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11 Hard-Earned Lessons From Selling a Struggling Business

January 15, 2021 |  

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Jack Rivlin co-founded The Tab, a U.K. based media company that published digital campus newspapers across the U.K.

After ten years, The Tab had earned almost 6 million unique visitors and raised $10 million of capital from the likes of investors, including Rupert Murdoch’s News Corp. Things were looking up for The Tab, but when an attempt to crack the U.S. market failed, things started to unravel.

Wounded and tired from his failed foray into the U.S. market, Rivlin decided it was time to get out. He put the business up for sale and agreed to an acquisition offer of $2 million only to find out the buyer couldn’t come up with the cash. He then received an offer from News Corp for around $1.3 million only to have it rescinded as the pandemic was announced in March of 2020.

Eventually, Rivlin agreed to sell The Tab for $1 million — most of which was distributed to his shareholders. The experience left Rivlin wiser about the M&A process, and in this surprisingly candid interview, Rivlin shares:

  1. How to ensure your acquirer has the money to close.
  2. The telltale sign your acquirer is scrambling to find financing.
  3. What it’s like to meet Rupert Murdoch.
  4. What is meant by “warranty risk” (and why you need to be paid to shoulder it).
  5. What “Death Spiral Financing” is.
  6. What a “split exchange completion” is and why you should consider it a risk.
  7. How to use a deposit to protect yourself from a shady buyer.
  8. The most crucial principle of negotiation.
  9. Why you should never reveal who the other bidders are for your business.
  10. Why owning a big slice of a small company is better than owning a small portion of a big company.
  11. Why it’s better to “travel than arrive.”

Rivlin’s ill-fated attempt to crack the U.S. market was compromised when Facebook, The Tab’s primary traffic source, changed their algorithm, diverting much of The Tab’s audience. An over-dependence on a single supplier will undermine your score on The Switzerland Structure, one of eight drivers of your company’s value. To discover how your business performs on all eight factors, get your Value Builder Score.

Jack Rivlin’s blog post outlining the sale of The Tab – “Lessons from a gruelling two years selling my company.”

Our guest

Jack Rivlin is the founder and former CEO of The Tab, a youth publisher with an audience of millions. After founding the business at university, Jack launched The Tab across the UK and US and it is now a household name in the UK. The company raised $10 million from investors including Rupert Murdoch but ultimately failed to build a successful business. Last year he sold the company for $1 million and has written a candid account of the sale online. Twitter handle: @jackrivlin

Transcript

John Warrillow:

Hey guys, it’s John Warrillow. After five years of hosting Built to Sell Radio, I’ve distilled the secrets from the most successful founders into the ultimate field guide. The Art of Selling Your Business: Winning Strategies and Secret Hacks for Exiting on Top is now available.

John Warrillow:

The Art of Selling Your Business is a playbook for punching above your weight in a negotiation to sell your company. Now, you may still be years away from selling, but there are actions you can take now that will make your business irresistible to an acquirer in the future, and in this book, you’ll get answers to your most vexing questions like, “When’s the right time to sell? How should I value my business? What are the biggest mistakes owners make when they sell? How do I get multiple offers? How do I attract an offer from an acquirer without looking like I’m desperate to sell? How many companies should I approach? How do I separate real acquirers from tire kickers? When in the process do I reveal my numbers? When and how do I tell my employees?”

John Warrillow:

“How do I avoid re-trading when the buyer drops their price during diligence?” And the age old, “How do I avoid an earn-out?” Along with actionable answers to the questions, you’ll also get a playbook for defending yourself against the dirty tricks used by the most unscrupulous acquirers, including how to defend yourself against re-trading. Acquirers who intentionally set unattainable earn-out goals. Financing an acquirer’s business. Becoming a prop deal. Strategic pacing. Competitors posing as acquirers. Accepting illiquid or overvalued shares for your business in lieu of cash, and giving away your retained earnings as part of your deal.

John Warrillow:

You’ll also get easy to understand definitions of some of the most bewildering terms acquirers use in negotiating to buy your business. Stuff like tipping basket, covenant, downstroke, escrow, indemnification, earn-out, QEV, reps and warranty, churn. I’m just about to throw up just using all of this industry lingo, but you’ll get a definition for each of them in an easy to understand package. If you order The Art of Selling Your Business today, you’ll receive a collection of thank you gifts to enjoy alongside the book. Just go to builttosell.com/selling.

John Warrillow:

You know, they say that we learn more from our failures than we do our successes, and my next guest Jack Rivlin is a great example of that. Jack built a successful company called The Tab, but when he went to sell it, he made some fundamental mistakes, and as he describes in this beautifully candid interview, he learned a lot from the process, including how to ensure your acquirer has the money to close, the tell-tale sign your acquirer is scrambling to find financing.

John Warrillow:

What it’s like to meet Rupert Murdoch. What is meant by warranty risk, and why you should be paid for to shoulder it. What death spiral financing is. What a split exchange completion is, and why you should consider it a risk. How to use a deposit to protect yourself from a shady buyer. How Rivlin learned the most crucial principle of negotiation: why you should never reveal who the other bidders are for your business. Why owning a big slice of a small company may be better than owning a small portion of a big company, and why it’s better to travel than arrive.

John Warrillow:

Here to tell you his entire story is Jack Rivlin. Jack Rivlin, welcome to Built to Sell Radio.

