How to Structure Your Earn-out in Uncertain Times

Transcript

John Warrillow:

So, is your company a service business? If it is, I think you’re going to like this next episode with Anson Sowby, who started a creative agency, built it up over six years, and sold it to one of the world’s largest advertising agencies; a company called Havas. In this episode, Anson talks a lot about the pros and cons to an earnout. And an earnout is a configuration where you’re accepting some of your payment for your company in the future. It’s a retention tool that acquirers use to keep you in the game after you sell your company. There are lots of tips and tricks to negotiating a earnout that works for both sides. And in this episode, I think Anson does a great job with describing how he thought through the sale of his company.

John Warrillow:

Now, if you’re not a service company, rest assured there’s lots in this episode for you too. Because regardless of what type of company, you may have to have some form of transition period or earnout. And again, thinking through the nuances and details of that structure are going to be important.

John Warrillow:

Here to tell you how Anson thought about it, is Anson Sowby.

John Warrillow:

Anson Sowby, welcome to Built to Sell Radio.

Anson Sowby:

Hi. Great to be here.

John Warrillow:

The company that you start is called Battery. Tell us what precipitated you’d be getting this company. What was it, how did you get into it, that kind of stuff?

Anson Sowby:

So, without backing up till I was four years old. But I’ll try to do that quickly. Both my parents were entrepreneurs. My dad had a small medical practice, my mom was a sitcom director in the 80s, so she directed A-Team, and L.A Law, and What’s Happening Now!!

John Warrillow:

Wait, your mom directed the A-Team?

Anson Sowby:

She did.

John Warrillow:

Unbelievable. Okay. See, that was my favorite show. The reason I’m so screwed up is because I spent most of my youth watching A-Team reruns. So, there you go.

Anson Sowby:

So, I’ll share a picture with you of me being babysat by Mr. T on the set of the A-Team, that I was just showing someone yesterday. But essentially I grew up around both my parents being entrepreneurs, and the work-life balance really didn’t exist, and it all kind of melded together. So, I guess in my heart it was something I always knew I was going to do, and I always was going to become an entrepreneur. Just maybe got started a little later than I thought because I didn’t start Battery until my mid-30s.

John Warrillow:

What did you do before?

Anson Sowby:

So, before that I was on the marketing side. So I was in marketing for video games, then films, and toys. So, I was essentially on the client side.

John Warrillow:

What was it that you thought being an entrepreneur would do that being on the client side would not do? What was it that you were going towards?

Anson Sowby:

I think I just had this itch to build something for myself. Luckily the types of companies I was at, it was a very entrepreneurial video game company, and a very entrepreneurial toy company. So, even though I was in these larger companies, I was “raised” in my 20s thinking like an entrepreneur. And not taking no for an answer, and not taking anything at face value. So, I think it was definitely part of my path. And it got to a point where I guess I was just mature enough to be able to do it [crosstalk 00:04:52].

John Warrillow:

Got it. And so you start Battery. It’s a communications marketing agency, is that right?

Anson Sowby:

Yes. Yes.

John Warrillow:

Did you guys have a specific niche or a special-

Anson Sowby:

We did, yes. So, when I started in 2013, I saw the need, because I was coming from video games, the need to… so, the video game industry was starting to transition back then. What is now become Fortnite and call it “live experience video games”, video games are moving away from a packaged disc. And they are being marketed like films back then. You’d try to sell as many copies as you can in the first two weeks in Walmart, and then you get pulled off the shelf.

Anson Sowby:

Well, video games were starting to transition to these live evergreen experiences. And I worked a lot with Procter & Gamble and Unilever, and I saw an opportunity to bring brand building rigor to video games. And to treat them like consumer products, rather than these tent pole entertainment releases.

Anson Sowby:

So, that was the original point of Battery, to bring that type of rigor to video games, and then we brought it to streaming entertainment with Netflix, and then kind of moved along the gauntlet of entertainment. But originally it started with that intent in mind.

John Warrillow:

And you grew up around the entertainment business. You’re in LA, so that felt probably pretty natural to be in that space?

Anson Sowby:

Yeah, I guess so. As natural as entertainment can feel, right? It still feels like such a bizarre weird world, yes. Even though I was babysat on the A-Team, which sounds bizarre, and it is. Entertainment is great because it’s always changing. It’s ahead of the curve, whether it’s technology, and that’s what I loved so much about the video game industry specifically.

John Warrillow:

And we were talking offline before we got started, and you shared that you started Battery with a view of building it to sell. Maybe talk to me about that.

Anson Sowby:

I really did. Not to steal the name of your show, but I truly built it to sell. So, when I started in 2013, I said, “I want to be ready when the company is ready.” Meaning I’m building this company to sell it. I just didn’t know what that meant. Did that mean I’m selling 10% to capitalize it so I can grow it more? Am I selling 100% and walking off into the sunset?

Anson Sowby:

And then, so I started to learn about all the different ways of selling. Back then I thought, “Well, there’s only one way. You sell it, and then that’s it.” So I learned about earnouts, I learned about earn-ins. Selling to private equity, selling to holding companies. But that was very much my intent, to do that from the beginning. So, I actually started interviewing M&A bankers, to help me to do that within probably two and a half years at the company. Not that the company was ready by then by no means. But I knew this would be a process. I knew it would take a few years.

Anson Sowby:

So that was my whole headline, since I work in advertising, is that I wanted to be ready when I felt the company was ready. And so I needed to make sure the financials, the structure, that I knew what I wanted. So, that was the key point in actually bringing on bankers really early, and interviewing different types of bankers in starting that process.

John Warrillow:

You know there’s a kind of a pejorative sort of quote, you’ve probably seen it in, I think it was in Fast Company the first time I saw it. Was just like built-to-flip, and the idea that only the most greedy, money grabbing entrepreneur would ever build to sell. It’s a criticism I get all the time about, “How could you advocate people build companies to sell them? They should be building them to last”, to use a Jim Collins expression. How did you reconcile that in your own mind? Because some people might say, “Well, that’s totally the wrong way to build a company. You should build it so that you’d be happy to run it forever.”

