How to Sell Your Business to a Competitor

Transcript

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.

John Warrillow:

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. 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:

Alright, my guess is that you’ve considered, at some point, selling your company to a direct competitor. My guess is that it also makes you feel just a little bit squeamish. The idea of selling to a direct threat, you’ve got to reveal all of your confidential information, all your business process to someone who could take advantage of that information if they choose not to follow through on their acquisition offer.

John Warrillow:

My next guest built a company called 360pi. His name is Alex Rink, and he sold to a direct competitor, but he did it in a really intelligent way. He shares some really fascinating insights, a couple that popped for me. Number one, the importance of leaving a little bit of field left to plow, the idea that there’s a big opportunity that an acquirer can take advantage of, that you have not already gone after.

John Warrillow:

Number two, strategic acquirers usually can pay a little bit more for your company, and Alex will go on to describe how and why that’s the case. He’ll also talk about something called staged disclosures, a way for you to minimize the risk of selling to a direct competitor. Here for the entire story is Alex Rink. Enjoy.

John Warrillow:

Alex Rink, Welcome to Built to Sell Radio.

Alexander Rink:

Thanks very much, John. Pleasure to be here.

John Warrillow:

So 360pi, what did you guys do?

Alexander Rink:

We were a software as a service, based in Ottawa, Canada. What we did was what’s called retail price intelligence. So essentially, that’s having really large scale crawlers going out and pulling in the price information from eCommerce websites, aggregating that, comparing and matching products to ensure that you’re getting the right kind of pricing on the right products. And then providing the intelligence and insights from that back to retailers to help them to price their products and/or decide whether they even want to continue listing that product based upon whatever revenues and margins they’re going to get for the pricing that they’ve got compared to the market.

John Warrillow:

That’s really cool. So if I’m Staples, for example, I could say I’m going to subscribe, and I want you to check out the price of 8.5 x 11 paper for printers. I want you to check Walmart, and Amazon, and every other retailer and then tell me if my pricing is in the range. Is that the idea?

Alexander Rink:

Yeah, that’s exactly the right idea, and you’ve even picked a good area, which is office products. We did tend to focus on durables and consumer electronics, and so on. Some of our customers were Bill.com, Ace Hardware, Best Buy, Orsoc.com, Home Depot. And the one thing I would add … You gave an example of a specific product and a few stores and so on, but we really focused on, and where we were very good, is that we had algorithms and systems in place, highly scalable systems, to do enormous volumes.

Alexander Rink:

So we had clients where we would be doing over a million products every single day across 10, 20, 30 different retailers. And so everybody knows about how Amazon is very competitive on pricing. Well, they do this themselves, but most other retailers don’t have the technical and financial chops to invest in those kind of capabilities themselves. And as a result, third-party providers such as 360pi came to market to be able to deliver that kind of service for them.

John Warrillow:

How did you deal with … because, on one hand, you’re an amazing source of insight for an etailer like a Staples, as an example. On the other hand, you’re the bad guy because you’re also crawling their site. Right? And getting their information and selling it to their competitors. Was that a point of contention with clients?

Alexander Rink:

From time to time. I think most of the time, really, the clients should mostly be thinking about, “How do I get this intelligence?” I think they just realize, “I’ve got a choice here. Either I participate in it, and I get this information. Or I don’t, in which case I’m blind, and other people can be getting it.”

Alexander Rink:

I mean, certainly from our perspective, we wanted to conduct ourselves with the greatest integrity with clients, and so we’d have Chinese walls. We would serve multiple clients in, for example, the home improvement space, or consumer electronics, or whatever, but we never have situations where specific information that we were doing for one client is going necessarily to the other client. We’re treating each client individually in terms of what it is they’re looking for and ensuring that we’re giving them what they’re requesting.

John Warrillow:

That’s helpful. And what was the business model? You mentioned you charged these clients on a SAS basis or software to service basis. Was it 100% SaaS? Was there some service revenue associated with it, or what was the makeup there?

Alexander Rink:

Yeah, it was almost exclusively SaaS revenue. Every once in awhile, there was a small amount of services revenue. And every once in awhile, there was an opportunity to do more in terms of services. I’ll say that by and large, we, I don’t want to say resisted getting into services, but we just tried to stay as close as we could and focus as much as possible on the SaaS side of things and try to bundle it up in that and the recurring revenue component.

Alexander Rink:

And a big part of that, to be perfectly honest, was, I mean, just thinking. And I mentioned to you early in the introduction that I had read your book during the time that I was a CEO at 360, and so just realizing around multiples, around services revenue versus recurring SaaS subscription revenue. And the balance I tried to strike was, “Is this service revenue going to somehow lead to more business? Or is it just going to be like a one-time effort?”

Alexander Rink:

And if it would help to get the client up, installed, and so on, I mean, then obviously, it’s sometimes, I don’t want to call it a necessary evil because it’s revenue, and you’re happy to do it and so on. But for the most part, we tried to look at it from a perspective of how do we make this product and capabilities as easy for them to adopt as possible so that it does require as little service as possible, and that we can get them up and started and using the recurring revenue service as opposed to having to dedicate staff to them?

John Warrillow:

Got it. And so you were the CEO of 360pi. How did you become the CEO? I understand that you didn’t create the company or start the company. Maybe talk us through the genesis of the company and how you got involved.

Alexander Rink:

Sure. 360pi was actually my third entrepreneurial endeavor. I’d done a couple of others where I was a CEO and co-founder, and with 360, I was at a stage where I had transitioned out of a previous business, and I was exploring opportunities. Someone introduced me to an individual who was CEO of a company in Ottawa, and they had incubated this idea. And the original idea, they called it Gazaro, and it was a business consumer comparison shopping engine.

Alexander Rink:

So what that means is people would go to the site, and they would look at products and search for those products and then see what the pricing was on those products at other retailers. And I remember being taken by it because I liked the analytics. I liked, from a shopping perspective, being able to save money on products. It had this mission of providing honest recommendations to consumers around where’s the best place to buy products and so on. And so I became attracted to that.

