Tips, Hacks And Countermeasures For Negotiating With A Giant

April 9, 2020 |  

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If you’re working from home amid the COVID-19 pandemic, you’ve probably received a few packages from Amazon. As more people order essentials to deal with “shelter at home” restrictions, Amazon has seen a sudden spike in activity, which is causing them to hire more than 100,000 fulfillment center workers. 

To read a transcript of this episode, click here.

If you’re working from home amid the COVID-19 pandemic, you’ve probably received a few packages from Amazon. As more people order essentials to deal with “shelter at home” restrictions, Amazon has seen a sudden spike in activity, which is causing them to hire more than 100,000 fulfillment center workers. 

Most Amazon orders arrive on time, and the seller gets paid just fine, but a tiny percentage of orders get mixed up, and that’s where a company called VeriShip helps. VeriShip is in the business of auditing anything that gets shipped by FedEx and UPS and recently acquired a company called Valence, which inspects shipments for Amazon Sellers and recovers a 25% commission when they spot a mistake Amazon has made. J L Needham started Valence, and in this episode, J L describes getting acquired by VeriShip.

This episode is jam-packed with negotiation tips, hacks and countermeasures you can use when negotiating with a giant. You’ll learn:

  • Why having a unique idea for a business may be overrated
  • How to use an MBA scholarship to find excellent talent for pennies on the dollar
  • Who a “deal sourcer” is and how to handle a call from one 
  • To measure your “risk thermostat.”
  • How to leverage industry events to meet potential acquirers 
  • How to thread the needle between a negotiation poker face and appearing standoffish
  • How to make your company look bigger than it is when an acquirer wants to visit your location
  • How to measure an employee’s commitment to your business
  • The persuasive role text (not email) can play in getting a deal done
  • How to psychoanalyze your acquirer
  • The difference between qualitative and quantitative valuation
  • How to define your “unfair advantage” and capitalize on it when you go to sell

During the negotiation with executives at VeriShip, J L relied on a colleague to help decipher the messages that were coming from the acquirer. He was paranoid about the deal falling apart, and this individual helped J L distinguish between usual deal pacing with real trouble spots. How about you? Do you have an advisor in your corner to help you navigate the process of selling? If not, complete this form, and we’ll get you in touch with one of our Certified Value Builders who are trained in our approach to building the value of your company. 

Our guest

JL Needham a deal-maker and advocate for businesses pursuing growth on technology platforms. He’s also a bridge-builder and can conceive and run a scrappy startup or operate within a global organization. He has spent 10 years launching ventures and helping brands win in Amazon's marketplace ecosystem, after spending many years at Google during its hyper-innovative Camelot years.

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Transcript

John Warrillow 

If you’re working from home these days, you probably received a few shipments from Amazon. And most of those shipments of course, come find the sellers get paid fine and everything works out fine. But very infrequently, Amazon makes a mistake. And those sellers don’t end up getting paid on time. And my next guest, JL Needham started a business called Valence, which was designed to spot those mistakes and ensure that Amazon sellers get paid properly. Well imagine right now Valence is pretty busy. Amazon has announced 200,000 new workers in their fulfillment centers to take into consideration the uptick in demand it has from all of us working from home and so the business is very relevant right now. But JL, in this episode talks a lot about some of the negotiation tips he learned from selling Valence to a company called Veriship. And I want you to pay special attention to what strategic M&A guys and gals called strategic pacing. And strategic pacing is when the other side of a negotiation drags its heels in getting back to you. As the owner of a business and founder of a business, you probably got a lot on the line when you go to sell it. And so when you send an email, every hour that goes by without receiving a response feels like a week, and JL does a tremendous job of describing that and gives you some tips and tricks for how to avoid negotiating with yourself and looking too desperate in the process of getting a reaction from the other side. It’s just one of many tips and tricks JL shares in this episode. Enjoy this wide ranging conversation with JL Needham.

 

John Warrillow 

JL Needham. Welcome to Built to Sell Radio.

 

JL Needham 

Hey there.

 

John Warrillow 

So what does the JL stand for?

 

John Warrillow 

John Lewis is the name my mom calls me and professionally I go by JL.

 

John Warrillow 

There’s a very famous shopping company in the UK called John Lewis. I like JL. It’s got a good ring to it. It feels sort of like, I don’t know like a famous author, I think of JK Rowling or something like that.

 

JL Needham 

It’s the result of the name John being so common. I joined an employer 20 years ago, and there were two Johns in the team and so I was told by my boss to pick a new name.

