How To Get Acquired By A Partner

April 24, 2020 |  

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Adam Ochstein started an HR software company called StratEx in the depths of the 2008 recession. CEOs were asking HR managers to do more with less and Ochstein’s software promised to help HR managers do just that. Despite the challenging economic environment, StratEx was an early success and was particularly popular with restaurants. Ochstein decided to focus on the hospitality sector and forged a partnership with Toast, one of the fastest-growing Point of Sale (POS) providers serving restaurants. The collaboration was a success, and StratEx ballooned to 160 employees. 

To read a transcript of this episode, click here.

Adam Ochstein started an HR software company called StratEx in the depths of the 2008 recession. CEOs were asking HR managers to do more with less and Ochstein’s software promised to help HR managers do just that. Despite the challenging economic environment, StratEx was an early success and was particularly popular with restaurants. Ochstein decided to focus on the hospitality sector and forged a partnership with Toast, one of the fastest-growing Point of Sale (POS) providers serving restaurants. The collaboration was a success, and StratEx ballooned to 160 employees. 

Toast raised $250 million in early 2019 and, in July of the same year, took some of that money and acquired StratEx.

For a value builder, the most critical lesson in this episode is in the way Ochstein struck his partnership deal with Toast. He included an option for Toast to acquire StratEx at a pre-arranged valuation so that Toast would not begrudge how quickly they were enabling StratEx to grow. The agreement also had a stipulation that restricted Toast from acquiring one of Ochstein’s competitors. It was a brilliant stroke of genius, which gave Ochstein a built-in exit strategy. 

This episode is peppered with insights including:

  • Two things Ochstein wishes he had done differently in building StratEx
  • How to divide up your sales territories
  • The secret to competing with a Fortune 500 giant
  • Definitions for terms like CAC, LTV and NPS
  • How to structure your earn-out

Ochstein started his HR software company as the economy hit a wall, and the recession (and an influx of giant competitors) forced StratEx to focus on restaurants to survive. This need to concentrate on a specific industry enabled Ochstein’s relationship with Toast and ultimately became the secret to a successful exit. How are you planning to pivot in the face of the COVID-19 pandemic? If you need an outside perspective from someone who has been there, request a conversation with a Certified Value Builder™ today

Our guest

Adam Ochstein is a proven sales and management executive who has run both startup and large scale organizations in all aspects of technology for close to twenty years. He led StratEx from a concept to one of the industry's elite Employment Lifecycle service companies focusing on the small and mid-sized business market.

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Transcript

John Warrillow:

If you’re looking for a little inspiration these days, look no further than Adam Ochstein. Adam started a company called StratEx, which was in the business of providing HR software. He sold that company to Toast, one of the fastest growing businesses in the restaurant category. They sell POS software to restaurants. What’s really fascinating about Adam’s story is how he started his first business, which was immediately following 9/11, and he started his second business, which was the business that he sold to Toast coming out of the depths of the 2008 recession. Through tremendous adversity and almost the necessity, he was able to pivot in both cases and create a successful business, which went on to get acquired in 2019. If you’re looking for, again, a little bit of a silver lining these days, what some of this economic turmoil will do is force you to make really tough decisions.

John Warrillow:

In good times, it’s easy to carry a bit of extra fat, a few extra business lines, may be some people that aren’t really fully optimized, but in difficult times, it really forces us to make really tough decisions and go into a business that we know we can compete, and that’s exactly what Ochstein did. I want you to listen very carefully for how he structured his partnership with Toast. For me, that’s really where the tremendous insight is in this. He structured his deal with Toast so that they had an option to buy him. I don’t want to go through all the details, but I think it was a brilliant stroke. Here to tell you the rest of the story is Adam Ochstein.

John Warrillow:

Alec Ochstein, welcome to Build to Sell Radio.

Adam Ochstein:

Thank you.

John Warrillow:

Where are you located right now?

Adam Ochstein:

I am about an hour and a half outside of Chicago in Southwest Michigan.

John Warrillow:

And hold up like the rest of us in this COVID-19 crisis.

Adam Ochstein:

Absolutely.

John Warrillow:

Tell me about this company. I understand that you started it in a crisis of sorts. Tell me about the genesis, how it came about.

