Start-Up To Ferrari In Five Years

December 6, 2019 |  

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Zain Hasan started an insurance agency called National Insurance Consulting Group (NICG), in 2014.

To read a transcript of this episode, click here.

Zain Hasan started an insurance agency called National Insurance Consulting Group (NICG), in 2014.

By 2019, Hasan had built NICG to more than $2 million in revenue, earning him a spot on the Inc. 5000 list of America’s fastest-growing companies. Hasan figured his company was worth between 6-8 times Earnings Before Interest Taxes Depreciation and Amortization (EBITDA). Given the consolidation happening in his industry, he decided it was time to sell.

Hasan received eight offers and agreed to one that paid him 85% of his proceeds in cash and the remaining 15% in shares in his acquirer, Risk Strategies Company. In this candid conversation, Hasan shares:

  • How he got comfortable taking 15% of his money in shares in a private company
  • Why he would use a 12-month “cliff” in a stock vesting schedule for employees and partners
  • How big companies use the magic of accretion to ensure they virtually never lose when making an acquisition
  • One surprising way to figure out the right time to sell
  • The tasty little pearls that should be in your Confidential Information Memorandum (CIM)

To celebrate his exit, Hasan bought himself a Ferrari, which he proudly drove to his father’s house to share the news of the sale of his company. What trophy will you buy yourself to celebrate the sale of your business? We’ll brainstorm that together in module 12 of The Value Builder System – get started by completing module 1 now.

Our guest

A serial entrepreneur, Zain Hasan focuses on the Client's viewpoint and identifies solutions to business leaders biggest challenges. Initially through his employee benefits expertise, Hasan set out a mission to fix the broken healthcare system by re-engineering the supply chain & removing the conflicts of interest inherent in the health insurance brokerage industry. Now as a Managing Director at Risk Strategies Company, Hasan is focused on bringing the market leading expertise in every practice area to enable enterprises to reduce their total cost of risk and outsource all risk management activities.

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Transcript

John Warrillow:                So have you thought about what you might buy yourself after you sell your company? I mean, I don’t want to debase selling your company into some monetary objective, making it all about the money, but I do think it’s worth thinking about what trophy you might buy yourself to commemorate your success. I mean, it can take a lifetime to build a company, and it’s important that there’s something on your desk or in your driveway or something you can point to as a physical manifestation of the success you’ve achieved. And my next guest, Zain Hasan, took that to heart. He went out and bought himself a Ferrari. Now you don’t have to buy yourself anything quite so outlandish as a Ferrari, but you should do I think something to really remember what you’ve achieved. Could be a trip, could be a volunteer experience, could be just something that you will always remember to commemorate that success you’ve enjoyed. And my next guest did exactly that.

John Warrillow:                He started a company called National Insurance Consulting Group or NICG in 2014. Built it up to a couple million dollars in revenue good for a spot on the Inc 5000 list of the fastest growing companies in America. When he figured the company was worth in the sort of six to eight time EBITDA range because there was a lot of consolidation going on in his industry, he decided that the time was right to strike. And he sold his company. Couple things to be on the look out for in this episode, listen to how he got comfortable taking shares as a currency for part of the sale of his company. Listen also to the mistakes he candidly admits to in giving equity to an employee and how he would use a cliff in future if he was going to share any equity or options with a potential employer partner. You will also hear him describe the effects of accretion or when a big company buys a little company, they can almost never lose because of the magic of accretion, and he’ll talk a little bit about that. It’s called an accretive acquisition.

John Warrillow:                He worked with a business coach and really found out a nice calculation you can use to figure out when the right time to sell your company is. He’ll describe that. And finally, he’ll share a few little tasty pearls of wisdom that should be included in your confidential information memorandum or CIM, which is the document you’re going to use or your M&A professional will use to sort of merchandise and sell your company. Here to tell you how he did it is Zain Hasan.

John Warrillow:                Zain Hasan, welcome to Built To Sell Radio.

Zain Hasan:                        Thanks, John. I appreciate it.

John Warrillow:                Yeah. So you were in the insurance business.

Zain Hasan:                        I was.

John Warrillow:                Yeah, you were. Tell me about the business that you started was sort of in employee benefits, is that right?

Zain Hasan:                        Yeah. So it’s really if you think of insurance brokers, which I know is not the most boring. I mean, it is the most boring probably industry most people even think of. But it’s something everybody needs. Everybody needs insurance. My specialty and background was I went straight out of college, worked at Cigna Healthcare, and I was working with companies that were working with brokers but working with companies that were between 25 and 250 employees. And essentially it was around the time the Affordable Care Act had come out. So there was a lot of questions, a lot of employers didn’t know what to do. And there were I had sort of noticed being in Cigna there was this misalignment of interests, meaning an insurance broker, the healthcare cost continued to rise year over year. It started becoming an event for most business owners. It’s certainly a challenge as an entrepreneur to afford health insurance. And the insurance companies and the broker, the broker’s compensated based on whatever’s good for the insurance company, not necessarily what’s good for the client.

Zain Hasan:                        So I spent four years at Cigna and then two years at Guardian so I could learn everything I could about the industry, and I went looking everywhere for a business model that really aligned to the employer where the compensation for the broker was on what’s the best interest for the client, and there weren’t any. So that’s what I did. I created my own firm. It is an insurance broker, but it’s called a consulting firm because we don’t get paid like a broker.

John Warrillow:                So yeah, what was the business model? How was it unique from a typical brokerage?

Zain Hasan:                        Sure. So a typical broker would be call it let’s say it’s 5% of the healthcare premium. So as healthcare costs go up, the natural incentive for that broker is to allow it to go up because that’s how they’re continuing to get raises. Our model was we’re going to do a per employee per month fee. And we won’t take commissions. It will be a transparent fee. So now that actually gave us the initiative and desire to say not only are we not aligned increasing your costs, we also didn’t accept bonuses. Bonuses were a huge amount. So there’s bonuses based on the profitability of your clients, which if you think about it as an entrepreneur business owner, you don’t want to be profitable to an insurance company. But the broker, their job is to make it profitable and then they’re driving more volume. So we didn’t accept those bonuses. Our whole model was to really transform an insurance brokerage to make it to where we wanted to be a consulting firm, but the model was that we wanted it to be recurring. And we figured if it was based on the employee count, as the business grew, then we were could to grow recurring revenue. So we had a flat per employee per month, and that way they knew we have no incentive to drive their costs up.