Jack Rivlin:

Hi, John. Thanks very much.

John Warrillow:

Tell me about The Tab. What is this company? It was something to do with universities and colleges in the UK. Explain it to me.

Jack Rivlin:

The Tab was an online publisher specializing in student news, so we published online campus news sites at universities across the UK and later the US. Articles written by student journalists who we would train in journalism, help publish stories that were relevant to local audiences, and then we monetized through online advertising your banners and boxes you see on sites, but also directly sold custom campaigns.

John Warrillow:

Got it, and how did you get this thing off the ground? I understand you raised some money, maybe. Walk me through that.

Jack Rivlin:

Yeah, so the business, we started at university, three of us, and then worked in journalism very briefly, but then we started raising money in 2012 with its seed round, and you know, with probably about a million dollars, US dollars, of capital, we sort of launched across the UK, and then by 2015 we had the UK market, and we were ready to launch in the US, so at that point we did a venture round with a venture capital firm called Bulletin, and then subsequently about two years later we did another round lead by News Corp, Rupert Murdoch. So in total, the funding came to about 10 million US dollars.

John Warrillow:

Wow, and what did you spend that on?

Jack Rivlin:

Yeah, now I think about that a lot when I’m lying in bed at night. The main area of cost was the US, so it was a pretty lean business. We were making a profit in the UK, a small one, when we took venture money in 2015, but launching across the US, I mean, it was mainly staff. We hired a lot of people to launch on campuses, travel around, train people in journalism, so we had a global headcount at our peak of about 50 people, which was about half and half between US and UK, and aside from editorial staff who were all reasonably young people, we also had a meaningful sized tech team in the UK of about six or seven people.

John Warrillow:

Fantastic. How much of the business did you have to give up, all told, to raise the 10 million?

Jack Rivlin:

A lot.

John Warrillow:

I’m assuming there’s three founders, so were you guys a third, a third, a third?

Jack Rivlin:

No, one of the founders stepped back sort of post-university, before it really became a proper business, so there were two of us. My co-founder, he left in 2016, right around when we did the funding from News Corp. I mean, I think of the business, it was three quarters or something like that that we gave up, so a lot. It was very diluted, and it was one of those things where at the very beginning you’re finding yourself saying, “As long as the pie’s huge, I don’t mind having a small slice.” But obviously as you get towards the end game, that pries on your mind a lot more, and you start to regret taking so much dilution.

John Warrillow:

Okay, that makes sense, and understandable why you chose to dilute yourself. Because you saw this as a huge opportunity. Particularly the US market, it sounds like.

Jack Rivlin:

Yeah, I mean, there was obviously a fork in the road where it could’ve been a pretty small kind of lifestyle business in the UK only, which was profitable, and we’ll come onto the sale of the company, but ultimately probably would’ve sold for more money. We thought there was a bigger prize available. There was a lot of VC money flowing into digital media in sort of 2014 to ’16, followed by a big crash.

Jack Rivlin:

So you know, there was a lot of money around. We felt that the US was a huge opportunity because what we specialized in was universities, and you know, there are many more students in the US. Campus culture is a really big deal there, more than in the UK, and it’s a great media environment, so we felt there were a lot of good ingredients for it, and being young, I think when we went to the US I was 25, maybe 26, it felt like a good time to take a risk, go for a big exit, and the thesis was that rather than just operating teams with lots of staff, that we would gradually be able to use tech to build a big journalism network that was a lot more kind of self-serve, so it would ultimately be more efficient and it would scale well, and that thesis was proved wrong, quite expensively wrong, because that’s where most of the funding went, testing that in the US.

Jack Rivlin:

But that was the idea, and we knew that if that didn’t work, that we would be looking at a worse result than if we didn’t take the risk, but it felt worth doing.

John Warrillow:

Tell me the operating metrics of the business while you were in the UK, before you went to the US. Like, what would top-line turnover revenue have been, and kind of bottom-line profit? You mentioned it was moderately profitable. Could you just give us a sense of the size of the company in the UK?

Jack Rivlin:

Yeah, so I’m going to have to think back here, but I think in the UK, I think we were doing about half a million pounds in revenue when we went to the US, so that’s about 700,000 US dollars, and you know, breaking even, but only just that year. We hadn’t had a full year of profit or anything like that, but we were clearly at a point where we were starting to do well, and actually, in the first year in the US, the UK revenue scaled up a lot, so by the end of that year, it was about two million dollars.

Jack Rivlin:

But you know, we spent some of that venture money just on the commercial side in the UK, so around the time that we were going to the US, we went from about 700,000 US dollars to about two million, and that was actually the peak of the business’s revenue.

John Warrillow:

Two million. And it sounds like the thesis in the US, this self-serve digital offering, didn’t bear fruit or just failed. At what point did you realize it had failed?

Jack Rivlin:

Yeah. Well, the big kind of macro factor in the digital media business was in 2017, Facebook just turned the taps off, or turned them down, to send much less traffic to publishers, which basically made everyone realize that their traffic, they didn’t really own it, and they were going to get a lot less, so that was kind of the big external factor that meant we had to slash costs, and at that point I think I felt, “This is going to look pretty shaky.”