Adam Ochstein:

Yeah. We pivoted a handful of times. I guess, a good lesson for an entrepreneur is don’t be so stuck in your ways when the winds change with you. We started StratEx the summer of 2001 and right when the dotcom was turning into the dotbomb and all the tech startups were imploding. We started StratEx as a sales consultancy working with venture-backed tech startups that had a good, maybe a good product or business model, but bad sales execution. Right when we were getting a handful of our first customers, I was actually based in New York and up in Boston kicking off a new client engagement right when 9/11, the planes hit the World Trade Center at 9/11. That’s probably the closest I’ve felt to what we’re going through this week and now with the coronavirus fear pandemic, was not really understanding what was going to occur next and our world permanently changed.

Adam Ochstein:

The lesson I learned there, and really understanding at the time and understanding it now, is that, if you have belief in what you’re doing and your business model, you see it through and you stay focused. Also, just head down and work through anything because hard work will always pay off.

John Warrillow:

How did you deal with the practical realities of things like cashflow? Because I’m assuming these venture-backed startups after 9/11 are not paying their bills. They’re certainly not engaging a lot of sales consultancies.

Adam Ochstein:

Yeah, it was definitely a challenge. We were fortunate enough that we were still small enough that we were just funding a handful of our salaries and a handful of consultants. It was challenging to fund, but we were able just to be really thoughtful on how we preserve cash, as most business owners know cash is king. He has the gold makes the rolls. So you hold onto your cash for as long as you can.

John Warrillow:

That is a well said statement these days, for sure. So you’re doing sales consulting, how does the business model evolve over time? I’m curious to know what it was when you came into 2008.

Adam Ochstein:

Yeah. When we were doing sales consulting, back in 2001, 2002, we were doing mostly … most of our clients were over selling enterprise software. The first thing we would tell the sales team when we met with them is you look at a company’s annual report, and the letter to the shareholders from the CEO always had a handful of business objectives in there that this is what we’re going to do this year. CEOs look to really do two things. One is take advantage of market opportunity and also mitigate risk associated with things that might be occurring from the outside. It seemed like eight out of 10 annual reports we were reading at the time, the CEO talked about outsourcing non-critical business processes.

Adam Ochstein:

It’s like the catch phrase at the time. Right in the crosshairs of those two things were IT and HR. Those were the two non-critical business processes that companies were looking to outsource. If you’re a McDonald’s or Burger King or Chase, you’re in the business of flipping burgers, or having bank branch is not a matter of having IT departments or HR. We looked at the business model, as we evolved it, it was … we were doing sales consulting. I also, in the back of my head when we started the company, knew that recurring revenue, subscription-based business was the gift that keeps on giving. If you can grow your customer base, take care of them, service them at a decent margin. That recurring revenue was really what makes business sustainable to the point where you have some type of exit someday because the business isn’t tied to Adam or John or Joe who started it.

Adam Ochstein:

These customers are my customers. It’s a recurring revenue. It’s a subscription business. I knew nothing about HR, but I did know that it was … what starts usually in enterprise, trickles down to mid-market into SMB. I moved to Chicago for personal reasons, knowing full well that there weren’t a lot of tech startups in Chicago, and ’02, ’03 we moved here. Early ’03, which was … The real reason why I pivoted the business model there, because I was living out of a plane, traveling back and forth to our clients in New York, Boston and DC market.

Adam Ochstein:

When we pivoted the business, realized that Chicago had a lot of small businesses and figured if we can offer an HR solution subscription base for a small business that doesn’t have an HR department, it would be a good business model. Without knowing even how to spell HR at the time, learn as we fake it till you make it type of thing, and initially was licensing third party software and made the decision in 2007, what the heck, I can build better software than the stuff we’re licensing, there’s not anything good in the market. So, bootstrapped it again and decided to build our own software application and launched the new software in late 2008/2009, which was a really good time.

John Warrillow:

You were a glutton for punishment man.

Adam Ochstein:

The lesson is, if you want to start a business, don’t start a business when Adam Ochstein is starting a business. Don’t pivot a business when Adam Ochstein pivots a business. It’s usually a bellwether for bad things to come.

