Walking Away From an 8 Figure Exit

 

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Josh Davis started Spirit of Women, a marketing agency selling content about women’s health to hospitals. Davis built the company up to almost $10 million in annual revenue when he kicked off a process to sell it, which he hoped would garner an offer of around 7x Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA).

Davis’ bankers canvassed more than 400 potential buyers, 40 of which expressed interest. Ultimately, Davis met with 12 and got acquisition offers from two private equity groups. He selected the highest bidder who embarked on a diligence process.

That’s when the problems began.

Soon after signing a Letter of Intent, Davis had dinner with his would-be acquirers, and something didn’t feel quite right. Next, the private equity group started re-trading, the process of lowering the original offer based on what they discovered in diligence. They told Davis they were unwilling to increase the compensation for any of his employees after the sale even though Davis’ employees were used to variable compensation incentives.

The further the diligence process went on, the more money Davis spent on legal bills, which he estimated were approaching $1 million all in. Finally, weeks away from closing, he pulled the deal — walking away from tens of millions of dollars.

Davis picked up the pieces and ultimately sold it a year later, but his first sale experience is packed with lessons learned:

  • A definition of “add-backs” and how to use them to add six or seven figures to your take from a sale.
  • How to decide between a broad or narrow auction.
  • How summer holidays impact your sale process.
  • How and when to tell your employees you’re selling.
  • The hidden benefit of meeting with potential acquirers.
  • Why the leverage (i.e. debt) used by a private equity acquirer matters.

You’ll also learn Davis’ secrets for:

  • Finding great salespeople
  • The biggest mistake most owners make in compensating salespeople.

Unlike most marketing agencies who work on a project basis, Davis sold hospitals three-year contracts to their programs, which made the company much more attractive (and valuable) to an acquirer. If you’re keen to transform your one-off service revenue into recurring contracts, complete Module 5 of The Value Builder SystemÔ. Get started now by getting your Value Builder Score for free.

Our guest

With over 20 years of senior leadership experience in life sciences, Joshua Davis brings extensive expertise in healthcare business and strategic marketing, as well as Thought Leader engagement and organizational partnership in both the pharmaceutical and hospital/health system sectors Davis was the founder of Spirit of Women LLC which he successfully guided from inception in 2000 to sale in 2015; he left the acquiring company in 2018 and has been advising growth companies in the Life Sciences sector since then. Spirit of Women was an integrated healthcare communications company focused on supporting women as the healthcare decision-makers for the family. Throughout its existence, Spirit of Women has worked with over 350 leading US hospitals and health systems and over 25 global life science companies with a primary focus on Cardiology, Oncology, Orthopedics and Primary Care. Spirit of Women was merged into other product lines of the acquiring company

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Transcript

John Warrillow:

Hey, this is a fun episode with a guy named Josh Davis who built a company up to $10 million in annual revenue. When he decided to put it on the auction block, he got 400 different companies interested in buying his business. Ultimately whittled the audience down to two finalists, chose one and entered into a due diligence process. Weeks away from selling, he decided to pull the plug. To tell you why, here is Josh Davis.

John Warrillow:

Josh Davis, welcome to Built To Sell Radio.

Josh Davis:

Thank you, John. Nice to be here.

John Warrillow:

So, I was doing the reading about your company, and it’s like, “Women’s health marketing in hospitals,” I’m like, “Oh my gosh, I have no clue what this dude does.” So give it to me straight. What is women’s health marketing? I need to understand what you guys did.

Josh Davis:

Think about Weight Watchers support groups with American Heart Association walks with hospital magazines, and just community building and marketing of hospitals to the community. And we helped hospitals do that towards women specifically. Women make up basically 75% of the hospital revenue.

John Warrillow:

Wow. So okay, if I’m a hospital, I want to attract women and make sure women in my community are healthy, I could subscribe to your service and you would provide articles, other sorts of activities for women in my community that would promote health and healthy living?

Josh Davis:

Yeah, I mean [crosstalk 00:01:05].

John Warrillow:

Am I getting it kind of right?

Josh Davis:

… exit in ’15, it was mostly 80% digital, when the company started in 2000, digital hardly existed. So really it was always a content marketing business but evolved for more traditional billboards, ads and magazines, to all digital content over the years we worked on it.

John Warrillow:

It’s so funny because I live in Canada where we have socialized medicine. So the idea of a hospital being a for-profit entity is so foreign to me, so you got to help me through this. The customer is the hospital, right?

Josh Davis:

Customer is the hospital.

John Warrillow:

Okay. And they’re buying it because they want more sick people? No, that can’t be the case. What’s the profit motive, I guess, for the hospital?

Josh Davis:

Put a scale on the U.S. hospital, just the U.S. hospital market, it’s around 6,000 hospitals. And the average revenue is 100 million+ per hospital, so it’s a gigantic market. So a marketing budget’s three, four million dollars of a huge budget. They’re spending something on radio print, maybe it’s made for the foundation to raise money, whatever they put it off as, there’s a marketing budget. And we fit into, I guess, a relational marketing, peer-to-peer, non-traditional clubs and community building, around this massive industry of hospital marketing departments. And then there’s-

John Warrillow:

I had no idea it was so big, it’s amazing. What would a hospital pay to subscribe? What would they pay?

Josh Davis:

One of our really good successes as a business was our contract and the way we thought about billing these hospitals to be clients, and they were on three-year contracts. So we had them on a 36-month contract in which the annual revenue ranged from 50 to 75 to 80 per hospital per year.

John Warrillow:

50,000 dollars?

