The 50% Bump

November 6, 2020 |  

Want to increase the value of your business by up to 71%?

Take the 13-minute survey and get your Value Builder Score

About this episode

Subscribe:

Stephen V. Smith built WordSouth, a marketing communication agency to 30 employees before a rare condition landed him in the Intensive Care Unit of his local hospital for seven weeks. Close to death, Smith gathered his team and began the heart-wrenching process of delegating his business’s critical pieces to trusted employees. Little did he know at the time, that decision would be an essential element of building a sellable company.

Smith went on to recover and sold WordSouth in June of 2020. Smith’s story is one of perseverance, humility with a healthy dose of savvy, including recommendations to:

  • Document Your Processes: Smith always struggled with delegating, but when he ended up in the hospital, he was forced to confront his reluctance. When healthy, Smith could probably do many things better than his employees, but being stuck in the hospital, he needed to get others to do the work.
  • Find a Strategic Acquirer: Smith was able to find a strategic acquirer based in Oregon called Pioneer Utility Resources. They were also involved in the marketing services industry, but did not have a presence in the south, a geographic market they were keen to access.
  • Model the Synergies: Smith was not satisfied with the first offer he received, so he holed up in a conference room with his accountant for five hours while they modeled out the future of his business. They calculated the value of the synergies Pioneer would enjoy. The resulting spreadsheet allowed Smith to increase the value of his company by as much as 50%.

There’s lots more to take away from this interview, including:

  • The biggest mistake most owners make when documenting their processes.
  • How to train a Chief Operating Officer.
  • The one person you need on your team if you’re going to go through a sale.
  • One surprising question every seller should ask an acquirer.
  • How to tell your employees you’re thinking of selling.
  • Smith’s biggest regret.

A big part of Smith’s success was finding a strategic acquirer who could benefit from what he had built. We’ll help you discover your best strategic acquirers using a tool called The Short List Builder, which is our focus in Module 11 of The Value Builder System™. Complete module 1 for free by answering the Value Builder questionnaire.

Our guest

Stephen believes in the power of story. It’s how we document our lives, pass on our principles, and share the lessons we’ve learned. Beyond this, Stephen believes that stories have the power to influence behavior and shape our future. He has witnessed this from his days as a small-town newspaper editor to his years of running a content marketing firm, and it’s what drives his passion and fuels his work. Alongside his wife, Michele, Stephen launched WordSouth on New Year’s Day 1996. Together, they took the company from a spare bedroom to the Inc. 5000 list, culminating in a successful acquisition in mid-2020. Stephen loves to talk about growing and selling a small business, the craft of storytelling, rural broadband, content marketing, and living life with a rare disease. Twitter: @stephenvsmith LinkedIn: https://www.linkedin.com/in/stephenvsmith/

Watch the interview

Want to increase the value of your business by up to 71%?

Take the 13-minute survey and get your Value Builder Score

Get Your Score Now

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. 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:

So who’s in the best position to leverage what you’ve built? Who are the strategic acquirers in your industry that can take advantage of your assets and make them worth more in their hands than they are in your hands? That’s the ultimate definition of a strategic acquirer. What you’ve built is worth more to them than it is to you. Which is why they typically pay generally a higher multiple than a financial buyer, an individual investor. So really giving some deep thought to who the strategic acquirers are for your business makes a whole lot of sense. It’s a conversation Stephen Smith had with his advisor where he was thinking through who would make the most sense to buy his company, WordSouth. They built it up to 30 employees. And he realized there was another organization in another geographic market that had a lot to gain by buying his business.

John Warrillow:

Here to tell you the story is Stephen Smith.

John Warrillow:

Stephen Smith, welcome to Built To Sell Radio.

Stephen Smith:

Hey, great to be here, John. Happy to be on the show.

John Warrillow:

Tell me about WordSouth. What do you guys do?

Stephen Smith:

We’re very niche. We work with rural utilities, that’s electric cooperatives, small town providers, broadband companies, telecommunications companies, and primarily those serving rural America.

John Warrillow:

But what do you do for them?

Stephen Smith:

We help them do three things. We come alongside them and become part of their mission. We help them tell their story. We help them market their services. And we help them train their people. And we’re a communications company, a traditional top agency slash publishing company, so we do a lot of magazine work, traditional publishing like that. But in addition to that we do a lot of digital work, social media, web design, things of that nature, just helping them tell their story.

John Warrillow:

Okay, so a marketing services agency with a specialization in working with these utility companies. How did you pick that niche? What’s the backstory there?

Stephen Smith:

Well, we started the company, my wife and I, almost 25 years ago as really a continuation of some freelance work that I was doing. I was in the newspaper business and was doing some freelance work on the side for a utility in that region, here in north Alabama. And we quickly saw that that was a need in a lot of areas, and over the years we’ve done other things besides that niche. We’ve dabbled in government and health care and lots of basic small business. So we’ve done a lot of things. But over time, like a lot of businesses, we found out who we were, what our strengths were, and really focused on that.

John Warrillow:

25 years working with your wife. I think I lasted about three weeks working with my wife. She worked in the company for about three weeks and it was like a disaster. I’m like, “It’s either the company or our marriage.” What’s the secret to working with your wife? How does that work?

Stephen Smith:

Well, you’d probably have to ask her what the secret is of putting up with me. I got the best end of the deal, I can tell you that side.

John Warrillow:

You’ve learned to answer that question very diplomatically. You sound like a politician.

Stephen Smith:

Well we work very well together, and we complement one another. I’m the writer and I’m the person out front, the deal maker, and she’s a designer, and she’s in the background making sure that I don’t mess up. So it’s a good partnership.

