The Tech Start-Up vs. The Bootstrap Lifestyle

 

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Peter Demangos has started two businesses in the Human Resources sector. One was a bootstrapped insurance brokerage where they sold employee benefits programs to large clients. The other was an HR software company called Collage, where Demangos and his co-founders raised $3.5 million of investment capital and sold three years later for $15 million.

Given that Demangos was the common denominator in both companies, his story provides a unique contrast of two different approaches to starting and building a business. Demangos retained 100% of the equity in his employee benefits brokerage, and with high margins, more than a million dollars in sales, and just five employees, it funded his lifestyle. When Demangos sold, he was able to get 8 times EBITDA for the brokerage, the majority of which was paid in cash.

By contrast, Demangos held a minority stake in his tech startup Collage, yet it was a much higher sale price, so he still had a healthy windfall.

The combination was enough money for Demangos to hit “his number,” a net worth beyond which he would never feel compelled to work again. This is why the conflicting set of emotions he feels today are somewhat surprising.

Listen now, and you’ll learn:

  • Why your software company should have a technology person among the founders.
  • How memberships drove more value for Collage than revenue or profits.
  • Why hiring a marketing intelligence specialist could give the value of your business a big boost.
  • The entrepreneur’s dilemma and why it can be such a vexing challenge to overcome.
  • The unusual trigger that caused Demangos to sell both of his companies.

When Demangos hit his number, he decided to sell to give himself the freedom never to work again. Wondering how to figure out the point where you’ve built enough value to stop working? Find out now by getting your PREScore™.

Our guest

Peter is the Founder of PDF Employee Benefits (acquired by Hub International in Oct 2019) and Co-Founder of Collage HR (acquired People Corporation in Nov 2019), organizations that have actively reinvented the way Canadian businesses manage HR & Benefits. Holding an MBA (from the Schulich School of Business), CFP and CLU designations, and a Bachelor of Commerce (from the Rotman School of Management), Peter is a strong believer in continued education. He continues to share his experiences by teaching the Pension & Benefits course at Humber College within the Human Resources Management Post-Graduate program, frequently guest lecturing at York University’s Masters in HR program, and regularly instructing for the HRPA / Canadian Benefits Program Certificate. Peter is also the President of the Entrepreneurs’ Organization, Toronto Chapter, and is passionate about entrepreneurship in Canada. https://www.linkedin.com/in/peterdemangos/

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Transcript

John Warrillow:

Would you rather own a small slice of a big company or a big slice of a small company? My next guest, Peter Demangos, has done exactly both of those things. And in this episode of Built To Sell Radio, he compares and contrasts his approach to running two different companies. One was a bootstrap startup where he retained 100% of the equity in the company and sold it for a healthy eight times EBITDA. The other was a tech startup where he built it up over a three-year run, raised a significant amount of capital and had a spectacular exit where he was a minority shareholder in a much bigger exit. And by comparing and contrasting the two, I think he does a fantastic job of describing the entrepreneur’s dilemma. Is it better to own a big slice of a small company or a small slice of a big company? Well, here to tell you how Peter thinks about it is Peter Demangos.

John Warrillow:

Peter Demangos, welcome to Built To Sell Radio.

Peter Demangos:

Thanks, John. Thanks for having me.

John Warrillow:

You’re welcome. So, you’re an expert in this insurance space. I know nothing about insurance, so you’re going to have to educate me about this whole category. Tell me a little bit about PDF. What does this company do?

Peter Demangos:

Sure. So, in its simplest form, we’re a brokerage. So, we sit in between the insurance company and the business customer. So, our business focus predominantly B2B. So, we would be managing, setting up and just looking after their entire benefits program. So, for most people, that’s your health and dental program that you’re familiar with. We expanded those services into wellness programs, as well as retirement programs. But call it 90% of our business was setting up and managing and specifically servicing.

Peter Demangos:

So, what maybe unique to us, because we focus a lot on large businesses, so a hundred to a couple of thousand employees was our target client. So, we work a lot with the HR department, HR world, and a lot of it was around servicing that. So, surveys, seminars for employees, education around how to effectively use their health and dental program and everything that goes with that. So, from the end user, the employee is familiar with their drug card or their programs, we would basically be the intermediary between that customer and the insurance company, which obviously sold the final product but they were removed from most of the negotiating aspect of it.

John Warrillow:

Got it. And what’s the business model?

Peter Demangos:

Yeah. So, we get, it’s funny enough, it’s a little bit of a conflict of interest, like many industries, I think you can probably say that, where we got a percentage of claims or percentage of what our customers paid. And they all knew this, it’s not as if, even though the insurance company does a great job of confusing a lot of how this all works. Customers more or less are aware that in our industry we get a percentage of claims. And that can range from 1% to 10% depending on size of company and so forth. So, you can argue that there’s a slight conflict in the sense where as a business, we are there trying to service and help customers reduce the cost of their health and their dental and their benefit programs. Meanwhile, we get paid more money, the higher, the more they spend or the higher they claim.

Peter Demangos:

So, the longterm successful brokerage obviously has the longterm horizon in mind, and the customer obviously would see that when you’re looking to make adjustments and plan changes in a way that’s going to create a sustainable program. But essentially, that’s how we get paid, we’re a percentage of what they pay.

John Warrillow:

That’s helpful. And is there a tail to the revenue? Do you get annuities every year the customer renews? Is there a piece of revenue [inaudible 00:02:47]?

Peter Demangos:

Yeah. So, and I speak only to the benefits corporate aspect of insurance because individual insurance works completely different, which is not our space. We get the same percentage every single year. So, it’s not a tail in the sense that it’s a smaller amount. It’s the exact same, it’s a 100% renewable revenue for us on an annual basis. And in theory, considering that in general, North America, it’s a blanket statement, but we’re all getting unhealthier, in theory, we’re probably, or we’ve seen that we make more money per year per customer because on average people are claiming more. Obviously, we’re trying to fight against that. But yeah, it’s the same amount, same percentage amount every single year.

