Drew Goodmanson https://www.goodmanson.com Maximize your Company Valuation prior to an Exit Tue, 31 Mar 2020 20:24:51 +0000 en-US hourly 1 https://wordpress.org/?v=5.3.6 https://www.goodmanson.com/wp-content/uploads/2018/11/cropped-GoodmansonFavicon-150x150.png Drew Goodmanson https://www.goodmanson.com 32 32 Preparation begins now to separate the winners from losers Post-Covid https://www.goodmanson.com/insights/preparation-begins-now-to-separate-the-winners-from-losers-post-covid/?utm_source=rss&utm_medium=rss&utm_campaign=preparation-begins-now-to-separate-the-winners-from-losers-post-covid Mon, 30 Mar 2020 23:15:08 +0000 https://www.goodmanson.com/?p=22407 Even if you survive this downturn, companies who do not become aggressive, adaptive and opportunistic may never recover. This is the lesson I learned in the 2008 downturn. After the dust settles, there will be a couple winners, but a lot more losers.

Yes, I know there will be differences from Covid-19, but in the 2008 downturn, our company emerged to became one of the Fastest Growing Companies in our market and then on the Inc. 500/5000 list. Later, we became part of the leadership team that consolidated our market that sold for $1.5 Billion which had started with a company doing in the low millions of revenue, which went on to be the Large Cap Private Equity Deal of the Year.

On the flip side, we saw some of our competitors survive, but many never fully recovered to the companies they once were. It was as if a company played it ‘safe’ or to ‘not lose’ it greatly increased their odds of failure. It was the companies that became aggressive, made adaptations and became opportunistic that won.

So what did we do?

After our survival planning (which was intense scenario planning and making extremely tough decisions that needed to come first), we immediately began working on the new realities that we saw coming. Here are a couple of the moves we made:

1. Our Pricing Changed: Our company offered high-end custom web development work all the way down to a SAAS product. Prior to the crash we were 50/50 in revenue breakdown. After the crash, people who used to spend $20-50k were now only willing to spend $12k, people who spent 10-20k were looking to spend closer to $5k and those who were $5k now only wanted to spend less than $2k. We successfully mapped this plan out through a Customer Value Mapping process to identify how to better package our offering and laser focus on this value. We even identified adjacent value we were already creating and/or could add that was profitable that allowed us to Expand our Revenue.

2. Our Economic Model Change: Two things happened after the downturn, we accelerated our dependency away from project based revenue and we needed to become profitable on less revenue per client. In terms of predictability, scaling and value, rather than grow project-based revenue we shifted quickly and heavily invested in our SAAS offering. Within a couple years we moved from 50% to 70% SAAS, and we tech enabled our custom offering to a ‘tailored’ solution which became 15% of our revenue so we became even more profitable on these and less dependent on project work and it we were able to price based on value we created not the time we spent on it. Tech Enablement became the way forward in many of the areas we worked, from operations, customer service, sales to marketing automation and lead nurturing. Our economic model shifted and we became a much healthier business.

3. Our Marketing Changed: In a lean time, we could no longer make assumptions and spend money without a clear ROI, so we doubled-down on the connection with our customers. We began an ongoing Voice of Customer monthly meetings to hear from Sales, Marketing, Customer Service and all customer-facing employees what they were hearing. We began an annual Customer Development process of Discovery Calls to customers, prospects and our market. From these calls we did Market Surveys validating the assumptions and learnings from our phone calls to ensure what we built was rooted in the value the market wanted. We re-oriented our entire marketing plan to align to how our customers bought and adjusted our pricing based on the data from the surveys. This included segmenting our market based on size and other demographics and building out 3 Buying Personas (Economic, User and Technical Buyers) because the decision process was rarely one person. Looking at these new realities, we identified our Ideal Customer Profile, the segment of the market we knew we could win and laser focused on them, while being opportunistic if other segments bought from us. We were early adopters of Marketing Automation and built nurturing sequences which eventually got us to a place where most of our deals were Leads we qualified and nurtured for months prior to them closing. This, our CRM and implementing tracking on all our marketing channels allowed us to better understand where to invest our marketing spend to get a ROI. All this tracking let us continue to adapt, refine and improve our performance.

4. Our Sales Changed: Most of our sales became SAAS-clients and we no longer needed professional sales people for these clients, so, we moved a Customer Service person into a role to help them buy, and this role became our number one salesperson. For larger deals, the User Buyer typically was tasked by the Economic Buyer to gather the information and make a recommendation on a solution. While the User Buyer presents themself as the decision maker, in the past we had a ‘verbal’ that we had won the deal, only to find out we didn’t close it. This could no longer happen, so we built the resources and plan to arm the User Buyer with tools to engage the Economic Buyer in the buying process. We built a consultative process for clients that began with a free analysis and then to a low cost process to help them map out the scope of their needs based on what the User and Economic Buyers would want. This process had a nearly 100% close rate if they did the scoping process. Again we became laser focused on where we could win (intentional), where in the past we were much more opportunistic, taking the deals that came to us.

5. Opportunistic M&A: After these improvements, we joined in a Private Equity-backed Market Consolidation where our company merged 10 others under us into a business unit and I became part of a leadership group that bought over 40 companies that sold for $1.5 Billion. This experience became the Large Cap Private Equity Deal of the Year.

After you do your survival planning, what type of company will you want to emerge from this crisis?

5 Strategies to Climb out Post-Covid

Like you these last couple weeks has been an absolute scramble to wrap my head around the new reality for many of our clients. While there are some that are being hit hard, others will be impacted but can use this time to prepare to come back even stronger.

For example, through the Customer Value Mapping we have identified for several clients value they give away that could be added as a revenue source. We are evaluating the slowdown to help a company transition from services for work performed revenue model to a tech-enabled retainer revenue model. We are conducting several Customer Development projects to expand revenue for companies based on adjacency value they could add to their current customers. Lastly, we are seeing some opportunistic M&A that could land a game-changing strategic acquisition for clients.

In light of these events, we are adapting our Valuation Playbook to help companies emerge even stronger

If you are a CEO and want to talk through any of these, happy to discuss how you could use any of these to come back stronger. We are passionate about helping businesses and know you are the visionaries and risk-takers who will help the entire economy recover after we get through this Covid storm.  Contact us if you’d like to learn more.

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Entrepreneurs Top Concerns about Selling a Business https://www.goodmanson.com/resources/entrepreneurs-top-concerns-about-selling-a-business/?utm_source=rss&utm_medium=rss&utm_campaign=entrepreneurs-top-concerns-about-selling-a-business https://www.goodmanson.com/resources/entrepreneurs-top-concerns-about-selling-a-business/#respond Wed, 19 Feb 2020 20:06:09 +0000 https://www.goodmanson.com/?p=22394

Most entrepreneurs care about the company they’ve built and this often impacts their decisions to sell. These concerns include their people, their legacy and what life will be like after they sell, whether they stay on or leave the business when they sell. We conducted the Entrepreneur Exit Report – Selling Your Company Survey and found that among the top concerns for their company post-sale, there were a few patterns. According to the entrepreneurs surveyed, their largest concerns (those that said their concern was Moderate to High) were the following:

Concerns on Selling a CompanyIf these concerns sound familiar, you aren’t alone. Understanding the root of these concerns, and how to design a deal that minimizes them, will assist with finding the right deal when selling your business. Grab a copy of the Exit Report and learn more about selling your company.

Worries about preserving culture

Company culture is the heart of your company, guiding every decision you make – from daily operations to which employees you hire. What’s more, it’s a large contributor to why your company fails or succeeds. As a result, it’s natural that preserving culture is a major concern when selling the business.

Many sellers are nagged by this worry, yet they don’t assess it seriously when selecting a deal. Divides in company culture can create misalignment and struggle in the future. It’s best to examine common values, behaviors and other relevant cultural information when considering potential deals. Further, take the time to build the case as to why a buyer would want to capitalize on your cultural competitive advantage is important. When you put these items into the equation, you can feel more confident about the culture being preserved after the sales transaction.

Struggles with executive team and focus

You worked hard to build your company, and in many cases you’re just as invested in securing the best deal as in ensuring that your company will thrive in the future. This often weighs heavily on the entrepreneur and the executive team as they consider life after selling.

For instance, what are the goals of the future buyer? Are they planning aggressive growth? If so, are your managers “plug and play” in this scenario? Or would the target growth rate push them past their capabilities, creating a rift in your company? The executive team might be fine meeting expectations, but if they aren’t, it’s critical to identify that early. You can even recruit key management players pre-sale who would meet the potential buyer’s goals to ensure that the executive team can meet the buyer’s focus. Creating alignment on the goals and expectations prior to the deal closing is essential for the leadership and often key to achieving deal terms like earn-outs or hold-backs for the seller.

Concerns regarding staffing issues and layoffs

Most entrepreneurs have carefully created a team that has helped their company become successful, and naturally, they’re protective of employees. They might feel bad about selling a company only to have their valued employees laid off in the future.

Understanding potential buyers’ strategies is critical to easing this worry. Companies typically lay off employees for a couple of major reasons. The first is to reduce staffing costs. They might plan to outsource tasks or reduce redundant tasks. Or a buyer might plan expansion of one department and reduction in another. As a result, personnel need to be laid off to accommodate the growing department. Timing and setting honest expectations when or if people will lose jobs is critical to the morale of employees. The buyer and seller should work together on this plan, sadly several sellers I’ve seen play ignorant and act shocked when layoffs occur post-sale.

Of course in some cases there might be new goals or business plans that require ramping-up to increase productivity. In these cases, the sale of the company will result in the opposite of layoffs: hiring. The key is to understand the future goals of the buyer and how these match with existing staff. (Suggested reading: What Entrepreneurs need to know about Selling to a Private Equity Firm)

Losing control of the company

Entrepreneurs know that selling a company involves giving up control, but it’s not that easy when the deal requires you to stay on board after the sale. For example, a high-dollar-value deal might require you to stay on for two to three years after the sale. It might be in a full-time, part-time or consultative role. First of all, decide beforehand if you’re open to this arrangement, because it can bring up the worries about loss of control. And if it’s workable, create some guidelines.

Maybe you’re open to staying on in a consultative role but not in the day-to-day operations. Perhaps you’re only willing to consult on key matters during the transaction period. Set those limits ahead of time so you’re not in the position of wanting to make decisions but feeling powerless to do so. This story should be clear and established from the onset to avoid missed expectations and ensuring a deal closes.

Moving ahead with greater peace of mind

Securing the highest sale price is a key goal in any business sale. But when you shed light on your biggest worries, you can uncover some of the hidden goals for a sale. For example, by outlining your non-negotiables in the deal (i.e., not being open to staying on after the sale due to a strong feeling of losing control) – you can move forward more effectively. You will have greater peace of mind knowing that worries won’t interfere with the sale and adversely affect the deal. Additionally, the result for management, employees and prospective buyers will also be more favorable.

Want to learn more? Check out our Exit Strategies and Research to learn about the right exit strategy for your business. Or grab the Valuation Playbook to maximize the value of your company prior to exit.

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Craig Misrach – Spinning Medical IP out of a University, Raising Money, Building a Business and Selling It https://www.goodmanson.com/exit-story/craig-misrach-spinning-ip-out-f-a-university-and-selling-it/?utm_source=rss&utm_medium=rss&utm_campaign=craig-misrach-spinning-ip-out-f-a-university-and-selling-it https://www.goodmanson.com/exit-story/craig-misrach-spinning-ip-out-f-a-university-and-selling-it/#respond Thu, 30 May 2019 23:14:28 +0000 http://www.goodmanson.com/?p=22146
Craig started a company by licensing medical IP (Intellectual Property) out of a University, raised money to fund it and ultimately sold it.

01

Dealing with Investors in your Exit

The impact of raising money without thinking about the exit standpoint including the need to manage up to the Board.

02

Licensing IP to Start a Company

Hear the process he went through to license IP from a University to build a successful company.

03

Transition from Founder to Board Role

His Employment Agreement that allowed him to maintain ownership and a board role upon leaving a day-to-day role.

Managing Director, Poppy Capital

Craig H. Misrach

Craig H. Misrach is an 18+ year business executive with C-level executive operating, finance, and accounting experience. Craig founded Poppy Capital as way to help both peer entrepreneurs and business owners complete a sale of their own business and also lead, operate, and grow another new business to success and growth.

From 2006-2016, was the Founding Chairman & CEO of Freedom Meditech, a multi-product diabetes medical device company. As CEO, Mr. Misrach secured $15M in private capital, obtained FDA clearance (the first in the world for a non-invasive diabetes detection instrument), established global manufacturing operations, launched product in the US and Europe, and generated over $45M in enterprise value during his 8+ year tenure as CEO. The company completed a cross-border M&A sale of assets to Sinocare, LTD(China) in November 2016.

Mr. Misrach is an active Certified Public Accountant (C.P.A.) in the State of California and serves on the Board of Directors of several private companies (DME Innovations, Aculief) and the Jewish Community Foundation of San Diego (non-profit/endowment). Mr. Misrach has a B.S. in Accounting and Finance from Indiana University and a MBA in General Management from The University of Virginia Darden School of Business.

Suggested Resources

What Entrepreneurs need to know about
Selling to a Private Equity FirmRead More
What Entrepreneurs need to know about
Using an Investment Banker or Business BrokerRead More

Full Transcript

Brandon: Welcome to Exits and Acquisitions podcast number eight. We have a friend of mine on today, Craig Misrach. And he’s an MBA, CPA, serial entrepreneur. And today, he’s gonna tell us the story of his last startup and exit. And we’re really excited to have you on today, Craig.

Craig: Thank you, Brandon. Glad to be here, and looking forward to a good chat.

Drew: Craig, this is Drew. I’d love to hear a little bit about how Freedom Meditech came about.

Craig: Sure. Just like everything, an epiphany in the shower, right? No, I mean, look, I wouldn’t call it traditional. I decided, you know, pretty early in my career, four years out of undergrad when I was moving up in the accounting and finance world that I wanted to start a business and I just knew myself well enough to know I needed to retool.

And I wanted to meet someone, a partner, that had complementary skill sets, and I decided going back to get my MBA would be the best way to do that. I think the odds from my colleagues at the University of Virginia, the Darden School, where I was getting my grad school degree was one, which was the number of interviews I would have for jobs there because they all knew I was determined to get something off the ground.

So, I took the approach of looking at the universe of problems that existed in the world and which one seemed to just trigger or elicit an emotion in me that wanted me to create something, or work with someone, or identify a technology that could help solve that problem, and looking in a variety of industries, could have been…it was real estate, manufacturing, and various others. I looked at the diabetes space and just at that time, which was 2006, the people with diabetes had to prick their finger multiple times a day to monitor their blood sugar levels, and I just shook my head after doing some research and looking at the landscape setting, “I cannot believe that it is still the status quo in 2006.” And you can in many ways say that even today in 2017.

So, it was really through matriculating at UVA and doing some research and surrounding myself with a lot of people that are much brighter, and more accomplished, and experienced than I, that I looked at this global problem and said, “We need to come up with something that’s better for the patient.” And it was really with that patient-focus, and understanding the nature of the problem, and learning lessons from how others had failed to come up with something better than pricking your finger did we set forth with the premise of Freedom Meditech.

Drew: And, you know, what resonated about this space, do you…I mean, is this something that you have, you know, connection to or was there a person that was passionate about it that you met at UVA, or how did that happen?

Craig: Yeah. I mean, it’s not one of those things. None of it’s in my family. My wife, her grandmother manages a disease and I’ve, you know, observed that over the years. But it more was, like I said, the patient, and, you know, you think about a lot of businesses or read about a lot of businesses that have an obsessive approach toward doing right by the customer, in this case, the patient.

And that was really the driving force. I’m a people person, born and raised in the Midwest, Cincinnati, Ohio. And I don’t know if it was how I was raised or how I’m wired, but that commitment toward coming up with an invention that could allow people to manage their diabetes in a manner that you could go as far as saying is more humane than pricking your finger or peeling back the onion, that’s not painful, that’s not inconvenient, that’s more accurate. You can go down the laundry list, but those became the driving factors from a, you know, in some ways a competitive standpoint and an achievement standpoint to try to strive for with the business.

Brandon: That’s such a huge space. What gave you the confidence to kind of enter that? I understand how you came up with it, but it’s such a big space and so many people. And it sounds like you have more like a finance background. Like, what made you think you could compete in that arena?

Craig: Well, as I say, ignorance is bliss. So, no… You know, when we’re talking about subsequently, you know, starting a second venture can many times be more challenging. It’s like, I have two reconstructive ACLs in each of my knees and doing the rehab for the second one was harder because you know what you were gonna have to go through from a rehab standpoint the second time.

Look, I didn’t know what I was getting into. I just knew that I was a determined individual, whether it’s academics or athletics, and then turning into business and what did I wanted to achieve from a career standpoint, so, determination, perseverance. I’m also aware, and I say this genuinely, I was hesitant to enter a field without a science background or engineering background where, quite honestly, there was no solutions to date, and I’m talking about having a non-invasive diabetes diagnostic device or a non-invasive diabetes glucose monitoring device that had ever been cleared by the FDA, zero.

And doing the research, finding all the venture capital money, Silicon Valley, Boston, down here in San Diego, we had estimated it to be about a billion dollars, with a B, over time that had been invested in various companies that all had failed in their mission to get FDA clearance. And who am I think that we can do that? And that just really turned into two key tenants of my philosophy which is, you know, always be learning…always be closing, but always be learning and in this case it was learning from the failures of others and what were the technical roadblocks that prevented those technologies from not being cleared by the FDA or not succeeding medically or in clinical trials. And then second, it was very logical to me is just surround myself as much as possible with people much smarter, much brighter, more experienced, and more technical than I.

Drew: Yeah. I think about, you know, some of the companies I’ve started, one in particular. Man, if I had known how much work was gonna go into it before I started it, there’s no way I would have started it. You know, like you said, ignorance can be absolute bliss. So, I mean, you’re jumping into something that, you know, you don’t know a ton about, you’re, you know, accounting and finance. So, what’s day one? You show up, and what does the beginning look like to you?

Craig: Yeah. So, look, I mean, like with a lot of entrepreneurs, I had somewhat of a false start. When I was in my MBA program, I learned about this problem and tried to get a venture off the ground with some technology that we had identified. I quickly learned from surrounding myself with those experts and soliciting their opinion, scientific, medical and otherwise that that venture, there were some scientific limitations, or it was a massive boulder to have to move up the hill to get to have it become medically accepted.

And it was through one of my mentors and actually a professor at the Darden School, who to this day I keep in touch with, and he had, ironically, had some experience in this field, at this intersection of ophthalmics and diabetes. And he was approached by a university who was out licensing some very, very, very young IP if you will. It was barely provisional patents had been filed, but I had learned enough in the year and a half about the space, the problem, the opportunity, as well as the human eye where this glucose information was being extracted that when this second technology was pushed across the desk to me, I knew a lot of those issues from the predecessor attempt were not present.

Just an example of that, when you’re looking in the human eye to extract sugar information, you have different chambers or compartments of the eye that you could be looking at to extract this information. And you have different technologies, you know, medical devices, or platforms that can be used to extract that data. And the water in your eye, as an example, for some technology platforms can be an inhibitor in generating accurate repeatable and precise measurements versus with the platform that was put on my desk to start Freedom Meditech, the water peak had an absolute or has an absolute zero, null effect on the technology platform.

So, a very iterative process of decision making that…you know, that is just one of the many examples, you know, as to how I got comfort with the technology platform and then ended up having to negotiate a license with a university that didn’t know who I was and didn’t want to be talking to me versus, you know, for example, the Pfizer, the Baxters and other multi-billion dollar pharmaceutical companies of the world.

Drew: So, how did you finance this? I mean was it student loans and credit cards? And, you know, how did you kind of get this stuff going?

Craig: Yeah. So, look, I mean, you had asked before what was the first step. I mean, I was getting a business plan together, when I was going to…I mean, it was a different time 10 years ago, getting a business plan together was more critical. Then to demonstrate it, you could look at all facets of the business, you had it documented, potential investors could review it. So, I did the whole business plan circuit in various programs at graduate schools.

And, you know, when I left Darden and moved back out here, I had the opportunity to in-license this. And actually, here in San Diego, I leveraged the services of CONNECT and their Springboard program, it’s a wonderful program where a lot of third-party professionals and experienced entrepreneurs are there to give back to first-time entrepreneurs and help them stage their business for financing. And I think the combination of both my concentration and entrepreneurship, and venture capital, as well as some finance previously in my career. Leaving school, the business plan I had in tow, the knowledge I had in the space, and willingness to be coachable which I think is crucial for an entrepreneur, all, you know, set the table for the ingredients, plus the team I was surrounding myself with where…moved back out here in the summer of 2006 after graduation, went back to my old employer to see if they had any contracting jobs so I could put some money on the table for my wife and I to live while I was trying to get it off the ground and negotiate the license, because no one was gonna finance the company unless I had rights to the technology, and then boom, boom, December 14, 2016, graduated the CONNECT Springboard program.

We signed the license with the university, and two week later raised half a million dollars. And I can’t emphasize enough to the listeners, it was a different period of time in 2006, prior to the financial crisis and being able to raise that early stage capital.

Drew: For sure. Brandon, didn’t you fund your company with a limo business?

Brandon: Yeah, absolutely.

Drew: By any means necessary, right?

Brandon: My business plan was just to figure out how to afford food and pay my rent.

Drew: Little side hustle. So, you also did some side hustle contract work, got things going, raised money, and, you know, I know you’ve been there over 10 years. Can you kind of give us a kind of condensed, you know, how did things take off and kind of when did you know, “Man, I’m really on to something.”

Craig: Yeah. So, you know, there’s definitely a few phases of it. And with any medical device, pharma, biotech business, you know, it really is crucial early in order to be financed to have intellectual property and a cogent sensible plan that ideally can be successful relative to generating efficacious clinical data.

So, it was kind of simple early as far as what the objectives were, it definitely was not simple to raise the capital. I guess one piece of advice is try not to start your business that’s pre-revenue and predicated on external capital during a financial crisis. So, I mean, look, I mean, no one could have foreseen the collapse of Bear Stearns and Lehman Brothers, but, you know, my first year I raised probably I think it was $500,000 and I mentioned after that initial seed capital, but once September, October hit, that 2007, I think I counted once, it was like five and a half months before I raised my next dollar.

And, so that early phase was excruciatingly tough. I even had a personal loan with a commercial bank that I was personally guaranteeing. I know entrepreneurs have stories of credit cards being financed, but have a personally guaranteed loan from a bank that is failing and on the verge of being ceased by the FDIC, it’s like brass knuckles, back alley type stuff. And I’m proud to say we repaid every dollar plus interest, but it didn’t change the fact that when we were going through that, it was a lot of stress on me and my family. But I was fortunate.

Actually, one of the early investors which was one of the few…most of the capital I raised in the business was off of angel investors, 17 million. And early on, a lot of angel money, it was crucial. But we did have an organization that invested that had a tranche security in, and had committed to a second six-figure tranche after we’d accomplished a milestone. But once the financial crisis happened, they said, “You know what, we know we’re contractually obligated to do that, but we’re not gonna provide that to you unless you’ve raised,” I think it was something like $300,000 within two weeks. And this is after not raising money for five and a half months.

So, I had 1 hour and 15 minutes left on that Friday before five o’clock, and I was still $125,000 short. And I somehow mustered it up and I walked into the firm with the checks literally, in order to get that second tranche. And that I think is the microcosm of an example of when I say perseverance, persistence, friends, and family, money, that first money is many times the hardest.

And when we go through that, it really started to feel like, you know, we can accomplish anything which, with what we are trying to accomplish, was a very important mentality to have that needed to bleed through the culture. So, I’d say that was the first phase.

The second phase is, okay, now you got some money, how are you gonna generate this clinical data and have validation that can in turn turn into an FDA regulatory strategy that can get to your state of grace which is clearance and revenue generation. So, again, a lot of the decision-making process that I…maybe it’s the CPA in me, I’m very detail-oriented, I don’t have problems acknowledging if I don’t understand something and asking questions to understand further. And in doing that, I challenge my engineers whether it was electrical engineers, mechanical engineers, optical engineers, software engineers, my VP of R&D, and I always use the need to have versus nice to have buckets when managing engineers because, God love them, they have some great ideas, but when capital is so precious early on, you do not have time to make mistakes that are nice to haves. And the need to haves in this type of space is on the straight…

Drew: You there?

Brandon: I’m hearing you. I think we’ve lost him. I don’t know, he’s still on. I just can’t hear him. Maybe it’s bad Wi-Fi. Craig, are you there?

Craig: You guys there?

Brandon: Yeah, are you there?

Drew: Yes.

Craig: Yeah.

Brandon: We lost you there.

Craig: So, I think where I was going was in the second phase, after I said the need to haves versus nice to haves with engineers was focus on the need to haves to get us efficacious clinical data because that is what is going to lead us to get the additional capital we need to further refine the product, add the nice to haves, in parallel, conduct our regulatory strategy and get to that primary goal at that middle stage of getting FDA clearance.

So, several cycles, two to three if not four of engineering clinical data collection, regulatory strategy and then segueing to manufacturing where that process of never fear asking a question and making informed decisions and making a decision…again, this is phase I didn’t have experience in and going with it, trusting your gut sometimes was really crucial.

And then, third phase, Drew…and it really comes back to people. Getting our product through FDA clearance with all the failures and all the smart money that had failed, I can never be thankful enough to our lead regulatory advisor in Orange County. She plucks individuals from the FDA and hires them, and has a way of communicating as a consultant that I have never observed before. I don’t know if you guys have hired consultants. You hired consultants for work product, for recommendations, for suggestions. The amount of time she said to me, “You know, I don’t know. But what do you think?”

When you’re talking to a regulatory advisor, some people would think that they would be intimidated by them. Like, I have no idea. But she put it on me, which is really where the decision lies. And I respect her so much for that, and she is highly sought after, I think because of her kind of open book policy, but ways that she challenges you as a chief executive and as a team to go about making decisions.

So, we got that FDA clearance. It was probably the day I’m most proud of in our business, to have accomplished something that so many people around the world have failed at doing. It’s a testament to our team. You know, I really consider myself merely just pushing buttons, making decisions, that others are doing the hard work and was fortunate to surround myself with.

But then it comes time to execution, and, you know, over that whole period of time, as I said, I raised $17 million, angel investors, not how I drew it up, but it was by necessity because the venture community had got it wrong so many times. We were not mature enough from a revenue generation standpoint to attract private equity. Crowdfunding did not exist at that time, nor do I even necessarily know if it’d be appropriate. And then it comes down to execution. In our country, the medical device space, life science space, it is just not trivial. You think you get FDA clearance, you’re done. Well, you need capital to build a sales force, whether independent reps, direct reps, distributors. Selling around the world, doing that efficiently, building a customer service department, having it streamlined to your contract manufacturer ensuring that everything is in compliance with the FDA, that you’re not saying anything inappropriately from a regulatory positioning, and generating revenue, building a marketing program, sales training.

You know, the list goes on and on. And in that second phase, you know, I stepped out nine months after our product launch as the CEO and transitioned to full-time board duties for the two years subsequent until our acquisition. And that was a new chapter in of itself is leaving your baby and being involved with it only in a board capacity versus an operating capacity, a lot of tough things that go along with that.

Brandon: Can you tell us about some of those?

Craig: So those are the phases.

Brandon: Can you dive into that a little bit?

Craig: Yes. So, look, you know, this was not one of these situations where, you know, you have a founding CEO riding off into the sunset in their golden parachute to the board. You know, I was fortunate, and this is one thing I’d recommend to any entrepreneur, you have corporate counsel, but you need, you know, a personal counsel as well, depending upon how your company is structured, in particular if it’s a C corp and you have board members and investors.

I was fortunate to get really good advice early on from an employment agreement standpoint. And as the company matured, we established a comp committee, you know, because I didn’t want any perceived notions by anyone that what I was getting paid was anything other than what had been approved by other people at the board level. And part and parcel to that is the what happens if things go wrong, or if you wanna move on. And, you know, that, in fact, did happen. There were some differences of opinion between myself and the board as to how we should market, sell, and commercialize the product. And you could have taken this in a variety of directions, creating a world war, if you will.

I had too much care of duty to the existing investors in the company. It had been eight and a half years. Our daughter, our first child had been born, and things change in life when that happens. And I said, “You know, I’ll transition to a board…you know, the full time board role,” thinking in the back of my mind that if things went wrong, there would be an opportunity for me to step back in because things had been in a complete upward trajectory for the eight and a half years that I led the business.

So, fortunately, our largest investor is one of the comp committee members, he saw to it that everything that was appropriately designated to me from a separation agreement standpoint was given to me, paid out to me over time. And I don’t even wanna say it softened the blow because the emotional part of it was like something you could never really imagine. And it really had more to do with the concern I had that the company was not gonna continue to succeed. If you look at the valuation numbers over my time, it was 62% compound annual growth rate when you look at the increase in valuation of the company from nothing when it started, and looking at the money that was raised over time, the valuation ascribed the business, and my biggest fears played true over time once I left the company. The only problem was when there should have been a re-entry of myself into the company which I was open to, we weren’t seeing eye to eye on how that was going to happen.

So, very tough, it was also tough for the employees. I had a mild exodus of…not mild, it was more than mild, a moderate exodus of employees, most all of which I had hired in the business, leaving the company when I transitioned out because we were very transparent as a start-up. When I left, we had probably, including sales force, you know, 80 employees and direct consultants that…well, I wasn’t directly tied to all of them, in some ways I had a touch point with, and a lot of the employees wanted to leave because they kind of knew how things had transpired in some ways at the board level, and they were not a believer in the new CEO of the company, you know, when I had transitioned out. So, that was…these were all very tough things to have to digest at that time.

Drew: By the way, you’re saying this all, you know, pretty calmly. I think I would be pissed if I started a company and, you know, that happened.

Craig: That is a light way of…I mean, look, you know, I’m in the entrepreneur’s organization, a global organization and having a peer to peer network to be able to talk about what you’re going through has been very helpful. It makes you feel like you’re not on an island and you’re not the only person that’s gone through this. It still sucks going through it, not to mention the monetary impact it can have. As I mentioned, I had some liquidity, but kept the vast majority of my equity in the business mostly because I’d had to. And to see that deteriorate in value, obviously along with other investors that you brought in and what you’ve built, and then to have other people, in many ways, be responsible…and look, I say this with, look, I was one of eight board members. I’m not absolving myself of responsibility. But the reality, anyone who knows the situation knows that when you’re a founding CEO and chairman for years and then you transition to full board role, you know, as one of eight in an externally financed company, your influence is literally one of eight.