John Warrillow:

Right. Are you starting anything right now?

Adam Ochstein:

I just sold my company basically. Maybe don’t sell a company in the middle of … in six months after you sell your company, Adam sells his company, the world’s going to turn upside down again.

John Warrillow:

Yeah. Nice to be in cash, for sure.

Adam Ochstein:

Yes. I think a good lesson is the opportunity created out of crisis. What we provide was HR software at a time when, in 2008/2009, organizations were being asked to do more with less. I might’ve been 150, 200 person organization that had a full time HR manager with an HR admin and the CEO was coming to the HR manager saying, “Hey, we can’t afford to keep the two person HR department. I need you doing more with … I’m going to ask you to get rid of your HR admin.” The software became a nice selling vehicle to automate a lot of the administrative burden that HR was dealing with. We were able to come in and say, if you reduce your HR team and do a lot of the administrative functions that your admin was dealing with through automation and self-service.

John Warrillow:

What was the product itself? We use, I think it’s called BambooHR. Do you know those guys?

Adam Ochstein:

Yeah.

John Warrillow:

Would they be a competitor of yours?

Adam Ochstein:

Yeah. But BambooHR, I believe came out and 2009, 2010, and didn’t have a payroll … Bamboo didn’t have a payroll part of their product until much later. StratEx provided HR software, employee lifecycle management. From recruitment all the way through termination inclusive.

John Warrillow:

Onboarding and policies.

Adam Ochstein:

Benefit administration, benefit management, time and attendance, performance reviews, payroll, discipline tracking, all the way through termination.

John Warrillow:

Here’s the thing, I’d be curious to know why you considered this a pivot as opposed to basically a brand new business. There’s nothing, at least from a lay person, at least on the outside, I don’t see anything a sales consultancy would have in common with an HR software. Why not just call them different businesses?

Adam Ochstein:

Oh, because I liked the name StratEx.

John Warrillow:

Okay, fair enough.

Adam Ochstein:

I pretty much winded down the old one and started the new one with the same name.

John Warrillow:

Okay. How did you make that decision to wind down? Because again, I think literally, this is very timely. I think there’s a lot of business owners right now saying like, do I need to wind this up entirely and go in a completely different direction and basically take nothing with me, or am I better off just trimming a couple of things and doubling down on my strategy? How did you come to the decision to get to exit completely out of the sales consulting business?

Adam Ochstein:

It was really a situation where … we had probably 14, 15 consultants at the peak when we made this decision on our payroll. I was living in Chicago servicing clients on the East Coast. My wife was pregnant with our first born. We moved to Chicago for family, and I was living out of a plane and of a suitcase and spending four days a week in either New York or Boston. I said, this is silly that we moved halfway across the country to be with family, to raise a family and I’m going to be away from my family 80% of the work week and 60% of the calendar week.

John Warrillow:

I get that, but why not just do sales consulting in Chicago? There’s lots of companies in Chicago you could do sales consulting for.

Adam Ochstein:

Yeah. We were a niche, so we were focused on venture-backed tech companies at the time. The tech community in Chicago didn’t really blossom yet. Chicago, Midwest was flyover. It was, you’re either on one of the two coast or maybe Denver. The second, and probably the bigger reason is I really wanted recurring revenue and I found it difficult to come up with a subscription based model where we can do boutique consulting in a subscription-based way. I’m sure there’s other businesses that have scaled that. I’m not a really good copywriter and I didn’t really want to sit there and write copy all day long to build a subscription playbook to sell to any business from a sales consultancy perspective.

Adam Ochstein:

I just basically reconstituted StratEx with the subscription based recurring model. I’m looking at the marketplace of Chicago, which didn’t have a bunch of tech, but Chicago is a very vibrant, small business community. Probably one of the most entrepreneurial cities that I’ve ever lived in or been in. There’s a ton of small businesses in Chicago. So I felt that that was a business model that lent itself to the marketplace that I was living in.

John Warrillow:

Got it. How did you finance the development of the HR tool?

Adam Ochstein:

Bootstrapped it through revenue that we were generating from the business that we already started, my personal bank account and then I took a second mortgage on my home. So completely bootstrapped it.