Josh Davis:

60 to 70,000 dollars per hospital.

John Warrillow:

Got it, okay. That’s [crosstalk 00:03:03], yep.

Josh Davis:

Though under 100,000. But then you’d have additional services, a service for heart disease or cardiovascular that we had on price, it was kind of a base price for these hospitals to have exclusive license to the content, which is by a media market, so you’d only own it in Nashville, Tennessee, you’d only own it in Northern Chicago. So, it was regional nature because hospitals don’t really compete more than a few hundred miles from each other.

John Warrillow:

How do you define a media market? Because it’s such an interesting, with an exclusivity contract because markets tend to sort of merge into one another. How did you guys put hard lines in the sand and try to claim a media market?

Josh Davis:

I guess it shows how long I’ve been in the media industries for, because when I got into it after school around 2000, it was called DMAs, which were designated market areas, and then there were also MSAs, which were also media service markets, mostly for radio and TV and all the regional broadcasters. It was very well defined in the hospitals-

John Warrillow:

So you just use their tables?

Josh Davis:

That’s the hospitals. The hospitals are already buying media, they’re already buying media.

John Warrillow:

Got it.

Josh Davis:

So they’re already buying into the system of how the media market works. As we evolved the business, we went strictly to a zip code basis. We’d say, “Okay, give us the four or five or seven zip codes around you,” and if we don’t think you’re being honest around where 80% of your customers are from, 80% of your revenue, you can always audit, the U.S. publishes everything so you can always audit the local zip code and actually verify, you’ll know. You think you have patients in that market, but it’s only 3% or 4%.

John Warrillow:

Great. How did you get customers to make a three-year commitment? Contract value could be more than 200,000 dollars, I would think that’s a big decision. How did you get them to make a three-year commitment?

Josh Davis:

It went to a sales cycle. We had a sales cycle that was almost 12 to 18 months, so the decision-making process with the client group was really, really long. And maybe the three-year contract versus a one-year contract added on five or six months to the end of it, but it was still an incredibly long sales cycle where you work in the hospitals for some cases six months, but some cases six years. It took that much time the hospital to buy in, because once the hospital does something, it’s just common organizational effort towards it.

John Warrillow:

How did you compensate sales people to reflect the fact that it was such a long sales cycle?

Josh Davis:

Very good question. We would pay the commissions upfront. So you’re signing a three-year contract which is paying annually, the salesperson’s making, at this time of sale, two years upfront, another one 12 months later. I think when we were really humming along doing six or seven sales a year, so there’s all this recurring revenue for the salesperson 12 months later as well.

Josh Davis:

The harder part was finding the perfect person to sell the product. It wasn’t like hiring someone to work at my sub shop or my insurance sales place, it was such a specialized niche around this, hospitals, U.S. hospitals, and how they interact with the community.

John Warrillow:

What did you learn about hiring salespeople over the years?

Josh Davis:

I learned I was really bad at it.

John Warrillow:

Did you ever get any better at it?

Josh Davis:

I hope so. Hopefully from now- [crosstalk 00:06:43].

John Warrillow:

What’s the secret?

Josh Davis:

I’m going to rely on other people to higher the salespeople and I’ll just support them.

John Warrillow:

No, but seriously, what did you learn? Did you discover anything interesting about hiring [crosstalk 00:06:56]?

Josh Davis:

Hiring or working with them?

John Warrillow:

I was thinking in particular about hiring them.

Josh Davis:

Really about hiring them, just how much, in my experience, in my space, you can over rely on sector knowledge. So within our space you can work in pharmaceutical sales rep or medical sales rep, whatever it is, all those overcompensates the fact they have some sort of health care in their background, some sort of physician sale process in their background. In almost no cases did it ever translate to what we were doing, which was really marketing services, it wasn’t selling a product. It was selling-

John Warrillow:

What did you find to be a better set of the characteristics to look for?

Josh Davis:

In salespeople. As I got more sophisticated, I liked the testing. So we were certainly doing really two or three sets of tests to look at is this a hunter, some will develop relationships or hunt, and making sure you have truly hunters in positions that involve making six, seven, 10 cold calls in a day, and you just got to thrive off that.

Josh Davis:

Versus someone who’s better at building relationships, which unless your company’s very large, you’re not really hiring people to build relationships, you’re hiring people to sell.

John Warrillow:

Which personality test did you find most predictive of success? Which one did you like the most?

Josh Davis:

I like the Enneagram. The Enneagram is one that I learned about more [crosstalk 00:08:29]

John Warrillow:

How do you spell it? Enneagram, I’ve never heard of that.

Josh Davis:

Enneagram, it’s E-N-N-E-A-G-R-A-M, I believe.

John Warrillow:

Okay.

Josh Davis:

I think [inaudible 00:08:37] are definitely in your area who would be certified to come in and talk to you about that and understand how that works. That’s not specifically for sales, that’d be more for organization development. But it has a sales … Within that 11-person structure of who you are in the workplace, there’s two or three that are sales, and you don’t fit within those two or three, it’s a good indicator as well.

Josh Davis:

I found with salespeople, what I really had to work on as I grew the company over 15 years was understanding how to compensate them so that they’re not being overpaid for their first sale and they’re decreasing their motivation to make additional sales, there’s some sort of cliff you don’t know about which they make their 10 sales and their kind of unmotivated the following year.

Josh Davis:

So I found I was constantly spending on a salesperson maybe one day a quarter, maybe two, just thinking about compensation and how to motivate them. And every year I got, I think, better at it, but you can’t control them as people, you still have people you’re dealing with whose lives you can’t always control.

