How to Hire a CEO Without Losing Your Company

Transcript

John Warrillow:

When they finally come up for the treatment for Covid-19 or some sort of vaccine, there’s going to be an enormous incentive for counterfeiters around the world to steal the technology and pawn fake products off people all over the world.

John Warrillow:

My next guest, Ara Ohanian, had a company designed to defend against counterfeiters. They basically put special barcodes in drugs and other consumer packaged goods that allow company manufacturers and their distribution partners to identify counterfeit products. It’s a cool business and Ara does a great job of demystifying it, making it something that I could understand. I’m sure you’ll be able to understand too.

John Warrillow:

In this amazing interview, he talks really candidly about the things he did when he took over Systech. In particular, two things that really changed the course of the company for the better. He talks a little bit about how the role of the CEO and founder can work in harmony together even if a private equity group is involved. He talks about how he positions Systech to be acquired and went after new markets in what I thought was a beautiful analogy of marriage. The precursor to marriage being dating or hot and heavy romance and how to convert that into a formal marriage. A wonderful wide ranging interview that I think you’re really going to like.

John Warrillow:

He gets into valuation details and metrics that you can use. And compares metrics for consulting revenue with licensing revenue with maintenance revenue, SaaS revenue, lots of different benchmarks. Here to tell you the entire story is Ara Ohanian. Ara Ohanian, welcome to Built to Sell Radio.

Ara Ohanian:

Thank you, John.

John Warrillow:

Tell me about this company. I’d love for you to describe what you guys do in layman’s terms so I can visualize it for myself.

Ara Ohanian:

Absolutely. Think of Systech as something that you see every day in your medicine cabinet. Every time you take a medicine and you look, there’s a barcode on the packaging. That barcode has a unique identifier with it. That unique identifier is there so that for any reason if there’s a need for a recall, manufacturing and the FDA would know where these products are and they can recall the ones that they need to. That’s where the unique identifier comes.

Ara Ohanian:

There’s also a little, in some of the medicines that you may have at your disposal from some of the larger names that you would see out there, there might be a J&J product, there might be a Merck product, there might be an invisible little stamp in that barcode that makes it impossible to reproduce that barcode and that packaging. As a result, it’s an anti-counterfeiting measure. As you know, there are a lot of counterfeit products in the market today that hurt people.

Ara Ohanian:

What Systech does, it makes sure we know where the products are, the unique ones so we can recall them, and we can make sure they’re authentic so there is no fake that actually infiltrates into the supply.

John Warrillow:

Okay. So my bottle of Tylenol has a code on the back. I get that. There may be an invisible code that avoids, stops counterfeiting. Why isn’t it the drug manufacturer’s responsibility to manage that? Why does Systech need to exist? Why wouldn’t Johnson & Johnson, or whoever makes Tylenol do that?

Ara Ohanian:

Absolutely. Well, Johnson & Johnson and Merck and so on are all clients of Systech. Right? Systech is an expert technology that provides these companies the ability to secure their product. Then these companies can then tell the FDA, “We’re compliant with the FDA rules of making sure that our products are serialized so that in case of a recall, we know exactly how to go into supply chain and recall and take the batches we need to bring back.” Knowing where is what.

John Warrillow:

There’s that bad batch of whatever in Denver, Colorado. There was some product that was mislabeled … Whatever. We identified it was a bad batch. We’ve got to recall that. They don’t recall every bottle of Tylenol across the world, they just recall the stuff in Denver, which was in whatever way compromised.

Ara Ohanian:

Exactly. Exactly. The FDA in the U.S. and Canada and Europe have their own equivalent, typically will have a regulatory compliance for doing this, so that they know if there’s a bad product in the marketplace, they can immediately take it out so people aren’t endangered.

John Warrillow:

Very cool. But I’m really interested as to why these drug manufacturers don’t do this. Why they need independent third party company they license or subscribe to? Again, I don’t know the Pharma industry at all, but I would’ve thought they would’ve done this themselves. What’s the benefit of outsourcing this to a Systech?

Ara Ohanian:

It’s mostly because it’s a very specialized thing. Just in layman’s terms, to what the product looks like. When Systech goes into a manufacturing plant of a pharmaceutical company … See, they do more than the pharmaceutical. They also do vaping products, like Juuls and also personal care products and cosmetic products.

Ara Ohanian:

But when Systech goes in, a camera goes on the line that Systech puts. There’s a little brain behind the camera that’s able to snap up to 2,000 pictures a minute as products are passing through the assembly lines. Every time a product passed through an assembly line, typically, there’s a barcode that’s printed on it. And then, that barcode has to be recorded and rapidly you need to put an alpha and numeric number associate it with that barcode and that package becomes unique. Now, you know that you have a unique product then track and trace.

Ara Ohanian:

That specialization is well beyond what a pharma company does. Right? You’d say it’s both a visual technologies, the ability to rapidly capture images, store these images, turn these images into alphanumeric identifiers. And then, be able to manage all of that globally through the supply chain so that you know exactly how to trace that product as it travels across the world.

Ara Ohanian:

When you look at all this, this is not a competence that typically manufacturing companies have. It’s really a technological competence that combines both software and visual tracking technology.

John Warrillow:

That makes sense. You’ve actually got these cameras that you install in these drug manufacturers’ places of business, the manufacturing plants?

Ara Ohanian:

Absolutely. They’ll be right either in their direct plants, on the assembly line where they package the products. The minute the product gets either a label on it or it goes into a little box, typically, a barcode is also assigned to that particular packaging. And that’s where we start taking a picture and storing that data.

