Case Study #30: Disrupted, then Acquired

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airbnbToday, everyone knows about Airbnb, but not that long ago, a little company called Homeaway, based out of Austin, was actually the pioneer in the home sharing space.

Airbnb has larger market space in cities, but Homeaway still to this day has the largest inventory of vacation homes in the world. They did this by acquiring 25 other firms, like VRBO domestically and the top 1-2 services in several key countries around the world. This allowed them to raise half a billion dollars in capital, go public, then eventually sell to Expedia for $3.9B. Not bad for helping to list vacation homes.

The Industry

The original business model put forward by Homeaway and VRBO was a subscription model: you paid to be part of the platform annually, and got to keep all the income you generated as a result. But Airbnb drove change here, as they entered the market using a transactional model, meaning neither the owner nor the renter needed a “membership” in order to rent.

This led to rapid adoption, and rather than let Airbnb gobble up the market, Homeaway (and all its acquired companies) added the transactional model as an option for those who wished to use the platform. Many owners continued to use the subscription model, as it was much more beneficial for them financially, especially in high volume areas.

While Homeaway dealt with Airbnb as a direct competitor, it also dealt with the Online Travel Agencies (OTAs) like Expedia, Travelocity, and Hotwire who saw homes as a natural complement to their platforms that already booked flights, rented cars, and offered hotel rooms.

Why not go full spectrum and add vacation homes too? For a while, they tried to compete against a company which had as its sole focus homes. Then they gave up and decided to go into a bidding war to buy out Homeaway. As we noted above, Expedia came out on top.

Why?

Ross Buhrdorf, Homeaway’s founder, noted that he didn’t really care which of the OTAs acquired Homeaway, as the Homeaway team didn’t see a significant brand difference among them. He knew that the strategy would be the same: consolidate the back offices, keep all the separate platforms mostly as they were, and add built-in functionality to the OTA platform itself.

Most of the Homeaway executive team would be jettisoned from those positions, as an OTA wouldn’t need them. So they wanted to make sure that the payout was good, and it certainly was.

Takeaways

  • Ross didn’t resent Airbnb’s entrance into the space he and his team had pioneered. In fact, when Airbnb showed the transactional model to be more successful, he adopted it as an option for his clients, both old and new, while keeping the subscription model that had worked over time. Never be too proud to take lessons from your competitors.
  • Ross didn’t just face direct competition. Companies with much larger financial resources and profit motive tried to replicate what he was doing. But singular focus often trumps financial resources, especially if those financial resources don’t match the singular focus. In this case, Homeaway’s focus on vacation homes beat out the better-monied OTAs who didn’t have Homeaway’s secret sauce or existing customer base.
  • Once you’ve beaten them, they can pay you. The acquisition by someone who had tried to take him down, in a way, must have been particularly satisfying for Ross and his team. Keep your head up when the competitors come at you. Focus on your company DNA and culture, keep your customers happy, and you might get a premium payout for your hard work.

Seller’s Remorse

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Seller's RemorseGiven the thousands of transactions we’ve been part of over the years, we’ve seen it all. One thing that we see more often than some might expect is seller’s remorse. This is totally normal, and can occur in a pronounced way even before the sale closes… sometimes derailing a transaction.

In this article we’ll examine some things to consider to mitigate seller’s remorse at any phase in a transaction.

Why does it occur?

A large part of the owner’s identity, perhaps even the largest part, is the role he/she plays at work. It governs social interactions (who you are having lunches with, who you spend the majority of your day with) as well as roles in the community (an owner may, because of his/her business, sit on various boards or play a role in the Chamber of Commerce).

If an owner doesn’t have other identities (perhaps a passionate hobby or a side business), seller remorse in the guise of “What do I do now?” can hit hard.

Before the sale closes.

Part of getting to know our clients here at Apex is asking in the very first meetings what the seller would do after a sale. We are interested in knowing motivations and know that strong motivations lead to cooperative and engaged sellers.

If we start to get calls and emails from the seller asking to slow things down or asking if this is truly the right thing to do, this is sometimes due to seller remorse. One of the first things we’ll go back to is that first conversation to remind him/her of what’s next. Then we’ll remind the seller of why.

