Deciding When To Sell

September 20, 2019 |  

About this episode


To read a transcript of this episode, click here.

In 1999, Peter Kelly was at Stanford business school when he and two partners spotted an opportunity to remake an industry – used cars.

Used cars from leasing and rental companies were being sold at physical auctions. Kelly realized the wholesale side of selling used cars was ripe for transformation and started OPENLANE, a digital auction for fleet owners to sell their old cars.

Kelly raised money from some Silicon Valley venture capitalists and went on to grow the company to more than $100 million in sales. Despite having to give up the majority of the business to investors, Kelly and his partners still had a sizable chunk of the company.

Having started his business while still in school, a big chunk of Kelly’s wealth was tied up in OPENLANE and he wanted some liquidity. That’s when he decided to accept an acquisition offer of almost $250 million for OPENLANE.

In this episode, you’ll learn:

  • How to raise venture capital
  • The difference between a “seed” vs. “A” round
  • A controlled auction and when to use one to sell
  • How acquirers use the build vs. buy calculation
  • The secret to deciding when to sell

At the time of the acquisition by KAR Auction Services, OPENLANE had the majority of its revenue coming from five customers – the largest of which was generating around a third of OPENLANE’s revenue. Ultimately the fear of losing one of those big customers became one of the driving reasons Kelly decided to sell. How dependent are you on one or two big customers? Find out, by completing The Switzerland Structure tool, part of Module 8 of The Value Builder System™.

Get start free by completing Module 1 now.

About Our Guest

Peter Kelly joined KAR in 2011 through the acquisition of OPENLANE. As co-founder, president and chief executive officer of OPENLANE, Kelly led the company’s strategic direction from the startup to the scaleup of what is now the leading online wholesale auction platform in North America. Over the past several years, he led the re-architecture of OPENLANE’s core technology and has grown transaction volumes to more than one million per year.
Most recently, Kelly served as chief technology officer of KAR and president of KAR digital services group.


John Warrillow:                So how do you figure out when’s the right time to sell your business? When you start off, you’ve got nothing, right? So you’re not risking a whole lot. But if your business goes on to be successful and worth something, every day you stay on as founder, CEO, and shareholder, you are risking essentially that portion of your wealth. My next guest, Peter Kelly, realized that. He built his business up to over $100 million in revenue, and knew that at some point he needed to take some chips off the table. When the opportunity presented itself to sell, he just did exactly that. So he’s going to tell you the story in all of its glory. He’ll talk about how to raise money from venture capitalists, how to manage a board if that’s what you’ve got. He’ll talk about that calculus around when and if to sell. Also, the whole idea of what you’re going to do after you sell, and in his case he went on to work for the company that acquired him. He’ll talk a little bit about what that was like, as well. Here to tell you the entire story is Peter Kelly.

John Warrillow:                Peter Kelly, welcome to Built To Sell Radio.

Peter Kelly:                        John, thank you. Delighted to be here.

John Warrillow:                Tell me a little bit about this company OPENLANE. We were talking before we hit record that OPENLANE has a big office in Toronto. But for people that don’t know what it is, what kind of company was OPENLANE?

Peter Kelly:                        Well, thank you, yes. OPENLANE, we were an online used car auction. Now, used car is something everybody’s familiar with, but we were not something that was available to retail customers. We were purely a B2B or a business-to-business auction for used cars, okay? It’s a pretty sizable industry. We started the company 20 years ago. At that time, there were about 10 million cars a year being sold in this B2B or wholesale channel at physical automotive auctions, okay? The way that market works is you’ve got two constituencies. You’ve got the sellers and the buyers. The sellers are typically commercial entities like rental car companies, automotive finance companies who might have off-lease portfolios, motor manufacturers who’ve got fleets of used cars, and other various types of vehicle fleets. Then on the buy side, you had automotive dealers. So the buyers were automotive dealers, and frankly a lot of the cars that your audience might see on a retail automotive dealer’s lot, they’ve actually acquired those cars at auction, at physical auction, or today digital auctions.

Peter Kelly:                        So I mentioned 10 million units a year, $100 billion of what we call gross merchandise value, the value of all those cars annually. We set about, 20 years ago when we first encountered this industry … The internet was happening. It was the dot-com era, if you remember back to 1999.

John Warrillow:                Sure.

Peter Kelly:                        We decided we were going to be the digital disruptor of that industry. We didn’t really know the word disruptor, but we were going to move that business online.

John Warrillow:                I know a guy who owns a car dealership, and he would say, “John, I go to the auction every Thursday at 3:00,” or whatever. “Give me the specs of the car you want, and I can get it for you at a lot less than you …” This is what you’re talking about, except taking this kludgy world of some guy showing up with a pencil and pen to the online world. Is that basically what you did?

Peter Kelly:                        That is it. That is it. But I will say, those physical auctions are still very, very much a viable channel. In fact, last year, still approximately 10 million vehicles sold through physical auction. If you ever had the chance to go to one of those auctions, I’d recommend it. It’s a very intense experience. There is multiple lanes running simultaneously, so multiple cars being sold at the same time. Dealers around the car. Each car auction lasts maybe 40 seconds.

John Warrillow:                Wow.

