By Jacquelyn Kung
At NIC this fall, I had the chance to catch up with some friends (and not in 15-minute speed dates that comprise much of my time at conferences). We went beyond the obvious reasons why our industry isn’t getting better, like rigid and unimaginative capital structures. One friend pointed out a little-known ugly secret to many operator agreements:
They lock the operator founder(s) in, so, without consent of ALL the owners, the operator is not able to change or transfer ownership of their operating company.
It sounds innocuous, right?
But let’s break it down – as the implications are huge.
How do you as an operator grow significantly or invest in new ideas?
You can’t – because equity financing brings new ownership. New ownership means you’d have to spend years meeting with and gathering the yes votes of all the owners who are scattered everywhere. And debt lenders don’t lend much to operators because the assets are low.
How do you sell as an operator?
You can’t – easily. So that means the smartest, capitalized entrepreneurs who have exits in mind don’t start operating businesses.
How does someone with operating experience buy an existing company and grow it?
Again, you can’t. So operating companies need to be started from scratch, which is risky and takes a long time (so it doesn’t attract capital or the best and brightest talent).
The one big exception is when private equity swoops in and buys, often an owner-operator combination for a platform play. But that is not innovation from within.
And so, operators are beholden to the capital owners, who squeeze their organizations for higher profits, because it exponentially increases the value of the real estate.
So, how do we change as an industry? I have a few ideas for a future blog (tired and sad writing all this now.)
Please leave your ideas below!