How to Sell a Consulting Business for 12 X EBITDA (Without an Earn-Out)

Transcript

John Warrillow:

Hey, it’s John Warrillow. I wanted to record this quick message to let you know that I’ve got a new book that’s now available called The Art of Selling Your Business. And really it’s a distillation of some of the best practices I’ve heard from some of the smartest entrepreneurs I’ve interviewed for the show. Having done now more than 300 plus interviews for Built to Sell Radio. I’ve seen that there’s this small group of founders who seem to really have incredible exits ones, where they make life-changing money from the sale of their company. And what I’ve tried to do is really analyze what are the transferrable lessons among that small cadre of winning exits? I put those into an action plan, a bit of a adjust add water recipe card for punching above your weight when it comes to selling your business. The book is called The Art of Selling Your Business. It’s available anywhere you buy books.

John Warrillow:

Running a service company can be a tricky thing. On one hand, it’s easy to start. It doesn’t require a lot of capital, but it’s also tough to sell. Because a service company, of course the primary assets are the people. As David Ogilvy said, “They go up and down the elevator every night.” How do you transfer a business where there really is no assets? There is no IP?

John Warrillow:

That makes my next guest story all that more interesting. Pete Martin started a company called EntryPoint and sold it to KPMG for fully 12 times EBITDA. Perhaps even more interesting is that came without an earn-out. How did he do it? Well, he’s about to tell you. The number one thing he did was pull himself out of his business. He’ll give you some strategies for how to do that. He negotiated with the vice chairman of KPMG, and he’ll tell you how he convinced him to buy his business without an earn-out. He’ll talk about how do you ensure that any competitor doesn’t use the veil of an acquisition in order to steal your employees and much, much more. Here to tell you his entire story is Pete Martin.

John Warrillow:

Pete Martin, welcome to Build to Sell Radio.

Pete Martin:

Hey John, how you doing, man? It’s great to be on the show.

John Warrillow:

I’m good. Yeah. EntryPoint Consulting. I got to confess, I saw the press release and I’m like, “I don’t have a clue what this guy did.” So you got to explain it to me. It was consulting, I know what that is. But what kind of consulting did you do?

Pete Martin:

So we were in a partner with SAP, which is a large German software company. And so we did all kinds of different services around implementing the software and typically big companies. And what we’re going to talk about today is our largest practice by far is 85% of the revenues had to do with servicing customers that did import/export. So if you’re exporting goods, you have to make sure you’re not shipping stuff to people that you shouldn’t ship to. You have to follow all the rules that the US Department puts in place. And so it really was, it was all around important export, specifically around implementing SAP in that particular set of modules.

John Warrillow:

I’ve heard of SAP, but I don’t know anything about it. So it’s a software that big companies use to do what exactly? How do big companies use SAP?

Pete Martin:

So the old term was enterprise resource planning. It’s basically business management software. SAP interestingly enough is the third largest software company in the world that very few people have ever heard of, unless you’ve come from a big company. So, it’s a single piece of software that literally runs every facet of a company from sales, distribution, purchasing, materials management, manufacturing, and it ties it all into kind of a single piece of software.

John Warrillow:

So if I’m like a Proctor & Gamble and I want to make sure the Crest Toothpaste shows up at the Kroger’s and they get billed for it at the right day, you would use SAP in the background to make all that stuff happen?

Pete Martin:

Yep.

John Warrillow:

Okay. Got it. And so someone like a Procter & Gamble would hire you to implement SAP software or to basically consult on its implementation, is that right?

Pete Martin:

Yeah. I’ll kind of give you an example. So we sold SAP, the software to Coca Cola and we sold the software itself was a hundred million dollars. And the implementation, the installation of the software across all their divisions, now, think about how big Coke is. They’re in 170 countries, whatever. The implementation was estimated to be 400 million. I think when all said and done, it’ll probably be close to a billion dollars by the time they implement it across all their sites. But it literally runs companies, which it was a very cool thing, because you really kind of get deep into how companies operate at the most fundamental level.

John Warrillow:

Why would they rely on independent consultants like you? Why wouldn’t they just do it themselves? These are big deals.

Pete Martin:

Yeah. Good question. Because it was all about building a platform and an ecosystem and they were able to grow. A lot of their growth came from the nineties. When this guy, Michael Hammer wrote Re-Engineering a Corporation, and they basically said, “Let’s go to Accenture and Deloitte and KPMG and EntryPoint and have them implement our software.” And so they didn’t have to scale up all these consultants around the world, they got instant scale. That software’s infinitely scalable. So they grew unbelievably in the nineties and beyond because of that, which is a smart strategy.

John Warrillow:

And as did you, you got the business up to 30 people or so before you decided to sell, is that right?

Pete Martin:

Yep. That’s exactly right.

John Warrillow:

And so help me understand how you thought about your dependency on SAP. One of the things that we talk about a lot is this idea of the Switzerland structure, where you can’t be too dependent on any one customer, supplier, partner, et cetera. As you grew, how did you reconcile the fact that man, we’re becoming pretty dependent on SAP. Did you think about that? Where were you guys sort of worried about that?