Jack Rivlin:

I closed the US in sort of March, April 2018, we closed the US. We actually had launched another kind of spinoff magazine which was for young women, I won’t go into the detail of it, and we kept doing that in the US until the end of 2018, so it was that year really where things wound down. I’d say from mid ’17 it was becoming clear that The Tab was not going to work out in the US, the self-serve model wasn’t going to work, and the Facebook situation had just made it much harder.

Jack Rivlin:

So you know, really, looking back, I honestly wish I had pulled the plug a little earlier just to give us more breathing room. But yeah, it was around that point in early 2018 where I pulled the plug on it.

John Warrillow:

And that’s about the time if I’m getting my chronology right, that you started to think about selling the company. Is that right?

Jack Rivlin:

Yeah, yeah, that was the catalyst for selling. I realized the US wasn’t going to work. That was the big dream of how this could become a really, really valuable company. It had failed. In the UK, we had much more penetration anyway with the audience, but also on the commercial side, so I knew there was a business there that had some value and was worth selling, and I felt that was just the natural time. You know, we didn’t have much cash left to grow the UK into something really big, and by that point, I was very diluted.

Jack Rivlin:

We didn’t have a lot of money for the project. I’d been doing it a long time. I was understandably pretty jaded. I think I made layoffs something like three or four Christmases in a row, which probably says a lot about my timing.

John Warrillow:

Father Christmas.

Jack Rivlin:

Yeah, exactly. Wasn’t fun. This is actually, this last Christmas was my first one in I think four years where I haven’t, but anyway you know, there were all these factors that contributed to a scenario where I was tired, I wasn’t massively incentivized, and I felt it was going to be hard to really multiply the size of the business in any meaningful way. That felt like a series of factors, it pointed quite clearly towards selling, and I had a couple of shareholders who were saying to me, “Look, you should just go and find out, is there a sale on the table here? Because it seems like a natural time.”

Jack Rivlin:

So I … sorry, go on, were you going to ask another?

John Warrillow:

No, I was just going to ask you, did you have any sense of what it was worth?

Jack Rivlin:

Well, throughout the process, that number went down, but no. I had shareholders who were not that connected with the media environment who had really lofty expectations for it. I knew, then, that we would sell the company for less than what we’d raised, so I knew it wasn’t going to be a good outcome for shareholders. I probably didn’t realize it would be quite as low as it was, and actually, as the process went on there were various reasons why that number dropped, but I wasn’t, in my mind, a million miles off.

Jack Rivlin:

It sold for a million dollars. I probably wasn’t ever expecting to get more than three, and in reality, was expecting lower, so I had a fairly good idea, but yeah, I kind of, basically from August to about Christmas of that year, 2018, I kind of kicked around the idea. I tried quite hard to get News Corp just to buy it without us running a process because that seemed like the cleanest way, and that was pretty unsuccessful because there was just no competitive tension there.

John Warrillow:

What was the reaction when you approached them about that?

Jack Rivlin:

I mean, they were interested and gave me a lot of time at high levels of the business. Not quite, Rupert, I haven’t really seen him much in the last few years.

John Warrillow:

Rupert Murdoch, the chairman and founder of News Corp, yeah.

Jack Rivlin:

Yeah, because that’s how we got the investment from them. We got a meeting with him, and he agreed to it on the spot, which was awesome, and-

John Warrillow:

What’s he like?

Jack Rivlin:

I really liked him. I mean, really cool. This was like summer 2016, and Brexit, the vote had just happened three days earlier, and my co-founder and I, we’d been at Glastonbury Music Festival, and the only date we could get with Rupert was the Monday after, so we came in kind of hungover and bleary-eyed, like I had to borrow my friends’ dad’s shoes, because I only had sneakers with me and stuff, and he was really cool. He was really down to earth, like gave us a lot of time, told us some really interesting stories.

Jack Rivlin:

We were there for like an hour, and he was really open about what he would like to see happen politically with Brexit and so on. It was a really fascinating meeting, and at one point my co-founder had Rupert’s phone in his hand because we were trying to install our app or something, and I was just like, “God, this is a crazy moment.” But yeah, I think like, we got the meeting because he’d met with one of our investors and he’d said to them, “I like the idea. I want to buy it.”

Jack Rivlin:

And so you know, there was probably an opportunity to sell there. This was kind of the high point of that digital media bubble before it really crashed in the following year, and I remember having a quite heated debate with my co-founder because my co-founder was preparing to leave anyway, and I think he thought this was a good opportunity to sell, you know, a tidy way to see it all through, but to be honest I thought we were going to end up taking too low a price here, and there’s a huge opportunity, I’d like to see the American thing through because we’d only been there a year.

Jack Rivlin:

So I really fought hard not to, and in the end he agreed, so we really steered the conversation towards investment. And look, who knows how that could’ve panned out? He could’ve said no, he could’ve said yes, then it died on the vine when it came to dealing with other people at News Corp. It would’ve been a higher risk outcome to push for than getting a few million dollars in investment, but I do think I probably could’ve sold it there and then for, I don’t know, five to 10 million pounds because the price at that funding round was like 11 million pounds or something like that.

Jack Rivlin:

It was around 10, which would’ve left me with a really great outcome. Far better. So yeah, I kick myself about that fairly often, but who knows how it would’ve panned out, of course?