Often there’s a health situation, or burnout, or simply the desire to do something else. By discussing the why (the past and present) and what’s next (the future) we can often make sure that sellers stay on track and engaged, which is key to a successful transaction.

After the sale closes.

A broker’s job is never done. Not only do clients come back to list new businesses with us, sometimes they go on to turn buyer after having sold.

We also get phone calls from clients suffering from seller’s remorse. We listen to the regret: “Why did I sell?” or “What should I do now?”  These sellers stayed focused throughout the transaction and the remorse hit later.

Just as we do with sellers struggling before the transaction closes, we ask some key questions:

  • Have you given yourself and your family some time? People can often be restless, dying to get “back into action,” but it’s important to take some time, not just to celebrate, but to also let your mind relax. Crops grow better when they are rotated in fields, so too even the best business owners need time to enjoy a liquidity event.
  • Have you considered going back into the same industry? Sometimes people rediscover a passion once the burden is no longer on their shoulders, or they see a new opportunity in a particular segment of the industry. If non-competes aren’t a barrier, why not leverage what you know and continue to succeed in an identity you have no wish to discard? Sometimes sellers get hubristic, imagining themselves to have the Midas touch. Building and selling a company in one industry does not endow you with the ability to do it in a completely different one. Just because it was your “old” identity doesn’t mean it can’t be part of the new one.

We are always looking for a few good brokers to join our team, and a business owner with a fresh sale under his/her belt is a great candidate.
If that describes you… give us a call today.

Case Study #29: Replacing Yourself

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Replacing YourselfSome years ago, Jim Brown started a software company called TerrAlign. This Sales Territory Management Software designed the best possible territories for sales representatives. They started in pharmaceuticals, but quickly entered into the consumer goods and medical products sectors as well. They would eventually be acquired by a fellow software company, but that couldn’t have happened if Jim hadn’t started the process of replacing himself.

Enter Ken

Ken Kramer had helped design some of the earliest versions of TerrAlign’s software and kept having good interactions with them as a vendor. So when the opportunity came for him to join the company, he took it, and started in partnerships and marketing. He was soon promoted to sales and marketing, and not long after that, was one of three employees that Jim chose to replace his functions as an owner/operator.

This is, of course, the best case scenario: promotion from within of those who have risen through the ranks on merit. They’ve had a chance to build relationships across the company which will only make taking on the new responsibilities easier.

Creative Tension

But, while an owner may be willing to delegate tasks, he might not be willing to let go of profits and cash flow. Ken wanted to use profits to invest and grow the company, while Jim focused on maintaining profitability. Ken had negotiated shadow equity as part of his promotion into the job of president, so while he was frustrated with Jim’s desire to keep things status quo, he knew that circumstances could always change.

Soon enough the ground started to shift. A competitor was acquired after it had been taken private by a VC some time prior. This changed the competitive landscape and led to MapAnything making an acquisition offer. MapAnything was also a software company, but focused on route optimization, so it was a sensible companion product for TerrAlign’s core competencies.

Transition

Ken led the transaction team, though he says if he had to do it all over he would have brought in help (like a banker or broker) to cut his learning cycle down and help him make better decisions. It also (naturally) took away his time from helping to run the business. In the end, his focus was on making sure the TerrAlign team all kept their jobs or had opportunities for new positions post-sale. The terms of the sale weren’t made public, but 1-3X revenue is a normal multiplier for slow-growth software companies.

What Ken couldn’t expect or predict was Salesforce acquiring MapAnything just a few months later. Most of the team was surprised, but given that it wasn’t their company anymore, they could hardly do anything other than try to continue on with Salesforce, which many of them chose to do.

Key Takeaways

  • As we’ve said before, apart from having a solid manual in place of how to run the business, demonstrating that the company can run without you by having a president in place makes it very easy for an acquirer to make an offer.
  • Even if you’ve had the foresight to plan for your own succession, you also have to plan for an acquisition. Jim had brought in Ken to do the former, but stifled him as he tried to do the latter, by growing the company aggressively.
  • Consider getting a broker (we’re a bit biased). As we saw with Ken, we help make the process easier, more educational, and often  more profitable.

Bad Deal or No Deal?