Pete Martin:

No, it’s a little bit of a different dependency. So in beginning of it, the first couple of years, we got virtually no business from SAP. We had to go find our own business. And so from a partnering perspective, we were technologists implementing their stuff. And so we weren’t really relying on SAP per se. The flip side of it Ben could have been, if they go to their customers and say, “Hey, these guys suck.” Then we’re in a big hurt. But in terms of kind of relying on them to grow the business, we weren’t as much as you normally would in a supplier kind of relationship like that. And it’s a fairly common thing that the big consulting firms in the world all have these hundred million dollar billion dollar practices around all of the big software companies from Oracle to SAP to Microsoft or whatever.

John Warrillow:

That’s helpful. And so you’re 30 employees. Give me a sense of the revenue. Is it time and materials or project-based? How do you bill for what you offer?

Pete Martin:

So when we started out, it was pretty much time and materials for most of those folks. Pretty healthy bill rates. And then as we really got our processes down and could figure out exactly about how long a particular project would take, we did some fixed price, less kind of time and materials based, but more project-based type of offerings. And then 18 months before we decided to sell the company, we really started to move into some recurring revenue type of service offerings, where we could chunk out a piece of an implementation. We knew exactly what it would take to implement. We built some intellectual property around it. And then we would just go fix [inaudible 00:08:26] as a product. That ended up being 25, 30% of our revenues in the end.

John Warrillow:

Amazing. So help me decode that. So 18 months before selling, you started to create some recurring revenue. What was the offering there? Can you be a bit more specific about what was a recurring offering?

Pete Martin:

Yeah, it’s going to get a little technical for a second. So basically the federal government says you cannot sell anything that could be used as a weapon, both software and hardware to people that they deem as what they call sanctioned party. So the bad guys, right? You can’t sell it to Syria, you can’t sell it to Iran, you can’t sell it to Saddam Hussein. And they forced companies to literally screen every one of their customers as the orders are going out to make sure you’re not shipping to somebody. And there’s this fuzzy logic.

Pete Martin:

So if there’s a Jon Warrillow with J-O-N a versus J-O-H-N, through the SAP software, we can kind of filter out if you’re a good guy or a bad guy. And so that we created the standard offering around that it’s called, Sanctioned Party Screening, where we could deliver that to a company that every single order that went through their system. And in the case of like a Citrix, Citrix is selling, they’ve got, I don’t know, 50 to a hundred thousand orders a day. Every single one of those customers has to be screened. So we bundled that up into an offering and called Sanctioned Party Screening. And then we could just ship that to a company, and we knew exactly what it would take to put that in and incredibly profitable.

John Warrillow:

I bet. That’s super helpful. When you say ship it, do you physically mean there’s a box? I would assume it was a sort of cloud-based, or is it on-premise software? What was it?

Pete Martin:

It’s on-premise or cloud-based software. And so, the delivery of it was the implementation of it. So it’s literally configured code. So SAP is a software that runs 26 different industries. It runs most of the Fortune 1000 companies in the world, but you have to configure it specifically for that business. So, we knew how to kind of manipulate the levers if you will, to be able to go in and configure that software very quickly for that particular company in their industry and their business

John Warrillow:

Have you ever attempted to go all in on Sanctioned Party Screening and get out of the consulting business and just focus on this piece?

Pete Martin:

Yeah, that’s a good question. It was kind of later, we had kind of gotten into that. Pretty close to when we were going to exit the business. Our concern about kind of going all in on just that was we think we limited the number of customers that we could go after. But that was the classic entrepreneurial appeal of, oh my God, if we just go down this one path, we give up all of this other business. And even though it was more profitable from a revenue perspective, it was significantly less than the other ones. And so we used it for both a service offering that made us money and we could heavily discount it. We would make it essentially what we call it a ramp offering, an on ramp. So come in and do a Sanctioned Party Screening for this amount of money. And we know we’d find all these other issues when we got in there and then we could go upsell from there.

John Warrillow:

That’s awesome. Thin edge of the wedge, as they say. Love it, love it. Who’s the we, Pete? Were there other shareholders, or I know you had 30 or so employees.

Pete Martin:

Yeah. So prior to starting up this company, I used to work for SAP and executive management for many years. And I was on the other side of the table where we then had business partners. And so one of our business partners, I got to know them fairly well. So when I left SAP, he and I started up this firm. So he was kind of early money guy. And then we built this thing together. And then at the height of 2008 before the financial crisis, and this was supposed to just be his second bite of the Apple.

Pete Martin:

He wasn’t quite ready to retire, kind of wanted to stay busy for a while. So I bought him out 2008. He got a return of 14 times his money. So he was a very happy guy. Unfortunately, in 2008, when the economy was really strong, our business was crushing it. So he got about the maximum valuation he was ever going to get. So he’s a happy guy. So, I bought him out in 2008, then I just ran the company kind of on my own after that. So I was the sole shareholder at that point.

John Warrillow:

What did you pay on a multiple of earnings to buy him out?

Pete Martin:

Oh gosh. At the time it was nine or 10 times earnings at that point. We had to do all kinds of-

Pete Martin:

Nine or 10 times earnings at that point. We had to do all kinds of math because he owned 55%, I own 45%, and then we did three levels of valuation where we kind of average those valuations. We did DCF. We did EBITDA multiple. And then we did a kind of a revenue multiple and smashed all those together for the average and paid amount on that.