John Warrillow:                Got it. So I don’t know anything about the insurance business. But my guess is that given that it was a flat monthly fee, it benefited you to keep the premium or to keep the insurance with the same provider so you didn’t have to do all the paperwork of… Or am I getting it wrong? Was there kind of an incentive to switch and shop it around every once in a while?

Zain Hasan:                        So that’s a great question. Our whole thing was today we look at insurance and if you think about insurance, you just sort of… I’ll use the auto insurance example. You pay and you got your deductible. But if you actually use your deductible, then your premium goes up. So what we were doing is what’s called, what I’ll call the fully insured model, meaning you’re buying insurance. And then there’s alternate funding or self funding, which sort of came out with companies that are 50 employees and up. Our specialty was that. And the reason was it was really… What we’ll look at, you think of as the supply chain of how healthcare is delivered. Well, that’s the misalignment I described at the broker level, it occurs at every level of how healthcare is delivered. And healthcare costs continue to rise. That’s a deeper conversation I don’t want to take them too far into the details of that.

Zain Hasan:                        But our model is to say we can help businesses go from paying insurance companies, and we’ll call it liquid operating expenses to not only reducing the cost but they can retain and turn that into where that becomes immediate cashflow. It’ll drive EBITDA because we’re actually driving, and we’re making a more efficient healthcare plan. We’re not usually just keeping up with the same carrier. In fact, we almost always change the carrier. And we’re developing a three year or a five year roadmap where we want to get them to be at the end because instead of year over year increases, our model typically driving about a 3% to 5% reduction year over year.

John Warrillow:                Carriers must hate you guys.

Zain Hasan:                        They don’t love us. That’s for sure. Candidly, a big part was we didn’t go onto a bunch of shows to say our business model because I do know two other people that operate similar. Once I did my business, they created businesses similarly. And the carriers wouldn’t pay them even though they had revenue, they had accounts. But once the carriers found out what their destination was, which was we call it to try to get them freed of the carrier. Then if they found that out publicly, we had to kind of keep a low radar because there’s 3.2 trillion, that’s 18% of our GDP spent on healthcare. There’s a lot of power in making sure things don’t change if they don’t want it to.

John Warrillow:                Yeah. For sure. So you did something quite interesting as I understand it, and you hired a chief operating officer. Can you talk a little bit about what triggered that decision and sort of what stage of the lifestyle you were at?

Zain Hasan:                        Yeah. So absolutely. So I started the business, and when I started it, it was bootstrap. And my first 82 meetings were rejections. So-

John Warrillow:                Meeting with who? Companies.

Zain Hasan:                        CEOs. CFOs. It was actually executive meetings where I was there to talk about the value we could provide. And I was by myself. I had my executive assistant who’s early on. And I think I overestimated how easy I assumed it would be because I wasn’t in the broker role. I was really working at Cigna at the carrier side. But I was joining the broker on a lot of their presentations. The part I didn’t see is how you build rapport, how did they get to that meeting. Because I was doing the presentation and helping them win cases, so I assumed that must mean it’d be easy for me to start that business. That was a big lesson, it was not easy at all. I think probably at rejection 42, I probably would’ve been ready to throw in the towel. My wife actually was the one who said, “No, keep going.”

Zain Hasan:                        My 83rd employer, the reason I hired who was the New York Times Chief Revenue Officer, and it was randomly how we got connected. But he knew someone who I knew, and essentially I just solved a payroll problem for a 3200 employee company. I found them a vendor, nothing to do with healthcare, and he reached out to me. And he was interested in how I solved that problem. I saw that he was the Chief Revenue Office of the New York Times, and I was like, okay, I feel like the biggest issue I have is, at the time, I was 27. I’m talking to employers and saying, “Trust me with your $8 million of healthcare spend.” So if I had someone that had 20 plus years. He was a West Point grad who could help… It didn’t even matter if he had knowledge of insurance because I knew everything that there was to know at the time about insurance. But I needed that credibility that comes with having someone that shows experience. So I had him come in, and our 83rd meeting was very deliberate where I had a staffing company business owner interview him. And she became my first client, which was a quarter million in revenue and 450 employees.

John Warrillow:                And so I get the idea of having gray hair. So he actually, this Chief Revenue Office of the New York Times actually joined your company as an employee, is that right?

Zain Hasan:                        Yeah. As a partner, yeah.

John Warrillow:                As a partner. Okay. And how did you guys work out the economics of that? He was obviously giving up a lot of salary and potential earnings. How did you figure out the value he was bringing and what slice of the company he would get?

Zain Hasan:                        So that’s a great question. In my personal experience, I should’ve done a lot more thinking about that because when you start, you think or I was thinking, “I just need revenue. My company’s probably not worth much.” The model was he was actually generous enough that he said, “You don’t have to agree to it upfront.” He came down. He was from New York. He came down to visit. We closed that deal that day. For him, the quarter million dollar first account, that was his first day meeting me. And I shrugged off my shoulders like it wasn’t a big deal. It was a huge deal. I drop him off at his hotel, and I’m like, “Don’t go.” He was going to leave the next morning. I said, “Don’t fly out tomorrow morning.” He was like, “What do you mean?” I was like, “Just stay for another day.”

Zain Hasan:                        I called the client, my new client, and I explained to her because she really wanted him to join the team. She liked him. And that was like I think everything went well. Can you refer me to anyone? She sent out nine referrals the next 30 days. He didn’t go back home for 30 days, and we wrote eight of those nine accounts.

John Warrillow:                So did he give up his job before he came down to pitch you that day, gig?

Zain Hasan:                        So actually he was the Chief Revenue Office of the New York Times about six weeks before him and I had first connected. From that point-

John Warrillow:                So he had left-

Zain Hasan:                        … retired, essentially. That was his plan was to retire.