John Warrillow:

That’s awesome. That’s awesome. What’s the economic model that you used? I mean a lot of marketing agencies bill by the hour or by the project. How did you bill for your services?

Stephen Smith:

On the publishing side of things, we pursued contracts that are all encompassing for that publication and the services that go along with that. On the marketing side of things, those non publication projects that are more traditional agency things, we’ve worked with those hourly models, but over the years we’ve really tried to move away from that and move more towards comprehensive contract. Instead of selling a bucket of hours, trying to focus on being that strategic partner for the company and to bring the services that they need based on the strategy we develop, the statement of work that comes from that, and then being their partner more on, not an hourly basis but a contract basis.

John Warrillow:

Got it. So as you’re building this company, is the thought of selling in your mind at all? When did that trigger for you?

Stephen Smith:

I guess several years ago, that seed was planted when … Initially I was in the newspaper business, and my former publisher, they sold their company, and I saw really what that did for them in their lives, and how they were able to cash in the sweat equity, if you will, and then do other things that interested them. And I certainly saw how hard they worked with being small business owners.

John Warrillow:

Did you see anything that made you, envious is probably too negative a word, but that made you aspire to do the same? Was it a car that they drove, a country club that they joined, another business that they started? What did they do that made you think man, I’d kind of like to do that one day?

Stephen Smith:

It was certainly nothing materialistic necessarily, it was just more of a lifestyle change for them.

John Warrillow:

Like what? What was the lifestyle change that you saw, that you wanted?

Stephen Smith:

I guess one of the biggest things is they slowed down. They stopped working as hard and took some time off and was able to … And they ended up doing some other things, getting into other projects and that sort of thing.

John Warrillow:

Did you start to think, well what would WordSouth actually be worth? Did you start to think about the value of the company?

Stephen Smith:

Oh yes, over the years, we’ve certainly looked at that and did a lot of research over the years of just always being in the, reading the magazines, reading the books, listening to the podcasts, just immersing ourselves in-

John Warrillow:

And what did you start to come to think that the company might be worth? Was there a valuation, a multiple that you were starting to think, oh, maybe we could get X? What was the methodology you were using to try to put a value on the company?

Stephen Smith:

Well, really for years I was just looking at the different models that people use to assign a valuation. And ultimately coming to the conclusion that a company is worth whatever a buyer is willing to pay for it, and the methodology that you get there is going to depend on the situation and the buyer and the circumstances. And as we became very serious about it, about looking for a buyer over the past say five years, we were looking more closely at those models and what might work for us.

Stephen Smith:

But again, we knew that that was going to be dependent on the folks that we ended up partnering with.

John Warrillow:

Yeah. And did you get a sense of what the standard multiple for a company like yours?

Stephen Smith:

We did. We had some ideas in terms of multiples of revenue, and multiples of EBITDA.

John Warrillow:

What was the range?

Stephen Smith:

The one that I tended to use as a rule of thumb was maybe a one to one and a half times revenue for a services company like ours that was very niche and was centered in this part of the country, lots of different factors. I felt like between a one and two might be a starting point for a conversation.

John Warrillow:

Got it. Got it. How big did you get this company before you decided to sell? Any proxy, like number of employees, revenue, whatever you’re comfortable sharing.

Stephen Smith:

Yeah, we were a seven figure company. We had grown to about 30 employees, and that’s a mix of part time and full time. And some contract thrown in there. We were to the point we had employees scattered across five or six states and serving clients in several other states, which as a side road here, I’ll say that moving to a distributed workforce over the past few years really served us well when the pandemic hit the country. We were able-

John Warrillow:

Yeah, you were already doing it, you were way ahead of the curve on that.

Stephen Smith:

Yeah, we really were.

John Warrillow:

Yeah, we talked before we hit record about a pretty significant life event for you back in, I think it was 2015, which changed a lot for you. Do you want to talk a little bit about that?

Stephen Smith:

Yeah, I’ll get into that. In 2014, I got a diagnosis with a rare disease called myasthenia gravis. Not a lot of people have heard of that. It’s a neuromuscular condition. And it took a year to get a diagnosis. When we finally did there was a surgery that they recommended. Thymus gland has to come out, and we found that there was a tumor on it, so it really needed to happen.

Stephen Smith:

Everything went well until a few weeks after that surgery in February of 2015, I went into the hospital, back into the hospital with complications, and went into what they call a myasthenic crisis. They said, “You may be in the hospital a week while we do this treatment.” And I thought, oh gosh, I have to get back to work, I can’t be in the hospital for a week. And that week turned into seven. So I was in the hospital for seven weeks, most of that in ICU.

Stephen Smith:

There came a point during that time that my wife and I said that we don’t know how long this is going to happen and how long this is going to be going on, and what after this looks like when I do get out of the hospital. And I didn’t really realize just how sick I was.

Stephen Smith:

So we called some of our folks in down to the hospital in Birmingham, Alabama, and we had a conversation with them, and said, “We’re going to make some assignments here. We’re going to hand out some new titles. We’re going to delegate some responsibilities.” And while we had certainly been looking at corporate structure and had a decent one in place, at that point we, well, I guess you could say it boiled down to me letting go, John. I’ve always had a delegation probably. So we said, “You’re responsible for this, you’re responsible for that.” And we put some things in place that has served us extremely well. From the time-

John Warrillow:

Like what?

