The Strategic vs. The Financial Buyer

October 4, 2017 |  

About this episode


Tom Franceski and his two partners built DocStar up to 45 employees when they decided to shop the business to some private equity (PE) investors. The PE guys offered four to six times Earnings Before Interest Taxes Depreciation and Amortization (EBITDA), which Franceski deemed low for a fast-growing software company.

To read a transcript of this episode, click here.

In fact, he and his partners wanted at least two times revenue for the business, which they knew they could get when Epicor, a strategic buyer, came knocking. In this episode, you’ll learn:

  • Why strategic buyers pay more than financial ones
  • The definition of a frictionless acquisition
  • How to use a cocktail of seller financing and mezzanine debt to buy a company with little of your own money on the line
  • The difference between in- and outbound marketing
  • How acquirers secretly evaluate your business without you even knowing they’re sizing you up

Do you know who the natural strategic buyers are for your business? Knowing and courting the strategic acquirers in your industry can be a great way to get a premium for your company. We’ll help you build your short list of strategies in Module 11 of The Value Builder System™—get started free by completing the Value Builder questionnaire.

About Our Guest

Tom Franceski is vice president and general manager of DocStar – (, a division of Epicor Software Corporation. DocStar’s proven business process automation technology and workflow expertise empowers organizations to operate at peak performance, navigate change, and grow. Prior to DocStar, Tom was the Vice President of Technology Products for Authentidate Holding Corporation for 11 years. Tom holds a BS degree in Accounting from Le Moyne College.


John Warrillow: Hey guys, this episode of Built to Sell Radio is brought to you by, the number one market place to buy or sell a small business.

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John Warrillow: Tom Franceski is next up. He was the co-owner of a business called DocStar. He built it up to 45 employees before he decided to sell. Couple things to be on the listen for. First of all, listen for the different reaction he got from private equity buyers, financial buyers, and the strategic buyer that he ultimately sold to. And that’s a really good indication of the difference between, again, a financial and a strategic acquisition. Tom goes on to define frictionalist acquisition, so that’s a good thing to listen for as well. He also acquired a business along the way, and did so using a combination of seller financing and mezzanine debt. So he defines both and talks about how you can use them to acquire a company. And then I also want you to listen for the way the acquirer in his case secretly evaluated his business before he let Tom know they were interested in buying the company. A tactic that a lot of buyers use, and may even use in your case.

John Warrillow: So, here to tell you the rest of the story is Tom Franceski.

John Warrillow: Tom Franceski, welcome to Built to Sell Radio.

Tom Franceski:   Good morning, thanks for having me. Appreciate you taking the time to chat with me today.

John Warrillow: Yeah, well no, I wanna hear the story about DocStar. So, what kind of business was DocStar?

Tom Franceski:   DocStar’s primarily a software company.

John Warrillow: I was gonna say, it should say “is”, because it’s still in business, right? I mean you’re …

Tom Franceski:   Oh, yeah. Yeah.

John Warrillow: You’re still very much a going concern.

Tom Franceski:   Oh yeah, going strong and thriving. But we’ve primarily been in the enterprise content management space.

John Warrillow: Okay, so imagine a-

Tom Franceski:   And primarily what that means- I’m sorry?

John Warrillow: Yeah, no. I was just gonna say, imagine I’m like 12 years old, and I don’t know what enterprise content management is, so … explain that one to me.

Tom Franceski:   Yeah. People hear about enterprise content management, but that’s not really what they buy. What they buy is an improvement to a business process. So we’re all about driving costs out of business processes. Primarily on the financial transaction side, and manufacturing side, to reduce the administrative costs of doing business.

Tom Franceski:   So, for example, one of our core solutions is an accounts payable automation solution. So what we wanna to do is we wanna drive the costs out of back office processes so organizations can invest more dollars in growing revenue rather than on the expense side, because most business owners thinks in terms of investment and expense. So we streamline core processes, AP sales order automation, that kind of thing. And we allow organizations to really think about, in the context of this conversation, in addition to selling our business and having gone through that process, our business is about making organizations more profitable, and more appealing to outside investors at higher valuations. Because, again, we drive costs out of the business.

John Warrillow: Interesting. So, again, let’s imagine I’m a manufacturing company and I’ve got this convoluted [inaudible 00:04:23] glue G accounts payable process. Like 16 people need to sign off before the check goes out to the vendor. In what way do you streamline that?

Tom Franceski:   So, a number of different ways, but let’s even start before the workflow process. If you’ve got a number of people in your accounts payable organization, they’re typically processing a lot of paper that comes into the business. They’re manually key-punching that information into an accounting system. And a lot of cases, they may be walking it around, desk to desk, or in and out of mailboxes to approve. Or perhaps you’ve got remote locations, and you’ve got a centralized accounts payable process, and so they’re over-nighting or sending through internal email, packages of documents that have to be approved. We start right at the beginning of the process, so we want documents, if possible, to come into electronic format into the organization. But if not, we’re gonna take that accounts payable invoice and we’re gonna convert it to an electronic file.

Tom Franceski:   So it all starts with digitization, and that’s sort of the premise behind our solution. So, we can grab the information electronically off that invoice, if it’s a PO based invoice. We can compare it to information in the accounting system and receiving information in the accounting system. We can populate the transaction in the accounting system if everything’s approved. So, in situations that are PO based, we can take that invoice, no one has to touch it, no one has to enter any information, and populate the accounting system or accounts payable transaction based on matching it with records that already exist within the organization.