John Warrillow:                Got it. That’s helpful for sure. So how did you go back? How did you figure out how to slice up the equity of the company? What he would be getting-

Zain Hasan:                        He actually made a recommendation 15%, and there wasn’t a vesting schedule. I won’t say I would’ve changed the 15% as much as I would add a vesting schedule to make sure it was earned.

John Warrillow:                For folks who don’t know what a vesting schedule is, describe that for folks.

Zain Hasan:                        Sure. So a vesting schedule would be if I’m trying to make sure that someone who comes on provides real value, and upfront, it’s really hard to get to know how well you know a business partner until you’re in the trenches with them every day building a business. So a vesting schedule, what I see typically from studying, personal studying, was that the norm was it’s called a 12 month cliff. So your first year, if I’m offering 10% let’s say, with a 12 month cliff, that means your first 12 months you’re not going to get equity. Once you hit month 12, then you get your first… So it’s a four year vesting schedule, 10%, 12 month cliff. So your first 12 months, you now have 2.5% equity, and then you can vest monthly or vest annually, meaning you’re gaining more equity each month at that point. The cliff to me is the most… In my lens, is the most important part because it gives you that 12 month window where let’s say everything on their resume looks amazing and their background looks amazing. But you find out when you’re in the trenches and you’re in there and they’re not carrying the weight, you’re trying to talk to them. It just doesn’t seem like it’s working out. You haven’t already given them equity. So it sort of gives you that trial time period to actually work with them.

John Warrillow:                How did you learn that lesson? In this case, it doesn’t sound like the New York Times guy stuck around very long.

Zain Hasan:                        That’s right. He didn’t. But I actually learned that lesson more so when I was looking to… I was always reading a lot because I went from starting… I went from corporate as a sales rep to a founder, which is a big change, and I knew I didn’t know leadership. There was a lot I didn’t, in my lens, I didn’t know. So I was trying to read, and I was looking up raising capital. I read a book called Venture Deals, and in that book, it actually talked about vesting schedules and the concept of just in general about the entrepreneurship and why those work. And I think part of it was also when he asked me the question of how I was going to lay out equity, I started to Google, “How do you lay out equity with a co founder or with someone in a startup.” And it typically led me down different vesting schedule dialogues. I didn’t have a good coach or mentor at the time.

John Warrillow:                Give me a sense of how big you got this company before you decided to sell. Whatever metric you want to use for size, revenue, or profit, or number of employees, whatever.

Zain Hasan:                        Sure. I’ll just use revenue. I mean, because our first, it was a pretty fast ride. I found it in July of 2014. We were acquired in July of 2019.

John Warrillow:                Wow.

Zain Hasan:                        So it was literally five years. It was first year, no revenue, no clients. But then second year… I don’t know the exact year over year, but here’s where we ended. We were essentially at $2.3 million in recurring revenue. And in 2019, we were number 667 on the Inc 5000.

John Warrillow:                Fantastic. That’s phenomenal growth, especially starting from scratch, right? You’re totally starting from the beginning. As you look back over that five years, would you point to any one kind of inflection point or any one strategic decision that you made that you think made a huge difference?

Zain Hasan:                        Yeah. I’ll point to it. There’s a number that I made and didn’t make that could have led to huge differences. I would say a big aspect was I had this fear at this point because once we had built up… The Chief Revenue Officer of the New York Times, him and I had built up a client base. I had this fear what it’d be like doing it alone. And so the moment he came, I remember he came in and he was like, “I’m not adding any value. I don’t feel like this is where I should be.” And at that time, I was so concerned about whether or not… because I hadn’t made a real sale on my own if you think about it. I had 82 meetings. My 83rd, where he was there, first client. He was there.

Zain Hasan:                        So from that first year, all the revenue, I was associating a lot more value to his presence. That whole concept of being able to… A lot of it was if I would to go back, I would say I would have more meetings where I was not bringing him. But it would give me the chance to say, “Okay. He’s got a lot of experience doing meetings. Let him give me feedback and kind of coach me in the process and not rely on the longevity.” Because we didn’t know each other well enough, and I would also say I would’ve asked him, what is his long term goal out of this because that was one of the things it just went so quick in looking for a solution because we were really in pain in terms of financially. We were either bankruptcy or finding a client. And if we didn’t find a client, we probably had 90 days left.

John Warrillow:                Why would you have asked him about his long term goal?

Zain Hasan:                        It would’ve helped me get a better understanding upfront as to what kind of equity stake somebody should have and how I should look at it. Are they going to want to learn insurance? Are they trying to build something that’s long lasting, that’s really going to last, and be a big enterprise? That was my goal. I wasn’t building it to sell. But that’s a lot of those questions weren’t asked in the beginning. I just didn’t have the business maturity at the time.

John Warrillow:                What did you come to learn about his motivations?

Zain Hasan:                        So I think his motivations were pure. He saw there was a lot of value being added, and still, we’re very close today. I think he’s a good guy, and genuinely, he saw I didn’t need him. He saw there was a burden. He was very expensive, and he saw it was costing me a significant amount of money. From his lens, he sat me down and he said, “You’ll get someone for the same price that you’re giving me that has significantly more experience.” And when I look back on the now, I think he’s right. But at the moment, I felt like I was crushed. I didn’t know how we were going to move forward. You do go forward. In my experience, you do go forward. It didn’t feel quite… It wasn’t as fun, and I sort of realized a big part of my journey is I do enjoy having someone in the trenches with me.

John Warrillow:                That’s interesting insight, for sure. So you say you weren’t building to sell. You’re only five years in and having a really nice growth trajectory. Made the Inc 5000. What triggered you to want to sell?

Zain Hasan:                        So I actually had been approached. Our industry, the insurance industry has a very, especially the insurance brokerage industry has a big gap because millennials don’t want to join. At least the studies show that the millennials don’t want to be come insurance brokers.

John Warrillow:                That’s interesting.