And you see this even with public companies. You’re seeing a lot of it today with takeovers, with activist investors, and power, ego, greed, control are just ugly, ugly, ugly things that I never saw to the extent that it would affect my business. I experienced it, but it was in ways that, you know, if it’s a consultant I’d…you know, the engagement would end, or if it’s someone I was potentially doing businesses, I wouldn’t do business with them. We turned down nine figures of financing ones because of an egomaniacal type of figure that was leading the transaction. But when you’re in bed with those individuals and you’re trying to run the business and your influence is muted and you just have to stand by and watch it like you’re in a straitjacket, and the plane is crashing in the bottom of the mountain and you’re the pilot, but, you know, you’re not given the keys to the pilot’s seat. It’s excruciating. Without my wife, without my peer network, and honestly moving on to my next thing, it was very challenging, very tough, Drew.

Brandon: Not just the pilot, you own part of the plane.

Craig: Exactly.

Drew: Not just the pilot, you owned part of the plane You birthed the plane. I mean, you basically, you know, started this, you financed it, you, you know, put everything on the line and, you know, I mean, I know for me at that point I’d have a strong emotional connection. And really, founder CEOs, when they’re replaced, typically it does not go well because there’s just an intangible passion, vision,, ability to make things happen that didn’t exist before that.

Craig: Yeah. And what’s even more though is this wasn’t a situation where as a founding CEO where I wasn’t willing to take on another role in the business. I actually volunteered to do that. But again, it became an ego, control, a greed thing. “We can do it better, we can do it our way.” That’s what was frustrating because it didn’t make business sense. It just did not make business sense because you will have, whether it’s technical founders, maybe they can’t, you know, in some situations maybe they don’t have the skillsets around the business. I mean, I was a business guy, I went to business school. So, after we got FDA clearance, and we’re launching product, it’s like finally now is the time where I can actually deploy a lot of the things that…excuse me, are in my arsenal.

So, to not be a part of that fabric from an operating standpoint was very disheartening, and as I said was also disheartening employees in the cultural, the cultural standpoint. To see that evaporate in many ways, the business that was virtual for so long became brick and mortar with people coming in the office everyday and enjoying themselves to be there, and believe in what we were doing.. So, yes, so that was all challenging and then to, you know, the value of the company, and it’s public information, it’s been disclosed, and the business grew to $35 million valuation. Yes, it was on paper, but several investors validated that, and if you look at where we were going and what we were trying to accomplish in a completely unadultered space from a competitive standpoint, no other non-invasive diabetes diagnostic device is cleared by the FDA. And, you know, for lack of a better analogy, you know, you’re getting in the way of yourself is what I felt, you know, as far as, you know, our company. It didn’t make it easier to digest, so. Yeah.

Drew: We’ll send you a good article in the “Harvard Business Review,” which basically is a study on founder-led companies and why they outperform the market and businesses where the founder leaves, and they kind of talk about this idea of this business insurgency, this mentality of just being able to go in and like you, almost like the ignorance is bliss. You were trying to overturn, you know, a whole way of thinking in a market. But, that’s, you know, irreplaceable. I know Brandon wants to talk probably a little bit about like, you know, with your accident, and, you know, other accidents, you know, how did that all kind of transpire?

Brandon: Yeah. Absolutely. You know, when did they decide…you know, I mean the board decided to exit, like can you tell me a little about that process and what it looked like? You there? Hello? Drew?

Drew: Yes.

Brandon: Craig? Anybody?

Drew: Well, that’s a great question. I’m glad you ask.

Brandon: You there?

Craig: I’m back. I lost you guys. Yeah.

Brandon: Okay. All right.

Drew: Brandon cried for a little bit, just passion, so.

Brandon: Yeah.

Drew: You missed that.

Brandon: So, at what point did the board decide to sell, and how did that process go? Can you tell us a little bit about that?

Craig: Yes. So, let’s talk about the end. So, you know, after I transitioned out, as I mentioned, there was a new CEO, that experiment failed quickly. And the board brought on actually an admirable gentleman, huge experience, that I thought was gonna, you know, get us back on track, and the experience in M&A, personable, employees really enjoy him. And the job though, you know, there were two primary ways to go, get the sales execution figured out, which there was some experience there and his ability to do so, and the cards had been stacked a little bit with some personnel that he was expected to execute with, and if that didn’t work or as we were monitoring cash flow, raise additional capital, which in the CEO’s previous experience, there really wasn’t a lot of capital raising experience. I had a very strong network of individuals in the community and venture resources and otherwise.

Long story short, it really was within six months that it became apparent that the CEO himself was having challenges raising capital, as well as not improving the sales yield as much as we had needed to. And at that point in an entirely, for all intents and purposes, majority angel finance company, their investor fatigue began to settle in where we weren’t gonna be able to get the re-ops in investment internally or otherwise, so it was kind of by necessity, what are you going to do at that point? I mean, you do have a fiduciary duty as a board to maximize value for the shareholders, and it became apparent, this being a year and a half after I left, that the strategies being deployed were not working. They were not able to raise additional capital.

And what happens is in this FDA stories is…and I had a VC say it to me once, and it’s a lot different than it used to be 10 years ago. 10 years ago you’d be striving for FDA clearance and then you sell the business on the valuation bump from accomplishing in the greenfield that lay ahead of you. But because the healthcare system in this country is so challenging with insurance reimbursements, selling to doctors, all of the money that goes into building a sales force, ongoing regulatory costs, the VC said, “If you haven’t sold the business prior to FDA clearance, you failed,” and that’s such a tough, tough, tough, harsh viewpoint, but I think there’s some merit to it.

And so, investor fatigue settles in. What are you gonna do? You gotta maximize value for shareholders. So, we brought on a boutique investment bank, campaign the company for sale, and the problem is is when you’re 18 months out from when you got clearance, as each month goes by that you have not improved your sales, it’s kind of another nail in the coffin because it’s a tougher and tougher story to sell on expectations or what could be because there will be the, “Well, what have you been doing, or what’s been”…you run out of, for lack of better word, excuses, or rationale as to why. You know, and again from my belief, it was just we weren’t executing. We didn’t execute well, which we’re not the first company. But there was nothing with the products, there was nothing with the customers, the customers loved the product. Pricing, it was a low-cash pay for patients out-of-pocket. You’re talking $10, $15, this is not a several thousand dollar genomic test or several hundred dollar 23andMe test.

So, what you’re gonna do? You hire a bank, we ran a process, we found out pretty soon within…typically you can find out between three and six months if it’s gonna sell for a single, or a double, or a triple, and if not, you go to plan B, which is sell for what you can and try to avoid it becoming a fire sale situation or close the door situation. And the process took about a year, and the acquirer of the business, and this was an asset sale of the business, ended up being a party that when we had, I don’t know, three to four offers on the table four to five months prior to the acquisition closing, they weren’t even one of the offers. So, it was, you know, definitely…it’s due diligence in any capacity, whether you’re raising capital or trying to sell the business. It’s imperative to be patient, to build trust, to get them what they need, and not be defensive if there’s holes that are being shot or concerns. Be open about it, acknowledge it, understand, it may be tried to be used against use as leverage in negotiation, but just treat it as that and it’s just part of the negotiation.

Brandon: If they were not on the table, how did they get ahead of the other bidders?

Craig: More money.

Brandon: Yeah. How much runway did you have at this time? Were you guys almost out of cash, did it come down to like a last minute thing?

Craig: Yeah. So, I mean, look, I’m gonna be on a panel in a couple of months to talk about how we raised capital. I think it was about 85 angel investors, oh, you know, $70 million. I don’t know, you could do the math on it, but we were pretty good at never raising less than $50,000 a person. I wasn’t out looking for $1000 here and there. And as I started doing that over time, I was successful in bringing on, you know, what is termed by many as some super angels. So, you know, quarter million dollar checks, making multiple investments over time, had a handful of investors that were seven-figure investors, and…so, when it got to that state of grace, you know, there was a little of, you know, not gonna let it go down to nothing as far as fumes or cash in the bank. Bridge money was gonna be provided. But we raised the bridge around when we kicked off the banking process, and we campaigned it only to internal investors, with the complete transparency as to…and I think there were some legal reasons why we couldn’t say it was solely to sell the business, but we made it clear that that versus ever before in the company was one of the objectives in why we were gonna raise a bridge around to give us runway to sell the business.

Brandon: Sure. Can you share any of the terms when you guys finally closed, or can you give us any sort of ranges there?

Craig: Yeah, so, I mean, it wasn’t unusual as far as how these deals in the medical device space are structured. So, we had an upfront payment, seven-figure upfront payment. We have a second milestone payment that has been delayed a little bit. I just actually texted our corporate development contact this morning. It’s pushing to early fall, but that will be the largest payment. So, the combination of those two payments, you know, are gonna make money for the last round of investors. And then we have a royalty structure over time. So, unfortunately, you know, Brandon and Drew, and for your listeners, I can’t disclose the total price, but if things go well over time with the sale of the product, you know, you’re looking at, I don’t know, a low eight-figure, you know, potential remuneration.

Drew: And what’s kind of your feeling about the whole deal? I mean, you know, like you said, I mean, there’s deals where people get, you know, home runs and you kind of talked about that earlier, you know. How are you feeling with the deal closed?

Craig: It’s this weird thing. I mentioned it earlier. Part of the mental anguish and despair when I left the CEO role was, you know, I’m not clairvoyant, no one is, but I kind of felt like I knew what was gonna happen. And I prepared myself so much for that eventuality. And honestly, when the second, you know, the second CEO was brought in after me and he’s a good person, and he was doing everything he could, you know…you are a board member, and I take the fiduciary duties seriously. So, you turn into…look, you’re there to give advice, and perspective, and take care of the investors, and I kind of became desensitized to it, to a certain extent so that when this all did go down with the banker, yeah, the expectation’s raised again when you kicked off the process with the bank, and you could see all the companies that are listed that you’re approaching and talking to, and you’re getting updates on diligence and you’re getting feedback from the CEO that we may get a term sheet here and there, but it’s not done until the money is wired, let alone an offer until an offer is extended.

So, once you went through that first batch, and I think any entrepreneur can probably have this approach, is once you go through that three to six-month period, you’re gonna know what the kind of eventuality is. And it looked bad at one point, even when we had those three to four offers, they were low ball, low offers. And I was shaking my head. I felt bad at that point. Like, I was. “I can’t believe this is gonna happen,” I thought we were gonna have to shut the doors, but there was a part of me that was like, everyone knows from the investor’s standpoint, selfishly speaking, that this is not my doing, you know. They knew what the company was worth two years ago, and they knew how things had changed. And many of them knew that I had offered to, you know, come back in the business.

So, in some ways it was like sadistically, you know, the egg is on the people’s face who it should be on. But you never want people to lose money, you always want people to make money, and…

Drew: You said that people knew the value a couple of years early. Had you had an offer prior that was much higher?

Craig: Well, no. I’m just speaking to being a privately financed company, your ascribed evaluation of the business. So, we had three different types of investors that came in at different times that all, you know, this is on our product launch. You know, and I’m happy. You know, for your listeners, you know, we did a convertible debt raise to start the business, about a half a million bucks. We continued to subscribing to that until we closed the series A of $2.3 million. We then did another bridge note of convertible debt with a discount, and bridged thus until we raised $7 million series B. That is what got us to FDA clearance and through FDA clearance. And then we raised a $5 million series C which included strategic investor leading that $5 million. So, at each of those phases, we had up around valuations from $4 million, to $12 million, to $20 million, to $35 million, something of that nature.

Drew: What was your final percentage and kind of the financial impact to you when the deal closed?

Craig: Yeah. So, when the deal closed, I was the largest shareholder. So, now, I was a common stock shareholder. So, with how you’re structuring these deals, we had a participating preferred structure, so money that came in comes out first. So, I, over time, had put money into the business. So, I believe all of that I’ll get back out plus some since I participated in the final bridge round. But other than the liquidity that I was provided upon my separation from the CEO role, the vast majority of that common stock, you know, is sitting in…

Brandon: I think we lost him.

Drew: Lost him.

Brandon: Hello?

Drew: Yeah.

Brandon: He’s still on. He must just have a bad connection. Where are you at, Craig? Craig, are you there? He’s still on. He’s just not…I wondered if he muted or…let’s see.

Drew: No, he didn’t mute.

Brandon: Are you there, Craig?

Craig: Yeah, I’m here. I don’t know if that’s my end or whatever. I’m sorry, it keeps happening.

Drew: So, the last thing you said was the vast majority of the common stock, what were you saying about what you’re…?

Craig: Majority of…well, the majority of my equity, you know, I put in money in the business over time, and I will have gotten most of that out plus some return on the bridge that I put in. But, you know, when you’re building the business, it’s the common stock, and as a majority shareholder really by way of the common stock, we raised money and each of those amounts with a participating preferred preference so that when proceeds from the sale were generated, you know, money is going back to the last round of investors with the premium that’s ascribed to that, and then in a cascading fashion, to the previous rounds of investors.

So, not a happy ending as it relates to my common stock holdings, but, you know, that’s why I did negotiate and I encourage any entrepreneur in their employment contract to try to get liquidity even if it’s from an insurance policy standpoint, if there is a separation, and then kind of segueing to what I do today as an investment advisor, there are a lot more opportunities through the JOBS Act and otherwise and through firms that have been created the last three to four years, which really weren’t in existence as much when I left the CEO role of my business, that can provide liquidity. They’re really into business of providing cash to employees of businesses that are private companies from the standpoint of those investors who think they can make money holding that private company paper and at the same time, those employees of the businesses can get a little bit of liquidity in situations where they’re not public or there’s not, you know, dividends or there’s not buybacks or, you know, sale of business imminent.

Brandon: Yeah. It’s really interesting. Good advice. Can you tell us a little bit more about what you’re doing now, and what you’re kind of working on next? It sounds like you’re a financial advisor, right?

Craig: Yes. So, it took me about six months to get bored after I left the CEO role in my company, even though I was still on the board, and I wanted to do something next. And I was approached by a few different investor groups to, you know, be the CEO of other medical device start-up companies. And just frankly, with everything I went through, I didn’t have the appetite to just go raise capital again in that capacity.

I started day trading on my own account. Granted, it was at a period of time, two years ago, where chimpanzees and all sorts of other mammals could make money. I wasn’t doing anything special.

Brandon: Just don’t take it out.

Craig: Yeah. So, it really opened my mind up to the capital markets and global macroeconomics. And an opportunity was presented by my firm, Bernstein, to join them in a role that both assist our private equity funds in raising institutional capital, as well as finding deals that we can write checks for companies toward. These are, you know, $30 million, $50 million checks.

Part and parcel to that, yes I am Series 7 licensed, and I am an investment adviser, not just managing wealth and devising investment strategies for individuals and foundations and endowments, but I’ve chosen to spend most of my time working with entrepreneurs, closely-held business owners, executives at public companies, all of those situations with which there is a high concentration of single stock that they’re holding, and they want to try to create some sort of tax efficient liquidity or planning related thereto which may include trusting the states, tax planning and diversification plans because again, I mean, I just get the joy out of helping other people out. And there’s definitely things that if you’re not prepared can cost you a lot of money in the long run. So, yes, that’s what I’m doing today.

Bernstein is a firm that’s been around 50 years. All we do is manage money. We manage $502 billion around the world of client’s money.

Brandon: Wow. I think that’s really interesting. I know a lot of financial advisors, and I’ve spoken to a lot of them. And they just don’t get it kind of where I’m coming from as an entrepreneur. So, I think that’s really powerful and really unique that you kind of have the background, you have the experience in, and you’re not just saying, “Well, if you put a little bit of this in your IRA, you’re gonna really paint the whole picture.” I mean, you really know what you’re talking about, and you’ve kind of walked the walk. So, I really like that.

Craig: Well, thank you. Yes, I’m not building my practice right now at a nursing home, just let me say that.

Brandon: Absolutely. Well, thanks for coming on the show. How can people get ahold of you? Maybe they, you know, have questions on something you went through or maybe they’re interested in the financial advice. How can they get ahold of you?

Craig: Easiest way is e-mail, craig.misrach@gmail.com, c-r-a-i-g-dot-m-i-s, an in sam,-r-a-c-h @gmail.com, also on LinkedIn.

Brandon: Perfect, Craig. Thank you so much for coming on today. It was great having you on the show.

Drew: Thanks, Craig.

Craig: Brandon, Drew, thank you very much for your time.

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150+ Entrepreneurs share their Best Advice on Selling a Company https://www.goodmanson.com/resources/150-entrepreneurs-advice-on-selling-a-company/?utm_source=rss&utm_medium=rss&utm_campaign=150-entrepreneurs-advice-on-selling-a-company https://www.goodmanson.com/resources/150-entrepreneurs-advice-on-selling-a-company/#respond Thu, 30 May 2019 20:58:36 +0000 http://www.goodmanson.com/?p=22132

We asked over 150 entrepreneurs to give us their best advice to those considering selling their businesses. We also asked over 100+ Investment Bankers and Private Equity firms, and they shared their best advice about what business owners should know before selling – and the critical steps and details most entrepreneurs might be missing. Here is what they had to share:

1. Understand your WHY for Selling

Selling a company is a major goal for many entrepreneurs, but some business owners aren’t asking an important question: “Why do I want to sell my company?” The reason might be fatigue or burnout from running the business, or the owner might simply be ready for a new venture. One entrepreneur explains that:

“You need to know if the number one reason is to get completely out, or if you’re doing this to solve a business problem so that you can stay in business.”

The answer to this question will change important aspects of the deal. For example, if you’re burned out, you might not want to stay on after the sale. And if staying on after the sale is an important term of a potential agreement – this might stall the deal.

Another entrepreneur explains there are many reasons to sell a business, and some of those reasons are more personal. It’s important to understand those reasons and how they factor into the big picture of the sale. “Be sure to really understand the personal reasons for selling,” explains the entrepreneur. Otherwise the difficult process of trying to sell will blow-up and impact you and everyone involved.

Investment Bankers agree with the entrepreneurs on this point and suggest that having a reason isn’t enough – you must have a good reason to sell. Before we work with an entrepreneur, we know they need to “have a good reason for wanting to sell, and a proper evaluation done.”

Understanding the underlying motivations for the sale of your business can help you create a plan that considers those motives and helps you reach your goals.

2. Prepare for the sale BEFORE you Plan to Exit

Certainly a top goal for many entrepreneurs is selling their business and collecting a big payout for years of hard work. Many business owners, however, aren’t able to sell when they want to because they aren’t fully prepared for the exit. According to Forbes magazine, about 4.5 million firms with a combined business value of $10 trillion will make this transition over the next 10 years, but it’s estimated that only 20 to 30 percent of businesses that go to market end up selling.

For starters, understanding what makes a valuation higher and planning in advance to can significantly increase the purchase price of a business.Another entrepreneur explained that it’s critical to “do the things that increase valuation before you go to market.

One research study found that two-thirds of the entrepreneurs surveyed said that getting a high value for their business to fund retirement or other business interests was a top goal. But less than 40 percent have had a formal valuation conducted in the last three years, and 65 percent have never had their financial statements audited.

One entrepreneur says that it’s important to “understand the value of what someone is willing to pay for your company. That may or may not be in line with your expectations of what your company is worth.”

Many business owners are surprised when the valuation comes in lower than expected. But when you understand what creates value in a company, you can make the right changes before the sale to increase the value.

It’s also critical to get your company ready to sell by looking at the financials. For example, you may want to audit the financials and ensure the right technology and a strong executive team are in place. Entrepreneurs routinely pointed out in the survey that it’s important to “make sure your books are in order.”

It takes more time than you may think…

Entrepreneurs, Investment Bankers and Private Equity firms all agree that timing is critical in the sale of a business. Many of the entrepreneurs surveyed focused on business owners needing to start working on the sale much sooner than expected. They explained that:

“It takes a lot of time – up to one year”

“Start planning 12-24 months in advance, if not longer.”

“The earlier you plan, the better your result.”

“Plan in advance. An effective process takes at least six months, and you generally need to plan to stick around two to three years to attract the widest range of suitors.”

Investment Bankers suggest an even longer planning period of two to three years in advance of the sale. By starting the planning process early, a business owner can understand the current value of a company and make adjustments to multiply that value. Planning early can also help with getting on the radar of potential buyers, including strategic buyers. “You need to get on their radar and sell when you’re ready – not when it’s required,” explains one entrepreneur.

3. Lean on your NETWORK and find Support

There are many important factors to consider during the sale of a business, and many business owners aren’t getting the advice they need most. One study showed that 80 percent of businesses surveyed hadn’t sought advice about a transition.

Entrepreneurs experienced in the sale of a business suggest that business owners get insight, understanding and tips from people who are experienced in the sale of a business. They also recommend taking a look at your business through a more independent lens than that of mentors, peers or even venture capital board members. This is especially important if there are multiple stakeholders who could potentially have conflicts of interest. As one entrepreneur warned, “Take the advice of your VC board members with a huge grain of salt and get a banker to start advising you. The VCs and founders become misaligned of the incentive at this junction in most cases, and you need an independent lens.”

Surrounding yourself with good advice allows you to better understand the potential for the deal. Who are the potential buyers for your company? How can you do a better job of positioning your company so it appeals to the best possible buyers? And how can you close the sale and secure the terms and the purchase price that you desire? Having a strong network and resources in place can assist with answering these questions.

This is often the most important financial transaction in an entrepreneurs life, so take the time to go through this process right.

4. Create a FAVORABLE Exit Environment

The hard work that the entrepreneur invested during the months and years of planning pays off during negotiations. The business owners have an accurate value of their company, they worked hard to create that value, and they have a group of prospective buyers interested in the purchase of their company. At this point, negotiations become key.

One entrepreneur explained that negotiations are made easier by the work you put in early in the process. “Companies are bought, not sold. Basically, if you build a great company (product, people, finances) – then selling it is easy.”

Negotiations are also made stronger by multiple bidders. One survey respondent says, “Only 10 percent of transactions ever close – have multiple bidders.

Defining the ideal buyer is also key to success, according to Private Equity firms. One PE firm survey respondent suggests that you “ensure there is alignment between the entrepreneur and management team and a private equity firm.” This plays into the valuation. If you have a great idea but clear business outcome for the exit, it can be difficult to command top dollar, according to one equity firm. So think about who you are selling to.

Understanding potential objections to the purchase of your business is also key. Investment Bankers were asked about the most important thing they would tell an entrepreneur wanting to sell, and one replied:

That the buyer has two major fears: they fear that they cannot continue to operate the business, and they fear that the seller is selling because they see a downturn coming. If we resolve those issues up front, we have a much better transaction.

Don’t just Negotiate on Price

Securing a high price is only one part of the deal – the second part is to ensure the terms of the deal are good. The surveyed entrepreneurs recommend that you take your time analyzing options and determining which is best. “Look for the best terms,” one survey respondent suggests, “not just the highest price.”

Key to understanding the terms is knowing what you want to do after the sale closes. One Investment Banker explains: “It’s important to understand what you want to do after the transaction and whether the terms of the deal allow you to accomplish that.

Also critical to negotiations is knowing when to walk away. For example, one survey respondent who sold a distressed company explained, “At what price would you and your team be actually better off walking away and shutting down the company? Often people see any non-zero outcome as ‘not failing,’ but a long earn-out in a culturally mismatched company could have way higher alternative cost of pain.

But Don’t Get Distracted by the Sale Process

In the early stages of seeking an exit, one entrepreneur suggests, “Run your business as if selling wasn’t an option.” The entrepreneur goes on to say, “Then hire the right bankers or partners so you don’t lose focus on running the company.” The right partner can help you take the right steps in preparing for the business sale and keep you from getting distracted, a common problem during the exit process.

5. Have a VISION for your Future

Imagine that you start the planning process early, maximize the valuation of your company, and secure a sales price and terms beyond your expectations. Now what? Understanding what comes next shouldn’t be an afterthought, according to those surveyed. Thinking about this aspect of the sale early is key to a smooth transition. “Selling your baby and not knowing what to do next,” explains one entrepreneur, “can easily lead to depression.

Or as the Harvard Business Review article writes “Congrats on selling your business,” a longtime mentor said the day after I signed the paperwork. “Now get ready for a depression.” (Dealing with the Emotional Fallout of Selling Your Business) Even if you hit the jackpot, the sale of your business is often an identity crisis for business owners.

Decide up front what you are willing and not willing to do after the sale. “Decide if you want to remain hired or not at the start,” recommends one survey respondent. If you do decide that you’re open to working at the company for a pre-set amount of time after the sale, get ready to not be in control any longer.

The hardest part of staying on after the sale is realizing that somebody else will be calling the shots in your business,” explains one entrepreneur. As a result, some business owners take a less active role in the company after the sale, such as working on a consulting basis and not in the day-to-day operations or in a management role.

Conclusion: Entrepreneurs Top 5 Recommendations on Selling a Company

So there you have it, the top things entrepreneurs recommend as you consider selling your business. They are:

1. Understand your WHY for Selling
2. Prepare for the sale BEFORE you Plan to Exit
3. Lean on your NETWORK and find Support
4. Create a FAVORABLE Exit Environment
5. Have a VISION for your Future

Planning the sale of your company includes many variables, but when you take the advice of business owners who have gone through the process and advisors who understand how to maximize the valuation of your company, you can accomplish – and even exceed – the goals that you set for the sale of your business.

Want to learn more? Grab your free copy of the Valuation Playbook and learn the best practices to maximize the value of your business.

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Amish Shah – The Playbook he’s used 4 times to Scale past $1M in revenue and his exit https://www.goodmanson.com/exit-story/amish-shah-scale-1m-playbook-2-exits/?utm_source=rss&utm_medium=rss&utm_campaign=amish-shah-scale-1m-playbook-2-exits https://www.goodmanson.com/exit-story/amish-shah-scale-1m-playbook-2-exits/#respond Thu, 30 May 2019 20:46:28 +0000 http://www.goodmanson.com/?p=22114
Hear Amish playbook to scale companies, from apps to online publishing to software, to 7-figures in revenue and his 8-figure exit to a public company that went bad.

01

$1M+ Revenue Playbook

Learn how Amish has scaled 4 companies including marketing, apps, online publishing and software, past 7-figures.

02

8-Figure Exit to a Publicly Traded Company

How he sold with a 8-figure valuation but ended up with nothing and how he’d do his next exit deal differently.

03

Focus shift from Money to Purpose

His shift from focusing on money, to founding a company that gives him a greater purpose, which gave him both.

CEO/ Founder @ Deep Origins

Amish Shah

Amish Shah who is a humanistic digital entrepreneur specializing in marketing and technology. His numerous online businesses – from apps to online publishing to software – have drawn over $50 million in sales over the past 11 years, and earned him a spot in the Inc. 500 (three times) as the CEO and Founder of one of the fastest growing companies in America.

Today Amish focuses on Deep Origins his passion: a digital marketing company focused on wellness media, content, and ecommerce products that builds digital tribes in various niches related to wellness, consciousness, personal growth & spirituality. His vision is to combine ancient wisdom and harness emerging web/mobile technologies to transform how people learn and evolve.

Amish is an expert in harnessing practices from the ancient for modern living,  where he has been featured on Inc. magazine,  Virgin on the Travel Channel.  Learn more about Amish at: http://amish-shah.com/

Suggested Resources

What Entrepreneurs need to know about
Selling to a Private Equity FirmRead More
What Entrepreneurs need to know about
Using an Investment Banker or Business BrokerRead More

Full Transcript

Brandon: Today, we have Amish Shah as a guest. He’s a friend of mine in San Diego. He lives in Encinitas, I believe. He started four companies. He’d gotten four companies over a million dollars in revenue, and he’s been on the Inc. 500 two times. He just recently last week was featured on Inc. and Virgin. And I think sometime next month, he’s gonna be on the “Travel Channel.” So, really excited to see that. And welcome to the show, Amish.

Amish: Thank you, Brandon. Great to be here.

Drew: Yeah, Amish. We’re glad to have you. I think, you know, just hearing that introduction, it kind of begs a question, what is your playbook to get a company over a million dollars? Because, you know, a lot of people maybe get one, but to have four over a million, that’s pretty impressive.

Amish: Yeah. Thanks, Drew. Well, you know, I can’t say they were all very easy to build. And I can’t say that they were all successful. You know, before that were successful, I also built eight to get to those four, or nine to get to those four, right? So, what happened was, you know, you learn as you build these companies.

My first company was a marketing…I started off an affiliate marketing, and then I kind of converted it into a SaaS company, which was really interesting. So, the way I look at kind of when I go into the market or when I’m looking at, “Okay. Do I wanna enter this, or do I wanna do this?” or like looking for my next idea, I guess you could say, I’ve always looked at the market and said, “Okay. Where are common tools and practices used across different industries but they’re not talking to each other?”

So, an example would be this. When I started my affiliate marketing company, it was just me. I was just doing it at home. And I brought it up to over a million dollars in the first two or three years. I was working my full-time job at the time actually. And my full-time job was a business analyst. I was working in New York at Morgan Stanley. And, you know, just like everyone else I’m like, “I need to get out of this thing,” got started tinkering on the internet. And I was like, “Okay. I’m gonna figure this out. I’m gonna figure this out.” And eventually, two and a half years, three years later, just sticking to it every single day, I figured it out. And, you know, my first year, I had gotten over I think like maybe $5,000 or something like that in revenue, then the year after, and it just grew. And on my third year of tinkering around, I had hit like, you know, 150, 200 grand. And I was like, “Wow. This is more than I’m making here. I’m about to get out of here.” So, I ended up quitting my job. The next year, I took it to 700,000. And the year after that, I took it 1.2, I believe.

And what I realize was I always look for opportunities where no one’s really hanging out but there’s a lot of traffic. And what I mentioned before also is where they’re using similar tools, and they’re using similar services. But again, they’re different kind of like audiences. So, in this particular case, I was building an affiliate marketing company. I’ll be honest with you, I was in the early Google days and the early affiliate marketing days, so I just think a lot of it was much easier back in 2003, 2002. So, scaling up to a million dollars back then I feel like was much easier than it is nowadays. But again, I found I was selling software. No one was really actually advertising selling software. So, I sold software. That was my big program. Then I sold eBay Affiliate Programs. No one was actually going out and doing it smart. I was scraping all of eBay’s top sellers. And then I put up in the ad words ad that said, “Get 10% off” keyword joining eBay today. And they were paying $36 at the time per sign up, which is crazy. They would never do that anymore, but that’s what they did when they want to come at rank the company and get more sales going.

So, that was kind of what I started. But then what I realized is this, I realize that I couldn’t scale any more beyond the $1.1 million. And that was just my own limitation. It was only me, maybe a programmer to help me out on the side, and that was it. So, I said, “Okay. So, how do I take this to the next level?” So, I started developing software to automate my campaign. I realized that there was no software out there. And if there was, it was like enterprise level software. We’re talking 2005, 2006, think back then. Everything was very expensive. There was no…the Joe Schmo was doing PPC in his backyard, which was kind of like me at the time.

There was no software for a guy like me. So, I just started developing my own. And sure enough, three, four years later, it got to the point where I was like, “Man, we can sell this software to the consumer because it’s so powerful. It’s so ahead of its time. It can, you know, split test landing pages. And it can, you know, measure your ROI analytics from all your ad words campaigns, and auto bid, and did all this stuff that people were like mind blown at the time. This was in 2008, 2009.

