9 Lessons From An Acquisition Offer Gone Wrong

August 21, 2020 |  

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Back in 2007, Aric Bandy saw Google investing heavily to compete with Amazon Web Services (AWS) and so decided to pivot his company, Agosto. Instead of offering general IT consulting, Bandy focused on helping clients move their businesses online using something Alphabet calls the Google Cloud Platform.

The move to tie his company so tightly to a juggernaut caught the attention of a global systems integrator, which made a play to acquire Agosto. The deal fell apart, but the process caused Bandy to realize he had some flaws in his model. Instead of mourning the loss of the acquisition deal, he started building his company to sell.

In this episode of Built to Sell Radio, Bandy describes the changes they made to make Agosto more attractive to an acquirer. It worked, as he successfully sold Agosto in April 2020 to one of the leading private equity groups in the cloud services arena.

The transformation of Agosto into a sellable company gives you a unique window into what acquirers look for in the companies they buy. Bandy shares a lot of his wisdom here, including:

  1. Why hitting $10 million in annual revenue is an essential benchmark for your valuation
  2. How to calculate the rule of 40
  3. The difference between what a financial and strategic acquirer value (Bandy had offers from both)
  4. How retroactive modeling ensures a growth-oriented business doesn’t get unfairly discounted for lack of profit
  5. How to eliminate your personal guarantee with your bank
  6. The surprising role a cash forecast plays in helping an acquirer value your company
  7. Why it might be worth investing in audited financial statements this year
  8. A definition for “assignability” and why you need it in your customer contracts
  9. The best advice Bandy was ever given about selling a company

Bandy described the emotional weight that has been lifted from his shoulders now that his net worth is not so dependent on his operating business. Considering your financial position is one of four things you need to do to get emotionally ready to sell your business. Evaluate your readiness on all four factors by getting your PREScore™.

Our guest

Aric Bandy is a serial entrepreneur with a history of building valuable companies. In his present role as EVP of Corporate Development, Aric focuses on the growth strategy for Pythian. Prior to Pythian, Aric led Agosto, an award-winning Google Cloud Premier Partner, which was acquired by Mill Point Capital and Pythian in 2020. During his tenure at Agosto, he packaged and sold off the Agosto MSP business in 2014. Before Agosto, Aric became the Vice President of Techies, the commercial spinout of Geek Squad, when Techies purchased Aric’s MSP start-up. Outside of his work role, he’s been an adjunct faculty member at the University of Minnesota teaching a course on leveraging cloud-based apps to advance global health research. Aric holds a bachelor’s degree in marketing management from the University of St. Thomas. Aric is a father of two, a guitar player, and can often be found outdoors with his boxer/husky rescue dog.

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Transcript

9 Lessons From An Acquisition Offer Gone Wrong

 

John Warrillow:

This episode of Built To Sell Radio is brought to you by PREScore. What on earth is a PREScore? Pre stands for personal readiness to exit your company and here we’re looking to evaluate how personally ready you are to leave your company. When you go to sell a business to have a successful exit and look back on it without regret, you need two things. Number one, a company that is attractive to an acquirer, to a company that’s built to sell, and number two You personally need to be ready to exit that business.

John Warrillow:

We found that there are four drivers of a happy and lucrative exit, four ways you can personally ready yourself to exit your business and by completing your PREScore, you are going to see how you’re performing against those four major drivers of a happy and lucrative exit. Just go to prescore.com

John Warrillow:

I want you to think back to the things you feel really committed to, things that you in your gut know to be true. My guess is you learn those from making a mistake, because so many of the things we hold so closely are things that we learned the hard way from trial and error, and my next guests Aric Bandy did exactly that. He went out and entered into a negotiation to sell his company only to have the deal blow up.

John Warrillow:

He committed to something at the end deal that he would change the way he ran his company to make it more of a sellable company. He called it architecting for an exit, and here you’re going to learn nine different things he did to get his business ready to sell. I won’t spoil the punchline. Here to tell you his entire story is Aric Bandy.

John Warrillow:

Aric Bandy, welcome to Built To Sell Radio.

Aric Bandy:

Thank you. Thank you very much.

John Warrillow:

It’s great to have you here. You’re in Minnesota, right?

Aric Bandy:

I am, just outside of Minneapolis.

John Warrillow:

Who is the cyclist-

Aric Bandy:

10,000 Lakes.

John Warrillow:

There you go. Who is the cyclist who was from that area? Lake Minnetonka.

Aric Bandy:

Oh, see, I’d be asking one of my business partners who are hardcore cyclists.

John Warrillow:

Greg LeMond, I think he’s from your neck of the woods. Is he a famous name that you’ve heard before?

Aric Bandy:

Oh yeah, of course.

John Warrillow:

I think he’s from that area where you are. It was good to know you and good to meet you. Tell me a little bit about this company, Agosto. What did you guys do?

Aric Bandy:

So like many of your listeners, we had lots of great growth opportunity over the years and our business model grew and evolved over time, over the last two decades or 20 years. At the time of our transaction, Agosto was what I’d call a cloud consultancy. So we helped organizations specifically around Google Cloud, which is Google’s commercial products and services. So we provided services, we provided resale, and we helped fortune 500 companies that were trying to look to take advantage of that technology within their environment get stood up, starting to use the services. We did development work. So we were one part application development. We were one part DevOps and infrastructure and then we actually helped clients around the collaboration space called G Suite.

John Warrillow:

So let’s go back to the beginning. You joined in 2007. You didn’t start the company. How did you come to run it?

Aric Bandy:

So like I said, the company started about 2000. One of the founders had actually moved on and was running a different startup. Agosto was a regional managed services player kind of doing like break-fix computer work, server management, et cetera. I came on board in 2007 and I knew the founders, the great cultural fit and I was looking for a place to just kind of call home for a little while, while this whole cloud thing was emerging in 2007. It was still very, very early days for the cloud.

John Warrillow:

So back in 2007, you guys are fixing people’s computers, when a network has a virus you’d kind of swoop in and get rid of the virus. That kind of stuff?

Aric Bandy:

Yeah. Exactly.

John Warrillow:

So did you buy the company? Did you become a shareholder or were you as they say, a kind of a managed gun, hired gun brought in as president?

Aric Bandy:

Actually didn’t even start off as president. I kind of came into the role pretty quick, because the business, and this is part of that whole evolution that many entrepreneurs face. The managed services space was pretty saturated. A lot of players really hard to scale, capital intensive, slow growth and the ROI or the evaluations were solid, but only solid if you hit a certain threshold and to get to that threshold was pretty substantial.

Aric Bandy:

I came in with relationship with Google Cloud that had just started. I mean, Google had really allocated their first 50 headcount to even start a commercial division in 2007. So I came in with a picture of like, how about we take this platform, Agosto, we pivot it and start to go after the cloud in a more significant way. Because of that, Because of the vision and the strategy, it just made sense that it took over running the company, and really see the strategy forward.