John Warrillow:

And how big did you get this company before you decided to sell it?

Peter Demangos:

So, top line revenue, we were about $13 million or so. And we had five employees. So, we were, again, focusing, we knew our audience, we had about a hundred customers in our space and which is, depending on where other businesses sit, that could be a lot. That could be nothing compared to my other business with thousands. It’s a very different segment. So, it was very much a relationship based type of organization. So, I was very heavily involved with most of the customers. And again, we focused specifically in HR department. So, we knew exactly where we did very well, and that was our key target audience. So, we wanted at least about a hundred employees. And getting to that a hundred customer base, my support base was account manager. So, I was the main person bringing on the bait, bringing on the business. And then I had account managers, call it one person every 25 people or 20 give or take.

John Warrillow:

So, let me understand because your revenue per employee is astronomical. So, of the $13 million is that when I buy a dental plan and I pay a $100 a month, are you referring to revenue, is the $100 a month or is it your percentage of that $100 a month that makes up the revenue for your firm?

Peter Demangos:

No, it’s the first part. So, it’s a top line amount, then we would get a… Think of it like payroll. So, the top line is a lot higher.

John Warrillow:

Okay.

Peter Demangos:

So, our gross profit, if you will, on that is closer to 10%. So, call it, let’s say a million and a half give or take.

John Warrillow:

That’s helpful. Okay.

Peter Demangos:

Yeah.

John Warrillow:

I was going to say your revenue per employee is like McKinsey, let’s say.

Peter Demangos:

Yeah. Yeah. And that’s the confusing part about the insurance business in general, especially the brokerage aspect where you’re looking on the top line revenue per employee. And I mean, payroll is the perfect example to me where, because in some cases not to make matters even more confusing, some cases we collected the money on behalf of the insurance company. So, that money actually funnels in through our brokerage. And then we paid out to the insurance company. In other cases, it went the other way round, insurance company collected and they paid us our portion. So, our revenue streams are messy in that sense, our top line revenue, I should say. So, if you look at gross profit, which I think is probably the more appropriate one, then you take, give or take call it 10% of that.

John Warrillow:

Got it. Okay. That’s helpful. Now, at what point did you come up with this other business idea Collage, because you started to run two companies, if I understand this correctly, simultaneously?

Peter Demangos:

Correct. Yes. I mean, the timing was perfect, in the sense that I was in the right time in my career, as far as understanding the pain points in my industry. So, I had been running PDF for about 10 years, started probably about seven, eight years at that time. And part of, again, speaking to the HR audience through PDF, I began teaching HR for teaching pension and benefits in the HR program at a local college here at Humber College. And for me it was great for multiple reasons, it’s a great way to get our brand out selfishly. It was a great way to give back to the community. I love teaching. And it was a great way to plug into the future HR leaders of the Toronto market. So, that was something that I really enjoyed doing. But in that moment I realized going even deeper into the HR world, I realized that there was tremendous amount of gap in HR services for the small business market.

Peter Demangos:

So, as I mentioned earlier, PDF was focused more on the a hundred plus employees that had HR, had a lot of HR solutions as a result of having a HR personnel. Whereas a small business, I recognized they don’t have the majority of these things and they certainly needed it. And a big reason why they didn’t have, it was just didn’t have the budget to pay for it. So, being exposed to the world of HR, the worlds were colliding. It was interesting. So, I was coming to this realization. And then, and in the South and the US there’s a company called Zenefits, benefits with the Z basically, that had basically all of the attention from the VC world, had raised tremendous amount of money. Evaluation, I think was upwards of a billion dollars. It was just like something unheard of.

Peter Demangos:

And it created a lot of noise in Canada. So I had to, I looked at that a little bit deeper at that time where I felt like there was a need for this. It felt like everything was happening at the same time. My co-founders at Collage, funny enough, the one co-founder particularly who had a finance background, he and I went to high school together, so we knew each other. And he was talking to me about wanting to get involved. So, he was looking for another startup as well. And he was talking to me about, what’s happening in the world of HR. All of a sudden, all the finance guys at Toronto got wind of HR and insurance as an industry to get into.

Peter Demangos:

So, like those three things started colliding, my industries, getting shooken up by the fears of what’s going to happen, if a Zenefits-like business comes North to Canada, which obviously they did not. And they had a slew of issues. I was seeing it from the perspective of, well, there’s an actual need here, small businesses in HR don’t have these technology services. And then the… Sorry, go ahead.

John Warrillow:

Yeah. No, I’m just, I’m confused. I don’t know anything about Zenefits, but I’m confused about what it is that Collage did. So, what was the, you’re talking about HR software, but when I think of HR, I think of some lady with glasses who has payroll stubs, and that’s just because that was the person that I, the only company I’ve ever worked for happened to be a woman who ran the HR department. That’s in my mind who an HR professional is. So, what kind of software do these people need?

Peter Demangos:

Right. So, HR software is basically taking any paperwork that any employee is familiar with in the journey of being onboarded, being maintained and being exited, if you will, that entire employee journey. The HR software takes all that paperwork and just takes it to the cloud in our case, or takes it to software. So, from onboarding a new employee and sifting through resumes. So, the applicant tracking system. So, within HR process, there are multiple types of systems. Some HR companies have doubled down on one aspect of it. So, maybe just an onboarding software, or maybe just a performance management software.

Peter Demangos:

Ours did a little bit of everything because, again, we recognized that small business didn’t have budget to pay for individual softwares. They wanted an all in one cookie cutter off the shelf product that was to give them only the necessary aspects of each one of those software. So, it included applicant tracking, and then you hired an employee. You needed to do performance management. You need to track all the employees, personal information, just have a database for that. And then if an employee has exited, you needed to obviously do the termination process and file paperwork with the government, that needs to be done at that time. And then the link to benefits in all this, and this is where my two worlds collided, was benefits as you’ve experienced. And most of us have experienced setting up benefits for ourselves and our employees, is that there’s a tremendous amount of paperwork, lives in the dark ages a little bit, the insurance space.