Alexander Rink:

And by that point, this was 2010, the original incubating company had actually put in over a couple of million dollars really building out this technology platform, but they had pretty much run aground with it. They were trying to really drive up the user base and get more people visiting, and getting people clicking through, and then you get money from affiliate marketing and so on. And it simply, frankly, just wasn’t working.

Alexander Rink:

I mean, the month before I joined, the revenues at the company were $1,000.00, literally. And this was like-

Alexander Rink:

Three years in.

John Warrillow:

First rung on the ladder.

Alexander Rink:

But like I said, I thought that it was a lot of potential and opportunity there, and I had a fair amount of experience in doing a couple of other software as a service. It was a number of years ago, known as an application service provider type of business. And so it just seemed like a situation where hey, they’ve got a great technical platform, but they’re looking for a CEO to really figure out how to get the product-market fit with this business.

Alexander Rink:

And for my part, I would be able to skip a lot of the early learning and so on, and testing, and building out a technology platform. So I joined in June of 2010-

John Warrillow:

And by the way, they had invested a lot of money. They had invested a couple of million bucks, so it wasn’t without some horsepower behind it. How did you structure your compensation? Did you get some shares or some options, or did you buy in? What was your piece of the action?

Alexander Rink:

Yeah, great question. At the time that I joined, that had already, as you said, put in a pretty fair amount of money, and they were actually keeping the company afloat with debt financing. So they had said, “Okay, no more investment capital. Now we’re going to do debt financing.” And I-

John Warrillow:

Who would lend them money with $1,000.00 of revenue?

Alexander Rink:

Yeah, so a-

John Warrillow:

Go on.

Alexander Rink:

[crosstalk 00:11:28] company was now putting money in on a debt basis because they just came out to ensure that if anything happened, they would be able to keep the IP. And so when I joined, I knew that we had basically about a year of runway. And the funds that were being put in were maintaining the development team that was there. And I was like, “Okay, I’ve got to basically figure this out within a year.”

Alexander Rink:

And so to your point about compensation, I didn’t actually draw any cash compensation to start, which doesn’t mean that I didn’t account for it. We figured out what we the amount that I would be deriving, but I was actually deferring income for the first little while. And in addition, negotiated absolutely a share package and so on. So it ended up being initial shares grant. There was the deferred compensation, a large portion of which I actually ended up converting into shares. And then there were options as well.

John Warrillow:

Got it. And was the part of your salary that you deferred, did you structure that as convertible debt? Was that the legal structure, or was it just on the back of a napkin like, “Hey, we all agree that first time there’s some money, I’m going to get paid?” Did you structure it formally or not?

Alexander Rink:

If I were doing this again, I would structure it formally. At the time, we actually kept it informal, and I think we trusted each other enough that that worked out. But I can definitely say that there could be situations where that wouldn’t work out, so if I were doing it again, I would structure it formally. But at the time, we didn’t, and it was informal, and like I said, it worked out fine.

John Warrillow:

So you got to get in on the ground floor of this business, but you make a fairly significant U-turn from the business-to-consumer model to what eventually was a business-to-business model. What precipitated that?

Alexander Rink:

Yeah, great question. It was a really interesting situation because, again, when I joined this company, I thought,” Oh, you know what? We can really amp up the number of users visiting this site. I love the mission here and what we’re doing, and so on.” But there were a few things that, as I got into it, concerned me.

Alexander Rink:

One of the things that you actually mention frequently in your book and generally in your webinars is dependency. And one of the big dependencies that … And I guess from my previous entrepreneurial ventures, I have become somewhat averse to dependencies through experience. And I’m sure you’ve heard the expression. What is it? Good judgment comes from experience, and experience comes from bad judgment.

John Warrillow:

Right, I have heard that.

Alexander Rink:

I’ve had enough bad judgment, which has led to experience, and hopefully, I’ve gotten some good judgment out of that. But we had an enormous dependency, which was … And this was not only us, but basically, anyone who was in this comparison shopping engine space, which is if you’re making your money from affiliate marketing, what that really means is that you’re trying to drive as many users to your site as possible, or visitors. And then they look at what they want to buy and so on, and they click. And then, they go through to the site where they end up purchasing.

Alexander Rink:

Well, where are those visitors coming from? I mean, typically, those visitors are coming from that they may just search on Google. And so we had over 90% of our traffic was coming in from Google. And so there was both an opportunity and a threat there. The opportunity was to significantly ramp up our search engine marketing, the SEO, the organic search engine terms so that if people were looking for something, it would appear.

Alexander Rink:

But the challenge there was that we were at 50,000 users a month, and that’s one of the reasons why we had such low revenue. Whereas, there were other comparison shopping engines who had been out for a while that had 15 to 25 million users per month.

John Warrillow:

Wow!

Alexander Rink:

So they were dominating the top few search engine results. And for us to get up there, we had to either significantly amp up what we were doing from an ESO perspective, and/or be so much different and better than anybody else in terms of the analytics and capabilities that we would offer and our site that we would end up creating a loyal user base that would keep coming back to us, and I just didn’t feel that was realistic in the timeframe that we had.

Alexander Rink:

I was also back to the dependency point, quite concerned about the possibility that well, what if Google changes its search engine algorithm, which-

John Warrillow:

It has been known to do. Yeah.

Alexander Rink:

Yeah. I mean, that was one of the key reasons we started looking around. Another one, which is subtle, but actually was really important to me, was we had this slogan, which I mentioned, like honest recommendations for consumers. And we were trying to do that by giving the price analytics and showing where the price had been historically and saying, “Hey, this is a good time to buy or not a good time to buy,” or whatever.

