The Freedom Point

October 23, 2020 |  

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In 2001, Adam Torres started TeamDynamix, a software used by colleges and universities to keep their IT department organized.

Over the next 15 years, Torres and his partner built TeamDynamix up to more than $5 million in annual sales. That’s when Torres, who figured his company was worth 3-5 times revenue, realized selling would give him enough money to live comfortably for the rest of his life.

There are some great lessons for aspiring value builders in the episode. You’ll discover:

  • The surprising thing that happens to software companies at $3 million in sales.
  • What Reps & Warranties are and why they can be so scary for first-time sellers.
  • What a “cap and basket” deal is and how it can limit your downside when selling your business.
  • Why Torres wishes he’d never signed a five-year non-compete.
  • How Nexus laws have the potential to derail your deal.

Torres used a methodology called Net Promoter Score to measure the satisfaction of his customers. It’s an approach recognized by many acquirers, and we’ll measure yours every six months for as long as you’re leveraging The Value Builder System™. Take the first step for free by getting your Value Builder Score.

Our guest

Adam Torres is a passionate entrepreneur and Technology Advocate. Adam’s passions for entrepreneurial endeavors and the Internet led to the formation of TeamDynamix in 2002. TeamDynamix is an Enterprise Service Management, Project Collaboration, Portfolio Management, and Resource Management application targeted at Institutions of Higher Education. As Chief Executive Officer, Adam led TeamDynamix to 7+ years of 35% growth with profit margins of seven figures. All of this achieved without any outside funding and entirely through organic growth. From 2015 to 2017, Adam led the way in selling TeamDynamix to two private equity firms. After the acquisition, Adam served as CEO and Chief Product Officer. Adam currently serves on the boards of Aviso Retention, Little Dreamers Big Believers, Balanced Family Academy, Test Double, GradLeaders, and Infoverity.

Transcript

John Warrillow:

So once a year, you go to the doctor, right? They take your blood pressure, maybe they prick your finger and they take a little blood and they give you a sense of your cholesterol level. Maybe if you go to one of those fancy healthcare facilities, they get you to run on a treadmill for a while, see how your heart’s doing. You get a checkup.

John Warrillow:

The same thing should be true of your business. When we look at your business through the Value Builder Score, we’re going to look at it through eight key drivers that acquirers care about, whether you want to sell your business immediately or in 10, 20 years from now, these are the eight factors that business buyers care about. Knowing them now will help you maximize the value of your business going forward. Just go to valuebuilder.com and take the questionnaire.

John Warrillow:

Here’s a little thought exercise for you. At what point is your business large enough that if you sold it, you could fund your lifestyle needs for the rest of your life? Because when you reach that point, it’s worth asking yourself, why continue? When the sale of your business could fund everything you could possibly need or want, you risk all of that every day you retain your company, and that’s exactly the point at which Adam Torres, my next guest, decided to sell his company. He built it up, TeamDynamix, over a 15 year period. So this is not an overnight thing, this is a 15 year run, built it up to what he figured it would be worth, around three to five times annual revenue. It was a software company, which gets valued at a very high multiple, but he figured that by selling it, he really was free.

John Warrillow:

And that’s exactly what he decided to do. There are lots of little pearls of wisdom in Torres’s story. I’ll let him describe them to you. Couple of things that stood out for me is some of the negotiation, granular details around things like a cap and basket, which he’ll describe, reps and warranties, which we get into. The whole issue of a non-compete, which is an important thing to consider that you may not want to sign, at least for the extension of a five year term, which Adam did. Lots of really interesting tidbits for an aspiring value builder. Here to tell you the rest of the story is Adam Torres.

John Warrillow:

Adam Torres, welcome to Built to Sell Radio.

Adam Torres:

Thanks for having me.

John Warrillow:

Yeah, so tell me about TeamDynamix, what did you guys do?

Adam Torres:

So we kind of started off in the project and portfolio management space, also in kind of the collaboration space, software business. Then over time, the business really morphed into IT service management, or ITSM, and ESM, enterprise service management. And within that domain, we really focused in the higher education space, and sometimes someone like state and local government.

John Warrillow:

So higher education I think of as universities and colleges, and they would have computers that they need to have networked and managed and make sure all the antivirus software’s up to date, is that the kind of stuff you did?

Adam Torres:

Yeah, sort of. I mean, that’s part of it on the enterprise side, but I think an easier way to maybe think of it is, “Hey, I’m at a specific college and university and I want to get on their network. What do I do?” Or “I’m at a specific university and I’m having trouble getting on their network.” Or “I need to request something from the institution,” whether that be a new student ID or really any kind of request management and fulfillment of that request that happens within the university space, that would be all kind of covered in ESM.

John Warrillow:

And was it a service business, or did you have some sort of software that enabled these requests?

Adam Torres:

Yeah, great question. It was a software business, so it was an enterprise software business, kind of hosted in the cloud. We also had a professional services group that did the implementation of the software at the particular school, help them kind of get set up and configured on it.

John Warrillow:

And did you use the SaaS business model, I’m assuming?

