How to Punch Above Your Weight Class With Acquirers

Transcript

John Warrillow:

Okay, so what are the numbers on your company’s dashboard? My guess is you look at your company’s revenue and profitability, which are two great metrics to track, but there are another eight key drivers of the value of your company that go well beyond just revenue and profitability that are the things that acquirers want to know about.

John Warrillow:

Going and getting your Value Builder Score will help you look at your business through the lens of an acquirer. Takes about 15 minutes to do. Go to valuebuilder.com to get your score.

John Warrillow:

Have you ever wondered how to get the attention of a large acquirer? Some corporate giant who you would never have the opportunity to meet unless they approached you? Have a think about the way you market your business, in particular for which key terms you rank for in a search. When an acquirer wants to invest in an industry like yours one of the first things they’re going to do is figure out, who are the big players in your industry? And if you rank at the top of those search listings, no matter how big or small your company is, you may get their attention, which is exactly what happened to my next guest, Peter Carlin. He was in the online learning space, and despite just having 24 employees at the time of the acquisition, he got the attention of a large corporate player who wanted to invest in online learning. He wouldn’t have done it without ranking at the top of Google searches.

John Warrillow:

Here to tell you the rest of Peter’s story is Peter Carlin.

John Warrillow:

Peter Carlin, welcome to Built To Sell Radio.

Peter Carlin:

Thanks, John, really great to be here. Thanks for inviting us.

John Warrillow:

It’s great to have another Irishman on a show, because we’ve only had a few, but all of our episodes with Irishmen have been world class so no pressure. But it’s great to have you here.

Peter Carlin:

Thanks, I’ll try and meet that bar.

John Warrillow:

You’re countrymen, you’ve got to make sure you level it up for you guys. So you’re based in Belfast, is that right?

Peter Carlin:

Yes, based in Belfast in Northern Ireland. We had offices in both Belfast and in Dublin.

John Warrillow:

Got it and how does a little company in Belfast become a world leader in e-learning. I’ve got to learn this story. So tell me about this company Logicearth. I want to hear about it. What did you guys do?

Peter Carlin:

Well, 10 years ago in the middle of the worst financial crisis that I can remember, my business partner and I, Paul McKay, left employment. We were working in an IT training business. We had too much knowledge and we had to put it somewhere, so we took the brief and crazy decision at the time to leave employment and start up a business. And really what we wanted to do was to bring transformation to learning. We had seen for so long just the spend was … the options that buyers had was just so narrow, we had to bring choice and transformation.

John Warrillow:

Okay, so when you say transformational learning, I’m reading between the lines here, you’re talking about e-learning, right? So everyone thinks about learning in the context of classroom, but you’re moving that online. Is that right? And doing courses, online courses?

Peter Carlin:

So what we do is we bring a very contemporary tool kit to how to do that. So we bring the knowledge, the tools, the people, the expertise, the content, and lots of methodologies into one place to give clients a huge amount of options to do that, because primarily, we think of two things, classroom and an e-learning course and that’s not how we do it. There’s a big mile wide gulf between those two things and we can fill it with really, really nice stuff.

John Warrillow:

Great and so your content is richer than a traditional e-learning course and it tries to get as close to a physical course as possible?

Peter Carlin:

I think what we’ve got to think about is how do people consume knowledge at home and at home, you’re on YouTube or you’re on a curation site or you’re on something else and we’re trying to bring those experiences into the methodologies that we use within the corporate sector to try and really engage learners in the program.

John Warrillow:

And what was the business model? How do you guys make money?

Peter Carlin:

Well, we did a number of things. We consulted on strategy and advice and we also sell infrastructure, so we sell learning platforms and large learning libraries and we have partnerships with the best companies across the world, companies like Skillsoft, a massive company, and we were the partner for them in Europe. And then thirdly, we created bespoke complex learning programs for clients, so that was field design from the ground up, all the way through to build and delivery.

John Warrillow:

So bespoke, meaning custom programs for clients. You had a specialty, though, as I understand it in the pharmaceutical space, is that right?

Peter Carlin:

Yeah, well, frameworks in our new guys, we do, but we have deliver medical writing service in the business, helping our pharma clients.

John Warrillow:

Got it, got it, oh, pharma, sorry, yup, got it. Okay, and so you’re doing custom programs for them, you’re also reselling Skillsoft and other sort of platform solutions. So that, you didn’t own the platform but you were a partner for them and selling.

Peter Carlin:

Yeah, very much a value out of re-seller work, whereby we could introduce those solutions and add a lot of value to the project.

John Warrillow:

Got it and then you mentioned third revenue stream but what was the third one? I’ve forgotten.

Peter Carlin:

The first one’s are on strategy advice and consulting.

John Warrillow:

Strategy.