Peter Kelly:                        Happening 10 times, 10 lanes adjacent to each other, so 10 cars being sold every minute. A mix of in-lane buyers, buyers physically at the premises, and of course, today, internet-based buyers who are looking in via video cam, webcam, and the internet and buying against the in-lane buyers real time. So it’s a very intense … It’s a true marketplace, really, when you think about it, of just what is the maximum value of this car? That’s the business that we set about essentially being a digital pure play without the physical component.

John Warrillow:                Got it. Okay. So if anybody’s ever used an online marketplace for cars, you kind of know what the consumer experience is like. The business-to-business experience obviously is much different and fascinating. I’ve got so many questions about this. This is completely unrelated to Built To Sell Radio, but I want to know what is the best deal you’ve ever seen somebody get on a car?

Peter Kelly:                        Well, if we’re doing our job, nobody gets a deal because the market should get it up to the right price. So I don’t know if I’ve got a good answer to that, but what I will say, automotive dealers, it’s a different experience. They’re buying for inventory. They’re buying at volume, although each car is sold one at a time. I will say, they work hard to get the right inventory for their dealership. There typically is a markup, but it’s probably not as much as most consumers think.

John Warrillow:                Got it.

Peter Kelly:                        With the internet and price transparency, that margin between the retail and the wholesale price has been compressed over the 20 years that I’ve been in this business, and consumers are getting pretty good deals out there, John. But I don’t know if I can tell you like a screaming deal.

John Warrillow:                I’m just curious.

Peter Kelly:                        Yeah, okay.

John Warrillow:                All right, so let’s get into the founding of this company, because it’s interesting. Were you a car guy? Did you come from owning a car dealership?

Peter Kelly:                        No, no.

John Warrillow:                Or how did you stumble into this?

Peter Kelly:                        Yeah, it was a question, really, of kind of stumbling onto this. The backstory here was I had come over to the United States. I’m Irish originally. Come over to the United States in 1997 for grad school, business school in California. Of course, we had two years there, and thinking about what will I do next? One of the reasons I came over was I wanted to be Silicon Valley. I was interested in technology. I was interested in someday starting a business, but I had no idea what or when. My background prior to that was actually construction, but I came to California and starting paying more attention to the internet. eBay had gone public. That was an online auction, and myself and two of my classmates basically, as we were looking to start our second year, we said, “Why don’t we just dedicate our second year to seeing if we can start a business right now? There is no time like the present. We’re 30 years old. We could spend this next year on the golf course or we could actually do some work. Let’s do some work.”

Peter Kelly:                        So we started kind of looking at opportunities, and the first opportunity we looked at … We were all actually of European background, and we looked at an automotive idea in Europe. As we dug into that idea, we found used car auctions, right? The first auction we visited in the Bay Area … I went to that. I’ve just described to you what that process is like, and we just thought the internet’s going to … Well, we thought the internet’s going to blow up this business, but for sure the internet’s going to change this business. Why don’t we do that? So we kind of pivoted from a European-based idea to an American idea. Research the industry. Try to figure out a go-to-market strategy, a technology. Try to get some developers on board. Ultimately, we were all graduating business school with a lot of debt, let’s say.

John Warrillow:                I was going to say.

Peter Kelly:                        We had no personal capital, and we also knew this was going to cost millions of dollars at least, at a minimum, to get the infrastructure and everything up and running. So we went down the venture capital route, and I guess we were fortunate. Either the mix of a good idea and the time. It was pre the dot-com crash, where we were able to get a number of term sheets from Silicon Valley type investors and get a series A and build a team and start going at it that way. But none of us actually had automotive background, and none of us were American. So we had some pretty big strikes against us trying to tackle the U.S. auto market.

John Warrillow:                How did you convince a VC that a bunch of European business school expats were going to have any success?

Peter Kelly:                        Well, I think the idea itself was pretty strong. I think people just looked at this market and thought, “Wow, it’s a big industry. It’s automotive. It’s a part of the industry most people don’t think of, the wholesale part. It’s transaction driven.” Frankly, our relationship with our initial investor started off kind of advisory more than anything else. He hadn’t yet invested. He was like, “Hey, can you get any more validation of this idea? For example, can you go out to the industry and get some former CEO of a motor company to say, ‘Hey, I know this deal, and this makes sense’?” So we went after that, and we did that. “Can you get a couple of people from the U.S. automotive market industry to join your team?” Those were all sort of credibility points. If we could achieve those, there’d be a greater comfort level in investing.

Peter Kelly:                        So we were able to make all that happen. Ultimately, when it came to the time, we actually had a number of term sheets. But because we had a track record with this investor, we went with that one because, I guess, we felt we had worked well together, and he had kind of coached us a little bit, frankly.

John Warrillow:                So that’s a series A. I know nothing about this world because I’ve never gone down this route, but I understand there’s a friends and family round of investment, and then there might be a seed round. Is a seed round synonymous with an A round? Are those two synonyms for one another, or what?

Peter Kelly:                        It’s evolved a little bit over the years, John. Today, typically, people do seed rounds for their series A.

John Warrillow:                Okay.