Alexander Rink:

So we were not only saying how the price compares to other stores, but we were also telling you where that price was compared to where it had been historically. And then we came up with this novel idea of a deal score, so we’d say, “Hey, this is a 9.5 out of 10 deal score. You really want to take advantage of this one.” Or, “You know what? This one’s a three out of 10 because even though you’re saving $50.00 on it, it was actually $100.00 off last week.”

Alexander Rink:

So loved the mission that we were going for, but the way that we were making money, and this is, again, 2010 timeframe, is by people clicking through to go purchase. So when you think about that, we are monetarily incented to try and get as many-

John Warrillow:

Enable bad deals.

Alexander Rink:

Well, yeah, to click through. And I just felt that there was a fundamental disconnect or a lack of integrity if you like. And I don’t say it in the negative sense. I just mean it from a disconnect between what we were purporting to do in terms of the mission and the way that we were making money. And I think your mission and how you make money in order to be effective should really be structurally aligned.

John Warrillow:

Got it. And so you migrated to the business-to-business model.

Alexander Rink:

Yeah, and I’ll tell you the third factor is just because we knew that there was a limit to how long we were going to be getting money. We needed to generate funds for the business. Right? Before you can succeed, you need to survive. We needed to figure out survival. And there’s no way we were going to be able to realistically raise funds from investors with a broken model, with $2.5 million having been invested, with no significant revenues, and so on.

Alexander Rink:

And given my experience in the B2B space, it just seemed like a natural place to go to try and earn your money the old fashioned way, actually deliver value to customers. And so we started to approach retailers. And when we got calls back, we realized, “Hey, you know what? We might be onto something here.”

John Warrillow:

What would a typical retailer pay you for a 360pi contract? How much would that cost them a year?

Alexander Rink:

Yeah, so we were the premium provider in our space. We had higher quality. We really hung our hat on our quality. And we got to the point where, essentially, because of the nature of the scalability that we were offering, we’d really have to put effort into setting up a customer and then, like I said, also the quality. We’d have a minimum threshold of $25,000.00 and year. Anything below that, it’s not to say that in the early days, we would do the occasional one, but we got to a point where we just said, “You know what?”

Alexander Rink:

We would put it into our sales qualification discussions because we just realized, look, if someone is trying to put $5,000.00 or $10,000.00, it’s just not going to be worth it for us to do. It’s too much of an opportunity cost versus other deals that we can go after.

John Warrillow:

Got it. And the investors in the business, when you joined during this time, who are they? Are they individuals, companies, an incubator? What is the capital structure? Who put up the 2.5 million bucks?

Alexander Rink:

Yeah, so it’s a services business in Ottawa, and essentially they had government contracts and some enterprise contracts. And they had a very innovative co-founder there, who really wanted to do advanced technology work. And he ended up starting up, again, the predecessor company of 360pi, which is called Gazaro. We eventually rebranded it to your point. As we switched to B3B, we rebranded it 360pi.

Alexander Rink:

But he then actually ended up leaving the company and going to California and starting up a very well-funded … Essentially, think of Airbnb for cars. It’s a company called Getaround. So his name is San Zaid, and he started up the original idea, and then I took it on and ran that business. And then meanwhile, he went to California and started up another business, which has been certainly successful and getting a lot of attention, raising a lot of funds.

John Warrillow:

Fantastic. So Sam is his name?

Alexander Rink:

Sam.

John Warrillow:

Sam, so he was playing with house money in the sense that it wasn’t his money. He was a co-founder of the service, so I guess it was his money partially, by extension.

Alexander Rink:

Yeah, so Sam was a co-founder in this services business called Action. Action was the business that incubated Gazaro. And there was someone named Brian who was actually running Action at the time. So while Sam came up with the idea and Brian supported it, and they both put money in, they were, as you say, playing with house money of Action. And so Action ended up being a shareholder, and both Brian and Sam served on our board subsequently.

John Warrillow:

Got it. And so what was their reaction to this fairly significant pivot? You come in and say, “We’re not going to do B2C. We’re going to do B2B.” How did they react to that?

Alexander Rink:

Honestly, I think they were happy with that. I think when they brought me on, they were just like, “We’ve run aground. We’re not really sure what to do here. We’re looking for someone to take this on. Please help us out.”

John Warrillow:

Please, make us some money.

Alexander Rink:

Yeah, exactly. So I mean, when we demonstrated to them that we were getting traction, that the retailers were signing up, I think they were happy to see that something was coming of the platform that had been built.

John Warrillow:

So as you grew, how big did you get this before you decided to sell? What number of employees, or revenue, or what was your metric for when you got … How big did you get before you sold it?

Alexander Rink:

Yeah, when we were acquired, it was in April of 2017. It was the actual acquisition date. And again, we took it from zero to, we got to the mid-seven figures in revenues. We were 40 employees, 35 full-time, and five part-time doing some data analysis work for us.

John Warrillow:

Got it. And what did you think a company like that would be worth? Before you took it to market, did you have some intelligence and some sense of what you thought the company was worth based on what you were seeing in the marketplace?

Alexander Rink:

I mean, just ranges really, not specific numbers, but a general idea. I know that we had the option. It always comes down to a matter of timing. What’s the right time to go to market? And I’m sure we’ll get into this question. There were a set of factors that had us say, “You know what? Now is about the right time.”

Alexander Rink:

I mean, we’d certainly have discussions with VCs around potential financing and getting some idea around valuation benchmarks. And we figured that those would more or less play out from an acquisition perspective as well.

John Warrillow:

And what kind of benchmarks were the VCs giving you?

Alexander Rink:

Yeah, I mean, it really depends, but I mean, typically, they’d be anywhere from $15 to $30 million dollars type of thing.

John Warrillow:

Oh, okay, so this is acquisition price. I was actually thinking of multiple of revenue or multiple of EBITDA

Alexander Rink:

Yeah, sorry. It wasn’t EBITDA. We actually were operationally profitable, so we weren’t one of those really pedal to the metal in terms of the growth and making almost the same number-

John Warrillow:

No money, yeah.