Peter Carlin:

The second one was writing infrastructure around those platforms and content services, and then the third one was really about building those complex, customized learning solutions for our clients.

John Warrillow:

Got it, got it and would it be typical in a client engagement that you would include all three of those, where there’d be some consulting upfront, they’d choose a platform which you would sell them, and then there would be the implementation? Would that be a typical engagement or people bought sort of bits and pieces?

Peter Carlin:

Yeah, it’s one of two typical engagements. So quite often the client will have their own infrastructure and we’ll just make sure we’re using it properly and building the learner experience and content around it. But if those clients did not have the appropriate technology or infrastructure, then we can supply it as part of that service.

John Warrillow:

Got it. That’s helpful for sure. And so how big did you get this company before you decided it was maybe time to sell?

Peter Carlin:

Yes, we were up to 21 people. We had a team of learning designers, learning technology consultants, instructional designers and digital designers and we were doing pretty well on our own, but we were struggling really to break through to the next level, to get into the-

John Warrillow:

What does that mean, break through to the next level? What does that mean?

Peter Carlin:

Well, we were struggling to get into the bigger clients from our base in Northern Ireland and in Dublin. It was we were expert at everything that we were doing, but we just weren’t able to crack that business development model and I think that’s kind of where the next logical step came from through the acquisition.

John Warrillow:

Got it. So some of the big clients, you were looking at some of the big multinational pharma companies and they just weren’t giving you the kind of time of day, is that right?

Peter Carlin:

Yeah, it’s just very difficult to break through into the next level and albeit, we were making progress, I think our strategy required that we sped that up as best we could.

John Warrillow:

Who was doing the selling, Peter? Was it you and Paul or did you have sales people?

Peter Carlin:

Yeah, well, if you think of selling in two way, there’s looking after existing clients. So our model was that our learning consultants would look after the clients. We did not need to sell to them, we just needed to build brilliant things for them. From a business development point of view, we did have a business development team, but primarily it was Paul and I and in the later stages, it was done through a very contemporary digital marketing strategy. So we put a lot of time and effort into digital marketing.

John Warrillow:

Got it, got it, you had the classic sort of hunter-farmer model where the learning people did the farming. Got it, okay. That’s helpful for sure. So you were trying to break through to the next level, when did potentially selling the business sort of become the most logical solution? I’m sure you considered other strategies for breaking through to the next sort of these larger accounts.

Peter Carlin:

Yeah, that’s a really good question. I suppose over the years, we had been approached several times and then the first couple of times, it was quite a surprise. It was a nice feeling, people were noticing you and trying to make offers, but we never gelled, we never really got to an offer that was good for us. And I suppose after the third time, we were thinking, “Well, this is pretty consistent. We suspect that this is going to happen again, and we were very happy just to understand that wait it out because we weren’t going to sell to somebody we didn’t like. We weren’t going to sell where the strategy was wrong or where there wasn’t a meeting of values. So we just suspected that time would deliver the right answer for us and sure enough that did happen when we met this new group.

John Warrillow:

Let’s get into the offers that you got. You mentioned there were three primary, like sort of approaches prior to the one you actually sort of engaged with.

Peter Carlin:

Yeah.

John Warrillow:

You mentioned, I’d be curious to know sort of valuation multiples, like how they were valuing the company, not necessarily the number but sort of the was it a multiple of EBITDA or whatever? And also you mentioned, you didn’t want to perceive the selling … or there wasn’t a cultural fit. I’d be curious to know what you were looking for in a cultural fit. So let’s do the first question first. Multiples, so what were they offering, multiples on revenue or EBITDA? How did they structure?

Peter Carlin:

I think there was two different types of offer during those years and one of them was based on EBITDA, a multiplier on EBITDA. There was one very cheeky offer from a broker on that.

John Warrillow:

Why do you say cheeky?

Peter Carlin:

Well, I think … and again, this is one of the things you learn. We were approached and we spent quite a lot of time sharing information with them. We felt that the approach was genuine and then at the last minute, we were introduced to a more senior person who turned up in a meeting full of fanfare and offered us basically a salary, and this dream that the company who would be buying us would be fantastic for us. So we closed that negotiation down quite quickly.

John Warrillow:

So let me get this straight. So they came to you, did they put a number on the table before the senior person came in and basically tried to hire you?

Peter Carlin:

Yes, yeah, they were intimating like there was a multiplier on the table that started at three, three and a half times EBITDA, which we weren’t entertaining.

John Warrillow:

So you started at three and a half times EBITDA and then the senior guy comes in and takes the three and a half times EBITDA off the table?

Peter Carlin:

Yeah, Pretty much, yeah, yeah.

John Warrillow:

And says, “Well, what we’d really like to do, Peter, is hire you.”