John Warrillow: I think I got ya.

Tom Franceski:   Which it is non-PO- yeah?

John Warrillow: Sorry, no I think I get, basically, the idea and I think that makes sense. I’m surprised that the big accounting solutions, QuickBooks, and small business on up, and Enterprise … why wouldn’t they have built this technology?

Tom Franceski:   Well, what’s interesting is that was sort of the strategic rationale for the deal with Epicor, is that more and more organization are looking for this technology and believe it or not, most accounting system providers and ERP solution providers, don’t have a function like this in their product. They might have some rudimentary workflow processes that allow for routing of documents. Very basic most of the time. They might have an attach capability where you can actually attach an invoice to a record within the accounting system, but it typically happens on the back end of the transaction, not true automation on the front end of the transaction. So a lot of times it’s more of an electronic storage cabinet than it is a true workflow in business process transaction solution, which is what we do, and where we come into play.

John Warrillow: Awesome. So, how did you get into DocStar? I mean ’cause you didn’t start the business yourself did you?

Tom Franceski:   I didn’t. Interesting story. I had owned a company in a technology space around systems integration technologies in the mid 90’s. I sold that company to a public company in 1996. That company had the DocStar business, or was about to launch the DocStar business. I ran the company for them that I sold them for a couple years, and after having been very successful with that they asked me to take over the DocStar business and run it for them. I ran this business for a few years before myself and a couple of partners bought it from the company in 2007.

John Warrillow: How did you value it when you bought it?

Tom Franceski:   Well we knew the business extremely well, and the organization that was selling it was interested in doing a transaction, hopefully with insiders, because that would provide the best continuity for the business. We sort of looked at it from the standpoint of, what were the metrics associated with it at the time? We did a base calculation and came up with a value that we were comfortable with, and thought we could secure financing to get accomplished. And then we asked them to help us and step in with some seller financing. So we got a pretty attractive price on the organization with some inside knowledge for the things that we could do to improve it. That would require investment, but the owners at the time didn’t want to make that investment, and they got a frictionless transaction that didn’t require a lot of outside transaction costs to get accomplished.

John Warrillow: Got it. So, when you think about back in 2007, what was the rough multiple … was it a multiple of revenue you were buying the company for? Or multiple of EBITDA? I think people would be curious to know, when you’re valuing the business what, again, were you thinking about a multiple of revenue, or multiple of EBITDA?

Tom Franceski:   Yeah, so at that point, if you think about it as three individuals buying the organization and then needing to go out and secure some capital, it was all cashflow based transaction. So, it was on the low end of the multiple around EBITDA.

John Warrillow: Got it. So your buying it for multiple of EBITDA. Now, you’d been successful already. Were you able to write the check yourself? Why did you bring partners in?

Tom Franceski:   Yeah, no. I had two partners, first of all, who I did the transaction with, who I’d gotten to know extremely well. One of the key things for building any organization and driving value for your business, is having a strong management team. It’s important when anyone thinks about growing a business to sell, that it can’t be based on any one individual. It has to be based on the skills and capabilities of the strong team, and their ability to operate independently. So I had two people who I had relationships with, who I knew well, and I knew were strong business operators, who were gonna join me as part of the management team. So, that was part of the rationale on the front end to have partners.

Tom Franceski:   Now, we also went out and raised some mezzanine debt to be able to finance the transaction, and also asked the sellers to hold a note on the backend behind the mezzanine lenders. The whole idea there was just leverage. We put a certain amount of equity up front as three individuals, and then we financed the transaction as debt. We didn’t want to over-leverage the business. We didn’t want to load it up with too much debt, because we wanted to be able to comfortably service the debt. And of course, we bought in June of 2007. Half the world stopped operating in the first half of 2008, so it’s good that we didn’t.

John Warrillow: Yeah, no, it sounds like it. I wanna go back to the partners because a lot of people listening to this saying, “Okay, when I start a business I’m gonna find two partners, I’m gonna divide it up. Everybody’s gonna have 33%, and on we go.” With the view that it’s all for one, one for all, and it’s better to have partners in your management team. You could’ve, I’m assuming, hired the two individuals you felt confidant in, maybe giving them some phantom equity, but you chose not to. All three of you guys bought into the business. Put, actually, cash into the business. That’s a different story.

Tom Franceski:   Yeah, and again, and by the way, I believe in equity participation for the leadership team. The whole organization if you can accomplish it, but of course, when you’re a smaller business that can become unwieldy in terms of managing overall transactions. But, the two guys that I was interested in bringing into the business provably wouldn’t have joined if it was only a salary-based opportunity, or compensation-based opportunity. They saw the vision of the business. They saw the opportunity in the business, and they were interested in being a part of the upside as well. And, ultimately, we would’ve brought a couple other team members into equity participation as they joined our senior managment team. It was important for us to have them have skin in the game as well.

John Warrillow: Got it. You used a couple terms earlier. Mezzanine debt and seller financing. So let’s just explain those for folks.

John Warrillow: Seller financing. Can you, in layman’s’ terms, explain that to folks?

Tom Franceski:   Seller financing was the … basically the organization that owned the business provided some of the financing for us to buy it. So, as part of the purchase price, they took a note back for part of the purchase price.

