CASE: E-735

DATE: 09/03/20

BUCK JACK CAPITAL: CLOSING OR QUITTING

Laura Franklin and William Colt met at the kitchen table of their Colorado Springs apartment to
decide how to respond to the spread of COVID-19. The pandemic had reached Colorado, which
caused them to question their plan to close the purchase of the Shandy Clinic in a few days. The
documents were complete, approvals had been granted by the state authorities, and investor
money had been received. All that remained was signing the last page and wiring the money.

The easiest solution, perhaps, was to delay the purchase. But, only two months prior, Colt and
Franklin had requested a delay because of a mistake they had made dealing with landlords.
While their relationship with the sellers, Ty and Amy Shandy, had helped overcome that hurdle,
Colt worried that asking for another delay would jeopardize the transaction. Meanwhile, revenue
growth at the Shandy Clinic was exceeding expectations, making the agreed-upon asking price
seem like a bargain. Though they had no legal duty restricting them from closing, the pair
wondered if they had an obligation to their investors to push off finalizing the deal because of the
pandemic.

They were worn out from working on this acquisition for two-and-a-half years and, in
anticipation of closing, the pair had spent their last few thousand dollars paying off outstanding
bills—leaving them completely out of money. Franklin said to Colt, her cousin, “If this falls
apart then we’re done. I might as well go back to teaching fourth grade in Mississippi, and you
to installing pipelines.”

BACKGROUND

William Colt and Laura Franklin grew up near each other in Houston, Texas, where their
families raised them more as siblings than cousins. “Many of my favorite childhood memories,”
Colt recalled, “are from the weekends we spent at our grandparents’ ranch just outside of the
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Buck Jack Capital E-735 p. 2

city.” Franklin added, “Once William and I reached elementary school, we were also given
chores to do around the ranch. These taught us the importance of honest work. Because, after a
few months, our parents would find out if we failed to bury seeds deep enough, causing the
plants to dry out, or if we skimped when applying primer, leading the paint to peel.”

After attending Texas A&M University, Colt worked in the oil and gas industry as a subsea
pipeline installation engineer. After a few years, he was given authority over a project’s
execution. There at sea, far from the office, Colt discovered that he enjoyed directing and
motivating the crew of 120 in a high-stress environment. Consequently, he decided to pursue an
MBA at Rice University to transition to a management-oriented career.

Franklin, meanwhile, graduated from Trinity University before moving to Mississippi to teach
fourth-grade students as a Teach For America corps member. She recalled:

During my second year of teaching, I told my parents that I loved my work and
planned to stay in for a while. After expressing support for my decision, my dad
reminded me that great choices come from great options. He encouraged me to
consider applying to graduate school to develop my other interest, education
business models and policy. So, I decided to apply, and was accepted, to the dual
degree program at the Harvard Kennedy School and Stanford GSB.

While at Stanford, Franklin took a class on entrepreneurship through acquisition. “It was the
first time I realized how similar the issues I faced as a teacher were to those of a business
operator,” she learned. “But everyone around me had run companies or closed huge deals. I
doubted that someone with my background could be successful as a searcher, and decided that
raising a fund was not for me.”

The situation changed when, three months before Franklin’s Stanford graduation, her
grandmother died. She recalled, “Everything was put into perspective. Buying a company to run
checked the boxes for me; an opportunity to grow, make an impact, and have autonomy. I
decided to not let self-doubt hold me back. My grandmother’s death reminded me to live my one
life courageously.”

Franklin wanted a partner to compliment her skillset and jointly endure the highs and lows. And
she was convinced that Colt was her ideal partner. “My plan to convince him was to ask for his
help moving back to Houston after school got out,” Franklin recalled. “For the two-day drive I
worked to sell him on becoming my partner. By the time we reached New Mexico, he was in.”

STARTING THEIR SEARCH

To streamline prospecting, Colt tested a custom tool with around 30 potential sellers that
programmatically personalized a simple email (see Exhibit 1). “We learned from investors that
the response rate to our initial emails was typical of cold emails,” Colt recalled. “We used that
same process to contact thousands of companies and spoke with each that responded.”