By then, we had scaled the company up to over $5 million a year just on affiliate marketing income, and we were gonna add on this software. This was gonna be a huge addition to the business. And what I realize that this software, so the affiliate marketing side of the business, around the same time, I had gotten into the internet marketing side of the business. And what I mean by the internet marketing is the personality types, the people who sell their info courses or digital courses, and they have affiliates, and, you know, they drive a lot of traffic with affiliate. But specifically on digital products, I didn’t really understand that world at the time but I had learned to understand it very well.

And so, what I did was I created this software that would bridge the gap between those two people. So, I started off an affiliate marketing. But then what I realized was that this software is not only used for affiliate marketers. It can be used by internet marketers who sell their own products, or anyone that sells their own product, even e-commerce stores just because it would track pixels and things like that. So, that’s how wide we went with the tool. This was probably like in 2010 is when we launched that. And that’s what helped scale our company. So, that was the first company. I kind of started off by finding where there was a lot of traffic, and not enough, I should say, where there’s a lot of demand and not enough supply. So, I’ve kind of filled those gaps. And then…

Drew: Amish, quick question on that…

Amish: Sure.

Drew: …if you don’t mind. You know, so, we have a listener who’s like, “Man, I’d love to find this idea of, you know, where there’s a lot of traffic.” But, you know, I realized you said around hanging out. But nothing is there. What are the indicators or what are the things that you, you know, tools, or resources, something I could use to find that?

Amish: Sure. Google AdWords has, you know, keyword research tool. You can plug in your keyword, whatever your main keyword is multiple keywords if you want. And it kind of spits out if it’s competitive, if it’s not competitive, what the average bid price would be for advertising. The higher the bid price, the more competitive it is. And that’s just the easiest way to look. Another thing you can do is just type in your keyword or whatever your idea is into Google and see if anyone doing exactly your idea. And if they are, check how much traffic they’re getting to their website. Check that on alexa.com. There’s also quantcast.com that you can plug in, you know, other competitor’s website.

There’s also some sneaky tools out there where you can look at your competitor’s ads and how long they’ve been running. Now, this is a pretty interesting thing that’s come up. In fact, our tool that we sold in 2010 actually did this. So, you could type in a keyword, and then it would spy on their competitors on people who are bidding, and then deliver those results to you. So, what happens is no one would go 150 days advertising if they weren’t profitable. So, you’re able to see how many days people are running. Now, there’s a couple of tools that do this right now. The first one that comes to mind is WhatRunsWhere. I believe that’s probably the biggest one right now, I believe.

So, using kind of some of these tools, you can kind of get a gauge of where the market is at, who’s serving them. Particularly now, Facebook is really popular, and you can take that keyword, pop it into Facebook, see how many fan pages out there, see how many likes they have, see what the engagement is on these pages, see if anyone is selling these things in this market. These are all indicators that you will eventually, you know, your first one may not be successful, so you try another product or try another thing. But these are the things that you can sway the results in your favor, basically.

Drew: So, you kind of looked at a market analysis from that and see, “Man, there’s something here. There are some profitable things. You know, where could I solve a problem that hasn’t been solved in this space?”

Amish: Exactly. You got to fill the gap. There’s always a gap in these marketplaces, so how do you fill that gap?

Drew: Nice. So, you did the first company. And then I think you said the second company was an app company. Tell me a little bit about how that came about.

Amish: Sure. So, that was born off the same idea of when I first started internet marketing in 2002 or 2001. Back then, my goal was to build at least one side every three days. I said, “I don’t care what it takes. I’m gonna stay up all night. So, I would sit there and code it, and program it, and design it myself literally. And I forced myself to put up a site every three to four days. And that was my mentality. And sure enough, it started bringing in some money. And then I got smarter. And then I understood it better. Then I understood traffic. And then, you know, it kind of just leads you to the next step.

So, I followed the same thing in the app world. In 2009, 2008, I was still like in the process of building that software. But I also wanted to try something new. I’ve always been like the type of guy to be like a serial entrepreneur type, like, “I wanna do this. And I wanna do that. And I wanna try this. And I wanna try that.” So, I decided to get into the apps just to see if I can get an app on the marketplace because back then, 2008, 2009, people were like absolutely like all hot and fresh, you know. And everyone was all over. In fact, the iPhone was still pretty new back then as well.

So, again, I saw the opportunity. There wasn’t a lot of apps when you searched certain keywords. So, an example would be Las Vegas tour guide. Well, guess what, there wasn’t anything in there for Las Vegas tour guide. Even though on Google, it gets massive amounts of searches, right? So, the same principle that I used. I was like, “You know, the App Store is nothing but a search engine. And people are looking for exact terms whether you believe it or not.” People are typing in full on search queries into the App Store as if it’s Google. So, what I did…

Drew: That is a great idea.

Amish: So, what I did was I just…

Drew: So, you knew the high-traffic words, and you basically said, “You know, how many of these can be app-ified?

Amish: Exactly. So, then I got to the point where I got two or three apps up, and I’m like, “Wow, okay. I’m gonna start outsourcing this.” So, my mind, the way it works is I find an idea. If I can get 3 sales, 4 sales, 5 sales, 7 download, 10 downloads, whatever the metric is that you’re tracking, I can push it to 1,000, I can push it to 2,000, and I can push it to 3,000.

So, what I did was I just created a whole entire system. You know, that’s probably the key, building systems that are repeatable. So, I created a step-by-step system that I outsourced this whole entire process too where, “This is where you get your RSS feed from. This is how the title should be. This is what the description of the app should be. This is how you submit it onto the App Store. This is what you need to do over here.” And so, we created a literally like a conveyor belt type of system where we were now pumping out apps like every four days, five days.

Drew: So, were these people doing that Google Search concept. And then does that constantly identifying app opportunity and then building?

Amish: Exactly. Yep.

Drew: And then did you oversee the ones they picked, or did you just kind of say, “Hey, any time you see this gap, here’s the system. Go make it.”

Amish: Yeah. I gave him a general idea and niches. Anything that people are passionate about dogs, you know, cats, you know, animals, babies, kids, anything that people are really, really passionate about. Those are the kind of things that I kind of went after because passion is what drives people to search. So, that’s where we started. And then from there, I kind of just created a system that says, “Okay. It has to have this many searches. And it should have this much competition level,” because the more competition, the better. That means people are making money in that space.

Brandon:[inaudible 00:27:07] for those happened? And where did you get your cost down to for apps, do you know?

Amish: Yeah. We did actually end up calculating our cost per app, and it came down to like $12 or $13 per app.

Brandon:In particular.

Amish: Yeah. Because it just became a system. So, that’s how I scaled the second one to a million dollars. And again, I use a very similar model that I used in my other company where again, we license the piece of software this time. And so, while I was doing the apps, I’m like, “Okay, I wanna keep growing this app stuff. That’s great.” But on the side, I’m gonna build a piece of software that automates it for me internally.

So, I licensed the piece of software. We customized it. And then it showed us our metric, showed us what we needed inside of this app or inside of this piece of software. I was like, “Okay. This is great. We’ve automated our process. Now I can take this software and turn it into money.” So, I was like, “How do we turn cost centers into profit centers?” You know, I think sometimes we look at that in business as like, “This is the massive cost center, but how can I turn it into something that actually makes money?

Drew: And you did this in the previous company while you’re managing kind of your Google ads and all that kind of stuff? You’re saying you also made that into a…

Amish: A software, yep, exactly.

Drew: Well, that’s great. How many apps did you ultimately get to in the App Store?

Amish: We ended up getting up to 300 plus apps in the App Store. Some of them are still active, but you got to search way to the bottom of the pool for them, yeah.

Drew: They’re all orphans now.

Amish: Yeah, exactly.

Drew: So, I mean, I love this idea. I mean, basically, you’re saying to get to, you know, build a seven-figure value company, you know, you talked about building systems and scaling that, automating that, and then identifying ways to make your cost centers profitable. So, you know, it sounds like this company now, you know, has value. I believe this is one of the ones that you sold. So, how did that go down?

Amish: So, this company, within nine months of starting the company, an app company with such a kind of big eco spirit to play with, you know, we were getting thousands of downloads a day, thousands and thousands of downloads a day. And we were up there. We were on the radar of a lot of the kind of people who are interested in the app space.

So, a gentleman approached me. I believe I had gotten a common introduction through someone and he’s like, “You know, we’re looking to invest in an app company.” And I was like, “Well, that’s pretty cool. I got an app company, you know?” And I never took on investors before that. And I was like, “Maybe I’ll take on an investor.” And he was thinking like, you know, or we go public with this company because apps are hot right now. And building a public company around apps would be a great idea.

So, I was sold on that idea. Truth be told, my previous company that I did have, the marketing software and, you know, all the websites and affiliate marketing campaigns we’re running, I brought a business partner on when I had moved to California and we just didn’t get along. So, that deal didn’t really sit too well with both of us. It kind of ended up in a bad relationship. So, this was kind of like…I was still kind of feeling that, you know, when this opportunity approached with the app company. And I was like, “You know what, maybe, you know, this is my time. They’re were older. They’re like 50s.” They’re in their 50s, like, yeah, these are the people I need to be working with, you know. And gray hair. They’ve been there. They’ve dond that, you know.

Brandon:That’s why I started working with Drew.

Drew: Oh, come on. I’m not that old, bro.

Amish: So, then, yeah, so basically, they approached me. It moved so fast. And so, I moved my assets into this company. Well, they took my name.

Drew: Wait, wait. Slow that down. I mean, did they offer you something? Like, talk me through that.

Amish: Oh, yeah, yeah, yeah. Yeah, yeah, of course, of course. So, the deal was, “Hey, roll your assets into this company. We’ll scale the company to 10 million, to 20 million, to 30 million, to who knows 100 million market cap. And your company that’s only making a million bucks a year right now or two million bucks a year can be worth infinitely more in shares. And I was like, “God. That’s the smartest thing I’ve heard for the life of it, right?”

Brandon:Were there any cash exchanged at that point? Or was it kind of just they pulled their shares into this.

Amish: There was no cash exchanged. Yeah. There was no cash exchanged. So, the company took on my company name. We did like a reverse…not a reverse. I forgot what it was called. But anyway, my company became the name of the publicly traded company, my company name. So, they gave me $1.9 million in shares.

There was a small cash exchange which was technically paid out of the money that was being made in the company at the time, which would be, it was like $30,000 upfront. And then I was gonna be paid on salary at $18,000 a month. And then I said, “Okay. Well, you know what, that’s gonna be kind of just enough for me and my wife to get by for a little while. I’m kind of looking at the carrot at the end of the stick here, you know. I wanna grow this thing.”

Brandon:How long was this process? Like, how long did it take from the day he called you, and so you managed the camp and had a deal?

Amish: I would say this one moved quickly I’d say about under four to five months. I’d say somewhere in that range. So, it was very quick. It was definitely under six months from…

Drew: So, there’s like a due diligence process? Like, were you loading up data or any of that kind of stuff?

Amish: There was a due diligence on their part. They looked at just to make sure that I did have the proper kind of company that I said that, you know, I had. So, they looked at P&Ls;. They looked at revenue statement. They looked at, you know, what assets do I have and how much passion I really wanted to build this thing, and they saw that.

From my side to their side, I’ll be honest, I didn’t do much. I Googled some of them. And, you know, I saw some great track records. You know, these guys have worked at some of the largest digital agencies in the world. I shouldn’t just say marketing agency, forget digital. You’re talking about, you know, $100 billion company. And I was like, “Well, these guys work at massive companies and they’ve got the experience.” Again, I was impressed because I was like these are guys I should be hanging out with. They totally get corporate, and public, and taking things public, and, you know, all that kind of stuff. So, I did a little bit of research. Could I have done more? Yes, I probably should have, to be honest with you.

Drew: Why is that?

Amish: Because it blew up in my face. And, you know, it’s one of those things where like you’re unsure but, you know, when you get that feeling inside that your gut is telling you you’re unsure and you don’t know if you should do it. But then your mind is like, “Oh, man. You got to do this. This is like your only thing right now. You’ll figure it out. And this is such a great play.” I went against my guts, you know. I’ve truly just went against my gut. And I knew something was wrong but I just couldn’t put my finger on it, you know? It’s just that when everything seems too good to be true kind of, you know. So, anyway…

Brandon:Oh, go ahead.

Amish: Oh, no, go ahead.

Brandon:Oh, I was gonna ask the details of kind of how it stands out.

Amish: So, the public company deal ended up not working out, the management on the public company. So, I had stepped into a management structure that was kind of in place. They kind of had the good old boys, I guess you could say, and the management. And I was joining the good old boys. And I didn’t know that they had that relationship prior to me until after getting in.

And so, it turned into like my vision versus their vision, versus what needs to be done. And so, we quickly, actually ended up acquiring, I don’t know, four other companies. My company got acquired for 1.9 million in shares, and then the salary that I mentioned. And then all the other companies, I don’t remember. I honestly don’t remember what they got acquired for. But here we had an app roll-up, basically app company roll-up, and got in the marketing cap up to $10 to $15 million.

Now, throughout this process, there’s these papers that come flying at you when you’re in the public company and you just got to sign them, and you got to keep pushing them along. And basically, I got screwed to not being able to sell my shares first. There’s like there was a priority schedule. And I was like number four on the priority schedule. So, whoever is number one, gets to sell their shares first. And that is ultimately where I had got screw into out of this whole entire deal. I saw this coming before actually the whole company busted. I saw the change in vision. They pivoted three or four times. Salary wasn’t being paid every single month and employees were not happy. I kind of saw the wheels were trembling, you know. So, I exited. I said, “Hey, guys, I’m out. I’m gonna continue to keep my shares or I think we set a certain percentage of the shares. And what I’m going to do is I’m going to exit. And I’m going to take my assets with me. And you’re gonna have to deal with it.”

So, through some a lot of back and forth through lawyers and all that kind of stuff, I ended up exiting. I was able to get all my assets back. So, I got all my apps and my app software and marketing back, which was the good piece of it. I said anything that happen, I at least got my assets out of it. And so, those revenue streams went back, started coming back to me.

Brandon:I would think that they would just start threatening you with all sorts of law suits and [crosstalk 00:37:21]…

Amish: Oh, they did. They did. Oh, they did. They did.

Brandon:How did you end up getting that?

Amish: I basically just stood my ground. I said, “Look, you guys are doing something weird. I don’t know what it is but it felt shady to me. And I am going to exit. And I promise not to open my mouth if you just give me back my shit.”

Drew: So, you had negotiated for the assets, or you just kind of called the deal off?

Amish: No. I negotiated the assets because I was like, “This is my shit. You guys start taking it. And then you’re gonna kick me out with nothing?” You know, like, that’s not fair. I should at least get my stuff back or I should be able to sell the shares.

Brandon:Yeah. Do you think when you signed the document thing that you couldn’t sell your shares, is there a lesson there where you should’ve had a better lawyer or a lawyer at all to look at those documents? Or was that kind of just something that you had to sign?

Amish: It was like one of those things that you have to sign where, you know, it’s like four out of five people on the board agree. And if they don’t agree, then I don’t really have a choice either way, you know. That’s why I said I felt like the good old boys, you know. So, honestly, I feel like I was scammed. I think I was scammed, to be honest with you because…

Drew: Do you know where they are now? Is it still going?

Amish: The company since then has pivoted like six more times. They went into like fashion. And then they went into like after that, they went into more app stuff, and then they went into fashion. Then they went into this. And then now, I don’t even know where it is. It’s worth nothing. It’s like half of half a penny. And if not, it might have been already sold to another person or thing.

Brandon:Do you think that they had the right idea, though, for kind of just looking at that model for rolling up the app industry and kind of buying a synergistic apps? Do you like…

Amish: I think it’s a great idea. Yeah. As long as you can find synergistic idea, and you can create one common vision in the company. The problem was I had a vision, and someone else had a vision, and someone else had a vision. Because it was a roll-up, it was being run by entrepreneurs who all had a vision.

Drew: So, let’s say we have, you know, listeners that are in a similar situation where, you know, someone is saying, “Hey, let’s do a roll-up. We’re gonna bring two or three companies together,” because I was a part of something similar where they put like four entrepreneurs together. And it, you know, eventually, you know, sold for almost $1.5 billion. So, it was a good situation. You know, how do you do due diligence on them, or what would you do differently to better vet and see whether your vision and the company’s kind of direction are aligned?

Amish: Sure. I think when I first did it, you know, don’t react to your current life circumstances. Make sure you do your due diligence. I felt like I was in a reactionary mode, so I just pulled the trigger without having a lawyer look at the initial contracts, understanding what the consequences are, what’s the real agenda behind the management, doing more diligence behind the management. If it is a public company then you’re going into something bigger. Who are they? What do they do? What have they done in the past or what have they been involved in in the past? Have they done public companies in the past? What did they do? What was the track record, you know? You know, success leaves clues, and so does failure, and so does scammers, and conman. So, if you do enough diligence, you will find in, you will uncover it. So, it’s like listening to your gut. If anything seems off, you know, dig in.

Brandon:Yeah, absolutely. What about, you know, they said, you know, anytime you’re doing a roll-up or any acquisition, or even a transfer of sale of a company, there’s always that kind of culture shift in setting the vision. I knew Drew is probably one of the best people I know that, like, if you were the one calling the shots, what would you have changed about kind of merging all those cultures and visions together so it would’ve run smoother?

Amish: I think the group of entrepreneurs that were put together should’ve been in charge of running the business, not this good old boys management crew. And perhaps hiring a separate CEO to kind of reflect back to these entrepreneurs and say, “Okay. This is what I think everyone is saying.” So, better team and better team support, and making sure all of us are on the same page because there’s no doubt that those four companies that we acquired if we work together. And if we did what we said we were going to do from day one and not change the vision a billion times, we could’ve taken that thing to very extraordinary height, I really believe so. So, you know, it all have to do with your team. It all have to do with how you get along with them. So, yeah, you know, I think that team is everything and making sure that you’re cool with everybody on the team.

Brandon:Yeah, absolutely. I think Drew’s big fan of kind of bringing everybody to the table, setting the vision and getting out of the way, it sounds like that’s kind of what needed to happen, right? You took your assets back. What was your next step there?

Amish: So, after I took my assets, now that I rebranded and I relaunched the software and the educational course around building apps, got back out there, got a lot of affiliates involved, and kind of ramped it back up, getting it back to kind of where I needed it to be. At that point, to be honest with you, I just…I was jaded. You know, two businesses that I had failed back to back takes a tremendous kick to the ego and your nuts at the same time, and your bank account. So, I was kind of just depressed from the whole thing. I was like, I don’t wanna do apps anymore. I hate this shit, you know. Maybe I’m not meant for tech companies because this was my second tech company that maybe I should just step off, you know. Maybe I should do it something different.

And so, what I did was I ended up bringing someone on as a partner, small-time operator operating manager. I think I just said, “Okay. I’ll give you a small salary and I’ll give you 30% of rev share and equity of the company over time.” And he was great. He helped me. We got the product back out. He took me out of the day-to-day stuff. And he said, “Look, I’ll do this as long as I can sell this thing for you or find a buyer for you. Give me the permission to go find the buyer.” And I said…

Brandon:[crosstalk 00:44:10]

Amish: Pretty much from day one, yeah, because he knew if I’m gonna be doing this, then I wanna be able to do this, you know. So, I said, “Okay, cool. I’m cool with that, you know.” So, he did it. And sure enough, like within a year, he had found a buyer. And I was like, “Wow.”

Brandon:Do you know more about that process of how you’re finding a buyer? Was he just looking at that…

Amish: So, yeah, we found out with a broker, business broker. So, there’s a lot of…

Drew: And I’m not screwing around this time, huh?

Amish: Yeah, exactly. We’re going through a business broker. We’re gonna find someone legit. We’re gonna make sure they have the money, and that this isn’t just some like stock play or whatever, you know. So then, he did that, you know, and I did that, too. I was obviously involved in the whole process.

So, a lot of due diligence, ex-oil kind of tycoon kind of guy, a lot of family generational wealth, a lot of diverse assets in their portfolio, and they knew apps and technology was something that they wanted to invest in more. They just didn’t have much knowledge on it to be honest with you but they found our company sexy. And so, we got to talking and, you know, this due diligence process was an extremely long time. I think I wanna say it was a year, to be honest with you. We needed to build a very strong relationship with him. He was flying out like on the weekly. He wanted to have a business plan developed. So, we hired a growth think out of LA to build a whole entire business plan and financial forecast and, you know, if this business model is viable. He wanted to prove that this business model was actually viable.

And so, that process took a very long time, looking at financials. And when you get someone that doesn’t know much about technology and you’re in technology for a decade, some of the questions are like, “Okay. So, what do you mean your employer programmers are in a different country?

Brandon:How do you work in the computer?

Amish: And what do you mean…

Brandon:Why does the cup holder keep coming in and out?

Amish: “What do you mean you don’t ship them anything? Like, you don’t ship them anything?” I’m like, “No. It’s like a digital virtual app maker.” And so, these were the kinds of questions we were getting, to be honest with you.

Drew: But a year, man, that is a long due diligence process. Like, why were you willing to endure that?

Amish: I didn’t want anything to do with the company, to be honest with you. And this is around the time I actually started my third company. So, I was just like, “Hey, dude, I’m giving this to you, my new operations manager. I want you to go run it and pay me every single month. You take your cut and see if we can find a buyer and we’ll both be happy.”

Drew: Did the buyer ever pull the trigger?

Amish: Sorry?

Drew: Did he ever actually buy the company?

Amish: He did, he did. So, he ended up buying the company. We ended up exiting for around…the sale price was 1.2 million. We got half of that upfront. The way we structured it was half of it upfront. Half of it was put into a new company, new co that we developed that was going to hold the assets of another idea that we had. So, he was gonna invest $200,000 into that idea, which was a whole separate entity. And we’re like, “Yeah. You know, we’re gonna go do this app thing like in a big way.” I would be left with 10% of the old company. And the new company, I wanna say I own like 15% to 20%, somewhere in that range because he wanted us to work. He wanted us to take this thing to newer heights basically.

So, he was willing to put 200 grand into new co. He was willing to cover all of the overhead of the operation that we want to hire. And the other $400,000 was going to be paid as an earn-out basically. We need to hit these numbers and I’ll start paying you. And he had a very specific parameters. I think once it reached over a million or a million and a half bucks in revenue, he would start paying us out on the earn-out.

Brandon:And what was that sale price based off of? Was that a multiple or something, or how did you come up with that number?

Amish: It was a multiple. Yeah. It was a multiple of just gross, one year’s gross. We didn’t try to get fancy with it and trying to put extra numbers around it. We’re like, “Look, this company does a million dollars a year. You want in or you want out?”

Brandon:Got it. And what was the impact of just, you know, emotionally and, you know, to your life kind of going through these kind of sales and the experience you’ve had?

Amish: It’s not…I mean, in my case to be honest with you, it wasn’t easy, both of the sales, I should say, you know. I felt I might have exited too early and I should be focusing on one idea longer. Everything was very quick start. My first company was much longer. I was in there for like eight years but that was because my business partner and I didn’t get along. This app company, I was in there only for like, you know, a year and a half, two years before I decided to sell it, three years at the most. And, you know, I wish I had gotten a little bit more revenue under my belt, traded more system, hired more employee, and built it out a little bit, you know, before trying to do something like that.

So, I think it was rushed. And it felt that way. And it took a toll on my energy. It took a toll on my life personally and emotionally because you build something and then it’s like having a baby. It’s like you build something and you’re like, “Oh my god. I put all this energy, and time, and sweat, and money into this thing. And now it’s producing money. And I wanna grow this thing. And I wanna scale it.” And you think you’re doing everything right. And then you realize you’re not. And, you know, it’s harsh. It’s the harsh reality sometimes of situations, you know. You just have to recover. You just have to kind of bounce back.

So, that deal did end up…what happened with that one was we hired a bunch of new programmers immediately because he was gonna put the money in. We started driving the vision of the company. I had stepped away from the day to day. I have been removed off of salary because the operations manager and director that they hired said that he was gonna run new co and old co. So, I said, “Okay, great. Awesome. I’ll just be the visionary. I’ll tell you what to do. I’ll tell you some ideas that we should execute on.”

So, we hired like two or three programmers. We all got an office here in Encinitas. And we started cranking the way of the company. Before you knew it, we were kind of running out of cash and we said, “Okay. We got to make decisions here.” The guy who bought the company was like, “We got to do something.” The programming team wanted to move on one direction. The operations manager kind of just threw up his hands and said, “I don’t know what to do.” I said, “We need to move this way.” And the guy who bought the company basically said, “Okay. This is my company. I’m taking the programmers, you and operations manager. I’m not talking to you anymore.” He just stopped talking to us.

So, we’re like, “What the hell?” Like, this guy just took our programmers and left. Pretty much kicked us out of the company and just said, “Okay. I’m going to do this.” And so, over time, he said, “I’m putting 200 grand more in. I’m basically diluting your shares, diluting your shares, diluting your shares.” And he diluted us. Until eventually the company just flopped and stopped producing revenue. And all the other programmers were let go and never got the earn-out side of it.

Again, it’s just like when no one is there to set the vision of the company and like set those milestones, like, now the programmer has an idea, now the other programmer has an idea. Now, the guy who bought the company wants to go and invest in lacrosse app. And you’re like, “What the hell is going on?” I don’t know. When you sell a company, there’s an emotional attachment there. And you wanna see your baby thrive, you know. It’s like you wanna see your baby turn into something big because there’s nothing more in my life that I would’ve loved than to see that company go to the next type even if I didn’t own any of it. Unless I know I can just be like, “Oh, that company is still rocking? Well, that’s pretty cool. It’s my idea, you know.”

Drew: Right.

Brandon:Absolutely. Is there anything you would’ve changed in that deal, in this kind of second deal?

Amish: You know, I wish I was more present in the company post-sale because the guy was willing to put a lot of money into the company if he saw some kind of results. But my heart wasn’t there and I just had no desire to. But in hindsight, if I had just put in, you know, that extra effort, I feel like we could’ve taken it places.

Drew: And how is this kind of shaping what you’re doing now?

Amish: So, yeah, since those two kind of companies, you know, what’s funny is my first company that I was talking about that me and my partner didn’t get along, around all this kind of chaos, we ended up selling that company for a short amount. So, that was also a successful sale, I should say, but it was a short sale. So, we just want to get rid of that. So, that’s what we did.

And so, I took a lot of that money that I had made from these two exits and put it into a new company where I just want to do something more aligned with my, I guess, you could say like more aligned with who I am and I guess my purpose. And my wife and I are really into like eastern kind of wellness. And that has like yoga and meditation and like eastern natural healing, I guess you could say, you know, natural modes of health basically. And we decided we also wanted to work together on something like that. And so I said, “Yeah, I would love to work with you on something like that.” And, you know, that’s something that we’re really interested in bringing ancient wisdom back to the world through modern, improving it with modern science. So, it’s not just saying, “Hey, go do this because it’s fun and it’s like the ancient said it.” It’s like, “No, this is actually helping your heart, or this is actually helping your mind, or this is actually helping, you know, this part of your life.”

So, that’s what we’ve been focused on for the last four and a half, five years. And we’d took that, I also took that company over a million dollars. So, that one took me a little bit longer to get over a million dollars. Took me two and a half years or so, but that’s because I stepped into a whole another world, and I had to kind of get my ground. I didn’t really know what I was doing when I stepped into that world. And now we’re on scale to 4x this year, so pretty exciting time.

Drew: Congrats.

Brandon:I know I’ve had a lot of kind of deep conversations with you kind of, you know, when the other company kind of failed, when you were working on that company, you really didn’t like what you were doing. And correct me if I’m wrong, but you really didn’t like what you were doing. You’re kind of depressed. You kind of didn’t have your kind of meaning and doing something that was really fulfilling. I think you not only started this company, but you’ve completely changed your life and your lifestyle. Do you wanna talk anything about that as well? [crosstalk 00:55:47]

Amish: Yeah. You know, I would love to talk about that. You know, I think growing up, you know, my parents were immigrants. They moved here from India in 1978. And so, I’m first generation. I was born in New Jersey. I was born in Edison, New Jersey. And so, I grew up, you know, in America with the American dream. And my parents didn’t make much money growing up, you know.

So, I was the man, you know. I had to break out of that cycle. That was my thing. So, I feel like I was just taught that I need to make money, make money, make money, make money. I was never taught to build a business. I was never taught to grow, or to expand, or to optimize, or to focus on one thing and put your heart into it, you know. I was always taught, “Go make money and buy the Ferraris, and the Lamborghinis, and the watches, and the expensive shit and party, and take private jets.” That’s not even making money, right?

But that was my life now for a very long time. And before I knew it, I had gotten very, very, very sick living that lifestyle with my first couple of companies. And it’s like a massive toll on my body. And, you know, I was 30 years old, or 29 or 30 years old sitting in the doctor’s office. And I was severely depressed. I was suicidal. I had like eczema going all over my body. I was like, there’s blood in my stool.

Drew: Wow.

Amish: So, he took all my test and he’s like, “Dude,” he’s like, “You’re messed up, man.” He’s like, “Your cholesterol is 380. Your liver is about to pop and your kidney is about to give up on you.” And that’s when I was like, “Holy crap.” I was like, “What the hell am I doing?” Maybe what I’m trying to do in the technological affiliate marketing like make money, like here just go make money, go make money, go, go, fast, fast, fast, you know, instead of like thinking, consciously thinking about what I’m doing and feeling what I’m doing was a big issue, you know. It got in the way of my life. I did surround myself with the Maseratis and Ferraris and the beautiful houses in La Jolla. And I wasted a shit on the money.

I had great experiences, don’t get me wrong. And I wouldn’t look back on it at any point in my life, you know, just because I’ve had experiences that I don’t think anyone half of the world may not have had, more than half of the world. But in hindsight, man, it’s just like, you know, really go deep into one thing. And make sure you love what you do, you know. If you don’t love what you do, you’re gonna look for other ways to make your life happy. And I think I was just miserable in trying to build like a kind of marketing company when that’s not really what I wanted to do. I wanted to be more involved in this ancient wisdom, and yoga, and meditation and actually do good, you know. I wanted to see if I can shift the world a little bit instead of just make money for myself.

Brandon:Absolutely. Good words.

Amish: That’s really, you know, what it’s been about.

Brandon:In the end, I ask the kind of the biggest takeaway that you learned from your experience, do you think that would be it or…because that sounded so amazing?

Amish: That is it. That is it, you know. Do what you love. Do it from the heart. Make sure you…and give it your all. And try and focus on one thing, you know, and go deep.

Brandon:Absolutely. Well, thanks for coming on this show today, Amish. It’s great advice. And we’re really excited to hear about the rest of your story. How can our listeners follow you or get in touch with you?

Amish: Sure, yeah. You can go to deeporigin.com, that’s my company. Or you can check me out on my own website which is amish-shah.com. So, not dash like the word but the hyphen, so amish-shah.com.

Brandon:Great. That’s so great.

Drew: Awesome. Thank you so much.

