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Pathfinder Health offered software to therapists helping patients with Autism. The company founder was creative, but the company had reached a plateau.
Pathfinder Health offered software to therapists helping patients with Autism. The company founder was creative, but the company had reached a plateau.
Tina Youngblood was brought in as a hired gun to turn things around and get the company ready to sell. Within one year, Youngblood had fixed the culture and financials and stabilized the product. That’s when she went to leverage her industry contacts to find an acquirer. In this episode, you’ll discover:
One of Youngblood’s first moves was to fix her company’s timid culture. How’s the vibe in your business? We’ll measure how engaged your employees are and benchmark against world leaders on employee satisfaction in step 7 of The Value Builder System™. Get started for free by getting your Value Builder Score.
John Warrillow: So, when the right time to step aside and let someone else run your company? I think that is the age old question for us, as founders. I mean, when you start a business, obviously, your creativity, your energy, your vision are so important to get this entire entity off the ground when the entire world wants you to stay put. There are just so many obstacles in the beginning. It’s really when a premium is placed on your creativity and your energy and your drive, and all those assets that you have in spades. Yet, once you’ve got the thing going, and you’ve got revenue and you’ve, hopefully, got a bit of profit, there may be someone else out there who is better suited to grow your business beyond where you have it today.
John Warrillow: That’s when Tina Youngblood gets brought into companies. Tina is my next guest. She got brought into Pathfinder Health when the founder had gotten the business to a point of a couple million dollars in annual revenue but just couldn’t bust beyond that point. Tina came in to make some fundamental changes. As she’ll describe, she changed the product development process, she changed the culture, a little bit about sales and marketing, made some fundamental changes to the financials of the business, and ultimately, went on to sell the company. I think the real nugget here is when to know when the right time to sell, or leave your company, is. Here to tell you how Tina diagnosed that is Tina Youngblood. Tina Youngblood, welcome to Build To Sell Radio.
Tina Youngblood: Thank you. Good to be here.
John Warrillow: Tell me a little bit about this company, Pathfinder. What are do you guys do?
Tina Youngblood: So, we are a software development company, and what we build is clinical and practice management software for therapists who treat people on the autism spectrum. So, if you think about the rates of autism, in the United States especially, have skyrocketed in the last 10 years or so, and it’s a very pen and paper intensive industry. It’s applied behavioral analysis therapy, is the therapy that’s been scientifically proven to work to help people on the spectrum. So, what we did is create an automated platform so that those therapists could collect data electronically, submit claims electronically. So, they get paid faster and they can improve the lives of the people that they serve.
John Warrillow: So, I don’t know a lot about autism. If you are treating someone with autism, there’s presumably an assessment stage where you’re trying to understand where on the spectrum they are. Did you guys offer those sort of assessment tools?
Tina Youngblood: We have some assessment tools. What we really focused on was post assessment and then the actual therapy. So, the protocols, the skills. So, there are different protocols that therapists use to help people acquire skills. So, we automated the collection of data in that realm. So, yeah. The assessment tool itself is pretty intensive. A lot of times our clients would load that into the system and then they would use our system to create goal plans and things for the people on the autism spectrum to improve their skillsets.
John Warrillow: It might help people who haven’t experiences autism firsthand. Could you give us an example of a tool in your system that someone would develop, that they would take a child through who was recently diagnosed with autism?
Tina Youngblood: Absolutely. So, tying your shoes, something that you teach your children, or your children learn to do, is 100 times more complicated when the person’s on the spectrum, depending on the level of severity, where on the spectrum they fall. So, you have to break it down into 10 steps. Right? So, what we would do is our software would allow the therapist to say, “Step one: Put this lace in your left hand. Step two: Make a loop. Step three.” So, by breaking it down into multiple steps, that helps the person acquire that skill. Washing your hands. Again, something that may seem so routine, but if you’re …
John Warrillow: Second nature, yep.
Tina Youngblood: Yeah. If you’re autistic, you might not quite understand how to do it, and they get very frustrated. So, there’s a second piece to the software that’s behavior related. So, a lot of times people on the spectrum hurt themselves, or they run, because they get very frustrated that they can’t wash their hands or tie their shoes. So, we created intervals so that they could start and stop a timer of a child who’s running and how long it lasts. The amount of times they can reduce the negative behavior and increase the positive rewards around acquiring a skill, then the faster that person acquires that skill. We automated all of that.
John Warrillow: So, the doctor or the clinician was able to automate things. Why not just use a Google Doc? If you were a doctor and you specialized in autism, why not just create your own Google Doc? It sounds like everything was customized anyways. Maybe I’m not understanding it. What made you guys different than them creating their own … I don’t know … Word document or Google document?
Tina Youngblood: Actually, a lot of them did. So, the difference is, in an Excel spreadsheet, for example, because it’s very data driven, think about an Excel spreadsheet where you have to record the number of times a certain behavior occurred, or how long it took for a skill to be acquired, and there were different parts to the treatment, very complex in terms of describing it. But you have to be able to perform the task in three different environments, meaning, one at school, one at home, one in the clinic, with three different people. That means that it’s really embedded and it’s not just something that’s happening in one environment. All of that needs to get graphed and reported on so that you can show progress. This is important for two reasons. One, to help the person acquire the skills faster, and then Excel spreadsheet, you have to record it all, write your formulas yourself, create the graphs.