Tom Franceski:   And then, mezzanine financing is typically a little bit more expensive than bank financing. They step into situations where the business has good cashflow, and demonstrated capability to service the cashflow related to the debt that the company’s gonna take on. But, perhaps, the company itself doesn’t have the assets to secure the debt the was that a bank would require to collateralize the loan.

John Warrillow: So, for folks at home, let’s imagine that the purchase price of DocStar was $100, just for fun. Now, what proportion of that would you guys have kicked in? What proportion of that would’ve been the seller kicking, in the way of financing, and what proportion would’ve been mezzanine debt? And, or bank debt?

Tom Franceski:   Yeah, so for us it was, just to put the numbers in rough proportion, it was about 20%, 40%, 40%. So, we did the transaction putting up about 20% of the transaction in equity. We took on the mezzanine financing for about 40%, and then the seller held about 40% of the note.

John Warrillow: Got it. And there was no traditional bank financing? Obviously mezzanine debt is usually a form of bank financing, but no kind of tier one bank financing the deal. It was the mezzanine debt that got it done, right?

Tom Franceski:   Right. So, think about it from this perspective. Once you do the transaction, you finance the payment of the transaction price using certain data instruments, but then you have to have working capital to operate your business. And you wanna have some working capital in the business, but you want working capital lines available to help drive and support your cashflow needs as you grow the business out. So in addition to the seller, the mezzanine debt, and the seller based financing, we had a tier one bank that participated, but that was a working capital facility that was based on primarily accounts receivable financing.

John Warrillow: Awesome. So, you get this business under your own purview, and it’s 2007 … as you say, the world went to pieces in 2008. Talk to us about the next 10 years. You built it up to successfully sell it. As you think about that 10 year run, what were the seminal moments, the big moments, as you think about it?

Tom Franceski:   For us, unfortunately, when we bought the business, we had a very clear perspective on what we needed to do. What we wanted to do. One of those was to invest in a new product. We wanted to take the current version of the product and convert it over to a SaaS based product. All browser-based that could be delivered to, either in the cloud or on premise to a customer based on their choice. Because, in the work that we were doing, we saw, obviously, the markets from a valuation standpoint and also customer preference beginning to turn towards SaaS base-

John Warrillow: SaaS base softwares [inaudible 00:14:45]-

Tom Franceski:   Right, but we also recognized that with the type of transactions we were doing and documents we were working with, there were gonna be organizations that didn’t want to have their product, the solution in the cloud. They were gonna wanna own the IP, and have it behind their firewall. So we made a decision that says, “We’re gonna give them the best of both worlds. We’re gonna architect them a product that’s browser-based and built for Cloud, but then we’re gonna give customers the option for how they wanna buy it.” And that gives us a broad market reach. It also helps with financial stability of the business, because Cloud revenue is another component of recurring revenue, which is extremely important in terms of valuation. It gave us the stability because, obviously, recurring revenue is more stable in customer preference. So, it met a couple of needs.

Tom Franceski:   Now, we did the transaction with a timeline for what that investment was gonna be, and we thought it was gonna be a couple of years. The business, frankly, we separate our recurring activity from our new license activity. In 2008, we took a hit on new license activity. When you buy the business you want to invest, you wanna grow, you wanna have fun. We had to take a step back. We actually had to reduce staff at one point during 2009, based on the downtrend that we saw, but myself and my two partners have a fairly good experience running businesses, so we’ve been through cycles like this before. So, we took a step backward before we could accelerate forward.

Tom Franceski:   It was really 2012 before we had completed our investment in the new product and were ready to bring it out to market. We did a couple of things. We had been more generalist prior to that. We made a decision to focus on accounts payable automation as we came to market in 2013 with our new product. Again, we introduced the product as a SaaS based solution that could be delivered either way. We focused our market opportunity on accounts payable automation, and then even two families of products within ERP systems, because our product, as you mentioned earlier, is very complimentary to an ERP system.

Tom Franceski:   We wanted to be selling integrated with the ERP systems, so we picked a couple of family’s products that had great mid-market presence. The Microsoft family of products around dynamics, and the Sage family of products. And then we also made a significant transition at the time, to go from what we used to call, sort of a legacy-demand generation approach, where we were trying to find customers that needed us by outbound by email, by outbound telemarketing. And we really began to embrace web-based demand generation where customers who were looking our solution would be able to find us.

Tom Franceski:   A combination of those three or four strategic decisions, and our focus for our customers, back from the beginning, to really allow our customers to drive efficiency. And around the time, people were looking for productivity tools, because after 2008, 2009, organizations had right-sized. They’d taken a lot of administrative cost out to get down to a back-officed expense burden that was consistent with what their revenues had, for a lot of companies, shrunk to. Now they were thinking about growing again. And they wanted to be able to grow without adding back-office investment and expense. So we need productivity tools to do that. We were right at the right place. Allowed them to streamline operations, be more nimble, and adapt in terms of going after new business opportunities and models, scale without significant investment, going to new geographies without thinking of having to add back-offices, ’cause it all could be consolidated. And then lastly, give their customers a great experience, which is one of the things we’ve been about.

Tom Franceski:   So we hit 2013, and from 2013 until we sold the company, we saw consistent revenue growth between 25-30% a year, with a strong emphasis on SaaS business. So, a recurring revenue in addition to our maintenance streams. Our SaaS recurring revenue was growing at an aggressive clip.

John Warrillow: That’s fantastic. I want to go back to 2009, where you actually had to reduce staff. And you can go back further than that … When you did the deal to acquire the company, you mention 20% of the equity and 40% through mezzanine debt and the other 40% through seller financing … Did you and your partners have to personally guarantee any of that debt?

