Case Study #16: Doubling Down on the Value of You

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Doubling downIn 2011 Dan Bradbury was building a company called Business Growth Systems that taught marketing to small business owners.

They would hold seminars explaining how to build infrastructure to create and track demand for products and services. 

Often those seminars served as funnels into individual client work, in which he and his staff served as a hybrid agency, helping these businesses create that infrastructure hands-on.  

He was creating a profitable company and experiencing great growth when he had a serious biking accident. The seven months he spent in rehabilitation included re-learning how to use a computer, among many things.

But with all that time he’d spent in traction, he realized two things:

  1. The company was too dependent upon him.
  2. He never wanted to put his family in this kind of position again.

So, he set about finding a way to rectify this.

Research

Dan asked a friend who had experience in M&A to take a look at his business to see how sellable it was. The answer, after a cursory examination, was “no chance.” The business was entirely dependent upon Dan and Dan’s friend advised him to acquire a similar competitor and then replace himself. Then the business would be sellable.

Merger

Dan started making the rounds, and many knew that he and his business were “wounded” because of his accident and injury, but he found a fellow owner who was willing to go in on an “option” type deal. Dan would guarantee that upon a sale, this owner would receive at least X. It wasn’t a conventional type of deal, and it very much set the tone for the type of deal they would get in the end.

Leaning in

Dan and his new partner saw that they both had a good income stream relating to an emailing software platform and really started to develop that stream. At the same time, Dan remembered that there was a company that offered a competing platform.

This company had often tried to recruit Dan to leave his business and move to America with his family. In addition, they had been in an aggressive growth phase in the US but didn’t seem to make any headway in the UK (where Dan was based).

While all this time Dan had been working on making his business not reliant on him, at this moment he chose to make a possible deal all about him and the contingent possibilities. He reached out to the US company and basically said, “You can have me and my company. You’ll have an entree into the UK market, and I and my team will help you grow it.” The acquisition was framed less as a financial one and more of a strategic one.

Closing the deal

As the men in suits started doing the math, it became clear that they were interested in how quickly Dan and his team could reconfigure and start selling their software.  

If that downtime was low, the acquisition could be accretive, and hence, pay for itself. While Dan assured them this downtime would be low, they wanted to de-risk the deal as well, and the offer was ⅓ cash, ⅓ stock, and ⅓ earnout.  The earnout was tied to the number of new customers acquired for their software (and was uncapped).

Dan hesitated. He knew about all the stories around failed earnouts but his WHY? was powerful and at this point, he had no real BATNA (best alternative to a negotiated agreement) and hence didn’t have a strong negotiating position. Alas, with the finish line simply pushed back a bit further, he took the deal.

The story ends happily. Not only did Dan deliver the original amount promised to Nick, his business partner, but Nick made 80% more than that number. They both did have to work harder in order to do that, but that’s always what earnouts are aimed to do…to squeeze that last possible drop of motivation from an owner who very well may be mentally “done.”

Considerations

Never wait for an accident to make your company less dependent on you. Taking the time to do this will benefit you, your family and friends, your employees, and your bottom line.

If a traumatic life event causes you to reconsider everything, remember that going in with an attitude of “I have to sell” weakens your negotiating position, and may force you to take the first offer that comes by (which may not be the best one).

Finally, don’t be afraid to dangle yourself as a possible asset in the sale. Sometimes, given the right alignment of goals, that’s exactly what a buyer might want to hear.

Remember to speak with an Apex Business Advisor for assistance in preparing your business for sale. We know the right people to help you systematize and add even more value to what you’re already doing.

Case Study #15: Beware of Shares and Options

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bewareIn 1992 Doug Chapiewsky started CenterPoint Solutions, Inc. He’d spent time at Bell Labs helping to develop what would become the call center model.

But back then it was simply a single number that would then fork out to different people answering the phone.  

He saw an opportunity in a space that the big legacy players considered too insignificant to work on.

Together, with some other savvy technologists, he created software that would integrate with the calls and build systems for those running call centers (and answering the phone).

Growth

Doug grew the company to 60 employees and realized that he didn’t have the funds (or the desire) to grow the company to 300. He was in a no man’s land in the industry between 30 and 300 employees and he decided to scale back instead. By embracing a software licensing model with his 30 employees, he had $5M in annual topline revenue with 60-65% net margins.