Tina Youngblood: The insurance companies, in 2004, by the way, just one quick statistic … In 2004, zero states, no states in the United States required companies, insurance companies, to pay for this type of therapy. In the year 2020, 48 do. But insurance companies, Blue Cross and Blue Shield or United Healthcare, or whatever they may be, Aetna, in order for the insurance company to continue to pay for the therapy, the therapist has to show progress. So, a lot of what our software did was graphing and reporting, which, again, you can do in an Excel spreadsheet, it just takes a lot longer to do. So, you can attach graphs that show progress. To the insurance company, that shows them that the therapy is working.
John Warrillow: Got it. What was your business model? How did you charge for the software?
Tina Youngblood: It was software as a service, so SaaS is a term that software people will understand. We had a subscription to it. So, it was a monthly. A lot of times it was an annual subscription, but companies could pay for an annual. Sometimes we did two years. Sometimes it was month-to-month. So, it was a subscription to get access to our software. Our customer success team had some clinicians as part of that. So, they got software but they also got support from clinicians who understood ABA therapy, applied behavior analysis therapy. So, we did that. We also did some consulting work, as well. So, if you had a start-up practice that needed help getting credentialed with the insurance company, or how do I set up a business, an ABA business, we also sold some consulting services, as well.
John Warrillow: So, what would the size be of a typical customer? Are we talking massive clinics, or kind of small, mid-size clinics?
Tina Youngblood: All across the board. I think our niche was the under 50 employees. So, under 50 employees was pretty much our sweet spot. It’s very intensive therapy. So, in a lot of cases, the therapist was one-on-one with the child. So, again, depending on the size of the clinic and depending on the severity of the treatment plan, it’s very much a one-to-one situation. So, one therapist equals one client. We had some as big as 600 patients. So, we had some that were very, very large. Again, most of ours were within the below 50 employees. So, somewhere around 35 to 50 patients was our basic …
John Warrillow: How’d you guys sell it?
Tina Youngblood: We sold it the old fashioned way. We sold it by attending conferences. This is, again, an industry that’s growing. So, we sold it by attending conferences and doing demos. We sold it with a call center here in Kansas City that just called on clinics. A lot of it was also word of mouth. So, this is an industry that’s growing. It’s also a very tight knit community. So, Facebook, believe it or not, was often a good referral source for us, because they create groups and they say, “Who do you use?”
John Warrillow: I would imagine. Yeah.
Tina Youngblood: It was a combination of all those things.
John Warrillow: My understanding is you didn’t actually start the company but you joined it. Maybe talk a little bit about where it was when you joined it and why you were brought on?
Tina Youngblood: Absolutely. So, the founder of the organization, and you know this because you interview entrepreneurs all the time, often the person that has the entrepreneurial idea and starts a company doesn’t have the same skillset that’s required to grow the company. It’s two very different sets of DNA. So, what happened in our situation was we were a six-year-old start-up. You can’t be a start-up after six years. So, the investors … The board asked the CEO to step aside, the founder to step aside, and bring in someone who had leadership experience and operational experience in turning companies around and growing them. It just happened to be … I’ve never run a software company before, by the way. I’m an accountant by trade, accounting professor, actually, who spent 15 years in financial services. So, I’ve run insurance companies and claims companies. I’ve been in that space but I’d never run a software company before.
Tina Youngblood: It was interesting. When I interviewed for the position, the chairman of the board asked me this question, or made the statement. He said, “You’ve never run a software company before.” I said, “You’re right. The first time I ran an insurance company was the first time I did that, too.” Here’s what smart leaders know. Right? They know what they don’t know. So, they know what questions to ask. They surround themselves with smart, talented people who have complementary skillsets. They understand the financials. I think that’s a really important piece of it. They challenge the status quo. Only phrase that gets you kicked out of my office is, “We’ve always done it that way.” So, I was brought in, really, to take a look from an objective perspective and just say, “Okay, what’s broken? What needs to be fixed? How do we fix it? What does this need to look like? What do we want to be when we grow up? How do we get there?” That’s kind of the promise of it. Yeah.
John Warrillow: I want to explore this idea of the founder’s skills and what they look like versus the person who is brought in to, in your case, really kind of build and, ultimately, sell the company. How would you characterize the strengths of a founder versus sort of a second generation leader, like yourself?
Tina Youngblood: So, the founder’s strengths, I believe, are several fold. One is the creative idea. Right? What made him say, “We’re going to take this on?” It was knowing what was needed in the industry. It was understanding that industry. It was finding that one solution that we could differentiate ourselves from others. It’s the nerve to go out and try it and build it. That takes a lot of guts to go and borrow money, or find investors to give you money, to go try something, to go build something that didn’t exist before. We were one of the first all-in-one solutions to the marketplace because of the founder.
John Warrillow: So, creativity, boldness, courage, determination, all those attributes. Those sound like great attributes for any leader. Why did they have a shelf life? Why did they kind of run out of steam?