Anson Sowby:

I mean honestly, I had that conversation quite a bit about plan B thinking, “Should I build this to give to my son?” And my son’s 10 years old right now. Should I be giving it to him so he can come and work with me? So, I thought I wanted to sell it, but obviously in the back of my mind I thought, “Well, what if my son wants to do this? What if this is my retirement? What if this is what I should be doing?” So, I definitely wasn’t absolutely positive. I just felt that I did want to sell it.

Anson Sowby:

But to your point, I definitely wasn’t looking at it as a flip. Because the challenge that service companies have, it’s really tough for us to raise funding. We don’t have a product. We don’t have a subscription-based service. In advertising, we’re selling people time, like a law firm does, like a doctor’s office. So, we have a very difficult time in raising money. So, I also looked at the type of sell or sale that would allow us to “capitalize and raise money”.

Anson Sowby:

And as we started growing, pretty early on, our clients were Warner Bros., they were Netflix. So I joked in the beginning, we were going up against other agencies that had more offices than we had employees. And maybe it was part of my impatience, I didn’t want to take 20 years to get it to a good place. I wanted to accelerate the growth. But again, I was looking at all the different types of options. Flip it, keep it, capitalize it, it was just educating and learning that process.

Anson Sowby:

So, when I say built to sell, I think there’s so many different meanings of the word sell. There’s so many different ways to sell a business. And I didn’t know what it was, but I was determined to figure it out.

John Warrillow:

I want to get into that. Now, in 2013 you started, and as I understand it, it was acquired in 2019, at which point you had 50 employees. That’s a nice growth. That’s an amazing run rate. And I’d be curious as well, if there was a time in that six year run which felt difficult. A lot of people listening to this right now are going through tremendous challenges in their companies, and I wonder if there was ever a moment in time where you thought the company might be at jeopardy, or that you needed to make a huge pivot in order to survive?

Anson Sowby:

Every day. Every day I was nervous. Every day I thought the company could go under. And that was also part of building it to sell, of finding that right partner who, again, thank God we did do this a year ago. We’re on much stronger ground during these horrible times now, because of what we did do a year ago. And it still is very much so. Still is a daily struggle. There are a lot of times where I’ve felt like we could just go under, because as a service company, we’re at the whim of our clients. If our clients pull our [inaudible 00:12:09], if our clients pull a job. And so that was even more reason to strengthen the company, so those types of things, which are natural, that we could fortify and build a moat around our company.

John Warrillow:

Give us an example of some of the very tactical things you did to build to sell. I’d be really curious about the very kind of tactical, almost minutiae level things that you did to set yourself up to sell.

Anson Sowby:

So, the first thing we did was try to align ourselves, and bring on the right M&A bankers. So, met with probably five or seven different types of people who help a small business sell. And so I started that, I want to say that was in about 2015. And I started that process, and it took a couple years of maintaining relationships with these people. Seeing what other types of businesses they were selling. Seeing how hard they would try to sell me on their services. Keeping in contact with them. Seeing what types of information they would share with me. And so after about two years I really honed in, and I felt like I had found the right one, or the right group to help us do that.

Anson Sowby:

And that process was just eye-opening. Just seeing the types of transactions they were going through, and honestly, at that time, they were all really keen to earn our business, that an unexpected benefit were the people they started introducing me to. So, I actually met our CFO through one of the M&A groups, who introduced me to him. And then that was this domino effect of bringing in a CFO and everyone I met. So, there were these unintended benefits that I couldn’t have imagined. And also understanding how they were structuring it, what their fees were going to be, what type of percentage they took of the deal, what their relationships were. And again, not like I spoke to these people every day. I probably didn’t speak with them more than once a quarter over the course of two years.

Anson Sowby:

And then started to ask a lot of hard questions of myself. Personally where did I want to be? So, I was 43 last year when I sold the company. I thought of what age do I want to be… so, it caused a lot of this inner reflection.

Anson Sowby:

So, that was the meaning of the whole headline; I wanted to be ready when the company was ready. And the M&A guys, that was surprising how long that process took. And that was another light bulb, “Man this takes a long time.” To sell it the right way. It’s not just…

John Warrillow:

Yeah. It’s not just put up an ad and it’s sold. How did your age impact your decision around selling?

Anson Sowby:

Yeah, it really did. Because it impacted the type of sale. I think I am way too young to do a flip it, sail off into the sunset and do whatever people do when they retire. I’m way too young and full of way too much energy to do that. But then I also looked at different earnout structures, where we’d sell a percentage and earn-out over two, three, four, five, years. And I though, “Okay, well that’s interesting, if I do it over five years, okay I’ll still be in my forties, I could theoretically still start another company in my early fifties.” So absolutely. And also the age of my kids. Thinking “Okay, my son’s 10, he’s in the house for another eight years. My daughter is six.” So, that all played a key role of where I wanted to be age-wise at the time of the transaction.

John Warrillow:

I guess there’s another school of thought as well. I’d be curious to know if this went through your mind. Because, yeah, one thing would be to sell at such a young age, but there may be another school of thought that said, “Maybe I’ve got another 15 or 20 years left in my career, why don’t I hang on to 100% of the equity, build it five times the size, and then sell it 20 years from now?” Did that sort of thinking, and maybe talk through how you arrived at your decision not to do that?

Anson Sowby:

Yeah, it absolutely did. So, I want to say 2015 was an incredible year for us. It was just a real breakout year. We did big campaigns for Lego and Batman, and blanketed Times Square, and did these big TV commercials at Premera during the NBA Finals. And I honestly got a little cocky. I got a little cocky. I thought, “Wow, this is easy. 24 months in and we’re doing commercials with LeBron on the NBA Finals. Man, I must really know what I’m doing.”