Peter Demangos:

So, what Collage and Collage like companies were doing at that time in Zenefits was in the US, really doubled down on that. It was bringing that and the world of payroll as well together. So, benefits and payroll have a lot of paperwork, and they were taking that paperwork heavy lifting off the table and say, “Well, now the employee goes online. They self administer through the cloud platform and that’s going to sync to the insurance company.” So, the same to the payroll company. So, you get rid of all that paperwork. So, it was infringing on the benefits world because it was providing benefits, admin technology that was essentially threatening the way the benefits set up was being done all these years prior. So, now it became, this type of software became attractive to a company that says, “Well, if I can get this HR software….”

Peter Demangos:

And to backstep a little bit, Zenefits business model at that time, and this is why it was creating a lot of shockwave, they were given this away for free in order to get your benefits business. So, they were a licensed brokerage. And so it was Collage, funny enough, we took the similar business model. We were a licensed broker. So, in essence, competing with PDF, but totally different segments of the market. And what we were doing, we were saying, “Well, here’s the HR software that’s going to manage all your benefits admin, your HR admin, your payroll completely for free. We’ll give you that software, if you make us your benefits provider, your benefits broker.” So, that was the hook.

Peter Demangos:

And that was creating a big shockwave in the market because now companies were faced with, “Do I take this new “broker” with this technology that’s free. That otherwise was unaffordable for me because I’m a small business. Or do I stick with my previous broker who’s been doing things the same way. Who has a lot more gray hair and hasn’t really evolved with the insurance.” So, because of that, there was a lot of movement in our space the last five years.

John Warrillow:

Wow, you must’ve been like shooting fish in a barrel?

Peter Demangos:

For sure. Yeah.

John Warrillow:

What an interesting contrast, on one hand, you’ve got a heavily service business, you as the rainmaker, but profitable, and then you’ve got this software company. What was it like to learn an entire different category? I mean, I would assume software is such a different beast.

Peter Demangos:

Completely. I mean, thankfully one of my co-founders was a tech genius. The guy is incredible. So, without him, obviously none of this is possible. And I think that’s the realization I had. And if I ever were to start another tech company, I value having a technology at a co-founder level. For us it went significantly far, because like many of us, when we’re thinking about building a business, the dilemma is always “Well, do I hire, do I give shares?” For us being how key was the technology piece, having that the co-founder mindset, as well as the technology experts all in one together was a deal breaker or ended up being.

John Warrillow:

How did you guys raise money? Did you raise money or did you bootstrap Collage?

Peter Demangos:

So, we raised money with Collage through Power or Financial Power Corp. And the reason, again, I wish I had a more heroic story in this, but I feel like the stars really aligned in our scenario in the sense that, there was a company called Wealthsimple in Toronto that had raised money from Power Corp, did that tremendously well. And I think Power Corp and a few other large financial institutions realized that there’s something here where we can invest in young entrepreneurs and try and recreate the future financial pillars that have provided them so much wealth in the past where people were doing business in a different way. So, Wealthsimple, I think was a great example of how that works, call it old money, but yet new way of doing business through technology. And we were the second investment. Now, I think our course portfolio consists of probably a hundred companies to give you some context, from the past four years.

Peter Demangos:

So, we raise capital because to your question about the difference between a tech company and one that’s, I managed 100% of my own, I bootstrapped it, PDF I was growing brick by brick. I didn’t take on any debt. I didn’t take on any external capital. Everything was running at a profitable basis. And the way I thought about growing that business was dramatically different from a tech company where it’s all about fast growth. So, we were never aiming to be profitable. At best case, we’re aiming to be breakeven, just so we wouldn’t be in a difficult position that we needed to raise capital just to make payroll. But everything was all about growth. So we gave a lot of product away for free.

Peter Demangos:

We recognize that our industry and the tech space good or bad, right? And I think everyone’s got their own perspective on technology and valuations around it. We recognize at the time the evaluation was very heavily based on membership, not profitability or not even revenue for that matter. So, we were very focused on just sweeping up a tremendous amount of membership in a very short period of time. And I think, I’m certain that that’s the biggest value that our on buyer saw in us, was the fact that we acquired so many employees in such a short period of time. So, the way to grow, the mindset around growing that business and the discipline in growing that with that focus, exceptionally different.

Peter Demangos:

And it made me feel very uneasy because we were spending money very quickly to grow that, if you’re growing a business to be profitable and to put food on the table for your family, you’re not taking those types of risks, right? It’s a very different dynamic.

John Warrillow:

Met with so many questions because it’s such a beautiful contrast, one a bootstrap cashflow business, the other financed. So, to go back to the comment around the value driver in Collage, your view was that it wasn’t recurring revenue as much as it was membership growth. Membership, being number of employees who are uploaded into the software.

Peter Demangos:

Correct. Yeah.

John Warrillow:

And what was it about membership that was so attractive to a strategic investor?

Peter Demangos:

Yeah. And it’s specifically because our platform had multiple services in it. So, again, we were our average customer at that point was about 20 employees. We did all of their HR services that otherwise could have been… So, for example, for PDF customers, they maybe have used three or four software, whereas for the Collage customer use just ours. So, the value to anything, the big value was to anyone who we plugged into. So, payroll insurance companies, and maybe another HR solution, but generally it’s payroll and insurance. Because now to the payroll company, we plug in the payroll to their services, or the insurance can plug into theirs. However, to the customer, we’re not just a payroll integration or an insurance integration or an applicant tracking system, we’re performance management software. We’re an exit software.

Peter Demangos:

So, we touched the customer in so many different ways beyond just payroll. So, we were a very sticky customer, or we had a very sticky relationship with the employee. So, to the payroll company who only had one type of point of contact, now that gave them access to many, was why it was very valuable to one of those parties that we plugged into. So, excuse me, insurance obviously, is one that bought us. But we recognized that we were sticky because of that.

John Warrillow:

Got it. How much money did you guys raise and what was the valuation?

