in the ass, and it’s very hard to gauge productivity. Second, it was clear to us going into the business that the staffing mix was not suitable for the business on a go-forward basis. The team we inherited was mostly dedicated, hard-working professionals. But many were not who we would need to reboot the business into growth mode. As a result, we had to manage the very delicate task of restaffing the business without undermining its stability and tanking employee morale. We certainly failed with the latter; dismissals and resignations became a frequent occurrence, each time chipping away at our credibility and at employee confidence in the business. It was ugly. Check out Peterson’s Glassdoor if you don’t believe me.
Some of our former employees may be reading this, and to them, I wish to say that every termination was felt personally and often painfully by me and Mo. Getting fired, especially when the cause is probably not clear to the employee, is one of the worst days of someone’s life. Any manager who cannot empathize with this is either lying or a sociopath. But alas this restructuring was necessary to save the business. My only regret is not moving faster.
Rebuilding the Airplane
Retooling a business for growth - while depending on its current cash flow to fund operations - is tricky as hell. For us, it was a constant balance of managing future-facing projects vs the rear-guard action of making sure that the legacy business didn’t tank. On the whole, the forward-facing work was extremely gratifying as we were building the company we envisioned rather than the company we inherited. Years two and three were consumed by this phase. Some examples of the moves we made include:
Hiring excellent functional leaders. This seems obvious because it is. That doesn’t mean it was easy or straightforward. We invested in hiring truly talented people in key roles such as marketing, editorial, accounting, technology, and data. It took a long time to find these people and we didn’t always get it right on the first go. But the difference in output - both quality and quantity - between a superstar and a mediocre hire was staggering. More than this, great recruits did much to alleviate much of the stress of operating the business. Simply put, they gave us operating leverage. In retrospect, this is obvious but in the moment - when it felt like the business was on the brink of collapse - letting go of these functions was hard to accept. What would I do differently? I’d probably invest in a recruiter to take some of the heavy lifting off of my shoulders. Beyond this, I’m not sure there is a way to short-circuit the time it takes to assemble the right team.
Rebuilding and relaunching (multiple times) our flagship website, Petersons.com plus mobile apps. As part of this, we killed our homegrown learning management system in favor of a third-party LMS. This move would allow us to sell Peterson’s rich test prep assets directly to consumers. Four years on, this is the growth engine of the business. But the initial steps were a series of painful starts and stops, with plenty of mistakes and turnover along the way. I would like to say that some of this could have been avoided had we planned better from the outset but this ignores the constant iteration that is the reality of an operating environment. With each step forward, we learned something essential that simply wasn’t knowable prior to taking that step forward. It’s here - in this ability to keep pushing forward - that I believe our experience (and foolish tenacity) as startup entrepreneurs really comes in handy. Nothing ever works on the first try, and even when it does start to work it tends to be a slow build. Growth is just really, really hard to manage.
Strategic acquisitions. This is where having private equity capital (even if we are the sponsors) comes in handy. We acquired a key competitor in the data business, which allowed us to solidify our advantage in the market. We also acquired a children’s book business - BES Publishing - at once adding scale to our books business and providing a healthy source of cash to finance our investments.
Divesting non-core assets. We inherited a business called EssayEdge. It was an excellent service but did not fit with our vision for Peterson’s as a content and data company. Quite randomly, we were put in touch with a Ukrainian concern developing a portfolio of businesses serving the US market. 90 days later we successfully carved out EssayEdge - putting some cash back into the business and simplifying our lives.
This phase of the business easily took 2+ years. Some of it was foreseeable at the outset; other initiatives only presented themselves after we were stuck into the business and operating day-to-day. Throughout, the hardest part was deciding what not to do and then managing the change internally. If I’m honest, the only thing I would do differently next time would be to lead with the growth initiatives. What I mean by this is that I would prioritize the opportunities that would generate new revenue above all others - including cost-cutting. The reason is simple: growth solves all problems. And while it is unpredictable, there are sometimes a series of low-risk bets (like relaunching a shitty website, hiring good salespeople, etc) that can have an outsized impact on overall business performance. Some early wins do a lot to inspire the team’s confidence in leadership and the overall vision. Easy to say, hard to do.
Parting Thoughts
When successful, a turnaround is exactly that: a reverse of the decline and a flip to growth. In our experience, this was a gradual and intermittent process. For anyone who has started a company, it looks a lot like the lean startup methodology - but applied at scale to existing business lines. Test, iterate, revise, and invest. For example, we re-launched Petersons.com (more than once) but it wasn’t until the most recent iteration that the growth really started to accelerate. The same goes for our mobile apps. The same goes for our data and Dean Vaughn businesses. This is why turnaround is a bit of a misnomer. Turnaround implies that the business reverses course and retreads the same path - and in doing so is able to regain its financial footing. Usually, this is about undoing some of the stupid mistakes made along the way. Which is a lot of what Marcus does on The Profit.
With Peterson’s, our challenge was less about reversing the mistakes of our predecessors (though there was plenty of that) than it was about uncovering the next area of growth for the business. This is a painfully iterative process that requires time, investment, and most of all, persistence to accomplish.
Four years on all of our major lines of businesses are showing impressive growth. The business is more focused and more profitable than the one we acquired.