But there was a problem.  

Doug’s marriage had been paying the price in the early years of growth and he felt he was really in a “your marriage or your business” scenario. He opted to try to save his marriage and started getting the company ready for sale.

Opportunity

Doug began to (in his words) “dress up the company.” He got a great general manager in position, let some toxic people go, and made sure that all the financials were tight and in order.  

It was the year 2000 and lots of M&A in tech was being done in stock swaps and other such transactions. Doug, like many, didn’t really see the crash coming and accepted an offer which only gave 10% of the valuation in cash, with the rest in stock and options.

Problems

On the day of the acquisition by an Israeli-based telecommunications firm, the stock price of that publicly traded company went from $75/share to $100/share, and Doug felt pretty good about things.  

But, before too long, that company, like many, started restating their earnings and the stock priced tanked…falling all the way to $12/share before being delisted. Worse, they’d failed to get Doug properly certified securities in time which he could have liquidated to at least recoup some of the value. Both the shares and options were worthless and Doug entered a 2-year litigation against (the ironically named) Nice Systems.

In the end, Doug’s lawyer went to rehab and Doug took a settlement, choosing to start his entrepreneurial life over. He now runs HDS, LLC, which provides housing management software to Native American housing entities and US public housing authorities.

Lessons

We’ve said this before in previous articles, but put first things first. No business is worth losing close personal friendships, or worse, your marriage. Never let your excitement for building a company eclipse one of the reasons you’re ostensibly building it.

Beware of taking any part of your offer in shares or options. Much like an earnout, the outcome often isn’t entirely dependent upon your personal efforts.

Finally, if there’s not a good offer available, be patient and willing to wait. As you can see from his story, Doug would’ve done far better to pass on this offer, potentially ride out the dot-com fallout, and pivot, if needed, to something else.  

Unlike the pets.com of that era, he was actually providing proven value for a necessary product, and if he could’ve found a good manager, he might have been able to keep both his relationship and his business until the right time.

Questions? Remember to speak with an Apex Business Advisor for assistance in preparing your business for sale.

Case Study #14: Even When You’re Early, You Can Sell

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you can sellIn 2006 when Claude Theoret began building elements of the company which would later become Nexalogy, the term “big data” didn’t even exist. It was just called data mining.  

Today we’re familiar with the term and easily recognize big players like Amazon, Facebook, and Netflix not only using big data to improve their own businesses, but selling portions of that data in the marketplace.

Big data is growing and is only poised to get bigger.

But, like MySpace, which predated Facebook but was later wiped out by it, it’s often true that “Pioneers get slaughtered and settlers prosper.”

Claude and his team were probably caught somewhere in the middle.

His company analyzed big data within various market segments to help companies identify and mitigate hidden or previously unnoticed risks.

He also had to do a great deal of customer education in 2010-2014 when he was growing his company, as there was still a great deal of ignorance among his potential and actual clients about how big data worked or could be utilized.

Why sell?

There were a number of factors working against Claude.  

  • He needed cash to grow the company, but his ask for VCs was too small. He wanted $1.6M but most VCs cut minimum checks of $5M, which was far more than he needed and would have diluted his ownership beyond his comfort level.
  • He didn’t have enough secondary services to sell his clients after the initial projects, another aspect that would have excited VCs.
  • U.S. VCs (Claude’s company was based in Canada) required a move to a major hub like NYC or Austin, and with a young family, that was a no-go for him.

After a number of presentations, Claude realized that VC money wouldn’t happen, and that acquisition would be their best path forward.

But by this time his burn rate had taken the company to a tough place financially. His wife helped saved the business by draining her retirement account to bridge the company until a government grant came through. 

How to value?

Companies in this space now often sell for anywhere between 4-8 times topline revenue. At the time that Claude decided to sell in 2015, his company was doing $1.7M in revenue, nearly double the revenue from the year before.  

They hired a firm to put together a dynamic financial model that not only included financial statements updated in real-time, but projections for how the company could perform across various growth rates.  

It also included plans to deploy the now-abandoned-raise of $1.6M. He hired an M&A firm and soon Datametrix AI Limited expressed serious interest.  