John Warrillow:

Are you the 100% shareholder or did you have founders, co-founders in the business?

Adam Ochstein:

I did have some co-founders in the business who were limited partners. Then when we decided to build the software, initially it was through a consultant who ended up becoming my 50/50 business partner when we turned the service company into a software company. We used to have the debate all the time. It was funny because we were on opposite sides of the debate, and you would think that we would be arguing different positions. We’d have the argument, are you a service company or a software company? Sammy, my business partner who was the software developer would say we’re a service company, and I would argue that we’re a software company.

Adam Ochstein:

I think we were both probably right, but when it came to valuation, he’ll probably tell you that it’s better than I won the slight argument that it’s a software company.

John Warrillow:

What’s the difference? Take me inside that debate between you and Sammy. What would you guys be arguing?

Adam Ochstein:

He would argue that we’re a people first business and we’re in the business of servicing other businesses, and what separates us is the quality of people we have working for us, servicing those customers. I would argue that I would prefer to have software automate everything where I didn’t have to have ever have to speak to or my team speak to another human being, and that we can print money without having to hire more people.

John Warrillow:

How much of your revenue was from service versus software?

Adam Ochstein:

Well, we sold it as a SaaS business, so software … I guess that we were both bright as software as a service. We charge employee per month for the software application. That was encompassing, not only the software platform, but also the people. Then we started to split it out. Towards the end, it was probably … there was two lines of business, 70% was software and 30% was service because we had HR consultants that we would sell as an ad. Initially, it was bundled, then eventually we broke it off and said, okay, you want to just buy our software and license it on a per seat basis and do you or do you want and/or do you want to have an HR consultant who is PHR certified and they can be like your outsource consultant working with your organization? We have those different lines of business, and that was probably 70 software revenue and 30% the people part of it.

John Warrillow:

What triggered your decision to separate out the service component?

Adam Ochstein:

When we started to move up market a bit, when we built the … initially, we before we built a software application, the business model was I want to walk into an organization and say who handles HR and have three or four people point at each other and say that’s their job. Then when we built the software application, we did such a nice job building it that it automated so much that allowed us to move up market to organizations that had 300, 400, 500, 600, 700, 800 employees and even bigger than that, and there was already an HR team in place. The last thing we want to do is come in and say, buy our software, and by the way, your company doesn’t need your entire HR team, but you should go ahead and move forward with us.

Adam Ochstein:

I don’t think an HR person would make that decision to move forward with us. So we decided to break it out and say, use the software to run your organization, Mr. or Mrs. HR and your team would be better off situated if they use it, your people will be happier. That’s why we split it out.

John Warrillow:

Got it, got it. That’s helpful for sure. How did you sell it? What was your approach to selling it? This is from a sales guy who has worked a lot of work selling and consulting for SaaS based companies, what was your sales model for StratEx?

Adam Ochstein:

Initially, since we were all bootstrapped, and this is some of the mistakes we made along the way. It was the 100% distribution model.

John Warrillow:

What does that mean?

Adam Ochstein:

We didn’t have any direct sales team, initially. You’re speaking to the only sales person that was in the company probably for 10 years. I would go through … ’08, ’09 also with Obamacare passing, you had all the benefit brokers who were scared that their pot of gold … that some version of Obamacare was going to move like Canada, where it could be a nationalized healthcare, and this whole model where I actually get commissions based on … employer based benefits was going to just put all these guys out of business. We distributed through regional benefit brokers who wanted to have another product, another reason to going to HR and make themselves sticky. Our big distribution for a handful of years was through regional benefit brokers that took the product and brought it to their customers to automate open enrollment and benefits to help them manage their HR and blah, blah, blah, blah, blah.

Adam Ochstein:

But also, gave them, when we did a rev share, it gave them more revenue for those customers that potentially would have offset reduction in fees, and commissions had the need for healthcare premiums gone away. We did that. Then we realized that we didn’t really control our own destiny by selling through a channel partner. We were starting to make some money then and we decided to hire a tiger team type sales team. We had, at the time, probably 65, 70 employees and we decided, and they’re all in servicing customers, implementation or software development. Then we decided to hire like an eight to 10 salesperson team. Some would manage our channel partnership, these regional benefit brokers and then have a direct sales team that would go out and cold call and prospect businesses and sell direct.