Peter Carlin:

Well, he went through the lowest common point in the thing, going, “You’re not worth this and you’re not worth that. You’re worth a salary and this is what’s on the table, take it or leave it,” and we kind of had a little …

John Warrillow:

That’s mind boggling. How big a company do you have at this stage?

Peter Carlin:

Oh, I think we were turning over about $2 million. We had about 15 people on the team.

John Warrillow:

Right.

Peter Carlin:

Still quite early on, but it was just one of those funny experiences but it leaves you with a good experience for the next time.

John Warrillow:

But, you know what, I think it’s actually very educational because a lot of the listeners to this program would be feeling those sorts of approaches right now in the wake of COVID or in the midst of COVID, I should say, a lot of businesses have been … Their performance is down and there’s a lot of bottom feeders out there, trying to buy companies for pennies on the dollar and they’re using these pitches, good cop, bad cop where … kind of a good cop rolls in and says, “We’d like to offer you three and a half times EBITDA,” bad cop comes in and says, “You’re worthless.” So what was your emotional reaction to the senior guy coming in and saying, “Well, you’re not worth anything?”

Peter Carlin:

I think I went through a few seconds of anger, going, “You’ve completely wasted our time,” and then it just turned into laughter, because I just wrote it off as an interesting experience that wouldn’t happen again. It really taught us to kind of approach the conversations in a very different way. The next time, to really suss out the seriousness of the approach and who was behind it and why and ask all the really hard questions up front.

John Warrillow:

What questions can you ask upfront to determine the seriousness of an acquisition offer?

Peter Carlin:

I think you can be very blunt about everything. I think it’s … They’re coming to you, most cases. They’ve made the approach and I think it’s okay to ask about who’s funding this?

John Warrillow:

Who’s funding it.

Peter Carlin:

Yeah, what is their strategy, what bits of, part of my business do they like, which bits of my business did they not like? How do they see strategy going forward, in terms of growth and integration and ask about timing. I wouldn’t put any restrictions on what you can ask.

John Warrillow:

And were those questions not ones that you asked the initial person who put the three and a half times number on the table?

Peter Carlin:

No, we didn’t ask as many question as we should have, but it’s definitely we learned through missed experiences.

John Warrillow:

Yeah, yeah, which is why we do this show, so that’s helpful. So you had the cheeky offer. What were the subsequent offers, were they around that three and half times EBITDA or what was the range you were starting to kind of triangulate around?

Peter Carlin:

Yeah, I think that was a starting point. There was a trend around that starting point, around the three and a half number. It’s obviously an open aim to a negotiation, which should move. The next offer came in and there were shares on the table of the other business and again that wasn’t a model that suited us.

John Warrillow:

Why not?

Peter Carlin:

They were much nicer people but it wasn’t a model that suited us at the time.

John Warrillow:

What was it about taking shares in their company that was not a fit?

Peter Carlin:

Well, I suppose, we weren’t 100% sure of their three to five year strategy. I don’t think we had an objection to taking shares as such, but we just weren’t a 100% sure of where their strategy was going and felt it was a bit of a risk for our own personal outcome.

John Warrillow:

And when you take shares as compensation, I guess, you also have to try to determine how they’re valuing those shares. Did you get into that at all and try to see what their valuation model was for their own shares to determine whether that was undervaluing or over valuing?

Peter Carlin:

Yeah, well, I think we kind of were using our gut feel quite a lot as well, to say like we really like these people or we could really like their point of view and their technology and where they were going but we weren’t sure of the future strategy in terms of their share growth and couldn’t see how that was going to give us a return.

John Warrillow:

Got it, got it, so how did you end up going from sort of reacting to offers to proactively considering them? What your next step to sort of formalize your decision to sell?

Peter Carlin:

We didn’t actually make that jump. I think what we could see was there was a consistency of approach, there’s maybe an approach every 12, 13 months. The first few times it was quite a surprise, there was a nice feeling. We couldn’t find a fit, but what we guessed was that that sort of consistency would increase. Because we were really punching above our weight in terms of our digital marketing so our brand was getting noticed worldwide. And that those approaches, we did get another approach and it started off as a conversation around a strategic partnership but as we got to know them and they got to know us, we could see that the fit was fantastic and real creative group of people. And then the discussion progressed from there, from being a strategic partnership into an M&A.

John Warrillow:

Got it. When you say punching above your weight in terms of digital media, describe that. What does that mean?

Peter Carlin:

We were a small company, we had big ideas, we had big ambitions. We have a very strong proposition about what we want to do and what we want to achieve. We want to change the world with corporate learning and we want to do it quickly. So we put a lot of effort into an SEO strategy, into campaigns. We put in a marketing automation system. We rebuilt our website, but we were blogging nearly twice a week. So our messages and our marketing statistics were growing and growing and growing, the website visits, the number of keywords that were ranking for and the traffic to the site was just increasing every day and there was great conversations going on around the world about what we were talking about. So we looked bigger than what we were.