 

John Warrillow 

That’s great. We might be the same vintage like when I was growing up. I was born in 71 and everybody had the name John. I had like four John’s in my class.

 

JL Needham 

Yeah.

 

John Warrillow 

Well, it’s great to meet you JL and I want to hear about this company Valence. So how did this company start? Describe the business problem you were trying to solve.

 

John Warrillow 

Sure. So Valence is a auditor for Amazon sellers. An increasing share of our economy, as you know, has moved to the Amazon ecosystem and there hundreds of thousands of businesses sell their products. And in doing so, Amazon can make mistakes on how they handle the inventory of moves through their fulfillment center network. And when that happens, a seller can be out $100, a thousand even 10,000. And without the know-how they can’t get that money back. And that’s the the solution that Valence has brought to the table which is identifying, tracking those errors Amazon makes, and then persuading Amazon to give them money that’s owed to the seller. So that’s the problem that we solve. But we weren’t the first to solve it. We’re a B2B business. Others innovated and created this years before we got into the game. But we knowingly said, “Hey, we could do this better. We could do this for a particular type of seller.” And that’s how we got started.

 

John Warrillow 

What was the unique angle you want to bring to it?

 

 

So Valence was spun off of a larger business known as BuyBoxer that I’d been involved in building for seven years. And we saw that the Amazon ecosystem was moving more toward brands selling direct to Amazon shoppers, it’s the kind of the direct to consumer B2C phenomenon that’s been reshaping how brands now operate. And recognizing that brands would value this service, even more than a retailer would because they don’t have retail operations in their DNA. And that as they were moving into that business model, we’d be there to help them and so that’s what we launched to do is to really focus on one type of customer, one that we knew wouldn’t be as profitable or as big at the outset but over time will become more strategically valuable. And that proved to be the case.

 

John Warrillow 

So if I’m like, I’m thinking of the cosmetic company, Kiehl’s, are you familiar with Kiehl’s?

 

John Warrillow 

Yeah, sure.

 

John Warrillow 

So if I’m Kiehl’s I believe they sell on Amazon as an Amazon seller. It’s a Kiehl’s branded product they sell as an Amazon seller to Amazon. Is that the kind of brand that you would you would work with?

 

 

Yes. Actually your most recent guest SPY Optics, the CEO of that company, they’re clients of Valence. And so they operate on Amazon, like other brands, such that they are selling directly to the consumer. They do that by putting their inventory into the Amazon fulfillment centers through the Fulfilled By Amazon or FBA program. And that’s how the errors occurred. So they’re interesting, this inventory, Amazon’s managing it. Amazon has a very large operation. Robots and humans running around doing things and stuff goes wrong. Fortunately, Amazon documents what goes wrong and thus we are able to isolate the error, place the value on it and then persuade Amazon to reimburse for the year.

 

John Warrillow 

I’ve still like fuzzy. Like I sort of conceptually get it. But getting into the weeds of it, it must be very difficult to to track all this stuff. Why doesn’t Amazon do it? Why do they need a third party?

 

 

They actually do automatically reimburse for some of their errors but if you as the seller want to get all the money owed to you, you have to have an auditor. You have to have someone who comes in and looks for these smaller errors orthe bigger systemic ones that Amazon itself doesn’t recognize. And then make the request for it based on a dollar amount with documentation, all the rest. I’ll give you a couple of examples. When you ship products into the Amazon fulfillment center network, again, world’s largest operation of its kind, stuff can go wrong. One box on top of a stack can go missing. The robot can open the box and count 22 units rather than 24. And each of those errors accumulate and become meaningful. Another example is there are we’ve identified eight different ways that Amazon can mishandle return. So when a shopper receives a product, doesn’t like it, sends it back, there are eight ways that Amazon’s staff can incorrectly process that return. And that should not be at the cost of the seller. That should be Amazon’s cost that they’ve incurred by not doing it right. And so we we track that and then take care of it.

 

John Warrillow 

I’m guessing you’re not on Jeff Bezos’s Christmas card list?

 

 

Well, no, we don’t we don’t improve their margins. At the same time, we are a developer in their community, we were creating value for their sellers. And to the extent that their sellers feel more confident about investing in their Amazon sales channel because they have an auditor backing them and catching errors, the more likely they are to then grow that the size of their business or that side of their business and Amazon does win. So they don’t necessarily make our work easier, but they do make it possible by virtue of the reporting that we tap into they provide to perform the auditing.

 

John Warrillow 

And you raise a good point, if the whole system is more transparent, more effective, it does improve the health in the long run of the entire ecosystem.