John Warrillow:

Got it. And how did you come up with the money to pay him? I would imagine that’s a significant chunk of change.

Pete Martin:

Yeah. So we gave them a pretty big downstroke and that-

John Warrillow:

Being a cash payment upfront.

Pete Martin:

That’s correct. Sorry. Yep. And then we paid them out over another two years or three years. We just kind of agreed to a payment on a reasonable interest rate and we paid them out over time.

John Warrillow:

What would have happened had you reneged on that payment schedule or be unable to pay that off?

Pete Martin:

I think he would have been very kind and said, “What’s going on here, man?”

John Warrillow:

I guess, legally what would have happened. I’m sure he would have been a good guy about it. But, I mean, was there some sort of recourse that he had?

Pete Martin:

Yeah. It wasn’t super harsh. It wasn’t something where he takes back all of his shares. I think we treated it as a normal promissory note. So there wasn’t a recourse in terms of giving back shares or clawback or anything else. It was a, “Hey, I have the right to then go legally go after you guys for my money.” We did that because we gave him a large enough down payment of cash that he was pretty happy with the deal.

John Warrillow:

What gave you the confidence? I’ve often been curious about this because it’s so counterintuitive. You start a company often times with little cash and then all of a sudden the business says, “Oh, we need you to write a massive check.” And I don’t know that I’d had the stomach for it. What gave you the confidence to say, “Yeah, I’m going to write a check with a lot of zeros on it to buy out my partner.”

Pete Martin:

The 18 to 24 months before we did this deal with the partner, we were growing 50% a year, 50% to a 100% a year. But obviously we never saw 2009 kind of coming. And so we had a lot of faith that the business was going to continue to grow, and it was generating a lot of cash. So we had the full confidence at that point in time that the forecast looked good, the runway looked good, the cashflow looked good, and it just made sense at that point.

John Warrillow:

How bad did it-

Pete Martin:

… now and knowing what we know, probably not.

John Warrillow:

Why? What happened?

Pete Martin:

Just because then financial crisis took… We had a customer that we’d implemented their business system in October of that year. And we went live and a couple of weeks later, CEO calls me up and he said, “This thing is all screwed up. All the numbers are wrong.” And we’re like, “What are you talking about?” So we sent a team of half a dozen guys, and we’re literally running the numbers on spreadsheets. And we’re like, “We’ve got good news and bad. The good news is the system’s working perfectly. The numbers are right. The bad news is your numbers are down by 35-40%.” And literally was the very beginning of the recession that we went and do at that point.

John Warrillow:

And what impact did that recession have on your company in terms of… Yeah, go ahead.

Pete Martin:

Our pipeline disappeared pretty much. We lost about 35% of our revenue and we got through it without laying off a single employee. But I can tell you there were weeks where I’m lying awake just saying, “I hope to God this check comes in from this customer so we can make payroll.”

John Warrillow:

Did your former partner have to wait on any of his checks?

Pete Martin:

No, we kind of gave him a heads up and said, “Hey, we may miss some checks, or we may not miss any checks but we may be late. Are you okay with that?” And he’s like, “Yeah, considering the economic environment, I get it. And I’m here to support you.”

John Warrillow:

That was good of him. But presumably the business did turn around because at some point you decided to sell. What was the trigger? You mentioned 18 months. What was the trigger that made you think, “Okay, now I want to, I want to get on my front foot and start preparing this business to sell.”

Pete Martin:

Yeah. It wasn’t a financial thing. Honestly, I was bored, and we were bored from a couple of perspectives. I really developed the leadership team to be able to step up. So a lot of the stuff that I was doing in the past, they were now taking over, which was a great thing. So I had kind of less things to do. This was my fourth business. And so I wasn’t finding enough stuff to do. So I was kind of getting bored and I’m like, “You know what, I might as well monetize this thing if I can.” So that kind of got me thinking about it. It wasn’t, “Hey, Pete wants his pay off.” It was, “I know myself. If I’m bored, I’m not a good leader. I’m not a good employee. I’m not a good performer.” And so I could kind of see that going because that had happened a couple of times at my career and just said, “All right, it’s time to jettison this thing.”

John Warrillow:

So what did you do next?

Pete Martin:

So I spent probably two days kind of by myself, just in a conference room. In fact, I think I spent two days in a Panera or something. Just kind of writing down-

John Warrillow:

Who’s the dude loitering with the notebook, with the really cold coffee beside him?

Pete Martin:

We think we saw him last night. We think he’s been sleeping here all night. Said, “What does Pete want to do? And what do I think this is worth? And how could I maximize the value of this thing?” And I had started and sold three businesses before that, smaller businesses. And I won’t say I screwed up every exit, but I knew kind of what to do. I kind of went through the school of hard knocks and said, “All right, I got to completely pulled myself out of the business and have these guys step up. I need to create some recurring revenue streams. I need to make sure we have a nice profitability that looks like it’s a nice curve. We need to continue to build the business. We need to make sure we have loyal customers.” There’s a concept called the net promoter score. And we had been running net promoter score for five… We started probably two years after the book came out.