Anson Sowby:

And then 2016 was a, I won’t curse on your show, it was a piece of crap year. It was like the startup Gods hit me in the face and said, “No, you don’t know everything after 24 months.” In 2016 was a really bad year. We rebounded in 2017. But like they say, I think you learn the most from your failures than your successes.

Anson Sowby:

So, I started to get very cocky early on. And I thought, “Oh, imagine what I can build this thing in 20 years.” And then 2016 came round. Now again, not to say that I wanted to flip-flop that easy, but it just made me look at the different scenarios. And I’d say, without jumping ahead, once we hired the right M&A guys, and we started actively shopping ourselves around to private equity firms, to traditional ad agency holding companies, to technology platforms, I started to see the types of deals they liked to do, and the types of deals they’re comfortable with. And then I asked myself, “Okay, what is the right type of deal for me?”

Anson Sowby:

So, that was the big eye-opener. Taking a year, and doing a roadshow across the US of meeting with all these different types of firms. And they all really definitely had the types of deals that I’m comfortable with. And that’s pretty obvious from the beginning of the deals they like to do, especially these big groups that do lots of deals a year. So, that also helped the process. Because honestly, there were a couple ideas in my mind of deal structures that no one wanted to do that kind of deal. So, I thought, “Okay, well, am I okay with the type of deal they want to do?”

Anson Sowby:

It was a very long winded answer to a simple question.

John Warrillow:

No, it’s great. I want to get to the deal structures in a minute. But tell me how you pulled yourself out of the mess that was 2016. What tactical things did you do to get the company going again?

Anson Sowby:

So, it was at that point that one of the M&A firms introduced me to our CFO. We didn’t have a full-time CFO at that point. We had an outside, call it an outside back-office accounting firm. And that was just such a big step in the company. And obviously it sounds so, “Duh, obvious” looking back. “Yeah, you need a CFO, genius.” It doesn’t take a rocket scientist to realize that.

Anson Sowby:

So, having him come in and start to really establish a lot of rigors, and proper P&L management, and bringing that internally. But again, I met him via one of the M&A firms. And he’s still our CFO till today and I hope he’s my CFO forever.

John Warrillow:

What was your revenue, or some proxy for size, number of employees, whatever you want to use, at the time that you hired the CFO?

Anson Sowby:

The time I hired the CFO we were over 10 million in revenue. 10 million annual revenue.

John Warrillow:

Got it. That’s helpful for sure.

Anson Sowby:

But we should have done it when we were four million or five million. You know?

John Warrillow:

Really?

Anson Sowby:

Yeah.

John Warrillow:

Interesting. Take me through what else you did to build to sell. So, you mentioned you kind of made some very specific decisions along the way with a view to selling, one of them was to start conversations with M&A firms. What else did you do internally, the way you managed your team, the kind of customers you took on, to “build to sell”?

Anson Sowby:

Yeah. Very good question. So, I brought on a couple of really key advisors to the company, and gave them small pieces of ownership, because they had recently sold companies, so I wanted to really tap into that, and just their networks. And then additionally, we did a profit-sharing structure in the company with key senior people, who we wanted to keep them with the company because, again, we’re a service-based company, we’re only as good as our people, and that would have sent a very… high turnover would not have been a promising feature of the company to a potential buyer. And I wanted them to be involved in the process. The people we did that with I could count on one hand internally. So, it was a small key group of equity participation units, to make them as part of it.

Anson Sowby:

And then of course a big thing I should say was my business partner, who heads up all of our creative side. So, he and I split the equity in a good way to where… I wanted to make sure that we were a team, because I hoped we were going to be David against Goliath. And I wanted… unfortunately, not an “us versus them”, I shouldn’t say that antagonistically. But that it truly was kind of us against the world. So, I knew we all had to have a stake in the game.

John Warrillow:

When did you bring in your creative director?

Anson Sowby:

That was in 2014. Early 2014. So, still very, very early, early in the company.

John Warrillow:

And how did they earn their equity? Did they buy into the company, did you give it to them over time? How did that work?

Anson Sowby:

Good question. It was a bit over time, and he had a lot of really key relationships, was able to bring in a tremendous amount of business. And kudos to him, he slashed his salary to a fraction of what it was before he joined. So, that combination of earning it over time, cutting his salary, and also bringing in some pretty big pieces of business. It was just a no-brainer. And truly felt like my team member.

John Warrillow:

Got it. Got it, okay. How did you treat the profit-sharing units at the exit? In other words, I guess a lot of people would be wondering, “How do I keep my senior people to stick around for the earnout, when I know the only way I’m going to hit my earnout is if I keep those senior people.” How did you think through that?

Anson Sowby:

So, it’s a very good question. Because we did do an earnout with Havas, so it’s a multi-year deal to basically earnout the 100% of the sale. Just as Havas structured my incentive to stay on, I wanted to structure the incentive of the other people in Battery to stay on, because I knew we’d all have to do this together. So, it was really multi-year deals that were tied to the earnout structure. So, we changed that over time, once we knew the type of sale that we were going to do.

John Warrillow:

Got it. And would those funds for those senior people, would they be treated as taxable income, or capital gains? In other words, would they have gotten a lower tax rate? Do you know what I’m getting at?

Anson Sowby:

Oh, that’s a good question. That’s above my pay grade. But, yes. It was the tax part of it. And so the M&A guys that we brought on, one of them at their firm was a tax guy. He was a former CPA, he was a tax guy through and through. And so that of course was, and still is, a big learning of course, because the tax component is such a key part of it. But that’s one reason why I love that M&A firm, that one partner was a former CPA, so had the tax laws drilled in.

John Warrillow:

That’s great. That’s great. So, let’s get into the structure itself. So, it’s 2016, 17, and you’re starting to survey the landscape of potential acquisition types. What did you come to learn about the types of deals that were available?

Anson Sowby:

Yeah, so I was thinking there were three different types of deals that could be right for us. Either one was selling a small percentage of the company, call it 10 or 15%. Or of course there was a 51% we’d sell with controlling interest. Or there was a 100%. So, I kind of honed in on, “All right, I think those are the three types of deals that are right for us, obviously at different stages of the company.”