John Warrillow:

What did you find, in your case, again, speaking from your own experience, worked the best in terms of comp? How did you structure it?

Josh Davis:

It’s a great question. I always felt best as the employer with the lowest possible monthly draw.

John Warrillow:

Sure.

Josh Davis:

Whether it was 5,000 or 15,000, whatever it was, I’d like to get that as close to five or somewhere in that … as low as possible. But clearly I’ve had some months where there was 20 grand a month just for a person in that space. So, I like having a very low base as much as you can and I like having unlimited earning potential. So if they make 15 sales and the goal was 10, 15, 16, 17, 18, 19, 20, they can make 80% more. Just very generous on the back end, because if I started a year with four sales people, usually two were successful by the end of the year.

John Warrillow:

[crosstalk 00:10:41]. Yeah.

Josh Davis:

And then also, I don’t know, in my experience, I don’t want to generalize, I always had a highly emotional sales team. I don’t know if that’s typical but in my case, they took a lot of emotional energy to simply keep on track, or maybe it was just because they were more valuable so I had more connection to their life’s dramas or whatever else-

John Warrillow:

I’ve heard that before. The drama is attached to the sales organization. Let’s get into the actual, kind of leading up to 2013 when you decided to put the company on the market. Just give me the broad strokes numbers at this point, what’s the revenue, number of employees. I’d love to know what the contract renewal rate is, just to give me a sense of what that churn rate is, I’m sure that was key stat in the sales book.

Josh Davis:

Yeah. So it was always based on, first let me start. My dad was an entrepreneur so I grew up around businesses, and something I learned early on, I’m not sure it was on purpose, I just kind of absorbed it, was there’s a good philosophy, which I subscribe to, that you build a business to sell it, and that’s really it’s only purpose. Because unless you want to pass it down as a car dealership or generational, I never had a vision for this business not being sold.

Josh Davis:

So when I started the business or got involved in 2000, I always thought when I could sell it, which I understood was at $10 million of revenue, that was the goal. So as we fast forward to 2013, that was when we were … 2014 our forward projection was 10 million dollars-plus revenue.

John Warrillow:

What was magic about 10 million?

Josh Davis:

Just my understanding from private equity and from bankers that there’s X number of companies looking to buy companies under 10 million, once you go above 10 million, there’s X times 10 more private equity funds at that level, once you’re over 15 million, there’s X times 15. The bigger you are, there’s more buyers out there, but if you’re selling a company at seven million dollars, you won’t get in front of a lot of buyers because the buyers are only looking for deals that are showing 10 million revenue. So for me, that was the first opportunity I’d have to sell at the kind of level or multiple I expected.

John Warrillow:

So what you expected in ’14 was 10 million. What were you at in your previous finished fiscal year or whatever?

Josh Davis:

We had a good little run there. So I think 2012, remember that the sales process takes a couple of years, so in [crosstalk 00:13:34] we hired the bankers, we didn’t know our ’13 numbers yet, so you’re really selling off ’12 and ’13 and ’14. I think ’12 we did just under nine million or so.

Josh Davis:

And we were a typical, we’d grow at 15-20%, we were a stable business, we weren’t growing 30% a year. Maybe we were mid eights or whatever we were, at our growth rate, 2014 you were clearly at 10 and change. So in 2013, we started a process, I think 2013 we ended the year somewhere with nine and change, so somewhere on that path, which is all you need. Because we went to market, we actually sent out our CIM, our confidential memorandum of the company, it was July of ’14. You’re talking about literally a year and a half later. So we executed exactly as we had put out in our little graphs.

Josh Davis:

The bankers, these young bankers you meet in there, they do dozens of these deals a year. You’re just one of many deals they do. The fact we had this really, really … I went to grad school, I have an MBA. We had one of those classic grad school graphs.

John Warrillow:

The hockey stick.

Josh Davis:

[crosstalk 00:14:48] hockey stick.

John Warrillow:

Yeah.

Josh Davis:

And we’re like, “Oh my God, look at page 12 and 13.” It was looking at the hockey stick graph. So we executed in ’12, ’13, and then ’14 was the year we were selling off of. The reason the timing was, I knew in ’12 we were … With a recurring revenue model, you have a good sense of where you’re going to head.

Josh Davis:

I kind of started thinking about it at that point and literally spent six months just interviewing bankers, just looking at how to look at hiring a banker. It was a long purposely planned process that started and took 18 months or plus once you hear the entire exit story.

John Warrillow:

What did you think the company might be worth in terms of a multiple of earnings?

Josh Davis:

So as I said, I went to university and grad school in the States and have an MBA, and I guess my education stuck with me for selling my first business because it’s something I learned. In grad school, certainly a seven times multiple.

Josh Davis:

I mean, if you look at industry averages across the last 100 years or whatever, 60, 40, whatever it is, there’s numbers which seven times multiples are hard to get but certainly attainable. It’s not a 15 or 20, it’s not a salesforce.com multiple but for a marketing services business it’s a good kind of target.

Josh Davis:

So I was focused on that. And as your listeners know, sometimes earning means if you’re making three/four million dollars a year, that’s 25 to 30 million dollars. For your listeners who haven’t sold companies, when you sell the company you have add-backs, you have these add-backs you didn’t realize were 3-400,000 dollars of expenses that aren’t carrying forward, and you can get a seven times multiple on that, that’s another four or five million dollars.