John Warrillow:

The sales cycle for this must be enormous. How long does it take to sell a drug manufacturer the Systech product?

Ara Ohanian:

It’s interesting. From one perspective it’s a fairly complex product, it looks like. And it is very sophisticated more than complex. But at the same time, because it follows regulation and compliance, when the government comes up with a new regulation, and whether it’s a pharma company or tobacco company or a spirit company needs to adhere to it, they typically have a very specific deadline by which they need to adhere to that.

Ara Ohanian:

You’ll have a few companies like Systech immediately update their solutions to be able to help companies comply to this regulation. As a result, their sales cycle depends on the pressure that the government puts in. So occasionally you’ll know about something two years in advance. You’ll start two years in advance talking to your customer and planning with them.

Ara Ohanian:

In some cases when it’s an immediate response to a crisis, as we are in one now, as you can imagine, then all of a sudden the timeframe really gets contracted considerably.

John Warrillow:

In the event that were to identify a vaccine or a drug regime that treated Covid-19, presumably that would impact Systech on some level? How would that? How would you guys be impacted by that?

Ara Ohanian:

Absolutely. Well, assuming that … One of Systech has the top 20 pharma players in the world that’s a customer, and then probably another 300 pharma companies around the world of different size, and also contract manufacturers in pharma as customers. Assuming that a vaccine that needs to be created and distributed either is one of those companies that’s a Systech customer or a manufacturing, a contract manufacturer that may be using Systech technology today for all the products they do, then typically Systech will end up having an important part of that. Not only in serializing, giving a unique serial number to each product made, but in this case one of the fear also is will there be an infiltration of fake products by counterfeiters in the marketplace? That becomes a big issue because when fake vaccines get into the marketplace, people die.

John Warrillow:

Right.

Ara Ohanian:

For instance, Systech’s been helping a number of customers with vaccines and medication around malaria around the world for many, many years and those become important. So it’s not only knowing what the product is, where it is, but also be able to create some kind of technology that says, “We know it’s the real one.”

John Warrillow:

Do you have direct competitors that basically do exactly what you guys do?

Ara Ohanian:

Typically, this is where I think Systech was somewhat fortunate. That if you look at the world, there are two pieces of this. All right? One piece is just a serialization, which is putting a unique serial number associated to barcode. For that, there’s a number of companies in the world that do that. And so it’s not that there’s that many, but there’s four or five companies that you often will see in the pharmaceutical. And then there may be four or five companies that are more active in the food and beverage. So from that perspective, there are solutions that do that.

Ara Ohanian:

Once you get into the arena of counterfeiting and anti-counterfeiting technologies, this is where things change drastically because the world has developed all kinds of analog anti-counterfeit technologies over the years. Maybe that little shiny sticker you see on a Microsoft product, was this hologram sticker, might be invisible ink. It might be infrared ink. Might be a little marking on the packaging. There are all kinds of things that physically are taking care of that.

Ara Ohanian:

But one of the issues is that the counterfeiters in the marketplace have become more sophisticated than those who protecting these products. And the counterfeiters have moved to digital solutions. They rapidly put digital plants, reproduce a product. By the time Interpol gets there, they’re okay to vacate and abandon a particular factory because their profits are so high. I think the last firm was making counterfeit medicine or booze or so on, it was four times more profitable than narcotics selling. You can see how lucrative.

John Warrillow:

Wow.

Ara Ohanian:

There is no direct criminality for it because there’s a company in between.

Ara Ohanian:

On the digital side, there’s very few technologies today that are viable. One of the things about Systech, I’ve created a product protected by multiple patents that is able to look at the little piece of printed barcode, that ink that touches the cardboard or the label and has a single way of finding out, which one we are looking at. No two are the same. In fact, mother nature in the printing of ink on paper doesn’t produce twice the same thing unless it does it four quadrillion time. So the one four quadrillionth time, there’s a chance that it might be identical. So as you can see, the chances of duplicating that are very difficult.

Ara Ohanian:

In a way, Systech was quite fortunate that its scientists come up with something. In fact, when they developed it, they didn’t develop it as a product. They developed it as a way to help the cameras see noise. Whatever was different between one barcode passing at 100 yards a second on an assembly line, versus another. Those noise made it difficult to take pictures so they took the noise out so they could do it rapidly. That noise is actually the unique, call it differences that mother nature puts inside of that printing process, and we captured that and then patented that process.

John Warrillow:

It’s just incredible. I mean, I’ve been doing this show for years now, four years, and I’m never ceased to be amazed at all of the businesses out there and the technology and all of the layers of the economy. I think it’s fascinating.

John Warrillow:

Okay. You’ve succeeded in taking an idiot, someone who knows nothing about the pharma business and, I think, educating me about what you guys did and do, which is fantastic and a feat unto itself.

John Warrillow:

Let’s talk about how you got to Systech. What was your journey? Because you didn’t start the company, as I understand it, you arrived there a couple years ago. Tell me about that.

Ara Ohanian:

That’s correct. Although my background was that of an entrepreneur, I started two companies before I started running other people’s companies. In this case, it was a 30 year old company, was doing well. Was in a single industry, that was pharmaceutical. A very brilliant founder who thoroughly ran the company, an engineer. Most key people within the company with an engineering background as well.

Ara Ohanian:

Both the founder and his investors decided at some point that if they were to bring someone that had, had some experience in taking company to the next level … And I’ll explain what that means. Next level of value. And also had experience in emerging in M&A and exiting a company into another that, that was the right place to go for Systech, because it had a tremendous base for success, tremendous technology. They felt by being somewhat smaller, in this case it was under a $100 million company, they were not able to really scale their solution everywhere that it should be around the world. I was brought in to help take the company to its next level of value and opportunity.