Adam Ochstein:

What we did, it was interesting, is I gave each different sales rep a different vertical to focus on and come up with a vertical play to say, okay, you’re selling to manufacturing, you’re selling to mortgage and real estate industry, you’re selling to distribution, you’re selling to hospitality and restaurants, you’re selling to different verticals. Our current client mix was all across the board, across different verticals. But what a lot of those organizations had in common based on what the software did was a federated or distributed organization where I didn’t necessarily have everyone working out of one location. I had people distributed across multiple, maybe it’s eight to 10 branches of a mortgage bank or eight to 10 restaurants or eight to 10 hotels.

Adam Ochstein:

We had corporate HR that was dealing with paperwork, and how do I automate the stream of new hires, terms, requests for time off, pay changes, all the different things, all those transactions that occur within that, employee life cycle, how do we automate that in a paper free way? Where I couldn’t walk it down to the payroll manager’s office or the HR office, I actually was across the country, and that obviously sounds commonplace today, but 10, 12 years ago, that was a differentiator for us to come in, in that distributed workforce and say software can automate a lot of that manual process. The sales reps that were doing the best, of all my sales reps, and maybe it was some luck, but I don’t think it was, were the ones I gave the vertical for restaurant, retail and hospitality.

Adam Ochstein:

We got more traction and more business and a higher close rate within that part of the vertical than any other vertical. Our current customer base that was representative of a restaurant and hospitality were our happiest customers. This was also at a time when big payroll was starting to wake up and start to build HR systems. If you look at our biggest competitor, obviously ADP, from a payroll perspective, I would wish I would have had the foresight to take a snapshot, screenshot of their website from 2004, 2005 when we first started. Every year, all the way up to like 2012 or 2013, it would have been payroll, and then maybe around 2006, 2007, you’d see little snippets of information around HR. By 2010, ’11, it was HR and payroll, and now you go to their website, it’s all HR with, and by the way, we do payroll.

Adam Ochstein:

The reason I’m bringing that up is, as big as our sales team could have gotten, and I could went out and raised hundreds of millions of dollars, we never would’ve been able to replicate the sales army that these big payroll organizations already had. They were now coming into our space. So, we decided in 2013 to get highly vertically focused and say that we’re going to be the absolute best HR payroll software provider for restaurant and hospitality. So, we got highly vertically focused and decided to … our direct sales team was mandated that they’re only allowed to go after HR and payroll, as long as there point of sale or property management system, PMS, they could sell it. But if there wasn’t a POS or PMS on premise, they weren’t allowed to sell to those types of customers anymore.

Adam Ochstein:

So we went all in. The vertical, realizing that in the restaurant sector there’s close to 15 to … no, not today, but a month ago, 15 to 16 million people that worked in the restaurant sector throughout the United States. So it was a huge, huge vertical to focus on. We had no internal competition, external competition that were exclusively focused on that vertical and allowed us to then start to carve out a niche for ourselves in a pretty big niche and then create some strategic partnerships with other vendors that did things that were tangential to us.

John Warrillow:

What did you do with the other customers who were using and paying for the software outside of restaurants when you decided to triple down on restaurants? Did you retire those customers? Did you just keep them and not service them? How’d you handle it?

Adam Ochstein:

We continue to, and to this day, we have probably 10%, 15% of our customer base being non-restaurant hospitality. They still have challenges around hiring people, terminating people, paying people, managing all those things through the life cycle. It’s just that our product roadmap is, the product became more and more focused on the unique nuances and challenges that a restaurant might face versus a mortgage company or a manufacturer.

John Warrillow:

Got it. That makes complete sense. Here we are again, we’re recording this in March of 2020 when 90% of the workforce in the restaurant business has been suspended, or furloughed laid off, however you want to describe it, how did you think through de-risking that decision at the time? No one of course, could have foreseen this pandemic, but was that a discussion internally about doubling down on restaurants? At the time when you did it, did you consider the potential risk that was associated with that?