Brandon:Thanks, Amish.

Amish: Cool. Thank you, guys.

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Scott Neuberger – Spin Out and Merger with Competitor Leads to $100M Strategic Exit https://www.goodmanson.com/exit-story/scott-neuberger-merging-with-competitor-leads-to-100m-exit/?utm_source=rss&utm_medium=rss&utm_campaign=scott-neuberger-merging-with-competitor-leads-to-100m-exit https://www.goodmanson.com/exit-story/scott-neuberger-merging-with-competitor-leads-to-100m-exit/#respond Tue, 21 May 2019 18:26:19 +0000 http://www.goodmanson.com/?p=22079
After spinning a technology product out of Qualcomm to create a company, he merged it with a competitor which ultimately valued the company more than 30x higher than at the time of the spin out less than 3 years earlier.

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01

Spinning technology out of companies

Identifying an underperforming technology in Fortune 500 company and spinning it out without having to invest a lot of capital.

02

Merging with a Rival

How they decided to merge with their largest rival to dominate an emerging market and become a high value acquisition target.

03

Strategic Exit through a Bidding War

Pitting the two largest companies in their industry against each other to have a 30x exit.

Co-Founder and Managing Partner at Karmel Capital

Scott Neuberger

Scott Neuberger co-founded Karmel Capital in 2013 and is a Managing Partner of the firm. Previously, Mr. Neuberger was CFO of Whistle Labs, Inc. in 2015 and up to and after the 2016 acquisition of Whistle Labs by Mars Petcare. He joined Whistle Labs in its acquisition of Snaptracs, Inc. in 2015. Mr. Neuberger was CEO of Snaptracs from 2013 until 2015. In 2013, Karmel Capital acquired 85% of Snaptracs, a wholly owned subsidiary of Qualcomm Incorporated (NASDAQ: QCOM). Snaptracs developed, manufactured, and sold Tagg, a wearable device for dogs that tracked their GPS location and exercise. Prior to Snaptracs, Mr. Neuberger was President of Infocore Inc. a data driven marketing firm dedicated to transforming one to one marketing. While at Infocore from 2009 – 2013, Mr. Neuberger grew the revenue of the firm 3x and increased its profits significantly. Mr. Neuberger started his business career as a co-founder of Collegeboxes Inc. while an undergraduate and was CEO of the company until it was acquired in 2008. Collegeboxes provides shipping and storage services to students at 50 colleges and universities in the U.S. Collegeboxes is now owned by AMERCO (NASDAQ: UHAL). Mr. Neuberger received his B.S.B.A in Finance from Washington University in St. Louis in 2003.

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Full Transcript

Drew: Today we have a Scott Neuberger with us. Scott and I have been friends since 2010, so it’s been a little over seven years. And he and I have known each other through the entrepreneur’s organization. Scott is an interesting guy in that he is a triple threat. He has done a startup, he has done a turnaround, and he has done a corporate spin-out called Tagg that we’re gonna hear about today. He also has a wife and four young kids. And a little-known fact may be that he is the number one New England Patriots fan in San Diego. So with that, Scott, we’re glad to have you here on the show today.

Scott: Thank you, Drew. Thank you, Brandon.

Brandon: Great to have you. So Scott, why don’t you tell us a little bit more about how you acquired this company and, you know, what you’ve learned from that?

Scott: Sure. So in 2013 with a partner we started looking for undervalued technology companies to acquire and were particularly focused on businesses that were already, you know, founded or owned by larger corporations. And we were introduced to a team at Qualcomm that had started a launch of a GPS tracking product for pets called Tagg two years prior to that, which was the culmination of a significant amount of research and development by Qualcomm to develop a very small lightweight long-lasting, from a battery perspective, cellular GPS tracking device. And it immediately became very interesting to us because it was clear that there was, you know, very high-end technology involved, you know, intellectual capital that was hard to come by especially for, you know, for the size of business that it was. And so there was a very large difference between sort of how much technology was involved compared to how big the business was. That smelled like value to us and opportunity. And so we got very interested very quickly and within a few months had negotiated a creative agreement where we acquired the business from Qualcomm without actually having to pay any cash. In fact, in a lot of ways, they paid us to acquire the business. It wasn’t in a great position from a dollars and cents perspective but there was a lot of assets available both physical and intellectual.

Drew: Wow, that was a lot. I mean, like, I’ve got, like, 10 questions that came to my mind. One of them is in the beginning, you know, what set you off was this idea of identifying an undervalue tech company. Can you maybe tell me a little bit about, like, what did you mean by that and kind of what got you to start looking into maybe existing companies to find that kind of asset?

Scott: Yeah, so what got us there was it was sort of the sum total of my partner and I’s, you know, sort of careers up to that point, which was we both had entrepreneurial roots where we started businesses from scratch. And doing that and kind of fighting that fight for as long as we did, you know, it had gotten pressed in our memories pretty hard that there’s a big difference between starting a company, even raising your first round or two rounds of capital, and, you know, or many after that and ultimately selling and generating a tremendous amount of equity value in the business. And so for me personally I focused…you know, I became very interested in acquiring businesses as opposed to starting businesses because it felt like I was already sort of stepping into something that had a foundation as opposed to having to build that foundation. And I instead could really focus my energy on building the building and not have to build a foundation and the building. And so, you know, we’re looking inside of all corners for that type of opportunity. But, you know, so what we learned though was that inside corporations they often don’t sort of fall for the sunk cost problem that a lot of, you know, individual owners and entrepreneurs sort of get stung by which is, you know, they get very focused on how much they’ve invested with either time and/or money and thus are very emotionally attached to the product or service or asset they’ve built, thus making it hard to sometimes, you know, get them to sell it when it’s in fact probably a good time for them to sell it. Inside a big company like Qualcomm, you know, they’re very rational and very focused on what their opportunity cost is beyond just the capital that they’re investing and thus it was a very rational quick conversation. And we were able to negotiate terms that we thought were very good and, you know, that was a major focus for why we were focusing on companies to begin with.

Brandon: So did Qualcomm have that kind of listed for sale or did you meet them in your networking and kind of through your network or how did you, like, really find out about this opportunity because I know a lot of people want opportunities like this and you kind of look online and you try to find companies for sale. But how did you, like, actually connect with them and then kind of move down those discussions?

Scott: Previously they had retained an investment banker to market the business. But the first kind of round had kind of that process, had sort of run its course, and they hadn’t developed any strong, you know, possibilities. And that was right around the time that we got personally introduced to the team that was in charge there. And sort of the combination of the personal introduction and the fact that the strategic review hadn’t really generated any significant potential meant that the Qualcomm decided just to deal with us directly and not through their investment banker. But that was just sort of a circumstance of, you know, part of the circumstances.

Drew: Now Scott, some people might say that getting an asset that they had invested… I think that you said maybe over $100 million for no cash down. To say that, that is terms that are very good, that could be maybe the understatement of the year. [crosstalk 00:26:29]

Brandon: How did that whole process work with no cash? Like, what were the terms of that deal?

Scott: Well, the terms of the deal involved a promissory note that my partner and I gave the company, gave Qualcomm. So that was the form of the purchase price. But in exchange for that sort of promissory note and why we say that there was sort of was no cash involved in the transaction was that the company had about $5 million worth of finished goods inventory already, you know, in its warehouse of the GPS tracking product. And so those were among the assets that we acquired, which we were able to sell, you know, to retailers and consumers and net more than the $3 million promissory note that we issued to Qualcomm. So, in essence, that’s why they “Paid us to take the business.”

Brandon: That makes sense. Why were they looking to sell?

Scott: They were looking to sell we believe because they were…you know, Qualcomm has very big visions and very big… They’re trying to tackle very big problems and create very big opportunities. And when they went down the path of Tagg it was because they thought they were creating, you know, a cell phone-sized opportunity. You know, some of their early marketing campaigns were called The Cell Phone for Dogs. I think that was their, you know, desire or wish but it turned out not to be the reality of the time. And so when it became clear that it was not going to be a cell phone-sized opportunity then it was, you know, just like I said sort of a question of, you know, what is their opportunity cost relative to continue doing this? And the engineers and the people that they are putting on and sort of the reputation that they’re investing in it, what else could that be doing for them?

Brandon: Absolutely. So you kind of got the brand and you got some of their inventory. Did you also get any of their staff?

Scott: We tried. We did get about 10 people from Qualcomm ended up joining the company as an independent entity. We tried to get more and it’s hard to get people to get out of large corporations like Qualcomm. So we had to supplement the team quite significantly. I mean, you know, part of the turnaround effort involved reducing the expense of the business substantially. So we had to learn to live on less. But, you know, the business inside Qualcomm had more than 50 employees and a lot of support from other sort of pieces of the Qualcomm infrastructure. And we had…you know, we built a team about 20 to start with and ultimately to about 30.

Brandon: How did that transition work? Like, you know, day one you had the deal. You’re walking into the office on Monday morning. How did it go from there?

Scott: Well, so, you know, the way it felt, like, it was, you know, jumping on a moving train and trying to change direction from almost a total stop. I mean, everything had to be done over, like, in terms of even just, you know, finding an office and setting up payroll and, you know, computers, and desks, and everything like that all the way to, you know, recasting the marketing strategy, you know, getting work started on a next generation product as soon as possible, which we started, you know, pretty much right when we acquired the business in mid-2013. And then that product started shipping to customers in early 2015. You know, it was a complex product. It took a long time to build. We knew that if it was gonna be a long-term success that we needed to continue to innovate on the product itself. And that was a long-term investment. So, I mean, there was just so many things to do in such a short period of time. And, you know, by nature of the fact that it was also a business that was, you know, I think safe to say in a distressed situation, there was, you know, always a focus on, you know, are we improving the business or just, you know, sort of pushing the can down the road?

Drew: Scott, when you bought it I guess who was with you in that purchase? And then, like, kind of, what was the game plan or thinking of like, “Hey, this is where we’re gonna take this?”

Scott: Yeah, so my partner in the transaction was Jim Berline. And so the two of us were the ones doing the transaction. We formed the board, the company, and we invested nearly all the capital that went into the company after the transaction. And during…how we decided what to do, you know, I wish we could say we had this grand master plan, you know, that was fully baked out on day one. It wasn’t exactly as clean as that, you know. What we first did…you know, the first six months were purely focused on just, you know, proving that there was a pulse and that we could control that pulse in the business in terms of being able t, you know, invest marketing dollars and, you know, increase sales or, you know, invest in the customer experience and decrease churn or, you know, reduce costs and still have, you know, everything working in the business. And during that process we were also just sort of thinking a lot about the company and where we wanted take it and we went through different ideas. I mean, for a long time, in fact, pretty late into the period where we owned the business, we had considered using it more as a platform to launch other internet things, consumer products, consumer or business to business products that could operate on the same technological infrastructure that was built for the GPS, the patch GPS device. Over time we, you know, ended up focusing only on the pet space and that was mostly because it was the biggest market opportunity. It was the most defined market opportunity in front of us. And, you know, I think it was a good decision in the end.

Drew: So you launched this. You said, you know, we didn’t have this grand master plan and you’re going after things. I guess what were some of the things that worked that you kind of like, “Wow, this really worked well,” and maybe what were some of the biggest challenges that you had that you ran into?

Scott: Sure. So I think on the biggest challenges side I think, you know, we could…taking the product out of Qualcomm was one thing but removing all of the…but really reforming the cost structure of the business, which was really driven by…which was dictated by a lot of decisions that Qualcomm had made about how the product was manufactured, where it was manufactured, and how the service was. The infrastructure for the service was created and maintained largely using, you know, very expensive enterprise level software, which was, you know, appropriate for a company like Qualcomm building another cell phone. But not necessarily the same decisions that, you know, a startup focused on, you know, consumer technology device would have made. And so, you know, it was harder than we anticipated to sort of turn the ship around and reduce the cost of the business, which necessitated more investment in the company. You know, on the positive side or on the accomplishments that when I look back fondly on it, I would say that we really dramatically changed the customer lifetime value and really by lengthening the average customer lifespan or the amount of time that the customer is a subscriber to the service after buying the product. And, you know, there was no one silver bullet there. But it was a lot of just really focused time talking to customers, understanding their experience, understanding what was the good and the bad of that experience and really focusing on fixing that, improving that experience, getting them connected to the product early on in their ownership period. And also, you know, coming up with a better warmer brand so that we were attracting people more because they’ll love their pet more than the sort of a more colder just pure technological specs of the product.

Brandon: What did your team look like at this point? Like, who did you have on the team and kind of in what season, what positions?

Scott: So most of the team was focused on engineering, either hardware or software. The balance of it was… I would say 60% of the team is probably software because there was a pretty robust infrastructure, again, that was built by Qualcomm that had to be maintained and not only maintained but also redesigned basically from scratch as quickly as possible. So that was a big undertaking and it necessitated most of the team effort. The next biggest team was really our marketing team. We had a CMO and several people that worked for him. And so it really was a software-dominated team, you know, and one that also had to market and grow the [inaudible 00:39:00] as fast as possible.

Drew: So, I mean, in essence you have this GPS tracking dog collar that you’re selling and, you know, it’s out there. It’s on the market. I mean, did you have any competitors? Like, what was the space like at that point?

Scott: Yes, so there were a handful of products out there that were, ranged the gamut from various technologies that allowed you to, you know, try to locate your dog. Some of them were purpose-built for pets but most of those did not involve pure cell phone GPS kind of connections, meaning that the accuracy was much more limited or the range was much more limited. And there were certainly other cellular GPS devices on the market that were or general tracking devices that had identified the pet market as a clear opportunity and directing some marketing resources towards it. But there were very few pure play pet-focused cellular GPS devices on the market at the time. Throughout the about 18 months that we owned the business, you know, fully, a number of products we’re announced. A few of them actually came to market. It was one of these areas where it’s really easy to dream about the opportunity. You know, everybody knows the sort of sexiness of the pet space and, you know, the market dynamics that drive it, sort of the humanization of the pet, which is the sort of global trend that’s been driving, you know, really tremendous sales growth in that space for really decades now. But actually bringing a product to market and getting it, you know, built and certified with, you know, a cellular network like Horizon was a bunch harder to do and quite capital-intensive. So there were people but there weren’t really any pure play direct competitors that had… Many were close to the size of subscriber base that we do.

Drew: So you’re, you know, you’re off to the races. You’ve got farmers who are super happy because their dog that wanders away miles away, you could track them a far distance. And, you know, the New York person is, you know, watching their dog get walked by their professional dog walker and they’re all paying you or Verizon whoever the fees to use this. Kind of you look at the horizon and what were some of the things that, you know, you were kind of thinking of, like, you know, going next? And what were some of the options and then ultimately, you know, what did you guys decide?

Scott: So, you know, after we sort of proved out that there was a pulse there and that we could, you know, that the initial turnaround the taken a fact which you really lowered the burn in the business from, you know, probably over a $1 million a month to near cash flow neutral. And so we felt like the business was self-sustaining to some extent. And then we started figuring out what we wanted to do and where we wanted to take the business. And like I said, you know, even though we kept experimenting with sort of other platform plays using the infrastructure in other markets, most of our energy focused on the pet space. And when…and the deeper we got in the pet space, you know, the more we realized that we needed a more complete team that could, you know, fully realize the vision of Tagg and also, you know, a warmer brand. Despite our best efforts for Tagg to really warm up the brand and create a story that resonated with people, the history of the company being part of the largest, you know, corporation and it’s…you know, it was hard to fully put to rest and pivot away from. And so where we ultimately ended up was merging the company with a startup that was less than two years old called Whistle that was founded to bring technology to the pet parent relationship and had at the time launched a activity monitor, which was essentially a FitBit for dogs but was very interested in bringing GPS functionality to their product that they were selling to customers.

Drew: So how did that happen? I mean, did you approach them? Did they approach you? Maybe how did the connection…talk to me about that.

Scott: So interestingly they actually launched their business publicly the same week that we acquired the business from Qualcomm. So from the very beginning we were very aware of each other. We weren’t in a direct competitive space. But we were certainly the two I think the most, the best funded companies in sort of the pet technology space at the time. And even though we weren’t direct competitors we were quite knowledgeable with each other. And so we had formed a relationship with them early on and, you know, one of a friendly partnership early on and had tracked each other’s progress over that about 18-month period before the company’s ultimately merged together between their…when they publicly launched their product. And we acquired Tagg too when the two businesses to merge together. And then, you know, a few months before when the transaction actually took place, I believe they approached us specifically. And we welcomed that approach and then we engaged in, you know, very, very helpful negotiations I think for both parties.

Drew: So on your end tell me, like, did you bring someone in to help you with the process? Did you guys do all the negotiating yourself? Maybe talk to me about that, the transaction, and how you negotiated that.

Scott: Yeah. You know, I think both parties had their advisers but it was mostly, you know, myself and my partner and the two co-founders or two of the three co-founders of Whistle that were the CEO and COO just spending a lot of time talking in person, on the phone, you know, over probably 5 or 10 different meetings and then, you know, a host of phone calls and just forming a relationship. I mean, a merger at its core depends upon, you know, there being a strong relationship between the people that are, you know, gonna be running the combined business. And so that’s what we focused on. And then ultimately, you know, it made sense for a transaction to come out of that and both parties felt that way and then it was just down to carrying out the terms of the transaction.

Brandon: What did the terms end up being and how long does this kind of process take from start to finish?

Scott: So I’d say it was about three months, three to four months start to finish from first contact to closing, I mean, from first, you know, contact related to this topic to closing. And the final deal terms involved a cash payment to my partner and I of about $6 million and then a continuing equity stake in the combined business that was equal to about 20% of the combined business.

Brandon: How did the… You know, everybody has a horror story about business partners. How did you guys kind of merge everybody together and keep everybody on track?

Scott: You know, both businesses were on a very fast-paced kind of schedule, you know, focused on growth, focused on launching your products, getting them to market, growing a subscriber base. You know, one of the things I give Whistle a ton of credit for is that they had from very early on focused on the culture of the company and that led really through the business, through the whole, you know, through the office and all the different people in the different places that worked for the company. And so they did a really great job of welcoming in the Tagg team into that culture. And that I think facilitated a very quick sort of meshing of the teams. I remember there was…within a month of the closing we did an all-hands couple day retreat where, you know, everybody which involved, you know, probably 60 or 70 people from, you know, many states. Most of the people were in San Diego and San Francisco but there was people from Hawaii. There was people from North Carolina. There was people from Colorado, lots of other places like that, that where we had, you know, one or two full-time employees that worked out of their home. And, you know, they were able to really, you know, extend that culture to Tagg, to the Tagg team, quite quickly and even though the product maintained the Tagg name for a long time, just because of certain realities, that made that hard to change on a dime. The product, the brand Whistle, very much became the effective name of the business. And that, I think, was an important step to realizing the true value of the company beyond any, you know, in particular in one device or, you know, one business model. You know, it was about building a vision for what the long-term pet and pet parent relationship would look like and how technology would really be a core piece of that.

Brandon: That’s great. What was the biggest thing you learned from that deal?

Scott: Getting to the sort of nuts and bolts of the acquisition and the discussion, one thing I personally learned was that I think I focused too much on the method of the payment, meaning, like, what the total, like, you know, final percentage of the ownership stake of the business was gonna be of, you know, the Tagg shareholders in the combined company and less on what the total dollar value of the deal was. And so personally I think I learned really, you know, focusing on the dollar value first and then sort of how that dollar value was paid, you know, whether that’s equity or debt or cash or, you know, other things that would be perhaps a more fruitful end to the negotiation but nonetheless, you know, it was a good deal.

Drew: Good. Yeah, and, I mean, it sounds like the cash kind of covered the money that you had already put in so, you know, being made whole. And so you had that and then you had another upside with Whistle. What was your role, you know, when the companies came together?

Scott: I was the CFO of the combined company from the point that the companies merged to the point that that company was acquired by another party in a few months after that.

Drew: So, I mean, this is kind of an ideal situation in that you’re getting a multiple exit scenario here. You know, talk to us about the second acquisition. You know, how did that come about?

Scott: So in the merger also at the same time Whistle raised a round of financing simultaneously with the closing of that merger or acquisition. And one of the largest investors, actually the largest investor, in that second round of financing for us was Mars Pet Care, which is the largest, one of the largest, pet food and pet care businesses in the world. And they ended up acquiring the remaining portion of the equity. They owned, you know, far less than a controlling stake at the point of the merger but they ended up acquiring the rest of the equity of the business almost exactly a year after the merger transaction. And, you know, the way it came about was really just, you know, furthering this… You know, they had a deeply-held belief that technology was going to be a driving relationship of the pet and pet parent relationship in the future. And that’s what brought them to the investment to begin with and then the period of… You know, for the first six months to nine months I guess of the merged company I think just cemented that in their minds and showed that, you know, what they could do as if it was a wholly-owned piece of this large corporation. In some ways it’s kind of interesting that it started as a large corporation, you know, and then to reform itself and matured a bit and then ended up back in owned by a large corporation in the end. And I think all three of those sort of phases of its life were necessary frankly. But it was… You know, you’d have to talk to them to know for sure but I would imagine it was always on the table of ideas that they were planning on. And it was just sort of a matter of timing and the timing worked out quite perfectly for, you know, Tagg and Whistle that they decided to move forward and move forward aggressively as quickly as they did.

Brandon: I think when you hear about people raising money they don’t have to think of a strategic investor like Mars. Is there any insight to how those big companies work and how you can reach out to them to raise money?

Scott: You know, in today’s world, you know, it’s we’re only…we’re all connected at some level to everybody. And I think one of the things that the CEO and COO of Whistle did so successfully is they really were able to connect with so many people and connect effectively to so many people in lots of different areas. And I don’t know exactly where the Mars relationship generated from. But I’ve seen this in several parts of my career that involving, you know, strategic investors and strategic partners in a meaningful way can pay huge dividends. So I certainly recommend as much as possible to, you know, always be focused on finding those types of investors or those types of partners, you know, because there’s just…there’s, you know, more and that’s the reason they call it strategic. There’s more to be gained than just the dollars and cents of the transaction and that, you know, that can ultimately lead to good things for everybody, whether it’s sort of increasing motivation or increased valuation in dollars.

Drew: So Mars is involved. They’ve invested, you know. They’re seeing what’s happening in the combined company. You know, so it seems like they’ve got the inside track. Were they the only kind of person or party at the table?

Scott: There were other bidders when it came down to it and that’s, you know, when I referenced sort of great timing, you know, it worked out that there were some competitor bidders that were, you know, let’s say important competitors for Mars that I think spurred then to move faster than they otherwise might have. And that was good for everybody involved.

Drew: Bidding wars are always good when you’re in the sales process, right? So where did it end up? You know, what did you sell for? You know, what were some of the terms of the sale?

Scott: The business sold for $100 million cash and sort of on top of that and sort of, you know, there were several other sort of subterms to it. But they were all sort of around the concept of trying to maintain the independence of Whistle inside of Mars and give them the freedom to continue to flourish but with, you know, less focus or less worrying about the short-term cash implications of their growth plans and really focus on building the best and most valuable long-term brand and sort of services that they could. And so, you know, we’re just over a year since that transaction. I think it’s about almost 15 months from since that transaction and, you know, I have not been involved for just about a year now. But, you know, everything I see and hear that is that it’s going, you know, swimmingly well.

Drew: Awesome and I’m no mathematician but 20% of $100 million sounds like $20 million. So, you know, is that what you and your partners got?

Scott: I can neither confirm. No, I’m kidding. Yes, 20% of the $100 million is $20 million.

Drew: That’s fantastic. So you had already received six and so you get another 20. I guess what were your emotions when, you know… How were you feeling when you, you know, heard that that deal closed and, you know, what was going on in your mind at that moment?

Scott: You know, it was a great feeling. I guess obviously it felt very validating for the amount of, you know, risk that we took in the transaction, you know, and the different decisions we made that, you know, ultimately it seemed to turn out about as good as we can do but, you know, it certainly wasn’t always looking like that was the case or that’s what the outcome was going to be. So I just think it was felt great and it felt validating me and it really, you know, spurred me and it motivated me to get working on the next deal and see if we can get even bigger than that.

Drew: In that moment I guess where were you when you heard the deal closed and what’s the first thing you did?

Scott: Well, so, I mean, I was sitting at my desk in the office and I heard that it closed. You know, I was… So I was not in the deal room when it happened. But it had been expected that day and, you know, essentially I think in today’s world, as we all know, you know, it’s often sort of remote signatures and just, you know, it’s less dramatic or climactic than it may have been in the past. But what did I do? I mean, I think I e-mailed a lot of my friends and family in telling them about the news and just, you know, sitting back and saying, “Wow. I can’t believe that really just happened.”

Drew: You logged into your bank account to make sure it’s all there.

Brandon: Well, that’s so exciting. How else did your life change after that?

Scott: Well, I think more than anything it broadened my view of the horizon and what’s really possible. And it focused me on thinking bigger. It also afforded me…you know, basically for about the last year I’ve been able to really… You know, I’ve probably worked just about as hard as I’ve ever worked but under a very different environment without, you know, a company to run or investors to, you know, report to and to be able to, you know, chart my own course and, you know, explore lots of different things make several investments and, you know, I think plant a lot of seeds for what should be, you know, a very fruitful harvest in the future.

Brandon: Yeah, everybody says think bigger. People have told me that forever. Like, what does that really mean for you now compared to how you were thinking before and then kind of how it will change how you think in the future?

Scott: I think one way it manifests for me is that, you know, to not worry as much about, you know, how I would finance deal X, Y, or Z, or, you know, or what the, you know, size of the targets that I’m going after. You know, that there’s different financing opportunities and different sources of funding for all sizes of transactions and that just because it’s a larger business or a larger-sized transaction doesn’t mean it’s a harder transaction or that it is, you know, that you need something that I don’t already have. So I think it’s just, you know, focusing more on the specifics of the opportunity and less on the dollar numbers involved, having confidence that if the opportunity is right, the funding and the financing for the transaction will be there.

Brandon: Absolutely.

Drew: Awesome.

Brandon: What’s one piece of advice you would give to someone who wants to sell their company?

Scott: Try to get multiple bidders involved.

Drew: Nice. One question I have, which goes back a little bit but, you know, when I sold the last company, you know, I went out and got a golf cart that’s big pimping. You know, it’s got hydraulics. It’s all black and surround sound, etc. You know, was there something that you went out and bought and splurged on, you know, after the transaction closed?

Scott: No, not any one thing. But I would say that, you know, the year plus of just, you know, at a disciplined but, you know, slow pace was the biggest thing I splurged on. I didn’t feel like I had any, you know, defined, you know, demand to earn a salary or to, you know, make a certain amount of money in this past year. And I think that I am very, very thankful for that and certainly the transaction afforded me that ability.

Brandon: Absolutely. What do you think you’ll work on next now?

Scott: Well, so I actually have two just sort of operating things happening right now. One is my same partnership with Jim Berline where, you know, continuing to look for the next sort of undervalued technology company and potentially, you know, do another transaction along the same lines of Tagg. And then at the same time, we also formed a new group called Crown Growth. And, you know, we’re focused on finding great entrepreneurs and great businesses and linking them to strong private equity firms and affecting a role of transactions where platforms acquire add-on companies and are able to deliver great returns for themselves and their shareholders.

Brandon: That’s exciting. How can our listeners stay in touch with you through your journey?

Scott: So you can reach me at scott@crowngrowth.com or on LinkedIn you can find me at Scott Neuberger. And I’d certainly love to talk to you, talk to anybody.

Drew: Awesome, Scott. What a great story, you know, a lot of pieces here for people to learn from. Congratulations on all your success and we look forward to continuing to hear what you’re up to.

Scott: Great. Thank you.

Drew: Awesome.

Brandon: Good job. That was awesome.

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Dean Rosenberg – Finding and Selling a High Value Niche SaaS Company https://www.goodmanson.com/exit-story/dean-ronsenberg-finding-a-high-value-niche/?utm_source=rss&utm_medium=rss&utm_campaign=dean-ronsenberg-finding-a-high-value-niche https://www.goodmanson.com/exit-story/dean-ronsenberg-finding-a-high-value-niche/#respond Tue, 14 May 2019 17:43:07 +0000 http://www.goodmanson.com/?p=22057
Building a niche SaaS company from a client’s custom software request and selling it even when they weren’t looking for an exit.

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01

Selling when not Planning To

How Dean built a great company and sold it versus focusing on the exit where there is a risk that you don’t build a great company in the process.

02

Finding a High Value Niche

How Dean built a niche SaaS company from a Custom Development request from a large customer.

03

Using PR to Scale to a $7M Business

How free PR helped them grow and get the attention of the market, which ultimately led to an exit.

President at Tech Coast Angels San Diego

Dean Rosenberg

Dean is President of the San Diego Chapter of Tech Coast Angels, one of the largest early stage investment groups in the US. He has been an active entrepreneur within the San Diego start-up ecosystem since 1989, raising over $30M in venture capital. His last software company, AIRSIS, Inc. was funded by TCA and acquired by a public company in 2014. Dean is now a “professional” angel investor and is active in over 25 companies.

Dean is the Founder/CEO of Venture San Diego which is focused on providing support, mentoring, and funding to early stage companies within the start-up ecosystem in Southern California. Venture San Diego assists early stage management teams with business strategy, operational execution, and financing.

Dean is an investor, advisor, and mentor to early stage founders, management teams, and companies. Seasoned CEO and CTO with an eye for execution and a bias for action.

Suggested Resources

What Entrepreneurs need to know about
Selling to a Private Equity FirmRead More
What Entrepreneurs need to know about
Using an Investment Banker or Business BrokerRead More

Full Transcript

Drew: Today we have Dean Rosenberg with us. I’ve known Dean, and Brandon, you as well, have known him for a number of years through the entrepreneurs’ organization here in San Diego. Dean has been active in the entrepreneur community for…I think since the late ’80s. So he has got a lot of experience. In fact, he created the first online restaurant order system in ’96. And he has started several companies. He’s raised money, done custom software development all under the guise of these harebrained schemes, as his wife calls them. So we’re glad to have him and learn from him today. Welcome.

Dean: Hey, thanks,

Drew. Thanks, Brandon.

Brandon: Thanks for coming on, Dean. Why don’t you tell us a little bit about what your last company did and how you started it?

Dean: Yes. So my last company was actually called AIRSIS. But we were more known in the industry we served for the SaaS product we had, which was called PortVision. And what PortVision did is that it essentially tracked the real-time location of every large ship in the world like maritime vessels, like boats and ships. And then we gave that information back to companies for them to solve business problems. I wanna say we captured something like 100 million individual vessel movements every day and maintained a data warehouse of billions of records and then gave them back to, you know, all different sorts of stakeholders who wanted to know about…information about the movement of those ships. It actually started as…we had a software consulting company. And PortVision really was a project that we were intending to do for a client that just got out of control and turned into a product. And that came with it all sorts of other challenges because when you’re set up as a software consulting company and you’re used to there being a price tag on every hour of your staff’s time, and then as you move forward, you have to do things like invest in R&D and tell people you don’t want their checks for work-for-hire. And there’s all sorts of sort of management and entrepreneurial challenges in kind of navigating that journey.