Tina Youngblood: I think what happens often, and certainly what happened here, when you’re on that path of creativity, you sometimes take your eye off the financial discipline ball. Right? So, one of the first things I did when I came in was I looked at the financials. I said, “Why are we spending this money over here? Why are we doing this, this way?” As a founder, you’re not looking for EBITDA. Right? You’re not looking for net income, necessarily. You’re looking for market share and how do you go after and attack the marketplace? I think a second generation leader, like myself, comes in and says, “Hang on a minute.” Nothing happens until somebody sells something. Right? Thomas J. Watson said a famous statement. Nothing happens until somebody sells something.
Tina Youngblood: The second piece that, I think, as a second generation, it’s natural for me because I’ve come in situations like this before. My very first question is, “Okay. Let me see the financials. I want to see the income statement. I want to see the revenue line. I want to see the expense line. I want to understand everything about that.” I think that’s just something that’s not second nature to an entrepreneur, but certainly to somebody like me that’s got experience in running companies in multiple industries.
John Warrillow: What did you see when you saw the P&L?
Tina Youngblood: Opportunities for improvement.
John Warrillow: Can you parse that for us?
Tina Youngblood: How’s that for a … How’s that for politically correct? No. So, one of the first … I did two or three things simultaneously. One of the things I walked into was a platform that was a mess. Part of the reason it was a mess was because we were getting to market too quickly. So, it was like, “Got to get this feature. Got to get this done. Got to get this done.” So, stabilizing the platform. We ended up losing data and having some serious issues with our actual software. That’s a problem when you have an industry like ABA therapy that requires data going back years, again, to show improvement and to get claims paid. The second thing I saw … So, stabilizing the platform, number one. Number two, it was not making money. It was not profitable. That’s one of the reasons I was brought in. So, I looked at the financials. I took almost three quarters of a million dollars of run rate cost out of the organization in four months. We were a small company.
John Warrillow: Three quarters of a what?
Tina Youngblood: Million.
John Warrillow: I thought you said billion.
Tina Youngblood: No, no. No, no. We weren’t that big. We were a very …
John Warrillow: How big were you? How much revenue were you generating when you came in?
Tina Youngblood: It was only about two million dollars in top line revenue.
John Warrillow: Mm-hmm (affirmative).
Tina Youngblood: So, to take $700,000 of cost out had a huge impact. Again, those are things that I could see when I walked in. Maybe they were necessary at the start-up phase. Maybe they were the right thing at that time, but certainly not to stabilize it, the bottom line, and then to grow the business. So, I took a ton of cost out. That ended up being a really important aspect for, again, the board. I knew what the investors were looking for. It was kind of a mess when I got here. The CFO and I spent a lot of time together. We were very disciplined about making sure we were spending our investors’ money as if it was our own.
John Warrillow: What was the capital structure? Who were the investors? How was that structure?
Tina Youngblood: We were a very complex capital structure for a very small business, I have to say. We had Series A preferred investors. So, we had some venture capital firms in this software and behavior health space that were our two biggest investors. We had a host of others that were angel investors. Again, in the start-up phase, you have some angel investors that come in and get you started. Then we did a Series A round. So, we had some preferred shareholders who were really on the board and who were really driving the business, at the time I was brought in.
John Warrillow: Got it. What was your … I’m trying to formulate the question. What was your sense or feeling of the dynamic between the founder and the investors, at the time you were interviewing?
Tina Youngblood: It was a good relationship. I think the founder realized he needed me. He needed someone to come in and help. I’m sure it was tough at the beginning, I’m certain it was, when they started having the conversation about replacing him. By the time we got to the interviewing process, and with me and the board, he knew that it was time. He knew that he couldn’t be the person to take the company to the next level. Again, he’s very much a start-up guy. He’s creative. He’s got an entrepreneurial spirit. He’s good at finding it, going, building it, and then he wants to move on to the next fun thing. So, that was it.
John Warrillow: If you and I were at a restaurant and we were having lunch, and I was a founder and you were sort of providing advice to me, and I asked you, “How do I know when it’s time? How do I know when the business has gone beyond my skillset,” what sorts of advice would you give me in order to figure out whether I’m the best one to run my company or I should bring in a hired gun?
Tina Youngblood: Great question and a tough one. I think it’s probably going to be dependent on the person. I won’t generalize. I’ll say this. If you’re still a start-up six to eight years in, that’s a clear signal. If you’re not clearly profitable, or clearly have a leading market share, if you’re not at a point where you’re generating the return that your investors expect, it’s time for you to think about somebody else coming in. So, I think that was probably the biggest thing for our founder, was knowing that we had spun our … It was like treading water, almost. When you get to a point in your business where you feel like you’re just treading water, you’re not growing, you’re not gaining market share, you’re not beating your competitors, I think it’s time to really sit back and go, “Am I the right person to lead this organization into the future?” I think that was the aha moment for him.
John Warrillow: How did they recruit you? You’ve run much larger companies. I’m curious to know what they said or did to say, “Come in and run this relatively small business.”
Tina Youngblood: It’s funny. That was the other question that the chairman of the board asked me in the interview. I’ve run four billion dollar businesses. Why? This is a small M, lowercase M. Why would I want to do it? I answered it two different ways. There was a two part answer to that. One, quite frankly, is it’s never been about the size of the income statement. It’s always been about the work for me. I don’t care if it’s four billion or four million. The work is what drew me to it. It needed a financial turnaround. It needed a cultural turnaround. Culture is everything, by the way. It’s everything. It’s not a thing, it’s everything. It needed a cultural turnaround. It needed a boost of leadership and energy.
