Case Study #42: Cash From the Cloud

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Cash from the CloudWhen Aric Bandy joined Agosto in 2007 the company had already been in the managed services business for seven years. Managed services was a saturated and capital-intensive space, and Aric saw an opportunity in a then-emerging market that we take for granted now: the cloud. While he didn’t know then that a big exit was in his future, he knew there was the possibility of one if he moved with intentionality.

Demand

From 2007-2014, Aric only saw demand for cloud services and the support related to them increase, whereas the market lagged to keep up with demand. He knew there was a finite window to expand his firm to fill that gap, and managed to encourage the company not only to divest its managed services division, but to plow the majority of those profits back into the company to expand its cloud offerings.

The “cloud” market has three big players, Google, Amazon, and Microsoft. Even with their large investments in the space, they weren’t equipped to handle individual accounts. They relied on certified and trusted partners to use the infrastructure they provided to cater to individual client needs. As such, Aric often found himself walking into boardrooms of big companies, many in the Fortune 100, side-by-side with a Google representative. He was able to bask in that brand halo and become a trusted vendor for these companies.

Exit Thesis

Unlike many business owners, Aric was obsessed not only with the idea of selling, but with the way to do it right. He wanted to engineer his business to yield a premium valuation.

Key components of this “exit thesis” included:

  1. Audited financial statements. He hired a reputable firm at significant cost to make sure they had squeaky clean financials that would stand an audit.
  2. Assignability. Since he had contracts to manage the cloud services of many firms, he needed to make sure that those contracts could be transferred to a future buyer. In the early days of growing the business, he wasn’t as serious about the wording in the contracts. But in 2016, as he got ready to go to market, he went back to tighten up all those contracts.
  3. Growth possibility. He had developed loyalty with his existing customers and they wanted more services than he could provide. That meant that there was good growth potential with the right partners/acquirers.
  4. Timing. He had to be willing to walk away from offers if he didn’t feel the premium was right. This happened on more than one occasion when they went to market and got offers they weren’t happy with.

Notice that all of these ideas of Aric came from a place of reflection and patience. He wasn’t in a hurry to sell the business, but that didn’t mean he put off thinking about how to do it right.

Blood In the Water

What changed things was the strategic acquisition of a competitor in the cloud space, for 13-14 times EBITDA. Suddenly other players woke up, and the offers that Aric and his team were dissatisfied with before this acquisition suddenly got a lot better. He went exclusive with one buyer in December 2019 and closed in April 2020, in the middle of lockdowns and a global pandemic. At the time of closing, Agosto was providing services to 360 companies, 80 of which were in the Fortune 100.

Key Lessons

  1. Be on the lookout for where your industry is moving and see if you can’t move there first. Aric ditched the comfortable model of managed services and leaped into the opportunity of cloud services.
  2. Have your paperwork and contracts in order. This is probably one of the first three questions we always ask people who come to us to sell: do you have your financial paperwork in order?
  3. Have a plan. Aric didn’t just wait to get tired of running the company. He planned for a future exit for almost 13 years. And he got a corresponding reward for that planning and patience.
  4. Be ready to walk away. If you don’t have to sell, you have the freedom to refuse an offer if you feel you can continue to grow the company and get a better value.

If you need help with any one of these lessons so you can plan for the exit of your dreams, give us a call.

Why You Don’t Hire a Real Estate Agent to Sell a Business

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Why You Don't Hire a Real Estate Agent to Sell a BusinessWhile at first there may seem to be some logic behind the idea of hiring a real estate agent, it’s probably the worst thing you can do if you’re seriously interested in either selling your business or getting the price you want for it. This doesn’t mean real estate agents and Realtors® you know are bad people. They are just not the people to hire to sell a business.

Pros?

But before we get to the bad news, let’s examine some of the reasons you might consider a real estate agent in the first place:

  1. Price! The real estate agent has told you that he/she will take a lower commission than a business broker would. That would be a pro, if the real estate agent could get you the same price that a business broker could. Otherwise, it’s very much penny-wise, pound-foolish.
  2. Real estate. Some sellers might think that because real estate is an asset that is involved in the sale, that they need to hire a real estate agent to handle the business sale. This isn’t necessarily the case.

Cons

Good vs. BadAlas, that’s the end of the good news. Now to the realities of hiring a real estate agent to sell a business.