Stephen Smith:

Well, the biggest thing is having, or putting a COO in place, and having people over sales and marketing and letting some of that go and giving people ownership of their responsibilities, and truly delegating, which is always hard I think for a small business owner that started a company that was really … I mean, for so many years, WordSouth was Stephen Smith and his support staff. And getting to the place that the clients and prospects and the industries we serve do not focus their attention on you, that they don’t identify the company by you, it’s a hard place to move from. So we really started trying to move away from that and put those employees out there and out front, and it really served us well, because from the time that we made those intentional efforts to the time we sold the business earlier this year, our business doubled. And I think that that is, a lot of it has to do with the fact that we got serious about our corporate structure and really doubled down on that.

John Warrillow:

Amazing. I’ve got so many questions around that. You delegated, and delegation is something we hear about in business school and in theory, and it sounds good, but to your point, it was difficult for you. What is the secret, what did you learn about effective delegation? What did you learn about what you were doing wrong and what you started to do as the correct way to delegate?

Stephen Smith:

Well, you have to stop saying, “Well I can do that. I can do that better.” Most of the time that’s probably true as the owner and founder. You’re closer to the business, you’re closer to the … It’s all in your head, you understand everything and how it should work. You got to get that out of your head. You have to create those processes. You have to document those. And you have to get ownership of those. You can’t let … You can’t just create those processes and hand them down from on high and say, “This is how we’re going to do things,” you have to involve people in developing those. You have to give people ownership of the process and ownership of the outcome of the jobs that you’ve delegated to them, hold them responsible for that.

John Warrillow:

I think a lot of people listening will be like yeah, here we go, process again. I know, I’ve heard this, I read the e-myth, I know I got to do it, but man I don’t know where to start. I don’t know how to get it out of my head. Short of ending up in the hospital, which nobody wants to do, obviously, what advice would you give someone who’s struggling to get it out of their head?

Stephen Smith:

Well one I would say get alone and get quiet, and notebook and pad, not a computer, not your phone, just notebook and a pen, and think through how do I get from A to Z? How do I do this thing? Write those steps out. But then, the people that watch you do those things, if you were involved in those, you need to get those people involved in that process too. Because chances are you’re going to say, “Well here’s how we do this thing, and we always do it,” they’re going to say, A, “Well you may think that’s how you do it, Stephen, but this is what it looks like from the outside.”

John Warrillow:

Was how we did it back in 1986.

Stephen Smith:

Right. Or, “This is how it looks from the outside.” Or, “If we would tweak A, B, and C, it would make it a much, much smoother process,” and get their input on it.

Stephen Smith:

I was joking with one of our executive team the other day that I really like developing processes, I just don’t like following them, because I’m a bit of a free spirit when it comes to that, and they’re always … You hear the groans on staff when I’m involved in actually managing a project. They’re like, “Don’t we just need to turn that over to an account manager, and you just kind of consult there?” Because yeah, they do a great job, our team, taking the processes, the systems that we’ve developed over time and running with those.

John Warrillow:

Another thing you did was bring in a chief operating officer. What was that experience like for you?

Stephen Smith:

Well, he was already on staff, so it was really just identifying someone that fit that mold so well and was already an leader in the company. And by that point it was almost a matter of just giving him the title, because he had really stepped prior to the sickness, of course. He was a leader. But when I went into the hospital, he knew things had to happen. His name is Jared, shout out there to Jared. But he did a great job of taking hold of what needed to happen and make sure things were continuing back at the office.

John Warrillow:

Was there a sense of, for you and your wife, that you were becoming too dependent on Jerry? Particularly when you were sick, I’m imagining that that might have felt a little uncomfortable.

Stephen Smith:

No, not at all, because he had already proven himself, and not just Jared, but other staff members, Carrie, and Andy, and Elizabeth, and other people who had already shown that they could be trusted with the roles that we had given them. So there was a great comfort level there. We just have a tremendous leadership team. And Noble, can’t forget Noble.

Stephen Smith:

We had a great leadership team already in place that was doing a very good job. It was just a matter of, a lot of it was just a matter of Stephen saying, “Okay, go do your job and I’m going to stay out of the way.”

John Warrillow:

Yeah. I’d be curious to know how you chose to compensate Jerry, not necessarily his salary but the structure of his deal, because I think a lot of people hear the word COO or second in command and they wonder, do I need to share equity, do we now have to have audited statements so that we can do profit sharing, what was your structure for compensating a COO?

Stephen Smith:

Oh, ours was very simple. Jared was on salary before then and remained on salary afterwards. We didn’t give any kind of equity share or anything.

John Warrillow:

Got it. Got it. And so no additional, no change to his comp, effectively, even though he was taking on this broader responsibility, or at least this bigger title.

Stephen Smith:

No change in structure, yes.

John Warrillow:

Got it, got it. Okay. That’s helpful. When did this shift from making it all about Stephen to delegating and creating this business that could thrive without you, when did that shift to wanting to sell the business? What was the trigger there?

Stephen Smith:

Well, bear in mind that for years, thinking about selling the business had been in the back of our minds. Admittedly, the back of my mind a lot stronger than my wife’s, because I, okay, it’s one of those dreams he’s played with. I’m an idea guy, always coming up with things. But I felt like we were building something of value and that one day we would be able to cash in on that sweat equity.

Stephen Smith:

We had had some conversations within the last five years. We had a couple of conversations with two different organizations, thinking about what this would look like. They were partners, people that we worked with in the industry about are there some synergies here, is there something worth talking about here, just some early exploratory conversations, that remained that, they didn’t go much further than that. Just looking at, exploring the what ifs, I guess.