Tina Youngblood: That’s always been what drew me to every business I’ve ever run, has been what … I like to fix things. So, if it’s broken and it needs fixed, I love to come in and figure that stuff out, solve the puzzle. The second one was a very personal reason. I had a special needs brother who was born when I was seven. He had cataracts on both of his eyes and had a lot of physical ailments. As I’ve been reflecting back and learning about this business, I’m pretty sure he was on the spectrum, as well. He passed away when he was 20, but he was never supposed to live to 12. So, he was a blessing every day.
Tina Youngblood: I promised myself … I took a year off in 2017. I wasn’t having fun anymore at my last role. I literally just said, “I’m done for a while.” I promised myself I wouldn’t go back to work unless I could live a mission driven life and really have a purpose. He’s been a big part of that. This was my opportunity to take my experience and what I know and apply it to something that, again, I’m certain that when Micah was alive, had we known about ABA therapy at the time, I’m pretty sure he was on the spectrum and would have benefited from it. So, it was just that perfect opportunity to give and to give back in another way than just simply being the CEO.
John Warrillow: That’s helpful. Thank you for sharing that personal experience. What did you find when you got into the business, when you first sort of arrived? What were the first moves that you made?
Tina Youngblood: First move that I made was to put some business perspective to the product ownership role. So, in software development, product owner is kind of a key role. It’s the person that helps set the strategy and make decisions about what you will build and what you won’t build, and about when you’re going to build it and how you’re going to build it. One of the first things I walked into and found out was that we were putting out new releases every two weeks. This is software. This is complex. So, it was going out, it wasn’t quality tested, there were too many bugs. It’s software, so there are always going to be bugs, but the first thing I did was I said, “We’re going to quarterly releases, full stop.”
Tina Youngblood: I don’t have to be a software developer to know that it takes more than two weeks to build a feature. So, the first thing we did was slow down on releases and we went to quarterly. I put a product owner in place with a business liaison. So, I took some people from the business that understood claims and that understood ABA therapy, and I put them together with the software engineers and said, “You now own this product.” That was a really important piece of the stabilizing of the platform. It made the product better as a result.
John Warrillow: What did the investors want you to do? A lot of venture capitalists would be swinging for the fences, right? They would invest with the view that it’s got to be a sort of unicorn or it’s not worth our time. What did they want you to do?
Tina Youngblood: One of the greatest joys in this role, for me, they didn’t tell me what to do. I love them for that. I got very lucky with this group. What they said was, “Clean sheet of paper, there are no sacred cows and there’s no big directive here.” They trusted me to come in and figure it out. One of the things I promised them was, “In 30 days, you’ll have a talent assessment. In 60 days, you’ll have a sense of where the product sits. In 90 days, I’ll lay out my strategic plan for you.” I held myself accountable to those things. They just wanted me to come in, figure it out, like I said, and fix it, and ultimately, sell it. It was for them, the goals.
John Warrillow: So, they did want you to sell. They were clear about that.
Tina Youngblood: Yeah. It became pretty clear when I was brought on that had I come on earlier, it might have been a different scenario, but because when I was brought in to turn it around it was really at the point that they were ready to exit. They’d already been in it for four years. For venture capitalists, that’s a lifetime. Four years is a long time.
John Warrillow: Mm-hmm (affirmative). It certainly is. So, you made a change to the product release schedule. How would you characterize the culture when you arrived?
Tina Youngblood: The culture was, I would call it, timid. I think there was some uncertainty about … We were actually a result of two companies coming together. So, the founder of Pathfinder wrote the clinical product. They merged with a claims management product to create Pathfinder Health Innovations. So, the two founders were not always aligned in the strategic thinking. So, when I walked in, the culture was, “We’re not exactly sure.” They were looking at their shoes a little bit when I walked in. There was not a lot of teamwork. I would say it was kind of a command and control environment. That’s just not my style. It was very much a culture of … They went through a lot of chief technology officers. I’ll just put it that way. I would say the culture needed a big boost of energy. It needed some reality check. That’s not always easy to do. In my case, I was lucky enough that they bought in pretty quickly after I became the CEO, they all bought in.
John Warrillow: Did the founders remain as shareholders and investors during your tenure?
Tina Youngblood: They did.
John Warrillow: Okay. I’ve got a ton of questions. About how many employees at this time, roughly?
Tina Youngblood: Less than 50. About 30, 35.
John Warrillow: Okay. So, what did you do to change the culture?
Tina Youngblood: I love that question. It’s an impossible question to answer, in some ways. You kind of have to live through it. One of the things I did is lead by example. I believe in honest, transparent communication. I won’t lie to you. I won’t hold anything … I can’t always tell everybody everything. Right? I do have shareholders. I was pretty honest and I was pretty transparent in my communications. I’m a genuine person. I think they saw that in me, that, again, I know what I don’t know. There’s no ego in it. I would ask questions and I was learning with them at the same time that I was helping steer. When I asked a question, I really meant it as a question. Right? I didn’t come in with all the answers.