Peter Demangos:

So, we raised, it’s interesting because we ended up only meeting three and a half, but we had a commitment of five at evaluation of 13.

John Warrillow:

So, you raised $3.5 million at a valuation of 13 million.

Peter Demangos:

Correct. Yeah.

John Warrillow:

Okay. So, giving up roughly… I’m doing the math in my head, 25%, is that right, ish?

Peter Demangos:

Yeah.

John Warrillow:

22%. And so, you and your other founders kept the remaining equity or were there other investors?

Peter Demangos:

So, we kept the remaining and we had a decent proportion that we committed to our staff in options. So, we split the balance, not exactly four ways, but we were very pro-employee owning shares of the company.

John Warrillow:

And were you always building to sell, Peter? I mean, was that part of, I guess, I’d be curious to know how was your exit, your intention to exit different between PDF and Collage?

Peter Demangos:

Yeah. So, PDF, and I’ll come back to it, but I was never looking to sell there, but circumstances put an opportunity that made a lot of sense. At Collage we were always looking to hit a checkpoint that was going to give us one of two options, raise more money or sell. I think, I always thought that for me, it would be a naive thought for me to think that this is a legacy business that we pass on to our children. I mean, aside from the fact that there are multiple shareholders, the technology world in general is a very fickle one in the sense that you’re here today, you’re gone tomorrow. So, I think that throughout the whole time I was aware of that. And I knew that we had created a lot of waves in the water that people were looking at us, looking at us from investment.

Peter Demangos:

So, we always had different investments that came across our desk, partner investments or partial investments. And in that opportunity, there was the offer of full out acquisition. So, I always knew that we were either going to double down further and go to the next step or we’d have an opportunity to sell. So, yeah, I think that was always on my mind that we weren’t building to sell, but we were running the business in the way that it was attractive to people looking from outside in, if that makes sense.

John Warrillow:

I mean, people listening to this show would be interested to know what specific decisions you took to make your business attractive to an outside strategic investor. Can you give people an example, maybe something that’s maybe less specific to insurance, but was there anything that you did that might transfer whatever industry someone’s in, that you did because your intention was specifically to either sell or raise an additional a lot of money?

Peter Demangos:

For sure. People in process are the quickest way I can sum it up. And I know some of it, even to me seemed a little counterintuitive. But I recognize that if the co-founders were too heavily involved in the process, that necessarily is not good to the business. So, getting, for example, the proper management in place, because that’s a sellable feature to an acquirer, or even to a partner or to an investor. The investor, if we just take that channel for a moment, they’re looking to say, “Okay, if I put a dollar into this machine, it’s going to output $10.” They just want a system, and they want to understand how that they’re going to get their $10 on the back end of that deal.

Peter Demangos:

And people, the right people in the seat actually goes a long way beyond just the co-founders. The co-founders, a lot of reasons cause someone to be a co-founder. My case, right place the right time, I saw a pain point, sure. That doesn’t mean that I’m necessarily the right person, every stage of the business to make the key decisions. And I mean, most sophisticated investors will see that.

Peter Demangos:

So, from my experience, I’ve found that they were looking for co-founders that were intelligent enough to know which people to put in the right place. So, we made some key hires that actually elevated our brand to say, “Well, look, we have this person and sitting in the seat and they come on this wealth of experience as co-founders we don’t bring to the table, but we recognize that that’s a gap, and that’s our skillset as a co-founder to bring, to fill that gap.” So, we paid… Yeah, sorry, go ahead.

John Warrillow:

I was going to say, so give me an example of a key hire, external hire, not one of the co-founders that you think added to your value.

Peter Demangos:

So for us, it was a marketing intelligence and not necessarily the marketing that first comes to mind, which is like commercials and that type of marketing, but more so, we brought on a consultant and we ended up hiring through multiple hire. So, it took us a while to get the right fits. But it really, the gap that we recognized that we need to fill, was we didn’t have expertise on our team, call it the journey of the customer, the customer success journey, or that particular process that the customer goes through from funnel management. So, it’s marketing/sales. You could call it business insights, but it’s more the technical aspect of marketing.

Peter Demangos:

So, you make sure that you capitalize on every opportunity as the customer goes through each phase. So, that expertise was something that we didn’t have. We knew how to bring people forward. We had a good reputation. We had some good marketing campaigns. We had a great network. But then what, you catch the person’s attention. There was a lot of gaps in the next steps and how to funnel that person through an upsell and the system around that. So, having the person that’s experienced in creating that flow, but also knowing what technology to use and leverage. And there are tons of platforms out there. But that was critical because, then now we can go back to investors or potential acquirers and say, “Well, here is the machine, right? And this is how it’s going to flow through it. Here’s the person managing it, and they’ve done this before. And this is how you’re going to output your $10 on your one investment.”

John Warrillow:

Got it. So, there was, you could communicate, there was a systematic way to bring in clients through the funnel to become customers. And you had codified that and you had talent. That’s excellent. So, talk to us about the exit of PDF. So, here you are, you’ve got this company where you’ve got these 100 clients. Why sell? What was the trigger?

Peter Demangos:

Yeah, it’s a good question. And I never plan to sell. We were very profitable and it was, like I said, Collage we were not aiming to be profitable. So, PDF was what provided my lifestyle. And I knew the business had great relationships. In the process of getting attention through Collage, from insurance and payroll and so forth, in that process, I developed a relationship with all, obviously the parties, but specifically with HUB International.

John Warrillow:

Sorry, what’s HUB International. What is that?

Peter Demangos:

So, HUB International is one of the largest brokerages in North America, the largest now in Canada. And there are private equity backed and they basically have grown tremendously through acquisition. So, they did a great job in the US and then they came up to Canada basically saying, “Well, we succeeded in this model in the US or specifically around buying benefits.” So, HUB International has been predominantly in the property and casualty type of insurance. So, think of for, I mean, they do individual home and auto, but if you think of from businesses like your liability insurance for a business, any business has some level of insurance that protect them. So, that was their bread and butter.