John Warrillow:

At that time, it’s generating less than $100 million in revenue. How many employees did you have, ballpark?

Ara Ohanian:

I think there were total with directly, I think, just around 200, and possibly there were another 100 contractors around the world that worked for the company. But direct, about 200 people.

John Warrillow:

How did you first meet the founder? Maybe describe that initial meeting.

Ara Ohanian:

Absolutely. That was the most nervous moment because having been a founder three times myself of companies I then exited, had somebody come and told me that I’m going to be taking your job and do something for you, felt a little bit uncomfortable. But the minute I met the founder, it was very clear that he wanted this company to go beyond what he had done.

Ara Ohanian:

As a founder for 30 years, when we met … We met at a business club in Manhattan. I arrived early. He was there sitting at the bar. Both of us introduced ourselves and had a beer at lunch, which was unusual already. Most people only have water at lunch, so we had good chemistry. During that time he explained to me how he really thought that his company and what he had built had so much potential, but he had been as an engineer and as a person focused on building this. Had not necessarily developed all of the experiences of really taking this, what he had built into a new territory. Whether those territories were geographic, or whether they were new verticals. His dream was for his company to be able to do greater beyond himself.

Ara Ohanian:

I was one of the candidates that he interviewed. He still owned 30% of the company and was on the board of the company during that time. So it was important for him to be part of. He was leading some of the decisions on the selection of who would step in his shoes.

John Warrillow:

We talk about this notion of … On this show, quite a bit, where private equity comes in. They buy in a majority recapitalization, the majority of shares from the founder, but will ask the founder to hold and carry some shares. And then the founder gets the “second bite of the apple” if it’s a success down the road. That sounds like what the proposition was here. It was a private equity backed company. The founder was carrying some equity and wanted to have an exit at some point, I’m assuming.

Ara Ohanian:

Absolutely. Absolutely.

John Warrillow:

What was the timeframe you were given as it relates to when that exit would come to fruition? Did they say we want-

Ara Ohanian:

Yes. They did. From day one interviewing, the investors behind the company said that they’d already been invested in that company for quite a while. Some of them were there for 20 years. This was an unusual set of investors and private equity that had taken a much longer view because they really believed in the technology and where it could be and that it hadn’t seen its day yet. And so they’d gone beyond what the typical timeframe of the private equity investor was.

Ara Ohanian:

But in this case, they had reset the clock. They said that wanted within three to five years to be able to put the company on a new path of either liquidity, meaning whether that would be an IPO for the company, or an exit into a larger company that could really scale that product forward. So it was a three to five year window.

John Warrillow:

Fantastic. You get the job as CEO, what next? What did you start to do? It sounded like you fairly quickly you had a strategic discussion among the team as to how to position the company for an exit. Do you think you could describe that?

Ara Ohanian:

Yeah. I think there were a few things. I can take you through probably four or five things I can take you through. Please interrupt me if I’m a little bit too long on any one of them.

John Warrillow:

That’d be great.

Ara Ohanian:

But the first one, and most important, is the people. When you come into as into a company that’s been there for 30 years with the same founder/CEO, and over the past few years the investors had tried to hire management around to help the CEO take the company to the next level but had, had a lot of turnover. It hadn’t worked so they let some of these senior people go, so the SVP, the COO roles had changed.

Ara Ohanian:

One of the things happened is that the rest of the employees, it’s natural to get nervous, to start losing belief, faith in whether this is going to work. So my first thing was to make sure that I get those individuals who’ve taken the company to where they were, these were brilliant, brilliant scientists, engineers, process-oriented people made this complex solution work, to get them feel that there’s a new opportunity. They are part of it. Their thinking and their vision is going to be an integral part of the planning upfront and give them an opportunity for those who are excited to really feel they’re excited and they have new ideas. At the same time, try to identify those who perhaps have lost that spark, and see whether that spark can be reignited or perhaps it is better to not count on them anymore. That was the first thing, the people, the talent side and make sure I have the right moral.

John Warrillow:

I want to follow up there because it sounds like, my words not yours, the founder was probably what a lot of visionary founders are, which can be a difficult person to work for because they have just very strong passions and they’re not necessarily steeped in management technique. Again, those are my words, but I’m just reading between the lines, given the turnover at the senior level that the company had before you came.

Ara Ohanian:

Yeah.

John Warrillow:

Go ahead.

Ara Ohanian:

In this case actually, the founder was from what I saw a good manager, beloved, followed. But over the past two, three years or let’s say four years before I arrived, the board and the founder together in trying to take the company to the next level decided to hire a level of professional management between the founder and the employees. So that could have been a CEO, COO, a new chief financial officer or a new marketing person and someone like this to try to bring more professional management around the founder. In the process, it’s not an easy thing to do, so there was some turnover around making that happen.

Ara Ohanian:

I wasn’t there at the time, but what really happened, at some point the board, including founder said, “Look. We tried a few times. This hasn’t worked well. And we’re causing the company to … Potentially even some morale issues and so on.” They decided rather than try and create a layer between the founder and the rest of the employees and the organization, it would be better if the founder agrees that it makes sense to bring a professional CEO to come and help him realize his vision. I think a slight nuance, but because it was the turnover of that new management at the top that I think started causing a little bit of issue in moral. Because when your boss changes all the time, over three years, everybody gets nervous. Right?