 

John Warrillow 

That’s right. Yeah. So my backgroun is big tech, I worked for Google for close to a decade, I’ve been working in the Amazon arena for about 10 years. Now I work for Adobe, indirectly for a bit. And so big tech thinks this way, they think we need to feed our ecosystem, we need to empower everyone, even if they’re not necessarily friendly, we still have to do it. Conversely, so the company that acquired Valence, we’ll talk more about that, does auditing for FedEx and UPS and we don’t see the same kind of outlook there, the same posture. It’s more of a positional posture by  these carriers. They’re not tech companies by DNA. And so that’s why Valence was able to develop within Amazon because we have that access to the reporting that Amazon provides. Well, that makes so much sense. So what’s the business model, how do you get paid? Commission?

 

John Warrillow 

So every hundred dollars you bring back we invoice for, say, 25. It’s a negotiated commission level with larger clients. But for a standard client, it’s 25%. And generally everyone just embraces it. They think that’s fair. We didn’t have this money before will give you kind of found money. Right? Exactly. Yeah.

 

John Warrillow 

Makes sense. So how big did you get this business before you decided it was time to sell?

 

 

Well, we were getting bigger. Let’s say we were fulfilling our potential. The number that is most impressive as we were close to a billion dollars in annual Amazon sales, managed across hundreds of clients and had about 12 or 13 people on staff and all based here in the US in Utah where we were formed. And since then, since the acquisition, we’ve shot right past that billion dollar mark and are moving toward the second billion and it’s going to be upward from there. So if

 

John Warrillow 

I’m SPY Optic and iPad, I move 100 million dollars of inventory into the Amazon fulfillment centers, that would be considered 100 million dollars of what you call it distributor.

 

 

Yeah, that’s a sales. That’s the math. Yeah. So they’re they’re doing some 10s of millions a year on Amazon. So yes, we manage that volume that fits into that, that number.

 

John Warrillow 

Got it. And a portion of that would be stuff that goes missing, etc. And that’s the stuff that you would recover Got it? Right, that makes sense. And so what triggered your decision to sell this business?

 

 

So I’ve been reflecting on that question. And if you look at the story of the company, from today’s vantage point, it looks very formulaic like the whole thing was conceived to do exactly what it did. In the moment, it was, you know, more chaotic, but it was me deciding three years ago roughly, to take an opportunity to hire four grad students at the University of Utah in an entrepreneurship program, they were all doing MBAs related to entrepreneurship to validate three different business ideas. So I’ve been working in the Amazon arena for a while part of a larger company that’s historically the largest Amazon seller, by product assortment in the Amazon program I was describing, what you know as Prime on the on the, on the shopper side. And I developed three ideas, three things that I thought we could do, two of which were me too, like someone else had already done them. I just thought we could do this better. And so I took the three ideas to the grad students and said, validate, do the analysis tell me which of these opportunities is the most compelling how we would pursue it? And one of those three was the business that became Valence. And so it was very, you know, laboratory experiment and like, you know, kind of thoughtfully conceived. Other businesses I’ve been part of, you know, much more kind of, out of nowhere, but this was very orchestrated.

 

John Warrillow 

How did you pay the MBA students?

 

 

A scholarship, they all got a, you know, addition to their, their tuition money, so to speak for the two semesters. And then and this was the major kind of breakthrough that that represented, one of the four proved to be very capable. He was the one who actually validated the Valence business model. And when it was time to run with the business, he was the logical choice to  be the general manager. So I hired him, Jason Spar, and he then ran the business captain for the two plus years that followed before the acquisition.

 

John Warrillow 

Fascinating. Did you work with the university already, like did you have a pre existing relationship with them?

 

 

No I got it from an entrepreneur friend. This is the sidebar. It’s so important to develop a network among other entrepreneurs even if you don’t fit in the same industry segment. This this guy works in medical. He just you know, we’re chatting and he gave me this tip that this program had an opening and you know, I could fill it, I could bring some money in and get access to these students. And that’s where it all came from.

 

John Warrillow 

Fascinating. And so that’s how you hired or validated the idea. But it doesn’t answer the specific question about what triggered your decision to sell it.

 

 

Right. Okay. So we were about two years into growing the business. We’d achieved strong fit with the target clients. We were winning business and investing aggressively in our software development and staffing our operations team to do that interaction with Amazon. But cash flow was a challenge. Amazon had gotten kind of in the way of the the revenue projection we’ve made on which we based some investments in people. And that led to me and Jason agreeing, okay, let’s go get funding. It’s time to go to an initial round. And we were just in the process of having an initial conversations with VC types and building our deck and struggling with that process and kind of wary about how long it would take to get that funding, when out of the blue we got an overture through LinkedIn from a deal sourcer, as I now know her identity to be basically at a private equity company who was just you know, inquiring, would you be interested in selling your company?