Aric Bandy:

It really was the beginning stages of the evolution of our business model from a pure managed services to managed services with project services and tech services on top of that, and eventually, it didn’t make sense with the revenue growth that we’re seeing in the cloud services space to continue to maintain on premise managed services. So in 2014, I divested that portion of our business so we could singularly focus on what we were doing in and around Fortune 500 companies taking advantage of Google Cloud.

John Warrillow:

You mentioned the valuation for companies when you joined there was relatively modest for small businesses but if it grew to a certain size, it became more attractive. What sort of valuation multiples were you seeing for very small companies? Then what was sort of the ideal, was what were you seeing from much larger companies in the way of valuation multiples?

Aric Bandy:

So back then, MSPs or managed service providers, service companies that had recurring revenue streams with a healthy percentage of the revenue tied to ongoing contractualized service revenue. You could see three to four, maybe five times really times revenue. Generally, though, about three to four was pretty great, but you needed to be north of 10 million in recurring revenue to get that. It was really hard when we started as a few million in recurring revenue, to figure out how to capitalize the business to experience that kind of growth in a time horizon that made sense.

Aric Bandy:

So at our size, the valuations are all over the place. When you’re dealing with smaller companies there’s a lot more, I guess, wiggle room on both sides, low end and high side. When I went to actually to divest the managed services division, I was seeing a massive range in valuations because you’re talking about basically a owner operator selling to another owner operator.

Aric Bandy:

In a few million dollars types transactions, you’re not typically talking about traditional private equity, or bankers and stuff like that. Those are too small for them to bring it the attorneys and accountants and the auditors into the mix. There’s just not enough money involved. So it’s basically one owner operator selling to another owner operator and thus the valuations kind of go out the window to an extent and it totally just depends on the strategic fit of what that deal could look like.

Aric Bandy:

To the entity we ended up selling the division to was looking for creating a beachhead in the Minneapolis market. So for them, it was a strategic play because they were looking for growth and like I said, that market was saturated. So the only way that a lot of organizations were continuing to see positive growth was through inorganic, and acquisitions. So that’s where this fit.

Aric Bandy:

It was a great fit for our employees because they got to be a part of a bigger organization and see good growth. It was a great fit for them because they created this beachhead in Minneapolis, but it definitely made it a lot harder when I was trying to figure out what’s this practice worth? Is it worth three times revenue? Is it worth one times revenue?

John Warrillow:

At the time you were selling that division, it was a couple million in revenue ish?

Aric Bandy:

Yeah. Yeah.

John Warrillow:

So what did you come up with? What did you find it to be worth?

Aric Bandy:

So this is one of those funny stories that I’m sure many of your listeners as entrepreneurs, there’s a serendipitous moment where I had an offer on a table and I went to seek advice from a gentleman who I’ve known for a long time, who was a very seasoned business professional and has done M&A transaction. Sitting down, grabbing a beer saying, I got to run this deal past you, because I just don’t feel like this is the right kind of valuation, but I can’t get comparables in our size, in our space that helps me at all.

Aric Bandy:

During the course of about a 30 minute conversation, all of a sudden, he just says, “Hold on a moment,” walks away from the table, with this phone comes back and says, “I have a different buyer for you.” Because he had just two weeks prior been asked to rep this company that ended up buying the business that created a beachhead in Minneapolis.

Aric Bandy:

So back to your question, I really struggled with this. One of the things I learned in the most recent, we haven’t got to the story with the most recent transaction with Agosto, but what learned there is really spending a lot more time identifying kind of the exit thesis, like what is the necessary, in the organization, the structure, the architecture, the how you engineer business to actually be sold.

Aric Bandy:

In 2014, I knew I had a good company. I had good people, good engineers, good contracts, good clients, but I hadn’t really spent the time to understand exactly what those KPIs needed to be in order for it to yield the premium valuation. So when I actually moved to sell, I really struggled and I didn’t know how to benchmark a good deal from a bad deal.

Aric Bandy:

Ultimately, deals are in the eyes of the buyer and the seller. We were very happy with how that came together and how it provided additional capital into Agosto to continue to fuel our growth around our cloud consultancy practice. It was great for the buyer. The buyer articulated it really served their needs. So I think it was ultimately in the end, really a great deal, but I can’t answer the question about how did I solve it, whether it was the right deal or not. From a valuation standpoint, I still don’t know. Maybe they got a deal. Maybe we got a deal.

John Warrillow:

What was the difference between the low offer and the high offer on a percentage basis? Are we talking, like give us a sense are there huge ranges at that lower end?

Aric Bandy:

So the ranges were actually fairly close, probably about 30% difference, but it was the structure of the deal, which is also a big part of building towards sell, understanding what you’re trying to accomplish. So the one [crosstalk 00:12:46] on had basically 25% of the value of the deal upfront, and the rest over a four year earn out, and I’m struggling because part of my goal was to use this as a recapitalization of the business.

John Warrillow:

Meaning money to fund the cloud stuff.

Aric Bandy:

Exactly. To fuel where I was seeing explosive growth, to really transform Agosto’s business, from a regional player to a national, certainly very national, North America focus with some international practice and go up market with customers and increased valuation. This other deal that came out wasn’t quite as rich. It was about little less than 30% from the high end, but it was all cash upfront. So we got about one times revenue when push came to shove, which was a little like, based on what I said about what MSP valuations were, but again, those are, the only comparables I could find were bigger entities. The business model, there’s just evolution in revenue size and 10 million was in a really important threshold to start moving into that, what they call standard valuation range. We just were a long ways from that. So I still feel like we got actually a pretty solid deal.

John Warrillow:

The guy you were having a beer with, had you engaged him? Was he a paid consultant on your behalf or was he just a buddy giving advice?

Aric Bandy:

Just a buddy giving me advice.

John Warrillow:

How did you stick handle it because clearly he had been hired by that company to find a business like yours. So he was definitely, if you will, compromised to some extent because he was advocating for his buyer. How did you stick handle the relationship?

Aric Bandy:

It went from, hey, let’s go have a beer. I need some advice to oh, we’re negotiating now.

John Warrillow:

What was that like?

Aric Bandy:

So I’ve known him for a long time. He’s a very fair, reasonable resource. He had just talked with them about his engagement with them to help on the buy side. So he hadn’t fully structured and hadn’t really moved into the space to handle. He wasn’t up to speed on what they needed to buy. So just the timing of that worked out in such a way that we were able to have a pretty open conversation. If I’ve learned anything throughout these transactions, the more open and transparent and this is just the way I’ve played out the last couple, the better off it was because every organization we had wrinkles and wartps.

Aric Bandy:

We had some really great clients but we had some concentration issues and our MMR-

John Warrillow:

What’s MMR?

Aric Bandy:

Monthly recurring revenue stream. We had some concentration issues with some of our clients. I just chose to be upfront about that and say, here’s what where strong and here’s where we have some struggles and some challenges, and on the converse side, they chose to take a very kind of similar approach to just open negotiation and communication. So we were able to talk about the issues, what we’re trying to accomplish, what they’re trying to accomplish and come up with a fair price and structure.