John Warrillow:

Yeah, for sure. But in your case, you made it work. I’d be curious to know what your operating agreement was with the founder. A guy who’s had his business for 30 years. It’s very hard not to put your hands in all the operating elements. Yet for you to be successful, you have to … The buck has to stop with you. How did you guys come up with a way to work together that allowed you the freedom to run the business and take it to the next level without him feeling cut off at the knees?

Ara Ohanian:

Of course. Well, this was the best of both worlds. Doesn’t always happen that way. Because obviously when I was first interviewing for the position, it was very important for me to know that I run the company. I’m the CEO and the buck stops with me. As a result, that has to be clear because if you have unclear, lack of clarity as to who’s leading the show by the rest of the employees, looking like there’s two chefs in the kitchen, you’re not going to have a great meal. And that, we didn’t want that to happen.

Ara Ohanian:

To begin with, that was one of my conditions to come in was to make sure that not only I’m the CEO on the board of the company, we agreed to certain objectives. I have certain leeway in terms of decisions. What I can make as a decision, what I bring to the board. And then also, the other thing, I made sure that it would be more expensive to fire me in the first year than the fifth year of being there, so that I had enough time.

John Warrillow:

How do you do that?

Ara Ohanian:

You negotiate it in your contract. You basically say that, “If at the whim of the board, they decide they don’t want you, not for cause, but if they don’t want you, that if they do it in the first year, it’s going to cost them a lot more in their severance agreement. Even the second year a little bit less. In the third year, a lot less.” After that, it goes back to normal.

John Warrillow:

It’s almost the opposite of what a traditional employment agreement would be, which is the longer tenure the more severance. But what you’re describing is exactly opposite.

Ara Ohanian:

Correct. Because I believe that would build trust with the private equity guys, just say, “Look, I need two years runway to do what I need to do in order to take this company where it need to go. But some of the decisions I make might have short term negative impact, then we need to get through them. And some of it will also bring some pain in some ways.” The last thing I want to be is a person where we’re I have to double check every decision all the time. So it was important for me to know that in the first 24 months, I can really implement some very important strategies that we need to really stick to.

Ara Ohanian:

And then I also made sure that we put some incentive programs for the management that as these new strategies that we put in came to fruition, they were handsomely rewarded with new options and also with cash bonuses so they would be part of it. So there was alignment in compensation. That was the basic thing.

Ara Ohanian:

I said, “Look, after two years, if I’m not doing well, it should be easy for you to fire me. But if you don’t understand exactly perhaps what I’m doing because you haven’t done it before in the first 24 months, that’s not something I’m ready to take a risk on, so that’s the commitment I need from you guys.”

John Warrillow:

Fantastic.

Ara Ohanian:

They gave me that commitment and that trust.

John Warrillow:

That’s fantastic. I’m fascinated by this phenomenon of a CEO taking over a private equity backed founder led business, originally founder led. Because in essence, I mean if you peel back all the packaging and the layers and so forth, in essence, when you come in to take the business to the next level, almost by definition, whether articulated or not, you are taking policies, procedures, processes, decisions that the CEO made and making different decisions because you believe they need to go to a different level. At some level, the CEO has to feel like their decisions are being undermined or second guessed or they’re not as smart as you. If they were as smart as you, they would’ve made the decision in the first place. Did the founder feel … I mean I can’t speak for them, but-

Ara Ohanian:

No, actually. In this case, the founder was great. I also invited him into a very specific role.

John Warrillow:

What was that?

Ara Ohanian:

I needed a mentor to teach me about this new area because up to two years ago, I didn’t know what serialization was. This was a new area for me, a new technology, a new software and a new international business and all the industries we could go into with this particular solution. So I asked him to be my mentor on always be there to be able to vet some of the decision from a, call it, technical capabilities’ perspective. I often asked him to meet with me, most of the time outside of the office, having dinner, having lunch and so on. And say, “These are some of the things we want to do. This is a company you built up. I would like to get your insight about is there anything about this decision that gives you pause? Are there any problems you see that this would bring about,” and so on.

Ara Ohanian:

As a result, what happened, we started having these ongoing discussions. We met probably every two weeks, three weeks. We had dinner together, emptied a bottle of wine and talked about these things. There was some cases where he said, “Be very careful. I know this area, these people. These are some of the landmines you might feel.” We built a trusted relationship that way. It was very clear that our benefits were intertwined. Right? If I did well, he’s going to be a very, very wealthy man. And at the same time, I’m going to have a success under my belt with a nice little bonus on the side. So it was a win-win.

Ara Ohanian:

One of the things that was a little bit difficult at first to do because there had been multiple hires over a period of three, four years in senior management in different areas, in the service area, in the engineering area, in accounting and so on, a lot of new processes had been built on top of the other processes. As a result, decision making had really slowed down. So it was a company that was sub $100 million, but in some cases it took as long as a government entity to make a decision.

Ara Ohanian:

One of the things really that I started doing, this is how I got the internal talent pool to really be part of the … I brought people in groups and individuals and said, “Let’s identify processes that don’t make sense that slow us down.” It’s incredible. When that discussion started, everybody knew of at least three things that make absolutely no sense, that they were added somewhere along the way.

Ara Ohanian:

Give you an example, it’s the simplest one. But if an expense report was approved by a sales manager for direct sales representative reporting to that individual, it needed to still have three other approvals and then plus the CFO of the company. Which basically said, “We don’t trust our sales managers.” That was one of the examples, something that slowed down. So that one of the things that I changed, I said, “No. The manager that approves an expense for his direct report has absolute right to do that and we pay them immediately. No need to have another three permission. They need to have their decision making absolute.”