Adam Ochstein:

The only risk that we saw potentially de-risking would be, if we had a really big recession again, where the buying behaviors of consumers went away from the trend that we were seeing, which was … 15 ago it was a treat to take your family out for dinner. At least when I was a kid, it was like, we’re going out for dinner, it’s like once every two weeks, right?

John Warrillow:

Right.

Adam Ochstein:

To maybe 10, 15 years ago, it was maybe once or twice a week. Then it was take … see commercials with the husband or wife on the way home from work, stopping at a place to pick up food. The trend we were seeing was the exact opposite, was 60%, 70% of meals now were prepared outside the home, and either being delivered or picked up or actually eating outside the home. The risks that we saw was, is there going to be a big enough recession or depression again, like ’08, ’09, where those behaviors start to trend down and restaurants start to close. The other concern we had around it, from a risk perspective was, our pricing model is per employee per month, and we were always concerned about automation, robotics and things that restaurants can do to drive down headcount within the restaurant.

Adam Ochstein:

We were even contemplating moving away from a per employee per month fee model to more a per location per month model. So, it wouldn’t really matter whether I had 60 employees or 30 employees. I still needed to use the software to manage the function within my restaurant.

John Warrillow:

Got it. Okay. That’s helpful. How were you thinking about valuation for this company? As you grew and you saw other SaaS companies, I’m sure, did you start to have a sense of what the business might be worth?

Adam Ochstein:

Yeah. We’d spoke to a handful of investment bankers. I spoke to colleagues that I know that had SaaS businesses and you’d see some of these crazy evaluations of unprofitable companies that are getting 15 times trailing 12 revenue AR. We were profitable at the time and no one really cared about EBITDA or profit. It was all around gross margin for the business. CAC or customer, your acquisition cost and then LTV or lifetime value of that customer in the SaaS business are really the two metrics that people really look at is, what’s your acquisition costs to get new customers compared to the lifetime value of those customers?

Adam Ochstein:

Where we made mistakes along the way, I think were couple fold. One is, we didn’t grow as fast as we should have grown in term … We should have taken outside venture capital money to scale the business with sales and marketing and grow as fastly as possible, irrespective of profitability. Secondly, we didn’t pay enough attention to churn and NPS.

John Warrillow:

What’s NPS stand for?

Adam Ochstein:

Net promoter score.

John Warrillow:

Oh, NPS. Right. Okay, yep.

Adam Ochstein:

You get those questions, how likely are you to refer to another business? Scale of one to 10. Net promoter score, NPS says that if you’re a nine or a 10, that’s a positive number. One through six is a detractor and a seven and eight are neutral. I’m a new Yorker, so to me A is positive, but it doesn’t work that way. I would never give anyone a 10. We had a high customer retention, but we didn’t do a good enough job of really getting arms around churn and understanding why customers churn and stopping churn.

Adam Ochstein:

Our retention of our customer base was really solid, better than the industry average, but we needed to be probably, in hindsight, more ruthlessly focused on, when we lost a customer, doing a lot of detailed analysis of why they left and making sure that we didn’t make the same mistake with that type of customer again, taking on those types of customers, and then doing analysis of the customers that gave us a nine or 10 that were really happy. Why were they really happy and how do we scale that happiness across the rest of our customers?

John Warrillow:

What was your churn rate on an annual basis?

Adam Ochstein:

If we take out, because a good … we were going after multiunit restaurants, a good restaurant is going to open up more restaurants, so if you normalize how many, and we also were … if you normalize how many from … These amount of locations were using us in January of 2019, how many of you have those same customers were with us. In December of 2019, by a logo perspective, we were at 95% retention. We have 5% churn, which is good for the industry. A typical payroll, big payroll company will churn 12% to 15% of their base annually so that every eight years, they have to basically start the engine all over again, whereas our 5% churn, we have 20 years with those customers. But still, we could have done a better job of scaling our sales and marketing and not being so focused on profitability, which sounds silly, but that’s really the thing that matters to SaaS businesses. Then, you’re really being focused on almost zero churn and NPS being really high.

John Warrillow:

You’ve seen these case studies of these crazy multiples, get 15 times trading 12. Did you have a sense then if it wasn’t 15, like what you thought maybe you guys could get four?