Tom Franceski:   Yeah. We had a limited personal guarantee on the mezzanine financing.

John Warrillow: And what does that mean, limited personal guarantee? So they couldn’t take your home, but they could take everything else?

Tom Franceski:   It was limited to a dollar amount.

John Warrillow: I see.

Tom Franceski:   They put in “x” amount of dollars. We each personally guaranteed up to “y” amount of dollars on an individual level that we were comfortable with.

John Warrillow: And was that a one for one?

Tom Franceski:   No, it wasn’t one for one. It was about 35-40%.

John Warrillow: Got it. Got it. So your personal-

Tom Franceski:   What they wanted to do, I think, as we negotiated that part of the transaction … they wanted to make sure that if we made a decision to not pay them, it would be painful for us personally. And we wanted to make sure that if we made that decision not to pay them, it would be painful enough for them, but it wouldn’t kill us. So, we sort of put a fence around it.

John Warrillow: That’s interesting. I’ve never heard that before, but it’s a great way to think about it, for sure.

John Warrillow: So in 2009 when you were laying off staff, did you worry about that? What impact did having that personal guarantee have on the way you though about the business in the worst possible times?

Tom Franceski:   Yeah, I have to tell ya, I can’t remember ever thinking about the personal guarantee when we were going through that process, because we were never at risk of losing the business or not being able to meet debt payments. We had enough recurring revenue in the business so that we could stabilize it. We just had to deal with the fluctuation in LR and how much we were investing at the time. New license revenue, and how much we were investing at the time in building out our new solution. We had a few dials that we could move in either direction, to either accelerate or decelerate our investments with our team members. So we were confident that we could make those decisions, and of course, we made some sacrifices personally. You can’t be letting people go in your organization, cause there’s a commitment there. That’s always a very difficult thing for us to do along the way. But, we were the first ones to make compensation sacrifices before we asked other people to do that. We had that kind of impact. I don’t think we were ever in serious doubt that we were going to lose the business. And I can’t remember ever going to bed wondering whether I was gonna have to take care of that personal guarantee or not.

John Warrillow: Got it.

Tom Franceski:   And like I said, we’re not, this wasn’t our first fore in running businesses. The three of us had all been through it before, so we kind of had a good understanding of what we needed to do. Which was, by the way, be very decisive. Make hard decisions. Make them quick. Keep the team informed as to what you’re doing, and offer a lot of transparency as to why you’re doing it, and then move on.

John Warrillow: Got it. So let’s jump ahead to 2016-17. I mean the thing is growing, your recurring revenue is skyrocketing. What was the trigger that made you-

Tom Franceski:   I’m not quite sure it was skyrocketing, but it was growing nicely.

John Warrillow: Okay, I wrote down 25-30% growth overall, but your recurring revenue was growing, and it was growing at a bigger clip than that.

Tom Franceski:   It was.

John Warrillow: Yeah, I don’t know. I guess it’s subjective, definition of skyrocketing. Sounds pretty good to me. Talk to me about the acquisition. What triggered, first of all, the entire thing in the first place?

Tom Franceski:   Yeah, so let me give you a little background and perspective. One of my partners is the same age that I am, and another partner’s a little bit older than we are, so I-

John Warrillow: And that is how old, if you don’t mind me asking?

Tom Franceski:   Excuse me?

John Warrillow: And that how old? How old are you, if you don’t mind me asking?

Tom Franceski:   Yeah, so I’m 53 and my work partner, Greg, was a few years older. We had been talking for a while about two things. One is, we had gotten the model down as we came out of 2013 so that, one of the other things that we wanted to do was we wanted to do, theoretically, wanted to do some acquisitions to help accelerate growth. Our plan all along had been 20% organic, supplementing very strategic acquisitions.

Tom Franceski:   We did our first acquisition in 2014, which was a small deal that we were able to self finance between our own internally generated cashflow in a note that the seller was willing to hold in terms of buying that business. That was sort of the case of what we wanted to accomplish going forward on a bigger scale. And, my partner Greg, we were starting to get and exit strategy for Greg as he starts to think about phasing out of the business over time. We went out and I started to do 2014, 2015, I started to talk to a lot of private equity funds about potentially making an investment in the business.

Tom Franceski:   Again, we wanted to do three things. We had started to develop a pretty good return model for if we invested “x” in sales and marketing, we could expect “y” out of the back end of that engine, based on a lot of the FCO work we did in that digital demand generation. We wanted to invest a little bit there. We wanted to have a partner that was willing to step up and help us do acquisitions if we found the right opportunities, and we wanted to begin to think about an exit strategy for our partner who was thinking about exiting the business and retiring.

Tom Franceski:   All those things led me to the private equity market, so we had our minds in place for going out and raising capital or doing some kind of transaction. Frankly, we weren’t excited. We went out, we had a couple of term sheets from private equity funds. They were primarily financially based transactions, which I know your audience will probably understand the difference between a financial buyer and a strategic buyer-

John Warrillow: Define it, if you wouldn’t mind.

Tom Franceski:   A financial buyer is really based on cashflow. It’s an EBITDA based calculation. They’re thinking about, if the investment they make, how they can grow it, and what the return on those initial dollars are going to be. It’s really … We think of it as a financially based cashflow model that they’re working with.

