Case Study #7: Sold to a Competitor

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Sold to a Competitor

Andrew YangAndrew Yang Sold to a Competitor was the CEO of Manhattan GMAT when he sold to a competitor, Kaplan, in 2009.  

At the time of the sale, the company was doing $11M annually. Andrew stayed on post-acquisition and added an additional $6M a year in revenue before departing to start a non-profit.

What is the GMAT?

The GMAT is a computerized standardized exam (think ACT or SAT, but much harder) which students take in order to enter the top business schools.

Manhattan GMAT only hired instructors who scored in the 99th percentile on that test. They then paid them $100/hour as a base salary.

How did Andrew get involved?

Andrew was first asked to help create a curriculum for the one-man band that was the kernel of what would become Manhattan GMAT. He did just that and from 2001-2005 helped grow the company to $2M in annual revenue.

Why did he decide to sell?

The seeds for the sale were actually sown during a legal exchange. The general counsel at Kaplan had sent a letter identifying a question that was on one of Manhattan GMAT’s online forums. This question bore a close resemblance to a Kaplan question. Andrew was asked to remove the question.

Andrew responded promptly and said he would take the question down. He said also that he hoped future interactions would be around more positive issues. This took the general counsel by surprise, who subsequently shared the positive experience with the CEO of Kaplan. A few weeks later, the CEO of Kaplan asked Andrew to lunch.

Andrew had no plans to sell at the time, much less have the business sold to a competitor. Kaplan wasn’t offering to buy, but they were direct competitors. Kaplan’s CEO indicated that he would like to be part of any discussion for acquisition if and when Manhattan GMAT decided to sell.

Key lesson here: Being courteous when complying with a legal request isn’t hard and it may lead to wonderful results.

A year later, as more investment offers had come in, a financially-based offer from one of Kaplan’s competitors, Princeton Review, came in. Andrew let Kaplan know that a deal was in play.

Kaplan came back with a strategic valuation which offered roughly 40% more than the financial offer. There was really only one choice at that point. Andrew accepted Kaplan’s offer.

What was the toughest part of diligence?

Keeping the process from his staff. Andrew prided himself on transparency. He was having to produce all the necessary due diligence documents personally, though it seemed he was making strange requests of his staff for obscure and old reports.

Manhattan GMAT had been the tough, scrappy underdog, and now they were going to sell out to the “man,” the biggest corporate behemoth in the space.

Andrew made up for what he considered a departure from a core value of the old company by setting aside 10% of the earnings of the sale to pay out his staff based on service and loyalty. He particularly remembers that one of the team members used that payout for a down payment on a house.

Andrew now runs Venture for America, which places top college graduates in startups for two-year periods to help build the next generation of entrepreneurs. That venture grew directly out of his time building Manhattan GMAT.  You can learn more about it here.

If you liked this case study and would like to read others, check out our case study archive.

Understand the Benefits of a Quality Banking Relationship

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Whether you’re building your business to sell one day or thinking about buying a business for the first time, you need to make sure you have a quality banking relationship established. 

Some people think of a bank as simply someplace they keep their money or where they go when they need something. In reality, banks offer much more. Unfortunately too many people often fail to take advantage of those benefits because they haven’t established a quality banking relationship. 

Apex Business Advisors BankingA Shared Goal

Contrary to popular belief, bankers are actually interested in your financial success. The better you do, the better they do. They want you to succeed and will do what they can to help you.

That might be sending you referrals or connecting you with strategic partners. It might be simply giving you helpful advice on a business decision.

Knowing Your Numbers

Apart from seeing basic financial statements like a P&L and Balance Sheet, bankers are used to seeing  sophisticated financial documents and using them to make strategic adjustments for profitability.

Beyond simply examining the present, they can help you forecast the future. Remember, this is something they do every day across all types of businesses. When was the last time you sat down with your banker to discuss your financial statements?

Insider Access

If you have a good relationship with your bank, and there are new products or services the bank will be offering, you might be the first to know. Keep in mind that your banker is going to be your advocate if and when you need something important. The most important measure they keep in mind in their business is trust… and that takes time to build.

Customer Service

Do you want some odd charge adjusted? Want better rates on a line of credit or on your savings account? Want a higher credit line?  All are possibilities when you have an active and regular banking relationship. Why? Because you’re more than just an account number and a balance.  

You’ll also feel more comfortable asking for help when you have an open communication line instead of just calling out of the blue or only when there’s “trouble.”

Where to start?

Start by scheduling a meeting with your banker and look to make it something regular. Ask what you can do to help them and have a list of things you need help with  They may not be able to help you with every single issue, but they may know someone who can.

If you don’t have a bank or banker you feel you can build a relationship with, give us a call. We can give you a few trusted ones we work with and you can pick one that makes the most sense for you and your business.

Be Realistic About Your Cash Flow Adjustments

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Apex Business Advisors Selling A BusinessOne of the most important steps in getting a business ready for sale is preparing for a valuation.

An important step in this process is making sure that the proper Cash Flow adjustments, or “add-backs,” have been made to your annual Net Profit.

While we see lots of questionable cash flow adjustments. This article will focus on three we see very often: Owner Compensation, One-Time Expenses, and Legal Fees.

Cash Flow Adjustments

Owner Compensation

There are three abuses we frequently see here:

Owner pays him/herself nothing.

Sometimes this is done simply to avoid paying additional taxes. However, any buyer is going to want to account for owner compensation and will wonder why a business couldn’t pay the owner a salary. A buyer will need to account for a salary and unless the seller is 100% absentee, $0 isn’t going to work.

Owner has a relative in the business who either takes no salary or an unreasonable one.  

If it’s the former, it may be because he/she is trying to keep the business afloat. That additional salary will harm the company’s profitability. If it’s the latter, it’s simply an inefficient method of taking/distributing additional income.

Remember that buyers are going to want to continue the business after you’re out of the picture. They will probably not get a spouse to work for free nor will they necessarily want to pay a child or relative above market rates. Correct this before a sale.

Owner uses the business as a slush fund…just one or two steps short of (or far beyond) tax fraud.  

Alas, this is very common. While new business owners may decide to go wild and “expense everything,” the sign of a mature business is one in which benefits exclusive to the owner are modest.

Season tickets for a sports team that your sales staff use with clients? Reasonable.  A private box for your family that none of your staff have access to? Unreasonable.

Excessive personal expenses could give a potential buyer pause in making an offer and could negatively impact your value.

One-Time Expenses

Some sellers like to think of R&D, Marketing, or Advertising for their business as a “one-time” expense. Maybe they tried a new campaign but it didn’t pan out.

To survive, businesses need “one-time” new products or services developed by research and development. They constantly need to be thinking about how to continue to be relevant in the marketplace.

This doesn’t mean big spends or new products or new campaigns every quarter. But it does mean that these should be a regular part of your business expenses and not something you can claim as a one-time expense.

Legal Fees

As with the example above, legal fees often have to be accounted for. Now, we aren’t referring to the big ugly case that maybe took a couple of years to get through and was with “that one event” in 30 years.

We’re talking about the fact that your business may need regular legal consultations, whether it’s launching a new product, auditing old business practices, or discussion about future ventures.

Sure, for something out of the ordinary, a “one time expense” is very much appropriate. But legal fees in general?  The longer you own a business, the more you realize it’s as regular as rent. And please, don’t let the business pay for your personal legal problems.

Did this article make you uncomfortable?  That’s okay!  Give us a shout. We’ll help talk you through positive changes you can start making today to make your business more valuable.