Ara Ohanian:

But then what we introduced, we said, “But we’ll introduce a random audit of expense reports in the company. At any point in time, one will be picked up and looked at. And if the manager that approved it showed that they were either callous or irresponsible, they’ll be given one warning. If it happens again, then they won’t be there anymore.” We accelerate the decision making and that was one of the important things.

Ara Ohanian:

Once you do that and you give people more trust, now all of a sudden the same employees that had been feeling somewhat undermined at the three, four years of change of management, they felt they were part of the decision making going forward. I think that’s how we got them to be more excited about the future of company and helped us succeed as well.

John Warrillow:

I love the specificity of the expense report example, because it brings it to life for me as to what … You have a level of bureaucracy you encountered and the fast decision making that you went to.

John Warrillow:

Let’s go to the positioning of the business for an acquirer because I’d love to … I mean, you’ve got through the M&A space, business you’ve run in the past, so you’ve definitely thought this through. Was one of the reasons you were brought in, is your experience with M&A. Describe if you could what you did to position Systech to be acquired?

Ara Ohanian:

The first thing was reviewing the brand position of the company. What kind of company are you? What business are we in? Up to that point, when you went to any document or to the website of Systech where we asked anybody say, “We are the best serialization company in the world. We are the pioneer in serialization.” That’s the way it positioned itself. The issue was that, including myself coming in and 99% of the world doesn’t know what that means.

Ara Ohanian:

The first exercise was, “Let’s figure out what do we really do. What is it that if we were talking to my kid, or if we were talking to my wife, or if we’re talking to the grocer that I go to and they asked us what we do, and we said that, they wouldn’t understand. So what is it we do? Let’s break it down.” We spent the first two months really just doing a lot of focus groups within the company and then brought some customers and so on and we found out, “Well what we really do is that we help make … What we do is we help products of our customers be authentic always. Make sure they’re authentic. We make sure that they are connected. We should make sure that they’re safe.” Right? That’s our three things.

Ara Ohanian:

So we said, “Well, so …” We came up with this acronym, ASC. We said, “Well, basically, we’re a technology that makes sure that your products are always authentic, safe and connected as they travel the supply chain, so that when your customers eventually get the product, they don’t have to worry.”

Ara Ohanian:

And so we changed the position of the company and we said, “We’re in the business of giving you safe, connected and authentic products.” And because there’s so much risk for a company, whether it’s a pharma company, whether it’s a spirits and wine company, or whether it’s a vaping company, there’s so much risk that, that product, either something went wrong with it or it was sold to the wrong people, as in the case of vaping to minors, or there was an infiltration of a fake product in the supply chain, they all understood. So now we add a new branding position.

Ara Ohanian:

That was point number one. We change our brand proposition, our value statement and we change that in all our media. We change our brochures, our business cards, we created some a little metallic coin that we would take with us around, we did our website. Everything said that, so that was point number one.

John Warrillow:

Fantastic.

Ara Ohanian:

Point number two, one we had done that, we said, “Okay. Now let’s identify what other industries will our solution really be helpful?” We looked to say, “What are industries that potentially are threatened? Their supply chain gets threatened either by bandits who divert it or by counterfeiters who counterfeit product then push it into exist.” We looked at that.

Ara Ohanian:

We said, “Well …” We came up with food and beverage. We came up with wine and spirits. We came up with tobacco and vaping, the new vaping industry as it was transitioning. We came up with things you put on your face, so cosmetics. We said, “Wrong cosmetics can hurt the person’s skin.” Personal care, shampoos, having people who have been burnt by counterfeit shampooing in a number of countries. We looked at those things and we said, “Okay. Let’s now turn our value statement into for each of these industries what this mean.”

Ara Ohanian:

So we said, “What is authentic, safe and connected for a cosmetic company? What is it for a wine and spirit company, and so on.” Now we have that. Based on that, we decided that these were the places that we could create partnerships and alliances. We went and looked for partnership and alliances where those were fulfilling a product in those spaces.

Ara Ohanian:

One of them, for instance, which eventually became our acquirer, Dover, owned the company called Markem-Imaje. And Markem-Imaje are a speed printing company, about $1.2 billion company, that if you ever pick up a can of Coke and you looked at the little things printed on the can of Coke, their equipment printed that. So if they’re printing on a can of Coke, there would be a natural part to say, “Hey, if we can also add some technology to your printing, so when you print it, not only it says which can of Coke it is, we put a unique serial number. We can track and trace this. And we could anti-counterfeit solution on it as well.” All that happens while you’re printing on the packaging line. We put the camera, the CPU, and while you’re printing, we also pick up that information.

Ara Ohanian:

Now, you can go to Coke and say, “Not only we count your product and we print them so that we’re printing all the numbers and actually also the face of that can. We also make sure that when that product leaves, it’s authentic, it’s connected and it’s safe.” That was one example.

Ara Ohanian:

We looked at different type companies like Dover, Markem-Imaje in different areas. We said, “Those would be good partners because if we can have a successful partnership with them, they would eventually be a good place for us to exit.”

John Warrillow:

Fantastic. Step one was positioning. Step two was looking into new industries.

Ara Ohanian:

And distribution, where we could become part of their existing solution. So if you’re already printing all the information on, let’s say, a Maybelline mascara product, and now, but you also have issues where they divert them in the supply chain or they get counterfeited, now if you can take those two problems away, that company can tell its customers, “Hey, look. Now we can also help you with that.” Now we become partner with that customer.

Ara Ohanian:

So rather than us finding customers directly only, we said, “Let us become an important part of somebody else’s solution so they have now a new value proposition that allows them to ask for more money or get more scale and distribution.” That was the idea. Basically, how do you sell your product through the effort of others? That was point number two.