Anson Sowby:

So, then with these M&A guys, they started looking at different firms. Again, let’s say a private equity firm was interested in one of those three. A holding company was interested in one of those three. And kind of these tech platforms were then interested in one of those three. So then we started honing in on, like I said earlier, these companies are comfortable with a certain type of deal. So we started slotting ourselves into with these three types of companies. “Okay, how would they structure?”

Anson Sowby:

So, we started to get more specific, specific, specific, over time.

John Warrillow:

How did you ensure you were getting unbiased advice from your M&A firm, when since they get paid based on the transaction value, they would be incentivized to downplay a minority recapitalization like selling 10% of your company, and they would be highly incentivized to get you to sell it all?

Anson Sowby:

Right.

John Warrillow:

Did you think through that at all?

Anson Sowby:

Yeah, I really did. And I know it sounds odd to say this, but that’s where just a lot of trust came in, and that’s because I got to know these firms. Of course, absolutely, they’re incentivized because we’re paying them. Once the deal got to be closer within the last six months to a year, we’re paying them a monthly fee, but their monthly fee is peanuts compared to your point, yes. They’re taking a percentage of the deal. So, of course, the larger the deal is, the more incentivized they are to do that type of deal. That’s what was important to me.

Anson Sowby:

And again, the only way I could do that was getting to know them over those two years and getting that trust. And just, to use another bad business word, hoping that they were the right ones for us and we’d be the right fit for the longterm. So, that was a process of just getting to know those different groups over those two years.

John Warrillow:

Got it. So, you got the three buckets, we would refer to this, we meaning at Value Builder but also I think the M&A community would refer to it as a minority recapitalization, less than 50%, and a majority recapitalization 51%, and then an outright sale. So, those are the three buckets that you were considering. What kind of business was most likely to transact each of those types? So, the minority recap would have appealed to who?

Anson Sowby:

Good question. Those were, call it, advertising tech platforms. They were looking at it as, “Let me invest some in Battery, and then let’s plug Battery into our larger tech portfolio. And then we will then flip it after a certain amount of time.”

Anson Sowby:

And then the 51% was your traditional ad agency holding company; WPP is probably the biggest one out there. Those are just the types of deals they love to do. And then the number of years at the earnout can vary. But it was very obvious the WPPs of the world wanted that 51%.

Anson Sowby:

And then the 100%, I’d say that was probably a combination of those two. I’d say there were, as with any industry, there’s so many new types of ad agency holding models out there. Trying to solidify the old model that’s been around for 40, 50 years. So, those are more, let’s say, the newer models of looking to do it a different way, and they needed to grow their platform, and then are offering much quicker than a multi-year earnout.

John Warrillow:

That’s helpful. And what did you start to think the company might be worth? Did you have kind of a sense of how values were coming in as either a multiple EBITDA or multiple revenue? What were you hearing, what were you starting to get a sense of?

Anson Sowby:

Yeah. So, throughout those two years we were getting a very good feel of the typical EBITDA and top line revenue, multiples of ad agencies. Obviously there’s a lot of different types of ad agencies. There are media buying ad agencies, there’s creative ad agencies which we are, and then there’s, let’s call it, digital development ad agencies.

Anson Sowby:

So, the multiples are pretty consistent depending on what type of ad agency you are, and also where you are in the country. New York and LA are getting higher multiples than maybe let’s say someone in the middle of the country. Obviously it depends on the type of client you have.

Anson Sowby:

So, another long winded answer too. There was no simple answer. But we were starting to understand those types of multiples.

Anson Sowby:

And then, only as we got closer, then we started to understand how the earnout would be structured. How the multiple changes if we have a one year earnout, versus a three year, versus a five year. So, those things really start to change based on how long of an earnout it is, or what percentage we’re seeling at the beginning.

John Warrillow:

So, as a standard sort of, again, I’m looking just for a range of multiple EBITDA in the creative space, like are we talking six to 10 in that sort of range?

Anson Sowby:

Yeah. We were even seeing stuff as high as 14.

John Warrillow:

Wow, okay.

Anson Sowby:

13, yeah. Based on the type of agency, the type of clients, the type of longterm relationships. Or how long the agency had been around, yeah. So, obviously you can see that’s a tremendous range. I mean that is just a God awful range, depending on what the EBITDA is.

Anson Sowby:

So, it was helpful, but also it wasn’t, because it was just such a range out there.

John Warrillow:

And what impact did the length of the earnout have on the ultimate value that you were being offered? Was there a linear relationship? Meaning the longer you were willing to stay in an earnout, the higher the multiple?

Anson Sowby:

Absolutely, yes. But then also of course there’s the negative side is, the longer it takes, the more things can happen in the market. Maybe there’s going to be a horrible pandemic called corona that will affect [crosstalk 00:32:26].

John Warrillow:

Don’t joke.

Anson Sowby:

So, yes, there’s the positive side of, you have more runway, more time. But also, a higher multiple because you’re stretching it, but then obviously with more time opens yourself up for more things going wrong.

Anson Sowby:

But that goes back to that headline of, I wanted to be ready when we were ready. And basically a number of things happened on 2017 that I felt like we were ready, but way too young to sell 100%. I realized that. I said, “We are not nearly big enough after only four and a half years to sell 100%.” And again, that was my lens by which I evaluated everything. I wanted to be ready when we were first ready. And I felt we were ready, but we weren’t ready for 100.

John Warrillow:

That must have been music to the ears of these acquirers? Saying, “He wants to put some money in his jeans, but we’re going to keep Anson because he’s such a young guy.”

Anson Sowby:

That’s exactly it. The reason why I named the company Battery is that was my nickname when I was a little kid, because I had so much energy that they called me a rechargeable battery that didn’t need to be recharged. Because I guess in the early 80s that’s probably when rechargeable batteries were first invented, so I was called Battery.