Adam Torres:

We did have a SaaS business model. We hosted everything in the cloud with Microsoft Azure, and that’s how all of our customers connected to the platform and used it.

John Warrillow:

That’s helpful. Out of interest, what was the proportion of revenue between the SaaS recurring versus the one time installation?

Adam Torres:

Yeah, so that’s a good one. I mean, that changes over the years. These kinds of businesses have a lower valuation if the services portion gets to be an outsize portion. So everything that I kind of worked on and focused on was to never let that go over like 30 to 40% of the total revenue. Now, when you’re a small business and you don’t have a lot of existing base, your services tend to be on new clients, right? So on new clients, you add a client, and let’s say 50% of the deal is services to get it implemented in year one, but as the base of customers grows, that kind of dilutes down that services piece, and you should end up, I would say ideally we’d end up in like the 80/20 split.

John Warrillow:

Yeah, so bit of services revenue, but most of it coming from that recurring, so licenses, got it. When I think about universities and colleges and higher education, I mean, it kind of freaks me out just thinking about trying to sell to them, because I’m like, how would you go about actually selling to an organization that so bureaucratic, and ugh, just the thought of it makes me … Like, at least with a company, when you’re selling to a company, you can appeal to their desire for profits, right? A school of higher learning, I just … How did you sell to these guys?

Adam Torres:

Well, I mean, I think it’s one of those things where, I get that a lot, and believe it or not, it’s not as bad as you think, right? These guys-

John Warrillow:

How’d you figure out who to sell to?

Adam Torres:

Well, in our case, we were predominantly selling to the CIO, so it was a fairly clear path, we were selling to the IT organization within colleges and universities. I have some other businesses who are selling … other different buyers, but predominantly in this case, it’s the CIO who’s the buyer, or if it’s a really big school, you have directors under the CIO who have budget authority. It’s not as bad of a sales cycle as everyone thinks it is. They take a little bit longer, so we had about a six month sales cycle, plus or minus. But the great part of it is, when you’re selling SaaS business, they’re a little slower to buy, but they’re really slow to change. And so once you get them in the wheelhouse, it’s a customer that’s a lot less demanding on an ongoing basis, which means you can really build that base up over time.

John Warrillow:

So tougher to win, but once you win them, very sticky. Did you look at-

Adam Torres:

Yes.

John Warrillow:

… stuff like your LTV to CAC ratio, lifetime value to customer acquisition cost, was that a formula you guys spent some time looking at?

Adam Torres:

We looked at lifetime value, we didn’t spend a lot of effort on customer acquisition cost at all. We looked at lifetime value, we looked at first year software was pretty significant. We looked at year over year growth on the book. So we effectively had two sales forces in the end. I think at the beginning and we’re really small, not the case, but in the end, we kind of had a new account sales force, and their job’s just new accounts at pretty much any cost. Because we knew we made money on them once we got them, so if we spent a bunch of money to get those new accounts, it was okay. And then on the existing account side, their job was to really take that book of business, if you started the year at five million in existing customers, we really had a target of trying to add 10% on the existing customers, on those same customers every year, including any kind of attrition built into that model.

John Warrillow:

How did you incentivize those farmers, those customer success people who had the account, but they had to grow it. What was their variable comp tied to?

Adam Torres:

Yeah, so I believe in a business, the further you get away from the CEO, the less variable comp, but I like to see variable comp as far down the stack as possible, all the way down to the software developers. So I would tell you that the farmers or the customer success reps would be the second in the groups of incentive-based comp. So new salespeople would have the highest incentive-based comp, and then the farmers would kind of go down from there, and that would be a much higher base in the case of a farmer, and a much lower commission rate, versus a new account person, which would be much higher commission rate and a much lower base. And in our case, we used a [inaudible 00:09:46] for all, so I mean, it was all commission, sort of. But that’s kind of how we did it.

Adam Torres:

We also, the farmer had to be a little deeper with the product and a little more versed in all of the problems that the customer might face, so it just lent itself to kind of having people that were requiring a little bit higher of a base pay package.

John Warrillow:

Yeah. I’m curious, though, so there was a variable component, it was a lesser amount than the hunters got, but when it comes to the customer success people, like were you incentivizing them based on sort of forward-leading indicators like usage of the product, et cetera? Or was it all on their upsellability, their ability to hit that 10% number?

Adam Torres:

Yeah, most of it was on upsell, and then there was some on customer satisfaction. Or we use NPS, net promoter score. I love NPS, I like to use NPS in everything in terms of kind of getting a gauge of where the customer is. So we incentivize them as a group on NPS, and also really on their ability to kind of renew the contract, right? So that’s the third piece. So it would be upselling, renewing those contracts when they came due. I really love to sign a three year deal, that was kind of the sweet spot for me. I felt like any longer than that, you were kind of not producing enough value in a growing software base, any shorter than that it was too much work to keep putting those people back out on the line to renew those deals. So I kind of thought two to three years was kind of the sweet spot, so yeah. Renewals was big, upselling was big, and however you do customer satisfaction, we did it with NPS, which is slightly different than that, but I think the audience gets the point.