Brandon: That’s great. Can you tell us a little bit more about how you kind of converted those two, how long it took, you know, to go from a consulting to a product? You know, for people listening, you know, I know a lot of dev shops that have considered doing that. You know, what sort of advice would you offer to them?

Drew: Yeah. For us, we actually…we saw the writing on the wall around offshore, you know, developers and that programming was becoming widely commoditized. We were one of the first web development companies in Southern California. I mean, we started our web consulting company in 1996 probably. The web, as we know it, you know, started in ’94. So, since then, a lot of things changed. And so we sort of had a strategic interest in migrating from a consulting kind of labor-focused company to a product company. You know, as part of that journey, we actually identified something we thought we were good at around satellite-based tracking and developing kind of web-based portals to help track, manage, monitor, and control high-value assets around the world. We actually raised a million dollars in Angel investment to help launch that business. And a couple of years into it, we just realized we kind of sucked at it, that the market wasn’t adopting our product, that it was a pretty competitive space. And during that time, we were doing a separate project for a consortium of major oil companies around ship tracking. And I went to my board and said, “Hey, you know, what you gave us money for, you know, we’re not doing so good at. But this project we’re working on actually could be the next thing for the business.” And after a little bit of arm wrestling and such, we decided that that was going to be what we were gonna focus on to move the company forward and hopefully migrate it from a services company to a SaaS company.

Drew: That’s a pretty bold move to some degree. I mean, going in and basically saying, “Hey, I’ve raised money to build a company and it’s not working the way that we want.” Is that a fair assessment when you kind of said, “Hey, this is the future, it’s a different area than what you guys have invested in”?

Dean: Yeah. I mean, it was worse than that because, not only did we have to. And I hate this word because everybody’s using it. You know, not only did we have to [inaudible 00:16:59].

Drew: P-word.

Dean: Yeah, the P word is better. Yeah. I mean, now it’s funny. I’m on the other side of the table as a fairly active Angel investor, and now people wear pivots like a badge of honor like it’s a good thing. In a lot of ways, you know, the definition of pivot could also be failure. But not only did we have to, you know, use the P-word, but I also needed more money. So simultaneously, not only did I have to sell people on, you know, what we thought we were gonna do isn’t working, but now I wanna do another investment round because we found something better. And somehow, it worked because we did raise another million dollars, so a total of two million. And then that was enough to actually really launch the PortVision business. Fortunately, the customers funded the majority of the development for our product. And so the outside investment was exclusively for sales and marketing, which is actually a pretty good story to go to investors with.

Drew: Absolutely. And you know, I think we wanna talk a little bit about that. But before we do, was there a moment where you had maybe a sense of fear, or like, man, or this failed, like were you hit any kind of emotional wall or were you just like moving on?

Dean: No, no, it was literally…I came to my co-founder and my board and I said…you know, we had six salespeople at the time for the business model that wasn’t working. And I said, “This isn’t working.” One of my somewhat rose-colored glasses oriented board members said, “You’re too pessimistic. You need to give it some time.” And I looked him in the eye and I said, “We will be out of business in four months if we don’t take action now,” because we were burning cash and there wasn’t any evidence that it was gonna turn around. You know, I literally had to go into my office close the door, and all of my salespeople were remote. I had to make six phone calls and fire six otherwise, you know, good people just because my business plan wasn’t working.

Drew: And how did this consulting project come in that’s in a different space if you were focused on, you know, satellite and tracking?

Dean: It’s really the other way around. We were a software consulting company first. So we had lots of clients. We had local San Diego clients. We had already done a project for the port of San Diego. So we were exposed to the maritime industry and then they referred us out to some clients in Houston, you know, the Houston area. And so we were actually sort of already doing software consulting projects while we were trying to spin out this product, you know, satellite tracking business. The PortVision project was looking to be a fairly promising, you know, work-for-hire project. And then the question was could we transform it into, you know, a core part of our future business?

Brandon: Did your client become like an investor as well? Were they pumping money into this as well, or were they just buying the service from you as you were creating it?

Dean: Yeah. What we did was…we wanted to retain the rights to the product. So what we did is we sold it to the initial four customers as commercial off-the-shelf software. The only catch was we hadn’t written it yet. So there was no product to sell, but somehow we convinced them to move forward on that basis. We then, you know, developed the product. And it was ultimately relatively successful. You know, these were pretty large customers. I mean, we’re talking ExxonMobil and Valero and Shell. You know, they’re relatively large customers. The cool thing about that was after we delivered that product, we instantly had four multinational companies of reference accounts, which we were then able to leverage in a pretty aggressive PR campaign to spread the word about what we did to the rest of the world.

Brandon: Can you tell us more about that PR campaign?

Dean: So it’s just like with any other entrepreneur who’s probably listening. The object with PR is there’s really two things. One is you wanna get “free advertising” without having to pay anything, you know, from a trusted source. And then the second thing is you wanna really appear a whole lot bigger than you are. One of the tactics I used…when we started this thing with PortVision, I didn’t realize how connected sort of the oil industry was with the maritime industry. But it turned out that one of our, you know, first adopter groups for PortVision were these large companies that had a vested interest in knowing, you know, the movements of these oil tankers around the world or natural gas tankers, and whether it was a trader on Wall Street or whether it was somebody at a Marine Terminal that needed to know whether a vessel got through, you know, the Panama Canal or arrived at the sea buoy or whether it had left yet. There were all these different stakeholders in the oil industry. I didn’t know anything about this industry when we started. But one of the things we found was…I’m sure lots of listeners understand. And Brandon and Drew, I know you have been through this. Big companies do not typically allow you to cite them as references in press. It’s virtually impossible to get a company like ExxonMobil or Shell to agree to joint press with you. They just don’t do that. But turns out in the industry, there’s, you know, widely acknowledged group of eight companies, which are broadly known as the oil majors. And in the first year, we had about six of those companies. And then we had seven of those companies. So I called a meeting in my company and I said, “We need to find one user at Chevron, one user anywhere in the world to buy our lowest in $2,000 per user per year product. Because the day after that one user at Chevron buys our product, we can tell everybody in the world who will listen that every major oil company in the world uses PortVision.”

Brandon: Love it.

Dean: And so that became our rallying cry. You know, like many good small aggressive companies, we had the cowbell in the office that we rang whenever we, you know, had a successful sale. And when we finally closed that deal with that company, we hired what I would say is a transformational PR consultant who did some amazing things with us. And we proceeded to tell the world. And then suddenly, for your salespeople, things get easier because now you can meet with any customer and you could say, “Yeah. It’s weird that you’re not a PortVision customer yet because every major oil companies a customer.” And of course…

Drew: What’s wrong with you?

Dean: Yeah. We started to have a swagger, which was funny because, you know, our PortVision business line was probably less than a million dollars in revenue at the time. But just having that confidence in that swagger, you know, it’s also a mantra that the press likes. You know, a lot of people don’t like to invest in marketing and don’t like to invest in PR. They think of it as a cost. But I looked at it as a strategic, you know, investment. And I had a full-time marketing director and a full-time internet marketing director, and a fairly high paid public relations consultant. And that was a big part of my job, was working with all of them to make sure that the story was told properly. We built relationships with, you know, every major trade publication. When the Maersk Alabama was hijacked, CNN came to us and MSNBC came to us and, you know, we provided collateral to the news outlets. We just built a reputation where… I used to joke I would be…I would always pile up my trade magazines for my business trips on airplanes. The plane would take off and I would break out the stack of like 15 trade magazines. And I’d be reading and suddenly, I get to a page and it would say, “Ten trends in vessel tracking by Dean Rosenberg, CEO of Port…” And I was like, “Wow, I wonder what Dean said.” And I’m like reading about me. And then I’d pick up the next one and it was another story about like… You know, we built, you know, this persona around the company as an expert and, again, what was admittedly a very small niche. But we then, you know, started to own that niche. It wasn’t just all, you know, PR fantasy. We did some very heavy lifting to help the industry, whether it was, you know, the BP oil spill. We did a lot of work with the Coast Guard and with BP around that and, you know, around Homeland Security and other things. You know, we certainly did our part on the business operations side, but PR really helps use it.

Brandon: Every entrepreneur I know that I talk to about PR has a horror story of a PR agency that they hired. Is there any kind of advice you would offer to somebody that was looking for a PR agency because it kind of sounds like you didn’t hire an agency? You hired a consultant, anything that you would offer advice on around that?

Dean: Yeah. So what happened with us is…I’m not good at that many things, but I happened to be an okay writer. And I was a little bit frustrated in my company because they’re on a lot of my employees who weren’t necessary…they were great at lots of things, but they weren’t great writers. And when my marketing director mentioned that she worked with a PR consultant, used to be at a big agency, but she’s now working on her own. She’s an IT consultant, doesn’t know anything about maritime, but maybe I should talk to her. I was very skeptical. And after one sort of, I don’t know, 30-minute conference call, she asked really good questions. The next day she wrote a press release, and I couldn’t believe what I was reading. I mean, it was her understanding of the business after spending a few minutes on the phone with us. How she positioned it, I realized that I found somebody who could free me of the burden of writing all the content, you know, in the business. And then she also was quite good at building relationships, you know, with the press. What I would steer clear…now I’m involved, you know, as a mentor to early-stage companies. What I always suggest people steer clear of is particularly in B2B companies, is avoid the PR consultants who are what I would call cheerleaders. They have a great smile. They’re hype machines. They’re relationship people. But in B2B, you need more than that. You need strategy. You need really, really good writing. You need, you know, some cerebral thought around it. If you have a restaurant chain, maybe the cheerleader is in a local market makes sense. But if you’re doing something heavy in machine learning or in some hardcore B2B space, it makes sense to partner with somebody where, you know, IQ is as important as the relationship side of the agency.

Drew: With some of those startups that you’re working with, have you been able to repeat kind of that PR success?

Dean: I mean, I’ve helped some of the CEOs I work with move in that direction. I’m very careful to not operate the company for them or to exert undue influence but I certainly… In fact, I was working with one CEO this week where we had this exact same conversation where I felt the agency that he was interacting with was probably not the agency that was going to…he’s in a very niche…very tech space, tech-oriented space. And I just didn’t think it was the right fit moving forward. The final chapter on that one’s not written, but maybe I’ll come back next year and I can tell you how it went.

Drew: Nice. You’re moving along swimmingly and things are going well. You’ve got all the majors. You know, what then…like what goes on after that?

Dean: So just to be clear, we never felt we were moving along swimmingly.

Drew: Okay, fair enough.

Dean: You know, just like with any SaaS company, you know, the promise of software as a service is it’s a money machine once you get to a critical mass. But getting to that critical mass is sort of a non-trivial exercise. I don’t think there was ever a time up until we sold a company where we felt like we could relax. You know, sometimes it was the treadmill effect, which I’m sure, you know, the two of you appreciate and listeners appreciate where you close a big deal then next week you lose a big deal and now you’re back to where you were, or you expand a relationship with a customer and then the next week your other big customer contracts their relationship. And then as we’re just hitting our stride, a free side on the internet pops up doing 50% of what we charge people to do, and we have to deal with that. And then we got past that. And then a patent troll sends us a FedEx package asking for, you know, a whole bunch of money. And so we never quite felt comfortable. I think paranoia is an important trait of entrepreneurs. I don’t remember who said that, you know, the old saying about, “Just because I’m paranoid doesn’t mean there aren’t actually people out trying to get me.”

Drew: Get me. Yeah. You know, when I had a SaaS company, our product pricing was, you know, in the hundreds, you know, maybe a little bit higher per month. But I’m assuming that, you know, you had probably a lot less customers. But they were spending a lot more per deal. So gaining and losing was fairly significant.

Dean: Yeah. We had two primary subscriptions, if you will. One was $2,000 per user per year and one was $10,000 per user per year. You know, we did a lot of, you know, site agreements and, you know, regional agreements and such so that, you know, that became a little blurred as with many SaaS companies. One thing you asked about going swimmingly, one thing that caught me off guard in a positive way was one day I was with my CFO and he showed me the financials. And we like weren’t burning any money that quarter. And I said, “What’s going on?” He said, “You know, we’re kind of breakeven.” I said, “Really?” And then the next quarter, we actually like made some money. And the next quarter, we made more money. And so it was like that we passed that point for a SaaS company. I sometimes talk about four of our biggest customers. Just by coincidence, we landed in different years but in the month of October. And those four customers, I think he called a million dollars in annual, you know, subscriber fees. And so every October…and this is really the beauty of a SaaS company. Every October, we would get a million dollars. We put it in the bank. And the only service we needed to provide to these customers was not canceling their account.

Drew: That’s why we all love SaaS.

Dean: Yeah. So that was like really when I realized, “Hey, this thing, once we got past critical mass, this actually is pretty interesting.” You know, and then there are other dynamics of SaaS companies, you know, where we maximize profit. We had effectively, you know, no cost of sales on…sorry, no cost of goods on our product because we had an infrastructure that was fixed that allowed us to capture all these ship signals and then after that, just setting up accounts at effectively no cost. We maximize profit as a SaaS company by taking the largest check a customer’s willing to write regardless of what the size of that check is. So we maximize profit by taking $20 from one customer and a million dollars from another customer. But of course, there’s pricing, integrity, and other things that come up that make that not so easy to do. But it’s hard to find a salesforce that solutions-oriented that’s not just selling out of a catalog that understands that dynamic around value-based selling and providing, you know, the right products and services and value to the right client for the right price, right?

Drew: Absolutely. And you talk about it…you know, you’re moving along and then you said, “You know, until we sold the company.” How did that come about?

Dean: So we were building what I would call a nice company. I mean, we were in the, I don’t know, you know, $6, $7 million range in revenue and we were growing. Another cool thing about a SaaS company, we had, I think, 94% year-over-year retention of our customers. So, with that kind of retention, any new sale grows the company because you’re keeping all of your users from the last year. And so, you know, we were growing. I wouldn’t say we were growing at, you know, Facebook levels. But you know, there was modest year-over-year growth. And I just come out of a board meeting and we reached consensus that we were going to continue to execute for the next two to three years, not focus on M&A because we’d actually gotten a little bit of visibility in what we were doing. And people came calling, and we just felt like, you know, the valuation gap existed where we needed to have a meaningful exit for shareholders and founders and employees was probably different than what an acquirer would wanna pay. So we just agreed that we were gonna just keep executing. And then a friend of our companies who’s relatively well-established in the Southern California region and in our industry ran into a public company at a trade show, and that company…he was sort of an investment banker and he said, “Well, what are you guys looking for?” And they said, “Well, you know, we’re getting into this vessel tracking thing and we really need to strengthen our software team.” You know, 99.9% of people in the world would have no idea about what my company did at AIRSIS. And here was this company that basically described exactly what we did. So the investment banker called me and he said, “Dean, you gotta meet with these guys. They’re looking for you.” I said, “Totally not interested. We’re gonna keep marching for, you know, two to three years.” And he said…I wanna say he said something like, “Dean, don’t turn down an offer that hasn’t been made. Just have a meeting with the guy.” And so I did. They asked about our interest in selling the company. And we just decided we were gonna share what we needed up front because we didn’t wanna waste their time and waste our time. And they thought it was nuts initially and then we got to know each other a little bit further. And one thing led to the other. And about nine months later, we were acquired.

Brandon: Wow. I can’t believe it. It happened pretty quickly. And did you say you hired that banker or he was a friend or what was the relationship with the banker?

Dean: Yeah. We ended up engaging the banker just for that transaction. It wasn’t like we were starting a process and building a book and shopping it. You know, we did give him the opportunity to help us close that one transaction. You know, I joked with the banker because our transaction was pretty easy and it was a pretty good payday for them. You know, I wanna say they said something like, “Yeah. You know, you’re compensating us for the other 20 deals that don’t close.” It’s kind of like a real estate agent. It’s not the one sale. It’s the 100 things they did before the one sale.

Brandon: Absolutely. What sort of details of the deal can you share?

Dean: The actual deal terms were never publicly disclosed. You know, it was in the tens of millions of dollars. It was a transaction that provided a meaningful return to the investors in our company. I think I had 20 shareholders in the company because I raised individual Angel money. You know, we had staff. Most of our employees had stock options in the company, so they, you know, benefited from it, and it was life-changing for the founders. You know, I think I’ve shared with you both in the past. My career is peppered with a bunch of singles and doubles. You know, I, fortunately, have never lost it all. But I’ve had, you know, some singles. You know, I would call this a solid triple.

Drew: You said that the buyer initially thought you guys were nuts. Tell me about that moment.

Dean: Yes. So they typically would buy…they thought we were nuts for a number of reasons. They typically would buy more closely held companies. You know, it might be a family-owned business. It’s going to be a multiple of EBITDA. You know, we tried to present the deal as, you know, we wanted, you know, four times revenue. And they brought that to their board who’s coughed and said, “Four times of revenue? This company is not making any money?” You know, we then proceeded to share with them what we thought they can do with us because they were a $3 billion, 12,000 employees public company with 195 offices. And imagine, you know, the sales juicing of that infrastructure compared to our…I think at the time I had probably 50 or 60 employees largely focused in either San Diego or Houston. You know, we started doing some performance around what they could do with our technology, and then also the strategic value of having, you know, a software team that they were looking to build any way that we can just plug in. And then we reminded them what their PE ratio was on the public markets. They were a New York Stock Exchange company. And at the time, we were doing, I don’t know, a million and a half of EBITDA. And if you applied their P to our EBITDA, it actually was in a creative transaction for them in what we were asking. You know, it took some reframing of the deal. But you know, it was…at the end of the day, I think they benefited from the transaction as much as we did.

Drew: Yeah. I think you’re hitting on something that a lot of people who go to sell their companies don’t really, you know, understand how to do, which is, you know, you don’t wanna sell your company necessarily for what it’s worth. You may wanna sell it for what it’s worth to the buyer. You know, I know some people talk about that idea of post-acquisition economics where…you know, and you use the term, you know, “what they could do with us.” Talk to me about like how did you build and present a vision of why you were far more valuable than maybe they initially thought. You know, how did you come to that and present that?

Dean: I mean, they were largely an oilfield services company. They were the market leader in ROVs, which are underwater robots that help, you know, do things five miles deep in the water. And so they were used to, you know, executing a project for a price that involved hourly fees. And it was a very sort of traditional business model. We had to actually educate them on what a SaaS business model was. We had to educate them on, if we closed $100,000 deal, it’s not $100,000 deal. It’s a net present value of the future stream of $100,000 a year forever, you know, or nearly forever at 94% retention. And that fundamentally is higher value revenue than getting contracted to do a job to go under the water and, you know, turn a handle on a pipeline or whatever it was that they were doing. You know, that required a little bit of education. I think also it helps to not be desperate to sell the company because, you know, there were…like I remember one scene where I flew out to meet with them. I was in a big conference room. There were probably eight or nine members of their deal team, including their lawyer and the VP of corporate development. And we had done a whole bunch of stuff. We put hundreds of documents in a data room. We did everything they asked us to do. They had sent us a 50-page IT survey to fill out. And they asked me, “How’s that survey coming along?” I looked the guy who asked me in the eye in front of this room of eight people and I said, “We’re not doing it.” And then like the room fell silent. And they said, “You’re not doing it?” I said, “Yeah. We decided we’re not doing it.” They said, “Why are you not doing it?” And then I just went through all the steps so far. I said, “Well, you know, we have compiled hundreds of documents. We put it in a data room. We delivered this to you. We delivered this to you. We delivered this to you. We now need you to catch up.” And I stopped talking and the room went silent. And about 10 seconds, 15 seconds later, the corporate development guy he said, “Fair enough. I get it.” You know, even though they’re clearly the gorilla in the room, you know, at the end of the day, we needed them more than they needed us likely. But to be able to have a conversation where there’s productive tension on both sides and where, you know, there is a fear of loss, I think, on the buyer’s side, especially in a big company, because as the deal moves forward, there’s board-level visibility to the deal. You know, a career could be made or broken by the deal. You know, you get to a point where the deal starts to be as important for people on the buyer’s side as it is on the seller’s side.

Drew: Now, all the things that you’re saying…I mean, I think it’s more sophisticated than a lot of the entrepreneurs that I’ve talked to who have sold their company. I mean, that you’re thinking about, “Okay. You know, has the board, you know, have visibility into this?” You know, the idea that you can go in and create the productive tension or push back. I mean, all of those, I guess, take a level of either, you know, giant, you know, balls or just maybe confidence from having done deals in the past, I guess. Help me understand like, you know, how did you get to a place where you, you know, kind of saw all of these different things and were able to navigate that?

Dean: I think confidence comes from a combination of experience and reasonableness. If we know what we’re asking is reasonable and we have confidence that comes from either, you know, our experience or the fact that we can, you know, go on to live another day if the deal doesn’t happen, then it allows you to engage with somebody as an equal. Now that I’m on the other side of the table as an investor, you know, so many companies that, you know, are desperate to, you know, sell the company because they’re not executing properly and they just need to monetize what they can or they gotta close that $5 million round, and what’s it gonna take to do it will give them whatever term. You know, this is sort of negotiating 101. If you’re negotiating from a position of weakness, there will likely be a suboptimal outcome, right?

Brandon: Absolutely. Was there any internal pressure from either your board or your staff or partners on your side? If you can share, how much did you own of the company at that time?

Dean: Yes. So I owned, I don’t know, 25 to 30. So there wasn’t that much pressure because, quite frankly, I don’t think any of us thought I was gonna get to the finish line. So, you know, I gave updates, and then when it started to look like it was gonna get to the finish line, you know, then suddenly my board started to get much more interested, you know, in what was going on. I tend to be a fairly risk-tolerant CEO and an entrepreneur. So I don’t typically spend a lot of money on lawyers for business transaction…you know, for general sort of business contracts and such. But for an M&A transaction, you know, we…our company lawyer was Mike Brown. And he’s now at DLA Piper in San Diego. He was just, you know, a killer just…forget the lawyer part, just a voice of reason, you know, business adviser. And when we got to a walkaway point on one of the deal terms, you know, he could then speak up and say, “Hey, this really matters to Dean and his team and they’re prepared to walk away over this.” And so like be leveraging, you know, our advisers in appropriate ways but still making sure that at the end of the day, the buck stopped with me. I think was a pretty good formula.

Brandon: Who else was on that kind of negotiating in sale team with you? So you had the banker, yourself, and this lawyer/adviser. Was there anybody else that was really helping to put the deal together and push it forward?

Dean: Yeah. It was primarily I would say…I mean, the banker and their great guys. We felt more confident engaging directly. So we didn’t actually have the banker negotiating for us. So they weren’t really that involved. I mean, they were invaluable in bringing the deal to us, but they weren’t that involved in the actual deal once it was in process. It was really myself, my CFO, and my lawyer. And I think that was a small enough group that it worked and it was the right skill sets. Now, there were certainly others who helped. I mean, I can’t even tell you how many times there were, you know, staff with papers on the floor trying to just like get everything together to… Because at the end of the day, it’s Sarbanes-Oxley and it’s a public company. And sometimes we had to remind them that this was, you know, an 8-figure transaction, not at 10 or 11-figure transaction, right?

Brandon: Right. I guess, how would you state your emotions? I mean, was there ups and downs for you? Were you, you know, able to kind of maintain composure or at times was it difficult?

Dean: And it’s funny because my co-founder is a pretty, you know, level-headed guy. You know, people accuse me of being pessimistic. I always say I’m not pessimistic. I’m realistic. So I don’t think until we got to the finish line that…you know, we were always aware that the transaction might not get to the finish line. What I think was interesting about emotions was, so if we forward to like the last day where the transaction closed and the phones were wired, we held that meeting in my lawyer’s office. My board was there because we had to do some final resolutions. We had a final conference call with the deal term at the buyer. And I remember him saying, “Okay. It sounds like everything’s been executed. I’ll go downstairs and initiate the wire.” You know, my board, we all shook hands and such and thanked my lawyer. And they all left. And it was just myself, and Mike, my lawyer. And we’re in this sort of, you know, empty conference room. Now it’s just me and Mike. And I look at Mike and…sorry for the French language here, but I have to be accurate here. I looked at Mike and I said, “You know, Mike, you have a shitty business model because you…you know, I hired you seven years ago, pretty much never used your services until I sold the company. You did a bunch of work and then you lose a client.” He pointed at me and he said, “Well, you screwed it up, Dean. You were supposed to go public.” And so we had this sort of like, you know, shake hands, embrace, you know, and got the word that the wire transfer was made. And I went in the elevator by myself. I went downstairs. I got in my car. I drove. I don’t remember whether I made it out of the parking lot or whether I made it around the corner. But then I had to pull my car over and I literally just started crying, like bawling. And you guys know me a little bit. I’m not the touchy-feely guy. I’m not that. You know, I’m the engineer, you know, the stoic, cold, you know, low EQ, all of that stuff. And it wasn’t that I was crying with happiness. It wasn’t that I was sad that I lost the business. It was just the pressure relief, the pressure valve of what was arguably, you know, a 20 or 30-year career of entrepreneurship with some failures and with all the things I’ve been through and just like the finality of it in this transaction. It was just an emotional overload that I was completely by myself. Nobody saw it. And it was just something I had just never been through before. It shows what we go through as entrepreneurs and the ups and downs and the meeting payroll and customer challenges. To make it real how hard my business was, I always tell people, “The day I sold my company, I had over 800,000 frequent flyer miles.” And that kind of tells two stories. One is I did a lot of business trips and two is I didn’t take any vacations because if I did, I would have found something.

Drew: Yeah. It sounds like you worked your ass off to build this. So what was the significance to you? I mean, in the moment, if you’re even looking back now like when you see that moment, how does this kind of fit into how you see your story as an entrepreneur?

Dean: One of the realities, and I think my team probably started to see this too, is I was pretty tired in the final months of the business before we sold it. So it was like I was ready to, I think, sell the company. You know, the transaction allowed me to sort of finally like take a breath. And then the other thing it allowed me to do was…you know, I really, really enjoy entrepreneurship, but I really was tired. I’ve wanted to take a break from operating a company. And I think it allowed me to start a new chapter, which I was ready to do.

Drew: In that sale, did you transition and work with the acquirer?

Dean: I did. It was an interesting sale because it was an all-cash sale. There weren’t like earn-outs. They did treat us very well. They treated me well, and I made a commitment to them that I would stay on for a period of time. You know, I was there for maybe another 12 to 18 months. Actually, it was a pretty fun experience for me most of the time because I’ve always been, you know, the guy who had the small company who’s at a trade show pulling on the pant’s legs of the big guys trying to be noticed. And now, for the first time in my career, I was the big guy because I was now working for a multi-billion dollar company. And I was in strategic planning sessions where, you know, they’re trying to figure out how to generate another billion dollars in revenue. I’d never seen a billion dollars before, let alone try to figure out how to generate another billion dollars. You know, that was all learning experience for me. You know, it’s punctuated by a little bit of, you know, the Dilbert stuff that happens in a big company. But overall, it was a very well-respected company that treated us well. I learned a lot while also recognizing that long-term I’m probably not a big company guy.

Brandon: Did they consolidate your team into their team or did they…or you’re kind of just running on the side?

Dean: They had started to do some things around data and software. And so with the acquisition of AIRSIS, we created what we called the global data solutions group within Oceaneering, within the company. I was pretty jazzed about that because, you know, we had about 60 people. They had in their group about 50, 60 people. It was kind of like a startup within this bigger company. And so they gave us the latitude to kind of do some cool stuff. So we had, you know, 100 people. We were doing, I don’t know, when I left maybe, I don’t know, $15 million, $20 million in revenue in the group. It was a lot of fun. It’s a lot better than, you know, getting acquired to be dismantled or, you know, some of the other acquisitions that happen, you know, in the space.

Brandon: Yeah, absolutely. Did your team feel the same way or did they all stay on board? How did they feel about the experience afterwards?

Dean: I think most of them did. I mean, there’s definitely…like marketing was tricky because they just weren’t a marketing-focused company. So here, you know, I came from this intense focus on marketing and PR and such. And that was a little bit of a culture change. So that was a bit of a challenge. There was at least one employee who actually left like literally the week after the merger because he said, “I’ve been through this three times in my career. It always sucks and I’m not going through another one.” But I think if you talk to the other employees, I think, you know, the benefits were better, you know, the terms were better. I think the only bummer is, you know, we all know what happened, you know, in the oil industry. I think the day that we were acquired, oil was at $107 a barrel or something, and then over the next couple of years, it went down to $39 a barrel. You know, this company was very focused on that industry and, you know, that was painful. The other thing that was painful is in San Diego, you know, in California, we’re programmed to viscerally, you know, hate the oil industry. You know, I had to deal with that. But now, you know, we’re in an environment where many of us would prefer to be, you know, working on solar and wind and sustainable, you know, stuff. And I mean, the reality was we were in the maritime industry, but we were so close to the oil industry that you couldn’t kind of avoid it.

Brandon: Yeah, absolutely. You know, if you’re working for this big company, the multi-billion dollar company are learning all these things, it sounds like it didn’t really have any SaaS. So you probably could have, you know, continued to help them with their SaaS models. Why did you decide to leave?

Dean: I think it ran its course. You know at the end of the day…you know, I had a weird career because I effectively never had a boss in my whole career. You know, I had a great boss at Oceaneering, but it was still a different dynamic. You know, I described it one way. And this is not the company’s fault, but I describe it as so…there was one weekend I was working all day Saturday, almost pulled an all-nighter on Saturday to do a million dollar proposal. And I turned to my wife…this was after the sale of the company when I was an employee of the buyer. I turned to my wife and I said, “You know, I just lost a weekend. And if we win this, nobody will notice. And if we lose this, nobody will notice.” And in the past, you know, a million dollar proposal, you know, was relevant to my family. Losing it was existential threat to my family’s finances. And winning it could be transformation. It was a completely different adrenaline rush. It was a different activity, the urgency. And so I lost a lot of that, you know, getting kind of, you know, buried in the middle of, you know, a much bigger company.

Brandon: So where did you go from there? You put your notice in and…you know, talk to me about that transition and then even your transition into Venture San Diego.

Dean: I launched Venture San Diego, which is a…you know, we focus on mentoring, consulting, advising, and investing in early-stage companies. I also took a role at Tech Coast Angels, is one of the largest Angel investment groups in the U.S., if not the world. And I took a board position in that organization. I’m a little bit unique in that group because I think I’m the only member who was the CEO of a TCA funded company who then went to the other side of the table after the sale of the company and then joined the board, you know, as an investor. So, I feel like, in TCA, I’m the voice of the entrepreneur. You know, I try to make sure that the members behave and treat the entrepreneur properly. And Angel groups sometimes get a bad rap for being a lot of work for a small amount of money and for…you know, all that kind of thing. And so I set out to sort of fix that. I ran the due diligence process and made a commitment to every entrepreneur that we would go from the kickoff of due diligence to, you know, a funding decision in less than 30 days every time. So, I started to do things that I saw that were, you know, issues with how entrepreneurs had access to capital. And you know, I did my best, you know, to address that.