Aric Bandy:

So it started at that beer. When he came back to the table, we had already started talking about the business. So I had already tipped my hand on a few of those things but it was really important that I felt just to continue that kind of theme throughout the entire negotiation and it made the whole thing go so much, much smoother.

John Warrillow:

So that money, you wanted to, in your own words recapitalize the business, meaning to inject some money to be able to take the business forward in this Google Cloud area. So the founders, the shareholders didn’t take money off the table at that point? They were willing to roll it all onto this Google Cloud?

Aric Bandy:

Yeah.

John Warrillow:

Got it.

Aric Bandy:

By that point, I was not just a hired gun anymore. I was on a shareholder plan. So to be able to come in and start being a part of the group that subsequently in the last few years materialized in a way so that there was a small shareholder group of us to really reap the benefits of transaction, which we just did earlier this year.

John Warrillow:

Got it. So where does it go from there? You’ve got the cash. You know the cloud is, this Google Cloud thing is important. I still, by the way, just as an aside, I think the word cloud, it seems so overused. I remember the IBM was supposed to be the cloud. Then like, Salesforce was like, you don’t need software anymore. Now it’s all in the cloud and now Google’s clouds like, you got to bear with me. The whole thing just seems like everybody’s using the same term. Anyway, so keep going. The Google Cloud? What was the opportunity that you saw?

Aric Bandy:

So this was one of those few moments where as an entrepreneur, I saw a market demand increasing faster than the market was able to keep up but it had to be capitalized. It took investment, I needed to hire salespeople, I needed to hire a marketing team, I needed to hire engineers, and I needed all of that to be hired before the revenue would catch up. It wasn’t a situation where I could onesie-twosie. I could hire somebody, get them productive and then based on their productivity turn around, hire another person and another person.

Aric Bandy:

The market was moving very rapidly from 2015 to ’18, ’19. There was no Amazon which is the big 800 pound gorilla in the public commercial cloud space.

John Warrillow:

The AWS offering.

Aric Bandy:

AWS, with 50 ish percent market share and Microsoft with Satya coming on board really substantially made investments there, Google re-architected their leadership team and started making, so there was like a massive players who were bringing tremendous capital to market to expand their market share and growth. That just paved the way for companies like Agosto to really see aggressive growth opportunity, but that required capital.

Aric Bandy:

So, we took the capital from the divestiture and put it right into the business. The owners took a little bit of money, but very, very little, and for the most part, all went into sales and marketing initially, followed then by engineering and that allowed us to begin a growth trajectory. In 2016, we had one of the first, we weren’t quite ready to look at selling but we had somebody come sniffing around because the market was hot.

Aric Bandy:

There was more demand than there was capacity to serve the demand. So we had a big global systems integrator, the very large, I don’t want to name names, but large consultancies that have hundreds of thousands of employees globally. They all needed competencies in each of the public cloud platforms. So they came sniffing around and it was really the first time we thought about, maybe we should sell Agosto instead of growing it.

John Warrillow:

Ballpark. How much, I know we have to be careful about revenue, but just, at that point 2016, how many employees did you have or can you give me some sense of sort of how big you grown by that point?

Aric Bandy:

When we divested the management services practice that the entire team that was with that went with that transaction. That team had been doing some of our cloud consultants engineering work. So we were, in 2014, 25 people and then 15 people went. So I went back to a really small team of only 10 people and we’re starting to grow. So by ’16, I don’t remember the number of employees at that point. We were probably back up to about 25, if I had to guess. Maybe 25 or 30.

John Warrillow:

The business, you’re doing it as you move to the Google Cloud, you’re, as I understand it, helping large enterprise organizations put their operations, services, products online in the cloud. Is that basically what you were doing?

Aric Bandy:

Yeah.

John Warrillow:

So one question is if you’re a US Bank, or you’re 3M or you’re one of the other large and reprise organizations based in the Twin Cities, why wouldn’t you just pick up the phone and call Google itself and say send me some smart people. I want to put my online banking on Google Cloud or whatever. Why wouldn’t you just call Google yourself if you’re that big?

Aric Bandy:

Well, and that was part of my secret sauce with the go to market, which is that’s exactly what they all did. They all called Microsoft, AWS, and Google and all of them don’t have the engineering bench to be able to handle every single customer. So they turn around to their top partners, and they say, hey, Agosto, so why don’t you come with us to US bank or whomever and let’s sit down together and see what we can do for this client.

Aric Bandy:

So it was part of my strategy for how to revamp our go to market in such a way that would pay for expanded growth. One, Google pulled me up market. So we started when we were an MSP or managed service provider, we started really in the kind of mid sized, and really even the small SMB, side of SMB. Our typical customer was 25 employees to maybe 100 employees was pretty common at that point.

Aric Bandy:

When we started doing the cloud consultancy, we started in that space, because that’s what we were already marketing to but pretty quickly, we went to like more 100 to 1,000 employees space. We spent a fair amount of time in that, what I call that mid markets, the M side of SMB. It was over time, especially when we divested at MSP and really pouring our capital into our growth, and building up engineers and stuff like that, that our competency, in combination with the market dynamic allowed us to continue to grow even further.

Aric Bandy:

So we were actually now starting to provide services to fortune 500, fortune 100 and part of that was that we were very tightly aligned with Google and they provided that credibility. Most of your listeners have never heard of Agosto. I’d be extra surprised if anybody has. We were a small, Midwest based company and here I am walking into fortune 100 companies right alongside Google, but because I was right alongside Google, their brand gave me credibility.

Aric Bandy:

So we were able to take down and really then grow. So by the time we did our transaction, we had 360 customers, a solid 80 of them were in the fortune 500 space, some very big recognizable logos, and we were doing meaningful work for them.

John Warrillow:

To what extent did you worry that you were tying your horse too closely to Google? Were there discussions among the ownership group to say, man, what if Google exits the cloud or AWS takes over? Were those conversations you guys had?

Aric Bandy:

So one of the lessons I learned and frankly, this is an interesting one because this is a debated topic a lot amongst, especially one of the shareholders and I. He and I would go back and forth on this a lot. When we exited the MSP business and then in 2016, when this large global systems integrator started sniffing around, we were like what maybe a gusto really has some value that we could look at a meaningful exit for us. The next few years.

Aric Bandy:

I then started to really work on trying to think about how do we architect this business so that it is attractive. The GSI came out hot and heavy, we’re going to buy you, we’re really interested. We’re going to put a premium valuation, and then it just kind of imploded and fell apart. Now, they went through, it actually had nothing to do with us or our business or who we were or customers or revenues, et cetera. It had everything to do with they had a change in leadership, change in direction, what they were going to do, go to market.