Tom Franceski:   A strategic investor has a different eye. A strategic investor has a hold in their portfolio, perhaps, that they want to fill a product, or fit a product in, to filter their customer base to either allow them to drive more mindshare and [inaudible 00:25:17] share, or other existing customer base to deal with a competitive situation. Or just to improve the overall profile of the organization and breath of technology that’s offered.

Tom Franceski:   And, the multiples that are paid, and the way to look evaluation are completely different, because a strategic investor really thinks more about what the product, or the business, would mean to their portfolio, not necessarily just what the cashflow’s gonna be generated from the assets that they’re actually acquiring specific to what existed before.

John Warrillow: And so the PE guys that you spoke with before, what kind of multiples of EBITDA were they offering? Ballpark.

Tom Franceski:   They were in that four to six [crosstalk 00:25:58]. Again, there’s a lot of variability there, right? Because a lot of it depended on how much maintenance revenue you had. They put a different multiple, perhaps, on your SaaS revenue. They put a different multiple on your net license revenue, and they put a different multiple on your professional services revenue. They had a little bit more complicated formula for how to come to things, but that was sort of the way that it all … that’s the way that it looked to me as I was talking to different people and thinking through it at the time.

John Warrillow: Got it. So, they’re offering four to six. And, give me a sense, at this time, how big a company are you guys in terms of revenue, number employees. Just give me a sense of how big DocStar was at the time.

Tom Franceski:   When we did the deal we were about 45 employees, so as a software company there’s some pretty standard metrics around revenue per employee to be profitable, so you get a good idea from that perspective.

John Warrillow: That’s helpful for sure. So, you kind of yawn at the PE offers thinking that’s not gonna get anybody excited. What was next?

Tom Franceski:   We were just moving down our path trying to find the right fund. And then in 2016 we got a call from Epicor. From a bis-dev at Epicor who came to us first masked as a customer who wanted to understand the technology and what we could do for their organization, so they took a look at our technology from a customer’s perspective. They were in a relationship with an accounts payable provider that they had been in for a number of years, but that provider wasn’t going in a direction that they wanted to go. And primarily, Epicor has a huge emphasis on driving to the Cloud. Putting a lot of energy, a lot of effort, into moving customers and products into the Cloud. That relationship wasn’t moving in that direction and they wanted a product that was built for Cloud, and ready to go.

Tom Franceski:   They called us up, and they went through the evaluation of, and I don’t mean a deep evaluation of technology, I just mean from a customer perspective evaluation of technology. They got in touch with me. They asked if we had an interest, and at the time I told them, “We’re not really interested in selling the business, but of course, we’re willing to have a conversation.” And all along we thought the most sensible exit strategy for us, if we did a sale, would be to an ERP provider because it’s a very strategic transaction for them to add the technology, and if they could take our solution and make the business worth a lot more than the business would be within just a normal PE based transaction.

John Warrillow: So the bis-dev guy came to you dressed up as a customer. Filled out the, “Yes, I want more information.” And one of your sales reps, I guess, contacted them and had the preliminary demo of the product. Is that how it went down?

Tom Franceski:   Yeah. That’s correct. And then they … once they went through the preliminary demo, and by the way, they were very discreet. They reached out … Our VP of sales was involved in the conversations at the time, so they reached out to him independently and asked him to have me give them a call.

John Warrillow: Got it, got it. And at what point did you realize that Epicor less for a sale and more for an acquisition?

Tom Franceski:   You mean at what point in time?

John Warrillow: Yeah, what point in the process did you go, “Oh, these guys aren’t looking to become a customer. They’re looking to actually buy our business.”

Tom Franceski:   Well, one thing that you learn about, at least I learned about their organization, is once they had gone through the initial process and developed interest, they were very clear about their intentions. AS soon as they contacted me they were interested in having a serious conversation about whether we’d be serious about doing a transaction with them. So, they didn’t continue to act like they wanted to be technology product buyers. They said they were interested in doing a transaction, and they told me exactly what their interest was in terms of it. It wasn’t gonna be an investment, it wasn’t a partnership they were looking for. They had made a decision to own the own the [inaudible 00:30:04].

John Warrillow: Got it. So, at what point … so what happens next? Where do you go from there? Do they present you with a letter of intent? Did you have some management meetings? Where does it go then?

Tom Franceski:   I spent probably, I mean they moved very quickly. I spent probably 15 days with them. I can remember the first conversation about value, because I was away for the weekend with my wife for Valentine’s Day, for February 2016. So, it was less than a month where we had exchanged some basic information around the business. They asked for some additional information. I supplied it, and they came back with a pretty tight letter of intent pretty quickly, with the terms and conditions that were willing to do the transaction at.

John Warrillow: And had you guys talked at all about valuation up until that? Or was the first time you saw their valuation interpretation that letter of intent?

Tom Franceski:   For all intents and purposes, the conversations that we had had prior to that were really just conversations. ‘Cause like I said, I’ve been through this a couple of times before with the PE guys and until you see numbers on the paper you don’t really have any feel for what they’re gonna come back. Which has been my experience …

John Warrillow: And what was your reaction when you saw the letter of intent from Epicor?

Tom Franceski:   You know what? Being very honest with you, we thought it was fair, but it wasn’t what we were willing to sell the business for. And so, our valuation as three owners was, you know, the business is at a point today where it’s in really good shape. It’s growing the way we’d like it to be growing. We’re not in a rush. We don’t have a financial need to sell the business. We don’t have a burning desire to get out of the business in any way. As a matter of fact, we liked the business a lot.