Drew: What do you think that you bring from your experiences that…you know, as you look to invest in startups, you know, how do you look at things differently now?

Dean: You know, one of the strongest aspects of sort of my experience that are my personality is I do tend to, you know, be sort of an optimist who is, you know, also tempered by the brutal realities of, you know, my current situation, whatever it is. I think if you google the Stockdale Paradox, Admiral Jim Stockdale had a similar outlook when he was a prisoner of war in Vietnam. I think it was Vietnam. You know, the idea of, you know, having sort of an overwhelming sense that you’re going to prevail in the end but also while confronting the brutal realities of your current situation, whatever it might be. And I think a lot of entrepreneurs, they just get the first part right. You know, they put on the rose-colored glasses and then they proceed to, you know, max out their credit cards or bankrupt their families or other sorts of things. And I think one of the things I bring is a really good balanced approach to evaluating all the data around, you know, a specific business opportunity and being able to interact with a management team and say, “Okay. Well, that’s good. Maybe that’s not good.” In fact, I was helping an entrepreneur raise money. And he was talking to a bunch of VCs. And he was wondering why I wasn’t moving forward. And I said, “Well, my experience is the ones that move forward are the ones where the VCS are calling you. They’re asking you what the status is. They’re constantly outreaching you. So of the VCS you’re talking to you, how many of them, if you never called them again, you think you’d never hear from them again.?” And he said, “All of them.” I said, “Then you don’t have any pending deals.” And so that’s a combination again of experience, you know, and objectivity and empathy and, you know, all the things you learned. And I’ve been doing this for, you know, almost 30 years. So I’ve made a lot of mistakes and I’ve seen, you know, good ways to handle things and bad ways to handle things.

Brandon: What type of companies are you looking to invest in and advice on how can they reach you?

Dean: Yeah. So I tend to focus on companies that have already demonstrated some level of product market fit. Perfect world that means they already have a product and they’re generating some level of revenue. But it might mean they have a prototype. It might mean that they’ve, you know, done some other work. I’m somewhat industry agnostic. If you go to my portfolio on venturesandiego.com, I think it’s mostly up-to-date, you’ll see that it runs the gamut from SaaS companies to chewing gum companies to life sciences. So I’m somewhat industry agnostic. You know, people can reach me through the website or at dean@venturesadiego.com. I’m also relatively active on LinkedIn. And I do spend quite a bit of time interacting with startup CEOs and, you know, where it makes sense, I’m happy to make the connections to help move them forward from a funding perspective.

Brandon: It sounds great. It sounds like a lot of fun. It sounds like you really enjoy it compared to the pressure that you had when you were running your company?

Dean: Yeah. I can’t say I’ll never do the startup thing again. But for where I am in my career right now, I think it’s the right fit of still exercising the same muscle but maybe without some of the stresses of the day-to-day.

Brandon: Absolutely.

Drew: Dean, it sounds like in this last exit, you know, you’ve hit a point where, you know, you get to work. You know, how has just even that psychologically, you know, changed your life?

Dean: So say that one more time, Drew. I’m not sure I understood.

Drew: So my assumption is you don’t have to go get a job to put food on the table today.

Dean: Yeah.

Drew: And so, you know, there’s something that changes in that dynamic where, you know, you know that, you know, that you’ve got enough money to kind of take care of yourself, your family, etc. Has that shifted kind of how you see things or do you feel any different as a result of that?

Dean: I mean, I’ve been, and maybe it’s because I’m the product of depression era of Jewish parents. My wife and I have always lived well beneath our means. So I’ve been fortunate from that perspective and my wife has been very successful in her career that, you know, we’ve always had enough money to live a life that we felt was fulfilling. But there’s no question that with financial independence comes, you know, a feeling that, you know, you have a few less worries. And I go back to sort of…I know Warren Buffett, when he was talking about leaving most of his money to charity and that his kids weren’t gonna get much, he made the comment. He said, “I want my kids to have enough money that they can do anything but not enough money that they can do nothing.” I’m not necessarily an ultra-high-net-worth guy. But you know, I really enjoy, you know, being able to take some of what I’ve earned through my work and be able to recycle that back through the local, you know, entrepreneur community and philanthropy. But I spend most of my time in fairness on entrepreneurship. You know, and maybe my investment alone is not super meaningful to a company trying to raise millions of dollars. But I now have a network of other individuals, and I can get 10 or 20 of them together to each put in, you know, 50K or 25 or 100K and now suddenly a company’s raising real money. I mean, that’s kind of rewarding. I enjoy being on that side of the table. And, you know, we all have egos. And I think it is interesting that I get invited to speak to a lot more classes, you know, business school classes and industry events because of, you know, the exit, which is interesting because I’m the same person. If the company didn’t exit, it’s not like I…you know, it’s not like anything changed, but I guess you get street cred that, you know, it’s more fun to have than not have, I guess.

Brandon: Absolutely. So this is always my favorite question. Now I’m scared to ask it. What’s one thing you bought or splurged on when, you know, the money hit your account?

Dean: I mean, if you saw about cars, you probably wouldn’t be impressed. But I guess one of them…you mentioned entrepreneurs organization and EO. I guess one of the things that happened purely by chance was right after I sold the company, I learned that there was a group in Atlanta of EO members that had a relationship with Richard Branson and they were going out Necker Island and the Virgin Islands to meet with them. So that was probably my one splurge where we actually spent five days out on Necker with Richard. And that was life-changing. I mean, that was an amazing experience so much so that we’re actually going back this December. So for a guy who doesn’t take vacations, that was a pretty epic vacation. You know, maybe the other thing is we did move to the beach. So I do feel like I’m maybe on vacation even when I’m at home now, which is a lot of fun. But otherwise, nothing’s really changed on a day-to-day basis.

Brandon: That’s awesome. I love that area. Did you go to Saba Rock?

Dean: No, uh-uh.

Brandon: I have to tell you about that later.

Dean: Okay. All right, cool.

Brandon: Yeah. As we wrap up here, is there one last piece of advice that you’d wanna give to somebody that’s kind of thinking about exiting their company?

Dean: You know, the biggest thing is build a great company and the exit will follow. You know, and this might sound contradictory. You know, you always wanna be doing things in your company that are going to lead to an exit. But if you’re exclusively focused on the exit, then there’s the risk that you don’t build a great company in the process. And it’s just a whole lot easier to sell your company when there’s something to sell.

Brandon: It’s great advice. Build a great company and the exit will come. We appreciate that. Dean, thanks for having us and we look forward to hearing about your new ventures.

Dean: Sounds good. Thanks, Brandon. Thanks, Drew.

Brandon: All right.

Drew: Awesome. Thanks, Dean.

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Andreas Roell – Private Equity Backed Market Consolidation Goes Sideways https://www.goodmanson.com/exit-story/andreas-roell-private-equity-backed-market-consolidation/?utm_source=rss&utm_medium=rss&utm_campaign=andreas-roell-private-equity-backed-market-consolidation https://www.goodmanson.com/exit-story/andreas-roell-private-equity-backed-market-consolidation/#respond Tue, 14 May 2019 16:43:01 +0000 http://www.goodmanson.com/?p=22048
Learnings from building the largest digital marketing agency in San Diego, acquiring companies, doing a Private Equity backed rollup gone sideways and from five subsequent exits since.

01

Losing Control of Your Business

Critical Terms and Deal Points that matter and why you need advisors to protect you.

02

Aggressively Pursing Growth

How aggressively pursuing growth can lead you to make decisions that put you in a risky situation.

03

Exit Led Personal Transformation

The inevitable transforming journey of an exit towards personal growth.

Managing Partner at Analytics Ventures

Andreas Roell

Andreas Roell is Managing Partner at Analytics Ventures, a Venture Studio Fund focused on starting new ventures with artificial intelligence and machine learning at their core. In this capacity, Andreas is spearheading the fund’s incubation and operations responsibilities that leads ventures from inception, to product validation and operational acceleration. Under his direct leadership are currently ventures ranging from health, advertising, business intelligence, and cloud solutions.

Prior to joining Analytics Ventures, Andreas was the co-founder and Chief Executive Officer of EGM Worldwide, headquartered in Dubai, United Arab Emirates. In this capacity, Andreas partnered with leading Arabic entertainment companies to develop the regions’ largest video-on-demand platform.  The company was acquired in 2013 by Rotana Media Group.

Prior to founding EGM Worldwide in 2012, Andreas was the Chairman and Chief Executive Officer of Geary Group, a global digital agency. Over the course of his 12-year tenure, he took the agency from inception and a $20,000 investment to making it the fourth largest independent search agency globally with offices in the North America, Asia, Europe and over 250 employees worldwide. The agency was acquired in 2012.

Suggested Resources

What Entrepreneurs need to know about
Selling to a Private Equity FirmRead More
What Entrepreneurs need to know about
Using an Investment Banker or Business BrokerRead More

Full Transcript

Brandon: Welcome to “Exits and Acquisitions” podcast. Today, we’ve got my good friend Andreas Roell on the show. He has his MBA from USD. He’s currently running a VC company focused on artificial intelligence called Analytics Ventures. They’ve invested and incubated six companies so far. He’s here to tell us about how in 2000 he started a company called Geary Group. They went from about 2000 to 2012. They bought five companies and then ended up exiting to a private equity firm. He’s started a total of eight companies so far and has three exits. And he looks really good in a pair of lederhosen. So thanks for coming on, Andreas.

Andreas: Thanks, Brandon. Thank you.

Drew: He also was a professional soccer player, Brandon.

Brandon: Oh, he was a professional soccer player. I forgot about that.

Andreas: When I was faster than I am right now. Thanks, Brandon. Glad to be here.

Drew: So, Andreas, I also know you and remember when you…I believe it was the largest marketing, you know, digital agency in San Diego at a point. Is that correct?

Andreas: Yeah, at one point we were able to hit the summit of the mountain. You’re right.

Drew: Well, congrats on that. And so Geary, I believe Interactive or Geary Group. Tell me a little bit about kind of the early days of building your digital agency.

Andreas: Yeah. I mean, it’s your typical call it American story, if you will. I mean, for me it was, as you probably will tell, as a listener, that at one point, you’ll realize that I’m not born and raised here. I’m from Germany originally. So, you know, I grew up in this whole other part of the world, dreaming about the American dream. And I was fortunate enough to actually live with that particular venture. During the time I had graduated from USD for my MBA, and I was trying to figure out what can I do in order to stay in the country. And at the end of the day, I found a way of partnering up with an advertising agency out of Las Vegas, hence the name Geary, that still exists.
And I decided I’m just going to convince them that…back in the days in 2000, not many people knew what digital was, what interactive was. And I convinced them simply to say, “Hey, if you offer interactive services, you’ll make yourself be very, very cool and hip and we’ll help you win your clients.” They went for it. They allowed me to use the name Geary, and at the end of the day it was me and a co-founder, which was my nephew who knew the technical side and the being the guy who can talk and we found ourselves working out of his house. He was a surfer. I had to literally chase him from the beach, from the waves onto the computer so we actually get work done.
But we were the typical story behind the wooden desk, I like to call it, with one computer and just figuring out what we need to do in order to get clients and grow from there. We started out and we got lucky with that relationship that I had mentioned that they brought us into a pitch with the Sahara Hotel and Casino in Las Vegas, which doesn’t exist nowadays anymore. And we ended up being the only guys offering advertising services and interactive services. And it turned out that was exactly the focus that they had because casinos were starting to feel the pressure from Expedia and Priceline and others.
So from there it went. I remember the day when the CMO looked me in the eyes of contract signing and asked me, “Do you actually know what you’re doing?” And I said, “Absolutely, I know.” And here, Brandon, we signed over a quarter million dollars’ worth of a contract to build a website. And I went home and I said to my partner, “We now freaking have to figure out what to do with it.” And they went. So it’s a typical, I call it, American dream story where you have all the confidence in the world, you believe in yourself, you call it pre-sale what you have in place, and you make it happen.
So we were lucky enough to work with pretty much all the independent casinos over the years and grow the organization organically. All cash flow. I didn’t take any outside money until 2005, 2006 when we were in a place where I just had made the decision of, okay, organic growth gets you at a certain place. But being a former athlete, as you had mentioned, I guess you can say I’m always fairly ambitious and just doing okay is not good enough for me. So I always wanted to test my limits and decided to get private equity for the purpose of doing a roll-up.
So that’s a strategy that I have defined as part of the growth story where I found that the world in the U.S. at that point existed of many small to medium-sized interactive agencies, web development firms and I felt that they were right for consolidation. And, you know, we’ve done a pretty good job in terms of operational processes, set up systems, message brand, all of those and I felt it was the right move for us to say, “Okay, give us a good amount of money that we can use in order to roll-up companies, which is what we did in 2005. Funny story around that is it was Bear Stearns but then we all know the story about Bear Stearns. So I got kind of like got in that motion as well.

Drew: Well, you hit a couple points. One is I think a mark of an entrepreneur can be that you sell something before you have it. I remember selling a web-based product and we had to like code it overnight. We were like, “Oh, crap we actually had to deliver on this.” So you’ve got that notch on your belt. So how did you go about…go ahead.

Andreas: No, not, that’s exactly right. I mean, the only cautionary point was, you know, maybe back then it was foolishness that helped me but I do caution sometimes to always do that. But that’s the only point I wanted to say.

Drew: Yeah, I always think that entrepreneurs to be kind of visionary they have like something is wrong with their brain and right with their brain where they don’t kind of understand time and space so they make decisions based on kind of a vision for what can be and then they’re like, “Oh, crap, this actually has to be built.” So that’s one thing I’ve seen a couple times. But you went out after private equity. Like what was that process like? How did you get a private equity firm to finally say, “Yes, we want to put some money behind you?”

Andreas: Yeah. I’m sure many of your listeners, they own businesses and they have growing businesses are familiar with call it once a month of a call of an associate of a private equity firm just knocking on your door and of course sending you a letter back then and saying, “Hey, we’ve been watching your business and we would like to put money to work.” So that was one of those situations where I guess the frequency of these messages or outrageous start getting larger, which made my mind work and I started having conversations with various different firms. I mean, reality from that is that you have to be very careful not to waste too much of your time because, first of all, all these associates are being hired for fishing exercises without really…I mean, they pretend to know something about your business, but they really don’t.
So one, I guess, message for your audience is just a very quick in terms of your qualification, in terms of what type of companies they invest in, and which category, how much money they put to work, what valuation process is. And I didn’t know this at first, but I got myself in these conversations. And after a period of time, you know, I found myself being an active chat with a with a group for private equity firms or venture capital firms, whatever they were. And I kind of like kept talking and I started devising or creating a vision or strategy because they start pushing me about, “What would you do with the money if we give it to you?”
So, again, on the fly to an extent, I started thinking about what am I actually going to do with that and how do I create a filter or qualification process around that whole roll-up strategy that was great in general of a message but there was not much substance to it? And when I was going through that more detailed orientation, one of them, again, was Bear Stearns, started really aligning itself with us because the partners of that equity group or the fund was very heavy around media and advertising background and we started getting into a conversation where I felt, “Okay, they speak my language and they understand my needs and what I’m trying to do.”
So I narrowed down to one. Got myself in negotiations, if you will. But at the end of the day, now looking back and having much more experience, I didn’t negotiate much. I pretty much just looked at how they’re going to give me money, they’re allowing to let me do what I want to do. Documents, “Here, attorney, please look at it but don’t do a lot of redlining because I want to get the deal done.” And so I would say I ended up doing a fairly accelerated deal within a three-month period after I identified the lead and then there was off to the races.

Drew: You know, what I remember is if an entrepreneur or someone listening wants to have those phone calls getting into kind of the local city kind of fastest-growing company list and then Inc. 500 to 5,000, it was just like an exponential number of private equity phone calls. Any experience share on that?

Andreas: Yeah, I mean, exactly right. When I was talking about the acceleration of those type of calls and outreach because, I mean, at the end of the day when you look at the business model now sitting as a venture capital too, got more insights on the other side of the table, I mean, that’s at the end of the day for them the target list. If they start seeing these Inc. 500 or 5,000 or fastest-growing list, in particular, cities and then they just categorize by the industry that these companies found and then they say, “Okay, this is a new one I haven’t heard of, I’m going to start popping myself into it.” I mean, that’s what I felt as well. And like I said, the key areas for an entrepreneur in retrospect is how can I digest that as quickly as I can from a qualification side so I don’t waste my time with somebody that just puts a lot of money in front of my face, but at the end of the day, it’s not a good match?

Drew: Knowing Brandon, he gets excited about deal terms. So I’m going to pause for a moment and let Brandonmaybe ask you some questions about that.

Brandon: Yeah, absolutely. So it was a three-month process. That sounds pretty short. Is that three months from when they first called you to when you had a deal signed, money in your bank account? Or was that kind of the started due diligence or how did that process work?

Andreas: Yeah. So I would say this frontend…I never really looked at the timeline. But I would say it was probably a half-year process from the ones I emotionally and strategically committed myself to. I wanted to get money and I wanted to do a roll-up to then actively talking over a period, call it a quarter, with multiple firms and then narrowing it down to one where I was shipped out to New York to have multi-day meetings in order to, again, present the plan and start talking through some of the terms and the approaches of what to do with the money. The largest component, as always, is the legal component.
So I would probably categorize it as a month-and-a-half of back and forth. But that’s even fairly short because the private equity firm at that level of where we were, and we got $6 million, they didn’t do too much due diligence or at least this firm didn’t do too much due diligence because they just more or less, you know, being $100 million fund or so, for them it was a diversified approach, early stage, know our risk environment. And so due diligence and interaction with them from a strategic level was fairly reduced at that point.

Brandon: Yeah, got it. So $6 million. What were the other terms of the deal? How much did they take and also like how big was your company at that point?

Andreas: The company, I think, at that point was that a clocking [SP] rate of about $12 million is what I probably recall. I don’t have the exact numbers in my head. In retrospect, right, I mean, I was in the service business. So service businesses, as Drew knows very well, get a quite handicapped multiplier and valuation model. Drew, obviously you were sitting I believe on the better side of the table than I was but we were timing material-based, fixed price project bids with clients that have not a continuous annuity type of revenue model. So we got checked on the on the multipliers side obviously dealing with the private equity group, me being inexperienced, I ended up being at a…they do it based on profitability and I got it applied on the multiplier on the profitability at that point. That was pre-money.
And what was the other question again, Brandon? The other terms, I’m sorry. The other terms were what came out of all of this was which in some of the big learnings where I did not put a lot of emphasis on was the whole process around governance and decision-making processes that comes out of the ask or the preferences that the private equity firm had. So for me, as I had mentioned in the introduction about the story, my whole focus was, “Oh, I want money and I want to execute my plan.” Everything else in terms of what’s the board competition, what’s the decision-making process, what’s the preferences at an exit [inaudible 00:26:30] were, on the one side ,Japanese to me because I didn’t have the experience and I didn’t do a good job in bringing advisors to the table and that.
And secondarily, you know, I was just in such a rush of being focused around the other pieces that I felt were more important and I felt if I build something great, I’m going to be fine at the end of the day. So the private equity group got themselves into a place where they could, you know, pretty much have control over the entire board, where they got it pretty steep cliff around preferences, where they had to make their money back multifold first before founders like myself putting enough exit to a share of the exit. You know, those type of stories, I just got myself talked into without doing the due diligence and having the right setup of advisors around myself.

Drew: Yeah, absolutely. What sort of advice would you recommend to somebody else that was in that circumstance? Because I feel like a lot of people know they need to do those things but they don’t really know who to turn to or where to find somebody like that to kind of ask for advice.

Andreas: The hard one on the outside, especially if you are, like I’d mentioned, an organically growth, cash flow growth business. I mean, you grow up in a culture and with an orientation of I’m gonna try to save money wherever I can. And the one area where I saved the money that I would advise not to save money on is on the legal advice. That’s where it starts by getting yourself with a counsel that has had the experience of doing these type of deals. It doesn’t have to be a big law firm, but at least a practitioner, an independent even, that has done deals like that in the past who can advise you, who have sat across the table with the big guys and is not afraid of asking certain questions, and also knows the dynamics of a deal.
Because a legal advisor can show up, you know, by the book and be very regimented about the book and the terms or at least following your advice. But if they don’t understand the dynamic of a deal structure in the negotiation, they can kill the deal. So I did not pay the money. I did not get myself a legal counsel with that experience, which is the starting point I would give every advice to an entrepreneur that you really get yourself around to find the right person there.
Secondarily, again, if you are an independently growing company and you do not have a board and you have partners like the advertising agency I was talking about, like my business partner, we all didn’t have the experience ourselves. So can you find advisors being a friend, being people that you just reach out to? I mean, I know an individual here in town who runs a very successful business. She does a phenomenal job by literally asking friends and say, “I want to know somebody who has bigger, better business experience than I do. Can you please introduce me to that person?”
Like I could not do these type of jobs. Maybe I was shy, I don’t know. Maybe I felt like that I knew everything. I didn’t know what it was. But I just didn’t have this pool of advisors around me that I could go to and say, “Listen, here’s what I’m planning and do. What would you advise me to look out for you?” When I had the deal terms, send it to them, get their perspective. I didn’t have that. I was doing everything in isolation. And that is probably, in retrospect now, the biggest mistake that I’ve made that I went through this and crossed the finish line almost all by myself.

Drew: Yeah, absolutely. I think that’s probably one of the most common things we hear, as far as advice entrepreneurs get an advisory board or at least a peer group around you to bounce these types of decisions off. So out of the $6 million, how much did you have for growth, how much did you take off the table, and kind of what were your next steps from there?

Andreas: So didn’t take anything off the table. So all of that was for growth through an acquisition. So there was a whole build-out that we did on the, call it, sales and marketing side. And then the other component was all about, okay, how do we find acquisitions of, call it, smaller/same sized groups of agencies, right? And agencies there, specifically, were either a specialty capability that we didn’t have and we felt we were weakened or the other was just a geographical expansion/client expansion mode. So we invested about $1.5 million into sales and marketing over the course of multi-years and then the remainder, which was $4.5 million, we used in terms of deal flow and deal structure. So we ended up doing acquisition of five entities. I mean, everything from the web development shop to an SEO shop to an organic link-building shop in Philippines.
It was quite varied and part of the process was, also which I think is a big lesson or a thought process people have to go through, that my job function shifted quite a bit as well, right? So I came from a place of being an operator, company leader. You know, I rather focus on the CEO jobs but then once the rollout strategy is starting occurring, I found myself very heavily on the road and, you know, started to get tired of companies that felt that they might be a right fit, which actually in the process of acquisition, we did hire an M&A firm to do the legwork around it, right? So, as I mentioned earlier, I had private equity funds kicking the tires on me. We pretty much hired a firm to do the other, sit suddenly on the other side of the table. And we started doing mass outreach to companies with particular categories of criteria. And then they narrowed it down for me and I was the one who then put myself on the road, started meeting with, you know, over 40-some companies in various different parts of the country and it ended up actually in the world as well.

Drew: And so in terms of deal flow, were most of the deals that were presented that you ended up buying from the M&A firm or did you kind of have things that you brought in and identified on your own?

Andreas: Yeah, I did on my own as well. I’d probably say…that’s actually a really good question. I never even thought about this. I would say that all the deals that we did, only one came from that M&A firm.

Drew: Okay. So what were the terms with them?

Andreas: With the M&A firm?

Drew: Yeah.

Andreas: It was a typical give me four months auto retainer that you just have to pay and then a percentage of the acquisition cost so that when you swallow somebody or when you buy somebody.

Drew: So before you even brought them in, you kind of found the other four of the five just because you knew the industry?

Andreas: Yeah. The sequence is like throughout the course of five, six years, right? So it’s not like that it all happened all at once. So I think the first one was given to us, actually, got given to us. Once we had private equity, we had to form a board. So that was one of the requirements. And like I mentioned, you know, it was not in our preferences to board. One of the board members, however, was a very plugged-in industry veteran who brought to us the first deal. And that was a deal up in San Francisco. And so that was without anybody’s help.
And then the others came along in terms of having been around the industry, having built the brand, having done some PR as well, right? Because when you do an acquisition, you obviously want to blow it out from a marketing side as well. That you’re suddenly a bigger guy than you were before and obviously other companies take note of that and started reaching out to you as well. So that’s where the other CEOs came in, which is the one that which came out of the M&A firm deal.

Drew: In terms of kind of instruments you were using to finance these deals, were leveraging up on debt or, you know, mezzanine, or you were just using kind of profit or how did you finance all that?

Andreas: No, that’s all where the money can come, right? So the money that we used that came in from the prior regulation finance, all came in for that purpose. So there was no line…I mean, we had our typical line of credits for receivables and things like that. Not for the purpose of, you know, doing acquisitions. And I did not…

Drew: Go ahead.

Andreas: I’m not a fan of leveraging. I mean, that’s not, I guess, my orientation for leverage purposes. So that’s why I just stayed away from that. I mean it can make the whole deal much riskier to begin with. And I felt, you know, as soon as I was able to raise the money, it was no reason to do that.

Drew: Right. So you wanted to do some M&A but you wanted to wear your seatbelt?

Andreas: Well, I gave up my seatbelt but you’re right. Yeah.

Drew: With the deal.

Andreas: It was the seatbelt I was wearing from that standpoint, but I did give up the seat.

Drew: Yeah. Okay. Fair enough. And then we talked a little bit, you talked about geographic or specialty based. Were there any other type of targets or how you targeted companies for the roll-up?

Andreas: No, not really. I think those were the ones. I think it was both a geographical, which in this business like in digital marketing business back in those days, it was much heavier in terms of locale, right? So it was more service providers were used more based on proximity to a company to people wanting…you know, the video conferencing tool that they exist today did not exist back then. So people wanted to touch and see somebody. So, for us, locale expansion automatically meant client expansion as well. So that’s one component. And the other one was the service component that we just felt would accelerate with existing clients, our revenue base.

Drew: Yep. And I’m guilty of this from my past, but I know sometimes small, self-funded companies tend to greatly overvalue themselves and have this skewed view. You know, how did you deal with that? Because I’m assuming some of the companies you were buying were more on the smaller side and maybe owner funded and kind of, you know, that environment.

Andreas: Yeah, that’s a hard one. I mean, obviously, I had to learn as I went through this. At first, I didn’t understand that concept and that spend. Again, it goes back to when you do a rollout process, the key component is how do I spend my time as efficient as I can? Because otherwise…

Drew: Plus you’re German, Andreas.

Andreas: Yeah, and that’s on top of that but that’s not at all. You’re right. But, you know, you really have to be efficient and that means you have to get yourself in a place where you truly know what you’re walking into and make a decision if it makes sense for you to spend more time into it. And I didn’t do that at first. So I remember a situation. So it was a cool company. I think it was in Baltimore somewhere, a 12-people shop. They did something really cool. They actually built the technology around search engine optimization…not search engine optimization, paid search advertising, like that. But I walked into their office and the climate was just really startup-oriented. I spent too much time on these guys. I got infatuated by what they had, what they were doing. They didn’t have a sales process.
I knew exactly, that type of tool I can tell all day long. But technical guys, backgrounds were engineering oriented. It ended up later on that the mother of the founder had all the decisions and I met her and she was just the woman who thought she can give her son a big payout. She had no reality check with the revenue base that they had, etc., etc. So I spent months talking to these guys, talking about integration, talking about what type of role he would have in our company without pressing to the point of, “Okay, so how much is it going to cost?” Right, again, this is early on and I learned my lessons around that. And when we got to the point, eventually, it was just unbelievably what the guy wanted. I mean, the guy had probably, if I remember, $400,000 worth of revenue for the year, paid himself a salary of $30,000 or what it was, no profit on the bottom line and he asked for $5 million.
And, you know, you fall off your chair and you try to say, “Are you real? Do you understand what you’re doing? Do you understand you have no concept around how you got to the valuation?” So I try to work on that. And at the end of the day, emotionally, and in this case, also from a sophistication standpoint, there was just no base to negotiate around and that’s just the worst negotiation you can have. So I learned over the course, especially in first-time entrepreneur environments, small business settings that the key questions you have to ask around, “Okay, what’s your expectation around valuation?” as quickly as you can.
Secondarily, “What’s the expectation around the role thereafter?” Because typically, it’s one or two founders that are used to calling the shots. And if you are doing what I did, building a growing, rolling up organization, they very likely are not going to be calling the shots going forward. So are they comfortable in that environment? Are they truly willing to put that secondary and put themselves into an HR environment that they are just part of there? It sounds horrible but part of the game. And if that’s not truly put on the table upfront, then either you have a hard time and a waste of time effort when it comes to your acquisition approach. And if that’s not even the case and you get the deal done, even worse, it’s gonna fall apart post-acquisition, which is even worse, in my opinion.

Drew: Absolutely. And I remember, Brandon, you went through that early this year, I think you were trying to buy a company and there was like a son-in-law or some sort of role and all sorts of like hidden landmines to navigate to try to get a deal done that were not…you had to kind of uncover in the process.

Brandon: Yeah. I did the exact same thing. It was going to be an earn-out or a loan from the seller, and it all fell apart. And I think exactly what Andreas is saying, I could have…if now that I’m smarter and figured that out, I could have sorted out our first 20 minutes in the conversation, but I probably let that go on 3 months and probably spent 10 or 20 grand in time and lawyers. Like we were all the way up to where she was supposed to sign the LOI and we were just so off about a couple of tiny, tiny basic things. And I was like, “Oh, my gosh. Like this could have been addressed in an email before we even met in person or talked on the phone.” I think you just get so excited sometimes when you’re doing an acquisition and…

Andreas: Yeah. That’s the problem.

Brandon: …you’re so nerdy about the details.

Drew: Well, I think you get passionate about the vision, right? You just see how that company fits in so easy and you just want them to see it and you hope they will.

Andreas: Well, that’s the problem with entrepreneur. I mean the good and the bad thing about entrepreneur, right. We don’t look at the many times that the little hole on the path. We actually look at the finish line already, or we literally live the finish line already. And I think you’re absolutely right.

Drew: What was the largest company that you acquired and kind of maybe share any experiences, challenges, or highlights of that acquisition?