So serious, in fact, that the negotiators canceled their flights back after an initial visit, and went to a nearby hotel to hammer out the LOI details with Claude.  

Reflections

While it’s true that firms like Claude’s now sell for much much more than he sold for, it was a combination of factors that led to a successful exit. He had help from both his wife and his government in bridging through a tough period.  

He engaged with a serious buyer and knew the number he wanted. But most importantly, he was running a revenue-generating business that just needed a bit of help – somewhere north of angel investing and somewhere just south of VC money.  

Being proactive with getting acquired was the difference between banking $5.7M in cash and stock (distributed 50/50 – the stock has more than doubled since the acquisition), which he eventually did, and being another startup carcass left on the side of the road.  

Case Study #13: Bought by the Competition

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competitionMark Carlson bought Minnesota Mailing Solutions in 1998 for around $1M and grew the business over 10 years, eventually selling it for $4.5M.

It was his ability to stay unemotional and focused on business fundamentals that ensured he walked away with the best offer possible.

In 1998 there was still a very large market for what Minnesota Mailing Solutions was offering: products that supported large-scale automated mailings for companies (think folding and inserting machines, with giant meters at the end of the assembly line).

Mark took the 6 employees and the inventory the business came with and went about growing the business.

In 2008 Mark saw two developments which triggered a desire to sell. The first was consolidation within the postage meter industry.

A merger shrunk a field of four USPS-sanctioned players to three. The second was a major and ongoing decline in the volume of first-class postage and sale of equipment.  

This led the three remaining players to look for profits as growth slowed. That’s when the idea of opening their own corporate stores that would compete with their own dealers (like Mark) became attractive. Indeed, they were able to track from an entire history of numbers just how well certain markets could do.

Mark decided to bring in a broker to help him navigate the sale unemotionally and thoughtfully. When the broker first solicited offers, both buyers lowballed, trying to get the most for the least. After declining both of the offers (around $3M), Mark and the broker went back to the fundamentals. How was the business being valued?  

Mark was using the same reasoning as when he originally bought the company: around 1X annual EBITDA plus inventory. He was doing around $4.5 million in annual revenue and had a small inventory and that was what he wanted. They went back to the buyers with the reasoning and the buyers also had realized now that they were bidding against each other.  

The smaller player between the two had been Mark’s dealer for 10 years, and their fatal mistake was in thinking this was an emotional play. At one point, the remark was made to Mark’s broker, “Mark is loyal to us; he’ll never sell to them.”  Them, in this case, was the biggest player in the industry and had been Mark’s direct competition for years.

Despite his broker dropping numerous hints that the bigger player had come in higher, that company didn’t increase their bid, and Mark took the better offer, which was greater by a magnitude of $500,000.  

He got a 98% payout with 2% contingent on the inventory holding up in an audit, which it did, and three months after the deal closed he got that 2% as well. He also stuck around for three years on salary, transitioning the company into the new products and the buyers’ way of doing business.

An unfortunate epilogue to this otherwise happy ending for Mark, who had built great value in a business that traditionally featured 15% net margins, was a frivolous lawsuit from the buyer who had lost out on the deal.  

Like a spurned lover, they reacted emotionally (precisely what Mark had avoided) and accused Mark of taking trade secrets, etc. After about a year of depositions and $100k in legal costs, the case was (unsurprisingly) dropped after the tantrum ran its course. But it’s a good thing to note that even if you’re able to remain unemotional, others may not.

Key takeaways:

  1. Know your numbers. The reason Mark was able to get even more money after receiving offers for 3X what he paid for the company was because he truly understood how his business worked, even in a declining market.
  2. Watch for signals. Mark saw the writing on the wall and rather than panic or avoid action, he moved and capitalized.
  3. Know your values. Everyone will approach the “loyalty” question in this story differently, but Mark didn’t decide his values during the transaction. He knew ahead of time, and they guided him to a successful conclusion.

Case Study #12: The Right Multiple

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handshakeIn 1993 Dennis Hart founded Apex Media Sales (what a great name!). Apex focused on long-form direct response television advertising, in the specific categories of religious and infomercial advertising.

Dennis enjoyed the structure of the company. It was a cash-in-advance business. While the television and cable networks demanded payment upfront, he was also able to demand that same payment from his clients.  