Stephen Smith:

It’s important to note that we never took the business to market. That just wasn’t an approach that was right for us. We didn’t hire a broker and go out there and market the thing because we knew that in order for an acquisition to be successful that we were going to stay on for a period of time for the stability of the company, and even though we did a lot of delegation and put clients out front, I mean put employees out front, I mean clients still knew me of course, and the stability of us being here so long, it was our company. An immediate exit after an acquisition would not have been healthy for the company. It would have created a lot of instability. We knew that whoever we ended up selling to, there had to be a lot of commonality in terms of mission and culture and business practices. It had to be the right partner.

John Warrillow:

Because you weren’t just going to drop off the keys and say, “Have at it, I’m out of here.” You knew you were going to stick around for awhile.

Stephen Smith:

Absolutely.

John Warrillow:

Where does it go from there? So it’s in the back of your mind, you’re having these preliminary conversations, they don’t go anywhere. When does it go to the front burner?

Stephen Smith:

This would have been in, let’s see, it would have been in 2018, early, I believe. We met the CEO of, fairly recent CEO of a company in Oregon, Pioneer Utility Resources, that his company’s actually very similar to us in terms of they work in the same space mainly with public power and electric cooperatives. They don’t do any broadband.

John Warrillow:

The name sounds like a utility itself. It sounds like the gas company or something like that. They’re really called Pioneer Utility Resources?

Stephen Smith:

Right, right.

John Warrillow:

What do they do?

Stephen Smith:

They publish a lot of magazines and also bring social media support to electric cooperatives and their statewide associations, mostly out west.

John Warrillow:

It’s a great name. It’s a great name. Because it feels so, I don’t know, like part of the industry.

Stephen Smith:

Right. And they are actually a cooperative themselves. They were formed by, back 60 years ago or so, they were formed by electric cooperatives out west who wanted a centralized communications support in terms of their statewide magazines and how they communicate with their in customers and members.

John Warrillow:

What is a co-op? I’ve heard of co-op apartment buildings in New York, I’ve heard of co-ops but in farming, but what does that mean, a co-op?

Stephen Smith:

Oh John, you’re going to take this down a 30 minute road here.

John Warrillow:

No, please, give me the short version, just the mountaintops.

Stephen Smith:

The cooperative business model really changed rural America. It provides a way for a community to come together and form this company that is cooperative, they are members of that company in that they take services from that company. Then that company can do business and they can borrow money from the federal government and create those services. It’s a way for the community of create services for themselves that private interests provide, because it’s just not profitable.

Stephen Smith:

In our particular area, we are served both by an electric cooperative and a telecommunications cooperative.

John Warrillow:

So they don’t have a profit incentive? Are they trying to make money?

Stephen Smith:

When you’re looking at an area of the country where let’s say an investor owned utility can go to a large city and for every mile of line that they build, they’re going to pass 30, 50, 100, 300 customers, and then you get out into the rural area and that same mile of line that costs the same to construct, maybe even more depending on terrain, is only going to pass six, seven, eight customers, and that’s all you have to get the money from to pay for the thing, it’s not attractive to investors, of course, because the money’s just not there. And the cooperative model is that any margins that the company makes is returned to the membership in the form of what they call capital credits. It’s not immediately returned that year, it’s usually like on a 30 year scale. But those profits are just assigned back to the members. So it’s really a form of business where the community can provide the services for themselves that an investor owned company never would because the profit’s just not there.

John Warrillow:

It’s got to be like herding cats with all these members and opinions, and …

Stephen Smith:

Well, the members are involved. Cooperatives have an annual meeting. They have a process where the cooperative members elect a board of directors to represent them. And that happens once a year, and those directors make all the policy decisions and those sorts of things. And they function as the board of directors would in a traditional corporation. They hire an executive team that runs the company.

Stephen Smith:

If you didn’t know, you walk into one of these here, the electric cooperative or telecommunications cooperative that serves us, you walk into the office and you see the operation and you look behind the scenes, you don’t see a lot of difference in terms of between that and a corporation except it’s all so very customer focused.

John Warrillow:

Okay. Got it. That’s helpful, for sure. So tell me where this conversation goes. This company up in Oregon, when does it turn from polite conversation to acquisition conversation?

Stephen Smith:

The entire process, believe it or not John, took about two years, a little better. And so much of that was just getting to know one another, and hey, I’m traveling to a conference, are you going to be at that one? Hey, maybe we can have dinner, and those kind of things. And over time it became so obviously that we had similar missions, similar cultures, and it just made so much sense for us to go down that road and explore what could be possible if we worked together.

John Warrillow:

Who made the first move?

Stephen Smith:

Oh, that’s like asking that question to my wife and I, how did we end up married? I can’t really say. It just happened organically, which is another thing that really made us know that this made a whole lot of sense.

John Warrillow:

What did they see strategically in you? You’re in similar businesses but you’re in a different part of the country. Why would they want to buy you, basically?

Stephen Smith:

Great question. One, the geographic differences that you mentioned there. They operate for the most part, except for some clients in South Carolina and Florida, for the most part they operate in the western part of the country, and we have no clients out there. So we have a strong base in the south and southeast, so geographically that made sense for them.

Stephen Smith:

But we’re also, in addition to working with electric cooperatives like they do, we’re heavily weighted in the telecommunications industry. And we do a lot of work in broadband marketing, helping these companies market their services, their broadband services. It’s an interesting thing, John, when we started the company, we were working in … Our very first client was an electric cooperative, and our second or third client was a telecommunications cooperative. Of course that was before we had broadband. I remember us building ads for that blazing fast 56k internet that was coming out.

John Warrillow:

Modem? Yeah.