Zain Hasan:                        So with that, there’s a lot of Baby Boomers that are retiring, and there’s a huge gap of not only skilled workers but there’s a huge gap of future roles that no one knows when those are going to be filled. So multiples, private equity sort of really jumped into this industry about the same time, about a couple years before I started my firm. I didn’t know that. I started my firm because it was what I knew I could add value to businesses. And I wanted to add that value to businesses. But with the multiples coming in, I got approached by a public company in roughly my third year, and they had made an offer. And I turned it out. And the reason I turned it down at that time, I did have a coach and a mentor at that time. And they had said, “If you get an offer for your business,” this was their advice. “If you say no to that offer, think of it like you’re taking a loan out,” because I didn’t come from money. So it was really self built completely. So they were like, “You’re taking a loan out from the bank to buy your business for that price. If you would do that, then it’s okay to say no. But if you wouldn’t do that, you should really think about that offer.”

John Warrillow:                That’s a neat analogy. I never heard that before.

Zain Hasan:                        So there was a time period where at the beginning, I was ready. I turned that down, and I still wanted to keep growing. Two years later, I had started another business, which was an HR outsourcing, HR technology. Essentially outsource payroll, outsource benefits, all of the side of if you think of an ADP or a pay loss or HR technology companies.

John Warrillow:                Sure.

Zain Hasan:                        Typically as an entrepreneur, in my experience, I hired my executive assistant. I asked them to become my HR director. I asked them to run payroll. And next thing I know, they know everything about how much everyone’s making, and it’s pretty easy for them to come up and ask for additional income. So part of that, which this is a real story of what happened to me, and they’re a valued member of the team. But the income request was certainly much higher than what I was comfortable doing. I was like, “Man, I wonder how many other businesses, business owners, other entrepreneurs deal with this because this is an issue. It’d be so nice to have some outsourced company who does payroll really well,” because it’s not fun to do and the ROI didn’t feel like it was entering payroll data. And that way I didn’t have to worry about anyone seeing how much everyone was getting paid.

John Warrillow:                So this is the genius behind this new business, which was taking your eye off the… Not eye off the ball, but certainly spreading yourself thin. Go back to, if you wouldn’t mind, the original offer. Can you talk about what the offer was either an aggregate amount or on a multiple of EBITDA?

Zain Hasan:                        Absolutely.

John Warrillow:                What were they offering?

Zain Hasan:                        That offer would’ve been essentially five times EBITDA, and it would’ve been the concept of what they were really looking for is it would’ve been with five years later, I would’ve gotten a multiple of revenue growth because they were saying I’m growing. They wanted me to run a local office, and the biggest aspect for me was I had just hit growth. So I didn’t see that as attractive or not attractive. It was like I can’t think about selling right now. There’s so much I want to get done.

John Warrillow:                So to clear, they were offering you five times EBITDA for the EBITDA that you had, that you were creating at that time, and then what was-

Zain Hasan:                        It was the minimal. Just so you know, the EBITDA was very low. It would’ve been pro forma EBITDA, meaning they would have said under our ownership, what would your EBITDA look like? And then taken a multiple of that, which is certainly much larger than my real tax return net income. And feel free to ask me, I know for a lot of people it’s not the this is the normal language. I have this language because of what I went through about pro forma, EBITDA, and I’m happy to explain it in more depth. But the bottom line when I look at the number, when I was looking at the number, I was like it wasn’t a big number because we were in growth stage. So I was investing and growing. We weren’t very profitable.

John Warrillow:                Okay.

Zain Hasan:                        Not in year three.

John Warrillow:                Got it. So it was a relatively modest amount of money upfront, but it sounds like there were some future payment that I’m not clear about. So they not only were going to pay you five times pro forma EBITDA but there was some future payment. What was that tied to?

Zain Hasan:                        So that would’ve been tied to there were a number of hurdles. If I hit a certain amount of growth, then I could achieve different ratios of what a multiple of revenue would have been. So saying, “Okay, you grow…” Because they looked at it like, “You’re doing sales. You’re building your client list. If you can build your client list, instead of making the investment upfront,” because what they were looking at is they’re saying, “We believe long term we’ll make it appealing enough where,” in their minds, they’re like, “That way you’re not feeling like your forfeiting the future.” So they were laying out a if you hit these certain hurdles, you’ll still get paid really well in the future. At that point and time, I was… Even though the difference between three years and five might seem like it’s not that big of a difference, but I think when you’re…

Zain Hasan:                        For those that are entrepreneurs, when I was in there every day, it felt like I was learning more than corporate would’ve taught me in a month because I had eight job titles that I was wearing that weren’t formal. At that time, I had two employees, we were three people. So small number of people. When we sold, I had six. So it was not a huge… My other company, the HR outsourcing company, had eight when my insurance agency had six. So just in terms of the revenue per employee, we were significantly larger on the insurance agency. And by our fifth year, our profitability, our EBITDA pro forma was significantly larger.

John Warrillow:                Got it. Got it. So that’s helpful in terms of why you turned down the first offer at that sort of stage. And I also understand why you were tempted to sell because you had this other business on the side that was growing quickly. What made you proactively get on your front foot and start selling the insurance brokerage?

Zain Hasan:                        Yes there was. So there was a point where I had a sold a number of clients, and I had to replicate and truly scale. And I was focused on scaling meant I had to find a way to train a sales force. So I had my first sales rep that I had hired, and I was trying to train that sales rep and sales. I realized through the experience and extremely credentialed. I actually had the experience of being a sales rep, a sales leader, and a sales executive. But benefits is a, it’s almost like from my lens, it’s almost like it’d be an engineer. You can be an engineer. But if you’re going to go sell the services, then you have to understand… To sell it and sell it well, I mean, these are usually multimillion dollar expenses. So they’re not done. The sales cycle is about 18 months for a new client typically. So it’s not done in a very short period.

Zain Hasan:                        You’re asking them to fire someone they currently typically like, their insurance broker, in order to hire you. And to get that done where someone else can feel comfortable being able to do it, that scale, scale was going to be when I could actually get sales reps out there so I wasn’t having to do all the selling. And when I realized that wasn’t viable, that deals weren’t going to get sold without me, I started to look for people in the industry. All of them that were very talented owned their own business or had sold their own business and that’s the point. So I sort of reached this point of understanding this business, the insurance agency was only going to grow as large as I could personally sell and my team could maintain.