Following dozens of unsuccessful meetings with other prospects, Colt and Franklin entered
advanced discussions with Paragon Energy, an electricity brokerage in Houston. In late
Buck Jack Capital E-735 p. 3

September, Paragon’s owner agreed to sign an LOI with Colt and Franklin. “After dinner,” Colt
remembered, “the seller surprised us with Paragon-branded polo shirts to wear when we
announced the new ownership together.” As they drove home, there was an uncomfortable
silence in the car. Eventually, Franklin said what was on both of their minds, “I cannot go
through with this. I have no interest in running an energy company. It is just not me.” They had
been pretending to be enthusiastic to get the company under an LOI. Colt explained, “By going
through such a high volume of leads, Laura and I figured we were bound to eventually find the
right company. But we realized that focusing on process distracted us from reflecting on what
kind of company was personally authentic.”

The following day they decided that, because of Franklin’s experience as an elementary school
teacher, the two were drawn to early childhood education. Relatedly, Colt was also interested in
pediatric therapy because, growing up, his mother had provided dyslexia tutoring for children
from their home. After checking that the sectors were growing, the searchers decided to narrow
their focus to early childhood education and therapy.

Next, they revisited their outreach process to make it more personal. To Colt, one obvious
differentiator was that they were cousins. “Including this made our talk about being values-
driven more understandable,” he explained. “Which is important to owners of double-bottom
line businesses like the ones we’d decided to pursue.” The pair then changed their contact
strategy, aiming to send just a dozen high-quality emails a week to prospective companies.
Franklin recounted:

Our emails had to communicate why we had any business emailing them in the
first place. Writing that “We believe that access to high quality early childhood
education and support services impacts the entire trajectory of a child’s life” was
not enough. It was important the owners believed us. Only after that could we
show how deeply we understood the industry and their business. Our messages
began with our background, then followed with why we were excited about their
business.

The new strategy worked. Nearly half of the companies Colt and Franklin reached out to with
personalized emails responded. Colt added, “More importantly, the companies that responded
were of higher quality than before. Many of the previous business owners who responded to our
‘spray-and-pray’ emails were just curious about the process and what their companies might be
worth. We needed sellers.”

The Importance of Shared Values

Within a few months, Colt and Franklin found a company in Chicago that fit with their goals.
The business, Illinois Autism Clinics (IAC), provided a range of treatment services for children
with autism spectrum disorders.

But as they worked more closely with IAC’s owner, Franklin noticed a few things that were off.
“For example, we were told a clinic’s waiting room furniture was brand new but,” Franklin
pointed out, “when we dug deeper, we discovered most of it was at least four years old. These
were little things, but we worried they signaled something larger.” Colt added:
Buck Jack Capital E-735 p. 4

It felt like we were always catching immaterial fibs during our diligence, but
never anything Laura or I thought would meaningfully impact the value of the
company. It was when we learned how IAC was billing insurers for a specific
type of therapy, which we thought was not fully in line with the therapy provided,
that we decided to seek outside perspectives. While it was a billing code that
could technically be justified, it felt in the gray area.

Colt and Franklin called their lead investor, Mateo Garcia, for help. He was emphatic in his
advice:

This is very reasonable multiple in an incredible industry—opportunities like

these do not come along often. Besides, this billing issue is not illegal, and even
if it were you could get indemnification. You will need to make changes at
whatever company you acquire. Stop waiting for the mythical perfect company.

Though Garcia’s advice was sound, Colt suggested the duo seek a second opinion from a
different investor, Jia Zhang. Zhang disagreed with Garcia, “These issues might be just the tip of
the iceberg. The founder’s character becomes part of company culture, so you might be
discovering much larger problems down the road.” Colt recalled:

That was a turning point for how we viewed our investors. Before this, we had
been reluctant to call them for advice because we thought we were expected to
know everything. And, whenever we had called someone, we just assumed they
were right. The advice we received, along with the lesson to not rely on a single
source of wisdom, was invaluable. Finally, the diligence process with IAC taught
us the importance of being explicit about what values were essential for us to
anchor a seller relationship around.

In the end, the cousins decided not to pursue IAC. They then specified what their anchoring
values would be: building trusting relationships, committing to work hard, and being their
authentic selves.

THE SHANDY CLINIC

Franklin and Colt soon found another company that fit their criteria: The Shandy Clinic. It was
one of the largest autism service providers in Colorado, founded and operated by Ty and Amy
Shandy. In this case, Franklin researched the Shandys deeply before sending them a
personalized email, which, in the end, stretched to six paragraphs (see Exhibit 2). It was the
novelty of Franklin’s email that led the Shandys to respond. In particular, the subject line:
Former fourth grade teacher would love to talk with you and Amy. It turned out Ty’s mom had
also been a fourth-grade teacher.