Alexander Rink:

… could make it EBITDA. So it was primarily a revenue multiple, but I will say that the revenue multiples at that time weren’t what they are now. If you look at SaaS valuation benchmarks, I mean, they’re in the stock market generally. And, of course, that impacts what VCs and PE firms are willing to pay. I think they’ve gone up a fair amount over the course of the last five to 10 years.

John Warrillow:

So I’m going to back into it and say you were seeing numbers in the three to six times revenue. Was that ish in that ballpark?

Alexander Rink:

Yeah, roughly. Yeah.

John Warrillow:

Got it. Okay. It’s still really healthy multiples, I mean, especially for someone that’s outside of the SaaS base, it’s astronomical multiple relative to some other less technical businesses. You mentioned there were some circumstances that made it feel like it was the right time to sell. What were they, and what triggered your decision?

Alexander Rink:

Yeah. I mean, it’s really an interesting situation because we had some really great tailwinds when we pivoted the business. The iPhone had come out in 2006 and was really starting to pick up steam, and then obviously Android devices, so mobile adoption generally. And I picked that out intentionally because one of the applications of mobile devices was people barcode scanning products in stores and being able to view the prices.

Alexander Rink:

And so that really put retailers at a disadvantage. They historically had been the ones who knew more about pricing than consumers. But that script flipped really quickly with mobile devices, the infusion of mobile devices. And so all of a sudden, retailers were at this huge disadvantage in terms of knowing about pricing, and that’s one of the things that really helped us because they felt like, “Oh, my gosh. We need more current information, and we can’t keep doing this manually, and sending people to stores, and putting in spreadsheets, and so on.” The need for that kind of a scalable solution became very important.

Alexander Rink:

I’ll also add there were huge tailwinds in terms of this was 2010, ’11, ’12 timeframe, coming out of the 2008 downturn. Right? A lot of behavior was around how do I save money. So I think a combination of those two really gave it a big lift.

Alexander Rink:

However, if you then project that forward a few years, Amazon was taking over 50%of every incremental eCommerce dollar spent. And we-

John Warrillow:

Did you say 50%?

Alexander Rink:

Yeah.

John Warrillow:

Five, zero?

Alexander Rink:

Yeah.

John Warrillow:

Whoa!

Alexander Rink:

And it got to the point where, when people would do a search for a product, they actually were more likely to start their search on Amazon than Google. Right? So that is the level of dominance that Amazon was having in the space. And so we did a great job of getting a number of marquee clients. We were exceptional in service. Our net promoter score was typically anywhere 40 to 60, so our customers were very loyal. We were winning service awards. We had a great brand and, like I said, premium pricing.

Alexander Rink:

But Amazon was ultimately sucking the oxygen out of the room for other retailers, and so what you’d have is a growing number of retailer insolvencies, one. And for those that weren’t insolvent, an increasing number of them were cutting back on expenses. And so while we did very well on retention, we’d typically be 85%, 90%-plus in terms of retention levels-

John Warrillow:

Logo or revenue?

Alexander Rink:

I’m sorry?

John Warrillow:

Logo or revenue retention?

Alexander Rink:

We measured it mostly by revenue.

John Warrillow:

Okay, so 80% to 90% revenue retention per year.

Alexander Rink:

Yeah, and growing clients and so on, so net retention was over 100%. But when we would lose an account, it was either because they went insolvent, or they were in such a dire financial situation that they just were looking to cut costs. And then it was a negative cycle, and we knew they wouldn’t necessarily be around for-

John Warrillow:

Sure, sure.

Alexander Rink:

So for us, we knew, at that point, it was we needed … And by the way, Amazon, like I said, had all of these capabilities themselves, so they’re not a logical customer. So at that point, we felt that there was actually another pivot possibility, not as large. You mentioned before a U-turn. It wasn’t literally 180-degrees, the first pivot. This was more like a 90-degree pivot, which was to essentially re-tool the capabilities and offer them to manufacturers.

Alexander Rink:

We would look in our database, and we would see, okay, you know what? Let’s say we’ve got 35 retailers. Now let’s look at number of manufacturers that are represented by all the products that we are crawling for those 35 retailers. And there were literally over … I remember taking a look at the results. There were over 3,000 brands that had over I think it was 500 products listed, so a really significant number of brands and manufacturers that we can go after, but what they were looking for was slightly different. And they were not yet at the place that retailers were in terms of offering to consumers.

Alexander Rink:

Brands were just a little bit further removed. They were typically using retailers as their channel. So it’s just different things that they would be looking for, which would require like I said, further investment and re-tooling of our capabilities, so all doable. And by the way, other companies who have survived in the space and succeeded did exactly that pivot.

Alexander Rink:

But I think from our side, this is a 2016 timeframe. I’d been in the business six years, and I had certain equity stake and so on. And we had, by the way, VC investors and so on. But the original company, Action, had been in the business for, by that point, nine years, so it was a really significant amount of time for them. And given how much they had put in much earlier, we’re talking 2007 to 2010 timeframe, at some point, they wanted to realize return on what they had-

Alexander Rink:

[crosstalk 00:30:39] So I think that the combination ended up being this confluence of different things. One is core market, still operationally profitable, but growth is slowing. Opportunity to go after this new market, but it’s going to require either slow, organic growth to fund it from the core business. Or go raise additional financing, which will imply dilution for the initial investors, the amount of time the initial investors have been in there. We had a VC investor, where they were very focused on a geographic area, and we were their only investment that was outside of that geographic area.

Alexander Rink:

So it just ended up being a set of different things that had us say, “You know what? We should probably take a look at what the market would bear here.”

John Warrillow:

Got it. And so what was next? Did you go to market yourself? Did you hire representation? What did you do?

Alexander Rink:

Yeah, so this happened in August of 2016 that we had this discussion. And then coincidentally and fortuitously, in October, we ended up getting an incoming offer, and it wasn’t like we were specifically trying to drum it up. It just came in. And we had been having discussions with that company, but we were obviously pleased because it was at least a starting point. And then-

John Warrillow:

How was the offer? What was your reaction to the offer relative to what you’d heard, the three to six times revenue? Did it meet your expectations, or was it way outside?