Tina Youngblood: I know a couple things. I know financial models don’t turn companies around, people do. So, I invested a lot in my people. I met every single person. We had two offices, one in Phoenix and one here. In my first 30 days I said, “Pretend we’re in a Clint Eastwood movie called The Good, The Bad, and The Ugly. Start with the good. Tell me the good. Tell me what’s not so good. If there’s something that you need to tell me that’s ugly, tell me. Let’s just talk about it.” That really went a long way, I think, to get them all onboard, that I was here to help and I was really here to turn this business around, but I wasn’t going to do it by myself. I do it with a team.
John Warrillow: Got it, got it. That’s helpful, for sure. What were the ground rules you put in place with the founder, or founders, to ensure they didn’t undermine your authority?
Tina Youngblood: Wow. That’s a good one. I think I respected the founder from the outset. There was a mutual respect that I’m the new person in charge. I respected where the business came from. I respected his part in it. When I made a decision that was against something, I never really got any pushback. I really didn’t. He didn’t undermine me at all. In fact, there was a time when he needed to exit, and we worked through that. Again, the messaging and the respect that I had for him made it a very easy … It made it an easy move for all of us.
John Warrillow: When you say he needed to exit, what do you mean? Exit as a shareholder or exit as day-to-day manager?
Tina Youngblood: As an employee. Yeah. As an employee. So, there was a point when we needed to … Again, I was working on what’s best for the business and how to add the most value to it. The business just couldn’t support the role that he was playing. It was a corporate development role, which is really around R and D, research and development. We just weren’t at a point where we could really say we wanted to invest in research and development. That wasn’t what I was brought onboard to do. It ultimately led to his going to go do something else. It was good for everyone, including him. I think the way we handled that was really important. Again, I respected him and where he was. He knew that I was the person that was going to save the business, ultimately. So, we agreed pretty early on that when that decision, if it needed to be made, he and I would talk about it first, and we did.
John Warrillow: Got it. So, you changed some fundamental things in the company. You changed the product release cycle, the culture, you stabilized the platform, sales and marketing. What were the impact of those changes on the financials of the company?
Tina Youngblood: Pretty significant. Again, seven months into my tenure, the board came to me and said, “You know what? You’ve done a great job of getting everything where we want it to be. Let’s go find a buyer.” So, we had a pretty significant impact on the financials, which made us an attractive target for the ultimate new owners of the business, which as I said …
John Warrillow: So, it sounds like the biggest impact was on the profitability of the company as opposed to the top line revenue?
Tina Youngblood: Yes. For sure. I think if I had it to do over again, there would have been a bigger impact on the top line.
John Warrillow: Why?
Tina Youngblood: I know we want to talk about that. I think it was really in the expense side of the house. We really got that and we stabilized the platform. We were a product … We were the best in the market, even though we were small. Our platform was better than anyone else’s in the market in terms of its own stability, some of the features that we created, and the product was attractive. So, I think those two things were what really had the greatest impact.
John Warrillow: So, let’s turn to the sale now. So, you make the decision that you’ve cleaned up the operations, the financials are much healthier. What did you do next? What did you do to get on your front foot to start proactively selling the company?
Tina Youngblood: I went through my network, to be quite honest. One of the questions I was also asked by the board in the interview process is if I had private equity connections, and I did. I had several. I also, because of our space being behavioral health, which has a ton of private equity money being thrown at it right now. We had been approached by several firms, before my tenure and certainly as soon as I arrived, that were interested in the business. I literally started reaching out to them and saying, “Okay, we’re ready.” I had three or four really great conversations with legitimate potential buyers in the process to get started. Again, part of it was my network.
John Warrillow: How were you thinking about valuation? Were you using evaluation sort of rule of thumb for a company like yours? What was your sense of value?
Tina Youngblood: Yeah. So, companies like ours typically trade on a multiple [crosstalk 00:33:33] of revenue. [crossalk 00:33:36] Annual recurring revenue, so ARR is kind of a big deal, because it is software. It’s not necessarily net income. It’s really top line. So, it’s a multiple of revenue. In our case, I felt like a big part of our valuation, however, was in our product roadmap and some of the work that we were doing on the product itself, and it had not come to fruition yet. So, I spent a lot of time on messaging. When I was talking with potential buyers, they had to give us credit or value for what was to come, not necessarily what had already happened. That was a big part of the sale and a big part of my role, was in that messaging and making that point that it wasn’t just about ARR. It had to be about the value that was going to come.
John Warrillow: How did you make that case? Because a lot of buyers would say, “Yeah, but Tina, there’s a lot of operational risk involved in bringing that to life. I mean, that’s going to be our job to bring that product roadmap to life. Now that you’ve told us what your product roadmap is, we can just basically go buy your competitor and build out those same features.” How did you make the case that they should pay for that?
Tina Youngblood: One of the things that I learned pretty quickly was that no one had figured it out in this industry, that there was a lot of opportunity for something like our platform to be put into the marketplace with the right ownership and make a difference in terms of competitive positioning. Part of it was … I didn’t actually say everything upfront. Right? I had to keep some of it in my pocket to make sure that I had the right potential buyers in mind for that very reason, because you want to avoid just showing everything. Right?
John Warrillow: Sure.
Tina Youngblood: Opening the hood and letting everything be visible. So, part of it was that. Part of it was in the way that we had competed and won in a very short period of time, won a couple key players that were part of the value, as well, to show that what we were doing was making a difference in the marketplace. Quite honestly, one of the things I did at the end of the day, when we got down to that three or four real, legitimate buyers, we demoed the system for them. I was confident enough in what our team had built, I go, “Let me show you our platform. Let me show you our product and why it’s better.” Ultimately, that kind of sold it. That solidified that message that we have something here that’s pretty good and that can be taken to the next level with the right next ownership group.