In early July, the two groups met at the Shandys’ home in Colorado Springs. Over lunch, Ty
Shandy informed the searchers they he had received a lot of previous interest. In fact, just a few
months earlier, a strategic acquirer had flown the Shandys to San Francisco for a lavish weekend
Buck Jack Capital E-735 p. 5

and offered a high price for the company. But the Shandys had stalled discussions, as they were
worried how the Clinic’s employees and patients would fare under the strategic acquirer.

Also during that meal, Amy asked the cousins about how their families had raised them, and then
point blank, what their values were. Franklin shared how, as young kids, she and Colt rode a
horse that would always buck them off. “But, no matter how many times we landed on the
ground,” she told them, “we always got back on. We decided to keep that lesson top of mind by
naming our fund after that horse, Buck Jack.” Later, the Shandys recounted that the story felt
indicative of true entrepreneurs.

Over the following months, Franklin and Colt flew to Colorado Springs repeatedly. They
focused on understanding the Shandys’ business instead of diving straight into spreadsheets and
discussions around price. And, at each visit with the Shandys, they received affirmation that
they were making progress building the relationship. Colt remembered:

After one of our meetings at a clinic, Amy commented on how, rather than
showing up in a suit and tie, we dressed like everyone at the clinic. We were also
investing more of our time into building personal relationships than we had in the
past. For example, a few times a week when we were in town, Laura and I would
wake up at 5 A.M. to join the Shandys at a spin class. And, after I learned that
Ty enjoys outdoor cycling, I started going on long rides with him—which were
not easy after eight years out of the saddle.

The relationship the searchers established with the Shandys differed significantly from that of
previous sellers. “Unlike our time in Chicago,” Franklin explained, “when we were in Colorado
Springs we spent as much time as we could with Ty and Amy—breakfast, lunch, and dinner.”
Then, once the searchers were back in Houston, they would concentrate on diligence and
analysis. Throughout the subsequent autumn months, Colt and Franklin became trusted friends
of the Shandys. Colt recalled, “By November, the Shandys felt comfortable asking us to house
sit and take care of their black lab, Barney… it was a relief to get out of our small rooms at the
Best Western!”

By the end of the year, the Shandys felt comfortable introducing Colt and Franklin to the staff
across all eleven clinics, and share the news of the pending close. A few days after the Shandy
Clinic holiday party, Amy Shandy insisted that she drive Franklin to the Denver airport, over a
three-hour round-trip. Franklin recalled:

I thought of how we had put so much effort in previous deals into collective data
and pouring over spreadsheets. But, standing there at the airport curb as Amy
drove away, I realized that buying a founding team’s company is more about
earning their trust—that you will care for their employees and protect their
legacy—than anything else.
Buck Jack Capital E-735 p. 6

Completing the Final Deliverable

The final closing deliverable was to get eleven landlords to sign lease assignments. When the
Shandys opened their first few locations, their landlords asked for personal guarantees because
they were, at the time, a small business. But, understandably, the Shandys were not going to sell
the company and still guarantee any of the new owner’s lease obligations. Colt and Franklin
assumed that since, in the intervening decade, the Shandy Clinic had established itself in the
community, there would not be an issue removing those personal guarantees. But the pair soon
ran into trouble. Franklin recalled:

William and I were walking through our lease assignment with the first landlord,
but when he got to the paragraph about removing the personal guarantee, he
asked, “Are you out of your mind?” We learned that landlords were not willing to
forgo those sizable protections for nothing in return. Despite all our bravado
about the search fund model and our investor group, Buck Jack had zero track
record and was an empty LLC.

The cousins realized they were never going to meet the deadline they had given the Shandys.
While the leases were eventually negotiated, making such a large miscalculation with the
landlords had eroded their credibility with the Shandys. Ty Shandy made this clear when he told
them, “In the time you two have been working on this sale, the Clinic has doubled the amount of
ABA therapy we provide. This is beginning to not feel equitable. Any more delays and we will
need to re-visit the terms of our deal.”

INVESTORS FRET ABOUT A LOOMING UNKNOWN

On February 24, 2020, growing fear around the spreading novel coronavirus caused the S&P 500
to slide over 3 percent, its worst day in two years. The virus, known as COVID-19, was
spreading across regions of China, South Korea, and Italy, and threatening to disrupt global
supply chains. While there was an increasing number of deaths in hot spots abroad, there had
not yet been a death in the United States. A few cities in California had declared a state of
emergency, but many other city officials across the country thought this was over-reacting.