 

John Warrillow 

What is a deal sourcer?

 

JL Needham 

So private equity

 

John Warrillow 

Not to be not to be confused with the deal sorcerer.

 

 

I don’t know if that they all go by that title. But that’s the description. I’ve now learned of it, which is that private equity companies staff a variety of positions, one of which, and that tends to be a more junior associate level contributor who just go talk to entrepreneurs all day. They look for interesting looking companies, they analyze what they can from a distance and then they make an overture and that’s what happened here. In this case was very targeted or calculated in that this private equity company owns the company Veriship, which is now the owner Valence. That’s the spoiler of the story here. And they decided, Okay, we need to go acquire an Amazon audit services to match our FedEx and UPS audit services to round out our business to diversify. And so that’s why she reached out to us.

 

John Warrillow 

Awesome. That makes sense. How did you finance the business in the first, you know, before you hire Jason. Was it self financed? Did you have investors?

 

JL Needham 

My savings. We had a bit of cash from other sources, but I was the funder of the business and wasn’t so comfortable, you know, I had savings to tap into. I joined Google pre IPO. So I got a boost back then. But when we decided to go get funding was because I was running out of those savings that I could comfortably dedicate to the business.

 

John Warrillow 

How did you think through what proportion of your net worth you were willing to invest in Valence? Did you have number? How did you come to that number? I think it’d be curious in particularly times now where you’ve got a lot of owners who are looking at their entire net worth saying, Oh my gosh, the public markets have just tanked. You know, the value of my business is probably down. And they’re going through all those machinations and calculations. So how did you think it through?

 

 

Well, as you know, everyone has a different relationship with money. And our relationship with money tends to be very conditioned by how we were raised, by a parent or both parents, how they kind of talked about it and acted. I was raised by an entrepreneur and my father, together with my mother risk a lot of capital a lot of the time as we were growing up, and so I had a pretty elevated thermostat reading, you could say for risk, so I was prepared to risk a large share of what I had saved, and that’s, in fact where I was as we were closing in on the deal. But that wouldn’t be other people’s thermostat setting. You know, others might be a little more moderated.

 

John Warrillow 

I love that concept of a risk thermostat. So you go to raise money in order to fix this cashflow piece. And you get this overture. Did you like what was the next step? Did you immediately engage in an LOI, a confidentiality agreement with this this private equity group or did you shop it more widely?

 

 

So here’s the other side of the story that again, in hindsight makes it all look like it was kind of planned to happen. Not too many months into building Valence, I went to a trade show for e-commerce service providers, shop talk. And there I checked out everyone that was doing stuff comparable to what we were doing and other parties and bumped into a business called Veriship and was very impressed by a lot of what I saw. They were like Valence auditors for e commerce and they were much more mature than us. That was evident and the guy spoke to their pitched me for a good 30 minutes on their business not knowing who was talking to like I was kind of a competitor but not really I was in a different segment but doing the same thing. And it just so kind of swept me off my feet and for the next year to two as we were building Valence every time I wondered what we do next or what you know, what’s our next move, what do we want to be when we grow up, I would look at this company Veriship and just kind of study how they were doing things and and you know, it was very inspiring actually to see what we could become. And so when this overture came through LinkedIn from the private equity firm behind Veriship, Summit Partners is their name, and thereafter within like a day, I think we got a calendar invitation to a call with this person and then we saw a Veriship email address on like, Oh my word like this is exactly we want to talk to. So at that point we they’d already sold us like we didn’t have to say anything. Now we didn’t, of course, make that declaration. We played poker face as you would expect, but we knew there would be a high potential for a deal to be good for both parties once that became evident.

 

John Warrillow 

How do you play poker face without seeming standoffish?

 

 

Yeah, I think what you do, what I did in two critical initial conversations, one over the phone, one in person that the CEO of Veriship flew out very soon after our first conversation to meet, was just try to, I guess, project confidence obviously, but also just knowledge that you like you that you know your stuff. And that, you know, you’re going as well. You want to just be the sort of person, sort of team that another party wants to be with, if you will. And so I did a lot of talking about how we see broader e-commerce trends, how we are managing our risk within Amazon as a single source of revenue and that seemed to just click or flip the switch so that within the second conversation, the CEO said, basically, hey, we want to buy you so let’s figure this out.