John Warrillow:

The other companies that you were ranking with, so if somebody typed in corporate learning you were up there at the top of the search. How big were those other companies that you were kind of competing for that mind share? Were they much larger?

Peter Carlin:

Yeah, well, you can imagine, it’s probably a $300 billion market worldwide for corporate learning and you can imagine the competition in that space.

John Warrillow:

Yeah.

Peter Carlin:

We were competing with the world best and companies, they were much more established than we were. So after a while, our strategy was kicking in. We were ranking up with the big companies.

John Warrillow:

Fantastic and how did you learn those skills? Did you work with a third party advertising agency, like a digital marketing agency? Did you have someone in house? Were you doing it?

Peter Carlin:

Well, we’re very deliberate about what we do. I mean, we run … I don’t know if you’ve heard of the traction model for running a business, we have yearly goals, we’ve got 90 day goals. We’ve appointed a senior team. We’ve got the right people in the right seats. We have a clear focus. So one of those brave decisions that we made to invest in was in digital marketing and we recruited a digital marketing expert and built … For a small company, we had two or three people primarily working in marketing alone and that was a big decision. It was a brave move and it really paid off.

John Warrillow:

Yeah, because it’s not like hiring a sales person or one of your learning farmers like where you can directly draw a line to their … Your increased sales or your increased profitability. This was a bit of a flyer.

Peter Carlin:

It absolutely was but it was our attempt to break through to the next level in terms of revenues and next level of clients without being acquired, but it really, really paid off for us. But I think we had put a lot of effort into it. We built the business around the marketing plan rather than hiring a marketing person to do something, we re-engineered the business around it.

John Warrillow:

That’s really fascinating. So how did your ultimate acquirer come to learn about you? Did you hire an M&A professional to sort of shop the business? Did they come to you? What was that like?

Peter Carlin:

No, they came to us, I think, in … as part of building that brand presence, we had appeared on some industry reports. We’ve appeared on a really nice competitive grid developed by the Fosway Group who are experts in the learning field. So I think we’re appearing on more and more publications and more industry reports and we just had our presence because of the effort that we were putting into building the ground.

John Warrillow:

Fantastic, and so the original approach was, “Hey, let’s partner.” When did the conversation, like then what triggered the conversation evolving from “Let’s partner,” to “Let’s acquire you.”

Peter Carlin:

Yeah, so the company that acquired us is called The Creative Engagement Group and they have a number of agencies, but they have a very big client base and they could see that their clients were requiring more and more and more services in digital learning in particular and in learning design, and I think they were looking for a partner who could fill what they called that white space in their client set. So we met them in London, they came over to Belfast, we had lots of discussions around what a strategic partnership could look like. They met the team. They could see our strategy. They could see our enterprise operating system working in terms of our goals and our traction model, and we started to learn about them. We were able to inquire deeply of what they were doing, about their approach and their values and their culture and their people. And we could just see this really lovely picture building up of the approach they have.

John Warrillow:

What did they see as the strategic value? What made you a strategic acquisition for them?

Peter Carlin:

Well, they could see that through acquiring us, that we could slot right into their business, into their strategic product set and service set and answer that question, which is learning within their corporate client base.

John Warrillow:

So they wanted to sell your services to their customers, primarily?

Peter Carlin:

Yes, yeah.

John Warrillow:

It wasn’t to get your customers. It was to have another thing to sell their existing customers.

Peter Carlin:

Exactly, yes.

John Warrillow:

And they’re a big marketing agency and they have lots, big Fortune 500 type, large enterprise clients.

Peter Carlin:

Yes, absolutely.

John Warrillow:

Got it, okay, and so how did they value the company? I’d be particularly interested in you had these three very disparate lines of revenue, right? The consulting, reselling the platform, and the actual bespoke creation. Did they get into how they valued those three different revenue streams?

Peter Carlin:

Yeah, they’d spent a lot of time trying to understand the proposition that we were bringing to our client base. I think reselling software licenses and content was pretty new to them but we spent a lot of time explaining why that was beneficial. They could fairly understand the consulting piece and the reason they were buying this was really for the third, which is that being able to design complex learning programs for large audiences, for large clients. So they got it pretty quickly. I think what they had to do was really knit together the picture of their other agencies and how we would fit in and having that piece where the whole is greater than the sum of the parts, in many ways, and that’s pretty much what we’ve been doing since we started with them.

John Warrillow:

E-learning is such a hot industry and I would imagine as you’ve described the primary driver of your value in their eyes were these learning professionals, the designers and the implementers, the people. How did you go about retaining them, because I would imagine those employees were very highly sought after, often recruited or attempted to be recruited away. How did you retain them?