Adam Ochstein:

Yeah, we were benchmarking to get … we felt that a fair valuation for us in a non-bidding situation would be in a four to six, four to seven times trailing 12.

John Warrillow:

Trailing 12 months revenue.

Adam Ochstein:

Yeah.

John Warrillow:

Got it. What triggered you to think about selling?

Adam Ochstein:

I knew that my oldest son, who was going to be 16 in a couple of weeks at the time, I always used to tease him that when you graduate college, you’re not going to be in the family business, or at least not this business. Because I knew when we were building the company, we were building it to sell. We really were. When you build a subscription business, hopefully your ultimate goal is to grow it and sell it. I don’t know if the timing was right, but I knew that … we ended up partnering with Toast. We got in the restaurant sector. We were looking to partner with all the point of sale providers because, if you think of the two big systems a restaurant needs to run, they’re using their point of sale for employees to key in orders. Typically, they’re punching in and out of a POS. Restaurants, their magic metric is you revenue per employee or dollars per hour worked.

Adam Ochstein:

They want to always be at like dollars per labor or revenue per labor. They want to always be like sub 20% of labor cost burden. So measuring those metrics were always important to a restaurant. We wanted a partner with modern point of sale providers, so that when we become system of record to hire an employee, so the manager who’s busy doesn’t have to key in all that employee data. I just hired Adam Ochstein, and now I have to get him hired in the point of sale. Then, taking all the punch data from the POS and having it download and uploaded to a payroll system was also cumbersome. So we were looking to create strategic partnerships with point of sale providers where we created that tight integration.

Adam Ochstein:

We did that with Toast, and Toast was growing at a really … they’re the growing modern point of sale provider and we created a partnership with them. They didn’t want it. They ended up white labeling our software. We negotiated into our partnership, which I necessarily didn’t want to do, but I also knew that it was the best chance of them being a proper exit for us, would be if we negotiated in a purchase option within our partnership agreement, which was probably the stickiest part of our negotiation was, how do we come up with something that is fair without knowing … In their perspective, I’d put myself in their shoes, we create this partnership and they’re wildly successful that in four years later they have 10,000 customers using our software, and they say, “Okay, well we want to buy you now.” And we say, “Well, here’s the price you have to pay 50 times,” right? Because we have all the leverage.

Adam Ochstein:

Conversely, I didn’t want to undersell what I felt the company would be worth. So we came up with some crazy formula of, if you represent X amount of our revenue and we can do all these different things, and then all of these different levers were hit, here’s the range of what the purchase would be. So, we actually pre-negotiated the purchase price range at the outset of the partnership. The reason why I was comfortable doing it is because I really felt I loved the culture of their company, I loved what they were doing in this space. They’re the fastest growing company in this space, and I felt that, if I could provide the perfect rocket fuel for my baby, this would be the perfect exit, that I would know that it would have lasting legacy to be part of the Toast ecosystem, was a place that I wasn’t selling out to a competitor. I wasn’t just selling out the sell out. I was taking what we built and what they were building and making a really, really cool product.

John Warrillow:

Who was the one that initially suggested the partnership includes some sort of acquisition offer?

Adam Ochstein:

It was me. I brought that up with them to pre-handle what I knew would be either A, ugly downstream or B, if they were looking at us and some of our competitors, we were the only one that I knew were restaurant-centric. So I felt we had the best chance of creating a partnership, but I also want to let them know that I was serious about the fact that, forget about white label. I truly believe that whoever’s going to win in this space is going to have a single platform to serve as the restaurant community and felt that I was putting my money where my mouth was by speaking first.

John Warrillow:

Was it a quid pro quo in the sense that, if you had wanted to buy Toast, were you given that option with the same valuation metric?

Adam Ochstein:

In my wildest dreams we would get big enough to buy them. They’re a little bit bigger than us.

John Warrillow:

Equally, did the agreement where they had the rights to buy you, the option to buy you at a pre-established range, did that preclude them from buying one of your competitors?

Adam Ochstein:

Yes. There was a breakup period of time where I think, winding down, if the partnership fell apart and they were unhappy, I think they had to wait 18 month or two or three, I forgot what the length of time was, but there was enough time that would make it pretty challenging for them to do that.