Anson Sowby:

And it kind of infused just my energy and passion. So when I was telling that to potential buyers, yes, that was the first thing everyone wanted to hear is, “Are you in this for the long haul?” And am I in this for 30 years? I don’t know. But I’m for sure in this throughout my 40s.

John Warrillow:

Right. And so, take us through what you found when you went to market. Did you get multiple offers? What was the range of offers that you got?

Anson Sowby:

We did, we did. We got multiple offers. I’d say we marketed ourselves to, I want to say about 10 different types of companies. Then we went under NDAs, and started to get pretty serious with about five or six of those. And then we got offers from those. So, it whittled down. But what I loved, there were very different types of offers.

John Warrillow:

Give us the range. Tell us about the range. Just describe the range.

Anson Sowby:

So, there were those type of offers of, “Let’s just invest a very small minority of the 10, 20% versus the 51%.” There was even an 80, 90%. There were different ranges of earnouts; one, two years, versus four or five years. And there was even ranges of how they wanted to change our name, how they wanted to plug us into their network, how they were being very flat out honest of what they wanted to do with us. Some of them were US based, some of them were European based, some were a mix of both. It was a nice range of different types of structures for sale.

John Warrillow:

What was it that they saw, these acquirers, as strategic in what you guys had built? That’s a pretty nice list of offers, having five serious conversations provides a little bit of competitive tension and it gives you some leverage in that negotiation. I think people would be curious, so what did Battery have that was so attractive, that you were able to attract five different serious contenders?

Anson Sowby:

I think the one commonality was where we were based.

John Warrillow:

LA?

Anson Sowby:

They were all very keen of either expanding into LA in existing offering, or putting a flag in the ground for the first time in LA, or strengthening their offering. Being in LA for sure was the number one commonality between all of them.

John Warrillow:

Isn’t that interesting? How did you feel about changing the name?

Anson Sowby:

You know it’s interesting. And that’s the balance of being an entrepreneur. You do get emotional about this because it’s your baby, it’s you. It’s interesting being an entrepreneur. There are things that it’s good to be emotional about, and are things it’s not good to be emotional about. I guess as is life itself. There’s things that are okay to get deeply emotionally invested, and others that didn’t. So, I kept telling myself, “Okay, it’s got to be all about the deal. It’s got to be all about the deal. It can’t just be about the name.”

Anson Sowby:

Then we also very much thought, “How will this impact the staff? What will they think about it?” And of course, because of confidentiality reasons we couldn’t be openly talking about this process with the staff. So, we knew there was going to be the day where hopefully, “Ta da!” We unveiled it, and how would everyone react? And we knew changing a name, that would theoretically cause a huge reaction.

Anson Sowby:

So, I was also thinking about, “What was that speech I was going to make to the troops? And how would I position it to them?” And I’m not positioning it in a, trying to sell it to them. How would I just tell it like it is? And me kind of practicing that, realized the type of deal I knew I wanted. The name was a very key point, because of how I knew everyone… because it wasn’t a sail off into the sunset and we’re gone. It was this we’re now in this together. So, I wanted it to be something that everyone would enjoy.

John Warrillow:

And so, I’m not sure I got a straight answer on how important the name was. So you had a number of different offers. Did you want to keep the name Battery?

Anson Sowby:

Yes. I wanted to keep the name Battery, yes.

John Warrillow:

Okay. And that was part of the negotiation?

Anson Sowby:

It was different [inaudible 00:38:56] on that. Some of them would put their name in front of that, or their name after Battery, or their name is a part of… so, there were these different variations.

John Warrillow:

Yeah. “Part of the WPP network of companies”, versus “powered by WPP” or something?

Anson Sowby:

Right. Exactly.

John Warrillow:

Got it. Okay. So, that’s helpful for sure. I’d love to know how you thought through the conversation and speech to the troops. Because occasionally I’ll do a talk, not these days, but occasionally I’ll do a talk to business owners. And I’ll talk about drivers of value. And I get to the Q&A part, and no matter what the first question, or certainly one of the first or three questions is always, “How do I tell my employees?” I’d love to know how you told your employees.

Anson Sowby:

So, the first thing we said to them is… So, last year the deal basically closed right before… it was announced at The Cannes Advertising Festival in France last June.

John Warrillow:

Which is where Havas’ headquarter I believe, isn’t it?

Anson Sowby:

Their headquarter in Paris, yes.

John Warrillow:

Oh, I’m sorry. Okay.

Anson Sowby:

Yes, yes. So, Havas announced it, I want to say during Cannes, I forget the exact date, I should have that tattooed on me. But call it June 15th. But of course, we had closed the deal shortly before then, but it wasn’t publicly announced. So, I had to wait until it was publicly announced, and then quickly tell everyone.

Anson Sowby:

And the first thing I thought is, “Okay, if I’m in their position, what do I want to hear?” And honestly my knee-jerk reaction was to tell them, “Okay guys, nothing’s going to change, we’re all good, we’re a team, we’re a family.” But then I thought, “Well that’s total BS. Of course things are going to change. That’s the whole reason why you do a deal, to change things, hopefully, for the better.”

Anson Sowby:

And then I realized, “Yeah, I can’t treat these people like little babies. ‘Don’t worry, nothing’s going to change, we’re all okay. By the way, a few of us just got a big check. But, no, nothing’s going to change.'” And that was a big turning point to me of saying, “Look. Things are going to change. And the whole reason why we’re doing this is to change for the better. But things are going to change.”

Anson Sowby:

The world changes, God knows the world just really changed three weeks ago. And that was a big thing in my mind, thinking, “I do want this to change Battery. And how can it change Battery?” But it was interesting that my knee-jerk reaction was to say, “Don’t worry. Nothing’s going to change.” I thought, “That’s total BS.” And I would see through that if someone told that to me.

John Warrillow:

So, you laid out what would change in the presentation? [crosstalk 00:41:43].