John Warrillow:

Got it, yeah. And for those who don’t know, the NPS acronym, it stands for net promoter score, simply surveying your customers, asking them a scale of zero to 10, how likely are you to recommend us to a friend or colleague? And then you analyze those results, calling your nines and 10s your promoters, and your zeros to sixes are your detractors. What was your net promoter score, I mean, what was the kind of range that you guys were falling into?

Adam Torres:

Ah, man, that’s a good question. I think we were always in like the 40 to 70 range.

John Warrillow:

That’s amazing.

Adam Torres:

I think 70 is considered world class. But quite honestly, I think it’s hard to just use a number and kind of put it out. You kind of have to base it a little bit on the industry. When you have more of a consumer based product, I think the numbers tend to be slightly lower, and on a business product they tend to be higher, only because the population of respondents is a little bit different, and I think businesses tend to be a little bit more bought in than do consumers.

John Warrillow:

Yeah, I think that’s … You just have to look at benchmarks for airlines and rental car companies to know what the business to consumer models look like. That’s helpful for sure, so definitely using and leveraging net promoter score. Got it. How did you finance this business? Was it, did you have partners, did you have folks, investors, did you raise money? What was the process?

Adam Torres:

Sure, so this was largely a self-financed business, with the exception of some family, who came in to the tune of, I think it was like 15 or $20,000, so it was total of like 15 or $20,000 invested, and that money went directly to buy, at that time we bought servers. I mean, that probably sounds foreign to anybody starting a software company now, but at that time you bought a server and you put it into a data center. And servers were expensive, so I think we spent 10 or $12,000 on servers and some networking, and that’s where all the money went.

Adam Torres:

But the business made money really from the beginning. So it’s a little different than a lot of these software plays, but it produced a very good net income. In the end, I mean, a lot of years we were doing 50% net income, 40 to 50% net income. So it made money along the way, a lot of money, and it also made money on the exit.

John Warrillow:

Got it, that’s helpful for sure. And so you mentioned there was a we, it sounds like there was a partner. Like who was your partner in this business?

Adam Torres:

Yeah, so this is a good story. I started this thing, kind of just me, and the next guy that came on, and the guy that came on after that, and then the fourth guy that came on, and then when it got time to, hey, quit jobs and really kind of go full time with this thing, I think number two, number three got a little bit spooked by it and said, “Hey, this was awesome, but I’m not ready to take that leap,” and number four was. And so he took that journey very early and I’m very appreciative of all that he was able to help do, and he still works in that business.

John Warrillow:

Got it, that makes sense. When you guys had that conversation, was it that you were asking them, the three individuals to actually invest cash in the business? Or to take a lower sort of comp and sort of invest some sweat equity, if you will?

Adam Torres:

Yeah, I mean I think it’s more the latter. We didn’t have any comp. So the first few years, or year or two, really, there was little to not compensation to any of the people that were working there. So yeah, it was just kind of a sweat equity kind of situation, with no comp. Doesn’t sound like a very good deal anymore, but I think at the time, I was 26 years old, and to me, I said, “I’m Moses, I can walk on water, we can do this thing and we just have to kind of stay focused on it.”

Adam Torres:

And really, I think as a younger person, you’re slightly more brazen and confident in your own abilities, and really I think that would characterize the culture of the business in the early days, was just like, “We’re just better than them, and we can do this.” And it took getting our chops licked a few times before we realized that, hey, this is a lot harder than we thought.

John Warrillow:

What was the biggest moment of humbling that you remember, where you realized how hard it was? Can you think of a specific example?

Adam Torres:

Yeah, you know early on we weren’t just focused on higher education. Early on I kind of thought that this is a very widely applicable product, and we can sell to anybody. And it was just two of us or three of us, there weren’t a lot of people involved at that time. And we had gone out and approached a Fortune 500 business to buy this thing, and it was like we would win a deal in terms of they thought we had the best offering, but then we couldn’t close the deal because they just would say, “You’re just not big enough. You’re just not a big enough company in order to do business with us. We don’t think that you’ll make it.” Or very kind of downtrodden feeling in some of these deals, and it was like, jeez, how does anybody build a company? If we’re too small to do business with, we win the deal, they think we have the best offering or the best product, and we still can’t complete the deal, and so it goes to the next best vendor because they’re just bigger.

Adam Torres:

And so there are a lot of places where we just kind of got squeezed, and there are lots of ways to squeeze a software company, especially a small one, and a lot of them are small at the beginning. There are lots of ways to squeeze them. I think we didn’t realize how brutal that world is, and being out there, it’s tough. It’s not just about having the best offering. And I think a lot of companies start out thinking, “I have the best offering,” or they start out with developers who say, “I could build a better mousetrap,” and sometimes those businesses don’t make it because they just can’t get over the hurdle of completing a sale.

John Warrillow:

I think you’ve got people nodding right now, Adam, I think people listening to this are going to go, “Yeah, I’ve tried pitching big companies, enterprise companies, Fortune 500 companies, and they blow me off.” What did you do? How did you get over that hump?