Despite the increased threat of the pandemic, Ty Shandy reassured Colt and Franklin that the
clinic could rely on the same teletherapy technology used during snow days to operate through a
local lockdown. In addition, the clinic was outperforming Colt’s original model, with EBITDA
growing from an original run-rate of $2.1 million to $2.4 million. Franklin noted to Colt that
“The risk of a few weeks or months of disruption in the business was much lower than the
possibility of needing to pay $1.5 million more to keep the multiple even—or losing the deal
altogether.”

The searchers proceeded as if they were going to close on schedule, before receiving the
following email from one of their investors:
Buck Jack Capital E-735 p. 7

From: Scott Baker

Date: Thursday, February 27, 2020
Subject: COVID
To: Laura Franklin, William Colt

Laura and Will,

I’m not sure if COVID-19 is going away. You might want to think
about adding a provision to your seller note that allows you to
not make payments if there are any closings like we’re seeing in
California.

Happy to chat more if you have questions.

Scott Baker

The searchers agreed it was a good idea and, at the time, the idea that Colorado would lock down
for any extended period seemed unlikely. The Shandys agreed with the request, in part because
they agreed the risk seemed low. Nonetheless, on the call, Amy Shandy took the occasion to
remind them, “Since we opened the new clinic this month, that strategic acquirer started calling
us again but we’re honoring our handshake. The closing date is ten days from now. You can’t
leave us high and dry again—promise you’ll close?”

It was only one week until the scheduled closing date. To celebrate, the Shandys received
approval from the manager of the Best Western to decorate a corner of their lobby for the
signing. Franklin recalled:

Amy told me that she would supply the champagne while the hotel would supply
the chocolate chip cookies. Our Buck Jack bank account had the money needed
and our investors had not stipulated anything that would prevent us from closing.
Everything was in place for the purchase—and the Shandys knew it.

The following week, Franklin returned to the apartment from working at the local coffee shop.
“I got a call earlier today from Mitch Cohen,” she told Colt. “He was just getting out of a UVA
board meeting and told me, ‘People much smarter than me think we’re going to be living on
another planet soon. He said we should delay, and that, ‘Never have I ever, ever, ever in my life
seen anything like this.’”

The cousins sat beside each other weighing the situation. Baker had implied that with a
provision in the seller note, he seemed fine with closing. Furthermore, the other 22 investors,
who had all wired their money, were not calling or emailing to ask for a delay or change of
terms. Only Cohen was interested in a delay and, while very experienced, was a small investor.
(see Exhibit 3). There was another issue to consider: Whether disrupting the deal was wise for
the other investors. The company was clobbering their numbers and the documents were all but
complete.
Buck Jack Capital E-735 p. 8

After a few minutes, Colt offered his thoughts. “Maybe we should reach out to Rachel, Scott,
and Walter.” The three investors had agreed to be on the search funders’ eventual board of
directors, but they were not empowered to make decisions until after the closing when the new
company was formed. Besides, Franklin pointed out, Walter Manton had invested much less
than the two largest institutional investors had, neither of which were directly represented.

Making this decision dispassionately would be difficult. Exhausted from two-and-a-half years of
searching—and facing the prospect of running out of money—Franklin concluded, “If we failed
to acquire the Shandy Clinic, our search would be over. Do we close on Monday or not?”
Buck Jack Capital E-735 p. 9

Exhibit 1
Initial Outreach Email Example

From: Laura Franklin

Date: Tuesday, May 15, 2018
Subject: Would love to grab coffee in Baltimore!
To: Jessica Ng

Dear Jessica,

First of all, I hope you’re having a wonderful Tuesday! I’m writing because I’m amazed by
Envisage Systems. From what I can tell, you’ve built an incredible company! Long story short,
my business partner, William, and I are trying to find on great company to purchase and then
operate ourselves – which is how we found you.

I’d really love to talk to you or even meet you in Baltimore, if you’re open to it. Just let me
know. Also, there’s more information about us on our website (below) if you’re interested!

Really looking forward to hopefully hearing back,

Laura Franklin
Buck Jack Capital | 713-555-5555
www.buckjackcapital.com

Source: Buck Jack Capital.