Aric Bandy:

What it did for me personally is I got to be much, much more thoughtful about how I’m architecting this business for a premium valuation and for an exit. So, to your question, that was a strategic decision because I believed that having a singularly focused company as opposed to more agnostic, we support Microsoft, we work with AWS, we work with Google, we work with IBM or others. I purposefully thought we would have a higher premium and be more attractive to the right buyer if we were singularly focused.

Aric Bandy:

Somebody that went out and said, we need to have a Google Cloud practice. We’ll either go build it or buy it. It’s an equation that every business is doing out there and when they decide it’s faster and more valuable for us to buy it because they have customer demand or what have you in our case. So if I had these other practice areas, my bet was that’d be a distraction and it could actually hurt my valuation.

Aric Bandy:

What I learned was it was more nuanced than that. I kind of really owned that statement I just gave, but once I started actually spending a lot more time, private equity didn’t care. It was the architecture to have a strong valuation for private equity was all about EBITDA, it was about, yes it was the kind of magic 40 you likely have heard which is, growth rate plus then your EBITDA percentage and if that’s a 40% number, you’re solid.

Aric Bandy:

If it’s less, you can have strong, like our EBITDA was lowered because I was building this business for growth, and I was funneling everything back into the business. So as soon as I could hire somebody, I’d hire somebody. Then they got going, I’d hire another person. So our EBITDA numbers weren’t terrible, but they weren’t great but our growth numbers were. 30 ish, 33, 34% year to year growth for five years straight.

Aric Bandy:

So private equity didn’t care about, there was no extra premium because we were Google only. The strategics they cared because they wanted to be able to have a tuck in that was very Google focused and especially last year, when I felt like we were getting to a size and valuation where it might be a good time for us to be looking at doing a deal. I started looking and there wasn’t a lot of comparables, but one of my competitors did exit to a strategic in December, of 2019.

Aric Bandy:

That helped really put up a watermark of what are these businesses worth, and they were probably the closest thing to a benchmark against Agosto that I had.

John Warrillow:

What did they sell for?

Aric Bandy:

I don’t know. It was a private transaction.

John Warrillow:

So how was it helpful that if you didn’t know what the number was?

Aric Bandy:

Well, I did dig around a little bit. So I think I had a sense.

John Warrillow:

What was your sense in terms of what you thought that they got, in terms of multiple revenue order?

Aric Bandy:

So there’s multiple EBITDA and they got I think, 13 or 14 times EBITDA, which is very strong.

John Warrillow:

Got it. So that gave you a benchmark of what a strategic was willing to pay for Agosto, what you thought roughly ballpark. Got it. Your EBITDA in your own admission wasn’t a priority, it was more top line revenue growth.

Aric Bandy:

Right, which became a problem once Mill Point Capital and Pythian. So in September of last year, Mill Point Capital acquired Pythian which is a services company out of Canada that is a Google partner but didn’t have the resale component. In late November, December timeframe, they expressed interest in Agosto and being able to combine Agosto with Pythian to create a much bigger player with hundreds of employees. A very deep service capabilities, a very deep engineering bench. Then the resale piece that we brought to the table, which is closely connected with Google Cloud and being able to resell those products.

Aric Bandy:

It was a really compelling story, but it did present a bit of a challenge when, because private equity typically looks at okay, what’s your EBITDA. Let’s give you a multiple of EBITDA and that just wasn’t going to cut it for us. Because we had tooled, I had tooled the business to fuel growth and I had wanted to get bigger before actually, in fact, we had hired a investment banker to really kind of help through the transaction and we had suspended that relationship in ’19.

Aric Bandy:

Because we’d gone to market, I got some term sheets into ’18 and early part of ’19 and I just didn’t feel like the valuation was where it needed to be. I hadn’t quite dialed in those KPIs, those metrics in the business to really be the kind of thing where I felt like I can build this a little bit further, I can continue to hit growth and at any point in time, I could have flipped it and focused on EBITDA, but I still thought there was more room to grow in the market as opposed to then just pull back on growth and just maximize EBITDA. That would have been in front of us, probably 2020, 2021 for an exit had this private equity group and Pythian not come into the fold.

John Warrillow:

So when you valuated those offers in ’18 and ’19, you mentioned that they just weren’t really valuing the business the way you thought it should be. What did you think they should value, how did you think they should value the business?

Aric Bandy:

That’s always a dilemma and I’ve talked to a number of entrepreneurial friends that have sold businesses and certainly, there’s some clear market guidelines, multiples of EBITDA, depending on the industry you’re in, maybe a multiple revenue. If you’re in a subscription based business, a SAS business, there’s multiple of like ARR, annuity based revenue. There’s like every industry has its two, three, four things that are all used to benchmark.

Aric Bandy:

Once you actually get into looking at a specific business, it gets a lot more complicated because no business just fits every single checkbox. It’s like, well, we’re really good here, but we’re struggling here and this is why we’re struggling and this is where it comes back to, in a similar way to the transaction of 2014, trying to determine what are we trying to accomplish? What is the buyer trying to accomplish and whether or not there’s a gap that’s, you can overcome that gap or not.

Aric Bandy:

In the case of us for the term sheets in ’18 into ’19, they’re really early stage private equity groups that believe Google Cloud was going to grow, but I don’t believe they quite had the confidence of what that was going to look like. So I believe that factored into their valuations. So their offers were a little light, a little lower, there wasn’t comparables in the market, or there had not been a transaction in my space.

Aric Bandy:

So no one knew like what are these things like? I don’t know. Somebody’s gotta be the first. It just falls back to that whole like, well, simply my business partners and I, we wanted a bigger payday, we felt the company was worth more. Maybe at the time, maybe it just flat out wasn’t. Maybe the PEs that were interested just weren’t the right PEs. I don’t know exactly what it was, but it eventually just worked its way down to this isn’t a good enough deal for what we feel that this is worth. So we’d rather continue to bet on ourselves and grow until we’re presented with the right opportunity.

John Warrillow:

So it sounds like because of your focus on top line revenue, sometimes at the expense of bottom line profit, you were hoping for a multiple of revenue, like the valuation to be pegged to a multiple of revenue. If I’m reading between the lines the offers in 2018 and ’19 were some multiple of EBITDA and therefore, the actual number was less than was appetizing for the ownership group.

Aric Bandy:

I think well stated.

John Warrillow:

Then what was your reaction to learn that your friends or your acquaintances, the company you were benchmarked against, also sold at a multiple of EBITDA? I would imagine like that might have been a bit destabilizing for you because here you are getting offers of multiples of EBITDA and then your buddy sells for multiple EBITDA and then you’re like, well, maybe I’ve been chasing the wrong goal all these years. Did that come to mind at all?

Aric Bandy:

Well, that was something that we look at pretty regularly. A couple times a year looked at the business, we had to go through evaluation process for ourselves once a year just as shareholders and looked at ourselves hard in the mirror like, what do we expect this thing to be worth and are we worth that or not? What do we need to do on the business to architect for that, and this is something that I think, I had to learn in this last go round, which is really truly architecting a business for sale, for an exit.