John Warrillow:

Got it, so what happened next? And I’m thinking at some point the lads appear, and I should just pull up and give your Medium post a plug, and I’ll put it in the show notes for folks listening. Jack, you and I got connected through a Medium blog post you wrote about the sale of your company, which reads like an incredible checklist of things to avoid, mistakes to avoid when selling your company. It’s a beautiful blog post. It’s really instructional. So I’ll put a link to the blog post in the show notes.

John Warrillow:

But you do mention something about a group of potential buyers that turned up fairly early in your process to sell that you referred to in an anonymized fashion as the lads. Tell us a little bit about the lads.

Jack Rivlin:

Yeah, yeah. I guess, by the way, this whole part of the story is probably the biggest learning for me, but I’d known these guys a little bit from when we were first starting out. They had run a similar company, they’d moved on. They said they had some money available. Someone mentioned to me that they were buying publishers, basically, and so I chatted to them, and it all moved pretty quickly, and we’d been running a process with some potential buyers. We’d set a deadline, asked for the best and final offer with the key terms, and they were one of two who bid, and their bid was the best, and I think we even negotiated it a little higher.

Jack Rivlin:

It ended up being, it was about double what we eventually sold the business for.

John Warrillow:

So roughly two million US dollars.

Jack Rivlin:

Yeah, yeah. Yeah, so we, it all looked pretty good, and you know, I liked them a lot, from meeting them. They were sort of my age and we got on well socially, but there was something a bit odd from the beginning. They would be really slow to reply to stuff, be really vague on detail of how stuff would happen, and obviously the biggest point was did they have the money? And everyone warns you about this before you go into selling your company, is make sure that the buyer has the ability to actually transact.

Jack Rivlin:

And I think I asked them their source of how they were going to pay for the two million dollars, and they said something like, “Funding is already in place from,” and there was a name of the fund who were providing it, and I Googled the fund, and the first result on Google said death spiral financing, and there was all these horrible stories about them. And I don’t know, a lot of the technical detail of death spiral financing is beyond me, but it’s not a phrase that instills a lot of confidence in you, in a buyer, but I think by this point we’d signed exclusive.

Jack Rivlin:

And it’s weird. I had experienced people around me, my two major shareholders were a massive VC firm and a huge media company. I had a chair holder who was kind of fulfilling the role of a broker for me, and everyone raised concerns, but it was like no one wanted to really stick their neck out and say, “We shouldn’t do this.” And I think really more than anything that’s because this was a tiny deal for all of them, so they were not going to try and fight to stand in my way, and I don’t blame them for that at all.

Jack Rivlin:

But you know, we all felt a bit like, “This is a bit odd, because they said they have funding in place, they said they could raise money really easily.” I think at the time, being completely new to the process, I didn’t have appreciation for the distinction between literally having cash in the bank versus funding in place, which sounds incredibly obvious now, but really I should’ve said, “I want to see a bank statement, and if you don’t have that,” I should’ve just walked away.

Jack Rivlin:

But my feeling was, “They’ll be able to close this really quickly. This is a firm sheet. Let’s just do it.” And despite being told about these buyers who string you along and who don’t have the money yet, I went ahead with them, and it was one of those where, as you went further down, more and more kind of ominous signs appeared, and I should say also that we were still losing money at this point, the company, partly because there was an area of the business, the direct sales bit, that meant our revenue figure was higher, but was really lost making by this point and up. I knew in my mind, I’d worked out, that if I cut this bit of the business out, we can be profitable.

Jack Rivlin:

But I didn’t want to reduce the revenue number and therefore end up with a smaller sale, and other people advised me that was the right decision. They were like, “Don’t change anything radical about your business now that you’re in the process. It’ll look bad.” So I kept it going, and consequently, we were loss-making, and I think the date that we were going to run out of money was like the 15th of September, and we signed terms with them in May or early June, so it should’ve been enough time, but they were being really slow. The DD was really slow, it took ages to get a drop sale-

John Warrillow:

DD, just define DD, for folks who maybe don’t know that term.

Jack Rivlin:

Yeah, the due diligence. Obviously, they had some lawyers look at all the financial and legal side of the business, just to check if there were any massive issues that they would uncover, which also was weirdly, it felt like there wasn’t anything really being done on the DD. It was really slow and noncommittal. They did a bit of a cursory look and then nothing, and I was like, “Oh, this is great. They’re really not going to be too stressful, because they’re really light touch,” which was their message.

Jack Rivlin:

But everyone else was like, “Really, you want a buyer who’s more committed than that.” And there was stuff like that, like my phone calls would go unanswered for like four days, to the buyer, who I had I thought a good relationship with. They kept having new reasons about how they were going to get the money, and you know, by this point we’re starting to rack up fees. They sent a purchase agreement across, which was honestly like the most boilerplate un-tailored version of one, and you know, the lawyers from our other shareholders were raising concerns.

Jack Rivlin:

They were just being really slow to agree with the documents, and I was having to really force stuff through, but we were racking up fees and it got to the point of kind of no return, or it felt like no return, by I guess late July, where I thought, “We’ve got to close this because otherwise we going to go bust.” And I was not prepared to go bust. This was a big point of contention with the shareholders is I basically said, “Look, if it comes down to it, I’m not getting a situation where we can’t pay stuff. I will just have to let everyone go and at least treat everyone well.”

