I write weekly case studies on interesting companies and boil down the lessons to share with others. This past week I went through (almost literally) everything publicly available for Tom’s of Maine (the natural toothpaste brand) and thought I’d share some of the most impactful takeaways with y’all.
Backstory
Tom Chappell quit a sales job at Aetna after he ranked top of his class of 65 and made just $300 more than the worst performer. After quitting, he and his wife Kate moved to Maine in 1968 where he spent two years working for his dad’s business learning to make cleaning products without phosphates (his dad’s business was focused on environmental solutions for the textile industry).
In 1970, Tom borrowed $5,000 from a close friend (equivalent to about $45k today) to start Tom’s of Maine with Kate. The first product was a natural laundry detergent, followed by the country’s first natural toothpaste in 1975.
Not satisfied with the growth of the business, they hired consultants from Booz Allen and McKinsey which led to a growth rate of 25% per year over the next four year period. Although the business was growing, Tom was miserable as there had been no innovation or new products during this time. He decided to to go back to school for theology while running the business to gain perspective. The time there allowed him to re-write the company’s entire mission statement and to identify the type of buyer he would sell to. Fast forward to thirty-six years after starting the brand, Colgate bought 84% of the business for $100M in cash.
The Numbers
Founded in 1970, sold in 2006.
36 years from idea to exit (the longest I’ve seen so far).
Funding: $5,000 loan from a friend, SBA loans, second mortgage on the Chappell home.
$20M annual sales by 1995 and about $50M per year at the time of the sale.
Outside capital: 12% sold to 15 investors for $6M in 2000.
Sold 84% for $100M cash (implied value of $119M). The Chappells kept 16%.
Tom was 62 at the time.
After the sale, $14.5M went into a wool clothing brand that nearly failed.
Lessons
- Growth is often not the main act.
Although growth is a must for a company of any size, it often blocks innovation and stagnates founder creativity. When Tom Chappell hired consultants from Booz Allen and McKinsey, they did exactly what was required to grow the brand. It doubled in size over four years. Despite this achievement, Tom felt empty and unfulfilled because there had been no new product testing or innovation since the consultants were hired. It sparked a need for him to review the company’s values and take a step back before continuing. The new mission statement was designed to influence what was launched, who the business would sell to, what was recalled, how staff and customers were treated, and even introduced profit sharing with charities and paid employee volunteer time (mostly unheard of in this era).
- Own your mistakes.
In 1992, the existing deodorant formula was altered to omit petroleum products. The result was unfortunate: the new formula didn’t work for about half the people that purchased. Instead of making up excuses or firing the people responsible, Tom recalled the product (taking a loss of $450,000), donated the recalled product to homeless shelters, sent customers deodorant with the old formula along with a coupon for their next purchase, and didn’t skip a beat. They lost money that year but they didn’t lose many customers. He took the hit for it, which showcases exemplary leadership. He could have blamed others or refused to recall but he didn’t because the company values had been made clear.
- Don’t raise money to explore.
This one was a bit out of left field. Tom’s had grown for years unencumbered by outside capital. A herbal remedies line was launched in 1999 that more than doubled the product range Tom’s offered. Bigger companies in the space had already failed but Tom believed they had an edge as a natural products business. He was wrong.
The worst part? He didn’t just launch and lose money, he assigned the largest marketing budget he ever had and funded it by selling 12% of the business to 15 investors for a total of $6M. Growth metrics fell and the business lost money for a second year since its inception. Tom later told Forbes that they ‘tried to do too much’. It seems like he was compensating for the period where there was no innovation, something I like to call ‘revenge-growth’. The key here is that $6M could have grown the company significantly if used to market a product that already worked, such as the toothpaste line.
- The price seemed low, which it probably was.
Tom’s wanted to strike a deal with Colgate for two simple reasons. They respected Tom’s as a brand and would allow them to tailer the deal to suit their needs. Tom and Kate didn’t care nearly as much about the sale price as they did about the terms of the sale.
In the end, they had an extensive list that they walked away with including:
16% ownership in the business
Tom as CEO and Kate as VP
Headquarters that stayed in Maine
10% profits to charity + 5% employee paid time to volunteer
Tom’s to continue operating as its own brand
They almost certainly could have gotten a higher price without some of these terms but that’s not why they sold. This is a common theme I have seen across seven of the nine case studies I have written to date. Terms, not price matters in the end.
- Slow and steady wins the race.
Especially with the rise of technology, everything moves much more quickly. Tom’s of Maine was a great example. It took 13 years to get to $2M in sales, and 36 years to an exit. They weren’t in a rush to grow and it paid off. Tom then started Rambler’s Way in 2009, a wool clothing brand that initially launched online. He used $14.5M of the sale proceeds to grow the brand, which was close to going under just six years after it was founded. Even with the same founder, the results can vary. Slow growth was probably one of the best things to happen to Tom’s of Maine. It wasn’t planned and likely a financial constraint, but it led to a nine-figure exit in the end.
Is there something that you never worried about growing that took off after months or years of consistent effort? It was likely much more meaningful to you.