John Warrillow:                And that’s of course going to hold you back in terms of the value of your company in the eyes of an acquirer because they realized they got to bring you along with the deal. Is that right?

Zain Hasan:                        That’s right. That’s right. And that’s why there are no deals that… So realistically, the concept of what I would have loved to have done was say you built a company that it’s acquired and you don’t need to go with it. But that isn’t how the model worked. It was the deal I accepted, and I hired an investment banker and went through the full process, an auction. And in that process, none of the deals, we had eight LOIs. All eight required that I stay on.

John Warrillow:                What did you think? Okay, that’s helpful. I want to dig into that in a moment. What did you think the company was worth? So more than a couple million dollars in revenue, profitable, growing. Did you have a sense of the range of multiple you thought you might be in?

Zain Hasan:                        I did. So I done a lot of research. There were some organizations and investment bankers that are very specific to this industry. So I knew that based on our size and based on the young demographic is a huge attractive factor where they apply a higher multiple. If the sale-

John Warrillow:                Younger demographic of your employees or of the company’s-

Zain Hasan:                        Of the guy making the sales. They call it the producer or the rain maker. So if it’s a young producer, that means that their tenure of being able to bring them onboard, they’re likely going to have a much longer career. So the multiples, what I was looking at were between six and eight times pro forma EBITDA. That’s where I was informed that that’s what I should be expecting.

John Warrillow:                And when you say pro forma EBITDA, can you just clarify what you mean versus… Of course, EBITDA, for those who may not be familiar with the acronym, earnings before interest, taxes, depreciation, and amortization, which is the expression of profit before tax. What do you mean by pro forma EBITDA?

Zain Hasan:                        So I mean if I looked at the call it immature… We were running business on an immature… We didn’t have a CFO. So if we’re looking at the financials, and I was looking at my annual tax return and it said net income of 600, then it’s a matter of… Okay, I’m running my business sort of a lot of personal expenses through it. So take all of those expenses that are personal, and apply it with the mentality of let’s say I’m not the owner of this company but the revenue’s continuing. So someone else now owns this company. What expenses are still going to apply?

John Warrillow:                Got it. And then we’ve talked about-

Zain Hasan:                        … then subtract those out.

John Warrillow:                Okay. We’ve talked about that on the show as adjusted EBITDA, and it sounds like it’s the same thing.

Zain Hasan:                        So yes, that would be the almost exact same thing.

John Warrillow:                Got it. Got it. So take me through the process. You hired an M&A professional to take the business to market, someone who specializes it sounds like in insurance agencies. What was that process like?

Zain Hasan:                        So there were two big ones. I called both. One was much larger.

John Warrillow:                These are the two big ones meaning the two M&A firms.

Zain Hasan:                        Two investment bankers. Two M&A advisors. So it was at the point where I had already reached out, and I had peers that had sold their firms. So other insurance agency owners that had sold. I had heard and looked up in private equity. It was insane the amount of private equity firms that had entered into this industry. I mean, every big name I’d ever heard of and the amount of transactions that were occurring where four or five years earlier the actual value of a firm would’ve been about 30% or 40% what the value was when I sold, and they continued to rise.

John Warrillow:                Wow.

Zain Hasan:                        To me, that was just a matter of luck. When I started, I wasn’t starting knowing I was going to sell the business or knowing multiples were going to go up. But it was going up really rapidly. So it became where I was hearing from everybody I was talking to that was I guess you could call them competitors. But it can be a friendly business, especially out of state areas and a lot of my clients are out of state. So I was hearing from most of my peers had sold their agencies. So I was asking them why. Why are you selling your firm? And their explanation was the multiples were so high that… And they had usually been in business significantly longer, third, fourth generation businesses.

Zain Hasan:                        They didn’t feel like succession planning or really there was a way to get a value internally that would compare to a third party or whether it’s private equity. The investment bankers, the M&A advisors, they explained there’s a couple tranches of buyers that are in this market. The public buyers, then there’s the giant public companies. Then from there, it would be the billion plus. So they are private equity backed, but they’re a billion in revenue and up. So the stock was a little less risk would be the concept of that. And then there was the private equity, which were under $500 million in revenue. So stock would have an opportunity and was typically growing at about 15% to 20%. So a lot of these agency owners were saying that they felt they couldn’t grow their firm anymore at 15%, 20%, and they sold because the private equity firms were continuing to grow.

Zain Hasan:                        And they were growing because if you think of this model, and I’ll just use an example. The publicly traded markets, they’re actually selling at… The values are between 12 and 17 times EBITDA. So if you think of the concept of just aggregating a bunch of insurance agencies, and let’s say you’re buying it six to eight. So the value of my firm would’ve been or was. If they can do it and go large enough in IPO, they know that that’s going to drive a significant ROI for everyone, including the investors, and that’s the investment thesis, that’s the model and the reason they do it. From my model it was because I had this very distinct other business, but we had almost 90% of our clients were clients of both businesses.

John Warrillow:                I was going to ask you, is there any crossover between clients from one business to the next? And so how did you handle that piece with perspective buyers?

Zain Hasan:                        That was definitely the most challenging aspect. I started when I talked to the M&A advisor, and I said, “I want to lay out one thing.” And I told both of M&A advisors [inaudible 00:37:56] yet. I said, “I have this other business. I’ve invested a good amount of what would’ve been my take home money into growing this other business. It’s not for sale.” So I asked them, I was like, “Before we even start this process, I need to know is that going to be a barrier.” And I had all these thoughts in my mind. I really thought about the concept, and my wife was encouraging me to move on. So this is life changing, don’t do this without thinking about it. So I really thought about it, and I was like, “Okay. If I’m going to do this, it has to be where the offer lays out that I can still own that other company.” From my lens, it wasn’t the end game I was hoping for. So I was like, I want to see this end game through this other business. And I saw that almost every client I sold was becoming a client on the other platform.

John Warrillow:                Got it.

Zain Hasan:                        I saw that as a much bigger opportunity if I could get… This is my mentality. What if I get a giant acquirer to acquire the insurance agency? And then in that process, every client and every other insurance broker that I would have as colleagues can sell the solution that my HR outsourcing business company provides. And when I said that to the investment banker, I was very confident, and I said, “We don’t have to sell my company. But if we’re going to do it, that’s the only way we’re going to do it.” And one of the investment bankers said, “That’s not going to happen.” The other investment banker said, “No problem. We’ll make it happen.” So it made it pretty easy to choose between the two investment bankers.