He didn’t have a warehouse or equipment he needed to buy or maintain. All he needed was hard drives to store the “inventory” from his clients. In the early 1990s there were very few players in this space and Dennis took advantage of being one of the first to market and generated $750,000,000 in revenue over the lifetime of the company.

The right timing…for once

Dennis had learned from previous experience in the stock market that he had the ability to pick winners. Unfortunately, he simply had bad timing. He would wait too long and those winners would become losers. When he started Apex he wanted to grow the company to a specific size and then sell…with no regrets.  

By 2007 he felt that he’d grown the company to a size that was the limit of his experience and desire. The company needed someone with more of both to go to the next level, and this realization dovetailed with interest from VCs, one in particular that was pursuing a roll-up strategy in this space.  

7X EBITDA

Apex would be the first company in this roll-up and 7 times EBITDA was the agreed-to deal point. But the acquirers did start to go over some of the owner benefits, which in Dennis’ estimation weren’t shameless tax avoidances but true business expenses around acquiring and romancing potential clients. Dennis was a tough negotiator, and on more than one occasion he was prepared to walk away. In the end, he obtained 95% of the purchase price up front and 5% to be released after one year.

A Family Affair

Dennis’ daughter Carrie had a similar vision to Dennis. She wanted to bring others into the company to take the firm to the next level. On more than one occasion, as Dennis threatened to walk away from the deal, she was the honest broker that kept everyone talking.

Dennis stayed on with the acquiring firm (and is still with them) and continues to work in the space. Dennis’ takeaways from the transaction should be similar to our own:

  • Begin with the end in mind. Think about what your exit strategy is and what your Why’s are.
  • Know your numbers and have clean financials. They will always make a sale easier.
  • Know what you want and be willing to walk. Instead of sabotaging your deal, you’ll often find that this impresses buyers because it indicates confidence in what you already have.

Got questions? Be sure you speak with your Apex Business Advisor to understand more of the ins and outs of the selling process.

Case Study #11: Be Prepared to Walk

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walkBefore Jeff Hoffman became a cofounder of the Priceline group of companies, he built Competitive Technologies, which was one of the first business intelligence companies in travel. He’d had a suite of products that would help companies manage and reduce travel expenses.  

He got his first break with Exxon-Mobil, which spent $40M USD annually on air travel alone. He knew that such a large company wasn’t simply going to offer money to an unproven startup, so he asked for an office and a negotiated percentage of savings (much like how freight auditing works).

He saved Exxon a lot of money and went on to add other features which were on a monthly subscription plan. He went from no revenue to $5M and was at $12M by Year 3.

It wasn’t long before he and his firm got the attention of the biggest player in the space by far, and that was (and is) American Express.

They reached out and asked to do a licensing deal, as some of their clients were asking for products that only Competitive Technologies was offering. The speed of adapting and ability to change had beaten out the nearly infinite money and resources that AMEX had.

But Jeff knew that licensing to AMEX would kill his business, and so he countered with an offer to sell…lock, stock and barrel. While AMEX was initially a bit shy about the idea, Jeff went “on offense” and started calling Thomas Cook and other competitors to stoke the fires with AMEX.  

He also went to a tradeshow that he’d previously not planned on attending, acquired the booth across the way from AMEX, and got everyone to come by the booth…friends, clients, everyone. Later on AMEX would tell Jeff that the idea of losing a deal to a competitor, as well as seeing the popularity of Competitive Technologies at the tradeshow, were what moved them from “interested” to “serious” in the acquisition process.

Jeff even went “on offense” with his M&A firm, as he couldn’t afford their full retainer at the time and offered them a kicker based on the final outcome of the deal in addition to some cash up front. One of his largest investors also offered to add a travel agency he owned into the deal as well so the total deal was around nine figures.  

But, as they entered negotiations, it became clear that AMEX normally did 3-year earnout deals on acquisitions and Jeff simply wasn’t going to take that deal. When this issue became a sticking point in the deal he started to reach back out to competitors and again went “on offense,” at one point literally getting up from the negotiating table at the hotel and saying, “We don’t think you’re serious, and we’re going to move on to pursuing an acquisition by one of your competitors.”  