Stephen Smith:

Exactly. So we’ve been in that a long time. We’ve been in both industries for all these years, and we’re really seeing the confluence of those now, because you have, in addition to the traditional incumbent telecommunications companies, a lot of electric cooperatives are getting into the broadband business now. So here with are with some expertise in both areas, and as that continues, as that momentum continues in that direction, we were heavily versed in the broadband industry, and they had little to no experience in that. So we were also bringing that to the table.

Stephen Smith:

And another thing that made it make a lot of sense was, again, I know I’ve said this before, but our missions were very similar. They’ve joked that they’re a communications company that is a cooperative and WordSouth is a communications company that acts like a cooperative. So we’re very mission driven and customer focused. And then our cultures, we’re just very similar. So it made sense in a lot of areas.

John Warrillow:

Got it. So the fit feels right, what happens next? Do they present you with a letter of intent, or do you guys talk numbers over dinner? How did the number stuff start to happen?

Stephen Smith:

Yes. We started talking about what those numbers might look like. We signed NDAs and got some initial numbers to them. They took some time with that, and we got back together with what an initial offer might look like. And then we had a meeting about that.

John Warrillow:

Was that verbal? Was that conversation verbal, where they started talking about what an initial offer might look like?

Stephen Smith:

No, that was written.

John Warrillow:

Written. And what was your reaction to their first written sense of what it might be worth?

Stephen Smith:

Initial reaction was we’re in the neighborhood, but we haven’t found the address yet, but we’ve got a good framework, and let’s start building on it from there.

John Warrillow:

In other words, you weren’t totally satisfied with the number. How did you get them up?

Stephen Smith:

This is an area, John, where I would highly recommend any business owner find an advisor that you can trust that has some M&A experience, even if it’s not directly involved in the kind of business that you’re in. If it’s something similar. And we certainly found that in a fellow named Rod Ballard. I’ll give a shout out with him. He’s with the accounting firm Jackson Thornton, and they work in the same space, we have a lot of clients similar. So Rod understood and had been through a lot of M&As, not with agencies, but with the telecommunications companies and things of that nature. He was very familiar with the industries.

Stephen Smith:

But Rod brought so many things to the table, and one of those being able to step back and say, “Okay, you’ve never really done …” As a small company, especially as a communications company, my wife and I both being creatives, our financial approach was certainly not as advanced as, we didn’t have a CFO, and we have a CPA that prepares the taxes, and those kind of things. So that was certainly an area that we weren’t real advanced in, and Rod was able to take us through a discounted cash flow analysis, and doing projections, and spreadsheets, like I didn’t know Excel could do all those things.

Stephen Smith:

I’ll never forget the day that he and I sat down at their office in Nashville and we were going to go over some initial numbers and take a look at some things and build out some of these forecasts. And I was thinking we’d be there 30 minutes to an hour as he went through, okay, here’s what I’m going to do and we’ll get back together next week. And we were in his conference room with the Excel pulled up on a big TV screen for five hours straight as we walked through getting to a point that we were pretty close to having what we needed to go back with a counter offer. It was exhausting, but it was well worth it.

John Warrillow:

Stephen, what is it that Rod is doing in Excel in that five hour meeting?

Stephen Smith:

Well, as a creative you have to know that I’ve blocked most of that out now.

John Warrillow:

It’s like women who have kids. They’re like, “I can’t remember, I have a kid now, it wasn’t that bad.”

Stephen Smith:

Exactly. Well the big thing was that analysis that I mentioned.

John Warrillow:

But what analysis is he doing? Is he doing forecasting, or is he doing analysis your current … Forecasting.

Stephen Smith:

Yeah.

John Warrillow:

Got it.

Stephen Smith:

But I tell you another thing that is [inaudible 00:36:09]. And I made a note not to forget to tell this story, is I pulled up a letter last night and read over it again and chuckled, where early in the negotiations, very early, I wrote the most ridiculous letter and was ready to send it to them, where I was stating, okay, if we’re going to move forward, we’re going to need this and this and this, and here’s the facts about us. Now these are things that we just want, I guess is basically how it was ticking off, and for this to work, these things are going to have to be in place. Because there’s so much emotion. I don’t care how stable you are, you get into selling something that is, I mean for us our third child, our business, emotions are going to kick in.

Stephen Smith:

I sent that letter to Rod and the next day he called me and he said, “Wow, Stephen. That’s pretty direct. You’re just laying it all out there.” And instead of saying, “Stephen, delete that. Don’t be an idiot. This is way too early to talk about this,” he very gently talked me off the ledge there. And that is the role, I mean a good advisor can help you take those blinders off and can help you think straight. Because no matter how focused you are, no matter how you feel like it’s not emotional and you’re in control of it, emotions are going to kick in when you are selling your own business, and something you started from the ground up.

John Warrillow:

Would you mind sharing, if you characterized the letter as ridiculous and very direct in Rod’s own vernacular, would you mind sharing some of the things that you wrote that you were going to ask for in the letter that you came to learn was perhaps too early in the conversation or too direct?

Stephen Smith:

I will never share those things publicly. No. Well, it’s just things like maybe approach, structure of the deal, and those kind of things. It was-

John Warrillow:

Like 100 percent cash up front, I don’t want any earn out. Is that the kind of thing you …

Stephen Smith:

Have you seen the letter?

John Warrillow:

No, but I’m guessing.

Stephen Smith:

That was actually one of the bullets, actually.

John Warrillow:

Yeah. Yeah. 100 percent cash up front, yeah. What else would have been in the letter?