Peter Carlin:

I think because we are very structured in what we do and we’re very deliberate in the traction model that we have is it … or the team are all involved in the decisions that we make. They’re all involved in executing those decisions and helping us move on. We’re also involved in really highly creative projects and I think they really love our client base and the complexity and the creativity of what we do so they get to see that by joining the group, and they all get to meet the other teams and they all got to understand what the other company was doing. They could see that that level of creativity was really just going to keep increasing. So I think we’ve got a really strong value proposition for our teams, as well as for our clients.

John Warrillow:

Got it. So this sort of flirting gets serious when they move from partnership to acquisition. At what point in the process did they put an offer in front of you?

Peter Carlin:

Well, there was a good number of months just getting to know each other, which was nice, it was a nice time period. So later on in that, several months later, they discussed about an acquisition and-

John Warrillow:

How’d that come up in conversation? Do you remember, was it over a pint or a coffee? How did that come out? Sort of raise its specter.

Peter Carlin:

Yeah, it might have been over a pint of guinness somewhere and it just felt like the next logical step to take. We were equally, both interested in both roots at the time. And the first thing we have really is really agree a head of terms about what the nature of the deal might look like.

John Warrillow:

And a head of terms for our North American listeners is like a letter of intent, right? It’s a deal sheet, it’s a set of deal terms that would provide the construct for a deal.

Peter Carlin:

Absolutely, yes, it’s a general agreement on the next … before you get into the detail.

John Warrillow:

And so what was the nature of the head of terms? Like what did you guys discuss? What did you agree to?

Peter Carlin:

Well, we discussed the construct of the financial arrangement might work, there are very good, lots of options on the table, and we went through each of them. I think we all came to agree-

John Warrillow:

What were you consider … When you say there are lots of options, what were the range of options you guys were discussing, in terms of the structure financially?

Peter Carlin:

Yes, essentially, it’s looking at the multiplier on the EBITDA is generally the way things go but we were also able to look at the future. Over the next three years what could we do and we discussed how the contract could take up into consideration. So we look at a future earnings strategy.

John Warrillow:

Got it, so kind of the difference between upfront cash versus earn-out and was it an earn-out that you discussed primarily or were there other ways that you could participate in the future or is it really focused in on the earn-out piece?

Peter Carlin:

Yeah, well, the earn-out is … Was looking at the EBITDA of the business in the future terms over the next three years, so that’s where the big calculation came to.

John Warrillow:

Got it, and where did you and Paul land on the importance of sort of cash up front, versus future earn out? Did you guys have a number in mind or a percentage? What was important to you?

Peter Carlin:

I think, there’s lots of variables in this type of calculation. I think, you have to be very content about your ability to go in and acquire, get into that client base and make progress with it. And we spent a lot of time just talking about the practical aspects of integrating with the new sales team, integrating with other parts of the business, further developing the value proposition, [inaudible 00:30:26] the type of clients that they have, the relationships with those clients. And so I suspect that 90% of our discussions were based at that very practical level about how are we going to do this and how will that work, more so than the numbers, kind of the numbers looked after themselves, mostly.

John Warrillow:

In what way did they look after themselves? I mean were you satisfied with the upfront cash that if you’re not … didn’t come through, it was okay or what do you mean by the numbers sort of took care of themselves?

Peter Carlin:

I think there’s obviously a balance between upfront cash and the future state … Now, this is before COVID … so we had to take a really practical view of what may or may not happen in terms of the future value and get the balance right between the upfront cash and the future potential.

John Warrillow:

Yeah, and so what … I mean if you’re unable to answer this question in your own sake, if you were advising and entrepreneur, what do you think is a reasonable proportion of kind of upfront versus earn out that they should be happy with or consider?

Peter Carlin:

I find it hard to answer that specifically, not because I’m withholding information. It’s more you have to be really sure that the fit is right, the cultural fit, the strategy is right, and the outcome is right for you. And if you can really get to that point where you’re happy with all of those things, then I think you’ll know what the calculation is going to be. I suspect though that you’d want to ask for as much as you can get away with.

John Warrillow:

Mm-hmm (affirmative), mm-hmm (affirmative), yeah, because in actual inclination is for the acquired to put as little cash upfront and put it all sort of all in the future of the deal and …

Peter Carlin:

Yeah, and I think what we learned, because everything in negotiation. Absolutely every element is a negotiation, you just got to be prepared to negotiate every single aspect of the agreement.

John Warrillow:

Yeah, but you were fairly friendly with these guys. It sounds like you’d been talking about a strategic partnership and … In what way was your coziness a liability when it came to negotiating the actual deal terms?