John Warrillow: Got it. Okay. So, you’re thinking your company is worth a multiple of revenue and that multiple may be, actually, a little higher because of this product roadmap and what you’ve got sort of in the hopper in the future. Again, I know we can’t talk specifically about your sale, but have you got a sense of what you had heard in the marketplace of software companies, what they were trading at on multiple of annual recurring revenue? What was the range you’d sort of heard about in the public?
Tina Youngblood: Yeah. So, it’s anywhere from six to eight times ARR, was kind of the benchmark. Again, this is software. So, it’s trading on, sometimes, silly multiples, if you think about bottom line. It was anywhere from six to eight times ARR. In our case, again, we had not fixed the sales and marketing group completely, but we had a pipeline. So, that was part of the sale, as well. The valuation, part of it was these are the opportunities we have in our sales pipeline, this is where we are. So, this is the untapped revenue potential that we have, and that was part of the value, as well.
John Warrillow: Six to eight times ARR. We’ve done a lot of these episodes with software companies. I would have thought that was a quite a bit larger software company. You’re getting the sense that it was sort of worth that in a smaller company. What was your data point for that, or how did you kind of discover that?
Tina Youngblood: It’s … I’m sorry. I’m walking because I’m plugging in. It’s not just the data point. For me, part of it was being able to prove the value without necessarily looking at a financial model. That required a lot more conversation on my part and a lot more trust on the part of the potential buyers, to kind of look at, again, what we had, what we were building, and assign a value to it. At the end of the day, it’s a negotiation. Right? You’re not always going to get what you want. You’re not always going to get what you think everything is worth. You just have to be able to articulate your value and show it.
John Warrillow: So, did you use an intermediary or an M and A professional or a business broker to kind of go to these private equity companies? Did you go direct?
Tina Youngblood: We went direct. It’s because of the size. I told the board if the CFO and I couldn’t do it ourselves, we would ask for help. But a company as small as ours, I knew, again, I’ve been the acquirer and I’ve been the acquired, both sides of that. So, I was like, “I know that Deloitte’s going to ask these questions, and Willkie Farr is going to ask these questions, and the investment bankers, and I know how to manage all of that.” So, I really … The CFO and I did the due diligence ourselves because we really focused on, at the end of the day, the best result for the investor.
John Warrillow: What was your reaction from the private equity companies you approached? Did they fall in love with open arms? What was their reaction?
Tina Youngblood: I would say they fell in love with the fact that I was brought in to turn the company around. They saw the work that we had done in the short period of time that we had done it. I think they loved that part. I think the product sold itself because the team has done such a great job creating a very valuable piece of software. So, I think they were in love with that. I think, for some of the potentials that ended up not going further, the sales and marketing were not where I wanted it to be. It was kind of the last leg in the table. Again, if I had it to do over again, I would have done that sooner rather than later.
Tina Youngblood: I think part of it, they couldn’t get their arms around, the future wasn’t always … Because I hadn’t proven it yet. So, part of that … That was the drawback, was, “Well, you haven’t actually created that sales and marketing team that you want.” I was like, “Right, because I need investment to do that. So, that’s going to be the job of the new owners.” Ultimately, that’s how it happened, but they certainly questioned it, and rightfully so because we hadn’t accomplished everything we’d set out to do yet.
John Warrillow: How many potential acquirers did you approach?
Tina Youngblood: 10-ish.
John Warrillow: How many of those sort of expressed genuine interest?
Tina Youngblood: Three. Three or four.
John Warrillow: Got it. The three or four, what was the strategic value they were looking at? Were they simply financial buyers looking for a steady flow of income?
Tina Youngblood: There was maybe one financial buyer that I eliminated pretty early on. The others were strategic buyers. I think that was important for this business, to have a strategic buyer. That’s ultimately what was we needed, was somebody that was going to believe in the future of it, not just what we had necessarily delivered up to this [inaudible 00:41:42].
John Warrillow: In what way was your business strategic? How did you see it fitting with another?
Tina Youngblood: It was strategic in the sense that, again, we ended up … The buyers were all buyers in the behavioral health space. Again, there was a lot of private equity and venture capital firms in the United States that are big into this behavioral health space. I think our value was we had figured some things out that our competitors had not.
John Warrillow: Like what?
Tina Youngblood: Like the practice management software that we built, the claims management software that we built, is the best in the industry. They don’t stay in business if they don’t get paid. So, we prioritized a lot of our software development around that part of it, the practice management part. I think that was truly of value. When we showed it to the three or four that ultimately ended up being legitimate potential buyers, we got a lot of wows from the practice management. It’s comprehensive. It’s the best in the industry. It’s a differentiator in this space. Again, the therapists can’t get paid, the therapist doesn’t stay in business.
John Warrillow: What exactly do you mean by practice management?
Tina Youngblood: So, practice management is … It’s really claims management. So, it’s everything from the billing to collecting the cash from either the insurance company or the parent or guardian of the patient to managing accounts receivable. It’s really everything that it takes to manage an ABA therapy practice. The private equity term is revenue cycle management. It’s basically everything, again, from billing to collections to accounts receivable. Everything you need to manage your business. Scheduling, all of that.