Peter Demangos:

And they rightfully saw the value through their success in the US by trying to acquire complimentary type of brokers, that being benefits brokers. And then look into cross-pollinate or cross sell and double down and provide more services, same customer. So, that worked tremendously well for them in the US from what I can tell. And then they took that model up to Canada, and they acquired about 20 companies in the past two years, us being one of them.

Peter Demangos:

And so at that time, I was approached by HUB, just being involved in the network, I was very in tune with. And that’s one thing I learned as well in my process, is even if you’re not looking to sell, I always thought has never hurt to have conversations with people. And just see what people are talking about. There’s always a learning that I’ve found in just having conversations, investors, buyers, and so forth.

Peter Demangos:

So, anyway, the conversations, knowing that we had a lot of people spotlighting on Collage, there was a side conversation then that went off with HUB. HUB was not interested in Collage. It wasn’t the type of company that they’re looking to acquire to fit their model, but they showed a lot of interest in my other business, which is the brokerage, would fit identically to their acquisition model. And at first I was very reluctant, but they said, let’s just go down the path. Let’s see what will happen. And I had heard from some others that had sold that things are favorable, that was cheap in the US, so they were coming up to Canada. Their model worked in the US. And then, yeah, there was the deal made a lot of sense for me personally. And it was just too good to be true, as I say.

John Warrillow:

And what made it too good to be true?

Peter Demangos:

So, historically, and this is probably no surprise. If you look at PDF, it’s arguably sometimes you can view it as a practice, more so than a business. Look at accounting firms, for example, legal firms, where the owner is the main component to the business. It’s tough to sell a business like that for anything beyond maybe one or two times EBITDA, simply because as the buyer you’re taking too great of a risk buying something where there’s a strong relationship. So, I was aware of that and I was totally fine with that, because it was a very profitable business. So, that was the unique thing about PDF where our industry just never had purchase multiples that were anything outside of that.

Peter Demangos:

Whereas when HUB came along and they were at that time, I mean now we’re in COVID-19, so I’m sure things are different, but at that time multiples were close to eight times EBITDA. So, and they were offering opportunities to plug into their organization. So, I’m still with HUB right now. My team is still with HUB. And it allowed basically an opportunity to de-risk take capital off the table, but still have the benefits of plugging into a large organization. And I think I just recognized that this is an opportunity where a lot of US companies, and HUB wasn’t the only one, there’s a few others that have come up to Canada and they’re just swallowing up business. They’re right now, they’re looking to acquire a lot of business and then probably integrate everything.

John Warrillow:

So, I’m assuming the eight times would have had some earn-out component to it. It wouldn’t have been all cash. Would it?

Peter Demangos:

Yeah. The majority is cash, at least in my particular case. But there’s always an earn-out component to it as well. I think it makes a lot of sense to incentivize, but the majority is cash. So, it was very unusual for our industry to see this.

John Warrillow:

Yeah.

Peter Demangos:

Which when you’re, at least when I was looking to sell, then it begs the question, and there was hesitation in that process, even though it’s eight times EBITDA, I was saying to myself, at least, no, are they seeing something in the industry that I’m not? Is something about to change, our industry is going to see bigger opportunities and greater opportunities? Or is the writing on the wall, actually the opposite that we’re going to end up being the majority of brokers in Canada are going to be the niche of large size brokers, and the smaller mid brokers actually won’t have a chance to survive as they are today because the insurance industry historically has been very fragmented.

Peter Demangos:

You have a lot of individual brokers that are involved in a lot of different types of insurance, where in the US it’s not as fragmented, there’s been a lot of consolidation. So, my personal thought was that the consolidation was going to happen in Canada as well. And I recognize the benefits. Having seen the world of collateral, where things are being consolidated and the world of the pure insurance component, where there’s consolidation. And I saw that in the States as well. My take on where our industry was going to look five years from now, is that it’s going to be made up of fewer larger brokers that offer more than just insurance, but they’re going to offer a lot of other types of services, that a boutique brokerage like us, I don’t think would have been able to compete. So, it felt like it was just the right time.

John Warrillow:

And your own personal life situation, what impact or what role did that play in your decision to sell PDF? What maybe, if you’re comfortable talking about the life stage you were at, was that a component in the decision to sell PDF?

Peter Demangos:

100% it was. So, I’m 35. And between the sale of the two businesses, it allowed me to hit my number and everyone has their number. And I just felt, just everything aligned, there was nothing… So, the fact that the deals themselves made a lot of sense. And then the fact that I was able to hit that personal financial number between those two deals just felt like it was the right thing. So, it wasn’t the key driver. I try to disconnect the emotion from the sale of the business, but it certainly helped motivate me. That’s for sure.

John Warrillow:

What was it about your number that you found motivating?

Peter Demangos:

Yeah, it’s a really good question. And I fortunately had to get into that type of thinking. And for me, at least that number was about as an entrepreneur minded person, that number was about getting to a point where I have full control of freedom of my destiny. And I never have to think about forcing to start a business or forcing to be an employee just to bring food on the table. So, it is an amount of money that I knew that I could in the market conservatively generate to provide for my lifestyle.

Peter Demangos:

So, that to me in my journey is always, well, that’s phase one in building, whatever my path is. First is find that autonomy being completely self sufficient. And then, to give me that clarity though, or that allows me in theory. I mean, I’m still in the transition of everything. But that gives me the clarity to make the right decisions. So, that was probably a big reason. I think that motivated or I’m certain that motivated because it allowed me to hit that first phase of my journey or whatever that looks like. And now I know that I have complete control on what the next steps are to be.

John Warrillow:

What’s phase two?

Peter Demangos:

Yeah. And that’s a really good question. So, now I’m with HUB. I mean, it’s a great organization. We have a two year earn-out there. I suspect even from my experience with them, that at the end of the two years, they’re probably going to put forward an attractive offer. And what’s unique about how this is, it’s all the acquisitions are entrepreneurs. So, it’s very entrepreneurial focus. So, for anyone who’s looking to make changes in our industry, HUB is an opportunity to be able to do that because it’s built, essentially after acquisition of entrepreneurs.