Peter Kelly:                        That was less the case back then, so the series A was a … It was a $5 million round. We raised $5 million in capital, and for that our investors took, give or take, 30+% of the company, right? Then founders had some, and obviously a decent chunk allocated for future employees. We knew we had to hire a lot of people, right? So it was that kind of, almost like a third, a third, a third split, and that was the series A. But today I think seed rounds are pretty common, although most seed rounds might be as big as our series A, right? The world’s changed, right?

John Warrillow:                So your calculus is what? I mean, you’re giving up a third of the company. How do you and your two partners get comfortable with that idea?

Peter Kelly:                        We didn’t have a whole lot of other courses of action. I think bootstrapping was not a possibility, you know? Although who knows, maybe. We didn’t really have the depth network of a friends and family to pull together a few millions of dollars to get this to it’s first sort of milestone, get technology built, get some customers on the platform. Again, in a B2B setting, think of our customers, motor companies, banks. Credibility was very important, so being able to say we’ve got institutional backing, we’ve got a substantial amount of capital on the balance sheet, we felt would help us.

John Warrillow:                So let’s get into the business itself. You’ve got this five million bucks, which allows you to build the technology and hire some people. The business model … are you making a little cut from each car that sells on the platform, or do people-

Peter Kelly:                        Yep.

John Warrillow:                How do you make money?

Peter Kelly:                        Yeah, the business model’s transaction driven, so it’s a mix of sell fees and buy fees, okay? Seller sells a car, pays a fee. Buyer buys a car, pays a fee.

John Warrillow:                Ah, the double-ended marketplace. I love it.

Peter Kelly:                        Yep, yeah. That’s principally the model, and then we also made some revenue if the buyer wanted us to move the car to their dealership, okay? So we had transport revenue, but that transport revenue, most of that was ultimately paid to a trucking company to move the car, right?

John Warrillow:                Okay [crosstalk 00:13:49].

Peter Kelly:                        We had kind of high-margin transaction fees, which was 60%, 70% of the revenue, and then transportation revenue, which was maybe the balance. And a double-sided marketplace, so very difficult early years getting sellers and buyers, and a chicken-and-egg problem. How do you make that work? Honestly, fairly naïve, young entrepreneurs learning an industry, learning how to build a company for the first time, so some mistakes along the way. I often say we had a lot of ups and downs, but thankfully we had more ups than downs, right? We were able to find a way to grow the business.

Peter Kelly:                        But frankly, very early on, within a year of incorporating the company, we hit the dot-com crash, right? Which was a very difficult time. We were fortunate. We had just raised our series B financing right before that, so we came out of the gate strong, got a customer on board, started selling cars. Everything was looking great. Raised a series B, which was a substantial amount of money, north of $20 million, which actually saved our company in the end of the day. Then the dot-com crash happened. Once the dot-com crash happened, everybody ran away from companies like us, okay? The motor companies didn’t want to take our calls. We were just another dot-com that was going to go out of business.

John Warrillow:                But to be clear, the investors can’t claw that money back all of a sudden, now that the landscape has changed.

Peter Kelly:                        No. That money was in. That money was in. What we did was we really battened down the hatches, you know? We basically said, “Hey, our go-to-market strategy is not working, or is not going to get there fast enough.”

John Warrillow:                What wasn’t working about it?

Peter Kelly:                        Our technology expense was fine. We got the platform built, and I think that the strength of our company through its entire history has been the strength of the technology. It’s been really strong. We’ve been a technology leader. But I think the sales and marketing expense of getting customers on board. The sales cycle on the seller side was extremely long, multi-year in some cases. On the buy side, dealers were certainly prepared to do business with us, but we heard a lot, “Hey, I need to kick the tires. I need to see the car. I need to smell the car. I need to know if it’s a smoker car.” If you think back to those days, John, it was pre-smart phone, right? A lot of dealers were dialing in on dial-up modem type connections, and the internet wasn’t … You went to a lot of dealerships. It wasn’t an easy place to pitch an online used car auction, right? So all those things were part of the reality.

Peter Kelly:                        I think what we had to decide was where could we be successful? So we narrowed our vision, our scope. We said, “Listen, we can’t change this entire industry, but there is a segment of cars here, off-lease cars, where the seller is the motor manufacturer and the buyer is the dealer of that brand.” So it’s, I’ll say, Volkswagen selling off-lease Volkswagen cars to Volkswagen dealers. So there’s a lot of trust in that relationship already.

John Warrillow:                They know the car. They know brand. Yeah.

Peter Kelly:                        They know the brand. They know the car. They know the packages, the equipment, and we can service that market. So we ended up really focusing on off-lease, and we ended up capturing I’ll say about half of the global OEM brands into programs like that. We call them private label programs, where the brand is selling its best vehicles to its franchise dealer network.

John Warrillow:                Peter-

Peter Kelly:                        That enabled us to survive.

John Warrillow:                Fantastic. I love it, and I wonder if there was any discussion about Volkswagen saying, “Hang on a minute. We’re Volkswagen. Why don’t we just create our own marketplace?”

Peter Kelly:                        Oh yeah. Oh yeah, yeah, yeah.

John Warrillow:                If 10 developers in a room somewhere and create their own marketplace.

Peter Kelly:                        Yeah, yeah.