Aric Bandy:

So when I heard about this competitor actually getting a multiple of EBITDA, but a high multiple of EBITDA, it was actually very encouraging because, okay, now there’s a benchmark. Now, there’s some sort of comparable in the space for what these things are actually worth. At that point, we weren’t, as you just mentioned, we weren’t really architected to maximize the valuation on a multiple of EBITDA, but we had had substantial growth.

Aric Bandy:

The private equity that came along was really interested. It was the first time we were talking to somebody that was interested in a growth oriented story, combining the asset that they had just acquired with Agosto to build a healthy, strong business, as opposed to private equity that’s just like, okay, well, there’s some value here. We can probably buy it, maybe squeeze a little bit cost out and flip it in a couple years, just on a multiple on the business itself.

Aric Bandy:

This private equity group was far, far more strategic. In fact, it was one of the first times I talked to somebody that looked at it more like a venture capital would but they’re from more of the private equity point of view. So it was all about growth and return and the strategic nature of the deal and that factored into why we were able to get the deal done that we were able to get done.

Aric Bandy:

Because they were able to see yes, our EBITDA was where it was but they also were able to get their head wrapped around what EBITDA could be if we squeeze the business. So we’re growth oriented, but I can go backwards and show a picture of what the business would have looked like if I had squeezed out and not invested from a profit back in or what would-

John Warrillow:

Did you do that model, Aric? Did you actually create that and show them?

Aric Bandy:

Yeah.

John Warrillow:

What was their reaction to that model?

Aric Bandy:

They’d already done some of it themselves. They’re a pretty savvy group. They had done a lot of their own analysis, they really dialed into the market, they really dialed into the value of the businesses. So for them, it wasn’t anything of surprise. They’d already kind of looked around and had looked at a few different entities and were pretty comfortable about what these businesses were actually worth. So by doing that model, all I really did was validate for ourselves that we’re getting a really good offer.

John Warrillow:

So what did you strip out to model what the business would have looked like had you not had your foot on the gas all the time and trying to grow basically at all costs? What were you able to pull out in the way of expenses to juice up the EBITDA number? What sorts of things did you pull out?

Aric Bandy:

So there’s market expenses, so that’s an easy one of looking at that cost center and saying, well, what’s a benchmark for a steady state company versus a growth oriented company and then right size that percentage and back that cost out. Was able to do obviously some professional fees that we were leveraging to help-

John Warrillow:

Recruiting fees, I would imagine too.

Aric Bandy:

Recruiting fees. We were carrying an extra bench meaning engineers because growth oriented you end up having to, I have to have people that can do the work before it can ever sell the work. If I was more steady state, I would have taken a different posture in how I would have staffed up. So factor in what that model would have been and then right size that. So those are the big cost buckets that I took out. To then get a picture of what EBITDA could have been if we had been more steady state oriented.

John Warrillow:

Because on this show, we’ve talked a lot about the process of doing like an adjusted EBITDA, adjusted income statement, but this actually sounds different. This sounds like you, I’m sure you did an adjusted EBITDA, but you also kind of retroactively went back and did a model. It sounds like actually a different thing that I’ve never heard anybody do before.

Aric Bandy:

Well, it was really helpful for us to see because our business and the business model is such we could have been tooled differently, we could have played it differently, I should have said. We’re much, much more conservative instead of very growth oriented, basically bottom line oriented as opposed to top line oriented, because you can’t serve two masters. So we served the top line master to push that growth up and it was really helpful for us to be able to go back and play that model out and say, well, if we’d gone the different direction, would we have been better off or worse off? Because we could have not done this deal. I had capitalized the business. We had just secured a pretty sizable note in early 2019, had plenty of capital. So I didn’t have to do a deal.

John Warrillow:

When you say no, do you mean you had an operating line of credit that you could draw down against?

Aric Bandy:

We were operating with a very favorable terms solid operating line of credit and it just afforded us the ability to roll the business forward a few couple of years of continued growth for our future transaction down on the road. So I was not like I said, we suspended our relationship with our banker because it was going to grow a little bit further and so for us being able to go backwards and do this model allowed me to look at it and say, well, we arguably would have done this model a year or two from now. Let’s just take that same perspective and roll backwards and see where would we be today, if we had taken that two years in reverse,

John Warrillow:

Out of interest, the line of credit that you had, was that secure? Did you have to sign a personal guarantee for that?

Aric Bandy:

No, no. Everybody starts there. We had enough assets. Part of what I’ve really fought for over the last number of years, especially in the technology services space. Banks, historically don’t understand our types of assets. They understand piece of equipment, they understand a piece of property, how they can capitalize something, they get those types of assets. Long term contracts to supply service to, that’s just like, almost vaporware to them.

Aric Bandy:

They just can’t get their head wrapped around it, but it is real legit asset. I’ve been successful over the last number of years of finding banks, bankers that are willing to spend the time for me to educate them on how it truly is an asset that is fundable and thus then not having to go down the path of personal guarantees. Obviously, like most entrepreneurs, most of your listeners, at some point in your career journey, you have to do it. It’s unavoidable.

Aric Bandy:

You get to a certain size and scale and you start having more revenues and weights and be able to kind of push on that, but even at our size, it still wasn’t a slam dunk. We still had to do a lot, I had to do a lot of work with the banks to get them comfortable with who are we. Many pitches. It almost felt like we were selling the business and even though we were just raising a line of credit.

John Warrillow:

Isn’t that wild? What else did you do? You mentioned this term, and I love it, architecting the business for an exit. That’s really an essence what all of our listeners are in one way, shape or form trying to do is architect for an exit. So what other tactical things did you do to architect for an exit?

Aric Bandy:

So I kind of break it down into a few different areas. There’s the financial piece, there’s the kind of the intangible piece. Starting off, we had to make some assumptions about why would somebody buy and pay a premium, what are the things they care about? Then from there, work backwards. So our business is very cash oriented. That’s how we were able to fuel the top line. Part of that architecture was building a very strong cash model. So we managed our cash down to the week and projected out for at least a full year, and actually often two years.

Aric Bandy:

So it gave us and because we started doing that years ago, our CFO, we built a level of competence in what our cash projections would look like. The further you got off on the calendar, the softer that becomes, but certainly for the next quarter, arguably, couple quarters, it was pretty tight because we had all this history and we’d been tracking it for such a long time.

Aric Bandy:

So when we got into negotiations, and we were pushing for a higher valuation, there were certain questions about well yeah, but if we had a level of confidence about what that revenue really, when we would see the dollars coming in, we were like, we’ve got a very tight model and can go backwards and show you the confidence with which we can operate off of and why this is a cash strong business. That built the confidence of the buyers to say, okay, that’s pretty tight. So that was one tactical thing-

John Warrillow:

Let me just push a little bit further because, help me understand. You’re getting acquired by some giant private equity group with all the money in the world. Why do they care about your cash flow statement? They can probably bankroll for you for years without, like why would they care?