Buck Jack Capital E-735 p. 10

Exhibit 2
Initial Outreach Email Example

From: Laura Franklin

Date: Monday, July 22, 2019
Subject: Former fourth grade teacher would love to talk with you and Amy
To: Amy Shandy, Ty Shandy

Dear Ty and Amy,

My name is Laura Franklin and I am a former fourth grade teacher who witnessed firsthand the
impact that access to high quality pediatric therapy services can have on the entire trajectory of a
child’s life. Increasing access to high quality therapeutic services and educational opportunities
has guided most of my adult decisions: after joining Teach For America after college, I studied
education at Harvard’s Kennedy School. Concurrent with my studies at the Kennedy School, I
pursued my MBA at Stanford. I say this not to rattle off accolades, but rather to convey my
commitment to continuing my own education with regard to enhancing and expanding access to
high quality services, supports, and education so that every child will have the opportunity to
reach his or her potential.

After graduating from business school, I raised what’s called a “search fund.” The search fund is
a business model that came out of Stanford in the ‘80s as a way for professors and investors to
back students financially and emotionally as they search for, invest in, and help operate and grow
one great company.

The model is different from traditional private equity or strategic investors because, instead of
building a portfolio, I’m looking for the one right match. And, even more importantly, the right
match is an owner who cares deeply about preserving the legacy and the culture that they’ve
built. Investors and “searchers” like myself think of the model as a succession plan rather than
simply an investment because of our commitment to help operate and grow the business going
forward.

My goal throughout the “search” has been to find one mission-driven company to not only help
grow but also to help deliver on the vision and mission that already exists. With the strong
support of my investors, I have looked almost exclusively at healthcare and education, and am
just amazed by the company you have built.
Buck Jack Capital E-735 p. 11

Exhibit 2 (continued)
Initial Outreach Email Example

From everything I can tell, The Shandy Clinic has impacted thousands of children’s and
families’ lives. I also thoroughly enjoyed reading the parent testimonials on your website, and it
is clear that parents are extremely grateful for the work that the Shandy Clinic is doing for their
children. It must be hugely fulfilling to see the difference you are making in the lives of every
child you help! If you’re open to it, I would love to have the opportunity to learn more about
both you and your work.

Please let me know if you’re open to potentially meeting in person or scheduling a call – I would
absolutely love to do either.

Thank you so much,

Laura
Buck Jack Capital | 713-555-5555
www.buckjackcapital.com

Source: Buck Jack Capital.

Buck Jack Capital E-735 p. 12

Exhibit 3
Portion of Capitalization Table

Capital Contribution Units

Name of Member
Initial Stepped Up Commitment Total Preferred Common
Nonquitt Partners II LP $76,000 $114,000 $114,000 114,000
Nonquitt Partners III LP $1,023,600 $1,023,600 1,023,600
Everest Partners Three LP $76,000 $114,000 $114,000 114,000
Everest Partners Four LP $1,023,600 $1,023,600 1,023,600
Heather Stone Partners $57,000 $85,500 $667,700 $753,200 753,200
John Ward $100,000 $100,000 100,000
Chaparral Search Partners $57,000 $85,500 $767,700 $853,200 853,200
TTCER Partners $57,000 $85,500 $1,000,000 $1,085,500 1,085,500
Westwind Partners $28,500 $42,750 $157,250 $200,000 200,000
Donelson Capital $28,500 $42,750 $157,250 $200,000 200,000
Mateo Garcia $38,000 $57,000 $57,000 57,000
Garcia Investments $511,800 $511,800 511,800
Murray Ventures $19,000 $28,500 $255,900 $284,400 284,400
Richard Carter $19,000 $28,500 $28,500 28,500
Shawn Singhi $19,000 $28,500 $255,900 $284,400 284,400
Search Fund Partners 6 LP $19,000 $28,500 $28,500 28,500
Search Fund Partners 7 LP $255,900 $255,900 255,900
Futaleufu Partners III $38,000 $57,000 $1,000,000 $1,057,000 1,057,000
Susan Torres $19,000 $28,500 $97,925 $126,425 126,425
Lowell Capital Group $19,000 $28,500 $255,900 $284,400 284,400
Rachel Campbell $9,500 $14,250 $127,950 $142,200 142,200
Erika Scott $9,500 $14,250 $127,950 $142,200 142,200
ETA Investments $9,500 $14,250 $14,250 14,250
Aire Search Partners $122,325 $122,325 122,325
Daniel King $9,500 $14,250 $50,000 $64,250 64,250
Walter Manton $200,000 $200,000 200,000
Mitch Cohen $200,000 $200,000 200,000
William Colt $61 $91 $91 91 2,207,319
Laura Franklin 2,207,319
Amy Shandy $1,030,082 1,030,082
Total: $608,061 $912,091 $8,358,650 $10,300,823 10,300,823 4,414,638

Source: Adapted by case writers from Buck Jack Capital data.