John Warrillow:                So how did you think through that strategic issue?

Peter Kelly:                        Well, a number of OEMs did that, right? A number of OEMs did that, yeah. In fact, one of the big ones did that initially, and part of our pitch was, “Hey, you see what this brand over here is doing? That’s going to take you two years to do, but if you sign up with us, we can have you there in three months.” Right? “So your dealers are starting to talk about that this other brand has got this offering. To get that through your IT shop’s going to take you a long time. How about we accelerate this patch for you?” So in a way it became a sales tool, in a way, or an angle. But different OEMs had different points of view, and we had to convince them. Again, lengthy sales cycle, like I talked to you about, but we were fortunate. We got some OEMs on quickly and then good reference accounts, and others saw that they were having a good experience and it kind of built on itself little by little, yeah.

John Warrillow:                So you credit this private label program really getting you through those years, the dot-com bust, et cetera.

Peter Kelly:                        Yeah, exactly. Yeah.

John Warrillow:                And of course the 20 million bucks, which is a nice war chest, as it were.

Peter Kelly:                        Yep. Yep, exactly. Yeah, and then we grew the business. I’m short circuiting here a little bit, but over say the 10-year period, which takes us up really to the Great Recession. We had grown the business at that point to about 350 employees, selling around 350,000 cars a year on our platform with, again, five or so global OEM accounts as our principle seller customers and then their franchise dealer network as our buyers. About a hundred million in revenue and profitable. That was where we found ourselves in sort of 2008. At that point, generating a positive cashflow and really kind of expanding our vision to say, “Okay, now let’s go back and do what we said we were going to do back in 1999. Now let’s take it out of this private label world and kind of go after the broader marketplace, not just off-lease cars.” Right?

John Warrillow:                Mm-hmm (affirmative), and that was 2008ish when the economy was starting to shake.

Peter Kelly:                        Right.

John Warrillow:                Peter, before we go further, let me ask you a question. If it’s too personal, you can just tell me where to go. You and your two founders were admittedly young guys, new to the United States, didn’t have a lot of money, had an idea, raised some money. But over time, you became obviously very successful. 300 employees, you’re doing 100 million in annual sales. Are you able to adjust your personal compensation such that it’s commensurate with what a market rate salary would be for someone like that? What I’m getting at is are you continually to underpay yourself all these years because you’re the founder? Or are you able to kind of true up that comp?

Peter Kelly:                        Well, there was certainly some truing up that happened, for sure, but I think there also was some element of hey, you’re in it for the-

John Warrillow:                Exit.

Peter Kelly:                        You’re in it for the payday, the exit, right, and you’re not in it to maximize your near-term compensation here. I will say just a couple of things on my two co-founders, and there were some other individuals on it in a very early stage as well. I was not the initial CEO. I became the CEO by the end, and my other two co-founders ended up moving on over the course of those 10 or 11 years for different reasons. They both went on to do entrepreneurial things. They both had other successful companies and successful exits and retained, obviously, their ownership in OPENLANE, but they ceased to have a sort of an active role at some point in the 10-year process. On your second question of the compensation, again, our board was good. That was a discussion every year. Our compensation definitely increased, but I guess when we did ultimately sell the company, my compensation sort of reset to what a public, a sizable North American company would value an executive role like mine at, right? So there was a reset at that point, yeah.

John Warrillow:                Yeah. I don’t know why it came to mind, but here you are, building this great company. I was curious to know if you were being sort of compensated along the way for it.

Peter Kelly:                        Oh yeah.

John Warrillow:                Let’s get through to 2008, the Great Recession. What was the business doing? How was it affected by that? Was that around the time that you decided to sell, or what was going on?

Peter Kelly:                        Well, I think the Great Recession was kind of a triggering event in the decision, although the timing was a little different, and I’ll explain that here in a second. Because we didn’t sell the company till 2011. Beginning of 2008, we’re feeling pretty good. Business is profitable. We’ve got all these employees, selling 350,000 cars, and we’re expanding our vision to go after a bigger opportunity. We’re actually starting to put more cash on the table, more chips on the table if you like, to go after a bigger payday. But then what happened sort of in parallel with that is the economy started to weaken, right? We could see that signal by mid-2008. We noticed we were starting to miss some numbers. Dealers weren’t buying cars at the same rate. The automotive industry is kind of an early warning predictor to some extent, because if a consumer’s not feeling confident, the first thing they’ll hold off purchasing is the next car, right?

John Warrillow:                A car, yeah.

Peter Kelly:                        So we could see something was afoot, and of course, then by late 2008 we had Lehman bankruptcies and all that sort of stuff. So we kind of pivoted on our strategy. We said, “We need to rein this in. We’re not going to burn all this cash again.” So we reined in expenses and said, “Let’s figure out what’s going on.” Then what actually went on is, if you think of retail automotive, retail automotive sales were basically cut in half by the Great Recession. They went from 17 million a year, new cars, to about 10.

John Warrillow:                Wow.