Tom Franceski:   So we looked at it with three priorities in mind, and all three priorities were important to us. One was, it had to be a financial transaction worth doing for us individually. It had to be a financial transaction that gave our employees and team members and opportunity to, or transaction, that gave our employees and team members an opportunity to potentially grow their careers in an organization. We didn’t want to do a transaction where half our people were gone two or three months later. We wanted a real ramp for the people who were committed to working with us and helped us build the business. And then three, we’re a channel based organization so we wanted to make sure that our channel partners had an opportunity to continue with the product and business as well. ‘Cause we had some channel partners who had built businesses around our product. We thought about the context of all three.

John Warrillow: How did you think about it personally? Whether it was a deal worth doing for you personally?

Tom Franceski:   Well, I had personally done a couple of transactions before, right? So, there was a certain amount of wealth built, kind of thing. My partners were both in very good personal financial situations, so neither of us had a need to do the transaction from that standpoint. So we just decided that we, we looked at it and said, “Okay, if we’ve got a strategic investor, potentially looking at the business, if we had to do, if we did a PE deal, if we did a straight financial deal what would that look like?” And then, what does the strategic deal look like? And then, how long will it take us to get to that same value on the strategic deal? ‘Cause there’s only so many strategic buyers out there. How long would it take us to get from point A to point B if we don’t do this transaction? What are the risks associated with it?

Tom Franceski:   Remember, we had been through the downturn in 2008 before, and we saw that eventually, we’re in a good economy right now, but it’s not gonna last forever. So that factored in. And then we just said, “Okay. Let’s go individually, you know, Greg, Tom, Jeff. What would be a meaningful number for you in terms of lifestyle? And future plans and wealth, and everything.” So, we sort of all came up, over a couple drinks, we came up with a number that we said, “You know, we each gotta get this much for this transaction to be worth doing, after tax.” And we came to that number. We went back to Epicor and said, “Hey guys, this is what we’re thinking. The numbers might not get you there. We perfectly understand and admit that, but this is what it’s going to take to get us to part with the business.”

John Warrillow: Love it. I’d love to be a fly on the wall with those drinks and you, and Tom, and Jeff, or Greg and Jeff … to hear that machinations after a couple drinks as to what it made sense.

Tom Franceski:   And you know what? The other thing is they’re both really smart guys, and so when you talk about negotiating a transaction those conversations were … 10% of the conversations was about the dollar value, and 90% of the conversation is, okay, how do we position to get what we want out of this? And how do we go back and how do we do this and how do we do that, as we thought about negotiating the deal and everything associated with it. It’s a lot of fun. It was a somewhat stressful time. It was a lot of work, but I gotta tell ya it was a lot of fun. It really was.

John Warrillow: Now Greg was older. Was his number different than yours in any way? Was his willingness to sell, for example, heightened by his closeness to retirement?

Tom Franceski:   No. I don’t think it was. I can’t say that for certain, right? Because who really knows, but I don’t think … Greg was not going to accept a number that was uncomfortable for him or for us, because of the difference in age that we had. And he’s a young spirit at heart. Good technology mind. Loves the business. Likes being involved. Frankly, when you start talking about having partners, this was a three person partnership that worked pretty well. So, we have a lot of fun together too. So it was fun operating the business, even in times when it was challenging.

John Warrillow: Got it. So you figure out what would make sense for you personally. You go back to Epicor. How did you make that case? Did you just say, “Look. I don’t have to justify it to you guys. This is the number, guys.” Or did you go through the whole process of justifying your number?

Tom Franceski:   Yeah, so along the way, of course we had some help from some outside advisors, and one of the guys that was helping me … So, we had a deal guy. We had a deal attorney. We had a deal guy who was doing some of the interfacing with Epicor on the negotiation, both him and I together. And then I had a guy, sort of behind the scenes, who I’ve know for a while, who’s been somewhat of a coach to me over time, who did a lot of MMA work first at GE, and then in other companies outside of GE in the software industry. So him and I did a lot of work just to say, “Okay, so here’s the number we gotta justify. How do we pull this thing apart and put it together in a way that can make sense to them, and they can sell to their … because Epicor are owned by a PE fund as well, and so they’ve gotta justify the purchase price at some level within their organization. We went back with a well thought out plan, and calculation to help support the dollars that we were looking for.

John Warrillow: What was in the plan?

Tom Franceski:   It primarily looked at the different revenue streams and the different buckets, and looked at the industry to see what someone might pay for those things in some cases, and rational in other cases. A little more than rational situations. But, we didn’t look at EBIDTA, because we weren’t interested in doing and EBIDTA transaction, and we were honest with them. We were not running the business. You can’t, growth, right? And margin, are inversely correlated in some cases. So if you’re running a 25-30% growth business, you’re not running the business to maximize EBIDTA. So, we were very clear to them. We’re invested in growing the business, and it’s not and EBIDTA based calculation that we’re gonna be comfortable with. We went and looked at the revenue components and assigned multiples based on what we thought was somewhat reasonable.

John Warrillow: So you’re looking at industry benchmarks for SaaS companies?

Tom Franceski:   Yeah, and as you know, there’s a lot of variability there. Lot of variability there. You can find a number to justify just about anything you wanna say.

John Warrillow: So what did you think, on a multiple of top line revenue, the business was worth?

Tom Franceski:   We thought it was north of two.