Josh Davis:

Seven times EBITDA is, in my education, a very appropriate multiple, and from the owner standpoint, it’s fair. It’s not 20 times, but it seemed like a fair multiple. We didn’t sell for quite seven, we were in that range. As you get to the four or five times and you’re thinking as an owner, “Should I sell or not?” The way to think about it, well, three or four years you’re going to earn that money back just through distribution. So I think emotionally, that seven times level makes sense that it’s such a common multiple for a successful deal, because as a seller and the buyer, I think it’s kind of a fair place to be.

John Warrillow:

In terms of add-backs, because that may be lingo that some people won’t have heard of, can you describe what the process of normalizing your profit and loss statement was and the add-backs, in your case, that didn’t carry forward? So people understand what an add-back is.

Josh Davis:

Yeah. So typically when someone buys your company, they’re buying all the assets and they’re buying either all the employers or none of the employees, or you as the owner may be staying on. But let’s say you as the owner are not staying on, then you have all these other costs that are going to the business like you’re having lunch every Friday at the country club and that becomes a business expense. That could be 50 grand right there, and you could have-

John Warrillow:

Man, you have expensive lunches in Florida.

Josh Davis:

This is some golfing life I saw in some movie.

John Warrillow:

Oh, okay. All right. To be clear. Okay, got it. So these are expenses that you might charge as business expenses that may not …

Josh Davis:

They’re non-ongoing company expenses. So maybe think if your Amex fee is 500 bucks a year and the company’s paying for Amex because you get frequent-flyer clubs at the airport, that 500 bucks, but those add up in a business. In our case, I think in most cases, you’re finding roles like our accountant’s niece is on the payroll, she’s really not moving forward expense, her job is ending, she’s not a key expense. Because the seller is really clear, if that person’s job is needed moving forward, we’re paying you for that, we get to keep it moving forward.

John Warrillow:

Got it.

Josh Davis:

You end up having a lot of dialogues about those topics and it opens up areas that are clearly add-backs. They’re saying, “Hey, we don’t value this part of your business. We’re not going to pay for it” then you’re like, “Okay. Well, that’s an add-back.”

John Warrillow:

Right. Well, there, we just increased my EBITA. You mentioned it yourself, you grew up in an entrepreneurial family, you got a business, you built this company to sell it, you had the 7X number on your mind. As you looked out in the universe, who did you think had a strategic reason to buy the business?

Josh Davis:

A strategic reason to buy the business, it was a very, very small pool or audience. There are some publishers out there doing these massive conferences and healthcare is one of their sectors, or an advertising agency, a big Havas or a Publicis. They would all be looking at us because we have agency function. They don’t pay seven time multiples, so within our audience who would buy us, they would be not a good buyer because you’re not going to get what you want from them. They’re going to view you differently at a lower value.

Josh Davis:

A better strategic for where we were would be someone who wanted to be in the pharmaceutical and also the health hospital marketing space. So we were being looked at by private equity mostly as a vehicle to do a roll up around because we could then create a vertical for them of one vertical being hospital services, I already mentioned there are 6,000 hospitals in the U.S., and also pharmaceutical services which is even a bigger sector.

Josh Davis:

So we were being looked mostly by financial buyers who said hey, “These guys are close to 10 million dollars, 80% is through hospitals, 20% is through pharma. Can we work with Josh and his team? And can we do other acquisitions from this?” We did talk to some strategic buyers but our exit process, by my direction, we did more of a wide auction. We had our bankers not just go to the top 100 private equity firms and the top 100 strategic buyers, we went to 600 private equity …

John Warrillow:

Wow.

Josh Davis:

Maybe it was 400. I think I exaggerated a little, let’s say 400. We had 400 to 500 in which we said we want to let them know about the company. It turns out the people we ended up talking to at the end during the final dance were all folks in the initial list. So it wasn’t like anything we did added to the end buyer community, but it gives a sense to your listeners how broad the appetite is for any, well, I shouldn’t say any, a successful business in a hot sector or good sector like U.S. healthcare with a compelling model of recurring revenue.

Josh Davis:

There were just a huge audience that wants to see that and 10 million. I think if we were at a five million dollar company, it would have been half those people because so many just said, “Hey, you know we don’t want to see this? The company is not big enough.”

John Warrillow:

So, at 10 million, you’ve got this list of 400 or so potential acquirers, many of which sounds like private equity. How did you think about the potential for that broad an auction becoming public information, that you were planning to sell the company and the impact that would have on your employees and potentially your customers?

Josh Davis:

Yeah, it’s a good question. So we’re in probably the 1% in which when we sold the company I told the employees upfront before I started the process what I was planning on doing, I communicated to them why we’re doing it and why I think it’s good for the company, our clients, and them. And so throughout the whole sales process, there was tremendous transparency and there was really almost a goodwill and kumbaya around what we were planning on doing.

Josh Davis:

The customers, in some way, I think also had the same sort of feeling that this should be a bigger company and we had a bigger owner or it might be better for us, so it wasn’t a secret. I think from a legal standpoint, from a cost standpoint, and your listeners should … I mean, if you’re going to sell a company, ensure you’re married to a lawyer or have a very good lawyer who’s a friend because you can easily be caught up in some legal expenses related to decisions.

Josh Davis:

That’d be a decision around that, it’ll increase your legal costs by 20-30 grand, because it creates more work on their side as you get more replies. So it’s all kind of a push and pull around it. But as you hear the whole story, that broad auction gave us a very good sense of … We did a broad auction versus a narrow auction.