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Bad Deal or No DealOne important reason you hire a broker to help you sell your business is the addition of a person to the transaction who is not emotionally tied to the business. We are there as your representative – to make sure you get the best deal possible at the time you are listing your business. And sometimes that advice will be to walk away from a transaction if we don’t think everything lines up in your interests.

Sometimes, no deal is better than a bad deal.

Bad Deals

There are many reasons why a deal may be a bad one, but there are two in particular that we see often that we try to deal with as soon as we can.

Price: this is before an offer is made, of course, but we try to make sure that the price we market the business for is not just in line with the financials and tax records of the company and the growth trajectory, but also with what the market is currently paying for businesses in your industry. That’s why it’s always so important to get a true valuation for your business. It’s objective, unemotional, and has nothing to do with what you “think you deserve” for your blood, sweat, and tears over the years.

But apart from a marketable price that we are confident will sell in a reasonable time, there also has to be consideration for the seller’s financial situation. For example, will the sale, after taxes, clear all the business debts of the seller? If not, would it make more sense to operate the business for some more time in order to be free and clear at closing?

Terms: this is after an offer to purchase and will usually be part of a package of negotiable deal points.  Almost all successful transactions have a fairly balanced allocation of financial risk.

On the seller’s part, some financing may be in order, whether as part of SBA requirements or simply because of the buyer’s need. The buyer may also ask for some assets to be classified in such a way that will result in more taxation for the seller.

On the buyer’s part, some personal funds may be included as part of the purchase, and income statements scrutinized to make sure he/she is not overextending him/herself to buy the business.

As we’ve said often in these articles, successful transactions also usually leave both buyers and sellers feeling that they did sacrifice something they would have preferred.  That’s why it’s called negotiation.

No Deal

It’s important to note that just because there’s not a deal doesn’t mean there isn’t a good reason for it.

On more than one occasion we have seen exceptional growth in financials for the current fiscal year and have advised our clients either not to list or to de-list their business so that we can get one more corporate tax return and thus boost the valuation of the company. Sometimes no deal is a strategic retreat rather than giving up.

But sometimes no deal happens because we’re not dealing with a motivated seller, or because the client doesn’t trust what we are telling him/her.

In our experience no deal is often better than a bad deal, because you can always try for a new transaction, trading on the lessons learned in the previous attempt, whereas a bad deal leaves you stuck with the consequences.

If you’ve got questions about pricing your business to sell, give us a call!

Seller Financing and Why it Matters

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Seller FinancingSeller financing is simply a particular portion of the sale of a business that is financed by the seller. This can sometimes include 100% of the sale price, but very often it’s a much smaller fraction of that, and is a frequent component of SBA loans.

In this article we’ll discuss the benefits of seller financing to both buyers and sellers.

It’s a Bridge

Not all buyers can qualify for the entire amount necessary to close a sale, and not all sellers need the entire amount for them to do what they have planned next in their lives. Seller financing can help to be one part of financing that can include ROBS funding, an SBA loan, or personal/family savings. Very often it can be that small bit of financing that helps to close a sale instead of having it fall through.

It’s a Hedge

A seller who lacks confidence in the ability of the business to carry on after the sale may have difficulty committing to seller financing, as that money would then be at risk of being completely lost. Buyers know this, and it’s a solid psychological help to know that the seller is willing to defer some portion of the proceeds of the sale into the future, when the company will be much more reflective of the management skills of the buyer than of the systems put in place by the seller.

It’s a Deal Point

Remember that in a transaction there are many horses that can be traded. Perhaps the buyer wants a different percentage of the sale to be classified as intellectual property, which can lead to higher taxes for the seller. In response, perhaps the seller asks for a lower amount of seller financing or different terms. Seller financing is just one of many options to help move a transaction forward to a successful conclusion.

It’s about Money

We’ve discussed alternative financing for small businesses before. Unlike these algorithmic driven companies, seller financing remains “alternative financing” that almost always will cost less than those options, somewhere between Prime + 1-3%, though sometimes for less. Terms are usually more favorable as well, as the outgoing seller knows exactly what cash flow is available and what is reasonable to siphon off to service a note.

What we do best (and have done for many years) is bring together eligible buyers and worthy sellers to complete transactions with many kinds of financing.  Give us a call to see if we can help you!