Peter Demangos:

So, I think at that moment, I’m going to be faced with a question of, do I want to take on our industry? Do I want to take advantage of the framework that HUB has and the size of HUB to take on our industry at a grander level? So, there are a lot of moving pieces in our industry at the large company level, consolidation and so forth. So, there’s going to be some unique opportunities in the insurance and HR space for some creative solutions. So, there’s potentially for anybody interested in that legacy, there is a potential to leverage the network and the foundation to make a huge impact.

Peter Demangos:

So, I think my big dilemma will be, am I done with this industry or do I want to make a bigger impact now that I have a foundation? So, given my age I think there’s some excitement of both. So, it’s a really tough decision. I think funny enough, it’s more stressful than I thought, but it’s a very fortunate without-

John Warrillow:

What do you find stressful?

Peter Demangos:

I think it’s the entrepreneur’s dilemma of putting pressure on oneself. So, when I first sold, I thought I’d be able to take the foot off the gas a little bit. Whereas now, funny enough, it’s completely turned on its head. I actually put more pressure on myself to say, “Well, now you have your financial freedom, go create a legacy.” I mean, I would almost, I’m almost getting mad at myself for thinking that I can just put things on cruise control. And now I feel the sense of an obligation to go and do something more impactful that I have the time resources and so forth to do it. So it’s, I never would have thought that my mind would have changed in that sense so quickly, at least, but it definitely has. I feel more of an obligation, more anxiety to go out and take advantage of the position that I’m in.

John Warrillow:

Why not just hit the beach?

Peter Demangos:

Yeah. And maybe I will, maybe for like two months out of the year, I’ll be on the beach. But that’s a good question. I mean, that was the initial thought to say, now I could hit the beach. But yeah, I think it’s the fire that drove me to begin with, to start businesses is certainly still there at my age. So, it is just a matter of how do you repurpose that in a way that’s going to be satisfying. And I think from my journey specifically, I like the idea of checking off different challenges. So, I probably wouldn’t start another brokerage again. If I stayed in the insurance world, I would take advantage of the structure that I’m in within right now with HUB. If I didn’t stay in the insurance world I would probably look at something completely different.

Peter Demangos:

But I don’t like the idea of just repeating what I did. And I know that’s probably not the smartest thing because there’s a lot of value in experience. But for what it’s worth for me, I like the idea of a new challenge. And I think that is what excites me more is to say, well, what else can I challenge myself with? And definitely being part of a large corporation. I was coming from small business, going to a large company in itself is a big challenge. Just understanding how big corporation works. So, I’m in the spirit right now where I’m just being a sponge. I’m just trying to take in as much as I can. I’ve had people look at and approach me for different types of angel investing. Obviously, I’ve not done anything like that. That’s a very easy way to lose everything you’ve earned by just throwing it at different investments. But I’m learning. I’m trying to understand what those other worlds look like.

John Warrillow:

Lets spend a few minutes on Collage, because I skipped over that unintentionally and we should circle back, because incredibly you sold both businesses in short order. So PDF, I think we’ve explored that deal. And I think I get that this sort of a structure of that deal. Talk about Collage. How was that sold and how did that compare and contrast with the PDF deal?

Peter Demangos:

So, Collage was sold based on us approaching another checkpoint. So, we had hit break-even, we recognized that we needed more money. We were about 45 employees at this point. We recognized that we needed to make a manoeuver and there was a lot of attention now in our industry. So, we knew competitors and large and small competitors were finding ways to get into the technology space. So for us, it was very clear. It was either partnering or being acquired by a large company that’s going to allow us to see this vision through and do it very quickly. It was very much a time play. Or we were going to look to… Sorry, either get acquired but still be part of that vision or raise some money, a significant amount of money to get to the next step. So, and we always continued to have those conversations, but we were always aware of it that we were going to hit that point. So, we hit it within about three years.

John Warrillow:

45 employees, are you able to, I mean, is it public to talk about how much revenue you had, how many members you had, that kind of stuff?

Peter Demangos:

I can talk about members. I’ll say this, I mean, we were a break-even essentially. So, and our biggest costs for the most part was employees. So, I mean, when you’re running a business like that technology, the cost of technology is the costs of your people, your developers. So, call it a couple of millions in revenue. I don’t remember the exact number. But again, we were not very… The business had the potential. If we were charging every customer, we would easily be five, six times more revenue. But we were again, very focused on membership. So, as we were growing, we were really growing to the amount that we needed to net out our profit.

Peter Demangos:

And then we were faced with the dilemma as well in that same discussion with my co-founders. One of the dilemmas was, “Okay, do we even want to take on more investors right now? We don’t want to get to the point where we’re a minority in the decision making between the three of us. Do we want to take on investors? Do we want to start charging customers?” So, we actually went through that discussion. We had the majority of our membership base was for free. They were on that platform. We were just really in growth mode. And that was the intent of leveraging that three and a half that we raised initially.

Peter Demangos:

But once we got to a point of break-even we said, well, we can either raise more money and be acquired, or we can look at turning this into a lifestyle small business. And that was a very legitimate question that we had or discussion that we had, which was, “Are we were going to charge customers, or we’re probably going to lose about half of them. But we’re now going to be a profitable organization. We’re going to be running along, probably making half a million, a million dollars in revenue a year by doing this transition. And then we can take business to something that’s maybe profiting a couple of million a year.” So, we had those discussions, but then we also recognize that going down that path, it’s not as easy as just turning that switch on, and assuming that the industries in the stay as quiet as it is.

Peter Demangos:

We knew that there was so much attention coming into our space, that we were going to be faced against other companies that had way more money behind them than we would have at that moment, if we decided to go bootstrap from that moment forward. So, it was a very difficult conversation because we had to figure out what aligns with what we want with this company. What aligns with the three of us in our lifestyle. Thankfully, as a co-founding team, we were very aligned. We had a great relationship which I think could have been completely different outcome had we not? But we had a great relationship. So for us it became a moment, the clarity or we had a moment of clarity and said, well, this is being acquired at that moment. Seemed like the best thing to do.