Josh Davis:

So for the listeners who know, a narrow auction is your investment banker says, “Hey, John, these five guys are going to buy you. We’re going to send it to 25 and by August we’re going to be having dinners and talking through it and you’ll get a check in January.” That’s what I recommend to you, that’s a narrow auction, that’s just the narrow 15-30 people versus a broad auction.

Josh Davis:

If I was doing it today, probably go to 1,000 people. I’d probably expand the audience to Asia and the Middle East and Europe because our 400 were basically all domestic. So broad auction’s broad and their auction would be more investment banker, friends and family.

John Warrillow:

What was your pitch to employees, making the case that selling your company would benefit them?

Josh Davis:

We always had a very positive and good employee morale and connection in the business, and that’s because our end product, we were B2B2C, so we call ourself business to business to consumer. We send stuff to hospitals that they send to consumers, B2B to the consumer.

Josh Davis:

The mission behind that was women’s health. It was breast cancer, it was babies, it was moms. So our entire employee base on their first interview, first week of work, it went away after years, I mean they loved the company but it was still a job. We had people who believed in what we were doing, believed that Spirit of Women is a brand that they’re proud to work for and believed me in saying that my own vision really takes us to 10 million dollars, and if you want to see this become a American Heart Association or some hybrid nonprofit huge organization, I need help.

Josh Davis:

So it was a very honest message that had a lot of truth in it, and it worked out, I don’t want to say it worked out better or worse the employees, I mean the company is still around, they have many happy employees who’ve been there before the merger, after the … So I don’t know what the end outcome was. We were able to tell them, which made my life easier because you’re not always saying, “Am I talking too loud? Did I send this email to the wrong person?”

Josh Davis:

So I think on probably a mental health standpoint, it was definitely better for me and for the sales process, the actual buyers. The private equity firms at the end, they loved it, it made the company worth more money that they’re not worried about the employees all revolting.

John Warrillow:

Yeah. It’s a fascinating conundrum, of course, because obviously some people worry about it getting out to their employees and so forth. In your case … Go ahead.

Josh Davis:

I think we’ve always had an attitude with our employees, we hired a lot of young people, a lot of people who were just straight out of college, a lot of folks came from nursing so we made a lot of flow from our hospitals to us.

Josh Davis:

So we got a lot of people who were in nursing for four or five years, who are used to making no money, having these incredibly hard, challenging jobs, and we gave them jobs, which we always incentivized them, they always make more money every year, and they were young professionals. It was a track to a young professional, it still is, it’s an interesting between hospitals and agency work and community health. It was a very interesting company.

John Warrillow:

You said to me your pitch was, “Look I need help to get us to the next level. My vision is 10 blah blah blah,” did you intend to stay on post-sale?

Josh Davis:

Yeah, let me assure you, I never assured the employees it was 10 but that that number was never [crosstalk 00:27:38].

John Warrillow:

Okay.

Josh Davis:

Their number was we had 120 clients and they were working their asses off, they were so busy because we had so many hospitals they had to service. The nice thing with the model is as you went from 40 clients to 80, it didn’t take double the staff to service them. So you had this network of hospitals they were servicing and working with.

Josh Davis:

So it was more around, “You guys are so busy, you’ll make more money, we’ll have more incentives,” it was more around, I pitched to them around … In our space there’s a publicly traded company called The Advisory Group. The Advisory Group, they’re publicly traded U.S. stock markets. They’re a 300 million dollar company in our space with employees making lots of money, it’s very highbrow consulting work.

Josh Davis:

So there was some vision as, “Did you guys want to work at this company in 10 years or do you want to be in the suburbs of Boca Raton, Florida?

John Warrillow:

Got it, got it. But I guess where I was going with that is-

Josh Davis:

And there are some salesmanship there. There was salesmanship by me because it wasn’t … Our talks around 10 million dollars, that was never part of it. I think one of the funniest things I can share with you, we sat the companies out on a Friday one day for a team lunch building exercise and probably some other team building exercise.

Josh Davis:

We talked about the exit plan and what it meant as far as bankers visiting the office and buyers visiting the office and being prepared for accountants and that whole thing. We let the team, it was probably 18-20 people who were there. Ask questions, what are your questions? And there were all sorts of questions like, “Will we still have coffee here? Will you get rid of the water?”

Josh Davis:

It was weird questions, but someone asked what EBITDA was, EBITDA. And these are all young healthcare marketing people and that’s a weird term. And no one knew, of the 20 people, no one knew who wasn’t a senior finance [crosstalk 00:29:36]

John Warrillow:

In finance, yeah.

Josh Davis:

And some nice little 28-year-old girl, Kelly, went up there and wrote out. It was so funny. I wish I remember what the words were, but it had nothing to do with finance. It was something marketing, it was awesome.

John Warrillow:

That’s great.

Josh Davis:

Yeah. I wouldn’t start with the premise of telling your staff is always to say no to because in many cases, you’re only talking to 25-30 people, that was in my case, it was 25-30 people. I think a lot of companies sell at that size. They’re people and they all want what’s best for you in some way as well. So, it was a very human experience, it helped, I think when we were selling the company, then the buyers all thought it maybe could be worth more money. Definitely that culture end of the company increased our value.

John Warrillow:

That’s super helpful. So let’s get into the sale itself. So bankers promoted it to 400+ folks, what was the next step? Did you get some interest? Did you get some letters of intent? Or what was [crosstalk 00:30:48].

Josh Davis:

Yeah. Remember, I’m the entrepreneur who started the sales process in March 2013. I wrote a check to my banker only for 50 grand, it was a small deposit on it, in March ’14. And by July, I’m ready to go to market, they should have the whole thing done, it should take 10 weeks or so.