Peter Kelly:                        Then it was a credit crisis, so leasing, as a percentage of cars purchased, went from 30% to like 17% or something. So basically lease originations got cut in half or more, right? Now, that didn’t affect us right at that moment because we’re selling off-lease cars. We’re selling cars that are three years old. But I could see that our core customer’s volume, because they share with us their lease origination data so we can service their account, that their volume was going to get cut in half three years from now, right? So I could see very clearly that our business, which by and large had been growing for 12 years, was now, at least transaction wise, was going to get cut probably in half, and that was going to be a prolonged … it wasn’t going to be just for one quarter. It was going to be for a period of a few years because the recession was a deep trough it took time to come back out of, right? This created a dilemma.

Peter Kelly:                        Now we were lucky we had some advanced warning on that, right? A lot of companies had to live that in real time. We had a bit of a lag, but it made me question, okay, what do I want to do here? The two choices are ride it out, batten down the hatches, or consider strategic options.

John Warrillow:                Mm-hmm (affirmative).

Peter Kelly:                        The other thing that was preying on my mind at that point, John, was competition had increased, okay? When we came out first, we were the first mover. We were the first to market with this idea, with this technology, but ultimately some of the established players had kind of come in and said, “We can do that too.” So we were facing increased competition, and I was concerned were we going to win any more of these big global accounts? Conversely, if we lost one of them in the midst of this trough, we’d be in a world of hurt, let’s just say.

John Warrillow:                If you had five, right?

Peter Kelly:                        We had about five, yeah, and our biggest was probably 30% of our volume, 30% of our revenue. I had some concern, let’s just say. 12 years in, you have something of value, right? But you haven’t monetized it, and now you’ve got a real difficult period ahead. At the same time, we had had inbound strategic interest in the initial years, a number of players saying, “Hey, would you consider an acquisition?” I guess at that point we also had … This is where some different opinions on the board, one board member in particular saying, “You know, this is the time to take the chips off the table,” and the others kind of saying, “This looks tough, but let’s just ride it out. We’re good. We got plenty of cash. We’re good.” You know? But those things were kind of playing in, and then other factors is where is the management team? I felt the management team was a good team. They would probably back either course, but I felt they wouldn’t mind a little liquidity, you know?

John Warrillow:                Because they had some shares, clearly.

Peter Kelly:                        Oh yeah, yeah. Frankly, probably half our employees had shares, right? So there was a broader audience with shares. Then personally, 12 years in, I had a young family at this point, three young kids probably all under the age of two or something. As I said, you’ve created something of value, but it’s not liquid today, and it’s probably not going to be liquid for the next few years unless you do something sooner. You have to choose what you’re going to do here, and there’s a quote. I’m Irish. There’s a movie about an Irish band, The Commitments, and the tagline on the movie poster is, “They had nothing, but they were willing to risk it all.” Well, it’s kind of like the entrepreneur’s dilemma in a way because when you have nothing it actually kind of is easy to risk it all. You’re just risking your time and your personal capital. But when you have something that you know is of value and could change your life, but it could conceivably go to zero, that’s a tougher risk to take, right? I think that’s kind of the dilemma I had.

John Warrillow:                I’m so happy you brought that up. What a great quote, and it’s so true, right?

Peter Kelly:                        Yeah, yeah.

John Warrillow:                It’s so true.

Peter Kelly:                        Yeah.

John Warrillow:                How did your co-founders who were no longer active in the business feel at this point?

Peter Kelly:                        One of them was on the board, and he and I had a good relationship. He was, “Let’s roll the dice. Let’s go for it. We don’t need to sell.” You know? But again, he had had a couple of other successes under his belt. He had diversified his portfolio a little bit, so we might’ve had a different point of view. I’m not saying he was wrong. It was a perfectly valid point of view, and with the benefit of hindsight, maybe there was a greater value realizing opportunity. Maybe. I don’t know. We never know, but he was probably more in the camp of stay the course. But at the end of the day, the board was very supportive. They were like, “Listen Peter, you’re the CEO. We’re not looking to put a different CEO in here. Either of these choices has pros and cons. Here’s my opinion, but ultimately we want to back you.” That was kind of the situation, and actually honestly cost me a lot of sleepless nights at the time, just thinking what do I do here? Sometimes I may be guilty of overthinking things, sometimes, but yeah, yeah that was the situation.

John Warrillow:                What was on the pros and cons list for you at that time? Any of those nights you were not sleeping, what were you thinking about?

Peter Kelly:                        Let’s say the pros. The pros of doing a deal. I knew there was a party out there, like the company that acquired us, KAR Auction Services, that was a really good strategic fit. They had been making investments in their digital platforms but just not having the right sort of success with that. They could really leverage our platform. That they would buy us, and it wasn’t a question of let’s shut down everything you have and move these customers over. It was more like let’s take everything you have and shut everything we have down and move our customers to you. That was the scenario, right? So in that scenario, the idea that it’s code that our engineer’s been writing goes on, right? That the employees who are here, if they want to continue on, it’s going to be different, but they’ll have that opportunity, at least most of them, to take this business to the next level.