John Warrillow: North of two times revenue.

Tom Franceski:   Yeah.

John Warrillow: Got it. And that’s what you, to tick your first box of being willing to do it, personally, that’s what you needed to see it … to get to. To do the deal?

Tom Franceski:   It worked out when you looked at that. When you looked at the multiple we came up with, and then you overlayed that against what the three of us decided we each needed to take out of the transaction, it sort of worked.

John Warrillow: Got it. And so, what was Epicor’s original offer, as a multiple of revenue?

Tom Franceski:   Less than two.

John Warrillow: More than one?

Tom Franceski:   We’ll just leave it at less than two.

John Warrillow: Okay. No worries, but you guys wanted two plus. One thing you did was went and looked at benchmarks of other industries. What else did you do? And the reason I’m asking this question is, I can see a lot of business owners listening to this saying, “Okay. I want to maximize value. I know part of this is optics. Part of this is the way I position the business and present the business to a strategic acquirer.” So what was it that you did to present back to Epicor, the opportunity, beyond just the third party benchmarks that you were able to come up with, but what they could do with the business. What did that look like?

Tom Franceski:   Well, yeah, keep in mind … Epicor is a very large organization with a lot of very talented people. As a matter of fact, one of the most appealing things about doing the transaction with Epicor, was the fact that we were gonna get to work for ’em and continue to grow this as part of an organization inside their business. I come back to the employees in the channel, and us as individuals. We’re growing an enterprise content management platform within Epicor and having a great time doing it right now. It’s a lot of fun. They’ve got a big customer base.

Tom Franceski:   This technology fits well within that customer base, so the rationale from that standpoint was clear, and we and I were passionate about wanting to be part of that as they grew it out. That part of it made sense as individuals as well, in that, not only were we really gonna get a chance to do it on a larger stage, right? And it’s been great, you know? Because frankly, the response to our technology within Epicor has been fantastic. The people are great. They’ve got a lot, a lot of really … a lot of customers that are passionate about using their technology to improve their operations, and we stepped right into that intersection in a perfect way we fit. Not only US based where most of, all of our business was, but now Epicor’s a global organization. So, we’ve rolled our product out across the U.K., Asia, Africa. So, we’re taking the product out globally, as well. There’s just a great strategic fit from that standpoint, and it was very important to us along the way.

Tom Franceski:   But, back to your question, Epicor did extensive due diligence on the technology. It spent a lot of time with our technology organization, and quite frankly, I’m very proud, we’re very proud, of the way we came out of it. ‘Cause we built a really good product with a really good architecture that works well for our customers and meets that market need. They spent time looking at our talent and our sales organization, our talent on our support teams and our services teams. They spent time looking at our customer base, so they had done a lot of work to make sure that we were the right strategic fit for them, and the right product for them to be buying based on everything we built. And frankly, I think they liked our culture.

Tom Franceski:   I think they loved the fact that we were such a customer focused culture and organization with really team members committed to making the business successful. Wanted a long term opportunity with the organization, so I would almost say the selling from that perspective was sort of jointly developed. We talked all the time about what this could mean within Epicor, and what we were doing and how it translated, and they got as excited as we were as they continued to look under the hood. I think there was a lot of joint in selling from that standpoint, to be honest with you.

John Warrillow: How was the deal structured vis-a-vis proportion and in earn out, versus sort of cash up front, versus a note? How did you actually structure the deal?

Tom Franceski:   I gotta be careful here, obviously, because of the Epicor thing, but I think we got very fair splits. And, if you go back to before what our goal … Our goal was to make sure that we achieved a certain amount of after tax check associated with the transaction, and so we pretty much made sure that we were going to get that amount regardless of what the earn out turned out to be, or how the whole escrow thing went down.

John Warrillow: Got it, got it. That’s helpful. So you got that not covered, so to speak, and so there’s upside if you’re able to make it happen.

Tom Franceski:   Yeah.

John Warrillow: In the next-

Tom Franceski:   And by the way, and they gave us very, a very fair organization. I’ll tell you something about Epicor. Very fair organization. They did everything they said they were gonna do. The transaction turned out very close to what we thought it would when we went into it, and what they told us it would be. So, it was a really … I won’t say it was an easy negotiation, and I won’t say there weren’t tense moments in the negotiation. There certainly were, but it was a very fair negotiation, a very open and honest negotiation.

John Warrillow: What made it tense?

Tom Franceski:   Well, just the … sometimes I think what makes it tense … this is maybe an instructive point, you get into these things and sometimes you negotiate against yourself, right? You’re in the middle of the transaction and you have a blip in the deal. You have a large customer that decides that they want to change the way that their doing business with you, or you have this happen … or a key employee indicates that perhaps they’re thinking about other options. That kind of thing. And you go home, and you say to yourself, “How could this impact the transaction?” And the three of us would sit down and talk about it. How do you think they’ll respond to this? So frankly, some of those tense points were just us sort of thinking about how you might have to negotiate- I call it negotiating against yourself, ’cause the other side isn’t engaged. It’s just all in your mind. So you had some tense moments like that, right? I think that’s part of anything like this when you’re trying to do a deal.

Tom Franceski:   But also, we had been counseled by outside advisors that there’s going to be a point in this negotiation where they try to negotiate some of the price down. So, during that portion, which I think is a natural part of the negotiation, and this is after the letter of intent gets signed, and you do due diligence, and a couple warts get exposed here and there that maybe weren’t apparent before. Then they come back to you and maybe wanna make a modification, or change to the deal. And I think you’ve gotta be comfortable with some confrontation and some tenseness associated with that when it occurs.