Josh Davis:

So March, April, May, June, July, so I’m already six months in and I’m freaking, I’m ready to go. And they’re like, “Well, we haven’t heard anything back yet” and I’m like, “What the fuck am I paying you guys for?” I’m sitting there, it’s August, I think I was in Florida, in Colorado it’s hot. I was like, “Do more. Put out more.”

Josh Davis:

But pretty much after that, September, kind of like most cycles in work, August is really quiet, July is very quiet, unless you get your CIM out in February, but things shut down in the summer. It’s not as bad as Europe, I hear. I don’t think it’s as bad as being in Spain or Germany in August, but things slow down.

Josh Davis:

So we got back from summer and the kids are back in school. But in that case I had no kids, I had a child a few months after that. But when you come back, we went from, let’s say it was 400 tota, we probably got back 40 requests for the CIM.

John Warrillow:

CIM being a confidential information memorandum, that kind of [crosstalk 00:32:10].

Josh Davis:

Yeah. It’s like a three-step process. So the banker writes something, you approve all these things, they’re all legally being read, you have a preview email, you have a mini CIM, which is a three-page really nice little PowerPoint or PDF, then you have a seven-page CIM maybe, then you have a full 30-40-page, whatever the final deck would be. And each one of those tend to have a legal signature with it, so you’re actually creating some confidentiality.

Josh Davis:

There was a CDA with everything we did. I mentioned legal costs, everything you do if it’s 40 CIMs or-

John Warrillow:

What does CDA stand for?

Josh Davis:

Memorandum of confidentiality.

John Warrillow:

Okay. Or like an NDA? Like a non-disclosure agreement or something?

Josh Davis:

Same as an NDA, yes.

John Warrillow:

Okay, got it. Okay. So, everything’s being signed up. So you’re dead at 40, of the 40 CIMS, you meet with some folks, how many of them actually came to the table with a formal offer?

Josh Davis:

Well, I think the best … We went from 400 to 40, of the 40, we didn’t hear back from all of them. Half the 40 were just jokes. So they just wanted it, they never saw it again, maybe it was a competitor. It was kind of scary, it could be a competitor, you don’t know what’s going to happen to them.

Josh Davis:

We sent out 40, we know who has them, because it basically says in the document, “If you receive this, you can’t share it.” We sent out 40, of the 40, we ended up in talks with around 12. And what that means is they’re saying, “Hey banker, we want to meet these guys. We want to meet Josh, we want to meet Josh’s team, we want fly to Boca, we’re ready to meet him.”

Josh Davis:

And of the 12, I think we met … I mean, this is pre Zoom, but we definitely have conference calls, there weren’t video calls. Of the 12, we probably spoke with eight or nine of them. I probably spoke closer to 25 or 30 through the entire course, but I probably spoke with eight or nine. We probably had six or seven in-persons mostly in Florida, a couple in New York.

Josh Davis:

I used those as ways just to learn a lot, because every time I met with one of these buyers, whether it’s a private equity firm or strategic buyer, they brought in really smart lawyers and bankers and really smart dudes, really smart guys who came in and we’d meet for three or four hours, maybe two or three hours, it was a half day usually, maybe have dinner, but I’d learn a lot.

Josh Davis:

They came in prepared, they came in with really good questions. Some of the questions led me to do things differently in the business, and I did that. It happens pretty quickly, that whole process takes three or four weeks because the bankers were saying, “Hey, there’s 12 of you guys. I hope you’re all ready to pony up. This guy wants whatever X.” Her job at that point, in my case I had a female lead banker, his job is to get that price up, and that 12 bankers to wherever it goes is a big part of that whole process.

Josh Davis:

It went from, imagine, August, September, October, went to 40, October November went to 12, and by December 1st, we had two. We were down to two. And somewhere post-Thanksgiving to December 11th, we chose the final private equity firm to side with. It’s a very formal process. We had to call the other guys who actually had a better relationship with the guy I said no to on that day, and the guy ended up trying to buy us.

Josh Davis:

I had to call the guy and say, “Hey, really sorry. We’re not selling to you. You just spent all this time trying to woo us, trying to buy us and we’re not going to sell to you.” And then you start a due diligence process, which is a whole other kind of-

John Warrillow:

What were the key differences between the two offers?

Josh Davis:

The banker’s big job at the end was just getting me as much cash as possible. There were some substantial differences in the offers related to leverage. One had three times money borrowed, one had two times money borrowed.

John Warrillow:

Why do you care?

Josh Davis:

Both the deals involve myself staying on. In some capacity they’re buying back 10% or buying back 15% or buying back 5%, so I was buying back some equity and the more leveraged the business is, the less valuable the equity is. So as you think about it, they’re making you buy back 15%, which is very common in private equity. But they lever the business up, you just run the risk of them taking your equity because the business is so levered up.

Josh Davis:

So it matters on that level of the quality of the offer. But at the end of the day, I think the final two bidders, there was four or five million dollars or maybe three or four million dollars of increase from the day this bidding war started on November 15th to the time it closed on December 11th. There were multiple folks giving really complex offers.