Adam Torres:

In that first example, I said to them, “Hey, look, I think you’re wrong about this and I think you’re wrong about us. But why don’t we do this? Why don’t we put the code, the entire source code,” this was a big gamble, “In an escrow, and if for any reason we don’t survive as a business in this period of time, you guys can access and have the source code, it becomes yours.” So basically we put the whole company on the line. But at that time, you’re taking risks. Like, that’s the thing about people that start companies, and I think the rest of the world doesn’t get that, right? They see successes, and money sometimes, and lifestyles that change dramatically. What they don’t see is that these people are taking big risks every single day, and they’re putting their life’s work on the line, and they’re not even really batting an eyelash, right? They’re just doing it all the time. And this was an example of me saying, “Yeah, let’s just go, we’ll give you the source code.” That’s a ridiculous ask, if you ask me. A company saying, “Hey, we don’t think you’re going to make it. We like what you’re doing, so we’re going to do business with you and kind of root for you to go out of business maybe so that we can access everything that you’ve done in the last several years.”

Adam Torres:

That’s the deal. And if you told that to most people, I think somebody might raise one of the fingers on their hand. But in this case, there was no way forward, so that was kind of the way that we had to do it in that particular instance. We’ve hit a number of challenges like that along the way, and had to deal with them in different ways, putting up a bond for thousands of dollars.

John Warrillow:

What did that organization say when you said that you were willing to put the source code in escrow?

Adam Torres:

I think they were a little bit surprised. I think they thought we would just go away, and-

John Warrillow:

What’d they do?

Adam Torres:

They agreed to it. We moved forward. And that was the first deal that kind of funded a lot of things. And I kind of thought of every deal early on, you’re getting squeezed on the cost, you’re getting squeezed on the terms, you’re getting squeezed on the assignments, you’re getting squeezed on so many things. The more I kind of, at the time I didn’t realize it, but the more I go, the further I go, I realize the people that have power, in a lot of cases, use it to kind of squeeze and pinch the smaller person in the arrangement. And I don’t think it’s a good way of doing business, I don’t think it’s healthy for a relationship, but that’s kind of what happens, and that’s what happened to us along that path. And it was one of those things where we just kind of had to punch our way through it. And so I think that’s just a lesson that sometimes you have to kind of take some of these terms.

Adam Torres:

And I think there’s a time where you push back, too. I think there’s a time where you say, “No, we’re not willing to do that.” I needed deals early on to fund the growth of the business, and so it was critical that we took those chances. We tamped down the chances that we took a little bit in terms of the severity of the outcome as the business grew and got a little bigger, we didn’t have to put the source code on the line, we didn’t have to pay a $20,000 bond in order to get a deal. We didn’t have to do some of those things as we got bigger; we shouldn’t have had to do them at the beginning.

John Warrillow:

You had to pay a $20,000 bond? How did that work?

Adam Torres:

Yeah, some of these states or schools, they just say, “Hey, in order to even bid,” they create a hurdle to kind of keep smaller people out. They say, “In order to even bid on this thing, you’ve got to basically write a check as a bond, and we’re going to hold that money until this contract works its way through,” just to bid on it. “And if you lose the bid, we’ll send you back your money,” but I mean, I think at the end of the day, what we saw in a lot of buying processes were a lot of businesses, and in some cases, goverments, put a lot of hurdles up, because they either didn’t want you to participate in that business, or for some reason they had been burned by something in the past, and so they create these hurdles that basically stifle small company innovation, that basically prevent you from participating, and I just think that’s one of those, it’s another thing, and you’re swimming upstream as a small business every day. And to have buyers who have money and buying power to put those hurdles up in front of you, I think it just makes it even harder.

John Warrillow:

I’d love to circle back to this customer who insisted you put the source code in escrow, at least they agreed to move forward based on that. How did you ultimately unwind that?

Adam Torres:

Well, I mean, we served them through their contract period, and I don’t know if it was two years or three years or whatever, and at the end of that time, they were not in the higher education space, and we had started to kind of become a little bit more vertical in terms of the types of industries that we wanted to go after. I think at first we kind of just said anyone can buy and benefit from this, and as we had gone down the path a little bit more, we decided that, hey, we really want to focus and specialize in this one area, and they weren’t in that area. So at the end of their contract, I don’t know if they decided, probably they decided not to move forward, but at that point the escrow just closed up.

John Warrillow:

Got it. Let’s move to the exit of TeamDynamix. What triggered your decision to want to sell?

Adam Torres:

Yeah, so this is really a personal decision. I had put a lot of time and effort into the business, and this business really defined pretty much every moment of every day of my life. And I got married along the way, and my wife and I were trying to have a child, and that process wasn’t going so well. It went on for a few years, and when we finally got pregnant, and my daughter was born, I just decided that I needed to have a different type of life. I just decided that the business was big enough and could support my family and I for the rest of our lives, and I just thought, “I don’t want to keep coming home at 8:00, I don’t want to keep missing things, I don’t want to spend this much time working anymore.” And so was presented that opportunity and decided to pursue it.