Peter Demangos:

The deal was optimized based on financials. It saw the best opportunity for the brand to go forward. So, we’re thinking about our employees because we had some acquirers at the table that would have completely changed our message, that we’ve been pushing to employees for three years. And I felt like as a co-founding team, I was not willing to accept that, to have my employees look at me and say, “Well, you just did this for the money.” That was a much more a bigger payout than what we had, but it was just totally disaligned what they wanted to do with the brand. So, it was-

John Warrillow:

You had multiple offers for you, get into the mechanics. Did you take it to market and formerly shop it with an M&A professional or what was the-

Peter Demangos:

We did, yes.

John Warrillow:

Okay.

Peter Demangos:

We did. And they had a range, I mean, some of the bids, the [inaudible 00:43:12] on bids was like 50%, five, zero.

John Warrillow:

Wow. From the low bid to the high bid, there was a 50% difference.

Peter Demangos:

Actually. Sorry, from the bid, yeah. From the low to the highest, almost double.

John Warrillow:

Wow. Wow. And so how many offers did you get?

Peter Demangos:

So, we had three offers.

John Warrillow:

And what types of companies did you go to in canvassing potential acquirers?

Peter Demangos:

So, payroll, insurance and insurance aggregator. So, People Corp that bought us, they’re not necessarily a broker. They’re more of an aggregator because they’ve acquired in their portfolio, they have brokerages, they have administrative companies, they have wellness companies. Now, they have us in the HR technology. So, they’re not an insurance company. But they’re not necessarily a broker, let’s say like HUB international, even though they have broker services. They’re more considered more of an aggregator. So, the big player insurance and payroll companies were the ones that it made most sense for them to be at the table.

John Warrillow:

Got it. So, and what was their offer? How was it structured? Can you talk a little bit about that?

Peter Demangos:

Yeah. So, the offers were more cash upfront. And I think, and again, I’m speculating based on what may have been in their mind, because that’s the fun and not so fun part of negotiating, is trying to anticipate what the other party is valuing your business on what’s introduced they might have. So, for the most part, they were more cash upfront, and that could have simply been just a balance sheet discussion for them where they’re a cash heavy. So, it just seemed that that was pretty straight across the board.

Peter Demangos:

There were targets or checkpoints on some synergies being achieved. So, some cross-sale being achieved. So, that was common to most of them. But I would say the biggest determining factor that provided that spectrum was how well they can integrate our platform into their existing services and then see that being cross sold across their network. And that’s why we saw that dramatic spectrum. And that’s where we recognize to in that process, that this is the right time to sell because our industry recognizes that they need this platform. And we recognized as a founding team that we needed a lot of capital. So, yeah.

John Warrillow:

Yeah. I want to explore that notion, again, because it’s the definition of a strategic acquisition. So, with regards to people, again, I don’t know the company at all, when they thought about the synergies, the strategic synergies, you’ve got this software that helps people manage their HR, company owners manage their HR. What was the synergy that People Corp saw? How were they planning to cross sell their services to your customers or vice versa? What did it look like?

Peter Demangos:

Yeah. And I can only share what I suspect because a lot of that was kept. We have some obvious synergies, but there’s certain aspects of it. Obviously, that as the one being acquired, we weren’t privy to. So, People Corp as an organization has done a great job of aggregating a bunch of other insurance brokers, as well as administrative type of companies. What was lacking was missing in their portfolio of companies was an HR platform that would tie these all together.

Peter Demangos:

So, if you think, if you look fast forward, at least from my experience in the industry, if I fast forward five, 10 years, and this is all done successfully, well by one of these large institutions. The perfect world is where the employee experience is one of where they log into one platform. And it’s really plugged into all other things that touches them in their employee journey, from payroll to HR and so forth, from large to small businesses. So, whichever big organization could find a way to tie those all together. And to me, I think that’s ultimately what they’re striving to do, which requires a lot of capital-

John Warrillow:

Got it.

Peter Demangos:

… is the ultimate winner.

John Warrillow:

So, you could log in as an employee, and welcome to ABC widgets, and you log in and there’s your benefits plan, your dental and your health. And you can probably option there and say, “Oh, I want to add my spouse or my kids. And Oh, I want to upgrade to this insurance package.” And it’s all just beautifully integrated.

Peter Demangos:

And furthermore, I think the next step for a lot of the large financial institution is, well, how do you take that and bring it to the household. So, if I’m an employee of a platform, it has all the things you just mentioned. However, that platform knows if I bought a house because I’ve changed my address, for example. Now, I could be sold mortgage insurance or I can be sold other types of things. So, it’s a race to a marketplace for the future of how the member or the employee is going to be purchasing financial services. And whoever owns that platform, the experience is ultimately the winner. And I’m not sure that anyone has figured out how it’s going to work, but it’s certainly the direction on where things are heading, where there most likely will be a smaller few of massive platforms that integrate.

Peter Demangos:

I don’t think this is one platform that covers everything. I think we live in a world where it’s more open source integrated. But it’s figuring out that if then you can tap into the individual and allow them at the click of a button to buy. From my experience insurance and financial services, they’re sold, they’re not really bought. No one really goes out looking for life insurance as an example. They’re at the right time where they’re buying a house and someone says, “Hey, you should probably think of life insurance.” Or they’re doing their will and the lawyer says, “Have you thought about life insurance?” So forth. So, I think the solution here or the end game is to be able to electronically to tap into that user at the right time in that life event.

John Warrillow:

That’s helpful for sure. What was People Corp’s acquisition price? I think they published it, right? Can you talk about the actual price?

Peter Demangos:

Yeah. So, the total deal was around $15 million and the majority of that was cash. And then there was some backend incentives for hitting certain milestones. So, it was pretty clear, pretty simple in that sense. So, some key targets on the back end and then the majority would be upfront cash deal.