Alexander Rink:

It was meh.

John Warrillow:

Okay-

John Warrillow:

Kinda a low ball

Alexander Rink:

Yeah, it was like, “Hey, nice to have an offer, but not excited about this.”

John Warrillow:

Okay, got it.

Alexander Rink:

Yeah. And then as it happened, we then got another incoming inquiry within two weeks of that, and it was like, “Wow! When it rains, it pours. What’s going on here?” And then, to your point, at that stage, and I had already been gearing up for this after we had this board discussion in August, I was already gearing up to, I don’t want to call it, do a roadshow, but just really drum up interest among prospective partners, and so on.

Alexander Rink:

And obviously, it’s super helpful to have, I don’t want to call it a bird in hand, but at least a bird that’s pretty interested because it made all of the subsequent discussions that much more meaningful. And I could really talk about partnership, but also talk about the growth prospects, the vision, where we’re going, and so on, knowing that there was this, if not a backstop, and emerging backstop of an offer that we could always fall back to if necessary. But obviously, because we weren’t super excited about it, we wanted to get something better.

John Warrillow:

Mm-hmm (affirmative). How’d you do that?

Alexander Rink:

I mean, really just looking at larger companies in the space for whom we would be a natural fit. And we had actually invested in business development prior, so we had a set of different partners, and it was natural to go to some of those companies. But we even extended it beyond that. I had been to trade shows. I had met CEOs with other companies, and I’d just reach out and essentially network with them, and then just start a conversation around, “Hey, I’d like to explore a partnership, and we’re looking at our strategic options,” and so on.

John Warrillow:

And did you use words like partnership and strategic options as code for we’re looking to get acquired here?

Alexander Rink:

Yeah, I think everybody uses the expression that great companies are acquired, not sold. So I certainly didn’t go out with, “Hey, we’re looking to sell the business.” It was, as you said, a little bit more subtle approach. I think subtle, but with enough implication.

Alexander Rink:

And actually, sorry, let me actually clarify. It was certainly subtle in the beginning, but then as we’d have the discussions, then I might lend in that we actually had received an offer from someone else, which would then get them, if they were somewhat considering it, start putting the thought into their mind. And it would help us to qualify whether they might actually be interested in participating or not.

John Warrillow:

And did you reveal the name of the company that had made the acquisition offer?

Alexander Rink:

No, never.

John Warrillow:

Okay.

Alexander Rink:

Yeah. I mean, we could have, and it would have added credibility. Sorry, I shouldn’t say we could have. I believe we were bound by nondisclosure, so I certainly wouldn’t from that perspective. But even if we weren’t bound by nondisclosure, I don’t think I would have disclosed that.

John Warrillow:

Would you disclose the category like, “We got an offer from a large marketing services firm,” would you get that specific with them?

Alexander Rink:

Yeah. It was a publicly listed firm. I mean, I think there’s, frankly, something like, as you say, marketing, or market intelligence, or eCommerce services, or whatever is broad and big enough that there’s any number of companies that could be represented by that.

John Warrillow:

Who did you think was the most strategic acquire?

Alexander Rink:

I’m sorry? Who did I think was-

John Warrillow:

Who did you think was the most strategic acquire? What did you think the biggest strategic premium could be made?

Alexander Rink:

Yeah, I mean, I think that at the end of the day, it comes down to, and you’ve mentioned this on your webinars, but at the end of the day, it comes down to what kind of cash flow and what kind of capability do you end up providing for the acquirer. So I think we looked at it from that perspective. Which are the companies that are either looking to break into this space where they can acquire our capability, and it’ll be an add-on to what it is that they’re already doing, or that they already have some of this and it’ll be synergistic and give them that many more clients and help them dominate the space that much more? I will say that when all is said and done, the company that acquired us was probably the best strategic fit.

John Warrillow:

And why was it strategic for them?

Alexander Rink:

This company was called Market Track, based in Chicago. It had been a profitable business starting in the area of promotions intelligence, and they were owned by a private equity firm. They had made a number of acquisitions, including in our space, and they were actually one of our biggest competitors. And by the way, this is not the company that came in with the initial offer that we talked about before that I said meh. They actually came in later, and we can talk about how we got there.

Alexander Rink:

But what made it strategic for them was, number one, they were already making acquisitions, and so it was part of their strategy to increment revenues in that way. Number two, they were already a competitor of ours. They already knew us, and they knew what it was like to compete against us. They knew we had superior technology.

Alexander Rink:

Number three, they had a better sales force than we did, and so for them, it was like Christmas. They could take, essentially, our product capability, integrate it into their existing portfolio and combine it with what they were already doing in our space, and then provide it to a superior sales force, both in terms of number and in terms of capability of what they were doing.

John Warrillow:

Hm. And so they were definitely interested. So fill in the gap between … Sincerely Market Track was interested. You had the somewhere low-ball offer, and you were starting a variety of conversations. Did you get additional offers? How did you go from informal networking conversations with CEOs to a final consummated transaction with Market Track?

Alexander Rink:

Yeah, so we started, as you said, with the low-ball, and I wouldn’t even call it low-ball. I would say that it was low-ball from our perspective. It wasn’t low-ball from the acquirer’s perspective. I think they were doing what they felt they could do, essentially.

John Warrillow:

I care about your perspective. From your perspective, it was low-ball, but keep going.

Alexander Rink:

Yeah, yeah. And I mentioned that we had another incoming, and so we used that for the negotiation between these two parties. And then, I was out drumming up interest in other parties as well. I will actually add that during this time, we also engaged in best banker to help us in negotiating and understanding the terms, and educating not only me but our board and walking us through that process, and so on, which was very helpful.