Jack Rivlin:

But it was a tense time, because you’re trying to do the best by shareholders, you’re trying to do the best by staff, you’re trying to get a good outcome for yourself, and trying to sleep at night, so it was just quite a stressful period, and anyway in about August I realized we needed a safety net here, so I basically said to them, “If you want to continue with the process, fine, but we want 150,000 pounds on signing.” Because, oh, sorry, I should say, about halfway through, they wanted to change to a split exchange completion, which basically means you sign the docs on one date, but you don’t get the money until a later date because they needed an extra couple of months to get the money.”

Jack Rivlin:

By this point, I think all our shareholders were like, “This is a basket case deal, these guys don’t have the money, but if Jack wants to see it through, let’s just support him.” You know, everyone was just like, “This is a horror show, that’s all it is.” But I just wanted to see it through, and once I got this agreement on the deposit, I thought, “Okay, well, this is now the best thing to do for the business anyway, because this cash will keep us alive.” In fact, that cash ensured that we never went out of business, so I agreed-

John Warrillow:

So if I’m clear, Jack, in return for agreeing to a split exchange completion, you got extracted from them a 150,000 pounds deposit.

Jack Rivlin:

Yeah, yeah, which was huge for us.

John Warrillow:

And that deposit was non-refundable. In other words, it was a breakup fee if they didn’t consummate the deal?

Jack Rivlin:

Yeah, exactly. I think they actually agreed very early on for a 50K one, and then we increased it once things were looking hairy, and I don’t know whose idea that was. I’m pretty sure it wasn’t mine. It was someone on our side’s, but it was a masterstroke because it meant that whatever happened it was worth doing the deal, which I have to say didn’t make me any less stressed by it, but at least I knew that we weren’t going to be able to pay everyone and were going to be able to make it through to Christmas and beyond.

Jack Rivlin:

In exchange for that, they said, “We want until the end of November to sign.” Which you know, when I first heard that, I think I dropped my cup of tea or whatever I was drinking because we started talking in April. We agreed on terms in May, and they’d said, “Yeah, this will be six weeks.” And now they were saying it was going to be six months.

Jack Rivlin:

But I reluctantly signed up to it. We exchanged, and then they basically had two months, and then the stories about where the money were coming from just kept getting kind of more and more bizarre. Suddenly, they were going to get the money by doing a reverse takeover of a company on the French stock exchange, and then it was like-

John Warrillow:

That’s going to sound like-

Jack Rivlin:

Oh, god, I know, and the thing is, I felt like an idiot kind of reliving it, but early on I was being a complete fool. After that, I was just thinking, “This is my only option. I’ve just got to at least get the exchange.” And then I was thinking, “Well, I have to wait until November anyway.” So I did, and obviously, when the 30th of November came, they needed an extension, there were new stories about where the money was coming from, and I just kind of got to final straw stage, and so before Christmas I just said to them, I don’t know if I said we’re out. They actually owed us our legal fees as well for missing the deadline, so I think I said something like, “If you pay our legal fees now, then we’ll continue talking to you. Otherwise, we are not speaking.”

Jack Rivlin:

And they didn’t reply for a month until mid-January, by which point I’d already given up on them and moved on, but they then kind of still tried to come up with some way of doing it, and I had just gave up, and I think the thing that I can’t quite get my head around is, the obvious assumption you would make hearing that story is that they were just doing it to drive us into administration and then pick us up for pennies.

John Warrillow:

Administration being what the UK refer to as bankruptcy for our US listeners.

Jack Rivlin:

Yeah, yeah, yeah, exactly. So exactly, when you can’t settle your debts and pay a staff, and someone has to come in and deal with it, so essentially, they were trying to push us over the edge, and in fact I had even had a casual conversation with them about another company they bought out of bankruptcy, and they said something like, “Yeah, we had to kind of,” I can’t remember what they said but the suggestion was there was a similar thing going on there, and so I assumed that was what was happening, but the thing is, we were being really open with our cash flow, it was pretty clear that if you gave us that 150K, that we were never going to go over that edge, so I don’t know if they were obviously a bit inept as well.

Jack Rivlin:

It was a bizarre experience and I have to say not one I’d like to relive, because you have a lot of sleepless nights, especially when my main priority was just getting out as quickly as possible. Just getting the process complete. And you know, it’s horrible. You’re withholding that from staff and so on. It’s not fun.

John Warrillow:

In retrospect, what was the first sign? I mean, we all know hindsight’s 2020, but in retrospect, if you rewind the tape, what was the first sign that you should’ve taken as an excuse to get out? What was their first indication?

Jack Rivlin:

Yeah, I think really early on we asked for proof of this funding, and it was just really slow, and, here’s the first sign. Sorry, I’ve just remembered. Have another shareholder who I really trust, who was not on the board and had kind of stepped back, but I just sent him the terms sheet that was their proof of funding, and he was basically like, “They won’t have the money. I’ve seen this before.” Explained what death spiral financing is, and so on, and you know, I should’ve listened to him because I trust his opinion. He’s seen this kind of thing many more times.

Jack Rivlin:

But I went ahead with it, and we did have another offer but it was much lower, so I think that was the point, and that was early. That was sort of three weeks after their offer, so we’re talking sort of May.

John Warrillow:

You’ve referenced death spiral financing a couple times. What is death spiral financing, in layman’s terms?