John Warrillow:

Got it. And so, you had raised money at a $13 million valuation, and then ultimately sold at a $15 million valuation. What was that conversation with your investor like? How were they feeling about the exit?

Peter Demangos:

Yeah. It’s an interesting one. And went through the same thought process trying to figure out what is the right amount to sell. And I think we were jaded by the fact that we had raised at a significant valuation. So, when we raised, we had zero revenue, there was just three co-founders. So, it was very much a raise on an opportunity. So, I mean, we can look at that and say, well, it was $13 million, the right valuation. I mean, who’s to say, right? At that moment, there’s so many moving parts.

Peter Demangos:

So, when we were looking to sell the business, we had to take that anchor out of the calculation and not say, well, it’s 15 or so, the right number, because we couldn’t consider the first valuation, which may run up into the most accurate. So, our investors actually were quite happy with it. Obviously, they made a return, their money.

Peter Demangos:

And again, I can’t speak on behalf of the investor, but what I’ve seen in our world, technology is a very interesting space in the sense that one in probably 100 of these businesses succeed the most are going to fail. And then there’s so many critical moments in the growth of the business where you can skyrocket, or you can become a completely bankrupted business.

Peter Demangos:

So for us, we have to look at it very seriously and say, well, here’s an opportunity for everyone to make a relatively significant amount of money, including our employees. It was the right decision from a partner perspective, to see the brand live on. Because the alternative was, well, we need to raise a significant amount of money to take it to a completely different level. And now we’re up against, so all of the partners or the partners, or the party that came to the table to buy us have since created or are in the process of creating their own competing product. So, we recognize that this was going to happen. These big organizations were going to compete head to head with us in a very short period of time. So, there was this very unique window where we had to make a quick decision on, do we sell based on this valuation, doesn’t make sense for the three years that we put into this, for the vision that we have for the brand. And ultimately, we decided yes.

John Warrillow:

And did the investor benefit from People’s acquisition in any way? Did Power Corp, who was the investor, did they go on to benefit on some level beyond just the financially?

Peter Demangos:

Not that I’m aware of, nothing that would have been in the deal.

John Warrillow:

Okay.

Peter Demangos:

Yeah.

John Warrillow:

Got it. As you, I mean, it’s such a rare rarity. I think this is, we’ve done 250 plus episodes of Built To Sell Radio, and I don’t think I can remember a situation where an entrepreneur has gone through two exits almost back to back. It provides such an interesting comparison. As you compare the two exits, what do you see as the real points of comparison and also contrast?

Peter Demangos:

Yeah. That’s a really good question. Yeah, as far as I think for me, when I look at that, trying to figure out the right answer to this question, it’s about understanding how it aligns to me personally. So, if I look at the deals themselves as one thing. But in my case, because I was dealing with both of them together, it was hard not to look at everything together and say, well, there’s a continental shift that’s happening in my industry. And here’s an opportunity to look at a personal financial windfall where it makes a lot of sense and the timing. So, as far as how they compared, I think they compare in the sense that it was striking at the moment in our industry where our industry was saying, there is a lot of deal activity right now that might not be the case.

Peter Demangos:

Now, in hindsight, obviously with COVID out, just certainly turned out to be the right decision. But that was the common thread between both of them where the industry was speaking and saying, it’s about to change, and it’s going to look a certain way. So, it felt like these were the right decisions. And I tried to take a little bit of emotion out of that decision making and recognize, I know my industry well enough to appreciate what’s about to happen.

Peter Demangos:

And then, the differences obviously were dramatic in the sense where with PDF, I was the sole decision maker. So, the process around alignment was far quicker obviously than, and then that of Collage. Collage was unique in the sense that we had many options, whether it was selling, whether it was raising more money, whether it was turning this into a smaller now going forward bootstrapped organization. So, there was a lot of internal awareness and discussion alignment that need to happen. So, that I think was, aside from the deal itself, presented some unique challenges, because we all get attached to our business. It’s our baby at the end of the day. And then in these moments, you really get to understand yourself a lot better than that, of what motivates you and what you want to achieve from your successes and so forth, without getting too philosophical on the matter. But it does take you into a place where you really need to, or I felt I really needed to self reflect and understand what it is that motivates me.

John Warrillow:

It’s interesting because your co-founders, one of whom you went to high school with, I mean, you knew these guys really, really well.

Peter Demangos:

Yeah.

John Warrillow:

What did you learn about them? What new, did you learn about your co-founders going through the exit process on Collage?

Peter Demangos:

Oh, wow. That’s a tough one, John. You know what? I was fortunate, I was very fortunate. We were very aligned from the get go as far as where we felt or rather feeling that the time to sell was appropriate. So, I think my learning in all this was that we got in, we started out at the business very quickly, so we didn’t do… Aside from having known each other, I still think any co-founding team has a lot of benefit by doing a little bit of understanding of who the co-founders are, and what skills they bring to the table and so forth. We got fortunate that everything aligned very smoothly. So, I really don’t have any negative learnings with my co-founding team, more so on the positive side, in the sense that I cannot stress how fortunate enough to know that we are so aligned, and seeing from different perspectives, technology, finance, and insurance, from seeing the opportunity the same way.

John Warrillow:

Fantastic. Well, I’m so glad it worked out for you in both cases. It’s an incredible story. Peter, is there a place where people can reach out if they want to get to know you more, maybe connect with you? Are you a LinkedIn guy? What’s the best way to reach out?

Peter Demangos:

LinkedIn would be the best, yeah. Just Peter Demangos on LinkedIn. Not that many people with that name, I’m sure they could find me.

John Warrillow:

The Greek spelling, and we’ll put it in the show notes at builttosell.com. Peter, it was great to get to know you. Congratulations on both exits. Can’t wait to see what happens in phase two.

Peter Demangos:

Thanks, John. I appreciate it. Thanks for having me.

John Warrillow:

Anytime.

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