Peter Carlin:

I don’t think it restricted us. I think what we learned to do and looking back, what I’d maybe do slightly differently is just to make sure that everybody like on both sides have all of their negotiating points raised in one place. I’ve gone through this in the past as well, and you could see that where sometimes those points were dripped into the discussion, and it wasn’t through bad intent, it’s just the way it happens. So I think if I was to do it again, I would make sure that all the negotiating points are brought to the table as quickly as possible in a short period of time, where you can see the entire picture in one go, but still be able to address each point.

John Warrillow:

And what would be on your list of negotiation points to make sure were covered in the first conversation? So obviously, the overall price is one. What are the other four, five terms that you think are important to get up front?

Peter Carlin:

Yeah, well, I think it’s important then, because we were also interested in the health, in the nature of the business afterwards. So I was really negotiating where, how we were going to grow the business, not only within their own client base but to the world. We’re also interested in how they were going to deal with the team and the terms and conditions of the staff to make sure that they were looked after. At the same time, as we were negotiating a sale, we were also negotiating an employment contract.

John Warrillow:

For yourselves?

Peter Carlin:

For ourselves, yeah. So, yeah, it’s really lots of different things.

John Warrillow:

And did you get the employment contracts squared away as part of the head of terms or was that something you dealt with after the fact?

Peter Carlin:

It was dealt with in line with the detailed contract.

John Warrillow:

Yeah, the [inaudible 00:34:47] share purchase agreement?

Peter Carlin:

Yeah.

John Warrillow:

Yeah, that’s often the case is of course, a lot of things like non-compete and salary and tenure, those are big drivers of the employment agreement and that could be a major bone of contention.

Peter Carlin:

Absolutely.

John Warrillow:

Was there anything, if you were to have done it differently, you mentioned that you would probably try to get those things done is one conversation? In your specific example, was there anything that you would have done differently?

Peter Carlin:

Yeah, I think the other thing I would have done very differently was just taking tax advice at a much earlier stage.

John Warrillow:

What did you come to know about the tax implications at sale?

Peter Carlin:

Well, what we found out was too late, that the things that we had to consider about …

John Warrillow:

What did you find out?

Peter Carlin:

Well, it was pretty much about UK a capital gains tax and how that works in detail and the timing of how all of that works and when, what constitute capital gains and what doesn’t so it was really complicated.

John Warrillow:

I know in North America, there’s this concept … Again, I don’t know if it’s the same in the UK … but there’s this concept of buying assets or shares. Shares are considered capital gains and again I’m going way beyond my pay grade even talking about this, but can be treated differently depending on the way, the tax jurisdiction you’re in. Was that the same in your case? They were buying essentially your assets which didn’t allow you to take advantage of the capital gains exemption or preferred tax rates, is that …

Peter Carlin:

Yeah, there were different parts to it.

John Warrillow:

Okay.

Peter Carlin:

It’s very much based on the initial consideration versus the duration of the earning. So my advice would be get a really good tax adviser early in the process, when you really know when things are making momentum, gathering momentum.

John Warrillow:

Yeah, before you agree to that head of terms, that letter of intent, well before that, you really want to engage a tax accountant to talk about … Even in some cases, at least in North America, there are some provisions where you have to hold shares for a certain period of time in order to enjoy that preferred capital gains exemption and so you even want to talk to an accountant even before, years before really that you’re ready to pull the trigger, just to make sure that you’re taking advantage of every kind of sort of tax … I don’t want to call them loopholes, because they’re not loopholes, they’re tax, the tax system as its written.

Peter Carlin:

Yeah, I think you really have to consider that the due diligence, the agreement, heads of terms and going through the final negotiations on the contract takes a lot of time. At the same time you’re trying to run a business and grow a business, and then throwing in tax complications at the last minute is not what you want to do.

John Warrillow:

No, let me ask. How has COVID impacted your business?

Peter Carlin:

Well, it’s funny because we set up the business in the middle of a financial crisis and so lived in April of this year in the middle of a pandemic.

John Warrillow:

You have a thing for disasters.

Peter Carlin:

Yeah. COVID has meant that we’ve all had to work from home. We’ve all had to figure out how to do that and also been with a lot of companies who are speeding up their transformation of learning and speeding up that move out of the physical classroom and into the virtual world of delivering learning. So we have just been absolutely flooded, helping clients do that.

John Warrillow:

I would imagine, yeah, because everybody’s building a learning course of some sort, everybody’s got to teach their employees that they would have relied on classroom training in the past. So it’s been good for your business?

Peter Carlin:

It’s been good and we’re trying to educate our clients not to move from a physical classroom just do virtual classroom, because we are all zoomed out already. Do not put them in front of more cameras.

John Warrillow:

Yeah.