Jack Rivlin:

I don’t actually know. I mean, I believe it’s a form of financing where you borrow money as a public company and then the way you pay it back is by creating a lot of new shares that dilute the retail investors who have invested in you, so that you’re protected and so is the lender. I think. I don’t actually know, and it’s obviously worth checking, but the name obviously doesn’t breed confidence.

John Warrillow:

Got it. And the other indication, it sounds like, in the terms sheet that you got, they used the term funding in place, and that was not exactly the same as having the cash in the bank.

Jack Rivlin:

Yeah. I mean, now I’ve been through this, I would never sell to anyone who doesn’t have the cash in the bank, and if I have any doubt about them having the cash in the bank, I’d need to see proof.

John Warrillow:

And proof in your mind would be a bank statement.

Jack Rivlin:

A bank statement, yeah. I think the people we ultimately sold the business to, I don’t think I actually asked for a bank statement because I’d just got to know them so well, and did trust them, and they did everything they said, and various other reasons.

Jack Rivlin:

But there were a couple of other bids where I did ask for that. Yeah, I mean, ideally, you’re selling to a company that’s large enough that their cash in the bank figure is publicly available and large, but failing that, yeah, I think I’d ask for a bank statement.

John Warrillow:

Where does the story go from there? It’s January 2019. You finally had enough with the lads. Where do you go from there?

Jack Rivlin:

Yeah, this is January 2020.

John Warrillow:

Forgive me. 2020.

Jack Rivlin:

So I’m basically a year in at this point, yeah. So, at this point, I went back to the buyer who’d made an offer early on. I mean, I should say, they actually, it was kind of an informal offer. We discussed it and I’d basically said, “Oh, I don’t think that’s large enough. We’ve got another one from the lads, so let’s leave it.” But they kind of always said, “Well, look, if you’re still interested then maybe there’s something we can do.” So I went back to them, and they’re just like, the contrast was so big, they’re such a pleasure to deal with and so trustworthy.

Jack Rivlin:

This is Digital box PLC. I went back to them, we talked about it, and they gave me an offer pretty quickly, so you know, you’d hope that it was kind of over then. But then, after all that, News Corp, who’d previously said they weren’t interested, suddenly decided that actually at this price, because it was a lower price, it was the price we eventually sold for-

John Warrillow:

Which I think you were candid in your blog post, it was 750,000 pounds, or about a million US dollars, right?

Jack Rivlin:

Yeah, yeah. Yeah, that was it.

John Warrillow:

Got it. So could we just, I just want to make sure I understand, Jack. If we can, again, rewind a little bit, you’re running a process, you’re getting multiple bidders, the lads offer two million. What was Digitalbox’s offer at that time before you went down the road with the lads?

Jack Rivlin:

I can’t remember exactly. It was more like we’d be around the million mark. I can’t remember.

John Warrillow:

Okay, so it was a bit more informal.

Jack Rivlin:

It might’ve been the same price. Yeah, yeah, yeah.

John Warrillow:

Got it, okay. The lads blow up and then you go back to Digitalbox and their offer is, what?

Jack Rivlin:

It’s 750,000 pounds.

John Warrillow:

Got it, and then how did News Corp, I guess they’re shareholders, so did you disclose to all of your shareholders that this was the offer on the table?

Jack Rivlin:

Well, yeah, I had to basically, I had to tell my staff and shareholders when the lads deal was signed, right? Because I thought that was going to be it. And it was announced to the market, because they were public. Probably cut that bit, just so as not to identify them, but I announced it to our staff and shareholders so everyone knew at that point, but News Corp were very involved throughout. I had someone there who was kind of a friend and confidante who was meeting on their side, so we were pretty open about it.

Jack Rivlin:

But they obviously, at that point, there had been some changes on their side. I simplified our business following the lads deal following through. I laid some people off which basically meant that we were financially sound. We were smaller. We were now down to like 10 people headcount, so I guess it was a more attractive buy for them, and the price was clearly lower, and they thought. “You know, maybe this works.” And fair enough.

Jack Rivlin:

And so they basically offered a little bit more. It wasn’t much more, but it was about a million pounds, and I thought, “Okay, well, I guess we’re selling to News Corp.” Which I wasn’t against. It’s probably a nicer story, but I just wanted to get it done, and I had a lot of faith in Digitalbox completing quickly. Anyway, so we did that, and News Corp, that whole discussion sort of took us somehow from January to March. Just because things move slower in bigger companies, there were people to get inside.

Jack Rivlin:

And got to March, got the term sheet, and it was ready to get it going, and then the lockdown happened in the UK. I think that was sort of mid-March, maybe 20th, around then.

John Warrillow:

The pandemic, yeah.

Jack Rivlin:

And I think this was sort of two weeks after I got the term sheet, and they basically rang and said, “Look, we can’t do it at that price anymore because of this pandemic.” You know, the stock market had crashed. They were really exposed to lockdown through various revenue streams were being hit, so they were saying, “Well, look, we’ll have to drop the price to 750K.” And I was like, “No, this is ridiculous. I’m holding firm.” And then it went from, “Well, maybe we can do 750K,” to, “we can’t do this at all.” Because the internal support for it just disappeared, and I actually, you can’t bear any ill will about that. It was a totally unique situation.