John Warrillow:

The book being Fred Reichheld’s The Loyalty Effect or The One Number You Need, et cetera.

Pete Martin:

Yeah, you got it. So we had this beautiful trajectory of cashflow, of growth, of NPS scores and everything else. And so I said, “What else do I need to do?” And it really was down to it, recurring revenue and removing Pete from the business.

John Warrillow:

Got it. What was your NPS score in those days?

Pete Martin:

We got an up to like 58 or 60.

John Warrillow:

Unbelievable. Unbelievable.

Pete Martin:

Just amazing.

John Warrillow:

That’s incredible. I mean, for folks listening, average net promoter score for companies across the US is around 15%, 10-15%. It varies by industry, but anything north of 50%, you’re kind of in world-class territory along with sort of Amazon, Google, Harley Davidson, USAA. So 58 is just like stunning. That’s incredible.

John Warrillow:

I’d love to dig into a theme that’s near and dear to my heart. Meaning how did you pull Pete out of the business? I think people, by the way, have heard that. They kind of get, “Oh, I got to pull myself out of the business.” But then it gets a bit murky. What do I specifically need to do to get myself out? Because I mean, in a consulting business, oftentimes the partners, the head, they’re involved right up serving clients, winning business.

Pete Martin:

Absolutely. And that’s very much the case kind of up to that point. And what can I tell you a little bit about the deal structure and then I’ll kind of go back and talk about [crosstalk 00:20:53]-

John Warrillow:

Sure.

Pete Martin:

As we are going through the due diligence process, and you can imagine KPMG, fourth-largest auditing form in the world, the due diligence that they went through was just brutal. But we kind of came out on the other side of that, which was great. And so we had a business sponsor within KPMG that wanted to get this deal done. And as we’re going through this process, the deal kind of got stuck. There was about a month to month and a half where there was very little activity coming from them. And so I called up this business sponsor and I said, “Hey, I can just tell something’s stuck. What’s up?” And he’s like, “I’m not really sure.” And I said, “Well, let me go talk to your boss’s boss,” who was the vice chairman of KPMG. And he was like, “You want to talk to the vice chairman of KPMG? What, are you kidding me?” I’m like, “Give me a meeting and I’ll get the deal unstuck. Just give me half an hour with this guy.” He’s got nothing to lose, so he was like, “All right, cool.”

Pete Martin:

So I get this meeting, fly out to New York. And I meet with this guy, Jeff LeSage, who is the vice chairman. And I said, “Jeff, it seems like you guys to get the deal done. Deal seems to be stuck. What’s up?” And he said, “Pete, we’ve never bought a company where the CEO and the owner and founder didn’t go with the deal. So I’m being told you’re not going with the deal. What’s up?” And so I said, basically two things. And then I’ll kind of go back to how this happened.

Pete Martin:

I said, “The one thing is I’m an entrepreneur. This is my fourth company. Yes, I’ve worked for big companies, whatever. I would make a really crappy employee. You don’t want me as an employee because I’m pretty independently minded.” And I said, “The second thing is,” I said, “if you look at our book of business from the last 12 months, and you look at the relationships that our customers have,” I said, “I can tell you who we signed because I’m that I’m the co-signer on the contract.” But I said, “I can’t tell you by name any of these people, none of them.” And I said, “The team that you’re getting are the people that you want because they have intellectual knowledge, they have the intellectual capital and they got the relationships with the clients.” And that was it. He’s like, “Okay, I get it. That’s fine.” And we got the deal done. Shook hands and we closed the deal 30 days later.

John Warrillow:

Amazing.

Pete Martin:

So to get to that point…

John Warrillow:

Pete, before we get to that point, I just love to ask you about that meeting with Jeff. What was your mindset on the plane on the way up to New York? What was going through your mind?

Pete Martin:

I didn’t know why the deal was stuck. I was very fearful that my business sponsor maybe didn’t have enough stick. I know he wasn’t the decision maker. He’s a big influencer, but I didn’t know what had been communicated up. Even though the A team had been involved, but we were going through all the normal process that a large company would go in and acquiring a smaller company. But the fact that he didn’t know why it was stuck was very worrisome. So I was working through mentally on the plane up every possible objection that he might have about buying the business, and what would be my response and how I could kind of overcome that objection. And that was not the one that I expected actually. I wasn’t sure what it was, but-

John Warrillow:

What were you expecting?

Pete Martin:

I thought it was price. I thought he had an issue with either the price of the terms, and the way we structured the deal was they paid 70% in cash at closing. 70% of the monies. There was another 10% hold back for three months. What they wanted to do, even though a lot of our client contracts were assignable to them. They had their own contract that was KPMG specific. So they wanted every customer of ours to sign a brand new contract. And so obviously a big part of the evaluation was based on that book of business coming over.

Pete Martin:

So there was a 90 day period where they had to go resign every client onto a KPMG contract. So 10% of the monies were held back for that. And then we kind of had this scale that said, “If 90% sign, this much is kind of released. If the 100% sign, this much as released.” And then there was 10% held back for… There was some key personnel, pretty much the leadership team that if they stayed at KPMG, then I got the rest of those 10%. And then kind of same thing if a couple of people left, particularly the rainmakers, then not all of that money was released. And so I thought it was around kind of those two factors, either the people, the clients or the price itself, and it wasn’t fortunately.