Stephen Smith:

That’s enough of that. I can’t remember. Let’s see, the 100 percent cash, and I don’t know. There were other things that it was just way too early to lay it out all on the line. And I just tell that story to say that’s just one ridiculous example. But I’m sure there are many others through the process that Rod was able to help us take a breath, slow down, think through, and that’s just a vital, vital role. I would not walk through that process without someone like Rod at your side.

John Warrillow:

Yeah. It’s such, I’m so glad you shared the story, because the temptation is to get, okay, we’re in a negotiation, I’m going to get my way dammit, and you can really turn off a really fruitful conversation very early. There’s a time and a place for those negotiations, but as Rod pointed out, it sounds like his advice was let’s get the hook in the fish before we pull too hard on the line. Got it.

John Warrillow:

What else did Rod do that made this deal work?

Stephen Smith:

I’m not sure how common this is, but Rod was actually involved up front with me in conversations with the CEO and CFO of the acquiring company, and was able to … He took part in the negotiations, I guess you would say. And asked a lot of good questions. It just makes a world of difference when someone who’s been through that M&A process, and in his case on both sides of the deal, bringing that experience to the table.

John Warrillow:

What kind of questions did Rod ask that you were like, oh man, that’s such a good question, I’ve never thought to ask that?

Stephen Smith:

There was one thing in particular. He was asking about maybe their plans for the company, what they saw long term. Let’s see, there was one … Oh, in particular he was asking about the source of funds. Basically, if this deal goes through, how are you going to pay for it? And I never would have thought to ask that. And that’s just one example. But yeah, I would highly advise anyone to seek out an advisor for sure.

John Warrillow:

Yeah. I want to go back to the five hour Excel marathon. So he’s forecasting out your business into the future. And for what purpose? What is it that he’s doing that for?

Stephen Smith:

Well, I think there are at least a couple of valuations that you can think about for a small business that’s looking at an acquisition. There’s, of course the value of the company today. There’s the value of what the company could be five years from now on its own. And then there’s the value of what the company can be with the acquisition. That was certainly an important factor for us, that we needed to establish a foundation of what we could do, and project out, of what we could do together. Because if you’re looking for, in our case, for us, in a business that we wanted to help continue to grow and prosper and be successful, we were looking for a strategic acquirer, and certainly a lot of small businesses, a strict financial acquisition is not really realistic, I guess. But we were absolutely looking for a strategic acquirer, because we wanted to see what we could accomplish together. We were looking for some synergies that we could build upon, scope and scale.

Stephen Smith:

Naturally when you’re looking at a valuation for that, you have to say what can we become together that will be much better than the sum of our parts. So he really helped to quantify that.

John Warrillow:

Got it. So he’s looking at it and saying, “Okay, if together we can bring the joint resources together, how much bigger could WordSouth be with the resources of Pioneer,” and vice versa.

Stephen Smith:

Right. Just painting a picture of what that marriage would look like.

John Warrillow:

Yeah. Yeah. Yeah. And again, I know we have to be careful about the actual number, but on a percentage basis, are you able to share the improvement you were able to garner from the first initial discussion to the five hour Excel marathon to the final deal? Did you get it up 10 percent, 50 percent, 100 percent? Can we talk at all about how impactful that was?

Stephen Smith:

It depends on which numbers we look at, but I would say that from the very beginnings of the conversation, that we were considerably higher. I would say 50 percent higher, probably.

John Warrillow:

Fantastic. How did you structure the deal? I know you wanted 100 percent cash. I’m guessing given the fact that you’re still there, it’s not the way it was structured. What did you end up doing in the way of structure?

Stephen Smith:

Of course some of those things fall under confidentiality, but I would say this. Think outside the box. If a company is looking at an acquisition that makes sense, the synergies are there, everything, culture’s there, that it’s a partnership, you really need to look at it like a partnership and not a transaction. At least that was the case for us. Then think outside the box. You look at, okay, it’s got to be multiples of EBITDA, it’s got to be multiples of revenue, it’s got to fall in line with industry standards. Well, I mean truth is, it doesn’t. As we were talking before the tape rolled, you have, a company is worth what it’s worth to the acquirer. So that valuation can be based on what we both see as the possibilities there. And the structure can follow that. You can develop a structure that is unconventional if it works in the particular situation, and that’s what we were able to do.

John Warrillow:

You know, if you were advising another entrepreneur, maybe in a service company, that was considering signing up for an earn out, because obviously a lot of service company owners would love 100 percent cash up front, but that’s just not reality. So if you were advising another service based owner who was considering an earn out offer, what advice would you give them if they were thinking about signing up for an earn out?

Stephen Smith:

I heard someone on your show once, John, say that if you sign up for an earn out, you better be prepared financially and mentally for what you got at closing to be all the money you would ever see. The problem that I’ve always had with an earn out is that ultimately, and you’re only going to do business with people that you believe you can trust, but ultimately when you sign that document, you have no control over the financial performance of that company when it’s no longer yours. You can have all the agreements in place, but there are mechanisms that if you … And again, you hope that you wouldn’t do business with people that would take these tactics. But if you have a company say well, you missed your mark by $10,000, and oh, we increased management fees or whatever, or we made these adjustments, or we allocated these expenses differently or whatever, they can move those things around, the can impact that bottom line. And you have no control over that.

Stephen Smith:

Certainly you can put up barriers where they couldn’t be unscrupulous about it. But at the end of the day, you’re betting your payout on metrics that ultimately you have no control over. And that’s always been the problem that I’ve had with an earn out.

John Warrillow:

So how did you get comfortable with that?