Anson Sowby:

Yeah. We laid out even the basics of saying, “Well, okay, how are we going to transition shared services over to our current company?” Meaning our IT or our payroll, these kind of basics. What is going to change, what I don’t know what’s going to change, what should change, what should not change? And so obviously there’s so many confidentialities in an agreement like this, that you can’t talk about every detail for obvious reasons. And I think we’re all mature enough to realize that.

Anson Sowby:

But there were certain things that obviously would change and would affect them. Of, “Okay, we’re going to go on the parent company’s 401(k) plan.” “What does that mean?” “We’re going to go onto their bank instead of ours.” “What does that mean?” So, I felt like it was really important to discuss the day-to-day shared services changes. And then this “Alright we’re in this journey together, let’s see what happens.”

Anson Sowby:

But that is the tough thing these days. And the whole notion of transparency. Where yes you want to be transparent, but in this case, I’m legally bound not to be transparent in certain things. So, it’s that fine line, without-

John Warrillow:

How did you reconcile that in your own mind? Because I know a lot of founders that I interview, they have real trouble with that, because the people that started with them and that believed in their original idea, they feel a tremendous debt of gratitude to them. And then they kind of go around negotiating behind their backs, and they’re carrying around this sort of secret like they’re a lover cheating on their spouse or something, right? How did you reconcile in your own mind, that you can’t talk about it?

Anson Sowby:

Yeah. That absolutely was. And I was very early on when we started to get serious with whatever it was, five, six or seven out of the 10 companies, and signed pretty legitimate NDAs of “Now this process was being restricted to a certain number of people.” But that process from starting to sign those NDAs to the final completion, I mean that was a good seven or eight months, so that was a long… and I had no idea that part of it would take that long either.

Anson Sowby:

So, yes, it was that thing of thinking “I’m cheating on everyone.” But obviously it was an easy choice, because I’m just legally bound to not talk about it. But yeah, it did. Because it’s not as if we were 10,000 people and I could go hide in a corner. We were, we still are, this family. And because it’s a very creative business, people spend a lot of hours with each other, there’s a lot of family banter back and forth. So, I just kept telling myself, “How can I do this so it’s good change for everyone?”

John Warrillow:

Got it. Sounds like you thought it through a lot. What was the most surprising reaction to the way you delivered the news? What was the thing that you didn’t anticipate in delivering the news to the team?

Anson Sowby:

You know, this was part internal and external. Sometimes I got the question of, “Wow, what are you doing next? Are you going to retire?” And I said, “No, no, no. It’s the exact…” Just because when you say you sell a company, we all think, “Okay, you sell 100% and you go move to, I don’t know, the Bahamas or whatever.” But there’s so many different varying aspects of that.

Anson Sowby:

And then I wanted to describe the structure, I couldn’t go into too many details. So basically said, “No one, I’m not going anywhere. Phil, my creative partner, is not going anywhere. We’re in this now for the long-haul.” But it’s interesting, maybe because I had gone through that three or four years understanding every type of sell. When you tell someone you sold your company, their question is, “Oh, wow, do you sleep in now?” Or “What are you doing tomorrow?” “No, no, no. I still work there.”

John Warrillow:

Right, yeah. Yeah, yeah. So, what proportion of your value, and I know it varies based on which sort of rung on the earnout ladder you end up hitting, but could you estimate among the five people that you were getting serious about, what proportion of the deal they were prepared to pay cash, versus something in the future tied to either earnout or some variation of earnout? Like I know there were a variety of offers you considered, but can you give me a sense, what proportion they were going to pay in cash versus in the future?

Anson Sowby:

Yeah. Everyone really more had the commonality of definitely more in the future than up front. And obviously that very much differed based on the length of the earnout, for obvious reasons. But definitely it was the overwhelming majority over time. And some of that majority really changed greatly based on, again, the forecast it’s success or failure of a potential earnout. So, just the ranges were just pretty wide. Even with the same deals, just based on an earnout. Earnout can go great or it can go poorly. So, there’s even a range within the same deals, which makes it complicated and tough to wrap your head around, because “Oh, by the way, you’re still running a business.” And that was a real challenge. Of constantly regulating myself, “Wait, am I spending too much time on this process?” Versus what I need to be doing and running my business. That was tough. Because you can just get sucked into that. That can be your full-time job.

John Warrillow:

Yeah, yeah. And whether the other side does it intentionally or not, answering all the questions gets… they know that you’re taking your eye off the ball, the price is coming down as you start to lose your energy through the process.

John Warrillow:

But it’s fair to say that more than half of the compensation across all the offers you were looking at would have been at risk on some level?

Anson Sowby:

Absolutely, yes. Yes.

John Warrillow:

Yeah. Okay, that’s helpful for sure.

John Warrillow:

I guess it leads me to my next question. And again, I get this might be something you can’t answer directly, so maybe indirectly is fine. But clearly we’re in the throes of, we’re recording this, this is our second week in April, so Los Angeles has been dealing with the pandemic, the COVID-19 pandemic really legitimately for over a month. I was in Los Angeles when they really started to lock it down, so I can remember.

John Warrillow:

And clearly we don’t know how the next months will unfold. How is it impacting your ability to hit your earnout? Could you give advice to other entrepreneurs who deal with a black swan, and they’re just in the throes of an earnout? Can you renegotiate, do people take it into account that there’s been this crazy event? Do you know what I’m asking?

Anson Sowby:

Yeah. No, it’s a good question. I mean we’re definitely too early on to know how of these four weeks or the next three months or the next 12 months, how will that really affect the earnout? So that’s probably the easier question. Is we’re simply just, right now our business is up, and thank good [inaudible 00:49:51] business is not down.

John Warrillow:

Congratulations.

Anson Sowby:

Again, it’s only been four weeks, but our business is not down. Now, will that remain the same way for six months, 12 months, 18 months? Your guess is as good as mine. But the big, big, big difference is the support system of the network. Of now being a part of a bigger network, to where just yesterday we had a major account that’s held by one of the other agencies in the network, and they introduced us to that account. A month ago that happened. So, not only now is the network actually funneling us some new business opportunities, and we’re doing the same.