John Warrillow:

How much revenue, like how big a company is it at this stage?

Adam Torres:

You know, that’s a good question. I’m going to just say approximately like five and a half million or six million, right in that range.

John Warrillow:

Got it. And so you made this decision on personal terms. So it sounds like you calculated your … “Okay, if I sell this thing, there’s enough money here that I can finance the rest of my life happily.” Is that-

Adam Torres:

Right.

John Warrillow:

… basically it? And how did you make that calculation? I think people would be curious to know, I’m not sure they need to know the number, but they might be interested in the methodology. Like financial advisors talk about this kind of 4% withdrawal rate, was that what you were doing? Or how did you do the math?

Adam Torres:

I don’t think it was so precise, I just think it was a big enough amount of money that just, it was more money than anyone I knew had, and I just thought, “Eh, I mean, this is a big amount of money.” And don’t forget, we were having multimillion dollar profits for five or six years before we sold it. So money was coming in. I remember when I bought a significant house, and I remember when the business really started to hit, and I’m getting a few hundred thousand dollars every quarter as a bonus, that was after taxes, and I just remember thinking, “What in the world am I going to do with all this money?”

Adam Torres:

So it was just, to go from having so little amount of income, so much income in a very short amount of time was very hard for me to wrap my mind around. And so I just remember we paid off our house in like a year, or a year and a half. And then I was like, “Now what do I do?” But it was just one of those things where, this was more money than pretty much anyone I knew, and I just thought, work doesn’t become a necessity anymore, ever again. And so for me, that was a trigger point, and that’s what I kind of was after and was able to graduate my life into a very different place than where it was before.

John Warrillow:

What was your next step? So you make this decision to sell, what next?

Adam Torres:

So when you’re a software company, I know we want to be specific, but when the business hit three million, I don’t know if there’s some way that people find out about it, but when you get to three million, just in the software business, if it’s reoccurring revenue, I mean, these businesses are selling now at like 10 times reoccurring revenue, right? So a $3 million business that might not be making a single dollar of profit might be getting a sale in the high 20s, low 30s in terms of return, which is a huge number if you think about it.

Adam Torres:

But you start getting inquiries, right, so about every couple weeks, another PE fund would reach out and say, “Hey, we invest in your space, we heard a lot about you, we’d really like to have a meeting,” and it’s usually, these PE firms hire these young MBA guys out of school, they usually go to top business schools. And they’re basically like sourcing people, right, so their job is just try to get somebody on the line, say, “Hey, yeah, I’ll talk to you,” and then they bring in one of their LPs. And that was happening for a while.

John Warrillow:

LP stands for limited partner.

Adam Torres:

Right. So that happens a lot, and I was just saying no to it, “No, no, no, no, no,” and finally I just said, “You know what? Maybe I’ll take one of these calls.” And so started to do that, and there were a lot of them. Like I said, at that point, probably they were coming in, something was coming in every week or two. So started taking the calls. Actually, the first deal that we started to pursue, we did not complete, and it’s a good thing. Then we kind of backtracked and said, “Okay, we’ve learned a little bit about doing this now, so now we know more about what we want, what we’re going to demand, and we’ll make those demands right at the beginning of the process instead of waiting to be into it a little bit more.”

Adam Torres:

And so then the second one we did, we kind of took it all the way through. But yeah, it started with these funds kind of just reaching out to you, and then me learning a little bit more about them and figuring out who I thought was a good fit. Having never gone through it before, I’m glad that the first trip bailed, because I don’t think the deal was what we ultimately would’ve wanted.

John Warrillow:

Let’s talk about the first one, the failure. What was the process like, what got you intrigued by their offer to begin with, and then what ultimately derailed it?

Adam Torres:

So one of the things that I was really big on, and I thought for me, I want to kind of work my way out of this thing. For the rest of the guys, a lot of them, they had built their lives around it, and they really had every intention of continuing on with the business. And so my goal was to really find a home for the business where it wasn’t going to be like a competitor who might just buy the company and get rid of most of the people, I really wanted a buyer that was going to continue the business on in as similar capacity as possible.

Adam Torres:

So that was kind of the thing that I was looking for. I think the first deal that we came across, it postured itself much like that. When we got into the details of it, though, we kind of realized that, “Hey, this isn’t a great deal.”

John Warrillow:

What made you realize it wasn’t a great deal?

Adam Torres:

Well, I think the amount of money was a big portion of it. I mean, I’m not greedy, but there were offers coming in that were, people were pushing LOIs, letter of intent, to us with significantly more money. I think the other thing was that the deal that we ultimately settled on was not to sell the entire thing. The first deal was 100%, and the individual or the fund that was coming in the first time was already talking about the people that they were going to start bringing in right away, and I was like, “Jeez, we’re not that far along, don’t you want to wait until we get a little bit more into this before you make those decisions?” And was already talking about the exit very quickly for me and the other partner that was involved, and then I just thought, “This is an ill-informed individual,” right? I mean these businesses, all these colleges and universities, about a couple hundred of them at the time, we had a lot of relationships with those people. That wouldn’t be something that you could just turn off in a month or two, and I think this fund, that was their thinking or their approach, and that was a little bit of a red flag for me.