John Warrillow:

So there was a pre-existing range of value based on, I’m assuming a multiple of revenue trailing 12 months?

Adam Ochstein:

That plus how big of a chunk of our overall customer base they represented. There’s all these different factors and there’s only different windows of time in which we can review it. Then after, I think three or four years, the automatic trigger went away and it just would revert to or convert to a standard partnership agreement.

John Warrillow:

Got it. Okay. Fascinating. So they had the rights to trigger it, but you did not.

Adam Ochstein:

Correct.

John Warrillow:

That right was tied to a date or a set of dates?

Adam Ochstein:

Yeah. There was a measurement period every six months. They were hitting certain thresholds, we were hitting certain thresholds, we could review it, and obviously it was in my best interest to wait as long as possible, because the longer it goes, the higher the valuation it becomes. I think, and I know, going into it, they were probably looking at it and saying, if this proof of concept pays off before the train leaves the station and becomes runaway and becomes too high of evaluation, let’s buy it. There’s that balance of we know this works by de-risking it that way. Who knows what would have … we’ve talked about de-risking before of the pandemic. Part of my deal is an earn-out. I would tell your listeners, always when you’re negotiating to sell your company, most of the time it’s going to have an earn-out, where you have to stick around for a period of time. You have to hit certain thresholds and measurements.

Adam Ochstein:

Have an act of God clause in there or some type of something else that would help if something like this, God forbid, ever happens again, what’s happening in our world.

John Warrillow:

Did you have an active God clause?

Adam Ochstein:

No.

John Warrillow:

Nope. What chunk of your deal is at risk?

Adam Ochstein:

A big chunk.

John Warrillow:

Like more than half.

Adam Ochstein:

No. A third.

John Warrillow:

A third, but enough to make it meaningful?

Adam Ochstein:

Yeah.

John Warrillow:

Do you have the time to recover or is the earn-out time-based? Do you know what I mean by that? Like you’ve got to hit a certain threshold by a certain date?

Adam Ochstein:

I will have time, but some of it will go away, because the first measurement period is on the first year anniversary, which is July. We won’t be out of the hell storm by then.

John Warrillow:

No. Forgive me, your partner is Sam or Sammy?

Adam Ochstein:

Sammy.

John Warrillow:

Sammy, what was his role in negotiating this partnership agreement? Was he on board with the sale chunk? It sounds like you initiated that, but was that something he thought was a good idea? What was his stance on that?

Adam Ochstein:

Yeah. Typical software developer, highly entrepreneurial. He was ready for his next challenge to build his next company. We’ve gotten along well enough that when … I don’t want to be a one hit wonder. I’d love to be able to say that, at some point in the future when I’ve done everything I can do to help transition StratEx over to Toast and fully integrate the companies and my earn-out is complete and I’ve done a lot, hopefully a lot of good work for Toast, sometime in the not too distant future whenever that is, I’d love to do another startup. If it’s software enabled business, which I’m sure it would be, I would love to be doing business with Sammy again and take all the lessons we learned this time and not make those mistakes, but clearly make them different ones, but not these.

John Warrillow:

Make some new ones together. Well, I appreciate you sharing the story. I must confess we’ve done now almost 300 episodes and I don’t think I’ve ever heard something quite as unique as the partnership agreement you struck with Toast, so I think that’s a really thought provoking thing for a lot of our lessors. I’m grateful for you sharing it. If people want to reach out, do you want to send them to the Toast website to learn a little bit more if they’re in the restaurant industry?

Adam Ochstein:

Yeah.

John Warrillow:

Do you accept sort of LinkedIn requests? What’s the best way for people to reach out?

Adam Ochstein:

If it’s Toast related, go to the Toast website. If it’s learning more about my trials or tribulations or life lessons, they can reach me via LinkedIn, Adam O-C-H-S-T-E-I-N.

John Warrillow:

Great, and we’ll put your name, and it’s got a unique spelling, in the show notes so people can catch up with you in LinkedIn. I really appreciate you spending the time with us under such difficult circumstances.

Adam Ochstein:

Thank you.

John Warrillow:

Thanks again.

Adam Ochstein:

Bye-bye.

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