Stephen Smith:

Well again, some of this falls under the confidentiality, but I will say that we were able to … Why does an acquirer want an earn out? Because they don’t want to put all the risk up front. They don’t want to fully invest in it 100 percent, they want to be able to spread that risk out, they want to be able to spread that cash flow out, buy themselves some time. And then the seller, they want to avoid an earn out, because they don’t want the risk of if we don’t hit these metrics, I have no control over what happens, what they do, and what happens to the economy, and I’m putting it all at risk.

Stephen Smith:

There are ways to accomplish both of those things without it being in the traditional earn out structure. Just get creative. Outside of the box.

John Warrillow:

Oh, you’re teasing me, Stephen. You’re teasing me. I need to know, man. Oh wow.

Stephen Smith:

Yeah, there are ways to accomplish that.

John Warrillow:

I’m really dying to know.

Stephen Smith:

I’m killing you, aren’t I?

John Warrillow:

You are. You are. So ways to accomplish meant you could tie future performance to revenue as opposed to EBITDA? I guess that would be one way to do it. You could take shares in the co-op, I’m guessing, maybe. Although you’re not a member.

Stephen Smith:

Right, right. Yeah.

John Warrillow:

You’re going to leave me hanging, aren’t you?

Stephen Smith:

Yeah, absolutely. Just think outside the box and be creative is what I would say. Because ultimately-

John Warrillow:

It sounds like call Rod too. He sounds like he might have some ideas.

Stephen Smith:

Rod’s good. I mean ultimately, how could we accomplish what both of us want to a degree? And isn’t that the heart of the negotiation as a whole? I mean you’re both trying to get the best deal. So if it’s a real partnership, you want everyone … In a negotiation, they say if both parties are generally unhappy, you’ve got a pretty good deal. Yeah. But you also want to be working with someone that really wants both parties to be relatively happy about it, if you intend to continue being involved. And I think that’s probably the case with most service businesses.

Stephen Smith:

I mean I know some that sold and walked away. But for the most part in the service business, you’re going to have to continue to have some skin in the game at some point. So you want that relationship to be solid.

John Warrillow:

And how did you insulate your relationship with the CEO of Pioneer so that the natural friction that comes with a negotiation did not impact your ability to work together?

Stephen Smith:

I don’t think there’s a secret or a trick there. It just depends on the personalities and the situation. He and I found common ground. He’s from a newspaper background, and so am I, and moved into this work. That was never an issue. Does that mean there were no tense moments? No, of course there were, with any negotiation. But that was just never an issue, because we both had the same … We both wanted it to work for the same reasons, because we knew we had something special here.

John Warrillow:

What was the most tense area of the negotiation?

Stephen Smith:

Hm. That is a great question. I don’t know that I can point to just a single one, John. Like I say, I’m sure there were some moments looking back. Nothing comes to mind though. I mean always the value of the deal in general is always the biggest point of contention, maybe. But it was a good process. And it took a long time.

John Warrillow:

How long did it take?

Stephen Smith:

When we started having what I would say serious conversation about it, it took about a year, maybe a little longer.

John Warrillow:

Wow. Wow.

Stephen Smith:

Yeah. Yeah.

John Warrillow:

What did you and your wife do to celebrate?

Stephen Smith:

Well, the deal closed June 30.

John Warrillow:

2020.

Stephen Smith:

Yes. So we’re still very fresh off of it. So the integration with the companies is immediately ramped up, going very, very quickly. So in terms of getting away, taking some time off, that has not happened yet. So we’re still looking forward to that.

Stephen Smith:

But in terms of a reward and a trophy, we’ve talked about … Well I guess I could say that it came down to a Tesla for me and a swimming pool for the family. We had a family vote, so you know who won there. No, I’m joking. But seriously, we are planning a remodel and outdoor living space with a pool and doing that for the whole family. So we’re excited about that.

John Warrillow:

That’s going to be amazing, especially in Alabama, where you guys get long, hot summers. That’s awesome.

Stephen Smith:

Oh yeah. Yeah.

John Warrillow:

What was it like to tell your employees that you’d sold the business?

Stephen Smith:

We have a very tight knit culture in our company. I know a lot of people say this, and it almost sounds trite, but it’s very real here, that our employees are really like family. I mean, we, even being distributed, and it seems like well that’d be hard to maintain there, I don’t really know how we accomplish that, but the closeness of our employees has continued as we’ve grown from eight, 10, 20, 30 employees and scattered across several states.

Stephen Smith:

So we knew this was going to be difficult, so we had been planning long before, and that’s one of the first things that Michele and I started talking about was how are we going to tell the employees. So we had a plan that we were going to bring everyone in for an all-company meeting, bring everyone into a central location, and that we were going to tell them the news and then work through all the emotions and work through, just give them time to process, give them time to be together with one another to help each other process, and have a whole day of it, take them to dinner, and put them up overnight and just really have some time to go through that.

Stephen Smith:

And of course we were thinking that the close might happen as early as February, March, and it did not, it took a little bit longer, on June 30th, like I say. So by that time all the travel restrictions from the pandemic, and we were unable to do that. That was the hardest part for us in terms of just dealing with the employees. We weren’t able to be with them. And so we had to do it all over a Zoom call.

Stephen Smith:

If I could change anything about the whole process, that would be it. I wish that we had the opportunity to be with them to tell them in person, because a Zoom call, you can only be so personal with that. But we had them all up on the Zoom, we shared the news, and we took a whole day with that, because we knew that the productivity would more or less be shot the rest of the day anyway.

Stephen Smith:

We let them break off into their teams after that and have some discussions, and discussions with their team leaders. We got back together that afternoon with just, ask me anything session, just give people time to process and talk. We did the best we could with it in a virtual environment.

John Warrillow:

What was the reaction?