John Warrillow:                Got it. So you got yourself an M&A professional. What did they do that surprised you in the way they positioned your company? What sort of magic did they pull out of a hat to sort of position you in the eyes of acquirers?

Zain Hasan:                        If you were to ask me to put together what they put together this, they call it a CIM. A CIM. I’ll call that-

John Warrillow:                Confidential information memorandum. Yup.

Zain Hasan:                        That’s it. I’ll call it an investor deck because there’s a presentation of the firm. When I read through that, I was like, “Oh my god. This looks amazing.”

John Warrillow:                Where do I invest?

Zain Hasan:                        Exactly. And I would never have been able to put that together because that was… Yes, it was them asking questions that they understood the market. They’d done 116 deals in that prior six months. And that’s all in insurance. They only do insurance.

John Warrillow:                What was it, Zain, in this CIM as you reflect now with some time under the bridge, water under the bridge, what was it in that CIM that you were so impressed by? What section? Specifically what did they say or do that made you think, “Man, these guys are good.”

Zain Hasan:                        So the big part was non-generational meaning it didn’t come… Money wasn’t handed to them. And it was truly self built. The age, and then the year over year. So year over year what they consider great sales for a insurance sales rep or they call it a producer. But an insurance sales rep, year over year, if you’re in the top 1% to 2%. The top even 10% I’ll say. It’s between $150,000 and $250,000 of new revenue. I was producing between $500,000 and $750,000 of new revenue. So I didn’t know those metrics. And I’m seeing as they put it all together in one comprehensive deck, and I’m seeing the hockey stick of the past. And I’m seeing how they laid out our EBITDA, our profitability hockey stick. And assuming everything stayed the way it was going, it looked like a very scalable business or at least I had significant capacity where at that over $2 million in revenue with six employees, significant revenue per employee. And it was year over year, our growth, and then you add that into the awards they had listed we had won. Being Inc number 667 out of the Inc 5000. And the fact that we had had a model where it was disrupting… I shouldn’t say disrupting. That’s probably an overused word. And I don’t want to give myself too much credit. It wasn’t that good.

Zain Hasan:                        But it was very different because our model was saying it was catching attention by actually shortening the sales cycle because I was saying I’m not vested to an insurance company’s best interest. Mr. CEO, CFO, I’m vested to your… I only win if you win. And that model, that description, and the way the sort of the numbers lay out ended up being when I was reading it, I certainly understood why they were behind my firm, especially…

Zain Hasan:                        Sorry about that, that’s kids. I guess that’s one of the perks of… I’ll be there, sweetheart. I’ll be right there. I love you too, sweetheart. I’ll be right there. That is one of the perks of being able to work from home, but I apologize for that.

John Warrillow:                Yeah, no. It’s great. I love it. I love it. I mean, in seriousness, how selling your company, how has that impacted your family life?

Zain Hasan:                        The moment that the company was actually sold and the cash came in, it was all of my net worth was tied into something illiquid. So not only did I have time for family, my mental state changed. I went from this mental state where I couldn’t really sleep. All day, all night, all I could think about was business. And I had tried numerous times to balance work and life. Although I still owned another business, it was so different because I had a financial foundation. I just had two kids. My wife and I had two kids. And so it was a big part of it was knowing the amount of the stress goes away, not completely because I was in an earn out. Meaning they required me to stay on. I would’ve probably wanted to stay on either way because the compensation. I do have an earn out, which is almost like a second liquidation event if I hit certain goals. But it just changes everything because I didn’t come from any money, and having that financial foundation, I bought a Ferrari. I bought a couple nice things.

John Warrillow:                Nice.

Zain Hasan:                        There certainly are upsides and downsides to losing control. But the financial foundation was so important for my family, for my peace of mind. And I’ve actually slept. I can go to sleep at eight and not have business on my mind, and I can honestly say that would’ve never been able to occur I don’t think.

John Warrillow:                Fantastic. So let’s get into the deal and stuff. You had eight offers. What was your reaction when you saw the breadth of what was on offer?

Zain Hasan:                        So it was my business partner and I, and I had a business partner who’s relatively early on. He’d been with me for two years. So he had a small amount of ownership.

John Warrillow:                This is not the New York Times guys. This is a different guy.

Zain Hasan:                        No, different guy. But the majority of the business was, and we had the… Most of our personnel was not the same personnel. So the six people we had at the end, one had been with us for three years. Only constant factor from employment was me. And so I was looking at them. I had met with each of the buyers. So the auction process they set up was they said, “Okay. We’re going to have you initially talk verbally with each one. Then we’re going to select eight.” Because there were more than eight to choose from. They’re like, “We’re going to select eight.” So I worked with the M&A advisor gave me their personal opinion on what would fit what I was looking for. And the different buyers that were out there, and then we narrowed that down to eight that they said, “Okay. Two days in a row…” It was a hotel and so it was like four essentially hour and a half long meetings each day, which were really sales pitch. It was my business partner and I, and we were pitching, what? How we build the business, who we are. They’d ask us questions. It was less business and more personal. Because they already seen the information, the CIM or investor deck had already gone out.

Zain Hasan:                        So they came with questions that were very specific, and from there it was really getting to know us because the insurance business is very highly relational. And they want to know how we did it differently, how did we think our growth model would look like. And each one sort of asked, “So what would it take for us to get to the next step?”

John Warrillow:                How did you answer that question?

Zain Hasan:                        Each one of them I had a very different answer because each buyer was very different, and some I was just meeting for the first time. Others I had known just because I had known of them. But it was essentially I had a feeling they’d all come in. I didn’t talk financials in that meeting because I was instructed not to. So I sort of assumed that that would be done by the investment banker, which is how it was. He handled all of the actual multiples, the details. He handled the entire transaction. All the interaction with the buyer, and I probably should’ve said it earlier but all interaction from lining up buyers, deciding… So he was the middle man for all communication. I think if I had… Now looking back because we’ve now done a couple deals where we acquired firms since I’ve joined the new organization, and I’m a managing director at a company called Risk Strategies, which is the company that acquired my firm.

