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Finding Founders: The Pain of Thrones

Mark Romeo | October 10, 2017

At Axial, we do something different every once in a while. Today, Mark Romeo, a Professional Services Consultant at Axial, shares with us an “intimate” conversation he had with Keith Kostek, founder of Impact Radio Accessories, on Kostek’s struggles on kickstarting the business and the battles he fought along the way.

WINTER THAT CAME: False Starts and Stops

Most people starting a business from their basement in Toronto have zero assurance that they will ultimately end up partnering with a private equity firm. The thought was especially distant for Keith Kostek when he started a distribution company that had only one client: an electronics manufacturer that produces subpar goods. Despite getting his brand into hundreds of retailers, Keith grew frustrated, or even ashamed, at pushing inferior products while bearing the brunt of customer complaints.

As both businesses inevitably suffered over several years, Keith’s protestations turned to pleas—imploring the manufacturer to improve their product quality. With two kids in diapers, and a beaten-down home undergoing much needed renovations, Keith was really feeling the pressure deep in his chest.

It soon hit his heart.

Keith Kostek, Founder of Impact Radio Accessories

Three EKG’s later (in as many months) meant something had to change. Keith could either sit still and starve or regroup and create a brand of his own: this time a product of pride.

Having recovered from the prior health condition, he drew a business loan for $100k and flew to China to meet with several factories. The goal was to produce samples of two-way radio accessories (same as he previously represented) ahead of an upcoming electronics trade show in Las Vegas. It was a deadline he couldn’t afford to miss.

The bet paid off in several new contracts including dealers Keith had previously worked with as a distributor. He later spent months—then years—training factory workers to produce the type of quality electronics he could be proud of. No longer fearing failure, Keith obsessed over filling the incoming orders from local vendors—never again allowing himself to be held hostage by a single client.

So in 2006, when New York City museums started stocking his headphones, he became overjoyed: not by some baseless surprise, but by the beautiful justice of his hard work and high standards that finally paid off.

SAVING FOR A STORM: Chips on the Table

Impact Radio Accessories was thus established, officially, in 2006. From the outset, it embraced a positive company culture—the family feel of the office bringing an explosive energy to their purpose. They were in it together. Growing from a staff of four to 30, the company generated $12m in revenue by their tenth year, with over 1000 retailers in six countries.

In those days, similar companies generally built themselves up to be bought by the likes of a Motorola or GE. Keith was tempted, but he caught wind of a small local manufacturer on the verge of bankruptcy that ultimately became Impact’s first acquisition. There came the most pivotal part of the entire ordeal – Keith’s meeting with the attorney, a man who eventually became his most trusted advisor and who helped close the deal.

One day over lunch, the two mused about the future. Loosened by beers, Keith confessed that he had been thinking of taking some chips off the table- that he would sleep far better knowing his children’s education and well-being could stand far above any rainy day ruins. At the age of 51, Keith had no intention of leaving the game. Too much energy; too many things to still push through, ensuring Impact’s always surpassed its previous year. He’d look back only to marry mistakes—never letting new knowledge leave his side.

Weeks later, the M&A attorney introduced Keith to a private equity firm and it was a day full of handshakes and suits. Keith presented his vision to a group of highly intelligent PE people who had answers and checks. But something didn’t feel right for him: all their proposals were premised on a five-year horizon, yet he still saw the long game.

A culture clash was evident, with Keith remembering how the burden of certain dollars can outweigh their worth. He began giving up the notion of “outside money”. He’d find a way on his own, as always. But months went by, and his ideas became stuck, like big bullets awaiting dry powder.

WITHOUT BENDING THE KNEE: A True Partnership Awaits

The attorney eventually got Keith another meeting, knowing now what the entrepreneur truly wanted. And once Keith sat down with the team from Founders Advantage Capital, a private equity firm based in Calgary, AB, he knew immediately that he had found true partners.

Congenial and organized, Founders explained their business model —developed by entrepreneurs for entrepreneurs—which enables business owners to keep their skin in the game, even after selling half of their hide.  

The Founders model saves a PE firm money on its initial buyout payment, while offering its acquired partner a generous back-end bonus package—tied entirely to performance. The calculated move rests heavily on human nature, given the economic incentive for business owners to aggressively surpass their past performance.

Harpreet Padda, Senior Vice President and Co-Head of Investments at Founders Advantage Capital

“If we make a 50% investment in your business, we may provide you 75% of all go-forward growth, contractually,” said Harpreet Padda, Senior Vice President & Co-Head of Investments at Founders Advantage Capital. “This disproportionate share of growth is also realized at the point of an ultimate sale. Even though you sold 50% of your business, you may receive up to 75% of net proceeds from a sale.”

Rather than a simple acquisition, Founders offered Keith a strategic alliance. Every meeting was like sitting around with old friends, overflowing with great ideas. They understood Keith’s goals, and the corporate culture he would work so hard to build. It wasn’t about how best to cut off the flowers in five years, but rather about planting several new seeds for an even greater garden.

“Rather than simply take off the top, we strengthen the bottom—providing just the springboard owners need to take their business to the next level,” Padda added. “We have a lot of respect for talent and believe that talent is the key ingredient for a successful business.”

Founders would ultimately provide the capital he needed to catapult the company, with Keith’s future payout tied to the new partnerships’ success. But no one from Founders misled him: It would take hard work.

Keith followed his gut, and the next day he decided to sign. Like many small firms, Keith found the due diligence process painful, but welcomed the efficient way it was performed. LOI to closing was just under three months.

Far from using the new safety net as a hammock, Impact Radio Accessories sprang forward from the propulsive mesh of Founders professional network with Keith fully focused on new and better products—organically building greater market share through their consistent reputation for quality and customer service.

The seat that Founders required gave Impact’s board a boon. A whole new realm of possibilities opened, not least of which was the excellent manufacturing contacts they attained through Founders extensive network, and the third-party vendor relationships those manufacturers brought with them.

“It’s funny though,” Keith chuckles. “We work even harder than before, because we respect these [Founders] guys, and don’t want to let them down,” he paused. “It’s like they have raised the goal posts, yet somehow pulled them closer.”

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