John Warrillow:

But wasn’t that what you wanted? You said you wanted to work your way out.

Adam Torres:

It was what I wanted, but I thought, in order for the business to be successful, that that needed to be a more gradual process than what was being proposed.

John Warrillow:

Got it. You mentioned you kind of learned some things from the first deal that you then applied to the second. What else did you learn from the first one? What can people learn from that experience?

Adam Torres:

Right, so I think the deal structure becomes very, very important. I think a lot of these deals have hurdles that the business needs to hit in order for the payout to be 100%, and those kinds of hurdles are problematic if the structure or the leadership of the business is changing as a result of the [inaudible 00:33:48]. So if I came to you and said, “Hey, let’s do this deal, I’ll give you, I don’t know, $20 million, but you have to make this much in terms of top line growth and this much in terms of earnings for the next three years in order for you to get that payout, but then you’re also not going to be in charge of it anymore,” that doesn’t sound like a highly probable scenario where you’re getting paid out.

Adam Torres:

And so a lot of these deals are, they sound good at first, and then you kind of peel back the onion a little bit. The other thing is, I always think that reps and warranties in a deal are what kill the deal. So I think you got to really focus on the reps and warranties. When we went through it the second time, that was one of the things we put up front. Because we were kind of getting into the reps and warranties on the first one, and it just was like, the things that we had to warrant and indemnify were, to me, seemed ludicrous. And so-

John Warrillow:

Like what?

Adam Torres:

… the second time, we were able to kind of really cap those reps and warranties. We used something called a cap and basket in the second deal, which is to say, none of those things kick in until you fill your basket, until there’s a certain amount, and in our case it was like, I don’t know, 100,000, or maybe it was a million, but it was like, “Hey, when the claims get to be a certain amount, the first amount, you just have to, they’re ticky tack things, we’re not going to deal with these claims. But then we’re also going to cap the amount of claims at a certain level so that there’s kind of like a, this is all that we would ever pay out in terms of claims.” So that’s the structure that I really, really like, and I would encourage anyone to use that model going forward.

John Warrillow:

That’s awesome. Let me talk directly to my listeners, because that term may be somewhat new to some folks. So reps and warranties, obviously, kind of promises that you’re making when you hand over your business, and if there are things that are not true, or that tend to be in dispute, there is an opportunity in some cases for the buyer to come back at you, and if you have a basket, as Adam’s describing, there’s a certain volume of those, financial volume of those that can happen without any sort of claim made. But if there’s also the cap, as you’re describing, Adam, there’s a limit to the sort of size of that claim. Have I got that about right?

Adam Torres:

Right on, right on. And I would say every deal … Well, I think at least for me that was a very important dimension of our second deal.

John Warrillow:

Adam, it’s, again, we learn so much from things that don’t necessarily go the way we thought. The first deal, you mentioned that there were things that they were asking you to indemnify that you weren’t comfortable with. Can you talk a little bit about the kinds of things you were like, “Oh man, that’s making me feel squeamish.”

Adam Torres:

Well, I think the first time you go through it, it’s a little shocking no matter what’s in their, right? So I would say that, the one thing I tell people is just relax about some of these things, right? So some of these things they ask you to indemnify in perpetuity, and those things are like, taxes. So that’s normal, right? If you didn’t pay your taxes before someone bought the business, you have to step in and do that.

Adam Torres:

But I think, John, all of it scared me the first time I was going through, and I think it just took a little bit of wearing me down On some of it. But then like the contract, I mean, you have a three year contract, for instance, right, and you’re going to indemnify all your contracts. So if something happens and a customer, we sell the company, I’m no longer there for some reason, no longer is the other partner, and all of a sudden the customer says, “Hey, I don’t want to pay my third year of my contract,” they want us to indemnify the whole length of those contracts pulling out forever, for however long they were. If it was a five year and we were in the first eight months of it, we’re indemnifying the rest of that deal.

Adam Torres:

I mean, come on. There’s a reasonable amount of time where you say, “Hey, if I’m not involved in this business anymore and the business did something that caused the contract or the customer to be upset and want to exit out of their contract and they don’t pay out the whole amount, I’m not going to come in and write a check for the rest of that.” I thought that was a little ludicrous. I think there’s some time frame on those contracts that’s reasonable. I think to say, “Hey, maybe 12 or 18 months is reasonable from the time of the close,” but if I had a three or a five year deal that was in the beginning of that deal, I’m not going to indemnify that whole amount.

Adam Torres:

And I think that scared me, right? That was one of those things where in the first deal we didn’t have a cap, and I just thought, “If this new owner comes in and screws up all these deals and these customers all angry and they want to get out if, they’re going to get out of it,” right? They’re states and municipalities, and if they don’t want to pay, they just don’t pay. So the reality of it is is you have to do a good job when you’re predominantly dealing with states, because they just don’t pay if they don’t want to pay. And there’s very little you can do about it. So I just wasn’t going to warrant all of that in perpetuity.