John Warrillow: Okay. So, you’ve got these three companies that have a stake in the behavioral health space, interested in the business, in particular because of the way you do claims and practice management. How did you create a kind of bidding war? You had these multiple bidders. Did you sort of drive them towards a date where you would be accepting offers? Did they bring you offers at different times? How did you structure that?
Tina Youngblood: Yeah. Ultimately, I drove them to a date because, as with all potential buyers and negotiations, if you don’t give a deadline, it can go on forever. So, we had a date in mind where we thought we could get the potential buyers comfortable enough with the product, the people, the processes, to make a decision or not. So, we did it by dates.
John Warrillow: When that date came, what was the result?
Tina Youngblood: That date came and the result was that I had the opportunity to choose who I thought was the best new ownership group. It was the last one I would have picked going into the negotiation. It was the owner of our largest competitor. So, one of the things that happened in the space, I was appointed in February of 2018 as the new CEO. Our largest competitor appointed a new CEO similar to the situation of Pathfinder in July of 2018. So, he was brought in to do some of the similar things that I was brought in to do, because of the whole founder scenario that we talked about earlier, the entrepreneur DNA.
Tina Youngblood: So, going in, you’re like, “But I compete against this group every day.” As I learned more about him, the new CEO, I learned about their business, their culture, we were aligned. That was the most important thing for me, was that the cultures align, because, again, if the acquisition’s going to be a success, it’s going to be because cultures match. Right?
John Warrillow: Yeah. For sure. How many offers did you actually get? You got one from a direct competitor. Did you get a letter of intent from the other two?
Tina Youngblood: I got one other, yeah. We were down to two. Interestingly, the third one that I thought was going to be in the mix wanted more of the sales and marketing piece done. They couldn’t get comfortable that that was going to come. So, they opted out. We agreed that they should opt out. Having a choice was important. The other piece that was important for me was that we saved the employees. We only lost very few employees, and that was important to me, as well, to save as many jobs as I could.
John Warrillow: Yeah. For sure. What was the board’s reaction to the two offers? Did they have sort of qualitative reaction to what was on offer?
Tina Youngblood: Ultimately, they were thrilled that we got the deal done, that we did it with a minimal amount of cost, didn’t hire an intermediary, and that we were saving jobs. Again, I was lucky that I walked into a business that had a supportive board of directors and a supportive investor group. When I said, “This is the right choice,” they supported me 100%. So, we agree and we moved on. They were great. There was nothing negative about it. It was really a positive experience on both sides.
John Warrillow: What were the kind of major differences between the two offers? Obviously, there was a difference in offer price, I’m assuming. Were there other kind of big things to look out for? If you can’t say specifically, we could just talk about it in a more general sense of if you were advising me, an entrepreneur, and I had two offers on the table for my business, cultural aspects aside for a moment, assuming there’s a cultural fit or I believe there to be a cultural fit between both buyers, what would you coach me to look for in the two offers that I’m comparing? Again, I’m trying to get into the kind of specific deal terms, or gotcha clauses, or things that you’d coach me to look out for.
Tina Youngblood: Yeah. If I was coaching you, and I have done this, by the way, I’ve had some experience in doing it. You look out for a couple things. One is certainty. So, if one offer has a certainty aspect, a certain aspect to it, meaning it’s a cash deal or on an anniversary date, it’s X, and it’s a certain amount, that’s important. I think rolling over equity is not always a good move for an entrepreneur, or something that’s got a lot of …
John Warrillow: What do you mean by rolling over equity?
Tina Youngblood: So, if the shareholder … If part of a deal had been structured like, “Okay, this shareholder will remain a shareholder in the new company,” that just adds some risk and uncertainty to your future. I think that’s not as attractive. If you’re an entrepreneur and you’re selling your business, I think you should look for … You should minimize the amount of uncertainty in what you’re ultimately going to receive. Nobody gets everything upfront, right? There’s always going to be some element of they either want you to stick around for some period of time to ensure a smooth transition, or they want customer retention. There’s going to be something about the deal that has some level of uncertainty or risk to it. I think you want to minimize that.
Tina Youngblood: Again, if I’m advising you, I’m going to tell you if it’s $100 now, certain, or it could be $200 but there are these seven things that have to happen, you’re better off to really think about taking what you know for a fact, unless you’re 100% certain that you’re going to be able to deliver on all those seven things that they want in order to get more money a year down the road or two years down the road. So, I think that’s an important piece.
John Warrillow: What proportion of a deal would you kind of expect to get, in terms of sort of in certain teams, i.e. cash or certainty around payments. Are we talking at least half of the value, 75%? What would you be … At what point would you kind of raise a red flag and think, “Yeah, that’s a little bit high a proportion to be at risk?”
Tina Youngblood: Yeah. I think you want more than 50% certainty, I think. Again, it depends on the business. It depends on what you’re selling. It depends on who your buyers are. If there’s 75% at risk, that’s a red flag. You don’t want to entertain that. There’s too much uncertainty. Some of it might be out of your control. That’s the other thing to think about. How much of the clauses are things that you can directly control yourself, or your team, and how much is subject to market cycle, environment, somebody else making a decision, like a customer? Customers can say, “I don’t like you and I’m leaving.” It has nothing to do with your product or the deal itself. So, I think if it’s more than … You want at least 50%. A little more than 50%. You want absolutely certain.