 

John Warrillow 

How did you allay their concerns that you were so deeply dependent on Amazon as your source of revenue?

 

 

By virtue of the fact that they, Veriship, were and still are so dependent on FedEx and UPS revenue from a similar business model. So for them, this was a diversification move. And it was also for us. We would be adding diversity to them, so that was more of a plus than a minus for us. The minus for us was that we were just a lot smaller than them in scale. And the revenue we were generating was not so meaningful compared to the value of our technology and the price we were placing on that technology.

 

John Warrillow 

I don’t mean this to sound pejorative, in a way I’m asking the question, but I think many listeners to this podcast would would be interested in the answer. You’re a 12 employee company as you get approached and hear that this big hotshot CEO from Veriship, a private equity backed company much bigger, much more mature than yours. How did you practically handle the fact that there were only 12  employees? like did you hide it? Did you go to a hotel? Did you invite them right in to see the size of your operation? Do you know what I’m asking? Did you feel squeamish at all about being only 12 employees? And I’m not suggesting that’s small but I think some people might feel a little bit a bit uneasy about letting people see underneath the covers like that.

 

John Warrillow 

Yeah, there was definitely some insecurity to it. Just to add to your your storytelling here. The CEO was actually the former CEO of TD Ameritrade, a guy who was running very large organizations. And so yeah, and he carried it. He’s a very charismatic and knows what he’s doing. Yeah, exactly. So well, we happen to be in a Regis office setting. That’s where we’re at. This was where we were then and still are today, an entirely remote team. So we were, we were pandemic prepared at that time. But we did have a temporary place where we met and we arranged for a conference room and we wound up having to squeeze into one room at one point. And it was a little uncomfortable to have the CTO and CEO with us there. But I think they saw us for who we were and the talent we represented, they could tell right away that our tech was for real. Our CTO is just sharp. He’s been in the Amazon space for a long time. He’s also my brother. So I had the advantage of  a trust based relationship there. And they could see that in him. They’re their CTO connected with the CTO of Valence right off and the CEO and I, you know, we jelled so. Yeah, that was a little scary, though. I have to say we were prepared in every way we could be for for the visit, knowing the importance of the impression we make.

 

John Warrillow 

How did you stick handle the equity piece of things with your brother?

 

John Warrillow 

Yeah. A book I read twice, during the first year of building Valence, that’s onesI recommend to your listeners is Peter Thiel’s Zero to One. Peter Thiel, co founder of PayPal. He offers a lot of principles for kind of almost natural laws, by which you run a startup or you build a company, one of which is that you you pay very close attention to the degree to which a contributor, especially a manager  contributor, is prepared to take equity versus near term compensation, otherwise known as a salary. Everyone has to pay the bills, of course, but I think it’s a really valuable conversation to have. And I’ve almost learned to just kind of push people, would you consider blowing your salary, this amount for that much equity? Not because it’s necessarily that important for the budget to work for the compensation budget, but just to see where people are on their commitment to what you’re building. So that’s a backdrop to say it was a bit tricky to ensure that all the co founders, there were five of us in the end, had a share of the equity that was proportionate to their contribution and, and how much salary they were weren’t taking. But we got it right. In the end, it was challenging, but we got it right.

 

John Warrillow 

So I’m assuming your brother is one of the co founders.

 

 

Actually, two brothers who are co founders. These, these are the two with whom I was building and I’m still associated with the BuyBoxer business that spun off Valence.

 

John Warrillow 

So I’m assuming you all said you tried to say okay, like, here’s a market rate salary for what I do. And and I’m willing to give up, you know, 40% of that salary in return for you know, what we agree is this, this value and equity, and another brother might say, well, I’m only willing to give up 20% of that because I’ve got a family and kids are Is that the kind of conversation you guys had?

 

 

Yes, with the brothers, it was simpler because we were being salaried by the other entity. And so it was more of a, we’re we’re contributing this technology, we’re contributing a bit of my time. Therefore, this is the reward, we should get back as co owners of the larger entity. For the other two co founders who were operators, there was a function of market salary for you would be x. But since you’re taking y, we’re going to offer  you z in additional equity.

 

John Warrillow 

Got it? Got it, which we think will be worth 2, 3, 4x some point down the future is that the math?

 

 

You tell that story hoping it’s true, and they believe it hoping it’s true. And then on occasion, it actually works out as it has here.

 

John Warrillow 

And so what multiple of x do you think you were able to deliver for those, those cofounders of what they gave up?

 

JL Needham 

Yeah, I haven’t thought about that math. So Jason Ppar, the the general manager of Valence would be able to give that number right away because he’s a great quantitative analyst. I would say it was at least four to six times I’m thinking what they gave up.