John Warrillow:

That makes sense. The second time around when you did successfully complete, you mentioned that there were the reps and warranties, you kind of put them up front early in the conversation. Tell me about that.

Adam Torres:

Well, the thing with the contracts, we kind of just said, “Hey, here’s how we feel about the contracts.” We kind of retrenched a little bit on the taxes, where everyone we talked to just said, “Look, the taxes is totally normal. You’re going to have to warrant that forever.” But there’s also, in the United States and Canada, there are nexus laws, and nexus kind of means, are you substantially in existence in that particular state where you’re doing business? That affects the sales tax rules in those particular states, and so it’s a very hard thing to navigate. Like, we operated in lots of states, my guess would be 30 some states. We didn’t have employees or property in these states, but some states are very, very aggressive when it comes to nexus laws. And so we didn’t file individually, like I didn’t file individually in every single one of those states that we did business pro rata. And that’s, the laws are gray, like it’s not so clear whether there’s nexus or not in those particular states. So they want you to warrant that kind of stuff too, and that’s just something you have to get comfortable with, it’s just a risk that you have to live with, and so far we haven’t had any problems.

Adam Torres:

We’ve paid all the appropriate taxes, mostly to Ohio. There were a few states that I think we did file in independently and paid taxes in these states, and what Canada does is they just withhold a portion of what they’re going to pay you, and they tell you if you want to get it, go file a tax return in Canada. So I think in that case, we just let them have it, and that’s how we proceeded.

John Warrillow:

I’d be curious to know how you were able to sort of generate offers. So the first one, it sounds like it kind of came to you out of the blue and you said, “You know what? Why don’t I take a flyer and enter this conversation.” As you started to proactively look for another deal, did you go to market? I think people listening would be like, “Adam, I’m so jealous of all the offers you were getting.” I mean, did you just fire up your email and say, “Okay, I’ve got these six emails, I’ll just send a note to all of them,” or did you proactively hire someone to represent you, like what was the way you went forward after the first deal collapsed?

Adam Torres:

Yeah, so first let me say that, like I don’t think that we did, or I did everything right. I think it was a lot of mistakes, and I think that’s characteristic of my entire life. It’s a lot of mistakes, and a lot of times I just kind of hung around. So a lot of what I’ve done, like people will say, they kind of [inaudible 00:42:20] that kind of issue, you’ve had all this success, you did all these things right, but the reality is, is really my life is a whole bunch of stories of just failures that I kind of weathered through. But in this particular case, we were kicking around hiring a firm. The problem with some of these firms is they want like five to 7% for you to sell your business, and I didn’t necessarily want to pay five to 7%.

Adam Torres:

Now, the risk that you’re taking is that they can give you way more than five to 7% in terms of a buyer’s ability to pay, so I mean, that’s the trade-off. But when the first offer came in, I kind of thought I had a baseline, so I kind of just upped that some percentage, it wasn’t as scientific as what everyone probably thinks, and then I kind of went back to the other people who said they wanted to participate in this and just said, “Hey, here’s the starting place.”

Adam Torres:

And I just thought, “We’ll just see what else is there,” and some of them bit, and that’s kind of how we proceeded. So it wasn’t as scientific. I also knew at the time, software companies in the SaaS space trade on ARR, or MRR, monthly recurring revenue, annual recurring revenue, and now the numbers are big, like I’ve seen a lot of numbers like eight to 10 times ARR. At the time, it was not as big, but … So we kind of knew what the multiples were, and that [crosstalk 00:43:47]-

John Warrillow:

What’d you think was a fair multiple at that time?

Adam Torres:

I thought three and a half to five times was where we needed to be in terms of [inaudible 00:43:55]. Now, I look back on it and think, did I leave 15 or $20 million on the table? Maybe, maybe I did. But look, you can always play that game, right? There’s always a nicer car or a bigger house or a better deal. So I don’t think about it too much, but I do think we might’ve left some money on the table in that first deal.

John Warrillow:

You mention mistakes. Again, I’m grateful for you sharing. What else do you think you might’ve done differently if, history being, vision being 20/20 in the rear-view mirror. What might you do differently if you had the deal to do over again?

Adam Torres:

Yeah, so I don’t think I would’ve done the deal in the year that I did it. I think I would’ve hung on for two more years and done the deal at that time. I mean, certainly hindsight’s 20/20. But I think one of the things that a lot of entrepreneurs might go through and what I went through is, it’s a little lonely running a company. At least for me, I had people that ran parts of the business, but nobody who really felt the magnitude of the risk that was being taken every day. And nobody who was willing to give no matter what, besides me, in that business. And I think a lot of people who are entrepreneurs feel that, and it’s an anxiety that’s just kind of with you all the time, or it was with me. And I think if I could’ve really gone out and worked to hire somebody that really shared that operating risk with me, across the entire business, I think I would’ve probably had the fortitude to keep going for a couple of more years, and I think that would’ve been a good decision. So in hindsight I think, I probably exited slightly too early.