Zain Hasan:                        I now have seen how much of a role that investment banker played because it’s so fast that we can decide not to buy a firm based on someone’s personality. So he really was… I look back on it now and I joke with him. I’m like he didn’t treat me like a client. He treated me like he was my boss. And he was telling me what I had to do. But if he didn’t, I probably never would have gotten through a deal.

John Warrillow:                Why? What were some of the things that you would’ve been tempted to answer and he instructed you not to?

Zain Hasan:                        So a lot of the things were around the future growth of the insurance business and the future growth of the HR business. And my passion, what I saw the scale, he wanted to make sure that it was very focused on the value that was going to be provided to the buyer, and we didn’t know at that time whether or not the buyer was going to have some type of layout requirement regarding the HR business. So that was one of the things that although was in the deck, it just had this one page. Out of 24 pages, one page that said this other company and it had the revenue and that’s it. So it was like in case buyers wanted to know more, they were certainly going to ask because it’s like I’m reading 33 pages of the insurance agency, and here’s this one page of this other business apparently that they own and it’s cap table, which is the ownership structure. So each of them asked me, and during that process, I explained. I said we’re going to win more deals because we have that business. But that business isn’t for sale because I’m invested a lot of money into it, and if you saw the balance sheet and the P&L, you wouldn’t pay what I would require.

Zain Hasan:                        But what ended up happening is all the buyers came back with this mentality, first verbally saying… Because when we had the LOIs, they all implied that they were going to have write a first refusal or something aligned to it. So I couldn’t just go sell it to some random person. And then as we got closer, once we selected and signed an LOI, it got tighter and tighter and tighter.

John Warrillow:                What got tighter?

Zain Hasan:                        Those provisions. The write of first refusal provisions in terms of like… And I understand because the whole goal is to make sure it’s not the value… Yeah, the value is also in the clients and the revenue we had, but if I left, this is a people based business. The goal is to lock me in with golden handcuffs. Because I was pretty stubborn on the idea of I wasn’t going to sell that other business, it was to make sure that if there was a time where it was going to be sold and there was a buyer coming in, I couldn’t sell equity or I could sell stock or I couldn’t… They had to have approval of that.

Zain Hasan:                        So what they actually did is we restructured a lot of that business. I had to buy out any other investors and just me and my business partner were the remaining two. So if I look at it from their shoes, they did everything very intelligently, but if I knew that was all going to happen at the beginning, I may have had… I love where I’m at. I may have had a different, a little bit different more rigorous approach to ensuring I had before singing on the line, really discussed what’s this going to look like. But I think my investment banker knew that and knew I might not be that easy to sort of trap down and hold down and keep committed. So he managed me. And I would say he got us to the deal. Going through the deal, there was a lot of emotion, especially when there’s a business partner. There’s a lot of emotion because things… The belief I had, I had this belief it was going to be rosy, exactly what the ROI said is how the deal would end. That’s not at all what happened.

Zain Hasan:                        It ended up really good, but there were issues that were very real that came up. Like we had an employee who left, who took $700,000 account with them. I’m currently suing the company because that was a violation of his contract. So when you think of that, that’s a huge amount of revenue. And that happened in the middle of the deals, not ideal. The worst time it could happen. But all of those moments end up at the end, it didn’t matter long term because whatever happens there, now I still have the financial foundation. I feel good. We’ve got a lot of resources and much more capabilities than I had.

John Warrillow:                So you were expecting six to eight times adjusted EBITDA or pro forma EBITDA. Were the eight offers roughly in that range?

Zain Hasan:                        All of them were in that range.

John Warrillow:                And what proportion of this six to eight were they asking, were they offering in cash upfront versus sort of tied to some future performance.

Zain Hasan:                        Sure. It was all that was cash upfront, but it was cash or the requirement depending on the buyer was 10% to 30% was in stock. There was no hold back of cash, but there was stock and cash. No one was allowing all cash.

John Warrillow:                So let me just throw… Let’s imagine you had a million dollars of EBITDA. They were offering you… Let’s say they said it was an $8 million offer. Of that a portion would have been in stock of their company?

Zain Hasan:                        That’s right.

John Warrillow:                As an example. Okay. That’s helpful. And how did you get comfortable with putting so much money at risk in-

Zain Hasan:                        In stock.

John Warrillow:                Yeah. Because if I’m not mistaken, their stock is not liquid, right?

Zain Hasan:                        That’s correct.

John Warrillow:                It’s not public. So what are your liquidation rights around that? Can you sell it?

Zain Hasan:                        I cannot sell it. When they recap, then-

John Warrillow:                Recapitalize.

Zain Hasan:                        For that, that means when the private equity sponsor changes hands. Usually because the private equity investments going to come in and on average, it’s five to seven years. And then they can sell it. They’ll try to sell it to another private equity firm. And so that is the historically… In our industry, that happens really, really frequently. But I got comfortable because every quarter they use a big four CPA firm to do an audit and actually do valuation of the stock price. And I got all that data in private detail, and we had one… What was really unique about our buyer that the other buyers did not have one, one class of stock. That was one of the most important aspects in order for me to be willing to invest in the stock, and it was the only one that had one class. Everyone else had a variety of classes of stock.

John Warrillow:                Right. Right. Interesting. So one class of stock. I wouldn’t want to say skeptic, but the… Getting paid that amount of money in cash upfront, were you tempted at all to just hit the beach and say, “I’m out. Thank you, but I’m not going to stick around here.”

Zain Hasan:                        Only because my personal expectations, meaning I had the other business. My personal expectations were much larger. To me it was an early exit, and it was an early exit because I believe those resources would leave to the meaningful end that I wanted through the combination of what I can get there and the other business I owned. So I didn’t have a temptation to do that at all honestly. It was I didn’t even take a week off. It was like the moment it happened, it was like, okay, day one. It felt like day one of a new life where now almost as if my parents had money and they’d given my money. I was starting a business type of thing because it was like now I’ve got new goals. I got to get used the what kind of resources we have. But I should probably take a vacation. I still haven’t.