Anson Sowby:

But even just the basic things like we have weekly calls with the network, just understanding financial-wise, healthcare-wise, IT-wise. I mean we truly do have an empire behind us. Even those basic things of joining a global leadership call every week and hearing how people in our network are dealing with it. I mean that support structure, could never put a price on that. Even just emotionally. And of course financially.

John Warrillow:

You’re all of a sudden not as lonely, as it sometimes feels for a lot of entrepreneurs where it all comes to them.

John Warrillow:

What advice would you give an entrepreneur if you’re having a beer with them, and they said, “Yeah, we’re thinking about doing a two year earnout” let’s say. And the earnout is gated, meaning in order to release the next tranche of funds to grow your business, you need to hit a certain milestone. So, year one you have to hit this milestone, and that will trigger these extra benefits from head office. Have you ever seen a structure like that? What advice would you give to a buddy who was evaluating an offer that had those sort of gates in it?

Anson Sowby:

I mean with us honestly we wanted to have specific milestone gates, because I felt the company was too young at that point to be sold 100%. So, I felt like we still had so much runway, and so much growth ahead of us, that honestly I wanted to be incentivized, and capitalize accordingly. So, I did look for that type of deal with very specific dates and revenue targets and profitability targets, that would unlock key milestones throughout the process. Not just now and then the end of the earnout. But that was because I felt the company was too young and too small to sell 100%. I felt like there was so much runway. With the right partner, we could grow bigger, better, faster.

John Warrillow:

I guess it’s also de-risking it a little bit for you, in the sense that you’re earning a little bit of money along the way, as opposed to the big check at the very end if you hit it. It’s done all or nothing I guess?

Anson Sowby:

Yes, exactly. Yes, yes.

John Warrillow:

Got it. And are there sticks involved as well? And again, if we have to talk more generally and can’t talk about your specific deal, but in general about the other offers, or just if you were giving advice to other entrepreneurs. Some deals I’ve seen that there’s carrots for hitting those milestones along the way, and so you’re kind of getting paid each year. But there’s also sticks, meaning if you don’t hit the milestones, it can make it more difficult to hit the second milestone if you don’t hit the first one.

Anson Sowby:

Yeah. I mean I will say we looked at, yeah, different types of deals. Some of them were cumulative; how you did each year, was based on previous years or a combination of the year. And if you did poorly for too long, it might be too difficult to regain footing from that. A lot of the different deals didn’t simply reset after a year, or reset every six months, they were based on each other, which is a huge risk of course. So, that was a big, big part of it, is looking and structuring that. And honestly it was eye-opening to me. I had no idea there were so many different potential variations.

John Warrillow:

Configurations, yeah.

Anson Sowby:

And I still, again, my goal has to be… theoretically on paper, growing a business isn’t rocket science. You grow the top line, you grow the bottom line. There’s obviously so much more complications than that. But I also said, “Okay, at the same time, I can’t get so obsessed with this formula in the sky of seeing where every penny is going, where every dollar is going.” At the end of the day I got to grow the top line and I got to grow the bottom line, and that will then take care of itself. So, I was also looking at other types of structures, thinking, “Okay, how is my brain, how can I forecast myself?” Dealing with that mentally and emotionally over the time period of that deal.

John Warrillow:

Yeah. How important did your lawyer become as the negotiation got further down the track? What I’ve heard from other entrepreneurs, I’d be curious if this happened with you, was early on the relationship with M&A Professional is critical. And then as it gets into the finer elements of the deal, like what are the gates, what are the carrots, what are the sticks, the M&A Professionals sometimes take somewhat of a backseat relative to the attorney, who sort of try to protect you. Did that happen with you? And maybe describe that if you could.

Anson Sowby:

Yeah. So, that was also part of our process of interviewing the different types of M&A guys, because I wanted guys who were going to be with us, guys and girls, who were going to be with us for the long-haul. So, our M&A team was really the spine, and stayed with us throughout the entire deal.

Anson Sowby:

And then our legal team, to your point, it was differing levels of importance. And again, just by nature of who we were dealing with, we were dealing with potential parent companies in varying different sizes. Again, the big agency holding companies, down to other smaller groups. So, just by that pure variant, really was a David and Goliath.

Anson Sowby:

And most of these firms, this is rinse and repeat for them, right? Their legal teams are doing this all the time, negotiating deals all the time. They’re very good at this, they have very certain templates they’re interested in doing. And so, I’d say our legal team played varying levels of importance throughout. But I wanted our M&A guys to be that spine the whole way through, because they were truly going to help us build the right deal for us, I felt more than lawyers would.

John Warrillow:

Yeah. Clearly Havas, the great company, well known company with the very high reputation. Were there other players maybe earlier on in the negotiation that tried to use any unscrupulous tactics with you? We’ve heard any number of different tricks and gotchas that acquirers try to pull the wool over the eyes of owners because they know you’re running a company and you don’t have the time or energy to become an expert in M&A. Did you have any sort of unscrupulous actors try any tricks on you that…

Anson Sowby:

You know I wouldn’t… not that I’m trying to look at everything with rose-colored glasses, but we definitely had a deal very early on. And I’m being honest, I forget what it was about that deal, but I remember saying to the guys of that company, saying “You wouldn’t take this deal if you were me. Am I missing something here? This seems so glaringly obvious. Would you do this if you were me?” And it was so glaringly obvious, but that was the type of deal that the parent company was simply comfortable in doing. And so I didn’t look at it as nefarious or scrupulous. I just looked at it as, “That’s the type of deal they want, and not the type of deal I want. Okay, great, we’re not meant for each other. We’re not meant to get married. I’m looking for a certain type of mate, they’re looking for a mate.” It doesn’t mean it’s unscrupulous, it just means, “Well, that’s simply not the right deal for me.”