Aric Bandy:

Well, certainly the fund that they use, there’s tons of capital in that fund but nonetheless, if they don’t have to push that capital to be used all the better. For us, it was less about actually, I’m going to rephrase that. It wasn’t so much that they cared about our ability to fund the business through cash flow. They cared to our ability to control the business and how tight of financial controls did we have on the business as a gauge for what’s the health of the business.

Aric Bandy:

The private equity group, they’re taking a leap of faith. They’re going to do as much due diligence as they possibly can. We had audited financials, our financials were in solid shape. That was part of one of the tactical things that we did. It was an expensive decision that we started many years ago, but it was the right decision to hire a reputable firm to go through and do audited financials for the last number of years because it just put us in a position where it could stand up to all sorts of scrutiny and there was no challenge.

Aric Bandy:

The private equity group used it more so as a litmus for how tightly were we managing the business? How much control did we have, were we susceptible to swings where you’d have some clients not pay? The financials tell a pretty good story about the health of the business when you get into it. If you have a bunch of customers that aren’t paying, well how closely are you managing those customers? Why are they not paying?

Aric Bandy:

Do you have a customer service relationship issue? Do you have a sales issue? What’s the net new versus the steady state of your current base? Those are all things you can start to see in the financials and then work backwards out of the financials to determine what’s going on here that could have resulted in the financials. So for them, the cash model was a way for them to get comfortable about our management of the business.

John Warrillow:

Okay, that’s helpful. What else did you do to architect the business to exit?

Aric Bandy:

So that was a big one. The other financials I just mentioned, having had spent a lot of years on the legal side, in 2016, when that GSI, that global systems integrator was interested in acquiring us, our contracts, our data room, our contract management, even some of the clauses in our contracts around assignability it was pretty loosey goosey.

John Warrillow:

What do you mean by assignability and why would assignability matter in the context of acquisition?

Aric Bandy:

So, for our business, we sign a contract with a client, and it’s to exchange service for fees. A lot of customers will push back on assignability because they don’t want you to be able to go sell that at a later point without their input-

John Warrillow:

Most people, I don’t think we’ll know what you mean by assignability. So just could you define that?

Aric Bandy:

So it’s a pretty common contract clause, where if I get a customer to sign a contract with me, I’ve got the ability to assign that contract to someone else. In this particular case, if I’m going to be sold, I need to be able to sign that contract to the buyer. Because the buyer is now taking over the asset and owning it. A lot of times when you’re just going fast and you’re trying to be very sales oriented with contracts and closing business, customers will push back on that and it’s a very easy one to say, okay, we’ll say that you can, customer, you have notice rights or you even have approval rights.

Aric Bandy:

So meaning a customer can say they get the ability to prove that that contract is now assigned. That might not seem like a big deal until they are selling and when you go to sell and you start looking at your contracts and that assignability, you may have a smooth process or you may have a very complicated process of chasing down customers and trying to get them to give you a waiver to say, yes, I can sell my business and part of selling my business is assigning these contracts to the new buyer.

John Warrillow:

Did you have to chase some down?

Aric Bandy:

So in 2016 when we first were flirting with this GSI, it dawned on me how kind of loose our contracts were and that is not something you can change overnight. You have to wait for contracts to come up for renewal. So at that point, I started fairly meticulously going through our contracts, especially our bigger ones, and making sure we had strong assignability.

Aric Bandy:

Once we actually did the transaction earlier this year, there were a few that we had to get approvals on. Big, big Fortune 100, they’re very difficult to negotiate with. So there was a handful, but there was like 10 out of our 360 accounts. The rest were all pretty clean and smooth.

John Warrillow:

Did you get any pushback on the 10 when you went back for assignability rights?

Aric Bandy:

No. The thing we had struggled with, and we haven’t talked about this yet is the fact that we did this transaction right in the middle of a pandemic. So, we closed April 1. The majority of, in talking to our investment banker, our legal counsel, the buyer’s legal counsel, and their bankers and the private equity group, like 80, 90% of all deals went pens up, meaning they just stopped any forward progress at that point in time because no one knew what was going to happen.

Aric Bandy:

What was going to happen with the economy. We had somebody last minute like, two, three weeks from close come out of the woodwork. They had talked to us early, they went dark, a private equity group, they went dark, they came back and they said, we’re sorry, we’re back. We really love the business. We would love to give you all cash, the entire transaction value all cash today, but well, not today, but we’ll sign a deal today, but we’re going to have a carve out because we don’t know what’s going to happen with the pandemic. So we’re going to wait and see like, it’s a, we’d love to do a deal, but we got to wait and see what happens

John Warrillow:

So what do we mean by a carve out? I don’t know what you mean by that.

Aric Bandy:

I’m sorry. A carve out?

John Warrillow:

I think you said like, we’re going to do the deal, a private equity company swoops in and says, okay, we’re going to give you 100% cash. You’re like, okay, I’ll take that. For the full valuation, but they weren’t willing to consummate the deal because of the pandemic. What was that?

Aric Bandy:

They wanted to wait until they understood what the pandemic was going to do their fund. So like, we’ll circle back in a couple months, just don’t do the current deal in front of you. We’re like, no, we’re in an exclusivity, we’re not interested in doing this and we just told them to go away. It was an example of the kinds of things and the kind of just weirdness that the pandemic caused in and around. So the fact that we were able to move forward with a transaction, I think, actually spoke volumes about the value both on the buyer and the seller side that we were committed to make this thing happen despite all of this other extra noise.

Aric Bandy:

Anyways, the reason you asked about this was, did I have any challenges of securing the assignability of those 10 I mentioned, and I had no challenges. In fact, one of the things that was, because I personally called all these clients and talk to them, and did the negotiations and all of them are super supportive of the story. The only challenge I ran into was getting a hold of people in the pandemic.

Aric Bandy:

Everybody is like button the hatches down and try to figure out what they’re going to do. These are customers across all different industries and everybody was unsure what was going to happen but some businesses were starting to see an uptick, some are starting to see their business starting to shrink a little bit. So everybody was just really concerned. So the only challenge I had was trying to get people’s attention and time to apply towards.

John Warrillow:

What did you say to those 10 to make the case that this acquisition was in their favor?

Aric Bandy:

Like I’d mentioned, there were two companies coming together and one of the struggles that our clients, our clients loved us. They loved the services we provided, they loved the people that were involved with it, but we were bigger. They wished that we had more competencies, more ability to support them, service them, et cetera. So for this transaction, this solved that. This gave us a huge advantage. We went from a small team to many, many hundreds of employees with deep competencies across core areas that our clients are asking for, clamoring, they just wish we could get it from us and now we’re there.

Aric Bandy:

So that was the story for the 10 which helped really resonate that like they were all like, yeah, from an assignability. That would be one where without good assignability clauses in contracts would really slow or even potentially jeopardize a deal. The fact that I started in 2016 kind of cleaning all that up and by the time we got to a transaction, our data room, our contracts, everything was nice and tidy reasonably so. It made it easier to go through the due diligence.