 

John Warrillow 

That’s awesome. Good for you. Good for you. So let’s get into the transaction stuff. So you’re approached by the private equity group, you get into the conversation it turns out it’s VERIPSHIP behind the the screen. What next? How did you guys come up with the terms? Did they come to you with a term sheet? Did you propose sort of something?

 

JL Needham 

So there was a series of back and forth communications, in writing and over the phone to get to a Letter of Intent. And and then once that intent arrived, then there was further and this was the challenging dynamic we faced: the CFO of Veriship is a very capable quantitative type, as is, Jason, as I mentioned, Valence’s general manager, and the two of them would go off on a track of analyzing revenue and lifetime value of clients and all that, that would lead to a certain kind of conclusions, while the CEO and I were talking strategy and the qualitative value of what we were offering, how it would position Veriship to do X and Y that they couldn’t do. And in the end, the valuation was not so attractive. It was just based on the hard numbers. It was much more attractive to us. And we thought it would be kind of more inspiring to them to do the deal if we could do the qualitative-based valuation. And so there was a there was tug of war throughout. And the warning I would offer is that anytime you have those quants in the circle, they’re going to want to pull it into like a very hardcore kind of conventional financial analysis which says, this company is worth seven figures of this amount. Whereas if you do At different analysis, you can come to a completely different conclusion. And there’s probably a case in general to do a bit of both. And the answer then is to find the right ratio of the two of quantitative to qualitative.

 

John Warrillow 

But at some point, even your qualitative discussions have to find their way into being quantitative, right? Like they’ve got to come up with a number at some point. How did you guys while spinning this kind of qualitative narrative, how did you take that to like to into like, here’s what the valence is worth as a result of that narrative?

 

JL Needham 

Yeah, so we we did some revenue forecasts for what could come if we were to put the Valence business on the platform that is Veriship, we did some projections of what we could do with two different additional services that we could roll out as part of the acquisition, post acquisition through the integration process. And with that, we were able to tell a story in which we were projecting a really Large numbers. So your to your point, yes. So the qualitative has to then become somewhat quantitative. And we did do that. But again, the quants in the circle would want to focus on today and what’s like actually happening now versus what we could do in a speculative way in the future.

 

John Warrillow 

Fantastic. So it’s a really good point. So your, your quants are gonna look historical, like this is the business today, whereas you’re trying to get get everybody focused on here’s what the future is, here’s what the strategic value of the two together is. What did you did you have a sense of what the business was worth, either on sort of a multiple of revenue that you value a company like that on?

 

JL Needham 

Yes, that’s right or on revenue or on EBITDA so the kind of net income. And both were used in the valuation process here, as were other factors. Candidly, though, when when the LOI was on the from the other party, I had no idea what that number is going to be. We were hoping for X. And we were preparing for Y and it wound up closer to Y. But still, you know where we were, we thought it was workable. We did tell them what we thought the company was worth at the outset. And we had the benefit of being able to say, Hey, we’re in the middle of a funding round, we’ve already done the initial analysis, it tells us that we’re worth X to Y. And we’ve had that validated by some VCs. So make your offer. So what we were kind of firm about that to start.

 

John Warrillow 

I don’t think you shared your revenue, or EBIDTA. So I’d be curious to know what you thought based on the funding round, your multiple of revenue would have been on that raise?

 

JL Needham 

Yeah, let’s see. I think trying to remember. The valuation we came to, in preparing for the the venture funding round was actually a lot less tied to revenue. It was more more tied to growth potential. But I think we’re looking at a valuation of eight to 10 times future EBITDA. We basically broke even in the year 2018. And so we were saying, here we are breakeven. Now we can grow at this pace. And if we had funding, we could grow at that pace. And we would generate this much in EBITDA therefore, eight to 10 times that, I think, was something like that in our model.

 

John Warrillow 

Interesting. And so how did that play out when you got the Letter of Intent was lower than than you’d hoped?