John Warrillow: I know, in your deal, we can’t talk specifically about price. Could you talk at all about the relative difference between the two? Were they kind of aligned around value, or was it wildly kind of different? Do you know what I’m asking?
Tina Youngblood: Yeah. Yes, I do. They weren’t that different, in the sense that … It’s interesting. Private equity firms behave similarly, especially those in the same industry, in the behavioral health space, in our case. They weren’t wildly different. I wouldn’t expect them to be, in most cases.
John Warrillow: Why?
Tina Youngblood: Well, because it’s a small world. They’re in the same industry, the same space. We’re different, definitely different, but they weren’t wildly different because they structure these deals all the time, they invest in these companies all the time. They’re dealing with an experienced venture capitalist or private equity firm, they’re going to have their three categories, or whatever it is, of deal terms, and they’re going to be pretty consistent across the board. Again, it’s a small world. They all know each other.
John Warrillow: Mm-hmm (affirmative). Yeah. Interesting. So, what was it that tipped the balance in favor of the ultimate acquirer? Why did you choose them?
Tina Youngblood: You’re probably not going to like this answer, but a lot of it was my gut. You take information in through your brain and the data all comes in, but you ultimately make decisions with your heart and your gut. I felt like I liked the CEO. I liked the private equity group. I know the four. They’re trustworthy. I believed, when they said they were going to keep this many jobs and this level of certainty for my employees, all of those things tipped it in favor of I made the right decision for this business and for the people. Again, the people are what’s most important to me, not just the financial terms.
Tina Youngblood: I knew exactly how many mouths I was feeding. I know their kids’ names, their dogs’ names, so that was really important to me, knowing that I trusted the new owners and that I believed in what they were going to do in the future. By the way, so far, they’ve held up their end of the bargain on absolutely everything they promised. It was a heart decision made with some head input. Ultimately, it was the right decision that my gut told me I was making the right move.
John Warrillow: Did your venture capitalists that invested in the business prior to it being acquired, did they have preferred rights? Did they have any preference? Were their shares pref shares? I’m assuming they were. That’s generally how they invest.
Tina Youngblood: Yeah. Yeah. That’s correct.
John Warrillow: So, how did the founder, who had since exited business, how did they feel about the deal when it was brought to the table?
Tina Youngblood: The founders were very supportive of all of it for the same reasons I just mentioned. It was the right decision for the business and the people. They were both 100% supportive. Again, we were … I feel really blessed that I had such a great group of people around me. They knew it was the right decision, as well. They were fine.
John Warrillow: Again, the strategic value that the acquirers saw in your company was this kind of secret sauce around claims management that you’d sort of codified and built into the tool. That was where you were really kind of industry leaders. Is that right?
Tina Youngblood: It wasn’t just that, but yes. That was a big piece of it. The other piece was they saw the potential to focus this product, our product, on the small to mid-size market segments. So, they saw two pieces to it. They saw the value and the practice management. They also saw that if we took our resources and really geared them toward the small business side of the market, that it would drive overall market share. So, it was a perfect complement to their product, which really was geared toward the bigger business side of the market.
John Warrillow: Got it. That’s helpful. As you reflect personally on the deal now, what are some of your feelings about it, having had a little bit of water under the bridge?
Tina Youngblood: I feel as good about it today as I did when we signed the deal, when we inked it, when I accepted the offer. Again, the more I get to know the new management team, the more exposure I have with the new CEO and with the group, the happier I am. Because they are [crosstalk 00:56:55]
John Warrillow: I guess I meant more practically, for you personally, do you intend to stay on? Are you employed now by the new owners? Is that sort of … Are you [crosstalk 00:57:06]
Tina Youngblood: You mean make it all about me?
John Warrillow: Yeah. Sure. I mean, I guess, you came into a situation as sort of a professional CEO … not sort of, a professional CEO. I wonder, is there part of you that now is craving doing it all over again, or do you feel like you want to stay within the fold of the existing company?
Tina Youngblood: Yeah. So, I’m too young to retire. That’s for certain. We’ll see. I think there’s an opportunity. If there’s an opportunity here with the new owners for me to continue to add value and contribute and have fun at the same time, I would certainly consider it. I always keep my options open. I mean, if the next one comes along that needs what I can offer, I’m certainly going to entertain that, as well. Right now I’m happy. I’m happy with it. I would absolutely consider staying on if they have a role for me and if they have a need for me to fill.
John Warrillow: Got it. Well, Tina, this is great. I know people are going to want to reach out, maybe offer you a job. So, what’s the best way for people to connect with you? Are you a Twitter? Are you an Instagram? Are you on LinkedIn? What’s your preferred means of saying hi?
Tina Youngblood: I definitely am on LinkedIn. That’s probably my preferred.
John Warrillow: Okay, great.
Tina Youngblood: Thank you for saying that. I look forward to hearing from whomever. Whatever next fun role I can contemplate, I’ll look forward to it.
John Warrillow: Well, it sounds like you got your hands full with the current business, and some great partners. It’s been a pleasure to chat with you. Thanks for joining us, Tina.
Tina Youngblood: My pleasure. Thank you.