John Warrillow:

And what was the other 10%? You mentioned 7% cash, 10 and 10.

Pete Martin:

And the final 10% was what was called an indemnification hold back. So they basically stick it in an escrow account. And if there’s any liabilities that come up, an employee sues, a customer sues, whatever, then they have the right to reach into those funds and pay for that lawsuit from those funds. And that was over the course of a year. So after a year, those monies were released.

John Warrillow:

Got it. Okay. Let’s now rewind to what you… So this is super helpful. So what you did to get the business to that point where it could run effectively without you.

Pete Martin:

Yeah. So we had a model that is not unlike an accounting firm.

Pete Martin:

So we had a model that is not unlike an accounting firm or a law firm where the lawyers and accountants are doing the selling, right? And so our consultants who did the billable work also had to go out and do the selling. So there’s a good part and a bad part about that. A, it’s very hard to scale and b, consultants they’re not professional salespeople. So they’ll tell you the stuff that you don’t want to hear just because that’s what they do, right? And so it killed sales cycles because they’re telling everything, right?

Pete Martin:

And so because of that, I always inserted myself into the sales process. I was always there saying, yeah, yeah, I know it’s going to be hard, but we can get you passed this. I know that this system sucks, but we’re going to get you past that, right? And so it took really a couple of years of leadership, professional development to get these guys over the fact to say, it’s okay to tell most of the story, you don’t have to tell all the story in a sell cycle, right? And it just took a long time. And so when I finally felt comfortable and saw the performance that they could go sell deals without me being involved, that was kind of the cue for me. Okay, I don’t need to insert myself into every deal.

John Warrillow:

And specifically, Pete, how did you train them? Did you bring in an external trainer, send them off to Sandler Sales training or did you personally teach them how to do that?

Pete Martin:

Yeah, so fortunately SAP had some training that we sent them through. Most of these guys are just brilliant people. They didn’t make the training. So it really was me taking them through a very conscientious processes, just saying, in a sales cycle, this is what you do, this what you say, this is what you don’t say, this is how you react to this stuff. Put the objections on the table and let’s talk about it as opposed to waiting three months down the road when we’re trying to get a contract and it never comes through. I wanted to do professional training. It ended up just being professional training essentially for me.

John Warrillow:

And Pete, where did you learn that? Did you learn Rackham spin selling or Xerox? Or what was your learning?

Pete Martin:

Yeah, so I worked for IBM for seven years. So I’ve been through every professional sales methodology there is from spin selling, solution selling, whatever through that. And then I was an executive at SAP so I was either being trained or training others as part of that. So I’m a sales guy, so it was basically 14 years of truly top end Fortune 500 professional sales, methodologies training.

John Warrillow:

Got it. So you got the consultants to learn how to sell. You taught the consultants to learn how to sell without falling all over themselves and unselling the customer. What else did you do to get it to work without you?

Pete Martin:

Yeah, I think a lot of the backend processes. So they would write the contracts, they’d write the proposals, statements of work. We ended up basically removing from that. So we created these templates and then had a back office handle a lot of that stuff on their behalf, which helped them just focus on selling and delivering and not all the other crap. In addition to having some uniformity, you could pull out three different contracts, three statements of work and they wouldn’t look anything alike, right? So it was combination of removing myself from the sales process front end process, and then putting some uniformity around kind of the backend fulfillment execution piece of it.

John Warrillow:

A lot of people, I speak with, a lot of entrepreneurs I speak with theoretically know the idea of creating processes. Oh, that’s a good idea. I should create processes and templates and worksheets. And yet they kind of like the hair on the back of the neck goes up when they think about having to create those. Did you create the templates and the processes or did you get someone on your team to do it?

Pete Martin:

We created a structure as a team. We spent a weekend in one of our… We had quarterly leadership retreats. And so we spent a good part of a half a day or a day putting together a framework that was flexible enough that we can use it across clients, but created some consistency. And then we gave it to some folks on the team and just say you’re not going to own this. I’m a process guy. ERP, SAP is all about process optimization. So this is the way I’ve been wired for gosh, 14 years or something. So I hated doing it, but I get the value of it right and your ability to scale much faster if you can put these processes in place. And you sleep better at night as an entrepreneur and owner, because you know that there are some controls in place without you having to be controlling.

John Warrillow:

Got it. So you documented your processes in particular, your sort of backend deal, templates and stuff. You got the sales, you got the consultants to sell. Is there anything else you did to pull Pete out of the middle of the business?

Pete Martin:

No, not really. That was kind of enough. And in a consulting business, you only got two things that are going on. You’ve got selling and you’ve got execution and fulfillment and then whatever administrative stuff. So the administrative stuff was handled. We had a good team doing that. And so it was really, they just wanted to know I wasn’t part of the delivery and I wasn’t part of the rainmaking. And when I was fairly convinced that that was the case, then that’s when the deals started to come together.

John Warrillow:

Got it. Got it. That’s helpful for sure. You mentioned recurring revenue. Maybe talk a little bit about that. The product that you referenced earlier, the sanction party screening, that’s the recurring revenue you created. Did you create that because you were thinking about an exit or was that something you did in advance?