Andreas: Yeah, it ended up being the first one actually. It was a little bit over a couple mil of a deal, San Francisco. It’s an organization that was a superstar at one point before I came along, heavily funded also from the private equity standpoint, very well-respected, well-known brand in the industry. And they kind of like were on the downswing. Couldn’t figure out how to grow or actually turn themselves into a diminishing company. So I was able to catch them on the way down. In that environment, it was very interesting because they were at the point, I think, that we snapped it up in the 30s from an employee standpoint or staff size basis.
Office, obviously, in San Francisco, but it came along with all of those big organizational, I guess, settings or parameters that you can think of. San Francisco to begin with, like people live a little bit more lavishly than where we used to get down in San Francisco. Nothing wrong with that, if anybody’s from San Francisco listening. But it’s just the office space costs quite higher than what we’re used to down here. You know, the administrative or the operational side of the business was heavily stacked with, I remember, four people on the accounting department all the way to a high-paying CFO full time. And then the story just went on.
And so the interesting part around the deal is I inherited that type of structure on top of that type of culture as well. So here we were still, even after we got private equity, we were still this…and I don’t want to make this about San Diego versus San Francisco but we were kind of like this scrappy, roll up your sleeves type of culture versus this was a heavy private equity-funded, lavishly-oriented culture. So I had to figure out how to get that integrated, first of all. At the same time, I also had to do some cleanup on the financial structure, clients structure as well. So there was a lot of cleanup work we had to do.
But the biggest challenge really at the end of the day, which is where, as I say, if you want to summarize after two years after the acquisition, either it’s a natural because I’ve heard these stories and I’ve seen the stories multiple times or it’s simply a failure. We could not integrate that culture because the two years afterwards, if you do a summary line underwork, I think there was only one employee left from that group that we had acquired. So, like I said, it is a very natural and I think I would advise everybody that is acquiring companies, just go in with a belief that a large percentage of the people will leave you at one point in time, call it the next 12 to 24 months. And your objective needs to be how do I own, in this case, clients, processes, what’s unique about it, what can you adopt into it? Because those people that may help you be that, they might be gone.
So that’s something that I faced. It was discouraging for me because I like to be coming from a leadership place that is very heavy around culture, taking care of people. I believe that brings out the best in individuals and having seen kind of like having standing in front of my company-wide message talking about, “Oh, here’s another group of individuals who left the firm,” was really heartbreaking for me to begin with. I mean, it made me harder and tougher at the end of the day, but it’s just something that I had to deal with. And I think that my analysis of that is just we had a cultural clash based on simply the roots where this company came from.

Drew: Yeah, I know when I was involved in kind of the buying of the 10 companies that we consolidated, when people left, it felt like a personal attack on their trust in me and the vision that I was communicating, which maybe I shouldn’t have, but I probably took it a little more personal than I should have.

Andreas: Yeah. And what you try to do, you try to integrate, right, the firms as well. So, it’s not like, “Oh, here’s the San Francisco part of it and here’s the San Diego part of the business,” in this example. Like you’re trying to create a message, it’s one company, right? So with that, you also have to communicate company-wide the bad news versus just keeping it in the San Francisco office as a news item, right? And that was the hard part for me.

Drew: So you bought five companies. How big did you get at that point and kind of where did you see things going next?

Andreas: So at the end of the story, we were in the mid-30s as a company. And I was still that guy that started out with this big measurement bar that kept moving, right? I mean, if you ask me in 2000, could I build a $30-plus million company, I would of I told you, you know, this is fantastic and I’m done, right? Because that’s kind of like how I thought back then. But when you’re in the race, which may be also a learning for entrepreneurs that the bar just keeps moving because you feel it, you smell it, you get in a groove, you get excited, right, all of those and the bar just keeps moving.
So I felt that the mid-30s that I can go to a hundred. And so that’s what I was shooting for. That’s what I want to keep going right. I mean, I started turning up the volume quite a bit around international expansion, you know, obviously with my heritage around Europe. I started looking at deals in the U.K., in Germany. I even went all the way out to the Middle East to start looking there for deals because I did feel that was the next wave, which is kind of like the secondary markets that can be penetrated with “American super services.” So that’s what the path that I was on and then I don’t know if you want me to talk about that already.

Drew: Sure, yeah. What happened next?

Andreas: Yeah, so the whole then part was like the wind got taken out of my wings based on, as I’d mentioned, the destruction of decision-making dynamic that had changed when I got private equity because the private equity group…and for listeners, when you get the venture capital, private equity groups, they all live on a certain timeline. The fund has to provide returns to the investors over a limited period of time. And so there’s something that is a term that becomes very prevalent then called vintage fund, which is these funds that are expired. And investors pretty much just want to grab any type of money that they have because they’re done with investing in that fund.
So that’s just the scenario that we found ourselves in. That private equity group started pushing into a place where they said, you know, “It’s time to count our checks, or dollars,” whatever you want to call it, and I’m able just to return another amount of money to my investors. The interesting dynamic in a place where we found ourselves and many funds found themselves as well, if a private equity group or venture capitalist already has generated return, positive return to the investors, even if it’s a loss for them, or even if it’s an amount of multiplier from the investment that’s lower than what they typically go for, it’s still icing on the cake, right. And so their bar of getting out is not as aggressive as if they were still heavy in the game with the fund. Does that make sense?

Drew: Yeah.

Andreas: So that’s kind of like the dynamic we found ourselves without any decision-making power, despite the fact that I had the title of CEO. We were pushed into a place where we said, “Okay, let’s put ourselves up for sale.” And the decision, I was obviously against it, voted against it, but nothing I could do and we got ourselves out. A private equity firm actually started gathering the candidates themselves without my participation, but I had to obviously participate when it came to due diligence and others. And that was it. So in 2012, found a company that acquired that was backed by a Japanese private equity firm and they were in their own roll-up strategy that were actually smaller than we were but they used as a vehicle with the financial backing that they had in order to accelerate their roll-up. And there was the day where I pretty much completely handed over the control of what I had built in our sweat, blood, and whatever you want to call it over 12 years.

Drew: Absolutely. Was there a big payday at that point or what did that kind of look like for you when it closed with the Japanese private equity firm?

Andreas: I mean, big payday is always subjective, right? So everybody…I mean, depending what your goals are. It was meaningful…just call it that, it was meaningful enough for me to be able to live my future in a way that I can focus on doing the things that I feel are right. Let’s call it that. And there was payout and there was earn-out in that component. Earn-out-wise, I did okay. I didn’t get 100% of the earn-out and it got really, really messy because, I mean, the real ugly side of that story was that within a month of having handed over and leave, we were supposed to be on for a 12-month period as an “employee” or staff member. I got a phone call that pretty much told me at 8:00 in the morning and I needed to pack my stuff and leave and I’m not allowed to talk to anybody anymore. So it got a little bit messy on that end. And I guess that’s a learning that you can share with your audience as well that even if you think you got a rock solid, I don’t know what you wanna call, transition period, don’t count on it. Just prepare yourself, try to take as much as you can up front. The organization never looks like it did when you had control over it.
So if you’re in a place of shifting heavily to upfront versus earn-out, highly advise it. Don’t count on “salary” if that’s part of the equation because something might happen just the way it happened to me where you, out of nowhere, suddenly get the call that you have to play quits and then, you know, the next, I don’t even know, four or five months or so were just heavy legal, you know, from an employee standpoint, conversation with that group in order just to get a portion out of what was promised to me on that end. And, you know, that’s the ugly side of the picture. So I hope everybody just takes that and say, “All right, this is something that I have to look out for,” and then don’t let it happen the way it happened to me. But the good side is I am happy. You know, it was meaningful enough for me and I’m able to do the things that I love to do.

Drew: I know Brandon is selling a company, one of his companies right now, and I think he said, “Look, cash upfront is all I’m really gonna look at.” So what’s the most cash upfront? You know, it’d be interesting to kind of think like what is the dollar upfront versus, you know, is it worth $20 earn-out or like what’s the ratio between the two?

Andreas: Are you asking me?

Brandon: Even worse than that…Oh, go ahead.

Andreas: No, go ahead, Brandon. Sorry.

Brandon: Or even worse than that, the brokers of the deal take a half commission on what the potential earn-out could be. So I could actually lose money by taking a bigger earn-out.

Andreas: Yeah, that’s a great point. I mean, they take it on the total amount. So then they’re not gonna wait around two years, that’s the earn-out period, to get a check every quarter or something like that. They want it all. Totally. So I agree with you,
Brandon. I agree with you. That’s my mentality too. If the upfront money I can bring home under my bed is meaningful or right in terms of valuation, everything else is just icing on the cake. And that’s how I do deals nowadays myself.

Brandon: Absolutely. I think it removes a lot of tire kickers from day one as well. I kind of make that one of the first things I’m saying and it kind of gets rid of the people that are gonna come up and say, “Oh, you know, I’ll give you know 90% earn-out.” It kind of weeds all those people out right away.

Andreas: Right. So, I mean, on the opposite side, me having been on the buyer side, I did use that technique to lower my risk profile. It’s interesting to try to push earn-out when you buy but you don’t push it when you sell.

Drew: Absolutely. So you’re running this company for 12 years. It’s your baby. You are probably working 100 hours a week. And I’m interested in how you kind of felt when the money hit your account and you sold to the equity firm. And then kind of how those emotions, you know, change when you got that phone call it at 8:00 a.m. Like could you explain the kind of what you were going through and how you dealt with it emotionally kind both of those times? Because that’s kind of high highs and low lows.

Andreas: Yeah, totally. And then I’m a little bit weird from a standpoint of celebrating. I’ve known in this about myself over the years and people have told me many times. I’m not the guy who likes to celebrate. And that might actually come back to my athletic life because when you won a game, you pretty much came back into the locker room and your coach told you, “Get ready for the next game.” I’ve never done a really good job in celebrating, which was the case here as well. I mean, if you asked me, “Did I did I charter a private jet and flew to Vegas and had a weekend or something?” No, I didn’t.
And almost like just went ahead and went back to work Monday morning. But one thing that did change for me though was that I suddenly started acting differently in terms of decision making. Because, you guys know this as well, if you are an entrepreneur that has put everything into it, you also have a lot of behavior that’s based on fear and anxiety of losing and, you know, kind of like everything being taken away from. And I felt on the day when the money hit, that that was taken away from me. That I could actually start working from a place of strength and really, you know, knowledge versus having this other layer of fear that constantly, you know, it plays with my mind to an extent. So that’s what happened there.
When I got let go, that was probably for me the most extreme emotional experience I’ve had in my life because also the way it happened was so abrupt. It was done in a way that, you know, in retrospect, I did not get any dignity in front of the people that I put words in front of, you know, for years because my entire team did not know, my cell phone was turned off, my email address was turned off. I was in a place where for 12 years, I used my work email as my life email. So I didn’t even know what my Gmail password was. I couldn’t even get in.
So I literally felt on the day I will never forget that I find myself on the beach, luckily in San Diego, we can sit at the beach at 2:00 in the afternoon. And I thought, “What an F-ing loser am I sitting here at 2:00 in the afternoon? I didn’t have any meetings. I didn’t have any calls. I can’t check any email. What am I gonna do?” So I fell into this big, big hole of feeling not worth anything anymore suddenly. And I struggled with that a lot.
And, you know, this is a learning I would have for anybody that’s selling a business that you need to emotionally prepare yourself for the day when you are not anymore, you know, on your LinkedIn profile that title, when your email address changes, when you’re not being asked anymore to speak in certain speaking engagements [inaudible 01:01:30] because it’s a big hit for you if you’re not prepared for that. So I always advise people…I mean, I had a friend who sold a business within the $50 million range. And I told him the best advice I can give you is find a counselor before you sell the business and start preparing yourself for that. And he did and he came back to me and he said that was probably the most brilliant advice. Yes, it was me who gave him advice.

Drew: You said the same thing to me, by the way. I went to counseling and did…Oh, my gosh.

Andreas: I did? Oh, okay, so I did it with you as well. I’ve been sharing that message because he came back to me and gave me that positive, you know, feedback. And I was so happy to see that because I don’t want anybody to go through and mostly what I went through because it really drained me and made me ask who I am and what my purpose is going forward. Even if you have money, as an entrepreneur you wanna know what’s next. It’s just who we are.

Drew: You know, I think that was the biggest shock for me was this sense of identity change, where it’s like, you had this whole identity that you built around that company and who you were as the CEO, as the founder, and all of these things that you had kind of like constructed around your sense of self and then all of them are removed in an instant. It is shocking.

Andreas: Yeah, yeah. So l would like to…

Drew: Go ahead.

Andreas: No, I just said that unless you’re just a money-driven guy that celebrates when the check comes in and you don’t care about anything else, what you just said,
Drew, you know, that’s gonna be actually your biggest question you have to answer yourself before, you know, cross the finish line.

Drew: Yes. And it’s amazing how few people are really prepared for that. I mean, anything else that you would say, I mean, you know, you were going to counseling. I mean, I think you talked about, you know, depression. I mean I know I went through a roller coaster of emotions and, you know, it worked, just to kind of process through that.

Andreas: Yeah. No, I mean, after a period of time like I did take some time off. And so call it month eight or so after, you know, having exited you start questioning also your, I don’t know, management skills, any type of skill that came so natural to you, analytical thinking processes. And, you know, being an athlete, I kind of like found myself doing individual sports. So not in a group. And I didn’t have much group dynamics anymore. And I think that’s another piece on the intangible side of an advice is, you know, find yourself places where you can be in group dynamics because it’s just really important to stay social.
Be able to mark in your calendar events that you can go to where you can get dressed up and do these types of things. And just so you feel like you’re still in the game and you still got it. Because when I started the next company, I really literally felt for the first three months or so, I had to remember all these things that are used to do, you know, how I was running meetings, how I was organizing myself, how, you know, I was able to touch people from a leadership side so they become effective. Like those things, I felt I had a bit of a ramp up again.

Drew: Anything else that you kind of learned about yourself even in that eight-month period of being off where a lot of the kind of identity around work was stripped away? You know, were there things that you discovered about yourself for the first time or that kind of came more to light?

Andreas: Yeah, I did. And, you know, I’m kind of like always this, how can I cramp so much stuff into my day? So, you know, that’s for me an element of feeling like I’ve done a good job today. The one thing in terms of my counselor…and I might have shared this with you too, Drew. The best advice she gave me was, “It’s time and great to water plants.” And obviously, I didn’t understand at first what she meant with that but having the ability to really slow down, if you’re this high-charging, always going individual and finding these moments where you can really water the plants has helped me now even not having been like full of juice to really find these pockets [SP] because that revitalization is so incredibly important and I didn’t have that. And with a revitalization, you know, you guys know this, we find a space to think about the purpose of what you do on a day-to-day basis, which then revitalizes you actually when you do the work. And I think that was one of the big learnings that I still practice today that I feel makes me also much more effective than I was back in those days.

Drew: Yeah, I’m about six months off of work from kind of stepping down. And, man, I feel like a lot of huge breakthroughs have come in the last six months that I now have the time and space really to deal with. So it’s been a blessing that I didn’t foresee.

Andreas: Yeah, good for you.

Drew: Well, good. Go ahead, Brandon.

Brandon: Yeah. You know, you cooled down a little bit and kind of reflected. What was your next steps and kind of what are you working on these days?

Andreas: Well, next up was that people started bugging me that…you know, over the years you always try to see what else can I do and in parallel to what you’re already doing. So I’ve always had these conversations with folks and some of them started bugging me, first jokingly, saying, “Hey, you don’t do anything anywhere, why don’t we do what we said we were gonna do later on becoming more concrete.” So one of those was a gentleman that became a friend who had been in the Middle East, Dubai specifically, where we kind of like always had the thesis that the Middle East is two years behind based on the internet specifically and techniques and tactics around the internet around what’s happening in the U.S.
So he convinced me or he actually called me up one day and he said, “Listen, we always talked about doing something. How about I secured the licenses of all the major TV and movie production companies in the Middle East, all Arabic, and can we do something with that?” So I started looking into that. And the outcome of that was that I showed up at my wife’s doorstep and asked to move for a period of time to the Middle East, to Dubai. And we started a video-on-demand platform. Well, what people started calling The Ruler of the Middle East, which ended up to be the fastest growing in that region. So I did that for a little bit over a year-and-a-half. Had a successful exit out of it to one of the licensing companies.
Obviously, it was a great experience in terms of, you know, running a fast-growing business, you know, having a nice earn-out…exit, I’m sorry. And then also what was the most fascinating, what region and the leadership of our region because I was able to get a team together out there. The team members all come from Palestine, Egypt, Turkey, Lebanon, India, Philippines. It was like the United Nations to kind of figure out how to manage. So that was fascinating. I did that for a little bit over a year-and-a-half.
And then, you know, I already started looking back into what I can do when I come back to San Diego. Started to work the end building up a business, which is one of the businesses that I have right now called Katana, which is a digital marketing paid media service provider, technology provider. I did that with several of my former leaders of my first business that I sold, all the people that did really well for me, for the business. I had all the trust in the world in that. And so it was kind of like very wonderful to bring them back together and start something.
It also gives them the chance to feel like going from an employee status into an ownership status. And it’s just beautiful to see the company has been around now a little bit over three years. And just seeing how these individuals are coming along is a wonderful bliss for me. And then in parallel what I’ve done, partnered up with two folks and we raised money. We currently have raised over $12.5 million and have what’s called a venture incubation fund where we start companies specifically around artificial intelligence. That’s where I spend my…like between those two sides of the business, that’s where I pretty much I spend all my juice nowadays.

Brandon: That’s great. When you were talking about the Middle East, it reminded of a book I read, the Ted Turner biography called “Call Me Ted.” Have you ever read that?

Andreas: I have not.

Brandon: You should read that. I think you’d like it. It’s a great, great book.

Drew: It reminded me of the Chris Farley interview when he’s like, “Have you seen that movie? That movie is great.”

Andreas: No. You guys need to send those to me. I want to check those out.

Drew: All right.

Brandon: Well, great, Andreas. I think that definitely helps. A lot of really good points there. And how can people stay in touch with you if they kind of wanna learn more about Analytics Ventures and what you’re doing and kind of follow your path on that?

Andreas: Sure. Absolutely. I’ll give you my email address. I’m happy to receive and answer any questions. It’s andreas@analytics-ventures.com.

Drew: Awesome. I appreciate you taking some time. Yeah, a fascinating story, a lot to learn from, and we look forward to seeing what continues to come from the work that you’re doing.

Andreas: Thank you guys for having me. I really appreciate it and I wish you guys all the best of luck.

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Alex Bates – $37M Exit after Transition from Service to SaaS https://www.goodmanson.com/exit-story/alex-bates-37m-exit/?utm_source=rss&utm_medium=rss&utm_campaign=alex-bates-37m-exit https://www.goodmanson.com/exit-story/alex-bates-37m-exit/#respond Tue, 14 May 2019 00:07:37 +0000 http://www.goodmanson.com/?p=21984
How the transition from custom software to SaaS led to a $37M Exit, significantly higher than a deal they rejected for far less when they were not SaaS.

01

Transitioning to SaaS

How Alex’s company transitioned revenue models to dramatically increase their valuation.

02

Deciding Not to Sell

The first time they went to sell they decided against it to put more time in and increase their valuation based on what they learned.

03

Finding the Right Buyer

Where and how they ended up finding the right buyer willing to pay a premium for their business.

Managing Director at Neocortex Ventures, Technology Chair at the Sandbox, author at Augmented Mind

Alex Bates

Alex brings a unique perspective at the intersection of machine learning, big data, and the IoT. As an undergraduate, he authored 5 peer-reviewed publications (current citation count of 117), performed DARPA-funded research in neural networks, as well as research in memory and computational diagnostics. Next he jumped into the private sector, applying analytics on some of the world’s largest data warehouses at Teradata, the pioneer in big data.

In 2006 Alex co-founded Mtelligence (Mtell) to harness the deluge of sensor data in the industrial IoT, with a mission of creating a world that doesn’t break down. Mtell’s machine learning platform is used to monitor global fleets of offshore drilling rigs, railroad engines, and process equipment, in effect creating a distributed immune system to protect equipment and personnel. Alex is lead inventor on 3 patents in the area of sensor networks and machine learning. Mtell was acquired in 2016 by AspenTech (NASDAQ: AZPN), the global leader in process optimization software. In the two years following the acquisition of Mtell, AspenTech more than doubled its market cap, adding $4 billion of shareholder value. In June 2018, Barron’s highlighted AspenTech as one of the top three AI investments outside of FAANG (Facebook, Apple, Amazon, Netflix, Google). Alex received degrees in Mathematics and Computer Science with a concentration in neuroscience.

His new book Augmented Mind (print release coming in May 2019) explores how the combination of AI with human intelligence — called Intelligence Augmentation — has revolutionary potential.

Suggested Resources

What Entrepreneurs need to know about
Selling to a Private Equity FirmRead More
What Entrepreneurs need to know about
Using an Investment Banker or Business BrokerRead More

Full Transcript

Brandon: So today’s guest is Alex Bates. He’s a good friend of mine, I’ve known him for several years. I met him through EO Entrepreneurs Organization and he actually lives in the building next door to me in San Diego. So we’ve had a lot of really good scotch nights together and I’m really happy to have you on today. How are you doing, Alex?

Alex: Doing great and great to be on with both of you here today.

Brandon: Perfect. So tell us a little bit about your company. What you do and how did you start it?

Alex: Well, you know, the early origins of the company came out of some consulting experience we had and it’s now kind of called the IOT Internet Of Things. And I met my co-founder just on a camping outing socially, just kind of randomly. And we got a lot of common interests and we were doing consulting, his background was mechanical engineering and sort of maintenance of big industrial equipment. My background was you know, computer science and kind of neural networks and AI. And we started talking about ways we could, you know, use new technology in this field. And out of our consulting practice, we decided to bootstrap this company and actually, you know, fund some software development and work on getting things going. And really from the beginning it was, we knew there had to be a better way, these big industrial energy companies were doing maintenance on a calendar schedule and having tons of equipment breakdowns and sometimes you had big environmental catastrophes. And meanwhile all this data was getting collected, we knew there was a better technology approach to doing maintenance and preventing these environmental catastrophes. So we really just started working on different technologies that could fit in that. And over time we crystallized a vision of creating a world that doesn’t break down. And that became kind of our why statement of the company. And we also came up with a mission of protecting all the world’s critical assets within five years by the time we refined that was our targeted goal. So it was really using AI and machine learning, you know, to learn to monitor this industrial equipment, learn how to predict failure and how to prevent these catastrophes that we saw with things like the Gulf oil spill.

Drew: Wow, that sounds like pretty heavy stuff in terms of, you know, industrial monitoring and predicting failure. Is that something that you’re studying or background or you just were doing this consulting work and learning about that?

Alex: You know, it’s interesting. I had almost no experience in the industrial realm. Back when I lived in Oregon, I dabbled at a company that did industrial control systems but I was very new to that. My co-founder, on the other hand, was all in on industrial and maintenance. So it was kind of merging those two worlds together, of technology and the industrial and mechanical engineering and reliability.

Drew: You know, there’s a lot of companies that are doing consulting or service-based work and they would love to get into being a software company. You know, I’ve talked to a lot of people in that place. How did you manage that transition from, “Hey, we need to do the consulting work to also then building software, you know, while you’re doing that?

Alex: It’s a pretty rocky transition but I think on the other hand, when you’re consulting and you’re deep in the trenches with customers, it’s one of the best ways to really get a finger on the pulse of what their challenges are and how you can really help them, you know, kind of boots on the ground. So the challenging part is that you’re completely ripping apart your business model and in fact trying to use one business to find another one. And there’s a lot of trade-offs there but you know, we kind of decided that the consulting was a completely temporary thing just to fund our formation of the software company. And so we, you know, kind of treated it that way but still tried to give the white glove treatment to our customers. Some of those consulting customers turned into pilot customers for the software. So that was a natural way to sort of bootstrap the technology and get some customer references. So I mean, I would recommend it but also I’d you know, caution that, be aware, it can be a rocky transition.

Drew: What was something that was rocky in that transition for you?

Alex: Well, I mean, part of it is just, you know, you’re trying to do a lot of billable hours and then you’re trying to do a lot of R&D and you know, there’s only so many hours per week. So I think what happens, you know, we had some big consulting clients like Fortune 500 companies and if you let them, they’ll kind of suck the life out of you. So you have to kind of be careful to, you know, preserve some of your own time and space for your own R&D and not get too deeply entrenched in their organizational structures. I mean we had clients that would go so far as to invite us out for some of their, you know, employee events and we just had to sort of pull back to make sure we weren’t too all in on the consulting side.

Drew: So you talked a little bit about bootstrapping this through your consulting work to build the software. Did you use any other ways to fund the startup and invest in the software development?

Alex: It was really a bootstrapping model. I mean, we did have some people come in, advisors. We had a couple employees move on for just, you know, kind of life transition reasons. And we did have a couple advisors buy out their shares, sort of a smallish, you know, angel investments. But it really was a bootstrap model until raised a corporate venture round, you know, two and a half years ago.

Drew: So you raised around two and a half years ago. What did you raise the money for?

Alex: Yeah. That was really eight years into the company. So it was early years of bootstrapping and then we, you know, started getting our revenue from software and so on. But the venture fund that we rounded at the time, we really wanted it to build out of marketing and sales capacity and also to build up, you know, scale up our infrastructure to support an evolution to cloud and more of a subscription model.

Drew: Good, and what fund did you bring in?

Alex: In terms of the investor, do you mean?

Drew: Yeah. Who was the investor?

Alex: Well, we did everything from talking to institutional investors up in Silicon Valley to talking to strategic corporate investors. And we ended up going with a strategic corporate venture investment from a company called PTC. And the nice thing about that, of course, the terms were probably much more favorable to the entrepreneur than you’d get from an institutional VC where it’s much more of a financial transaction and they’re going to put in clauses, you know, to protect their financial interests. And I think that a corporate strategic investment, they’re more interested in having strategic access to the technology and you know, the ability to maybe influence a board seat, the direction of the company and also the chance to adopt it within their company and push it out to their customer base. So we did go with a corporate venture investment for that initial round.

Drew: And so it sounds like that was a good experience. And then you know, I imagine we’re able to do some of this scale up, you know. Was the mission accomplished?

Alex: Yeah, I mean it definitely funded, you know, some higher…We were pretty conservative with it but it was sort of in between a C…it was kinda like a series A but you know, maybe a smaller series A round. But I think it definitely helped us fund towards some of our goals but we didn’t really ramp up massive spending. We were still pretty conservative with the burn rate.

Brandon: That’s great. So it sounds like everything was you know, moving along, you’re growing the company, you raised money. Kind of when and why did you decide to sell?

Alex: Well, it’s interesting. I mean, I think like a lot of entrepreneurs, we were pretty passionate about the technology and the cause and the mission, almost probably to a delusional point. So the selling was almost a secondary consideration. I think we all felt that in our industry in particular, that the way to get our technology to a broad market adoption and to hit our sort of vision of protecting all the world’s critical assets, it was unlikely to have a direct path for us to do that ourselves. Like going all the way to an IPO and sort of just scaling our company all the way end to end. So we did feel that probably the likely outcome would be, you know, an M&A event with one of the bigger industrial companies in this space and industrial’s interesting because there was a relative short list of possible acquirers. You know, there’s a lot of big names that are pretty well known. We figured that would happen but at the same time, I think we were all pretty passionate about what we were doing and the impact we could have and just scaling it up. We felt that when the right partner came along that we would certainly go that route.

Drew: Can you tell me, you know, where were you when you kind of realized that you guys made that decision to sell? Like what, were you in a room, was it a meeting? Like when did you kind of say, “Hey, we’re going to do this?”

Alex: I mean, we’d had a number of conversations over the years with some of the big industrial Goliaths, everyone from, like, IBM and GE to other, you know, other companies in that space. There were conversations being had. I would say that, you know, around the time that we took that investment, we also happened to meet this boutique investment banking firm and start conversations with them. And I think they helped educate us on how that process works and, you know, if we were looking at that, how to set ourselves up for doing it. And also, of course, we saw that they were able to broker negotiations and how that whole thing would work out.

Brandon: Who else did you bring on besides that boutique investment firm?

Alex: Well, we also had some additions to our advisory board. We had one key person, Michael Theman [SP], he joined probably about three years ago and he came in through a personal contact and he was an amazing addition. You know, he was part of the agency software, one of the biggest kind of AI success stories where they were the IPO, they were acquired for close to a billion dollars by FICO and now they monitor almost all worldwide credit card, you know, transactions for fraud. They were actually based in San Diego and that’s part of why we have this analytics footprint in our city. He actually ended up joining our advisory board and eventually our board of directors. And he was also extremely helpful to help just, you know, set up the company for success.

Brandon: Wow, that’s really cool. So you’ve got, you know, this team, you’ve decided you’re ready to sell and you’re ready to move on. What did you learn from the investment banker and working with them?

Alex: That firm was called…I believe they now are owned by another financial firm. But they were just extremely knowledgeable about the whole process. But also they were pretty specialized in the industrial software space. So they had particular knowledge about, you know, how it works in that particular environment. I mean, they told us everything from here’s what the due diligence checklist will look like. We did have a financial acting CFO who had joined our company and he had made sure, you know, our books were pretty clean. But definitely the Pacific Crest took it to the next level as far as making sure, you know, we’re setting ourselves up for a path where if it does come together, we’re going to be really well positioned.

Brandon: So, and then you had all that, did you kind of go to market at that point or kind of determine a number that you want to sell for and go to market, or what was kind of the next steps after that?

Alex: Well, we didn’t really have an exact number. I think that we knew that, you know, if we were hitting the milestones we laid out in terms of, you know, growth and closing some of our key customers, that the momentum itself would increase the numbers. They would go and try to find comps, you know, for valuations and so on. But number one, a lot of those transactions were private and so they weren’t publicly disclosed. And in some cases they were able to get, you know, maybe insight information about, okay, we think this was probably the multiple and just, you know, through the grapevine figure out what the going rate was. We were also in this emerging market, it’s at the intersection of IOT and analytics. And because it’s a new and emerging market category, there weren’t a long list of transactions because it kind of was a new space, if that makes sense.

Drew: So, Alex, my experience is that every entrepreneur has their own number. Did you have a number?

Alex: I think we had tossed around different ideas in terms of multiples. I think that at the time I was happy, you know. Early on, its funny because the number changes every time. Like at one point, you’re like, man, if we go about 20 and then in the next point, it’s like, man, if we go above 30 and then at the next one, it’s like, hey if we’re close to 40. So I think that the number kind of evolved also with our growth. But when we finally consummated the deal, it was definitely at the number I was very happy with.

Drew: Before we jumped on this call, you were saying you were at the tax man and, you know, obviously living in California like we do, it’s a painful place that sometimes you build a number and then you start going, “Holy crap.” After taxes, that’s not a lot.

Alex: I mean on the one hand, it’s a good problem to have. We always used to joke, like, that’s a high-class problem, but certainly California is not a cheap state.

Drew: So you went out to market and you started to shop. Tell us about that sales process and you know, what happened?

Alex: Well, the interesting thing I think, you know, for companies looking at M&A, when you talk to a savvy investment banker, they’ll tell you, you don’t want to put out a message that you’re up for sale. Like that sort of undermines your value and it also looks a little bit desperate. So there’s sort of a process where you can, I mean, at the high end, you can do this outreach where you’ll become…there will be awareness, where you will spread to Wall Street analysts who will then turn, inform some of the big players, and then they’ll hear about you through back channels where they’ll certainly want to reach out and pursue you. And that’s a really good model. And so I think for us, you know, we weren’t sort of putting out radar pings that we’re for sale, but we were leveraging these bankers that had, you know, that had back-channeled conversations and we’re able to put information in the hands of people that could reach maybe potential target acquirers.

Drew: And so did you have anybody get interested and start to approach you?