John Warrillow:                It sounds like you’re chasing… I don’t mean chasing in a pejorative type of way. I don’t mean it in any way. It sounds like your aspiring to a goal in the future. Gary Vaynerchuk says he wants to buy the New York Jets. What’s your sort of end game?

Zain Hasan:                        So that’s it. I want operating… I call it economic independence where I want to have built and I want to own but not have to be the CEO or run a business that will drive in at least $10 million in operating cashflow to me personally a year.

John Warrillow:                That’s the big goal that you’re chasing.

Zain Hasan:                        Yeah. So my outlook is when I’ve done that, that means I’ll sort of be on the board reviewing the financials, guiding the business. But my portion to take home would be around $10 million annually. And that’s a big goal. And if I don’t hit it, at least you shoot for the stars, you land on the moon. Something like that. So I aspire pretty high. And one of the things that has helped has been understanding that I can’t expect everyone around me to aspire to that same level. But that’s just who I’ve always sort of been. I don’t know. I don’t have a good reason or explanation for why that number. But it was the concept of I never wanted money to be the reason I didn’t do something. But I also felt money won’t change me. I am who I am and money was only going to make… It was just going to sort of grow whatever my natural characteristics are. So to me it was trying to make sure that I could do whatever I wanted to do, and earlier it was $10 million. Does that mean I have to settle there? No. That is the goal. And I always want to set hat goal that might not… A big, hair audacious goal as Steven Collins writes about.

John Warrillow:                What was life for you like-

Zain Hasan:                        Jim Collins, sorry.

John Warrillow:                Yeah, Jim Collins. What was life like for you as a child? What were your circumstances? You referenced a couple times you didn’t come from money, but just kind of give me a sense of what that was like.

Zain Hasan:                        So both my parents migrated from Pakistan when they were really… My dad I think was 14, and he came alone, no family. And my mom, she came from… I think she might’ve been 16 or 17. They met at the University of Maryland. I was born in Washington DC. I grew up in Snellville, Georgia. If you’re not familiar with Snellville, no one really is. But it’s about 40 miles east of Atlanta, and it was when I was growing up, I didn’t know that… I did. I’m being facetious but I didn’t really know that it was abnormal not be white because everybody… I mean, I was the only one that wasn’t in my elementary school. Now, Snellville’s basically an outskirt of Atlanta. It’s changed completely. When I grew up, we would drive four wheelers down the road to our girlfriend’s houses. I was the only one that had a jacked up truck and wasn’t a Caucasian guy down there. So I didn’t know the difference because I was welcomed.

Zain Hasan:                        But my parents had very strict concept of work, which was anything I want above my absolute needs, I was going to have to work for. So when I was 13, I got my first job at a car wash. And I had maintained jobs throughout. So I went to the University of Georgia. I paid my way through college. I had a scholarship, but whatever I had to pay for, whether that was room and board or fraternity, I paid for through working. And I think that was a big aspect of what helped me appreciate the ability… With what I have because I don’t look like it as money is something that’s always going to be there. But I’m not allergic to it. I certainly aspire to where it doesn’t create issues. But it’s one of the things where if I… When the money starts coming in, I would look towards adding value to other people’s lives with it and really creating more of a nonprofit that would really have a much bigger impact because I think there’s a lack in education today in society around finance, entrepreneurship, and sort of what I call the core values that it takes from EQ and IQ. And I’d really like to start a nonprofit that’s heavily focused on that. And not have to worry about money at all to do it. So I could really spend my energy on that.

John Warrillow:                Can you describe what it was like to tell your parents about the sale of your company?

Zain Hasan:                        Yes. I actually said I’m more proud of… I felt better about that moment because I remember telling my dad, and my dad saw the car, the Ferrari I bought. And he said, “I’m so proud of you that you got this car.” Because when I was young, it was always my dream car. That moment was like, I don’t know how to explain it other than it was more… The money didn’t mean anywhere near as much as that moment did. That he actually was… Because my dad worked all night as a security guard, and then during the day, he was in college. So he literally went… He spent 33 years at Motorola and then that’s the only other place he worked. He gave me the opportunity to have a little bit more of a risk tolerance than he could’ve had. While we didn’t have a very luxurious life, I think he gave me the core values that I needed to make sure I didn’t let money affect me. If that makes sense.

John Warrillow:                Yeah, absolutely. I’m sure he’s very proud of you. And lots to come.

Zain Hasan:                        Yeah, I hope so. If as long as I can add value, that’s the focus. I don’t think it’ll come by chasing money. It’ll only come by chasing, adding value.

John Warrillow:                Yeah, and you made that clear. I know people are going to want to reach out to you, Zain, and just connect. Is there a good way to do that?

Zain Hasan:                        Yeah, absolutely.

John Warrillow:                What’s best for you?

Zain Hasan:                        So I can also just give you my number, it’s my office number. And my assistant answers, but she’s very, very good at getting people to me. It’s 954-210-5300. And then you can also go to my LinkedIn, and it’s Zain, Z-A-I-N, Hasan, H-A-S-A-N. Look me up on LinkedIn. I’m on there a lot. Facebook, same thing. So I’m engaged in social media. And then I don’t know what the easiest way is, but I’m happy to provide my email.

John Warrillow:                Yeah. I mean, I think that’s probably good. We’ll get people to connect with you through LinkedIn. We can put your email in the show notes if you don’t mind. It’s easier [crosstalk 01:04:28].

Zain Hasan:                        Yeah, that’s perfect.

John Warrillow:                Yeah, that would be great. Look, I look forward to a second round of this interview. I think there’s a probably more to come in the Zain Hasan story. So I appreciate you spending the time with us today.

Zain Hasan:                        I greatly appreciate the opportunity, and I’m glad you got to meet my daughter. Right? But it was a pleasure meeting you, and I can’t tell you how much I appreciate. I’m a huge fan. I think this show’s provided me with a lot of value and hopefully this adds value to the listeners.

John Warrillow:                Cool. Thanks, Zain. Appreciate it.

Zain Hasan:                        Thanks, John.

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