Peter Kelly:                        As I mentioned, this company had customers that I had been pitching for years that we could never get to make the shift, but if we did this deal, it would just because a no-brainer. We’d just migrate them across to the system, right? Financial liquidity, right? I’ll say the other thing, and this maybe gets … we’ll talk about this further in the conversation here too. I also thought, “Hey, this’ll have been a pretty good run, you know? Start a company, grow it for 10 or 12 years, sell it, exit, move on personally, do something else with some success under my belt. I’ll be in a good place. I’ll be in my early 40s. I’m probably a very marketable person in Silicon Valley with that track record.” So those were the pros.

Peter Kelly:                        The cons were, hey, giving up on this independent, go it alone kind of part of our history, right? This digital disruptor from outside the industry changing things from the outside. Are we leaving money on the table? Are we getting full value here on this price? When we started the company, frankly, our preferred exit was public company. We wanted to IPO this company, right? We felt the industry was maybe big enough to support a public company like us, and we hadn’t got to that point. I felt we were close to that, had the recession not happened. We had a lot of the fundamentals heading the right way, but that changed things. So I think it was am I giving up on something here, you know? Also, when our two venture capital investors that had been frankly so great to work with both had a preference to stay the course, I kind of wanted to do that for them, right?

John Warrillow:                Honor them? Yeah, yeah.

Peter Kelly:                        Yeah. I wanted to be that guy, in a way, but at some level the personal side of it and just saying, “You know what? I can take this outcome. What I can’t take is a zero outcome. Try to ride this out, lose a customer, have this whole thing turn to zero.” I was a little fearful of that, you know? Yeah.

John Warrillow:                I do. We’ve done almost 300 episodes, and you have absolutely the most eloquent way of putting it. So I think a lot of people feel it, but you’ve done a tremendous job of articulating the idea of going to zero, right? That it all could go to zero without much … It happens.

Peter Kelly:                        It can happen.

John Warrillow:                Yeah, yeah. So let’s get into the actual transaction itself. I’m assuming you took the business to market. Did you hire like a investment banker? What was the process?

Peter Kelly:                        The process was an interesting process. In some respects, it was fairly straightforward. As I mentioned, John, we had some strategic outreach from various parties, three or four parties over the years, right? So we kind of knew who the four most likely strategic buyers were. Certainly the three.

John Warrillow:                Mm-hmm (affirmative).

Peter Kelly:                        So the initial outreach really was through a board member. One of our board members sort of had a conversation with two of those companies, and let’s just say that out of that discussion, one of those companies sent in an LOI, sort of something for a board to react to, okay?

John Warrillow:                Mm-hmm (affirmative).

Peter Kelly:                        But I sort of stayed out of that initial part of the dialogue. At that point, once we had something to react to, we had a debate among the board, and I kind of signaled that this price was in a range that I was compared to contemplate. It was a little bit low for what I’d like it to be, but it also was a price that deserved consideration. We got an investment bank in at that point, okay?

John Warrillow:                When you say a little bit low, Peter, what sort of valuation benchmarks were you going by? Is there anything in the industry? Are marketplaces generally [crosstalk 00:35:15]?

Peter Kelly:                        Well, yeah. There weren’t a lot of public internet marketplaces, and then with our dynamics, given the fact we were profitable but we weren’t going to be trending up the next few years, this is a complicated one to value. But we looked at EBITDA multiples, revenue multiples. We looked at the established players in the industry that were public comps. They tended to be fairly low, nine, 10 EBITDA kind of multiples.

John Warrillow:                Nine times EBITDA? Yeah.

Peter Kelly:                        EBITDA, yeah. The number I think we were looking at at the time per this LOI was about 15 times EBITDA, so it’s not a bad number, right?

John Warrillow:                Yep, yeah.

Peter Kelly:                        Then if you think that that EBITDA is likely to shrink in 2012 and 2013, perhaps, maybe it was even better number. But I was kind of looking just at the absolute dollars, as well, the amount of money invested, the kind of return our investors, shareholders were going to get, the financial investors. The deal ended up being a $250 million deal, okay?

John Warrillow:                Is that right? Yeah.

Peter Kelly:                        Yeah, or maybe a shade under that, 240-something. I’d have loved if we could’ve had a 300, you know? I think a 300, I’d’ve been feeling really good about everything. But at 250 I felt, “You know what? It’s not a bad deal. It’s not a bad deal,” and that’s kind of where I ended up, you know?

John Warrillow:                Yeah. Yeah. So the original offer on the LOI was around 15 times EBITDA. You thought it was a shade low but still worth talking about, definitely.

Peter Kelly:                        Yep. Yeah, so at that point we hired an investment bank, Montgomery company. We reached out to a number of other strategics, and at that point I think we got one other formal written offer came in.

John Warrillow:                Peter, when you said the other strategics, are you referring to the other two of the three that your board member reached out to?

Peter Kelly:                        Yeah.

John Warrillow:                Or more broadly?

Peter Kelly:                        We kept a very narrow process, so we reached out to maybe three companies, or maybe four in total. Certainly three. The other reason, we felt we had to keep this very, very close and under the radar. We were a small company with these massive global OEM clients that we just didn’t want to unsettle. We had deals. We were in discussions on renewal. We were pitching new customers. We didn’t want to take any opportunity away, so we felt we had to keep this very close, kind of keep it below the radar and make decisions quickly and move quickly. But in any case, we did get a second offer, then we evaluated both offers. We decided that the first company was the most credible buyer and maybe the best strategic fit, so we focused on trying to negotiate that to the upper end of the range they had given us, which they moved to the upper end of the range. It was a narrow range, but they moved to the upper end of their range. So at that point, we kind of … We made our decision.