Anson Sowby:

So, maybe I was lucky in that. I didn’t feel like we were having people coming out to… and maybe that’s because our M&A team did such a good job of filtering that out and I never even saw that, or I never even realized that. They could have been having conversations and I never saw. But I do remember though at one point there was something so glaring, and I said to them, “Is there something I’m missing? If you were in my shoes, would you really do this.” And it was-

John Warrillow:

And how did they react? Did they counteroffer with that? Or did they walk?

Anson Sowby:

No. The reaction was, well based on the parent company, the type of deals that parent company does, that’s what they want to do. And we said, “Well, guys, great. No ill will, hope our paths cross again, and let’s kill this right now.” And it was a no-brainer to kill it.

John Warrillow:

And did they come back?

Anson Sowby:

They did, but it never really got very far out of the starting gate. But that just showed, we had a positive ending to that transaction. We said, “Okay, this doesn’t work. That’s fine. No ill will.” And they did come back, but it was still under the parameters of, “Well, that’s still the type of deal we want to do.” And that was a huge learning opportunity for me.

John Warrillow:

How has it affected to have sold your company, notwithstanding that you’re still working very hard to integrate. How has it affected you emotionally since the deal has been consummated?

Anson Sowby:

That’s a really good question. I definitely experienced different emotions than I thought I would. So, right after the deal closed, I thought I would experience the obvious emotion of: exhale, “Okay, all right, we just did it. That’s okay.”

Anson Sowby:

And I’ll be honest about this, because I tell this to other people. And I know there’s a term for this, and I forget what the term for this is. I had the feeling of, “Oh, my God. Did they realize the company they just bought? I’m not worthy. Wait, why in the world did they buy a company like ours?” And I know there’s a word for that.

John Warrillow:

Impostor syndrome.

Anson Sowby:

Impostor syndrome.

John Warrillow:

Yeah. You had that too, right?

Anson Sowby:

I had no idea I would have that feeling. And it took a few months to get over that feeling. I had an imposter syndrome. I thought, “Oh my God.” Maybe it was my eagerness to please. But there wasn’t any specific reason. I had no idea about the imposter syndrome. That was the biggest learning, I wish I had known that before, or at least realized maybe that was an unintended emotion that I had no idea I would have.

John Warrillow:

What else? So, you expected the euphoria and the relief. You didn’t expect the imposter syndrome. What other sort of emotions have there been along the way?

Anson Sowby:

Definitely because we’re… again, this is not a sell 100% of the company, sail off into the sunset. It’s a multi-year earnout. It’s a trying to take the long-term view, versus the short-term. Because in any earnout, every penny is very important, because it’s multiples, it’s multiples on pennies. So, every penny is important. Trying to sweat the small stuff in certain areas, and not sweat the small stuff in other areas.

Anson Sowby:

Because I think in any earnout, an entrepreneur can drive themselves crazy. They can say, “Well, let’s not throw the $200 pizza party at the office, because if I have a sixth multiple, I just cost myself $800 for that $200 pizza party.” Or “If I have a 15 multiple, why am I throwing a $1,000 pizza party?” And I do think, and I said, “Well, hold on. If we don’t do a pizza party, blah, blah, blah.”

Anson Sowby:

And I had a friend that said that to me. That he was so watching every penny, he stopped throwing the pizza party, because he realized that every penny was 10 pennies out of his pocket. I think that’s the right way to look at it in certain senses, but not the right way to look at it in other senses. Hey, maybe if you have a six month earnout, don’t throw $200 pizza parties. But we’ve got a long enough runway, to where we got to keep throwing the pizza parties, even if it’s going to cost $1,000.

John Warrillow:

Yeah, yeah. Did you buy yourself a trophy?

Anson Sowby:

I didn’t. I didn’t. It’s funny. I had friends giving me different advice in what to buy, what not to buy. I didn’t buy a single thing.

John Warrillow:

How did you find out the check had cleared, or the wire transfer had cleared your bank account? Did you go to an ATM? Or were you at home? Where did you see the money show up in the account?

Anson Sowby:

Yeah. I was at my daughter’s pre-school graduation. Already feeling emotional, my daughter is in pre-school, and seeing images of her getting married. And on my Chase app hitting refresh as many times as my thumb could hit refresh. And then I saw it there, and then she was up on stage, and I was like, “Keep it together Anson.” Luckily I was in a place where it was okay to cry, because my daughter was on stage. But the emotions were just… and then I was like, “Well, hold on. Let me feel these emotions for a second. That’s okay. Let it kind of rush over you.”

John Warrillow:

Did you actually cry?

Anson Sowby:

Oh, I did. Oh, yeah. Yeah. And since then I’ve cried for other reasons, good and bad. But I hit refresh on that Chase app more times than I want to admit. Because you still don’t feel like it’s real. You don’t feel like it’s real until you see it, the money in the bank account. You can sign whatever you want to sign, but it’s not real until the money’s there.

John Warrillow:

All the moms and dads looking, like “What’s wrong with Anson, man? He seems pretty emotional. It’s just pre-school.”

Anson Sowby:

Right. “And why’s he looking at his phone instead of looking at his daughter.”

John Warrillow:

Yeah. Yeah, exactly. “What a creep.”

Anson Sowby:

Yeah.

John Warrillow:

Anson, this has been fun. I really appreciate you spending the time. I think it’s a tremendous story, clearly. And I wish you all the best in the next few years, next chapter. Been great to do this.

John Warrillow:

If people want to reach out, do you have social media that you… are you a Twitter guy? Do you have LinkedIn? What’s the best way for people to reach out?

Anson Sowby:

Yeah. I love, love, love LinkedIn. So, just Anson Sowby, you can find me on LinkedIn. I have an obsession with LinkedIn. I think it’s one of the best things out there.

John Warrillow:

[crosstalk 01:06:38] LinkedIn.

Anson Sowby:

Despite all the self-promotion that goes on on LinkedIn. You have to see through the self-promotion, but it’s a great platform.

John Warrillow:

Awesome. So, we’ll put that in the shout outs and the spelling of your name so people can search you up on LinkedIn. Thank you for doing this.

Anson Sowby:

Yeah, thanks a lot. It was a pleasure.