John Warrillow:

That makes sense, that makes sense. And it also makes sense, the sense of anxiety and just heaviness of running a company like that and being the only one at the end. Did you buy yourself a trophy? I mean, you’d already bought yourself a house, paid it off based on the profits of the company, but then you sell it. Did you buy yourself a new car or something for your wife, like what did you do to mark the occasion?

Adam Torres:

Yeah, I saw this question, and I’ve been thinking a little bit about it. I will tell you that I don’t know that I did anything really that significant. I mean, everyone’s like, “Oh, you should buy a Ferrari.” Like everyone else had a lot of ideas in terms of how I should spend my money, but you have to remember, in my particular case, I really enjoy having a fairly simple life. And I think it’ll be easy now for someone to say … Now, we live differently than we did before, but I think it was nothing that happened immediately after the deal. It was a few years out before we kind of, slightly upsized our lives. But I have the same car as I had back then, I don’t have this burning desire to own a lot of things. To me, the more things that I own, the more things I have to think about and maintain, and that weighs heavy on my mind.

Adam Torres:

What I really wanted to have most was my days back, and so I don’t know if that was something that I bought, but it was something that, now I work three days a week and I just, I dabble in things, right? Like I’ll go and sit at a coffee shop for two hours on a Wednesday and talk to some entrepreneur about what they’re working on. And I don’t want anything from them.

Adam Torres:

I think one of the things that I always found as I got going in the business, like everyone wanted something. Like here’s an account that wants to do business with me and wants to help me with my taxes and wants me to pay them, and so the advice to me was always a little bit tainted. And so I kind of just thought, “I want time and I want the ability to work with other entrepreneurs,” that really I can just kind of give them something without anything coming back in return, and they can trust that, “Hey, here’s someone who’s done this and has experienced these worries that I’m experiencing, and who isn’t just trying to get me to pay them some fee or hire their company or do something like that.”

Adam Torres:

And so, I don’t know. I didn’t buy anything. We do move to Florida for the wintertime and do that, but nothing extravagant. Like I didn’t go out and buy a Ferrari or a yacht or a condo in Monaco or anything like that.

John Warrillow:

Got it. You’ve certainly been busy. Tell us about what you’ve been doing since selling, I mean, what do you do now and how do you feel the three days that you are working?

Adam Torres:

Yeah, so one of the things that was a real struggle for me, and certainly it was a mistake, was the non-compete, non-solicitation agreement that I agreed to in the transaction. And what that did was that locked me out of two industries that I love very dearly, for a long time, five years actually. And that was one of the things that when, I probably didn’t completely process as we were going through the deal, and I wish, I would never have ever do that again, I would never sign such a long non-compete, non-solicitation type agreement.

Adam Torres:

So when I wanted to start to get back into technology and software and higher education, it was very challenging. My hands were very tied. So what I started doing was just saying, “Hey, I got to go into more traditional business, this is kind of locked out for me for a while.” So I just kind of started doing what I was talking about before, where a lot of these owners, they just want to talk to somebody about something, right? And they don’t want somebody leaning on them for another check or another thing, and I started doing that, and I just thought, “Maybe that’s what I’ll be, I’ll just kind of counsel other business owners, and if they want help, fine, if they don’t, that’s okay.”

Adam Torres:

And so I kind of started stumbling into things, and over time, a lot of trust got built with these owners, and they started to say, “Hey, would you invest in this thing to help me grow it?” Or “Would you help me find a new chief marketing officer?” Or “Would you introduce me to a potential university or a buyer or something?” And some cases I could help them, some cases my hands were tied, but I actually bought and invested in a chain of day cares that was where my kids went. There was nothing special about it, it was three day care centers, and now we have 10 and we’ve quadrupled the sales in a couple years. We have a medical practice that wasn’t doing so well and kind of got it turned around. So I just kind of help these business owners, usually for nothing at first, and they usually come to their own conclusion that they want me to be more formally involved in this business or not, and if they do, we’ll make an investment or I’ll make an investment in those businesses, and try to help them try to grow.

Adam Torres:

So since then we’ve had three or four other transactions, in just a few years. And we do two ESOPs, which is kind of a nice model for a services business. We did another outright sale, and then we had a second tranche on the first TeamDynamix product, so we had four transactions since 2016.

John Warrillow:

Fantastic. I’m going to link to your LinkedIn profile in the show notes. Is that the best way for people to reach out if they wanted to say hi, or did you want to send them to a website, or what’s the best way to connect?

Adam Torres:

Yeah, no, I think LinkedIn’s the best way for me. I do appreciate when someone actually sends a note. I get a lot of things from people that just want to connect and I’m not actually sure why. So I’m always on the fence with that, because I’m not actually trying to be solicited, financial advice or accounting advice or legal advice, and I get a lot of those, but yeah, I think LinkedIn’s a good way to get in touch with me.

John Warrillow:

Awesome. And it’s Adam Torres, T-O-R-R-E-S, if I’m correct.

Adam Torres:

Got it.

John Warrillow:

Awesome. Well, Adam, look, it was great to have you on, and continued success. Thanks for doing this.

Adam Torres:

Thanks, John. I appreciate it.

 

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