Stephen Smith:

A lot of shock, a lot of just concern. We have a lot of folks on staff who are former newspaper journalists and photographers. If you keep up with what’s happening in that industry, it’s just a bloodletting. And we had to make sure that those people knew that the consolidation that they’re seeing that’s gutting newsrooms across the country, that this was not that, that this was a true integration. And while you can’t look at anyone when you’re facing an acquisition and say, “You are safe, you will not lose your job,” I mean you can’t say that, as much as you want to, as much as you believe that. But you have to just reassure them, especially those that come from that background we did, that this is not what you’re seeing in the newspaper industry.

Stephen Smith:

I mean we have folks here who are victims of that, and we just had to be very direct about that. But it’s gotten easier over time, because we’ve continued to be busy, and so many of our team members are interacting with team members of Pioneer, and they’re seeing other new fresh faces, new projects they can be working on. There’s a real general excitement now. But that … Telling the employees was tough, and I knew it would be. A lot of tears and a lot of just difficult moments. And because of the uncertainty-

John Warrillow:

Was there resentment?

Stephen Smith:

No. No. I don’t think so. We certainly didn’t pick up on that. That never came through with any of the management team or anything. That’s another thing that I will say is we told our management team in January, we had everyone at … We always do our famous WordSouth After Christmas Christmas Party that happens the first week in January to get out of the holiday season. So we had everyone together in January thankfully before the pandemic got so bad here.

Stephen Smith:

So we brought everyone in for a Christmas party, and then when all the employees left the next day, we rented a huge house on a lake and brought in food and everything. It’s always our favorite time of year with the employees. So we had the house the next day and had an offsite management team meeting. So we went ahead and shared with them what we were looking at. At that time thinking the next few weeks, maybe toward the end of March maybe a closing.

Stephen Smith:

That helped us. And understand that some small business owners can’t do that for whatever reason. But for us, it made a lot of sense to share with those team leaders. We were able to walk through that process with them, and really see how they reacted, and walk through all the emotions and everything over the following days and weeks.

Stephen Smith:

And then they were in a very good place by the time we made the announcement. And that was so helpful. Because it wasn’t just Michele and me telling people, and everyone reacting at the same time. The management team went there with us. They had a very good feel for the deal, the opportunities, all the positives for it. And when their team members came to them, they had already been where they were at that time. So that was so helpful. We did not have to manage all of the emotional fallout of the announcement.

John Warrillow:

How did you ensure the management team kept it confidential?

Stephen Smith:

Well, the only thing you can do is say, “We trust you, keep this confidential.” And one thing that I did add is that we want to control this. Michele and I want to control the messaging and the rollout, and please give us that respect and give us that opportunity. And of course, we trust completely those folks. We’ve got a great team. There was never any concern that there was sharing outside of that group.

John Warrillow:

And did you provide some sort of incentive for them to help you close the deal or keep it confidential?

Stephen Smith:

No, not directly.

John Warrillow:

Of course they will benefit from being part of a larger organization, more career opportunities, more career mobility, more stability, blah blah blah, I would think there’s … Like there’s lots in it for them beyond just a paycheck, it sounds like.

Stephen Smith:

Oh, absolutely. Yeah, the integrated, the new integrated org chart has all of our team members in leadership positions spread across the whole thing, all verticals. So it’s pretty exciting to see what kind of opportunity is going to open up for them.

John Warrillow:

And for you, 90 days on, what are the emotions like for you? I know you’re still in the company. Have you experienced any surprising emotions since selling?

Stephen Smith:

Well, I would say I have been caught off guard a time or two by my emotional reaction to something that’s like, oh, that’s not mine to worry about anymore.

John Warrillow:

Like what?

Stephen Smith:

Oh, that happened. Well, the … Gosh, the coolest thing, John, is that this company has an amazing CFO who’s so, so sharp, so insightful. And having that resource that we’ve never had has been amazing. Insight into the numbers, and what these things mean, and how we need to be categorizing this. It’s just at a level that we’ve never been able to operate on. And having that resource is … And that was of course one of the things that we were looking for when we were looking for an acquirer, someone who could shore up the areas that we were weak in.

Stephen Smith:

That’s been, yeah, that’s been one of the most exciting things, just seeing things that we were never able to do before.

John Warrillow:

That’s great. You mentioned that you were expecting the deal to close in February, it ultimately closed at the end of June, I believe, or end of July.

Stephen Smith:

Yes, mm-hmm.

John Warrillow:

What made it extend such a long period of time? What was the reason for the delay?

Stephen Smith:

Well, my February thought was probably too aggressive. It would have been more like, March would have been more reasonable. But you had … There was no reason to rush things. And then too, when we got into the, well, I guess anyone that’s going to do an acquisition will tell you when the attorneys get involved, things take on a new dynamic. Starting to see those pages and pages of the agreement, the proposed agreement, and all the documentation that goes with that and walking through that with the attorneys, everything slowed down at that point. And that’s something that I knew that that would, I just didn’t understand how dramatic that was going to be, I guess. There’s a lot of small details to work through.

John Warrillow:

Yes sir, there are indeed. Well listen, I appreciate you sharing this story. Congratulations to you and Michele, I think it’s fantastic news.

Stephen Smith:

Thank you.

John Warrillow:

And I’m very grateful for you taking the time to share the story with us.

Stephen Smith:

Well it’s been a delight to be on the program, John. You put out a lot of good work, a lot of good content out there, and I know you’re a big help to a lot of small business owners.

John Warrillow:

Oh, that’s very kind of you to say. Thanks Stephen.

Stephen Smith:

All right, thank you.

 

BACK TO THE TOP