Josh Davis:

Law firms must love these things because each offer must take four or five associates, and it’s the whole day, and they send it out 7PM. And then we get in, we spend the whole day responding to it. They’re very comprehensive offers. I think we ended up with three, we ended up with multiple people doing it, so you have a lot of legal work taking place in which I’m a sales and marketing guy so I needed people to explain that to me, I just kept spending time on that that part of it and having …

Josh Davis:

In my case, my mom’s a lawyer, my sister, I have some legal background but having a strong legal team is a big part of the sales process with lawyers you trust because you’re going to spend more time with them than with your spouse, if you have one, or your employee, they become a big part of the last few months of your sale process.

John Warrillow:

What tipped the scales in favor of the PE firm that you ended up signing the LOI with? Why did you choose them?

Josh Davis:

On the investment banking side? [crosstalk 00:38:02].

John Warrillow:

No, no. You said you had two or three offers, there were some substantial differences between the two but eventually you chose one.

Josh Davis:

I think at the end it just kind of came. I probably got caught up in the whole process because at the end maybe the difference is 300,000 dollars, offer A to offer B. But I think I got so caught up in getting the most I could. So if I look back at looking at those two bankers or those two … It was both private equity. It was a private equity firm based in New York City, a private equity firm based in Chicago. So I was dealing with two different cities and two different buyers.

Josh Davis:

Looking back at it, would’ve chosen the one I turned down for a 300 grand difference but at the time I think I was so caught up in the bidding process over, “There’s more money here, it’s more this, more that.” That was [crosstalk 00:38:49].

John Warrillow:

What happened next?

Josh Davis:

So in our case, December 11th is when we signed the LOI. They want to close as close to February 1st as they can, so they were saying, “Hey, we’re going to get this whole thing done, seven-eight weeks we’re going to close, we’re going to give you a big check, you’ll become our star employee, we’re going to do all these cool things together, have a Florida presence. And our chairman who’s this trillionaire with airplanes has a place down there. We’re going to have this really amazing life together.”

Josh Davis:

It’s a process, but due diligence to me on their side is, “We said we’re going to pay you 25 million but after due diligence we’re going to pay you 21.2 and then make you do something …” It’s just a process to get less money from the seller, which cost a lot of legal costs, it costs a lot of finance, a lot of accounting costs. In our case, it really soured the deal.

Josh Davis:

So between December and March, I pulled the deal in April, we all spent three months of legal, three months of all this time to get the deal ready. We were ready. And then the bank gets involved. They’re like, “Oh, the deal’s done, but the bank hasn’t approved you yet.” You’re like, “Really? You haven’t told us that, we thought you had the money.” “No, we’re going to borrow the money.”

Josh Davis:

So there’s always these things that are happening. I had so much ill will towards the buyers … ill will is the wrong way to describe it. I had so much unease related to who they actually were because they seemed to have very strong opinions on things that were immaterial to the business or success. They had things like, “Josh, we love you and here’s what you’ll make, but none of your staff can have any raises the next 12 months.”

Josh Davis:

And I explained our company culture, like, “Well, that’s a great idea. Our whole incentive system’s based on sales and growth and they make money every month.” It was stuff like that. I’m like, “Okay guys, whatever you want, give me a big check, whatever you want.” But it was stuff like that along with things like working capital. And working capital is an arcane term, anyone who sells [inaudible 00:40:57] will learn all about. But you can fight about it for months. And you can spend a lot of money on this … It was things like that really create a lot of, in my own feeling, unease. And then on top of that to your listeners, I had just gotten married and my wife was due with a baby that summer.

Josh Davis:

So while I was supposed to close in April, I was also going to be a dad for the first time and my beautiful daughter, Olivia, was born in May of 2014. It was also like, “Hey, you guys seem like you might be pricks. I don’t really know. I don’t really care but I don’t need the money that badly to risk it with this new baby coming.” So I pulled the deal. It was at the last minute.

Josh Davis:

My banker said … he used the term leave them at the altar. Which we all walked away as gentlemen. I talked to them personally, it was very … although we spent maybe a million dollars combined on legal. I mean, their legal costs were more than mine and mine was substantial. So leaving at the alter was an expensive way to learn about the investment banking process, but it was the right decision for me because my daughter was born and I didn’t have to travel much that year and I got to spend time with her. And then I have a happy ending because I ended up on July 1st 2015, I had a sister company that was in our space peripherally who I knew their CEO, and during our sales process, he became my mentor or thought he was my mentor and he was aware of the whole thing. And he was amazed at my kahuna to walk away from this deal because they were ready to buy us.

Josh Davis:

I basically said to him, “If you want to buy us, we were worth 6.8 times EBITA on July 1st, 2014. You can buy us for that on July 1st, 2015 and we’ll give a 10% discount,” because clearly that number that I used or this multiple that … I know that the legal costs half million dollars and everything else. It gave me the number to do a merger. The merger equals, which I was able to buy out my father, my aunt’s, some other key stakeholders, they got out of the business. I think I had a small exit from that so I took some cash out and then ended up owning 26% of NewCo.

Josh Davis:

NewCo is still around, NewCo is based in the Midwest. I’m not involved anymore, but they’re still a successful company and the people who worked for me for, in my case, a dozen plus years, many are still there. I learned a lot from it. I’m kind of now still in the same industry. I’m still working in healthcare, now I’m working in cancer and oncology. So now I’m working global cancer research and helping drug companies with clinical trials and with physician engagement, and identification of … about leadership and who understands who’s treating what patients and what’s working.

Josh Davis:

So yeah, it’s on good terms and I’m happy for the new owners who bought me out a couple years later and happy … I mean, I have people who worked there for 20 plus years because I owned it for almost 15 years and I sold it five years ago. So it’s nice to see that whole longevity.