Peter Kelly:                        I guess the dilemma at that point, there was one other course of action I could’ve taken, which was one of our financial investors purely was interested in an exit. We had the possibility of potentially recapitalizing the company, allowing him to have his exit and have the other investors essentially buy out his share, and that would keep us … So it was do that or do the sale, and like I say, ultimately I kind of came down on let’s do the sale. Let’s do the sale, and so we signed the term sheet. Board approved the term sheet. We signed it, and then we entered a period of the purchase agreement and the diligence, right? As you know, as I’ve heard from your other interviewees, that’s an intense process, which it was.

John Warrillow:                Yeah, yeah.

Peter Kelly:                        So the purchase agreement, I recall that being quite difficult. We got into a lot of thorny negotiations on who bears this risk and potential lawsuit here, and it’s ultimately about allocation of risk and what’s market and a lot of lawyers involved. So that was a tough process. Also had to get some of the team under the covers on this to facilitate to enable the diligence to happen, so had to kind of go through that. So that took, I don’t know, 60, 90 days.

John Warrillow:                Point of interest, what was the rank and file employee, not your executives who would’ve been more involved, but the manager level person that had a bit of equity, what was their reaction when you let them know you had a firm offer?

Peter Kelly:                        Well, they did not know at this point. They didn’t know until the deal was announced, okay?

John Warrillow:                I see.

Peter Kelly:                        Again, until the definitive purchase agreement was signed, that’s the date we announced, right? We thought about how do we communicate it to the team. The management team was all in the loop at that point. We had multiple offices, so we had to kind of travel around to those offices and let people know. There was a certain amount of fear, you know? We’re being bought by a big company. Are all our jobs going away? That was the first kind of concern. That’s where everybody goes right out of the chute. I tried to reassure people, and I think it was possible to do so because I was able to say, “Listen, we’re being bought because we’re the best in the world at what we do, and this company is looking to build on what we have built here. So the opportunity to be part of the story remains for hopefully all of you if you want to take it. It’s going to be a little different. Culture might change a little bit. I’m still here. Management team’s still here, and we go on on that basis.”

Peter Kelly:                        I think by and large that was successful. Frankly, some of the functions like HR and legal, some functions got consolidated up to the corporate headquarters. But most of like our tech team stayed in place. Our customer teams, our sales teams stayed in place, and I’m delighted to say eight years on from that, so many of those people are still here and have had new opportunities in their careers through the acquisition. It’s kind of gratifying. Now of course, some left too, right? Some said, “The culture’s not for me. I like the startup, blah, blah, blah,” right? So it’s been all of the above.

John Warrillow:                What was the strategic fit? I’d be curious to know what it was with your ultimate acquirer, KAR Auction Services. Why did they want to buy you?

Peter Kelly:                        They could see that the future of the industry was digital.

John Warrillow:                What did they do, by the way? Did they do these physical auctions?

Peter Kelly:                        Yep, yeah.

John Warrillow:                I see.

Peter Kelly:                        Yeah, KAR Auction Services owned one of the two large physical auction chains.

John Warrillow:                Okay.

Peter Kelly:                        They also owned a salvage auction chain, which has recently been spun out as its own public company, and they were attempting to make that transition into this digital world. They were spending a lot of money on their platforms, and having some success, but not having the success that their investment demanded. So they felt build it versus buy, I guess, from their vantage point. Could they build everything we have themselves? It would probably take them a few years, by which stage we would’ve moved on to something different, or could they buy it? They wanted to buy, right? But actually that informed their whole thinking around the acquisition. Again, they were buying us not just for the customers but for our technology and for our people, so they wanted to …

Peter Kelly:                        In fact, they wanted our company to be part of transforming their culture. They recognized the world was changing, and I give their CEO Jim Hallett a lot of credit. He does not have a digital background himself, but he is an entrepreneur. His history is one of entrepreneurship, and he could see this world was changing and how does he get this large company that he commands to change with these times? He felt, “Let’s do an acquisition like this to catalyze that change in my company.”

John Warrillow:                Fantastic. If we go forward, were you as part of this being asked to stay on? Was there a kind of an earn-out component?

Peter Kelly:                        Yeah.

John Warrillow:                What was your personal sort of position in this?

Peter Kelly:                        Yeah, so that’s a good question. I mentioned Jim Hallett, the CEO. So in the diligence process, Jim and I met for one day in Toronto, where you’re living right now, at the airport.

John Warrillow:                Ah.

Peter Kelly:                        At the airport there in Toronto we met for a day, and I remember Jim saying at the time, “This is the only piece of diligence I’m doing on this deal.” He wanted to spend a day in the conversation with me, and he basically said, “Peter, are you going to stay the course on this deal? We’re buying the company for the people. You’re the person in charge. Are you in or out?” And I said, “Jim, you can count on me to make the deal a success for your company.” Then to be clear, I said, “What that means, Jim, is you can count on me for two years. You can count on me. I’m going to work hard. I’m going to make this a success for at least two years, and then we’ll see what happens.” Right? That was kind of a handshake agreement, and then coupled with that, Jim decided, which I appreciated, was it put me on the management team of the company as a direct report to him, kind of the digital guy on the management team, right?