Peter Carlin:

So we’ve given them those really contemporary methods in the middle of all that to allow people to self-learn and learn from each other.

John Warrillow:

Got it and you know, I think, I want to go back to the deal terms for a second because I think a lot of the people that listen to this show will have some level of earn out associated with their sale. Some will try to negotiate as much up front, but others will have to sort of deal with an earn out. Now, of course, earn outs can go fabulously well. There are lots of examples of credible payouts, equally, there are some where it’s a challenge because it’s hard to run a company within another company. So first of all on the upside, how did you structure things so that you could enjoy the upside? In other words, is there a cap to your ultimate pay out, if things go spectacularly well, is there a limit to how well you could do or is it sort of sky’s the limit?

Peter Carlin:

I think most people starting a business would have a naïve notion that somebody will come along someday and just offer you a big pot of cash.

John Warrillow:

Sure.

Peter Carlin:

That’s where you’d sell it and I think unless you’re in a real spectacular industry where that happens, then that’s fine, but don’t expect it. What to expect is a tough negotiation. They’re going to come at it from their best point of view. Everything will have to be negotiated and expect to cap, expect lots of different things that you haven’t thought of to be brought into those negotiations. Don’t expect it to be easy.

John Warrillow:

What would you tell people to be aware of in this kind of bucket or this category of things that you probably aren’t ready … or you’re not expecting? Like what sorts of things would you expect to see in that bucket?

Peter Carlin:

I think, you have to take steps to prepare yourself for a sale and that’s what we have done pretty good job out over the years, because we wanted to be organized, we wanted to be ahead of ourselves whenever the right moment came. And you have to have a real clear vision of what you do, you have to have a real clear understanding of why you make a difference in your industry. You have to be able to demonstrate that. You have to be able to demonstrate your focus and your commitment to growth and have all of those things ready.

Peter Carlin:

And when it comes to the sale, if you are very well prepared and have all of that really in good shape, and well thought out, then the process that you go through will be much more robotic, it’ll be much more one thing after another, being able to get over lots of the simple hurdles or probably even the most complicated hurdles quite easily. But you’ve got to expect difficult conversations around valuation, around what your make up of your clients are worth, a range of occurring revenues and being able to demonstrate why you’re in good shape.

John Warrillow:

Got it, got it, so as you approach your earn-out expect the acquirer to have some sort of cap to your potential earnings, even a spectacular outcome. What about the downside risk? Things we’ve heard of on this show is, “I walked into an earn-out with the best intentions and then the acquirer recast my profit and loss statement with a bunch of head office expenses or they promised that they’d get me in to see X, Y, and Z client. When I asked the sales rep to introduce me, he or she said, “No frigging way are we going to introduce you to our best clients. I don’t care what your earn out is, that’s my client.” I mean, I’m sure you heard similar horror stories.

Peter Carlin:

Yeah, and like I think based on prior experience, we asked the very explicit questions around how PNL would be calculated, we asked about internal costs and how they would be … We shouldn’t have been expecting any other internal cost that we weren’t used to. And all of those points have to be negotiated and there was a lot of detail behind it and I think, the heads of term’s pretty easy. The hardest part is the detail in the share participant absolute detail and you really need to find the time to clear your head and to go into the nth level of detail about what might happen in terms of those things.

Peter Carlin:

To answer your other point about an earn-out and being offered to, being put in front of clients. I think you’ve got to expect that you still have to go and work hard. You have to go in and prove yourself. You have to go and integrate well into the rest of the business. You have to go in and build relationships. Don’t be naïve in terms of thinking that things are going to be handed to you on a plate. It is really up to you to make the most of it, as well as being helped and supported by the acquirer.

John Warrillow:

Yeah, yeah, yeah, well said. I guess some people would look at this and say, “Peter, why … if you were going to have to do this earn out and it was going to be a significant part of your life …” I mean to me it’s a three year or what’s the length?

Peter Carlin:

Yeah, it’s three year …

John Warrillow:

Three year. Like why sell? Why not continue to operate independently? There must have been another way to crack into some of those other big clients. If you’re giving up your freedom? It can be a very uncomfortable position for a lot of entrepreneurs to feel like they’re beholden to another organization, especially those renegade entrepreneurs who it just feel like they want their cash up front and … So how would you answer that question? Why sell? If you’re going to do an earn out, why not just keep a 100%?

Peter Carlin:

It’s a really good question. We have a very strong answer and the strong answer was we absolutely loved what our new owners do. The Creative Engagement Group, they’re highly intelligent, highly creative bunch of people. They get out of bed in the morning to do the same thing that we want to do, which is to develop really creative solutions for our clients and make a difference, just make a difference for our clients and that’s why we sold … what that helped us to do was to really speed up our strategy of growth and get into bigger companies to make a difference.