Pete Martin:

It was very opportunistic in the beginning. So we had a client that came to us and said, we have a whole fact… We spun out a company kind of as a separate company as part of this. So we had a company that came to us and said, we’ve got this department of a dozen people, I think it was, that manually screened this stuff, review this stuff all the time. And they can’t even keep up with all the regulatory changes. There’s a new database updated by the government every couple of days or every week, basically there’s a brand new database and we just can’t handle it. And we want to outsource this to you guys. And we’re looking at HPE, we’re looking at IBM and we’re looking at you guys.

Pete Martin:

So we created a service offering around that and created a separate company that did business process outsourcing specifically for that. And so then we kind of had two flavors. So if somebody wanted to literally outsource that function, we could take that on. And the beautiful thing from a recurring revenue perspective is you just took a piece of their company over. It’s really hard for any company to take that back over. They don’t want to take it back over as long as you do a good job, right?

Pete Martin:

So we ended up structuring that differently and then I sold that business off. And then for the companies who wanted to keep that in-house, that’s where we created that service revenue, that recurring revenue stream, because that database has to be, they have to continue to screen. It never ends. Or if you violate these government controls from an export perspective, by law CEO’s are personally liable. So you can go to prison for shipping stuff to Syria or Iran.

John Warrillow:

There’s a case right now, the Huawei CFO is holed up in Vancouver with a bracelet around her ankle because the U.S. government has said, you’ve got to come stand for these charges. It’s a big deal. I’m aware of that lot. Yeah. Yeah. So when you went to sell the business, you mentioned there was roughly 25, 30% of the revenue was recurring. That was derived from this product, the sanction party screening.

Pete Martin:

Yeah.

John Warrillow:

Got it. So you’re bored. You’re like I’m going to get myself in trouble here unless I sell the company. So you made some of these changes, getting yourself out of the business. At what point did you start to get more on your front foot and go from getting it ready to sell to actually actively selling it?

Pete Martin:

Yeah, so, because I had sold three previous companies, I knew the value of getting a strategic involve in the mix, right? And I think deals go smoother, better and have a higher valuation when it’s a strategic that knows you, like you’ve actually done work together. So we approached a couple of the bigger consulting firms. We approached DY, Deloitte, KPMG and I think there might’ve been one other one. I think it was IBM and said, “Hey, we have excess capacity. We are frankly the best in the world at doing this. Let’s go figure out a way if we can partner.” And KPMG bit and so we actually went to the point of, we actually jointly bid on a couple of projects and we did that on purpose because we wanted them to kind of know how we worked. And you talk about in your new book about this concept of telling a story.

Pete Martin:

And so the story that we approached all these guys with was particularly KPMG is we said, look, you guys are out there advising clients on what to do. And so their bill rates are super high, but the engagements are very short. We’re actually then go delivering the work. So you’re telling a client they should do X, Y, and Z. We actually go do X, Y, and Z and so our projects are about five times longer than your engagement. And so what if you could do it all? But if you could say, you should do X, Y, and Z, and now we’ll actually put in X, Y, and Z, right? And so that was kind of the pitch.

Pete Martin:

And so we jointly bid on, I think two or three clients. Ended up not getting the work for two of the three. The third one we did, but what came out of it is they could actually now see the numbers. They could see that the piece that they were doing was whatever $10 and the piece we were getting was $30. And so even though the bill rates were different, ours were lower, the projects were significantly larger, right? That then became the story.

John Warrillow:

And when you went to approach Deloitte and KPMG and IBM to co partner with them, did you in your mind know that you wanted them to acquire you?

Pete Martin:

Yeah, absolutely. That’s how we did it.

John Warrillow:

Did they know?

Pete Martin:

I think the guys that KPMG did. We had had some kind of at the bar conversations about, hey, what if? Would you be interested? How are you growing your practice? What’s this thing look like in three years? And so theirs was by far the best fit. Deloitte already had kind of a competitive offering. I’m a former IBM-er, but you can just tell they couldn’t get out of their own way. And it just made sense. It was a perfect strategic fit for what they were doing.

Pete Martin:

And so after we got that feeling for where they were at, that’s when I said, “Hey, let’s go partner on a couple of deals and see what this thing looks like.” With that kind of in the mind of, if this goes rally well, they’re naturally going to go, “Hey, we’re giving away all this revenue to these guys and we brought them into our client. Why don’t we just bring them into the mix?” Right. That’s exactly how it happened.

John Warrillow:

Interesting. So who made the first move?

Pete Martin:

We did. We did.

John Warrillow:

What did you do?

Pete Martin:

From the acquisition perspective?

John Warrillow:

Yeah.

Pete Martin:

Oh sorry. No, after we kind of went through this very detailed sales process with a very, very large client that… We were both kind of underdogs. We had both teams super engaged, we built this amazing proposal and we kind of got through that. And so, as we were doing a kind of after review, after deal review, we’re kind of sit around talking. And this guy said, “Hey, this was great. You guys have this perfect cultural fit with what we’re doing. Would you ever consider selling?” I was like, ping. I’m like, yeah, yeah. I was playing a little cool. I’m like, “Yeah, I don’t know. I don’t know what we’ll do in the future, but yeah, we’ll think about it. How serious are you about it?” And he said, “I would be super serious.” And so I basically said, and this particular partner in his practice in KPMG had never acquired another entity. And I knew that. And so that ended up playing in our favor because I literally coached this guy through the process from beginning to end, which was kind of a weird position to be in, but it went really well.