 

JL Needham 

Yeah. But it was still in range, like it was in the in the span we’re kind of envisioning. Well, what ensued was a more tense negotiation. Tense because I didn’t know whether they would just walk away on us like, you know, they had other options. They had other things going on. The CEO was relatively new the role and was clearly focusing on other priorities. And two things really factored in that process. I’ve been reflecting on it. One is that I took advantage of two unfair advantages I have. That’s another concept that you encounter in Peter Thiel’s book is unfair advantages. Every business has one or more, versus other competitors. In my case, I trained to be a book editor and have worked a lot with the written word and communication. And so I did a lot of writing about our argument for the deal value in response to what I was getting from the other party, and that helped me refine the thinking and recognize that we were wrong about this and right about this and to really double down on what was we thought fundamental to the deal. So there’s a lot of written communication that we did, and later I heard from the CEO like that was very persuasive to him to have that in front of him and to be able to pass it along to the private equity company and make the art argument. The other unfair advantage I had was that my partner is a professor of business management at a university. And she’s taught negotiation for a decade. And so at every turn, I say, Okay, what about this and that and she would help me kind of go through the scenario. And so again, I’m sure all your listeners have certain things they can bring to this process that others may not have. And you just need to really lean on that and believe in it.

 

John Warrillow 

What was the best negotiation tip you got from your partner?

 

JL Needham 

We spent a lot of time psychoanalyzing the CEO, and wondering what would inspire a guy who’s seen many big deals this was a small deal, very small compared to what I think he managed before. But as you hear in the world of private equity and and deal making like this, every deal takes roughly the same amount of resources and energy to do. Like there’s the same kind of experience to it. And so she was very helpful in recognizing what he was signaling in a way that I didn’t see it and just taking very seriously the emotional quality to to the experience for both parties.

 

John Warrillow 

What kind of psychoanalysis was she doing? Like what what was she seeing?

 

JL Needham 

There were points when it was fear that they were just gonna walk away, I think she helped me recognize that the signal they were sending wasn’t actually disinterest but was actually let’s say them being poker faced, them like waiting for us to to make a move. That’s my my best memory of it. It was especially just you get really nervous when you have a big deal in front of you that could just disappear. Like I mean, it’s very hard to sleep. It’s very hard to eat or to concentrate when this is all there. And so having someone in my case I could turn to you to remind me Nope, it’s fine. So far all signals are positive. There’s nothing to be freaking out over there. There was a weekend we were hiking in southern Utah going from Grand Staircase Escalante, kind of attraction to the attraction and supposedly enjoying ourselves when I was waiting for a response to something and it didn’t come and it didn’t come from the CEO. And by Monday, I talked myself into the fact that deal was gone. It was over like you’d walked away on on us. Turns out he was doing the same thing in Canada. He was off the grid and just couldn’t respond to me because I got a text from the first thing Monday once he was back. And so she helped me make it through that weekend, even though it was tough.

 

John Warrillow 

I love this stuff, by the way, I think this is great because I think, you know, especially when you write with such eloquence and such effort and you put so much thought into writing something persuasive, you send it off, and the writer in you must have just been craving reaction, right? You’ve got this through in every possible dimension. And you’ve said it and all you want is something back and it’s crickets. Right? How you managed through that?

 

JL Needham 

Just captured it right there. Yeah.

 

John Warrillow 

Yeah. I find it so fascinating that you were able to get through it. How do you discern between strategic silence on the other end of the line? And I don’t mean, physical phone line. I mean, like, you know, you send something off and it takes them 5, 10, 12 days to get back to you versus the deal is, in fact, off the table? Like, how would an entrepreneur listening to this try to tease out whether, in fact the deal is on life support or if it’s just a natural negotiation stance the other side is taking?

 

JL Needham 

That’s a tough question to answer but what we did succeed at is taking opportunities to have side communication. There was a point when we weren’t hearing from Veriship, I was able to connect with the original party that reached out in the private equity company and she gave me a signal that reassured and clarify. There was a point where we would use our law firm to communicate with our law firm to confirm this and that and kind of communicate with the CFO on one track. So establishing as many lines of communication as possible, including informal ones. And also texting made such a huge difference to the just keeping rhythm. You know, email, you have to do communication around the deal documents by email, that’s the only way you can do it. But texting can help you kind of keep the heart beat, you know, hearing it and knowing that you’re on track and that this is in the way now can fix this. So multiple lines of communication, I think is the answer there.

 

John Warrillow 

Love it. So you establish a text relationship with the CEO?

 

JL Needham 

That’s right. He’s a hardcore texter. So he was just doing that constantly and I just realized, okay, this is how I connect with the guy.

 

John Warrillow 

So you’d send an email cc’ing 60 million people and then you flip a text to him say, hey, just sent you an email, heads up.

 

JL Needham 

That’s exactly right. And then I would ask our GM to, you know, communicate a detail with the CFO, just to find out where the CFO was, you know, it was more of like a ruse to see wherethey were on that side of things.

 

John Warrillow 

Got it. Got it. Love it. So how did it go from there? So you’re, you’re in the throes of this negotiation, presumably at some point, you signed a Letter of Intent and, and agreed, and, at least in theory entered.