Alex: Yeah. Well, and what’s interesting is it turned out that Aspen Tech, who was our, you know, our eventual acquirer, they had become aware of us already probably about two years before the actual acquisition. But really it was six months prior where they really flew out a team and really suddenly started taking the interest to the next level. And really from that point forward it was really key as far as having our, you know, Pacific Crest to help guide us through that process. [crosstalk 00:16:45]

Brandon: Go ahead.

Drew: You’re saying that you ultimately sold to them. But I think when we talked, you also said that there, you know, maybe a couple of years earlier, when you first went out, you had somebody interested but you weren’t quite maybe getting to the numbers that you wanted? Maybe tell me a little bit about that.

Alex: So there was a conversation almost maybe three years prior and it was with another big industrial company. And yeah, I mean I think at the time a couple of things happened. We were earlier stage and the market had hit a little bit of a rough patch. And so number one, we weren’t on an upward trajectory in terms of momentum, so that was one issue. Another issue is just that, like a lot of startups, had a lot of chaotic internal processes and maybe if we would have had better processes, we would have still rode out that rough patch in the market and had a stronger, you know, kind of sales pipeline. That conversation failed to consummate in an acquisition. And it was after that, you know, we did two things. We did raise this corporate round but we also brought in some external coaching that helped us really improve the processes that were pretty broken internally.

Drew: Got it. So you were saying that the investment that you took on two and a half years ago from the corporate was in light of kind of not ultimately selling, but taking on some money. Is that correct?

Alex: Yeah. So after that, we decided to take a round and then really try to improve our company and make it much stronger, especially looking at operational perspectives and then in our sales process.

Drew: And you said you kind of went back and you brought this coach in. Maybe tell us some of the things you did specifically to increase the value and start to make some transitions.

Alex: We knew we had wanted to make this jump to subscription pricing and towards software as a service. And so, but there’s a lot of inertia to making changes to pricing catalogs and, of course, existing cut target prospects in your pipeline want to stick with the existing enterprise pricing. So it is initially a pretty tough transition but we decided we had to do it. So we started making those changes to, you know, how we can adapt subscription pricing and changing our internal process to support that. So that was one very concrete thing. And the other things involved just looking at what our current process was for quantifying the sales pipeline all the way from leads to opportunities and the stage gates between them and, you know, how we qualify customers. And, of course, we, like a lot of companies, we had this thing where you chase the shiny ball, you know, “Hey, we got a new lead.” And suddenly you prioritize these new leads as opposed to ones that actually have a budget and are going to close within three months. Our coach has really helped us refine our whole sales prospecting motto and then operationally looking at even things like customer support and internal process to support that.

Brandon: A lot of people want to figure out how to go from kind of enterprise to SaaS. How did that transition go and what did you learn from that that you would kind of offer an advice or what would you do in the future?

Alex: You know, I think any transition like that can be a little bit rough going. I think that because there is so much inertia to big changes like that, for us it was helpful to have this external coaching consulting firm. Number one, to sort of diffuse egos when conversations come up about things that are going to change and two, just to keep you on point because these are multi-month transitions and you really have to…and meanwhile you’re trying to run your business and make this radical change. So it was helpful for us to have outside help and meeting you know, regularly to look at, make sure we’re on track to make that go. And for us, it was interesting because we did the subscription pricing transition. So that was one aspect. The second aspect can be cloud hosting and a lot of times SaaS is considered synonymous with you’re hosting the software. So the customers don’t have to have it on-premise. But you can actually do subscription pricing and still have an on-premise software model. And in the industrial sector, some clients still, they love subscription pricing but they’re not ready for complete cloud hosting because there’s concerns about their control system and getting data up in the cloud and there’s a lot of just real world challenges there. So we supported both models. So we did full subscription pricing, and we had some cloud-hosted customers and some on-prem customers.

Drew: So in these changes that you made, like, what was the impact to, like, your value, growth, the focus, you know? How did that kind of impact all of those things?

Alex: I would say there’s no question it improved the valuation. I mean, you know, what investment bankers will do is they’ll pull up comps and it was clear that SaaS multiples were higher than enterprise value or enterprise companies. So we knew that was a better model. We also knew that in the industry itself there was a shift towards SaaS and subscription pricing. So startups really shouldn’t be at the lagging end of adopting those changes that are clearly, you know, have a lot of momentum. So we wanted to be at the leading end of that transition. So we just decided to embrace it.

Brandon: Once you decided to sell, you know, you found the buyer, you got kind of these things sorted out, how long was the process of actually selling from when you first started talking and how did the process work?

Alex: Well, I mean I think earnest conversations probably started, you know, maybe six months out. And then due diligence was about a three-month process. So there were initial conversations and then there’s a whole process where there’s a letter of intent, a signature, you know, and then a formal due diligence process for going through that. So that was kind of the timeline.

Brandon: When did you tell your staff and how did they take it?

Alex: Well, see this is what’s interesting about this process and a lot of this was new to me, but there was a high degree of confidentiality in these discussions that was requested. One of the things we learned from the experience three years prior was that the most important thing when you start these conversations is not to kind of take your eye off the ball and not to get distracted, but how do…you want to start those conversations but you want to just also keep your foot on the gas pedal of growing your business and you know, hitting your milestones and that kind of thing. And so if we would have told all of our staff, you know, clearly this would be a major distraction and people kind of get short-timer syndrome. So we really didn’t tell anyone until pretty close to the end of the process, very close to the end of the process you know, when obviously we had to tell them and get signatures and things like that.

Brandon: When you say you learned that kind of the second time around, did you do something different the first time?

Alex: Yeah, I think the first time a lot more people were aware. And the problem, of course, is that these things are always very tentative and at best they take longer than you think. And at worst, you know, you might have conversations that die out and then more conversations that come in. So it can be demotivational if you’re always…I think as leaders you have to modulate a lot of those highs and lows because obviously there can be a lot of stress involved, and I think as technical and entrepreneurial leaders, have to bear that on our shoulders. And then certainly when the good news is official, you share it with everyone. But when there’s possible good news and then sometimes that falls through at the last second, that’s more stress than some people can take. So we were careful to sort of shield that.

Drew: I remember when we went through our sale and then subsequently I was part of a company where we bought about 40 companies. You know, every group kind of shared with their employees in different ways and sometimes, you know, we would show up and they were, like, learning about it for the first time and that didn’t go well. Sometimes people told them way too early and then there’s this kind of, like, long term fear and uncertainty and that’s not healthy either. So it’s like, you know, when exactly do you bring them in. You know, is there a moment where you say, “Man, this is the time where we should bring, you know, the employees in?”

Alex: Yeah, it is. I think it probably depends a little bit on the situation because like you say, you don’t want to wait too long and you don’t want to go too early and there’s a lot of judgment calls there. I mean, once you really maybe feel in your gut that it’s 100% sure, you might at that point decided to share maybe at least with more people on the leadership team. But certainly, that’s a tough one.

Drew: And then just out of curiosity, how many employees did you have and then how many of them maybe even had any equity or shares?

Alex: Well, technically we have nine full-time employees but we did have a pool of contractors and some were full-time equivalent, almost like employees. So with that, you know, we had probably about close to 20 including the contractors. And you asked how many shareholders there were?

Drew: Yes, that were employees as well.

Alex: They were employees. I mean all of our employees had stock options. So that was throughout the company. Consultants, only one or two did. And then our board members also had equity in the company.

Brandon: Kind of during this due diligence process and kind of mid-sale, did you have, like, one huge major concern throughout the process?

Alex: Well, I think part of our concern was sort of just, you know, you get a little paranoid that something can go wrong, especially when you’ve failed to consummate in the past. So I think there’s a lot of just maybe paranoia about, oh, you know, we have to…And there’s so much paperwork, like, you’ll get a questionnaire with 100 technical questions and you fill out and answer all 100, and then you get follow up questions, which are 200 questions. And then you answer those and then it’s, like, 500 questions. And I think part of it is, wow, are we ever going to have time to finish all of these questions and is it gonna sort of distract us from growing our business, and then just, you know, you, of course, you worry about…we were trying to close some big deals and we were actually able to close some deals during due diligence, which also is very helpful from a negotiating perspective. So I think that it’s like, man, are we going to be able to close these deals and answer all their questions and that kind of thing.

Drew: So you said you had a little failure to perform in the past. I believe there’s a pill for that, right?

Alex: I need some information on that.

Drew: But you did perform on this one. Tell me how much did you sell for?

Alex: So they actually decided to publicly disclose that. So it was 37 million, all cash deal and that was the amount.

Drew: Brandon, I think we need a sound effect next time we hear that because 37 million, that sounds awesome.

Brandon: And all cash too.

Drew: Nine full-time employees, all-cash. So no earnout, no funny business. Just a wire to your bank account.

Alex: It was just a wire and you know, they carve out 15% sort of as a reps and warranties kind of thing. But yeah, it was a cash deal, so it was a big celebration.

Drew: So where were you when you heard that it closed and the 37 million minus the 15% was being wired to your bank account?

Alex: Well, I’ll tell you, as one of the technical leaders of the company, I was intimately involved and engaged because the final day of due diligence, they had a team that flew out for Boston, and so they wanted to start at 6 a.m. and do this detailed technical screening where they were running code from the compiler and they’re also installing the media and running a battery of tests and making sure everything is 100% identical. It was definitely the most thorough evaluation I’ve ever been a part of, I mean, the whole due diligence was extremely thorough. We were pretty impressed. So the final day, of course, is pretty nerve-wracking and it took 12 hours. It was a 12-hour day and then, you know, they wanted to have all of these sorts of check marks and verifications and at the end of that, you know, was when the wires came through.

Drew: So you’re sitting there working all day, working your butt off, probably of the most stressful day of your life, making sure all the things are tight. So then at the end, that all happens and the wire happens. What was the, like, emotion that you felt at that moment when it closed?

Alex: You know, it was a combination of elation and it’s like when you’ve just run a marathon and you just, like, step over the finish line and half of you just wants to go take a nap. And the other half’s like, no, I gotta go out and celebrate. So I did go out and there was some pretty good scotch involved that night. But yeah, it was just also just a huge sigh of relief. There’s a lot of negotiation that happened right up to the 11th hour to make it seem like it could have been tentative. So then it’s just like, it happens and you actually kind of pinch yourself. Then you’re like, “Wait, did it happen?” And then you’re like, “Wait, show me that again.”

Drew: Did you log into your bank account and see how many zeros were behind the number?

Alex: We shared it. Actually, our CFO pulled it up and showed it to me and he actually took a photo of it. So that was the biggest that account had ever been.

Drew: Very cool.

Brandon: Kind of after you know, all the dust settled from that, how has this sale really changed your life?

Alex: Oh man. I mean a lot of different ways. Well, first of all, it obviously eliminates a lot of…it gives you a lot more financial independence and freedom, which frees up part of your mind that was maybe caught up in things that are a little bit more distracting, and now obviously it’s frees some of that up and then you can start to think about other things. And then you go out, and I think you meet a lot of interesting people that kind of opens up some conversations. Yeah. I mean, I think for me in this space of AI and analytics, it definitely made it easier to get ahold of people and start talking about future projects and collaborations also.

Drew: Who’s the most interesting person you met from that?

Alex: Well, I would have to say it would definitely be Richard Branson, which was an opportunity that came up to go out, you know, to his island, Necker Island, which I guess is only one of his two private islands. I mean, that guy is pretty amazing in terms of…I mean, in some similar ways to Elon Musk because he has a space company, you know, Virgin Galactic, he actually has an underwater company to do sort of these high-end submarines. And then, you know, also he has Virgin. But meanwhile, he lives on these islands in the Caribbean, British Virgin Islands, and has all these people fly out to his island. And that includes like, you know, high-end scientific and engineer people from, like, Singularity University and they’ll do, like, Ted talks and then he’ll go out kite surfing at 6 a.m. And I mean, that guy, just the way he lives his life is amazing. His nurse was there and she told us stories, like, he’s still out mountain biking down cliffs and he’ll fall and almost knocked his teeth through his mouth, and get back up and do it again the next week. So it’s pretty inspiring. This guy’s is in his 60s and he’s still living his life like that.

Drew: Very cool. So when are we going to be able to visit Bates Island?

Alex: Well, I’m taking notes. I mean, man, people like that, it helps you think about, wow, what would be the next level? Also Elon Musk, I mean, a guy that decided to disrupt, you know, multiple $10 to $100 billion industries just for fun. I mean, that’s interesting to think about those kinds of things. So I’ll keep you posted but I probably won’t be opening a Bates Motel. That would be [inaudible 00:34:44]

Drew: That’d be bad marketing.

Brandon: If you didn’t buy an island, what’s kind of one thing that you bought or a couple of things that you bought?

Alex: I did finally get a house and so I’m moving out of a downtown condo into a house. And that’s been a pretty nice transition because you know, you leave your condo, but then, you get the backyard, so that’s been fun to get that all settled in. And then also I did finally on the Elon Musk, talking about that, I did get a Tesla model S, it’s just an amazing piece of engineering. And I will admit I almost gave myself whiplash, so kind of learning how to dial that back on the throttle.

Drew: And that’s not a splurge. I think any self-respecting CTO to have a Tesla.

Alex: Yeah. Good point. [inaudible [00:35:42] requirement.

Drew: What are you doing now? You had to stay on with the company, right? How long do you need to stay on and kind of what are you working on now?

Alex: Well the initial discussion was for, you know, a two-year process and possibly farther. But, you know, there were some retention things involved. So I did agree to stay on and stay on as a full-time employee, as did my co-founder Paul, and some other…most of our personnel stayed on. So I think everyone got offers for employment [inaudible 00:36:17]. Yeah. I mean, at this point, it’s been interesting to see that…I would say that Aspen Tech is very experienced. They’ve, in their history have acquired over 30 companies, so they have a pretty detailed playbook. And a lot of the work now is number one, on the integration side. You know, tying everything into this bigger organization with a bigger sales force, customer support, R&D, and meeting with a lot more people for those different areas. And then, you know, a little bit of evangelism. So you know, I do a little bit of talking here and there but not a massive amount. But yeah, so I think it’s just now helping through their organization, trying to deliver on that original vision of creating a role that doesn’t break down, which was a complementary vision to theirs. So, you know, I think it’s just helping them through that.

Drew: Tell me, is it different being an employee than an owner? Like how has that changed for you in your life?

Alex: It’s radically different, that’s probably the…

Drew: It’s my understatement.

Alex: …roughest adjustment. Oh man, I mean, you’re a technical entrepreneur, you call the shots and you have a budget that’s [inaudible 00:37:27] control of the budget and now you’re an influencer. And so that is a radical shift. Well, I have to get used to that part but it is nice having the extra resources. So you try to take the good with the bad.

Brandon: And OPM is always good, other people’s money.

Alex: OPM, very happy with that.

Brandon: Have you learned anything, kind of how you were operating your company and then going and working for such a larger company that’s acquired all these companies and how they do business and how you used to business. Is there any, like, key takeaways of things you’ve learned?

Alex: Wow. Yeah. I mean, I’ve actually learned a lot from the technical leaders in this organization. In fact, we thought there was a really great culture fit from the very beginning of our conversations. Just really incredibly smart. You know, this team has grown out of these engineers out of MIT that [inaudible 00:38:26] the company out, like, 35 years ago. They’re not really humble, really hard-working, very technically shrewd and savvy and great people to work with. So actually I’ve learned more technical information, I learned about chemical engineering, which actually never would have thought I would be learning about. That was their roots and yeah, just the way they run it, their processes, I think has been helpful. On our side, I think helping them, they wanted to embrace more agile processes and we’ve helped them on that journey where they had more sort of waterfall style software development. So now we’re helping them move towards more scrum [inaudible 00:39:07] and you know, kind of learning how to middle ground. But yeah, certainly I’ve learned quite a bit.

Drew: So from, you know, the starting of your company, from consulting to building software, from software you know, enterprise to SaaS to selling, I mean you’ve gone through a ton of stuff and then joining this company, how will your next project be different if you were to start a new one, you know, from what you’ve done in the past?

Alex: It’s interesting. I always think, like, what would my lessons learned be? But there’s so many. I think you make so many mistakes and the hardest thing to really quantify but yet the most important is knowing what to prioritize, what’s really important at a given stage of your company’s evolution. And I think we made a lot of classic mistakes about over prioritizing, you know, maybe marketing and mark comm at certain points in time. And then over prioritizing or under prioritizing sales at other points in time, and things like customer support and making sure you don’t drop existing customers just when you’re pursuing new customers. Just knowing all those trade-off ups. Every startup is spread extremely thin. So I think a lot of the instinctual things about knowing how to prioritize and also how to shift the priorities when we do that. And another practical thing is bringing in outside consultant coaches. You do have to be careful because there’s tons of consultants, they’ll come in and bill hours you know, as long as they can, but we found some really solid ones that were helped to sort of do [inaudible 00:40:49] sprints with our senior leadership team and make sure we stayed on track for some of those initiatives.

Drew: And what was the best resource that somebody can go and look at or grab when it comes to dealing with this issue of prioritization that you said, you know, learned a lot about?

Alex: Well, it’s a question I’ve seen, you know, this scaling up Rockefeller Habits Model. I actually learned about that through EO, that in general helps you understand a lot of the principles to improve your core processes, whether it’s people or infrastructure and procedures. But we also worked with a company called RevCult, which sort of implements [inaudible 00:41:40] habits can be overwhelming. It’s an extremely thorough book and process. So probably just find coaches to help step through that, at least for the way we operated, that was helpful to help people kind of walk us through that journey.

Brandon: You hear so many bad things about consultants and coaches. Do you have any advice on kind of how to pick the right people?

Alex: You know, that is tough because we actually had, you know, on our evolution, we certainly early on, picked coaches where we thought, “Wow, this is the guy we need to work with,” and turned out maybe they were prioritizing the wrong thing. So, it’s really tough. I mean, you can check their track record, check their references but for me, if they’re grounded and [inaudible 00:42:30] once we read that book, [inaudible 00:42:36] it was such a massive sea change that it was so hard to get momentum, especially to get other people on the leadership team to go all in on it when they felt like I was kind of, you know, forcing it upon them. But once we found this external coach who is clearly, you know, I had read the book, so I asked them lots of questions, like, about scaling up and not only had he read it, he had clearly coached companies through it. And so that was a helpful kind of thing to test out.

Drew: So [inaudible 00:43:07] entrepreneurs who are listening and, you know, what’s the one piece of advice that you’d give to them if they’re starting to think about selling their company?

Alex: One piece of advice, which is a little bit…kind of turns the question a little bit is, I think, you know, focus on your vision and your why and your mission statement and that’s going to get you through the lows. I think that acquisitions usually take longer than you think. It’s one of those counterintuitive things where it’s probably a natural…I mean, every entrepreneur, you make a lot of sacrifices, you forego a lot of income, and clearly you would want some kind of liquidity event to pay you back for all that. Otherwise, you know, it would just be a rough road to take. So, for sure, you know, that’s going to be a natural thing you want to go towards. But I would say if you really focus on what your vision is and also set proof points, you know, here’s our milestones, here’s what route to do and just go all in on that. But I would advise even though you want to focus on building your business, maybe have a conversation with an investment banker. In the back of your mind, you’ll start to know about what processes they look for and due diligence. And you start to know, wow, we better get our salesforce pipeline totally dialed in. We better get our customer support processes documented. We’d better get, you know, our product management dialed in with a detailed roadmap. So I think starting those conversations will help you, even [inaudible 00:44:43] of growing your business as well.

Brandon: That’s really good advice, I appreciate it. I’ve got a few kinds of personal questions for you. How old are you?

Alex: You know, I just had a rough transition on that one, just crossed the big 4-0 number.

Brandon: Happy birthday.

Alex: Thank you.

Brandon: And did you go to college?

Alex: Yeah, I did. I went up to the University of Oregon. That was a great university [inaudible 00:45:19] There was a little sort of honors college program there. But I grew up mostly in Oregon, so I went to school, you know, kind of in state and kind of double majored in math and computer science. But I was really interested in AI, so I took, like, I think 64 credits of neuroscience, which wasn’t even…didn’t even count towards a major. So I was kind of not really sure how that helped, but I think it was just a passion.

Drew: Someday you and I will have to share some University of Oregon experiences.

Alex: We definitely should. Oh man.

Brandon: What is your relationship status?

Alex: Oh yeah. I’m single as far as relationships go.

Drew: What’s your Tinder handle for all the ladies?

Alex: In spite of being a technologist, I don’t necessarily have all those technical apps and Tinder and so on, but I’ll let you know…

Drew: Is that what it’s called, a technical app?

Alex: Technology of dating.

Brandon: How can girls or anybody else listening stay in touch with you and kind of follow you on your journey?

Alex: I don’t really have a Twitter or anything like that. I mean, I’m on my LinkedIn, I’m on Facebook and so on. But yeah, I don’t really keep a blog, so probably LinkedIn on the professional front would be the best way to get ahold of me. Always interested in talking about AI or the future of technology and anything like that.

Brandon: Perfect, Alex. I really appreciate you taking the time today.

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What Entrepreneurs need to know about using an Investment Banker or Business Broker https://www.goodmanson.com/resources/what-entrepreneurs-need-to-know-about-using-an-investment-banker-or-business-broker/?utm_source=rss&utm_medium=rss&utm_campaign=what-entrepreneurs-need-to-know-about-using-an-investment-banker-or-business-broker https://www.goodmanson.com/resources/what-entrepreneurs-need-to-know-about-using-an-investment-banker-or-business-broker/#respond Mon, 13 May 2019 23:08:19 +0000 http://www.goodmanson.com/?p=21970
Should You Use an Investment Banker or Business Broker?

You’ve worked hard to build your business, investing significant time and resources into growing your company into the thriving and successful business that it is today. Selling your company is an exciting prospect, and for many, it’s the dream. The reality of selling involves many details such as understanding how to reach the largest possible base of buyers and presenting your company in the best light. You want to secure the maximum value, get the best terms and also ensure that the buyer will help your company continue to thrive in the future.

Many business owners turn to investment bankers or business brokers to handle the transaction details. But there is often confusion surrounding this option, including understanding what investment bankers and business brokers do, how much they charge and how these types of deals work. If you’re considering this option, understanding a few details can help determine which path is best for your situation.

Why entrepreneurs don’t like investment bankers or business brokers.

According to our 2019 Entrepreneur Selling a Company Survey, the Net Promoter Score (NPS) for using an Investment Banker or Business Broker, which measures how likely a person is to recommend this type of service, was -42 NPS.

NPS on Investment Bankers by Entrepreneurs

A big reason why entrepreneurs aren’t using investment bankers or business brokers is they consider them to be too costly and aren’t always clear on the value they bring. So how much do these types of firms really cost? If an entrepreneur uses a business broker, which handles smaller-sized transactions, they can expect to pay a couple of different fees, including the following.

Fixed success fees. Business brokers charge a success fee, which is typically a percentage of the deal value. The percentage value can be fixed, or it can be adjustable. For example, with a fixed rate, the business broker earns a flat percentage of the sale amount. Success fees can vary based on many different factors, but it’s helpful to have a general idea of what to expect. Here is a general guide based on the value of your business.

  • Less than $1 million: 8%;
  • Between $1 million and $5 million: 6 – 8%;
  • Between $5 million and $10 million: 4 – 6%;
  • Between $10 million and $25 million: 4 – 5%;
  • Between $25 million and $50 million: 2.5 – 4%;
  • Between $50 million and $100 million: 2 – 3%;
  • Between $100 million and $250 million: 1.5 – 2.5%;
  • Between $250 million and $500 million: 1 – 2%; and
  • Above $500 million: 0.5% – 1.5%.

Scaled success fees. In contrast, with a scaled success rate, the rate paid varies based on the sale price. The structure of these deals can take many forms, but let’s look at an example. Let’s say that a business sells for $15 million, and based on the deal, the firm gets paid 4 percent. But let’s say that instead, the business gets a sale price of $30 million. In this instance, the firm might get paid 5 percent. The scale is finalized ahead of time, but generally, the higher the sale price, the higher the percentage the firm earns. The benefit of this arrangement is that entrepreneurs can avoid situations where a business broker closes a deal quickly without securing the best possible purchase price.

Retainer fee. A business broker may also require a retainer fee. For example, a retainer fee might range from $50,000 to $100,000 in a middle-market transaction. But it’s important to note that a retainer shouldn’t be large enough that it reduces motivation for the broker to earn the success fee and close the transaction. In general, the upfront fee shouldn’t be greater than 15 percent of the overall fee. And some firms deduct this retainer fee from the success fees.

Fee tail clause. The deal might also include a “fee tail” period that remains in effect for a specific period of time, such as 12 months after a terminated engagement. For instance, if an agreement terminates before a deal closing, and you close the deal on your own a few months after, you still owe the success fee to the first broker.

A Word of Caution on Fees. The fee structure you ultimately pick determines how aligned you are with your business broker. Also know that a broker makes most of their money when the transaction is completed. So they have a strong incentive to encourage a deal to get done, even if it may not represent the top value you would like to get.

Does using an Investment Banker benefit the sale of your business?

When first starting your research about using an investment banker or business broker, you might find general information explaining what they do. For instance, they help structure the transaction, negotiate the deal, add credibility to the sale and identify the right buyer. And this is all true, but there is more they do for the sale of the business, including the following.

Assistance with the planning process. They can help you prepare the business exit prior to the event. While It’s possible to exit within a matter of months, brokers often recommend 1-3 years planning to yield the best results. They can also help with a “sell now vs. sell later” comparison to determine the ideal timing.

Additionally, these professionals should help you understand the valuation of the company. They are motivated to ensure the valuation is high and that the deal will close. This allows you to focus on running your company and let the professional that you hire oversee the sales process.

Create a reverse auction. They can help you run a “reverse auction” and create a market to sell your business. For instance, unless a seller decides to negotiate a sale with a single buyer, some form of auction is often the best way to secure multiple bids and negotiate the highest possible sales price. A good business broker should communicate to likely buyers and help find other potential buyers who participate in the consideration to purchase your business.

Drive greater competition and a higher sales price. A good investment banker or business broker can also give the illusion of a second offer, which creates a critical element for the deal: competition. Sometimes there is a second or more interested parties, but often, one offer stands out amongst the others. However, having this illusion can move the first party into making their best possible offer, including a certainty of closing on the deal when terms are agreed upon.

Handles the tough issues. Tough issues can come up during the sale, including retention packages and escrow, and tensions can run high. If you’re dealing with the other side directly, you might be too close to the business to handle everything without emotional attachment. This isn’t the best situation if you end up staying on with the company for a period of time after the sale. A business broker can handle these details and help distance you from the conflict to avoid uncomfortable future situations.

Own your Story. Entrepreneurs need to be the ones who drive the story and communicate the value of your business. The area I’ve seen entrepreneurs miss when using a Business Broker is over-relying on them to build the deck to communicate with potential buyers.

Should you look for an Investment Banker or a Business Broker?

How large is your business? This is the most important question to ask when understanding the differences between using an investment banker and broker. Business brokers typically handle smaller transactions – generally up to $5 million in enterprise value. For instance, imagine that you’re selling your home. You might decide to use a real estate broker. The broker lists your house, advertises it to potential buyers and negotiates potential deals. This is a simplified version of what a business broker does for your business.

An investment banker handles the bigger deals, typically $50 million or higher. Additionally, investment bankers deal in securities and may need specialized licenses issued by the SEC. Both investment bankers and business brokers can assist with the sale of your company, but if your company is valued at less than $10 million, it typically makes more sense to use a business broker.

Understanding the different types of firms

If you’re looking into using an investment banker or broker, you’ll quickly discover that not all firms are structured in the same way. There are a variety of firm types, each engaging their clients a little differently. Understanding the differences will help you select the right one.

Boutique investment firms. This type of firm specializes in a specific type of investment, such as capital raising, mergers or acquisitions. These firms might have a few locations in a specific geographical area and may specialize in specific industries. Boutique firms may have lower fees when compared to larger investment banks. Also, the dealmaker is more involved in the sale when compared to a larger investment bank, where an analyst or associate may do the majority of the work.

Regional investment banks. A regional firm focuses on a specific geographical area. The typical deal size for these banks is larger than that of a boutique firm, generally $100 million and up. The benefit of using this type of firm is they have a deep industry knowledge similar to that of a larger investment bank. However, fees are typically higher than those of a boutique firm due to the higher overall cost associated with running a large firm.

Bulge bracket investment banks. This type of investment firm typically handles only large deals that exceed $1 billion, but they may also execute mid-market deals. One of the pros of using this type of firm is that it can get more attention and exposure for a business sale. One of the cons, however, is the high premium paid in fees.

Business brokerage firm. This type of firm handles smaller transactions, typically those less than $5 million. Business brokers assist with setting a sales price, conducting buyer searches and handling negotiations. They typically make the business available to a broad base of buyers and charge a success fee.

A word of caution on industry-focused brokers: While someone who has a deep knowledge of your industry may be of great value, often they are in a place where they will do deals with a small group of people. There is an element where they have an incentive to keep the buyers happy, knowing they will have repeat business with them versus being 100% in your corner. Ultimately they are often going to do more transactions with the buyer of your firm and as such want to make sure they’re viewed favorably by bringing the buyer a good deal.

Why should entrepreneurs rely on investment bankers and business brokers?

Let’s go back to the -42 NPS score. Why do people end up using investment bankers and business brokers, even though so many entrepreneurs have a negative view of them?

Research has found that the most difficult part of the transaction is finding the deal, which is likely why so many business owners who set out to sell don’t end up closing the transaction. In fact, research shows that only 20 to 30 percent of businesses that go to market actually end up selling.

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The second most difficult part of the transaction is the valuation, according to our survey participants. Oftentimes when selling on your own, as discussed previously, a potential buyer will treat your business as a distressed asset, which isn’t the reality of most situations.

In our survey, business brokers hit on two of the most difficult parts of the transaction: 1) finding a deal and 2) getting the valuation you want.

Since the most difficult parts of the transaction are finding that deal and getting the valuation that you want, this is precisely why most people end up hiring help. In fact, in our survey, despite a low NPS, 37.61 percent of respondents said they did or would rely on an investment banker or business broker to get a deal done. These professionals can help entrepreneurs solve their largest pain points when working to successfully sell their businesses.

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Bottom Line for Entrepreneurs

The realities of selling a business in today’s market is that this process is still a bit opaque and therefore often justifies using a professional to navigate this process.  The stakes are high when you sell your company with what often is the largest financial transaction an entrepreneur will have in their life. When used properly, an investment banker or business broker should help with securing a higher valuation for your company and getting the deal closed. But it’s important to understand a couple of key pieces of information. First, understand what the investment broker is compensated for, and second, know who the investment broker works for. They are primarily compensated when the deal closes, but it’s critical that the professional is aligned with your objectives in selling. Design a deal structure that is created with this in mind and motivates the professional to secure the highest price possible, while ensuring the deal is the best fit for you and your business.

Want to learn more about exiting big? Check out current Platform Strategy and learn if this could be the right exit strategy for your business.

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