John Warrillow:

It’s one of the ancillary benefits of going through an M&A process that doesn’t consummate in a deal is you kind of get a dress rehearsal. You get to figure out all the questions you get to answer, all the things you have to get done right. Is there anything else that you did to sort of architect the business for an exit?

Aric Bandy:

There was a lot of setting ourselves up organizationally. Part of what I needed to do in 2019 was as an entrepreneurial lead organization, up until really 2019 a lot still flowed to me. I still really, really involved in a lot of aspects of the business and even though we were scaling and growing, I had hit that threshold where needed to start building on a strong management layer to really help either fuel the transaction because buyers, it’s almost a liability if you have a great delivery team.

Aric Bandy:

Again, we’re in the services space, a great delivery team, and like an entrepreneurial lead organization because you have this gap. What happens if that entrepreneur leaves, what happens if they take the payday and they move out? You don’t have the people infrastructure in place to be able to sustain without those couple of key individuals that helped grow. So from ’18 and ’19, I hired up an entire management team.

Aric Bandy:

Now, there were two paths forward, one was continuing growth and I needed a management team to help fuel growth and take Agosto to the next level but also, that became really crucial in the transaction because it wasn’t just a couple of individuals that were Superman, Superwoman holding this thing together. It was beyond that, and there was teams and structure and a little bit more levels of maturity in the entire business operations, that then as we began to then integrate with Pythian, that structure fit in with their structure and provide a greater continuity.

Aric Bandy:

In a past life, I did a small managed services transaction in 2004 and we were of a size where it was myself and my business partner at the time and then all of our engineers on and my business partner ended up leaving and then I left about six months later. I just watched, we didn’t have that kind of structure in place and I watched as employees kind of bounce out and it just wasn’t integrated well, and there wasn’t the right kinds of structure in place.

Aric Bandy:

So, for Agosto it was important to build out this management layer to create good structure such that it can survive without a dynamic entrepreneur at the head.

John Warrillow:

What rule was the most important? As you look at the management team, what role was the critical hire?

Aric Bandy:

Boy, that’s a tough one and some of them might listen to this podcast.

John Warrillow:

Close your ears if you’re on the Agosto management team. Now go.

Aric Bandy:

That’s a really great question. I don’t know that I could-

John Warrillow:

Let me ask you in a different way. Let me ask you in a different way. I think everybody listening to this would love an unlimited checkbook to go hire C level people in sales, marketing, product development, blah, blah, blah. The reality is they don’t have that. They might be able to make one or two critical hires. So what advice would you give someone who knows that they can’t sell a business as deeply dependent on them personally, they know they have to build out a management team, but they could maybe afford one or two key people?

Aric Bandy:

So I was going to answer it and I think your question helped just kind of further that. The first hire I made was our VP of technology. One of the things that, and it’s not that he’s more valuable than the other members of the management team, it’s that I’m a sales oriented leader. So when it comes to the sales and the tech as an entrepreneur, you have to be good at a lot of things, but you also have to look at yourself accurately in the mirror and say I’m better at the go to market side sales, marketing, and some of the operations in financial management.

Aric Bandy:

Of all the things I do, I’m not the strongest in technology. So for Agosto, it was really crucial that I found that technology leader, that would be my counterpart to really spearhead that side of our maturation. I didn’t stop there, though. I put in practice leads. Part of what I did is I organized the business around the three discrete practice areas, and then I put a key leader in those practice areas and that did two things.

Aric Bandy:

One, it would allow me to either continue to fuel growth and where the growth is happening, and I can apply that capital as opposed to having more of a traditional like, I have an operations lead and I have all of our billable engineers. It was really more around what are customers engaging us on and I organized around that and then when we did a transaction, it also fed into an easier time doing integration. So it made us, I don’t know that it added to the valuation, but it certainly didn’t detract from the valuation because it made us an easier acquisition target.

John Warrillow:

When it came to the acquisition itself, I know you’d had a few, it sounds like a variety of different offers through 2018, 2019. Were you in talks with the guys at Mill Point exclusively? Was that the only group at the table or were you fielding other offers until you signed the LOI?

Aric Bandy:

Well, our journey was unique because we went to, 2016 someone came sniffing around. We actually dipped our toe in the water at that time, actually put a deal in place with a banker. We weren’t ready, like a lot of this architecting, engineering work on the business, getting our house in order, from the contracts, from assignability, getting our financials in order, some of these core KPIs, the team structure in order, all of these things had to get done before we were really a target that would yield the kind of valuation that I believed we could.

Aric Bandy:

So we then went back to market in ’17 for a little bit. At that point, I felt the business was in a better shape but the market still was early for Google Cloud. There were still a lot of people, financial players on the sidelines, just kind of waiting watching to see what Google was going to do. So it just wasn’t quite the right market time. 18 into ’19, we went out and ran a process. It was a clear tight process.

Aric Bandy:

Our banker got, I don’t know, 200 [inaudible 01:04:02] our teaser out to like 200, I don’t remember how many number, a lot of people. That whittled down, we did a handful of management presentations and we got some term sheets. Again, as I mentioned earlier, it just wasn’t still the valuations that we believed we were capable of and we did spend quite a bit of time like okay, transaction today versus risk of rolling forward by our own steam, and then doing a transaction later and that is a really important conversation to continue to have, which is like when is the right time to do a transaction, based on your just so many variables involved.

Aric Bandy:

So we actually came back off market in early 19, probably March, of 2019 and suspended working with our banker because I focused internally. I finished rounding out our management team. We had secured our line of credit for future growth, starting to higher up, especially in the sales and marketing side to take us to another level, with the intent to go back to the market to do a transaction later. 2020, 2021 timeframe.

Aric Bandy:

It just happened to be when a couple of people, I think started to hear that this competitor of mine was being, they were in a transaction and that spearheaded a market interest in doing similar deals. So we had a handful of entities reach out, four specifically. We did a couple of management presentations. We signed one LOI with Mill Point and at that point, we were in exclusivity and ran from really December, middle of December or so through the transaction under exclusivity.

Aric Bandy:

People kept reaching out. People kept expressing interest, especially after that that deal became public, then there was even more of an uptick. There were some attributes to this transaction that really were unique. Yes, this one, like a couple weeks before we close, reached out and tried to throw a Hail Mary, like we’ll just throw a lot of cash at you and it’s like, okay, whatever, it’s just noise. We’re really happy we did this deal and the way with which it came together. Anyways, long answer. So yes, we were an exclusivity from December until the transaction happened.

John Warrillow:

The four offers that you were entertaining, sort of, along with the one that actually consummated, I think it would be helpful to know, I’m assuming all of them had you rolling some equity into like a new entity of some sort. Proportionally, are you able to talk at all about the range from the four offers, like how much of your equity you were able to monetize versus roll into a new, do you know what I’m asking?