Alexander Rink:

As I was drumming up interest with other parties, I actually didn’t approach Market Track initially. And the reason I didn’t approach them initially was because they were a competitor. And I’ll say that we had a certain level of concern or paranoia if you like that, as a competitor, the word of this, if they knew that we were on the market or having this discussion, that it might get to their sales team, which might get back to our customers, and so on. We certainly had a level of concern about that.

Alexander Rink:

So as we were looking at all of these different opportunities and negotiating between the two that we did have, the initial offer was the one that seemed to be more serious. Again, we went and did presentations with them with a large number of their people in the room. It felt like a fit and all that kind of stuff, so we were taking it seriously just to be very clear.

Alexander Rink:

The second one that had come in, they ended up dropping out. I shouldn’t say they dropped out, but they essentially, rather than coming forward with an offer, they ended up saying, “Well, here’s a letter that isn’t a letter of intent, but it’s a letter to say we’re interested. But we’re not going to proceed to a letter of intent, and we want to learn more.” It was like, “What do you want me to do with this letter?”

John Warrillow:

Yeah, yeah. I think M&A guys call that an indication of interest, IOI, which is much less formal like, “We’ll pay between X and Y, but we need to learn more.”

Alexander Rink:

No, no, no. No, it didn’t even have a between X and Y. That’s what I’m saying.

John Warrillow:

Oh, it was just very vague.

Alexander Rink:

Yeah. And don’t get me wrong, I mean, the individual I was dealing with, who was the CEO of the firm, I mean, I think he was almost embarrassed, to be frank, to put it forward, but it was what his board had asked him to do. It was certainly not in line with the discussions we had been having, and so on. But anyway, be that as it may, I’m saying wonderful individual, but at that point, I had to say, “Okay. Well, you know what? I can’t do anything with this, so that’s gone.”

Alexander Rink:

And we still had this initial offer. We had all the other ones that I’d been approaching, and we were getting to the point where we were getting close to signing off on that initial one. And the other ones, I was using this time urgency around it to say, “Hey, we’re getting close. If you have an interest, now is the time to step up, or don’t, or whatever.” And the i-banker, by the way, was starting to reach out to other parties, etc. and I would say that the I-banker reaching out, that was only moderately effective because, while there’s this notion of, “Hey, we’ve got this great list,” and so on, they don’t really know the business as well. It’s also they’re reaching out to parties that are probably a little bit further afield, and so on, so those didn’t end up really coming to fruition.

Alexander Rink:

But as we were getting down to that stage where we were about to sign off on the first one, I went back to Market Track being a competitor. And their CEO had actually reached out to me a year or two prior, and we’d had breakfast. At the time, I just said, “Okay, whatever,” type thing. But I think it was really wise on his part because, again, they were inquisitive, and he did a really great job of just reaching out to companies on the pace and just getting to know people and establishing a lot of contact.

Alexander Rink:

And so as it came down to the late stages, I said, “You know what? This is going to end up going forward one way or another. They’re going to find out, so now the risk is lower if you like, or we have nothing really to lose, and so I reached out to him. And he said, “Yeah. Hey, thanks. I really appreciate your reaching out, and let’s have a conversation.” And we did, and then within a very short period of time, literally within two weeks …

Alexander Rink:

And sorry, the CEO had now moved into a chairman role, and there was a new CEO, so I met the chairman, met the CEO, and thought, “Well, these are good guys.” Within two weeks, we had an offer from them that was over one and a half times what the initial offer was.

John Warrillow:

Wow! Wow! And now we’re getting into a zone where you’re like, “Okay, this is a fair valuation. This is an offer that I want to-”

Alexander Rink:

Yeah, I mean, it certainly had all of our investors happy, and some of them very happy. It became an offer that was meaningful enough that alright, this is interesting. I still had the concerns out it being a competitor, to be clear. But the thing is, when they actually put forward the letter of intent, I’ve got to say it was so clean. It really showed their experience in having done all of these other acquisitions because when companies go for financing, the SAS businesses or VC funded businesses, you can often judge the VC based upon how clean their terms are.

Alexander Rink:

And the more onerous the terms, the more you say, “Oh, I don’t know if I want to work with them because frankly if this is what they’re putting forward, it just feels that this is going to end up being a slog for years to come.” And so I find that VCs can differentiate themselves based on nice, clean sheets. And I thought, just taking that from an acquisition perspective, what they put forward was so clean, simple, legible, easy, better terms in terms of dollars, less onerous in terms of residual, and so on, that it became a complete no-brainer to go with them.

John Warrillow:

I just want to parse this comment around a clean offer sheet because I think it’s really interesting. What makes an offer clean? It sounds like the acquisition price is within what you think is fair. The earn-out component, the transition component, the percentage that’s at risk, are you thinking of that as earn-out or you said a holdback? Do you differentiate an earn-out from, say, an escrow where it’s just really a legal escrow? What are you referring to when you talk about a holdback?

Alexander Rink:

Yeah, I’m probably a little bit limited in terms of what I can say here, but I will say that between earn-out, and escrow, and so on, I could probably say it wasn’t an earn-out. There was a bit of holdback, but it wasn’t overly significant. It covered their risks, and it was totally reasonable in the bigger scheme of things.

Alexander Rink:

In terms of other elements that were clean, it was also what they were looking for in terms of due diligence. It was the period and the duration of due diligence. The original one was looking for 90 days, and this term sheet was roughly four weeks of due diligence.

John Warrillow:

Wow!

Alexander Rink:

Yeah.

John Warrillow:

That’s amazing.

Alexander Rink:

Yeah, and again, the benefits of selling to a company in the space who was, A, experienced with acquisitions, and B, knew us, knew our product. Essentially, our reputation preceded ourselves in terms of what they were willing to do, and so on, so I think that’s another element.

Alexander Rink:

So again, to your point, clean equals how much are they holding back, for how long? How long is the diligence period? What’s involved in the diligence? What’s involved in terms of actually getting from where we are now in signing this letter of intent to actual close?