Ara Ohanian:

For a long time, my approach to exits is that an exit of a company is not selling your company for a certain amount of money. The exit of the company is having convinced a partner that you are so wonderful they should marry you. By marrying you, they’re going to be happier. They’re going to be richer. They’re going to have more kids and better vacations. So all of these things will be better. So it’s the natural process. And that partner said, “Darn, you know what? I love dating you and once in a while going out to dinner is great. But I really want you to myself.” And that’s what you make happen. Once you make that happen, then the issue is like, “Okay, what’s the dowry?”

Ara Ohanian:

That’s basically my simple way of approaching any exits. Doesn’t matter if it’s a 5%, five people company, 100 people or 2,000 people company. That fundamental doesn’t change. An exit in the sale of company is typically not a financial transaction. The financial transaction is the outcome of a marriage.

John Warrillow:

Well said, indeed. Part of what you were doing in step two of your process, looking at other industries, distribution channels, partnerships that you could forge, it was a bit of a Trojan horse in the sense that you knew if you could create a very strong alliance that, that wouldn’t in addition be the ideal acquirer.

Ara Ohanian:

Absolutely. What we did, we actually went after competing companies to some degree. We said, “Look, we are in pharmaceutical and we can be very attractive to anyone who wants to do more business in pharmaceutical because we’ve got a track record of 30 years of having secured trillions of dollars of prescription drugs for at least the top 20 pharmaceutical companies in the world. And in probably what is the most safe dangerous environment because something goes wrong with their medicine, it’s life or death often. So if we could secure a pharmaceutical drug to help bring more safety to a patient and a consumer of those medicines and drugs, we certainly are good enough to secure your can of Coke or your make-up or your shampoo or your wine.”

Ara Ohanian:

With that, we said, “Okay, we’ve identified the places we should also be securing.” And we said, “Rather than go direct to it, which would take us too long. I’ll be retired and probably my white hair will have turned to a bald head by then so that’d be too late.” So we said, “No. We’ve got to do it through an effort of others.” We looked at companies like Dover, Dover is the owner company of Markem-Imaje. We said, “Let’s have multiple partnerships in those different areas and see who wants to partner with us.”

Ara Ohanian:

So to some degree, we went a little bit into speed dating. Right? It’s a good thing. We went to a lot of companies that were very similar, that we felt had a product that was similar and to see which one would see ours as the sexiest. That’s how we went about it.

John Warrillow:

Now would you have been satisfied had you just forged a simple partnership or were all the speed dating that you were doing availed acquisition conversation? Do you know what I’m getting at? [crosstalk 00:46:12].

Ara Ohanian:

Yeah. Zero acquisition conversations. The only thing that we went into, once we identified the companies that would be potential distributors, we did a lot of work on the front end ourselves, and we created … We went to the marketplace and we bought products of their customers. And then we took those products back and we secured them through our technology and then we found a way, sometimes direct, sometimes to one degree of separation, to get to the right individual in those companies. Say, “Let us show what we’ve done to some products that you’ve actually packaged in the marketplace and see whether you have interest.” That was the first part.

Ara Ohanian:

Once we got them, once they said, “Wow. We can’t do that today.” So all of a sudden imagine, if you had the … If it was that can of Coke or that make-up, in the past they would just print it and it would go there. That was it. They didn’t know what was happening. [inaudible 00:47:13] til they heard, “Oh, we have a counterfeiting in I don’t know what market.” Now all of a sudden, we say, “Not only you could do that. You know where it is. We can track and trace it anywhere. And your consumers and distributors just with a smartphone can now scan that product and the phone will tell them whether they have a fake or a real product in their hand. If there’s a fake one, it immediately reported back to the supply chain. And now based on also some of the intricacies of the technologies, we can tell what other ones are likely to be faked also and what geographical area.”

Ara Ohanian:

Now that you had that solution thing and you excited someone, and then say, “We’d love to partner with you.” So we have to do a lot of work on the front end. Once they got excited, then we said, “Can we build? Our goal is to build together with you a go to market plan whereas if we did all the work to integrate our technology into your existing solution, where do you think you could take it into your customer base in the region?” With some of the customers we have this partner potential. They didn’t want to do that hard work upfront. And so we said, “We don’t want to have the partnership just on paper.” So we stepped away.

Ara Ohanian:

A few of them were ready to do that work upfront. Some of them more on regional basis or vertical basis. The one that eventually acquired us actually rapidly saw the benefit that they should do that globally. So we became a global partner. That took us a year to accomplish. And maybe eight, nine months later, at the dinner with the CEO of the partner company, he knew that we were in the market raising some additional capital for some of our growth initiatives and he said, “Would you guys consider an investment from us as a minority partner to help take you to your next destination?” And we said, “Yes. Well, let’s talk.” That led to eventually a full on acquisition.

Ara Ohanian:

So again, it wasn’t the financial discussion, it was getting the businesses to work well together.

John Warrillow:

Really, really fascinating and an incredible insight. What was the trigger that caused the conversation to turn from Markem-Imaje investing a minority stake in your company to outright acquisition?

Ara Ohanian:

It arrived by one of the … A smart acquirer typically will try to understand how will your solutions scale inside of theirs, and what kind of potential positive that would bring to their business in two areas. One of them, point of differentiation in the marketplace. And the second one, in new avenues of growth.

Ara Ohanian:

When we completed our end of the analysis of in which of their customer type products our system would work best, because it doesn’t necessarily work with every single product the best. Right? They have to pick the ones that it would be best. It became clear that this could have a significant advantage for them versus their competition to demonstrate to The Wall Street, to the marketplace, that they are innovating the way in which product printing and authenticity’s delivered. That was one thing.