Aric Bandy:

Yes. That was actually something at this size, this scale with some of these private equities, they were all pretty open to how much. There were ranges. They wanted enough skin in the game that the Agosto team is really involved. We’re showing up, we’re excited. We’re excited about that second bite at the apple. So it had to be meaningful, but the actual dollar amount or percentage was somewhat open for how much do we want to bet on the second bite of the apple versus how much do we want to actually-

John Warrillow:

Would 10% been meaningful? 20%, 30%? Give me a ballpark range.

Aric Bandy:

All of that range was part of these things. Anywhere from 10 to 40% was in range of conversations with some of these entities.

John Warrillow:

So Aric, I’d be curious, because I think a lot of entrepreneurs listening to this will have a number in their head and they’re like, I know with conviction that my business is worth x and you did and yet that conviction gets shaken. When the market tells them that, hey, no, it’s not worth x and blah, blah, blah. You went through an entire process in, I think it was, I guess 2019 where you started with 200 potential people on the list and [inaudible 01:08:33].

John Warrillow:

Even through all of that, when the push came to shove, you still didn’t get the number that you thought your business is worth. What gave you the confidence? What were you looking at to say, they’re still not getting it and to give you the confidence because I think a lot of people, having had 200 potential acquirers pick over the business, all of whom said no, it’s not worth it, a lot of them would have said, well, maybe you’re right. What were you looking at that gave you confidence to just, or just bullheaded stubbornness.

Aric Bandy:

This is where, and I’ve been at this point in a few different businesses where you sit down with your partners and say, we’ve got a valuable organization. We employ some great people that are able to provide for their families, et cetera. We made the right kinds of decisions along the way where we don’t have to be in a position to do a deal. It’s one of the, probably the best pieces of advice I was ever given is, well, number one, never be in a position where you have to do a deal. Make sure you can always walk away from the deal because then you’re able to really look at it, you’re not emotional about it.

Aric Bandy:

You’re able to say, I can do it, I can not do it. If this doesn’t accomplish what my and my business partners want to get done, from a personal standpoint, then I can just walk forward and I’m not forced, my hand isn’t forced to say, we got XYZ struggles. The business isn’t capitalized. I got to accept what I got to accept. So that was a really important piece of advice.

Aric Bandy:

Another piece of advice that I got, and actually our banker was like, super aggressive, just like, Aric, no matter what, never miss your numbers. Always beat your numbers. That was also a really good thing that we were able to do throughout the entire process. The owners and I, we sat down and we just looked at it and said, the deals into early 2019, they didn’t accomplish what we wanted to accomplish.

Aric Bandy:

So maybe the business was worth that, at that point in time. Arguably, based on the numbers probably was, but it didn’t do what we wanted it to do. I don’t know that it fully appreciated the unique nature. I think, one of the things that’s hard is in an emerging market, you don’t have lots and lots of benchmarks. If you’re in a saturated or even a laggard market, you’re able to see whatever things are paid for.

Aric Bandy:

There’s just so many benchmarks to measure, you know what a business is worth. When you’re in an emerging space, you don’t have that luxury. So it is a lot more gut and just kind of like, I think we’re worth more and maybe we’re not today because no one showed up willing to write a check for what we felt like we were worth but we had capitalized the business and had the luxury of saying, well, let’s just keep going.

John Warrillow:

Was there a shareholder who felt differently? Who was like Aric, I think we should take the money man?

Aric Bandy:

There was definitely discussion. There was a lot of discussion on it, but we had good alignment amongst us about what we wanted to do. We did, and this wasn’t really a big part of the story. For today, it is a big part of the story of our journey. In 2015, we’d started a software product that we spun out called Skykit and that was starting to take shape. So where there was challenges amongst us leaders was how do we fund Skykit, which is a sister, a brother sister company to Agosto and we own both. So do we do a deal now? Because we want to bet more on Skykit? Do we not do a deal because Agosto has more valuation creation opportunity. Then that just means we got other challenges around capitalizing Skykit, and how do you make those bets.

Aric Bandy:

So there was a lot of real hard conversations, a lot of modeling. Our CFO probably pumped out ridiculous amounts of models trying to like get our arms wrapped around how to value, where’s future valuation, what are those metrics looks like. That was something that I think we probably could have improved upon a little bit more, which is having a better kind of ability to model and show progress as opposed to looking at it purely from just a basic number standpoint.

Aric Bandy:

Yes, we had some models but we kept struggling at like, the valuations are different, the businesses are different. One’s a SAS based company, one’s a services, how do we apply that capital in the right way. Eventually we aligned with it, and collectively, we all signed off that 2019 wasn’t a good enough valuation and ultimately, the opportunity in late 2019 and now the one we did was the right valuation.

John Warrillow:

What is it like to have that kind of personal financial event? The consummation of the deal in 2020 for you personally. What does that feel like today?

Aric Bandy:

Someone said early on in my career that one of the best things that can happen to an entrepreneur is getting a deal under your belt because, so I’m still part of the organization. I’ve assumed a new role as executive vice president in corporate development. What it’s done for me personally is, I don’t have the same kind of emotional weight wait around risk that I did prior to transaction. Both for running the company as well as personally. That risk is just removed. There’s still risk, but it’s the emotionality of it that changes.

Aric Bandy:

So you’re able to, I’m able to approach things more clearly, approach things more factually. That reptilian part of the brain isn’t like overriding some of the logic that staring at me based on numbers, opportunities, market potential, et cetera. That’s just kind of been now removed and I feel like I’m now experiencing an opportunity to be even a better leader than I was when I was worrying about, we built enough business. I wasn’t like sweating payroll or anything like that.

Aric Bandy:

We were solid about that but there were big market moves and I was worried about the market outpacing us. We were in a nice spot in the Google ecosystem, but there was threat that bigger partners were going to move into the space. Then over the course of a number of years, our unique position in the market wouldn’t be unique anymore and then how do I compete with some of the capital that some of these other bigger partners bring in? So those are the kinds of things that really stressed me out and it’s that really that was really weighing on me. Then with a transaction like this, it just allows me to be, take that piece off.

John Warrillow:

Well said indeed. Someone else’s risk tolerance is always different, and by pulling yourself out, it allows you to be more rational about the risk. I loved the reptilian brain analogy. It’s a great story. I’m so grateful for you sharing it with us. I think we’ll have to do another version of this at some point when the next business sells because it sounds like that’s a going concern in and of itself. If people want to reach out Aric, is there a place that they can reach you? Is LinkedIn the best or do you want to point people to a website or what’s best?

Aric Bandy:

LinkedIn is kind of where everything is flowing through. So I think this is linkedn.com/aricbandy.

John Warrillow:

Aric is uniquely. A-R-I-C Bandy, B-A-N-D-Y. We’ll put that in the show notes at builttosell.com. Aric, thanks for joining us. It was great.

Aric Bandy:

Yes, thank you. Appreciate it.

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