Jack Rivlin:

But it was frustrating because it was just like another thing. I think my girlfriend said to me, that was the moment at which she was like, “I don’t think this thing is going to happen.” She didn’t say it to me at the time, but she was obviously thinking that, because it was like this, you know, I’m a fairly candid person. I’m not great at keeping my mouth shut, and I would talk to friends a lot about this from kind of the beginning, so 18 months in I was starting to look like I was slightly insane and maybe the thing was never going to happen.

Jack Rivlin:

And I was just flogging a dead horse. And at that point, I was like, “Well, there’s not really much I can do here. They’re not going to buy.” Digitalbox also were like, “We just need to wait and see how things pan out.” So I just said, “Let’s stop this process for however long it takes. Let’s revisit it in June,” I think I said. Told the staff, “Look, we’re going to revisit this, because it’s just not the right time.” I have to give them a lot of credit. The amount of patience they showed was enormous.

Jack Rivlin:

And so yeah, I kind of waited it out, and I’m trying to think of what I did during those few months. I didn’t really do any talking to potential buyers. There were a couple of others who were kind of sniffing around at this time, but I wasn’t having very serious conversations with them, and I kind of waited, yeah, and we just ran the business. We actually had a really good few months, business was pretty good. We were lucky enough we weren’t having to furlough or lay anyone off or anything like that, so we just waited out, and then in June I picked it up.

Jack Rivlin:

By this point we had a few potential buyers. Basically, it had slightly leaked out, the lag thing wasn’t happening, and so one potential buyer heard about us through that. Another one was someone I kind of knew who got in touch, so then we had three potentials, and yeah, they all kind of kept giving me really low ball offers at this stage, because they obviously thought, “This guy’s been doing it for ages, there’s a pandemic, he’ll go really low.” And I don’t think we exactly held firm … well, I think we did hold firm on price throughout the process, but we didn’t have very strong hands throughout the process, but this was the point at which I just said, “Look, I’m not going lower than 750K, because this is turning into a joke. I know the business is worth that.”

Jack Rivlin:

So I just held firm and anytime they offered lower, just said flat no, which I guess taught me a principle of negotiation, which is you’re only really going to get the deal you want if you literally will walk away. So I did that for a period, and then eventually, in August, I just said to everyone, “Look, best and final offer, and if it doesn’t meet our minimum, then we’re going to take the business off the market. Maybe I’ll step back and stay on the board, but we’re not going to keep doing this for another three months.”

Jack Rivlin:

So I did that, and we finally got our offers.

John Warrillow:

And of the three, you agreed to the 750K from Digitalbox?

Jack Rivlin:

Yeah, so they were all around that level, but sorry, Digitalbox, the difference was I really knew them and trusted them. We’d spent the most time with them, we got to know them. I liked their plans for the business and for the staff. I felt like there was not going to be any dishonesty or curveballs or difficulties with funding or anything like that, and we probably agreed the most terms with them just because we met the first time.

Jack Rivlin:

So for me, it was like, “This one has the highest chance of success.” They were all around the same level. One of them was actually for me, they offered a consulting deal for me that would’ve meant, financially, I would’ve done better, but I cared so much about just getting it done and having the right people, I actually liked the other buyer, but I just didn’t know them as well, so I felt like it was a slam dunk for Digitalbox, so we went ahead with them and I was right in that respect because they were a pleasure to deal with.

John Warrillow:

So Jack, tell me about the way your shareholders made out in this process. Sometimes, when in a venture capital firm invests, they get preferred shares, so they’re kind of guaranteed a preferred return. Was that the case with your investment rounds where you had to get them a preferred return, or did everybody just get … ?

Jack Rivlin:

Yeah, again, I probably can’t go into too much detail because I don’t want to, I don’t know what the rules are, but certainly, some shareholders have preferred shares, yeah, so some people did better than others and some people got pretty much nothing, which is a pretty hard thing to tell people. You know, like I have to say, I thought everyone was really understanding and kind about it, and for a venture capital firm that’s having billion-dollar exits, it’s probably pretty irrelevant, but nonetheless, there was a lot of kindness shown.

Jack Rivlin:

I definitely had a few angry emails from shareholders and phone calls, you know.

John Warrillow:

What was the most … ?

Jack Rivlin:

It was a … I had a couple of emails that were really angry that were just like, “You know, this is a miserable return. You should’ve listened to me a few years ago.” Et cetera. And fair enough. I made a ton of mistakes and it was a miserable return. I think in the circumstances it was as good as it was going to get, and you know, maybe there would’ve been a slightly better deal if we waited three years and installed someone else who was going to run the business and grow it, but I certainly don’t see it. It certainly would’ve been more than double, so I don’t think it really would’ve made a difference in the end. Ultimately, the failure was it didn’t work out in the US, we spent a lot of capital. There was no other move we could’ve pulled off, I think, that would’ve had a good probability of working out, so I actually think it was really the best time for everyone, but you know, clearly a very rocky process did not help.

John Warrillow:

How did you personally make out of this situation? Did you get any money out?

Jack Rivlin:

Yeah, I did. The outcome’s been good to me, in that I can put something towards my next business, but yeah, I mean, look, I think firstly my assumption is in most of these cases you need the founders to get some money for their shares because you need them to get warranties that only they can really give, and you know, those warranties have risk.