  • Many business brokers have real estate licenses themselves or have solid relationships with brokers who do, so there is no need to hire a real estate agent just because real estate is involved in the sale of your business.
  • A real estate agent will list your business on MLS, where no one in the history of buying businesses has thought of looking to buy a business.
  • Real estate agents are not familiar with confidential sales.
  • A real estate agent does not have any of the certifications that are standard in business brokering.  Whether it’s a CBI, CM&AP, or M&AMI, they don’t have them. They know the value of certifications because they often have them themselves… but not for selling businesses.
  • A real estate agent knows about selling homes and commercial property, not businesses.
    • Due diligence, financing, purchase and sale agreements are all done differently
    • Pricing of a business is very different from pricing real estate
    • Marketing a business is entirely different from marketing a home
      • Part of this is nurturing a trusted set of potential buyers who have the financial wherewithal to do more than kick tires (if you want more insight into marketing a business, check out our day in the life of a broker)
  • A real estate agent is used to dealing with clients who are not looking to acquire and build a business. They’re used to dealing with someone who is looking to buy a home. They may occasionally deal with those interested in real estate investing, but in those cases either someone is looking to buy and flip (a short term investment) or buy and rent (usually something that will be delegated to a property manager, not wrapped into the daily life of the buyer).

An Important Choice

An Important ChoiceMore often than not, the sale of a business will be the most significant financial event of your life. This isn’t something that you want to price shop on, or delegate to someone just because he/she is a dear friend. This is something that you want a seasoned expert to handle, so they can guide you through the process, get you serious and qualified offers, and shepherd you to closing successfully. Many brokers have real estate licenses, but we don’t sell houses or investment properties. We know our expertise!

We’ve got real estate licenses galore in our offices here at Apex.  If you’ve got real estate in your business sale, we’ve got you covered.

Book Club #24: The 7 Day Startup, by Dan Norris

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Book Club #24: The 7 Day Startup, by Dan NorrisWhile the book title, The 7 Day Startup, might make you roll your eyes a bit, the author’s premise is simple: it doesn’t take that long to start a business. And the most important knowledge you will gain will come after you launch. So launch!

We won’t be able to talk about the entire book in this review, but we’ll share some of the key highlights that any business owner can review, even one who is long past the days of starting up. Don’t be intimidated by the “7 Day” title. Dan just dedicates one day to various tasks to complete before launching.

Tasks to Complete Before Launching

  • The Nine Elements of a Great Bootstrapped Idea?
  • WTF is an MVP?
  • Choose a Business Name
  • Build a Website in One Day for under $100
  • 10 Ways to Market Your Business
  • Set Targets
  • Launch

Evaluate Your Idea

For any business that you want to pursue, there’s an easy nine point checklist Dan has put together. You don’t need to excel in each of these areas, but you should have a decent answer for each one. If you already have a business, you can use these questions to identify weak spots in your business to prepare it for sale.  

Does your business…

Have enjoyable Daily Tasks? It doesn’t make sense to start a business that is going to have you doing daily tasks that you don’t enjoy. What will be your day-to-day tasks for this business?

Product/Founder Fit? What skills do you have, what are you most known for, and where can you provide the most value? If this doesn’t line up with your business, that’s a problem.

A scalable business model? Do you have the ambition to grow your business and will it easily accept that growth?

The ability to operate profitably without the founder? Remember that if you can’t leave your business for 30 days and have it grow in your absence, you don’t own a business, you own a job. If you can’t do this with your business or business idea, you’ll have difficulty selling it.

The qualities of a sellable asset? One of the qualities of a sellable asset is the ability to run without the founder. Others include:

  • Product design
  • Intellectual property
  • Your team
  • Website
  • Recurring revenue

A large market potential? This is also often called “total addressable market” (TAM). You don’t have to become a national company, but you can’t be too niche.

Tap into pain/pleasure differentiators? What do your customers really care about? Does your business go beyond a “cool idea” and actually solve a pain they have or give them a pleasure they desire?

Have a unique lead generation advantage? This could be as simple as great content like blogs and videos or higher level strategies like webinars and courses. What is going to set you apart from your competitors?

Have the ability to launch quickly? If it’s going to take you a year to launch, you won’t be able to learn from customers as you go. Choose an idea that you can launch and modify quickly. When you start getting real data from paying customers, you can innovate and get the product perfect.

What’s in a Name?

What's in a Name?Dan points out that many people agonize over the “perfect” name for their business. Instead, he has six questions that get to the heart of what matters: a name that works.