He and his team walked out and he turned to one of his mentors (also the largest shareholder) and asked, “What now?” …“We’re going to walk to the hotel, but they will call us before we make it there.”  Sure enough, AMEX called him while he was still on the sidewalk, and they closed the deal.

Obviously most of us aren’t going to deal with AMEX nor are we going to consider walking away from a nine-figure deal. But the lessons are there for us to apply in our own circumstances:

Innovation – Jeff had created something that a big player coveted.

Strategic Action – Jeff increased the desire in his buyer through smart plays.

E-myth – Jeff had created a business that didn’t depend on him.

And finally….

Patience – He was willing to wait for the right deal, up to and including walking, and that showed AMEX they were dealing with an equal, and they treated him as such.

Case Study #10: Why DIY is a Bad Strategy for Selling a Business

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DIY Bad StrategyAlexis Neely went into law to “save” her dad, who had started out wanting to be an entrepreneur, but ended up as a bit of a con artist.

She also hoped that being a lawyer would save her from all the ups and downs she saw her father subjected to.  

Alexis could never have guessed she would become an entrepreneur herself, but not before learning a big lesson of her own…

Don’t try to sell your own business, even if you’re a lawyer.

What lawyers aren’t taught

While Alexis did graduate first in her class from Georgetown law in 1999, and went on to work for the prestigious firm of Munger, Tolles, and Olson, she notes that lawyers are taught about the mechanics of very large corporations, not small businesses.

In addition, lawyers don’t often have entrepreneurial mindsets and are stuck in poverty mentalities.  

After four years of witnessing this firsthand (and being buried in paperwork instead of the meaningful legal work she hoped to be engaged in), she started her own firm in 2003. Within three years, Alexis was generating $1M/year in revenue.

So, then why sell?

Alexis had a vision for a different type of law firm that wasn’t constrained by a bricks and mortar model. She also had young children and wanted the freedom to work from home without having to go into the office frequently.

So, in 2007, she emailed a professional email list she had curated with a “contest.”  “Come work with me side-by-side and buy my practice.” She was deluged with offers and interest, but when she finally made a choice and got into due diligence, that person simply disappeared.

She had already mentally moved on from the business. She was doing TV and was working on a book. So she did what she thought was the next best thing, which was to find someone who had owned a practice for a long time.  

Alexis did manage to find a person who had owned his own law practice for 20 years, but what she didn’t know was that he had never been truly financially successful with it. And the reason she didn’t know was…

She didn’t know her numbers

This may be shocking to hear, but Alexis was using “bank account” accounting, meaning she would check the bank account to see if there was enough money in there, and if there was, that meant the business was doing fine, and if there wasn’t, she just went out and earned more money for the firm.

Great hustle chops. Dreadful business owner chops. She didn’t know what kind of reports she should be looking at or how frequently. She wasn’t paying herself a proper salary. And she wasn’t paying her quarterly or payroll taxes on time.

Rather than take the time to get the numbers right, she simply offered a sweet seller-financed deal to this lawyer who had owned his own practice. Even though the revenue was at over $100k/month, she wanted $500,000 in total for the business (she had no concept of a valuation and oddly, no one to advise her to get one) and was willing to take $50,000 down and the rest in an earnout.

It doesn’t work that way

Two short years later, Alexis got the gut-punch telephone call. The lawyer she had “sold” the business to told her that there was no money left and the deal was off. She then went $150,000 into debt to service the remaining clients and wind that company down.  

While Alexis opined that you can’t take someone who’s never played at the level of a million dollar business and drop him/her into one and expect success, she placed the blame on herself. Doing everything herself cost her at least $1M.

Biggest Takeways

Years later Alexis notes that she always has financial statements that make 100% sense, that she reviews them weekly, monthly and quarterly, and that she would never again sell a business without using a broker.  We could have told her that!

Case Study #9: Fishing Trips

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fishing tripJohn Bowen was the CEO of Reinhardt Werba Bowen (RWB), a financial services company that was acquired by Assante Capital in 1998 for $25M.

While the exit was ultimately a happy one, it started inauspiciously. Why? Because John was the object of a “fishing trip” from a competitor.

What’s a “fishing trip”?

Sometimes a firm that’s in the same space or looking to come into your space will put together a Letter of Intent to start the diligence process. The goal is to get a better sense of your business and your direction.