John Warrillow:

Got it. That’s super helpful for sure. Were you able to gin up the offer at all? The one that came in was more attractive than the original, but were you able to get them nudged up a little bit?

Alexander Rink:

Yep, I would say nudge is probably a fair word. We didn’t end up getting it … Their offer was already a fair amount higher than the other one, but beyond that, we still were able to negotiate it a bit higher.

John Warrillow:

Yeah, yeah.

Alexander Rink:

But all said, I think it ended up being fair for our team, but I think it was also a very fair acquisition for them. Personal philosophy here, I think that at the end of the day, some of us are going to be in this for the long term, and it’s not necessarily one-shot deals. And I think it’s important that everybody walk away from a deal feeling happy, not anyone feeling like they got screwed in the process.

John Warrillow:

So you weren’t looking to drive every deal term, every dollar that you possibly could. You were looking for the triple win if you will, or whatever the-

Alexander Rink:

Triple win is right.

John Warrillow:

Yeah, yeah. Fantastic. What was the most surprising thing about the diligence process? They said in the LOT it would take four weeks. What came up that you were like, “That’s a curveball, I never expected that one”?

Alexander Rink:

Something that came up pretty quickly, I’m pretty sure they actually mentioned this before we signed. I can’t remember or recall exactly. But as it turned out, our acquirer was in the process themselves of getting acquired. So imagine one of these small fish, medium fish, bigger fish type of situations. So they were owned by a private equity firm. They had been owned by them for four years, and they happened to be in a situation where that private equity firm was transitioning out, was going to be selling them off.

Alexander Rink:

They had actually been out doing their own roadshow to get acquired. And they were in the process of getting acquired by yet another private equity firm, so transitioning from private equity firm A to private equity firm B.

John Warrillow:

Sure.

Alexander Rink:

And so when we found that out, and when the CEO shared it with me, which I honestly appreciated his candor, a totally above-board guy that said, “Look, for transparency, I’ve got to let you know this,” type of thing. And it had not been closed with the new acquirer yet, so in effect, he was disclosing something to me and showing vulnerability on his side just as I was concerned about the vulnerability we were showing in respect to competitor. He was equally showing some vulnerability by sharing with us that they were in this process.

Alexander Rink:

And they’re closed. I shouldn’t say they’re closed, but they ended up determining who they were going to be going with while we were in the midst of this four-week due diligence period. By the way, the four weeks ended up getting stretched to five, but whatever, so a four or five-week due diligence period. That would certainly generate some additional anxiety for us in a-

John Warrillow:

How did you protect yourself in that context?

Alexander Rink:

Yeah, so I don’t know that we had a way of protecting ourselves against the issue of their being acquired. I will say that we put protections in, in terms of the fact that they were a competitor of ours. Again, I think the CEO’s behavior to share that with us gave us a lot of comfort that this was an individual who was dealing in good faith and integrity.

Alexander Rink:

But by the same token, the last thing we wanted to do was completely open the kimono on who our customers were, so we staged the disclosures of what we’d be providing to them in due diligence when. And so for example, we could provide them things around suppliers, and financial, and so on. That could be very early stages. We’d get into revenues, and people, and so on. Maybe that’s phase two. And then phase three, the late stages, would be anything to do with actual identities of customers or reference calls with customers to actually verify that they’re pleased with our service.

John Warrillow:

How did they reference check with customers without tipping off that they were looking to acquire you? What was their talk track?

Alexander Rink:

Yeah, good question. I think, at that stage, I can’t recall whether we actually talked about looking at establishing a partnership together, or whether we were frankly just open with a client saying, “Listen, this is going to likely be happening in the very near future, and we’d appreciate your speaking with the prospective acquirer.” I think, in fact, we were open with those clients. I mean, they were going to find out soon enough. Literally, this was a space of a week or a week and a half away from when they’d be finding out.

John Warrillow:

Mm-hmm (affirmative), mm-hmm (affirmative). That’s interesting. So the staged disclosures was intentional because you were dealing with a competitor, and you wanted to know if the thing was going to go off the rails, you weren’t left having exposed something about your business that you would not have wanted to.

Alexander Rink:

Yeah, it was very intentional. It was very planned, and I was even very transparent with them like, “This is the way we’re going to do it. I hope that’s okay with you.” And I think there’s signals you pick up. Right? I mean, I think it was a positive signal they shared with us what they did. It would also be a signal to us if they were, “No, we need to know this right away.” The fact that they were reasonable about that and they understood, and they were empathetic about it, that obviously communicated to us about who they were as people and as an acquirer.

John Warrillow:

Yeah. But one thing that I’m still unclear on is you’re dealing with the CEO who is also reporting to a “private equity group” who owns the company. And that private equity group is selling its position to another private equity group. While it sounds like the relationship you had with the CEO was one of mutual trust and respect, what did you do to ensure that the private equity group, the incumbent, or the new one, didn’t detail the deal? Because ultimately, they still controlled the purse strings, I would think.

Alexander Rink:

Yeah, it’s a great question. I mean, to be frank, we had … I don’t think we actually had any contact with the acquiring PE firm, or if we did, it was only very late stages. It was all handled between the CEO, the selling PE firm. They obviously had shared with the acquiring PE firm that, “Hey, late-breaking news kind of thing. We have this opportunity. We’ve showed you our acquisition pipeline. Here’s this company that was one of our top targets, and we’re now in a situation where we can do this.” I think it was one of those situations where we had to take them on trust and good faith that they were managing that element of it.

John Warrillow:

Did you ensure that the LOI … In the LOI, did they stipulate that they had received board approval to make the offer, or was it contingent on board approval?

Alexander Rink:

Good question. I don’t recall exactly. There was nothing in it that gave us any concern that it wouldn’t move forward, so I’m going to say it either had board approval or … I mean, with these kinds of acquisitions, especially with a PE firm, they’re typically very involved, depending on the size of the company, the size of the acquisition, and so on. So when we were going through that process, not only were we dealing with the CEO and the members of the leadership team, and so on, but we were frequently interacting with the PE owners. They were often asking us for information because then they’d put it into their models, which they then would feed back, presumably to what their sale process.