Pete Martin:

And so I said if this is something that you’re generally interested in, you go talk to your M&A guys, you go talk to your chairman and you go figure out if that’s something you can actually get done. And if it’s of interest, and if it is you come back to me, thinking that it really wouldn’t go anywhere. And then I don’t know, a month and a half, two months later, he’s like, “I got the green light.” I’m like, “Greenlight for what?” And he’s like, “It’s project touchdown.” I’m like, “What are you talking about?” He goes, “That’s the project we have for acquiring the company.” I’m like, “All right. We’re good.”

John Warrillow:

Pete, before, around this time where you’re partnering with KPMG on this deal, what did you think…

John Warrillow:

… where you’re partnering with KPMG on this deal, what did you think your company might be worth? You paid your old partner nine times EBITDA, did you figure nine was… Did you think you could get nine for your company?

Pete Martin:

I thought we could get more money. And the reason, and again, personally, because my former business partner had bought and sold, I think, seven companies, this was my fourth one. And so I literally, every quarter got Ellis reports about what are the multiples by various valuation methods for different industries. And so I knew kind of in my head about where it should be.

John Warrillow:

But a smallish professional services consulting company, I would have expected six, seven times EBITDA; nine sounds really high to me. Where you were you not looking at the same benchmark, was six or seven sort of what you were seeing, and nine was on the high end, or-

Pete Martin:

Absolutely. That’s right about what we saw. But I knew I got these guys, I whet their appetite enough to know, and I helped build their business plan, literally they sold to upper management, about how much revenue they could do. And it had a massive positive impact on this guy’s practice. He more than doubled his practice in the first year by acquiring us.

Pete Martin:

So I helped shape the story, and I helped shape the valuation, and I helped shape the valuation through telling the story. And for the size that we were, and the size that those guys were, honestly between nine and 12 times EBITDA wasn’t a big deal to them, because they were large enough that it was basically a rounding error. So as long as it wasn’t egregious, and it wasn’t super unfair or completely out of the realm of evaluations, it really wasn’t questioned.

Pete Martin:

We had their M&A guys, we went through it, just say, “Pete, tell me why you’re worth 12 times EBITDA,” and that was literally the only conversation I had. They had already bought into the strategic value of us joining them.

John Warrillow:

Okay. So I may have messed up the order of the story there. So let me make sure I get this right. So your acquirer comes to you, and KPMG comes to you, Project Touchdown, I got the green light. You think you’re worth north of nine times EBITDA; at what point did you guys get into the number? Did they put a number in front of you? Was it verbal, or what was the…

Pete Martin:

I put a bigger number in front of them.

John Warrillow:

Okay. What did you put in front of them as a multiple of earnings?

Pete Martin:

I’m trying to remember, I think I did 2X of revenue, which would have been 25 times EBITDA, I think.

John Warrillow:

Love it!

Pete Martin:

That’s kind of what they did. And so the business manager, he didn’t know how to value companies, so he was like, “Oh, sounds good to me.” So by the time we kind of started working through the M&A process, when that got through to their M&A guy, he’s like, “Ah, no, we need to talk about the number.”

Pete Martin:

And one of the things that I always coach other business owners on is don’t ever separate terms and price, don’t ever. So basically what I told the M&A guy was, I said, “Let’s just set the number aside, let’s work through all of the other terms, earn-outs, indemnification holdbacks, all of the other stuff you’re going to stick into a contract, and then we’ll go back and revisit the number. And if you guys are asking for stuff that’s unreasonable, I’m sticking with the number. If you guys are putting primarily cash on the table and everything else, then we’ll talk about the number again.” And that’s exactly what happened. The number didn’t really get agreed to until we got the LOI from them.

John Warrillow:

Got it. So you’re 25, the M&A guy is like, “Not going to happen.”

John Warrillow:

You say, “Well, let’s talk about what terms.”

John Warrillow:

At that point they’re saying, “Mostly cash, a little bit of hold back.”

Pete Martin:

No, they’re talking about, “We want a low number, and we want to pay out over time, and we want earn-outs, and we want you to join the company,” whatever. Because that’s how they got used to buying companies. Every company typically had a process and standard deal terms. And so that’s why I was like, “We’ll revisit all of this together, kind of in one bundle. And we’re going to weigh different things against each other.” So he got it, he knew that I wasn’t just kind of a newbie.

John Warrillow:

A first-time seller. So they want a low valuation, they want to pay it over time, and et cetera. So where did you go from there? So your counsel to other entrepreneurs listening to this is don’t decouple those, like the price and the terms have to be… Like they’re one bucket.

Pete Martin:

Exactly.