Jack Rivlin:

So yeah, I think that’s right, and I’m happy with it. Like, I kick myself about not selling the business to Rupert Murdoch, but I think fundamentally I’ve done okay financially, I’ve got some money to do my next venture, and I got experience which you can’t put a price on. I read a quote, I can’t remember who it’s from, which is experience is what you get when you didn’t get what you want.

John Warrillow:

Oh, I like that quote. Can you explain what a warrant is?

Jack Rivlin:

Yeah, so-

John Warrillow:

Or a warranty?

Jack Rivlin:

I guess a warranty is like a promise that you’re giving that there are no defects with the business, and if that promise turns out not to be true, then you have to refund some of the money that you receive, so for example you’ll often warrant that you’re not being sued by anyone, and if it transpired that you were being sued then basically the cost would be paid for by you, and you know, some warranties are things that you don’t even know about. That’s the difficult thing, so when it comes to DD and also when you’re agreeing what the warranties are and what the limits are, you have to have a really long think, and search, and kind of investigation into any potential defects with the business, which is quite tricky, but you know, you can disclose things at that point which means that they won’t be held against you in a warranty.

John Warrillow:

That’s helpful for sure. There’s a quote in your blog post which I love, and I’d hope for you to define it or give some context around it. The quote is “it’s better to travel than arrive.”

Jack Rivlin:

Yeah, so actually, you know the shareholder I mentioned who took a look at the term sheet and said, “You know, this isn’t going to happen.” It was the same shareholder, Johnathan Landa, and I actually sent him a draft of the blog and he told me I misunderstood the phrase, so I edited it, so shows what I know, but the basic idea is that it’s often when you’re on the way up when you’re on the journey, people will give you the benefit of the doubt about how the business will be a success, so if you tell them a story like, “This business will be really valuable once we launch it in the US, because the US has a much larger market and the same principles are true in that market as in the UK,” then before you’ve done it people give you the benefit of the doubt, and therefore there’s some hype which will probably increases your valuation because there’s the opportunity the business could be really big.

Jack Rivlin:

Problem is, once you’ve arrived, the destination is bad, and the outcome’s been poor, i.e. you’ve proved that the US is a bigger market but it didn’t work out for you, the you lose all of that benefit of the doubt, and therefore you’re not getting any of that hope baked into your valuation. I mean, in this context, it would probably mean sell earlier because you could sell people the story that this business could be really big and they could make it really big, whereas if you arrive you’ve got to actually get that result which is much harder, and I think for me the takeaway for future ventures is that you can either be building a growth business with a really big hope story, in which case think really hard about whether you want to sell it on the way up before you’ve arrived.

Jack Rivlin:

Otherwise, you need to arrive at a business that has nice compound growth and is profitable. I think landing in between, which is where we landed, where you don’t have the hope of growth anymore but you don’t have the kind of nice, trustworthy business fundamentals, is the worst place to land.

John Warrillow:

The other point you made which I wanted to tease out for our listeners was the downside of letting the other bidders know who is at the table. Can you walk through what your learning was there?

Jack Rivlin:

Yeah. Basically, in the kind of final stage, we had these three. I think we actually had four bidders, but one didn’t really materialize, so let’s call it three. We had three who, you know, London’s a small place. They had, people on their board had been on each other’s boards. They knew each other. And I basically let slip who they were to each other. I mean, in one case, one of them asked me, “Is it Digitalbox?” And I can’t remember what I said. I think I denied it, but it was so obvious.

Jack Rivlin:

Point being, they all worked out each other’s identity, and I’m not accusing anyone of collusion at all, but you know, people talk, and obviously, the prices that were offered were pretty similar, and I think that’s slightly inevitable if you go down that route, because everyone works each other out, and I don’t know necessarily how I would’ve avoided that. I definitely could’ve been more careful about them finding out, but it made me think that I basically had the worst of both worlds because I wanted to go public and say, “We are for sale, if anyone wants to offer, here’s a deadline. This is basically an auction. Give us your final offer and we’ll pick you.”

Jack Rivlin:

And my shareholder said, “No, this will look like a fire sale. They’ll all be able to talk.” We kept it private, but we still allowed the bidders to know who each other were, so I felt like we got the worst of both worlds there, where they were able to talk and kind of get a bit aligned on price. I don’t know, maybe they would’ve ended up on the same price anyway, but you know, everyone says mum’s the word. Don’t tell anyone who the other bidders are or what the prices are, and probably I was a little bit too open on that front, and it probably did affect the price.

John Warrillow:

It’s such an amazing story, and I was so grateful for you sharing it. The blog post that I’ve referenced a couple times, we’ll put that in the show notes, at builttosell.com, and it’s a real fire, it’s a trial by fire. It’s I think 13 or 14 points that you learned along the way, so it’s definitely worth reading. Where else can people find you, what you’re up to? What’s the best way for folks who want to reach out digitally and say hi?

Jack Rivlin:

Yeah, I think I’m going to be writing more about the experience of burning through a lot of cash, and going through a journey that didn’t quite work out, so if you follow me on Twitter @jackrivlin, just my name, no spaces or anything, that’s probably the best place.

John Warrillow:

Fantastic. Well, Jack Rivlin, I appreciate you sharing this story with us.

Jack Rivlin:

Thanks a lot. Cheers, John.

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