While there’s an outside chance of a sale actually closing, most times that’s definitely not the goal. The goal is to fish for valuable insider information.

Why did John’s firm want to sell in the first place?

John and the other two partners (they each had ⅓ of the firm) didn’t have the expertise or capital to scale up their growth. As they went out into the private equity sector to raise funds, they found that most weren’t interested in this expansion of theirs. Instead, they wanted to buy the entire firm outright.

At one point, a global bank offered a terms sheet with the number $37M at the top. Given that the EBITDA of the firm was $1.6M (not normalized for owner compensation), this seemed too good of an opportunity to pass up.

What were the warning signs?

The biggest warning sign was the slow walk from the acquirer. We’ve said over and over that time kills deals, and this buyer was very slow in its due diligence. What else?

  • RWB was based in Silicon Valley. The acquirer was based in New York and they would never send anyone very senior to California, but always demanded that all the principals come to New York.
  • RWB had quickly built a practice around Silicon Valley entrepreneurs and this firm had almost no experience in that space, AND
  • They were almost entirely focused on strategic questions. They wanted to know how the business ran, what kind of software was being used, the differentiators RWB was using, etc. And they had almost no questions on financial modeling or the P&Ls (the classic due diligence questions).

“Never gonna happen”

John finally got wise to the strategy of the acquirer. This happened when a trusted advisor looked over the terms sheet and was briefed on the process so far. “If you don’t have the agenda, they do.”  John ended the process with the big bank. Next, he went back to the drawing board and focused on what the company was worth and why.

It was now known that RWB was for sale and some firms presented themselves as interested. They got an unsolicited term sheet from a firm that eventually ended up closing the deal. John noted that the entire process was so different.  “They said they wanted to put this together in 6 weeks, and we did.”  The momentum and intent was obvious.

Of the $25M exit, $15M was upfront and another $10M was in an earnout. John managed to escape being the victim of a fishing trip, close out a sale, and share his lessons with all of us.  

Case Study #8: What’s Your Sweat Equity Worth?

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Dr. Phil Carson (a different Dr. Phil than the one most people know) is the owner of Carson Natural Health. Before he began that business, he helped create a pharmacy business. He didn’t have anything to invest in that pharmacy business as he’d been wiped out in 2008-2009, so he earned his equity via sweat.

Why did the owner need Dr. Phil in the first place?

The owner had a medical supply company and was dealing with changes in the law that made it impossible for diabetic patients (which were his bread and butter) to buy from him. They had to buy from a pharmacist. So the owner needed to find a pharmacist in order to serve those clients who were leaving in droves at the time.

The early months

Sweat equityPhil had a regular 9-5 job at the time and worked nights and weekends to build a “closed door” pharmacy (one that wasn’t open to the public) that could fulfill the mail order clients.

After 6 months of this, he quit his day job and went full blast in the business and received a percent of shares in the company.

Growth

While the company had started with a focus on diabetics, they started to expand.

At the time of the sale they had five locations in all. That included retail locations to service local customers in addition to all the mail order business that had been built up.

It was clear to Phil that the expansion was a bit messy and that the company needed help. He reached out to someone he knew who consulted for businesses. Phil’s partner wasn’t only reluctant about the need for the analysis, but even made Phil pay for it.

When presented with the results, the partner simply decided to ignore the facts and refused to hire the consultant to implement any recommendations. At that point, confronted with such behavior, Phil began looking for an exit.

The sales process

Unsurprisingly, the owner didn’t take Phil seriously when Phil proposed a sale of his shares in the company. While Phil was frustrated enough at the situation that he would have happily walked away for $250,000, his business coach urged a professional valuation (so do we). When all the work with the numbers was done, the revenues indicated that Phil’s share was worth closer to $1.2M.  

As one can guess by now, the owner didn’t even offer half of what Phil would have settled for (Phil hadn’t told him he had done the due diligence already) and in response, Phil handed back the professional valuation and asked for $1.2M.

After a delay of a few more weeks while the owner double checked all the numbers, Phil got a check for the majority of that amount, and has been taking payments while doing some consulting work for the company and transitioning out.

Dr. Phil went on to build a company focused on holistic health. You can learn more about it here.

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.

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