  1. Is it taken? (Have you looked to see if the name is used in your state or country?)
  2. Is it simple? (Will the customer get it without you explaining it, or is this about an obscure name that you are tied to?)
  3. Is it easy to say out loud? (Will customers enjoy sharing it with friends?)
  4. Do you like it? (This isn’t the same as absolutely loving it, but rather does it sit well with you?)
  5. Does it make sense for your idea? (Real winners in this category include Chipotle, Google, and Dropbox)
  6. Is it broad? (Remember to give yourself some room to maneuver as you build your company.  You don’t have to be very specific to start.  Bob’s Bakery might work just as well as Bob’s Bagels.)

Where are the customers?

“Without question, the biggest mistake people make is obsessing over their idea and not focusing enough on finding people willing to pay for their product.”

“The popular stories you hear about startup validation go something like this: 1. I created a website with a brief video. 2. It went viral. 3. I bought a yacht.”

This is a point Dan keeps hammering home over and over in the book. Instead of spending time perfecting your idea, find out if someone is willing to pay for it. Here, he uses the MVP (minimum viable product) term made popular by Eric Ries of Lean Startup fame. If you can’t find people who are willing to pay for a bare bones version of your product, why would they pay for the version you are cooking up in your mind? “You don’t learn until you launch,” Dan says.

Instead of having everything be perfect on launch day, just focus on being competent. There’s only room to improve from launch day.

So, as Dan says, go for it!

Case Study #41: Tiny Bottles, Huge Exit

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Tiny Bottles, Huge ExitLara Morgan spent almost 20 years building a company that started by selling sewing kits to hotels and ended up selling them shampoo, body wash, slippers, laundry bags, and much more. When she finally sold to a private equity firm for 20M pounds sterling, her company, Pacific Direct, was bringing in 3.3M£ of EBITDA annually. But a major reason she had a successful exit was a failed acquisition attempt some years before.

The Business

Ever wonder how those tiny bottles of shampoo get into your hotel? The most upscale hotels are interested in showcasing the best brands with the most attractive branding. Lara and her team would create a license deal in which she paid a fee to use the brand likenesses but was responsible for absolutely everything, from the packaging to the products themselves. At the time of the sale, Pacific Direct had factories in China, Czechia, and Egypt and were delivering goods to hotels in 110 countries.

The Toll

In the last year before she decided to sell the company, Lara spent 220 nights away from home. Her children were 8, 6, and 4, and while she was driven to succeed and create a legacy for them, she was deeply conscious of “losing them” in the present. She knew something had to change. But thankfully, she had already gone through a big challenge in 2004 that prepared her for a successful sale: a failed acquisition.

In 2004, the hotel industry was still dealing with the effects of 9/11 and fewer people traveling. There was a terrorist attack that year that scared off the investment group that was interested in acquiring the company, but even in the process of preparing for the sale Lara was completely dissatisfied with her role in the company. She realized she hadn’t been a good teacher of her team and was more of a benevolent dictator than a competent leader.

She took some time off to reflect. When she came back to work, she went to her brokers and asked, “Where would I have scored poorly if we had made it further in diligence?” Armed with that feedback, she created a permanent data room and incentivized the employee in charge of it with a hefty bonus: a full year of pay if diligence went smoothly on the way to a successful sale.

Going to Market

Lara knew that natural acquirers included her own competitors, but where she was completely clueless and that’s where M&A professionals really helped. When the dust settled, she had three offers from the industry and two from private equity, ranging from 14.5M to 27.5M pounds sterling.

This is something we encourage here at Apex: cultivating multiple offers and not just jumping at the “highest offer.”

If you look closely, there is often a catch. In this case, it looked like Lara would need to be bolted to her desk for years as part of the deal for the highest offer. In the end, she took a private equity offer in which she took 14M upfront, left 6M in the company, some of which was at a 12% note during a time in which nobody was paying a lot for capital, and got to cash out again when the private equity firm sold the company.

One of the “non-negotiables” that Lara included as part of the acquisition was bonus payouts to all her employees, weighted towards those who were most senior. As part of her data room strategy, she had aligned senior management with incentives for a successful exit. This ended up being at least 8% of the total payout. She knew she wouldn’t have gotten to the successful transaction without her team, and she let her actions speak louder than her words.

Key takeaways:

  • Know when to say when: Lara was more successful than she had ever been, but she decided to stop planning for the future and start living in the present with her young family.
  • Fool me once: Lara wasn’t crushed by the first failed acquisition. She learned from the experience and made sure her weaknesses would be strengths the next time around.
  • Align your team: By targeting a future acquisition and making sure her senior management was on board with financial incentives, Lara ensured everyone would be pulling in the same direction.

Whatever your reason for selling, we’re here to help. Give us a call!