John Warrillow:

And how would you characterize the difference in tenor between your conversations with the private equity group, the selling private equity group, and the CEO of the operational company?

Alexander Rink:

They actually worked together pretty closely. We were the twelfth acquisition in four years. So in that period of time, they had gone through this exercise a number of times, and they knew that any time it was an acquisition, the PE firm would be very involved. So I would say while the types of information that the PE firm was looking for were different, typically more financial-based risks, and so on, it didn’t feel like it was a completely different kind of an interaction.

Alexander Rink:

I mean, obviously, with the CEO, they want to make sure it makes business sense and operationally can work. And there’s that cultural fit, and so on. I think the PE firms are less concerned about those kinds of things.

John Warrillow:

Culture shmulture. We’re going to make money dammit. Keep going. Okay. Did they play a little bad cop, good cop off each other?

Alexander Rink:

Not really. I actually found that they were all very friendly. I was surprised at how much that was the case. There wasn’t really any contentious element to this negotiation, and frankly, I don’t know whether that, to some extent, maybe that was a little bit of timing issues on their side. If this had been a longer due diligence, it gives you more time to dig into stuff and maybe push back, and so on.

Alexander Rink:

But I think that the four to five-week due diligence was in part because they were in their own sale process, and partly because they knew us and our reputation preceded us, and so on. But I think partly maybe affected as well by the fact that they were in their own sale process, and so it wasn’t really in their interest to drag things out. So why rake up mud unnecessarily? And they didn’t do that. I mean, it was honestly very smooth.

Alexander Rink:

The one thing I will say, and it’s not at all an issue of contention, but we had to prove above and beyond they knew us, and so on. I remember distinctly we had a meeting where we were talking about technologically how we felt that our product was superior, and they generally had a notion that it was as well. But there was a little bit of prove it, and that prove it was, okay, coming away from this meeting that we had in Chicago, they gave us a set of different products and said, “Show us what you can do.” And we did.

Alexander Rink:

And this was midway through the due diligence process, and I knew that wow, this was like put up or shut up type of thing. We really need to demonstrate that technologically, we’re going to end up coming up with better results than they can, and we passed that with flying colors.

John Warrillow:

I was going to say, presumably, you aced that exam.

Alexander Rink:

Not to say that we didn’t have some anxiety around it. We knew we had a superior product, or at least we had every reason to believe that we did. Until you actually prove it, it’s unproven. And so to do that and to have them come away saying, “Okay, yeah, you nailed that,” yeah, we’re doing the right thing here.

John Warrillow:

Got it. Excellent.

Alexander Rink:

Their re-affirming.

John Warrillow:

What was your reaction when diligence slipped from four weeks, as promised, to five?

Alexander Rink:

Yeah, and the slip was actually, there were just a couple of minor issues that led to the slip. It was supposed to be four weeks, and all the documents signed, cash in the bank, and so on. And the slip was literally five to seven days type of thing. One, there was a small, I’m going to say small in retrospect, but when you’re at that stage, everything feels huge.

Alexander Rink:

A legal issue that came up, and it was like, “Really?” And it wasn’t that they were being … They weren’t trying to extract anything. It was just their counselors became concerned about something. And I think from a business perspective, they felt, “You know what? This is reasonable,” but their counselors were advising them a certain way. And then, our counselors were pushing back and so on.

Alexander Rink:

So I just remember being on a phone call saying, “Look …” It caused anxiety that could really derail the deal at the very last minute. But fortunately, we were able to let cooler heads prevail and-

John Warrillow:

Do you remember what the deal point was?

Alexander Rink:

It was essentially around the nature of crawling websites generally, and it was a business that they were already in. And there was some new regulation that might come out or that was going to come out, and it could cause some concern. But really, we were doing the same thing they were, so it’s like if you’re concerned about us doing it, you should be concerned about yourself doing it. It doesn’t add anything to your existing risk. And honestly, it became a complete non-issue.

Alexander Rink:

And the second point of delay was just around cash in the bank. They’re arranging getting the numbers, getting the financing through, and so on. And again, when you’re in the very late stages, and you’re expecting that money to hit the bank, and everybody is geared up for it, and you’re gearing up to tell your company, and your investors are all expecting it, and so on, any delay causes some level of anxiety and stress. You had to say, “Well, didn’t we know this was coming?” But anyway, that got resolved, and then, of course, it was the sigh of relief when everything went through.

John Warrillow:

Yeah, yeah. Well, it’s a great story, and I’m grateful for you sharing it in such detail. Where could people reach out if they wanted to get to know you more? Is LinkedIn the best spot, or what’s the best way to send people to you?

Alexander Rink:

Yeah, I mean, if there’s anything that was useful here, I’d love to … If someone can get some benefit out of the experience I had, you can look me up on LinkedIn, Alexander Rink, R-I-N-K. Again, I go by Alex, but that’s how I’m listed in LinkedIn.

John Warrillow:

You’ve got to be a Canadian to have the name Rink.

Alexander Rink:

You wouldn’t believe how many times I’ve actually got to spell it for people, by the way.

John Warrillow:

Oh, really?

Alexander Rink:

Yeah.

John Warrillow:

Rink like a hockey rink, alright?

Alexander Rink:

Exactly. And then I also have a website, which is www.rinkventures.com.

John Warrillow:

Awesome, so it’s Alexander Rink on LinkedIn or Rink Ventures on the web.

Alexander Rink:

Yeah.

John Warrillow:

Alex, it was a pleasure. Thank you for doing this.

Alexander Rink:

Likewise. Thanks very much, John, for all that you do to help educate us entrepreneurs on being more effective in running our businesses.

John Warrillow:

Oh, my gosh, my pleasure.

Alexander Rink:

Alright, cheers.