John Warrillow:

That’s amazing. Last question. Do you remember the straw that broke the camel’s back when you finally picked up the phone and said, “I’m not doing this deal.”

Josh Davis:

I remember doing it. I was in the parking lot. So I was in Princeton, New Jersey. So Princeton’s a very beautiful town and very famous-

John Warrillow:

Posh [crosstalk 00:44:41].

Josh Davis:

A lot of drug companies there as well. So quite a few drug companies are either, I guess they were founded there, because a lot of smart people doing good science or they move there for access of talent, but there’s a lot of talented … I was running Princeton. I was in the parking lot of a client, it was March, April, and it was brutally cold. Really it was like a snowstorm outside, I’m in the parking lot in my rental car, some Ford Focus or something like … just classic compact car.

Josh Davis:

And I just left a meeting with this client or maybe I was just walking in. I was killing time maybe before or after a meeting and I just called my lawyer and I was like, “Hey, it’s all off, don’t bill any more hours,” so it was virtually just turn it off because it was an expensive … every day cost you money. It was, “Turn it all off and I’m done and how do I wind this all down?”

Josh Davis:

And my banker who was actually a friend as well, it was a guy I knew for a long time, really said, “As your friend, not as your lawyer.” Sorry, my lawyer, Michael. “As your lawyer and as your friend, let me say something. I beg you not to pull this deal, as your friend because in my experience as a lawyer, I’ve had a lot of people who ended up selling their companies and almost none ever regret it. But I know a handful of people who didn’t sell their companies and it was worth seven times EBIDTA but two years later is worth nothing.” As a friend, as an older, gentleman friend. The words of the wise, it really stuck with me because it was like, “Shit, now if this all goes to hell this guy warned me, he’s my buddy.”

Josh Davis:

I talked to my lawyer, he gave me the lawyer and the friend conversation and I said, “Okay, still turn off the freaking engine, this thing’s over.” And I flew back to Florida to Fort Lauderdale or West Palm Beach airport, and told my partners, I mean, that was hard. I tell my business partner who wanted the money. I mean, I had to tell people who also were incentivized to sell that we weren’t selling.

Josh Davis:

But yeah, as I said, I had a wife who was eight months pregnant. I was literally having a baby a month later. So my focus quickly moved from, “Oh this really expensive but impressive system, I really enjoyed the learnings I got from …” as I said, I met with eight or nine private equity firms. I learned so much from these … because we usually use two guys for a meeting, maybe three, women and men. There’s 25, 30 people I met who were all super bright, people who really had worked their whole lives to work really hard and to be able to talk at very high levels about, not just finance, but also strategy and operations.

John Warrillow:

What happened in the rental car in New Jersey? What was it that made you make the decision to pull the deal?

Josh Davis:

It was definitely being cold, and anxiety. It was definitely anxiety and the temperature. It could’ve been having a baby in a month. I don’t know what the anxiety was. But it was like, “Okay. It’s just time to make this decision,” because I think I did … I remember there was a dinner. So, I live in Delray Beach, Florida. Delray Beach, Florida’s full of people from Ontario. So a lot of people … I mean, Delray Beach is a great little beach town. We had the dinner with the buyers. And my wife came who was pregnant at the time, and it was like 20 people.

Josh Davis:

We had this dinner in December or January with the buyers. And it was this big dinner, and it was awkward. You could tell at the dinner something just wasn’t right. I had spent three or four months thinking, “Should I pull the deal?” So it was mostly just saying, “Hell, I’m sick of thinking about this. It doesn’t feel right. It’s not the right. The money is not enough money. The benefits aren’t enough benefits. And I don’t trust these things like them not understanding that cutting off 60k of staff wages is in the best interest of anyone, just made me uneasy.

Josh Davis:

And after three and a half months of that along with these costs that kept going up, legal and everything else. It was just time to actually turn the corner and move in a new direction which then put me actually in … [inaudible 00:49:18]. I mean, that did put me in a really, really tough 2014. So I worked my butt off the next seven months because I basically spent my last 15 months not selling, but packaging the business for sale. It was a tenuous ’14 because we did not hit our goal. We would hit in ’12 and ’13, but ’14 we were distracted and ended up being flat and not showing growth.

Josh Davis:

If you had to leave someone at the altar, not selling, everyone’s experience, including myself is you’ve taken your eyes off the business and you will dip 10% or 20% or hopefully not more than that, it can be 50, 60%. I was warned about it but I did not realize until that summer when my … just being a father, but how much we were behind, because we weren’t focused on growth. Good stuff, well, hopefully … I can stay for another question. Or …

John Warrillow:

No, I think you’ve been very generous with your time. I know we’re over time so we should break. Josh, this was amazing. Do you want to point people to a website? The new business, the oncology research, or what-

Josh Davis:

The new domain is mdoutlook.com.

John Warrillow:

Mdoutlook.com.

Josh Davis:

Mdoutlook, it’s kind of like Microsoft Outlook, but with MD in front. Mdoutlook, and we also what we call Oncology Intelligence. So Oncology Intelligence or Cancer Intelligence is our main thought leader portal. So if you’re a researcher in Germany or in Stanford and trying to learn more about melanoma or any sort of cancer, this is up-to-date 24/7, curated, peer-to-peer community.

John Warrillow:

That’s fantastic. And we’ll put that in the show notes at builttosell.com. Josh, this was great. Thank you so much.

Josh Davis:

So much fun. And be well. Stay safe.

John Warrillow:

Thanks, you too.

Josh Davis:

Bye.

John Warrillow:

Yeah, cheers.

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