Tom Franceski:   The key is to do it professionally, because you gotta remember the ult goal. The ultimate goal for us was to be a thriving part of the organization going forward.

John Warrillow: Yeah, we obviously called re-trading, but had a whole episodes talking about that re-trading concept up at the last minute, things getting renegotiated. Sometimes for valid reasons, other times because they know it’s a negotiation tactic, so …

Tom Franceski:   Yeah, and Epicor went through an ownership change while we were negotiating the deal, so we had that disruption thrown in as well. They were owned by Apax in early 2017, and then KKR bought Epicor in September, so that changed the tenor of the conversations and everything a little bit, as we waited for them to complete that acquisition, or the sale of the company.

John Warrillow: I bet. I’d love to ask you a personal question. Just personally, about the transaction. So you guys all had a couple drinks and decided what it would, to be meaningful to you financially, you had to get “x” amount of dollars after tax?

Tom Franceski:   Yeah, and let me be clear. The couple of drinks happened after there was a lot of paper, spreadsheets built, to try to figure out what it would be, but-

John Warrillow: I didn’t mean to suggest it wasn’t [crosstalk 00:46:18]-

Tom Franceski:   I don’t want to imply it was quite that casual.

John Warrillow: No, okay. But in any event, you’re making decision. You don’t have to sell, admittedly, you’ve already built some wealth outside the business. You don’t have to sell. The business is going well. For you to make the move, there’s a number that has to be hit. I’d be curious, because I think a lot of our listeners are sitting there saying the same thing, like, “What is a number that would have a material impact for me?” And for some, I think, it’s probably because they want to go buy something. Maybe the wanna pay off their house. Maybe they want to take a trip around the world and take five years off, or maybe they never wanna have to work again. Whatever justification they’ve come up with, and I’d be curious in your case what was it for you that made it material? Was it this idea of wanting to buy something, or something else? And then I’d love to ask a sort of follow up question, but first how did you answer that for yourself?

Tom Franceski:   I think there’s some fundamental things that you think about. I’m not a materialistic person, personally, in the true sense of the word, so I don’t have a lot of … I’ve got a nice home. I’ve got a nice vacation property that’s appealing to my wife and I. And I think my partners thought about it the same way. You wanna put yourself in a position, I think, for me … you wanna put yourself in a position where yourself and your spouse can live a very, very comfortable lifestyle. Can do things that, perhaps, you wouldn’t have been able to do otherwise. In terms of the lifestyle you live and the way you live your life. You think about children. You think about grandchildren. You think about educations that’ll ultimately have to be paid for, and different things like that. And financial stability, and wealth for the family. And so that’s sort of how I came to it, and I can tell you just by having known my partners as long as I’ve known them, I think they felt the same way, and thought about the same way. None of the three of us went and wrote some huge check to buy some extravagant purchase that we wouldn’t have otherwise bought.

John Warrillow: Got it. And my followup question was, now that the transaction has happened, the check has cleared the bank, and you’re actually now have enjoyed that liquidity, if you will, event, how has the money changed the way you think day to day about your life? The decisions your making, the educations, your funds, the way you think about your grandkids legacy, and so forth. Now that it’s done, how did your thinking at the time measure up to the reality today?

Tom Franceski:   That’s a great question. Frankly, it hasn’t changed all that much, right? It just I think gives you … You know there’s the old saying that you always wanna be able to just, if you decide one day, that if you don’t want to do it anymore, that it’s no longer fun, that you can pretty much disconnect and go do something different, or whatever else it is you wanna do. So, to the extent that we weren’t there before, it certainly puts you in a position where you don’t have to do things you don’t want to do anymore. And I’ve been lucky, because I’ve stayed with Epicor and I’ve enjoying thoroughly what I’m doing with the organization. Like I said before, we’re doing great things for customers. We’re going to continue to do that. We’ve got a great market opportunity. We’ve got great team members and I’m having a lot of fun doing it, and I want to continue to do it, right? But what the money does, so to speak, is it just allows you to … One of the benefits is it allows you to be in a position where you don’t wanna do it anymore, you don’t have to. And you don’t have to worry about the adverse ramifications financially of making that decision.

John Warrillow: And how do you stay hungry under those conditions?

Tom Franceski:   Well, if you know me, you know that it’s not all financially driven. Most people who, I think, do the things that we do are very competitive people, by nature. I certainly am. I have a tremendous amount of intellectual curiosity that keeps me driven on a day to day basis. I love the idea of trying to do something in an organization as large as Epicor, and see how that works out for me. I love working with the people that I work with on a day to day basis, so at some level the money is important, but it’s not what drives you to do what you do every day. You have to like what you do. You have to be passionate about what you do. So, this affords me that, and I just, you know … I want more. Not just more money. More opportunity, more experience, more challenges. That’s one of the things that drives me.

John Warrillow: Well said. Where can people get in touch with you Tom? What’s the best place you want our listeners to kinda go do something? Or go visit a website, or connect with you on LinkedIn. What’s the best way to follow up if they’re keen?

Tom Franceski:   They can find me at LinkedIn. Also, my email is out there and easy to find. It’s

John Warrillow: Fantastic. Tom, thanks very much for joining us.

Tom Franceski:   Thank you. Appreciate it.


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