 

JL Needham 

And well, what I’m describing the drama I’m describing happened pre LOI, post, and then as we were closing in on signing the documents, there was a point at the very end where the deal almost fell apart. And so you know, the drama kind of came and went over a six to eight week process.

 

John Warrillow 

What made the deal almost fall apart?

 

JL Needham 

The quants got really busy with the revenue numbers and weren’t impressed by the numbers they saw from a month that just ended in the middle of the deal process. And so we had to kind of revisit the structure. In the end, we had to give up a little bit of the value, we actually kept the value, the end deal number stable, we had to put more into the burnout structure as a consequence, and that was the kind of outcome for us.

 

John Warrillow 

How did you end up structuring the deal? Assuming there was an earnout component, like how did you kind of do the actual deal itself?

 

JL Needham 

Yeah, so if we had been fussy about the structure, like wanting it to all be cash or mostly cash. We would not have had a deal. The company wanted to do a deal that was more stock than cash just to protect their balance sheet for the next ventures for the company. And so we had to bendfurther in that direction. And so in the end, we wound up with a deal that’s majority stock and a meaningful amount of cash.

 

John Warrillow 

And the stock is in Veriship?

 

JL Needham 

Yep, that’s right. And I should mention that all of us on the team are offered positions at Veriship, and that’s where I work today. So we’re all there, helping to build the Amazon business for the company and also now helping to build the carrier focused business, the FedEx and UPS business.

 

John Warrillow 

What was the dynamic are among the five co founders as it relates to valuation? Did you agree whereas there are major differences in opinion?

 

JL Needham 

So the GM, Jason and I, ran most of that process and the others just trusted us. Since everyone had a slice of the pie, we were all kind of in it together. I would give periodic report updates and get reactions, but mostly Jason and I were… And I have to give him credit like he and I, he was the sounding board to help me think through the numbers, whereas my partner was helpful on kind of the negotiation tactics.

 

John Warrillow 

That’s helpful for sure. Ultimately, if you had to do over again, what might you do differently?

 

JL Needham 

Not experience as much drama. But you can only say that in hindsight, I don’t I don’t think there was as much going on on their side as we assumed there was, but we were the party that was yearning for the deal in the end. And consequently would have probably held out for a bigger number and a less demanding earn out performance criteria structure. So we’re we’re obligated to deliver pretty interesting results for the company to receive the full earnouts. So they negotiated a really attractive structure for them, I would say, and had we felt more confident about the fact that it was going to happen and that we were, you know, as attractive as we, I think what we were to them in the end, we would have gotten better numbers. I’m happy in the end, but yeah, and as I mentioned, in our side conversation prior, I’m in the process right now of potentially packaging another business for sale and so I’m going to be more confident and you know, prepared fo to the process to go slow and be you know, a bit of a job. So that and I’ll give a value as a result of that.

 

John Warrillow 

Interesting because you’ve had the experience of the emotional, you’re almost negotiating with yourself at some point. I wouldn’t be too hard on yourself in the sense that this is you put most of your life savings in this right. So this chance to get some, right. Yeah, yeah, yeah. Whereas I feel, you know sometimes when you hear about entrepreneurs have sold 10 businesses and this is their 11th. Well, no guff, they’re a little calmer in the process, because it’s not 90% of their net worth or whatever. It’s not a huge proportion of their wealth. And this is just another transaction. Right? Well, good for you. So you’re now at Veriship. And and you’re you’re also doing other things, if people wanted to reach out JL. Is there a way to do that? Is it Do you want to point them to a website, I’m sure we have lots of Amazon sellers that that listen to this is there somewhere, they should go to learn more about Veriship?

 

JL Needham 

Yeah, so the very ship website has a contact form, so they want to learn more about the Amazon audit service that Veriship offers or the auditing for FedEx and UPS, if they’re a very e-commerce centric business, that’s the place to go. I’m also happy to field questions through LinkedIn. I get overtures there a lot. In fact, it’s the case that when you sell a company people notice. I’ve received a lot of inquiries from various parties just interested in learning more. And it’s led me to actually reach out to others who are in this kind of chapter of their career to connect and chat. So yeah, Veriship website or LL Needham on LinkedIn.

 

John Warrillow 

Fantastic and you use the initials jL and Needham is NEEDHAM I believe, correct?

 

JL Needham 

That’s right.

 

John Warrillow 

Excellent. Well, JL It was a pleasure to speak with you today and I appreciate you sharing the story.

 

JL Needham 

My pleasure.

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