Peter Kelly:                        So I’m in at a high level in a public company, and obviously threw a lot of stock options and stuff my way to kind of make it financially interesting as well, and reset the comp and all that sort of stuff, right? So that was all part of that deal. So then what happened, I went home to my wife and said, “Two years, I’m out, okay?”

John Warrillow:                We’re on the beach, honey.

Peter Kelly:                        “We’ll take a trip around the world and we’ll figure out what to do after that.” So what exactly happened is we got the deal done, and we all got busy with the next chapter and started integrating these platforms, migrating these customers. Business volumes came back. We got through that trough. It seemed like a long time looking ahead. From the rear view mirror it looked like a blip, and our business started growing like crazy again, right? I also found, hey, I’m enjoying this. This is a big company, but when you’re at the management level of this company, it feels like a small company. You’re in with the executive team. You can make decisions quickly. It’s a pretty entrepreneurial place. I’m actually having fun here, right? I will say, John, I attempted on a few occasions to step back a little bit and say, “Let this baby walk by himself,” you know? But I always find I wanted to jump in and catch it, right? I felt it would do better when I was there, so I could see that I was adding value.

Peter Kelly:                        Frankly, the stock options. The company KAR did very well, stock wise, so those became … It became kind of golden handcuffs, in a way, for a period of time, like, “Wow, I could invest a lot more money if I stay one more year.” All that kind of stuff. So it all played a role. But I think at some level, the experience of continuing the transformation of the industry, working with a group of people that I enjoy in an industry that I’ve now 15, now 20 years experience of. Maybe I just got to sign up that I’m a used car guy. Maybe that’s who I am at this point.

John Warrillow:                That’s what the headline of this episode is going to be. Peter Kelly, the world’s greatest used car salesman.

Peter Kelly:                        But anyway, all of these things, and not walking away from the financial side. I’m not walking away from the financial side. But yeah, it’s been a journey. I had to go back and tell me wife, more than one occasion, that … We still went around the world. We made it a three-month trip not a year trip, so you know. But it’s been fun. It’s been fun.

John Warrillow:                Do you mind sharing with our listeners where you are and sort of how long you’ve been there? And I’d be curious to know how your wife’s feeling about that because that’s obviously a big change for your family.

Peter Kelly:                        Yeah. What ultimately happened is I ended up taking on the role of president of KAR, okay? So seven years later …

John Warrillow:                The company that acquired yours.

Peter Kelly:                        The company that acquired us, yeah. To put it in perspective, KAR, public company. We got about 15,000 employees. Selling about 3.5 million cars a year with about 2.5 billion in revenue.

John Warrillow:                Don’t screw it up, man. That sounds like an important job.

Peter Kelly:                        Fair enough. Fair enough. Talking to Jim, I said, “Figure out a succession plan that doesn’t involve me.” But at the same time, between Jim and the board, this opportunity presented itself. And when faced with it, I thought, “You know, I’m going to regret if I say no to this. How often am I going to get this opportunity to run a company like this in an industry that I know with customers that I know with a team that I like? Now, that’s going to involve having to move my family and my wife, so maybe let’s go and have that conversation.” So we did that, and I guess the net result of that is we’re out here in Carmel, Indiana and we’re-

John Warrillow:                You must be a good salesman.

Peter Kelly:                        Well, I will say I’m greatly appreciative of the support of my wife. She is really taking one for the team, to some extent, and putting her career and opportunity secondary to mine, but hopefully also the kids are at an age where hopefully it’ll be good for the family too. So that’s the process we’re going through, but yeah, we’ve relocated. No longer a Silicon Valley guy, and out here in our beautiful new head office in Carmel, yeah.

John Warrillow:                Well, real estate’s probably a little bit more reasonable, I’m guessing.

Peter Kelly:                        A little bit for your money out here, that’s true, yeah.

John Warrillow:                Yeah.

Peter Kelly:                        Yeah.

John Warrillow:                Yeah. I just can’t thank you enough for being so candid and sharing so many stories. Is there kind of an ask or a place that you’d want people to go. I’m sure people are going to want to kind of connect on LinkedIn. Are you active on LinkedIn? What’s the best …

Peter Kelly:                        Yeah.

John Warrillow:                Do you want to send people to a website?

Peter Kelly:                        Well, I am on LinkedIn. Peter Kelly is the name. If you look up Peter Kelly, KAR Auction Services, you would probably find me on there. Then the company is KAR Auction Services, that’s with a K. So if you’d go to, or the stock ticker is KAR, New York Stock Exchange. You’ll find plenty of information about our company there. But yeah, any of those. Any of those.

John Warrillow:                Great. Well listen Peter, it was great to meet you. Continued success. We’ll be watching from the sidelines to see how the KAR business continues. Appreciate you taking the time.

Peter Kelly:                        Thank you, John. It was great talking to you also. Have a great rest of the day.

John Warrillow:                Yeah, you too.

Peter Kelly:                        Thank you.


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