Ara Ohanian:

The second thing was the dollar amounts potentially that, that could bring in when you go to all of their customers. And if a fraction of them over a period of five years start adding this capability, what would be that revenue? It was the denouement of those two realities that allowed the CEO of the acquiring company to say, “Rather than just invest because it’s such a great, we believe in this technology so much. Why not own?”

John Warrillow:

How did you maintain negotiating leverage? Because to use your dating analogy, it sounds like you were engaged to Dover. You were really quite deeply integrated together, which feels really good from turning a hot and heavy romance, an engagement to marriage. That feels easy to transition. At the same time, they would’ve had tremendous leverage over you had you not had another acquirer at the ready.

Ara Ohanian:

Absolutely.

John Warrillow:

So how did you maintain some negotiating leverage?

Ara Ohanian:

That’s a superb question, John. In our case, in order not to have a situation where we only have one partner as potentially as an avenue, I had also gone and hired an investment bank at the same time as advisors. There’s a superb boutique firm in Cisco called Atlas. I called their CEO. His name is Tony Trousset and asked, actually the first thing, we had them in a competitive bid. So our board would also approve it. Asked them to become our advisors. So we were in parallel because I didn’t have to sell the company. I had to bring new liquidity in the company first. That was my first goal because were not even two years into a five year project. Right? So the first was to bring more liquidity into the company.

Ara Ohanian:

And so the investment bank was talking to different sources in private equity and large VCs and others and family offices that would’ve been good sources for that minority investment for us to invest in growth. So we had that option on the table. It was always there. And unless somebody was going to really make it worthwhile for investors to want to exit earlier, our option was to just raise money and use that money for our growth because we didn’t have to sell the company for another three to five years. We were at that time, maybe 13 months into my tenure. That was the first thing.

Ara Ohanian:

And then once it became more engaged, where the actual partner seriously started talking about wanting to own and acquire, I stepped out of the negotiation and Atlas, our investment banker, led the negotiation. That all of a sudden takes all the emotions out of the discussions and it becomes an objective discussion.

Ara Ohanian:

But at the same time, if you as a principal working with your partner, let’s say we want to buy you and they give you a number, you say, “Well, no. I’ve got another five places I can go to.” It’s not a nice thing to hear from your partner. It’s better not to. You’re there to operate together as a partner. But when the investment banker on one on one with the core development of the other side in a conversation can say, “Look. I hear you. But my client has so many more options through our channels that unless it’s really something that makes sene to the shareholder, it’d be difficult to advise them to do what they want to in five years rather than three years.” Those two things were the way in which we made sure we don’t have to get into the entanglement and negotiation and leverage issues.

John Warrillow:

Fantastic. Sort of creating a buffer between you and plausible deniability. Right? They’re a third party.

Ara Ohanian:

Yeah. It just makes sense. Because in the meantime, we were just having such a positive partnership that you don’t want to have one part, the most important part of your partnership with just the operation suffer, because now he’s starting to talk money. Right? The CEO of the acquiring company and I agreed together, said, “Hey, let’s just decide to build this business together and let’s put your investment banker and our corporate development guys to talk together. If they decide that it makes sense, they’ll come to sense. In the meantime, we’ve got to build a business. That’s what we do. We’re not here to sell a business. We’re to build it.”

John Warrillow:

How did you guys think about valuation? I mean you had such a unique product. I’m trying to … Are there standard multiples of a company like yours or what? How did you think about valuation?

Ara Ohanian:

It’s complicated. Because I’m under NDA, there’s so many things I can’t get into. But I can provide you the following input. I think will help. Different parts of your business create different kind of revenue. And each revenue category has a different valuation. So now, I can’t give you the exact percentage of what we had where, because I’m not supposed to share publicly the financial details of our transaction.

Ara Ohanian:

But I’ll give you an example. In our business, some of our revenue was pure service. Some of revenue was pure SaaS, so software as a service. Some of it was license, which is licensed software. Some of it was on premise versus some of it was in the Cloud. Some of it was maintenance revenue that came from the software that was licensed. And some of it was from equipment. By equipment could be one of those third party cameras that we would just infuse with Systech brains and then add a CPU around it and put it on an assembly line. So all these different things.

Ara Ohanian:

If you look at, let’s go to the two extreme. Typically, your hardware revenue is not worth a lot. In our case, our hardware revenue, you could probably be … It’s probably worth around one, one times revenue. Not more than that. Maybe a little bit more, but in generally.

Ara Ohanian:

But our SaaS revenue that we had, that SaaS revenue you could argue that we were seven times revenue. If we did it on revenue basis and not EBITDA. Then you say, “Well, what if the consulting revenue, the service revenues in between?” That depends. Right? You’ve got different kinds of consulting you do. Some of it is just implementation, so that’s lower level. It’s probably somewhere around 1.5 times revenue. Some of the consulting you may do is extremely expert based. As a result, has very high margins that can be up to 2.5 even sometimes 3 times. Right? It can happen but probably more like 2, 2.5 on the service side.

Ara Ohanian:

And then finally, your license revenue, if you look at it in the marketplace, license revenue depending on the business, depending on your financials can be as low as 1.5 times and as high as 3.5 times. So if you look at-

John Warrillow:

What’s the different between … Sorry to interrupt here, but I’d be curious to know what the difference between the license revenue and SaaS revenue is.