Peter Carlin:

I realize that that’s quite a unique [inaudible 00:46:02]. We just absolutely love the new state that we’re in and the new company that we’re in and what they do and their values that they have. So we just enjoy the process. So we were lucky.

John Warrillow:

It’s fantastic. What was it like to tell your employees?

Peter Carlin:

It was a daunting thing to do. I think it didn’t really come as a complete surprise because they had met quite a few people from the company. We had presented to them. We had introduced the team. It was genuinely at the beginning around a strategic partnership and due diligence around that. So I don’t think they were too surprised, but during that time, we had been able to show the team the histories and the examples and the content and the really good stuff that The Creative Engagement Group had built for their clients, so it just made it a lot easier. And I think that the message that we had which is we are going to become part of a much bigger group and be able to work on much bigger projects, much more creative projects was just so appealing.

John Warrillow:

What was concerning to your employees?

Peter Carlin:

I think it’s just natural human behavior that change is difficult. No matter how good the story is change is still difficult and people naturally feel anxious and concerned that change is happening that they’re not really sure how it’s going to turn out. So I think you just have to be very upfront and honest and collaborative with your team, and really just look after them in those first few weeks. I think you’ve got to really keep repeating the message as to why it’s good.

John Warrillow:

How did your relationship with Paul evolve or as the terms of the deal became more clear, were there times when you and Paul were out of alignment, maybe feeling differently about things? How did you work through those issues?

Peter Carlin:

I think Paul and I had set up a business and we’d been running it for 10 years, so we’re more like brothers than business partners with things …

John Warrillow:

But brothers scrap like cats and dogs, whether …

Peter Carlin:

Yeah.

John Warrillow:

They can do.

Peter Carlin:

I think we’ve been through so many ups and downs over those 10 years that we were able to work our way through the negotiation process, pretty seamlessly. It is difficult. I had been through it before so I’d probably had a little bit more experience than Paul and I knew the depth of detail that we would end up getting into. So, yeah, there were times that we were working things out but it was pretty good.

John Warrillow:

Was there a general sense that … I mean was he eager for certain terms that you were not in favor of or like what was the nature of the kind of turmoil?

Peter Carlin:

I think that the nature of the turmoil was, “Is this the right thing for us to do?” It was more a fundamental question rather than in the detail. “Are we doing the right thing? Should we hold out and try and do this on our own? These guys are brilliant and we can see this, but is this the right thing to do?” And I think deep down, we knew what the answer was. It was just human nature.

John Warrillow:

Yeah, are you at similar stages in your life, in your trajectory, similar age, similar life situations or are you kind of one very much older than the other? Are you sort of similar in life stage or not?

Peter Carlin:

No, we’re very similar. Paul’s a couple of years older than me, but we both have family and kids around the same age, very similar.

John Warrillow:

The reason I ask is that can often be the underlying cause of some of the turmoil is you’ve got a 65 year old and a 35 year old and one wants to grow for 30 years and one wants to get on the golf course, and that can be an area of contention, but doesn’t sound like that was the case in your … Did you buy yourself any trophies? Some ways to mark your achievement?

Peter Carlin:

I like cycling, so I bought myself a really professional static training bike. Thought it was a nice addition to my …

John Warrillow:

Fantastic. Is this like on those rollers that …

Peter Carlin:

No.

John Warrillow:

Not talking about a Peloton bike?

Peter Carlin:

It’s much nicer than a Peloton bike. It’s called a Wahoo.

John Warrillow:

Oh, I’ve heard of these, yeah. Serious cycling aficionados, go for that, right?

Peter Carlin:

Yeah.

John Warrillow:

Wannabes like me have a Peloton but serious cyclists go for the Wahoo got it, okay. So you bought yourself a Wahoo.

Peter Carlin:

Yeah.

John Warrillow:

That’s good. That’s great. I’m glad it worked out for you. Peter, I’m grateful for you sharing this story. One of the things that I particularly really took away from this is the importance of, I think in your own terms, punching above your weight class from a marketing perspective, which is in many ways how you kind of rose to the attention of so many of these acquirers. So I think that was a really key learning. Is there somewhere people can learn about you or learn about Logicearth or Creative Engagement Group? Is there a website you want to send people to? What’s the best way for people to reach you?

Peter Carlin:

Yeah, well, we’re still very active on social media. There’ll be a really good at Logicearth.com. Take time to visit TCEG.com, which is The Creative Engagement Group, because they do so many wonderful things. I’m on Twitter as @Logicearth.

John Warrillow:

Great, great, so lots of connections there and I think you’re relatively easy to find on LinkedIn as well, and we’ll put all that in the show notes at BuiltToSell.com. Peter, thanks for doing this.

Peter Carlin:

Thanks, John. It’s been a pleasure.