Sramana Mitra: What was your revenue in 2016 when you decided to switch gears?
Kristi Herold: We were doing $6.5 million in revenue.
Sramana Mitra: That is substantial for a word-of-mouth business.
Kristi Herold: We cared a lot about our customers and delivered good service. It was a great lifestyle business, but it wasn’t impacting millions of lives. It was in 2016 that I decided that I wanted to get a million people playing. That is the legacy that I wanted to leave. I wanted to grow the business to get a million people playing. The only way to do that was through acquisitions.
Sramana Mitra: Can you discuss the model of your acquisition? What was the financial engineering that you were doing with the acquisitions that you did?
Kristi Herold: Some of them were buying clubs in our city and other cities. The majority of them were 100% purchases. One was a majority share purchase because it was in a new area and I wanted to have relationships on the ground. I wanted to work with a good partner who would also benefit from our growth by partnering with us. Most of them were much smaller organizations than our own. That would be the goal forward – to get acquisitions but in a partnership form.
By majority stake, we can use our head office services and get some synergy through shared services but still have a partner on the ground in multiple areas who are driving growth. Our partners will benefit from the model as well. I believe that the only good deal that happens is a win-win. Nothing good ever happens when you are in a win-lose scenario. I am a big believer in strong relationships and win-win opportunities in the form of partnership.
Sramana Mitra: I am trying to understand the financial engineering of the acquisition. Are you paying cash to acquire these smaller clubs or are you paying a cash equity split? What is the structure of the acquisition?
Kristi Herold: We pay cash.
Sramana Mitra: You pay cash and become 100% owner of these clubs, but you keep the on-the-ground staff on so that they could continue with their avocation.
Kristi Herold: The truth is every acquisition is different. Having said that, the majority of the deals that we have done have been 100% acquisitions and where it makes sense to do so, we would keep the staff on the ground if they are a good fit for our organization. More often than not, this is the case. One of our deals was a majority share purchase but the owner stayed on as a partner in their business. It depends on what the owner is looking for.