Ara Ohanian:

Absolutely. SaaS revenue is basically a recurring license. It’s almost like a rental charge. Right? Let’s say, “Fine. I want to use your technology.” I say, “Okay. It’s going to cost you $100,000 a year.” You keep on getting the latest and the best of my software. If one day you decide you don’t want to use it, I switch you off. Because I’m offering you a SaaS software, through my Cloud facility. So I host it for you and you pay. A little bit like with Amazon, you pay to be on AWS. You pay for being on my Cloud and using the capabilities of the software. That’s the SaaS piece.

Ara Ohanian:

If I have licensed you the software, basically that means if you’ve bought the software from me, and you’re paying me a maintenance to maintain the software, that means that once you buy it, you don’t pay every year for it. You’ve only thing you pay annually is a little maintenance. Usually 15-20% depending on the kind of agreement you have.

Ara Ohanian:

So hence the difference. This is why SaaS based software revenue is tremendously most more valuable than licensed based and maintenance based. The reason is, every year, you have to resell your license business. You start at zero. Right? If you sold 10 customers, a million dollars in 2020, you make $20 million. If you did that in SaaS, let’s say it was you did half the price, you had $10 million. When you start 2021 with in your license business, you start at zero whereas in your SaaS business you start at 10.

Ara Ohanian:

So as you can see, there is a snowballing effect on your SaaS revenue, which is annual returning revenue. That’s part of your business. That’s the most valuable part. That’s why many businesses that have been licensed and maintenance software businesses are in the process, some of them are complete, and many of them in the process of converting their business to SaaS. It’s not that easy to do, but it’s doable.

John Warrillow:

That makes sense. So in Systech’s example, while we can’t get into specific details, you know that behind the scenes the M&A guys were pulling apart, teasing apart the different revenue streams and saying, “Okay, this kind of revenue’s worth X. And this kind of revenue’s worth Y.”

Ara Ohanian:

Absolutely. Just I can give you this one item, which is not confidential. But traditionally, in the Systech world, the pharmaceutical companies expected all the software to be on premise and they would only have to pay a maintenance. That was the model.

Ara Ohanian:

As we managed to bring the company more into this new era of authentic, safe and connected, which was a Cloud product now for anti-counterfeiting and the track and trace, that became the SaaS portion of it. So increasingly the company was going towards a SaaS model.

Ara Ohanian:

So also the projection into the future of the company’s valuation, what it would have been in the future assuming it continued expanding this SaaS revenue, made it more valuable? So from an acquirer perspective and certainly when you see that transition is happening and it’s happening successfully, if you can buy at the mezzanine level and the seller is happy with their deal, you have a lot of potential upside on that business. The key thing is to find a … There’s always a right number. Right? Between the buyer and seller.

John Warrillow:

Yeah. Yeah. All right. Just listening to you, it’s like a symphony of intelligence. I listen to what you’re saying and I understand it. It makes sense to me and it is so thought provoking. I’ve just enjoyed this conversation enormously. How did you learn what you’ve learned? I mean are you a reader? Are you a hyper-educated guy? How did you become so knowledgeable about business? Give us our marching orders here. We’re going to try to be like Ara. What’s your media consumption? How did you become as thoughtful about business as you are?

Ara Ohanian:

Well, it’s what I don’t know that’s more important. Right? I think one of the elements is continually wanting to learn. We learn for so many … I’m not a highly educated person. I think I’m the only person at Sydney University that now has a professor status without having a Masters. So it’s not based on the education.

Ara Ohanian:

I think it’s based on having the right people, the right teams around you, working together as one team and learning from each other. That’s probably where most of the opportunities come. The rest through experience. The only thing with experience, the world is changing so rapidly today. I think that sum total of experience gets possibly less valuable as we go with time. So some of the fundamentals remain but that experience is less so.

Ara Ohanian:

It’s the ability to always want to learn. I love Richard Branson. He asks in a post where it says that when he … A couple of times he got his first opportunity at something and he had no idea what it was, and his advice is take it and figure it out later. I think that’s it. It’s about wanting to learn. If you want to learn, if you keep on questioning your own assumptions you’ll evolve in your thinking and hopefully you’ll generate more knowledge that you can share with others.

Ara Ohanian:

If you remain close to your conviction and your assumptions … I’m not talking about your ethics and morality, those you have to. I’m talking about general knowledge issues around anything from business to politics to environment, to literature. If you don’t have that mind open, then it’s very difficult to keep on learning. Humans are a learning animal, but we often let the opinions and ideology get in the way and then our assumptions aren’t continually questioned and re-validated, I think. So hopefully I can do that forever and learn forever.

John Warrillow:

Well, I’m generous for you sharing with us today. Or, I’m grateful for the generosity you’ve shown me and us today. I’m grateful for that.

Ara Ohanian:

Yes. Thank you for speaking with me.

John Warrillow:

Yeah. Ara, if people wanted to reach out, is there a way for them to get connected to you? Are you a social media guy? What’s the best way? Is there a website you want to point people to?

Ara Ohanian:

I don’t have a website. No. I’m on LinkedIn, obviously. That’s probably … I’m pretty active. I don’t post all the time, but I’m daily reading and hearing of other people’s ideas. And occasionally if I have one, I’ll post it. But I do check it all the time. So-

John Warrillow:

LinkedIn is the best?

Ara Ohanian:

Yeah, it’s the best.

John Warrillow:

Awesome. We’ll put the spelling of your name, which is somewhat unique at least to my eye, in the show notes so people can match you up on LinkedIn.

John Warrillow:

It’s such a pleasure to meet you and continued success. Thanks for doing this.

Ara Ohanian:

Great. Thank you, John and continued success to you.