INC.: When you say "huge unrealized potential," do you mean you saw an opportunity to do it on a national basis?
GOLISANO: No, I wasn't thinking about that at the time. I just wanted to have a successful business in Rochester, and that's pretty much what Paychex was in 1974. Then these two people came in. One was a salesman I'd recruited in my previous job. He walked into the office one day and said, "Tom, you seem to be making it with this thing. How can I get involved?" And I said, "Why don't we open a branch office in Syracuse? We'll both put in some money and be 50-50 owners.'
That seemed like a good idea, and we did it.
* * *
INC.: And the other guy?
GOLISANO: He was an employee of a client. In fact, he was the one who'd decided to take the Paychex service. He came in and said, "This service is great. There's got to be a need for it, and I want to move to Miami and start one there. But I don't want to be your partner. Sell me a franchise." So we worked out a very loose franchise agreement, and I went down to Miami and helped him get set up. From him, I got a royalty and an up-front fee.
* * *
INC.: So you had one joint venture and one franchise. Then what?
GOLISANO: I said, "I think we've got something here," and I began to go out and recruit people. Over the next three years, I set up a total of 17 relationships -- 11 joint ventures and 6 franchises. All but one of the people came from Rochester, and they went to different parts of the country. I generally guaranteed them a two-, three-, or four-city territory.
* * *
INC.: Who were these people?
GOLISANO: People I'd known in various ways. Friends of the family. Guys I'd played softball with. Vendors that came in the door. High-school friends. One guy whose prior job was doorman at the Boca Raton Hotel & Club, in Florida. I met him playing slow-pitch. My first wife also got a franchise, as part of our separation agreement.
* * *
INC.: You're kidding.
GOLISANO: No, she decided that was what she wanted. And she'd never worked before, but she's a very talented person, with very good sales skills. So I set her up in business in New York City. She retired from the company in the early 1980s and today is one of our largest stockholders.
It's a situation that's worked out tremendously well for both of us -- because I had no long-term commitment and did not feel "taken," and she became financially independent. And no better relationship could ever come out of a divorce than that.
* * *
INC.: Did all these people succeed with their branches?
GOLISANO: Yes, but I have to tell you, they starved their first two or three years. I can't think of one who didn't.
INC.: Why?
GOLISANO: It just takes time to develop a client base.
* * *
INC.: Did you starve, too, during your first two or three years?
GOLISANO: Did I starve? Listen, I started this company with about two months' worth of money for a two-year project -- which is about how long I figured it would have to take for us to get to break-even.
* * *
INC.: What did you do when you ran out of money?
GOLISANO: Every game in the book. I covered my payroll with MasterCard and Visa, and floated them back and forth. I borrowed money from banks on an installment contract -- you know, like you buy a car. I borrowed money from my family. Just crazy things. Once I took my employees out to dinner at a local restaurant, and when I went to pay with my American Express card -- it had been canceled.
* * *
INC.: What happened?
GOLISANO: I had to ask the restaurateur if I could send him a check. He was one of our clients. I tell you, the look on his face . . .
* * *
INC.: In the end, how long did it take you to get to break-even?
GOLISANO: About four years.
* * *
INC.: Did you ever have doubts about making it?
GOLISANO: Only during the first six months or so. That was the scary time, because I was used to dealing with much larger clients, and I didn't know how small companies would react to this idea of buying a payroll service. Nobody had ever sold to that market before. I knew it was going to be an education job, but I didn't know how big a job. I had the idea of getting referrals from CPAs, but I didn't know for sure how they would react, either.
* * *
INC.: So what did you find out in the first six months?
GOLISANO: I found out it was very slow -- a lot slower than I expected.
* * *
INC.: But you could see it was going to work.
GOLISANO: Right. You see, one thing about Paychex is that, historically, it has been very predictable. Our overhead is predictable, and so is our revenue as long as we keep selling. That's because 75% of our business comes from referrals -- CPA referrals and client referrals. Even today. The older an office is, the more new clients it adds per year because of this referral thing. And the rate of growth increases almost geometrically over time. We can predict all that. Once a branch office reaches 100 clients, we can pinpoint within three months when it's going to break even.
INC.: But you couldn't do that back in 1971, could you?
GOLISANO: No, but I could see what was happening, and we got better as time went along. The overhead was always predictable, and the revenue per client was very predictable, because we deal with a lot of small clients. At the end of three or four years, the selling process was becoming more predictable as well. We were also beginning to learn about things like client retention, although that was not really an issue yet. So I could sit down with the people setting up the branch offices and draw a graph. I could say, "Look, if you sell one and a half clients per week, this is going to be your revenue at the end of 52 weeks, 104 weeks, and so on, and this what your overhead should be.'
INC.: Did that help them get established more quickly?
GOLISANO: Sure, it helped. And in addition, we started the branches with a lot more money, so they didn't have anywhere near the pressure that I'd had. By then, we were starting to make money in the Rochester operation, which was set up as a subchapter-S corporation. The joint ventures were also sub-S corporations. So their losses offset the gains in Rochester, and later their gains helped offset losses in those that weren't making money. That sub-S feature was very valuable in funding the growth of Paychex.