John Warrillow:

And you’re to screw yourself if you try to deal with them in isolation. So how did you go from, “We’re going to pay you a crappy multiple over time,” et cetera, to ultimately what you agreed to, which I think is 12 times EBITDA. Which for folks listening, for a professional services firm, it’s almost unheard of. It’s a huge number to get 12 times EBITDA, in particular without a huge earn-out. So how did you go from where they were, all the way up to 12 times?

Pete Martin:

I think it was a level of trust, the business guy who was driving the deal just said, “Look Pete, we’re going to have to talk about this number at some point.”

Pete Martin:

And I’m like, “I get it.” I said, “But do you understand my position of wanting to combine deal terms and price?”

Pete Martin:

And he said, “Yes, I do.”

Pete Martin:

So I said, “If you can trust me that we’ll get to a place that works for both of us, let’s just continue to move forward in the process. Let’s continue to talk about terms. Let’s continue to ferret out the due diligence,” they were already kind of starting that process, and it was a trust thing.

Pete Martin:

And so he said, “I trust you, don’t screw me at the end here and expect that you’re going to get that price, because you’re not.”

Pete Martin:

And I’m like, “I get it, let’s just kind of work through this thing together.” And it worked out great.

John Warrillow:

At what point did they prepare a letter of intent?

Pete Martin:

We did basically a letter, we did it IOI, enough-

John Warrillow:

Indication of interest?

Pete Martin:

Yeah, I’m sorry… To get me interested enough to go start preliminary due diligence. So we started showing them customer contracts but redacting all the names, kind of general sense of financials. We gave them a list of personnel without names and said, “Here’s the skills of these people.”

John Warrillow:

Do you remember what the multiple they were offering in the IOI? Was it like a range of, “We think we’d pay between X and Y?”

Pete Martin:

It was a range, yep, exactly.

John Warrillow:

Was it a multiple of EBITDA or was it a number?

Pete Martin:

It was a number.

John Warrillow:

Got it, got it.

Pete Martin:

And then we got through enough kind of preliminary due diligence that we’re like, “All right, let’s move this to an LOI.” So then we moved it to an LOI. We kept the number actually as a range, now that I think about it, in the LOI, with some very strict language that said, “Hey, we need to lock this down before we give you a definitive purchase agreement.”

Pete Martin:

And even though it was non-binding, it was pretty well fleshed out. There was more stuff in that LOI than you’d normally see in an LOI, because I wanted those deal terms in there. I wanted them to agree to how they were to structure the rest of the deal. So then we started the due diligence, and that took four months. They wanted six or nine. I said, “No.” They wanted 90 days to close-

John Warrillow:

Sorry, they wanted six or nine months of diligence?

Pete Martin:

They’re an auditing firm, right?

John Warrillow:

Oh my gosh.

Pete Martin:

And I said, “We’re not big enough; you’d have to go to each one of our houses,” like this is insane. And so, and again, it was they had their process, they were used to buying really big companies, and I get it. And so we just said, “Well, we’re not them. We’re kind of this different entity,” and so kind of came to terms on that. They finished the due diligence a little bit early. And again, they knew that I had sold before, so they weren’t going to use this as a way to restructure the deal towards the end.

Pete Martin:

And while we were doing that, we said, “Send us over your,” because we knew their contract was going to be huge, so we said, “Send over your purchase agreement. I’m going to have my attorney start to look at that.” So we did that in parallel.

Pete Martin:

I think the ultimate purchase agreement was 155 pages, with exhibits and schedules and everything else in there, but it was huge. So we spent a lot of money, and a lot of time with my attorney kind of going through this, and we got their counsel involved with my counsel, and they kind of worked through that over the course of a couple of months while we were going through due diligence.

Pete Martin:

So by the time we got to the point where we’re kind of ready to close, it was just basically at that point, it was a matter of talking to the key personnel to make sure they really wanted to go over to KPMG, and then we didn’t talk to all the clients, but we talked to probably 15 of the clients and said, “Here’s what’s going on, we’re selling the company, KPMG.” There were two companies they couldn’t take because of what they’re called independence problems; so if they audit that client, they’re not allowed to do consulting in the client.

Pete Martin:

So we didn’t change the deal structure, that was already kind of known from the beginning. So there were two clients they could not take on after they went through their independence review, and they weren’t super big so it was not a big deal. And so the closing was fairly straight forward. It was really clients coming over, and personnel coming over. And that’s a function of doing a really good job crafting the agreement, and doing a really good job at the due diligence process.

John Warrillow:

Got it. And I know we’ve only got a couple more minutes of time for you, but I do want to get one last question in which is, how did you avoid KPMG stealing your consultants instead of buying your company?

Pete Martin:

Because we wrote that into the contract upfront.

John Warrillow:

And when you say, “Wrote that in the contract,” what do you mean by that?

Pete Martin:

We wrote that into the LOI, that if we were going to release names, and people, and let them talk to folks, that there had to be a non-compete. So we actually wrote that into the LOI that they agreed to. And again, there are definitely buyers out there who will try to take advantage of entrepreneurs, and so you got to be super wary. And even if you put it in a contract it doesn’t mean that they don’t put a job posting out there, and your people are applying to it.

John Warrillow:

Somehow find it, somehow, yeah.

Pete Martin:

And so you’ve go to be super careful. But I trusted these guys, and they trusted me to do the right thing, and it ended up working out.

John Warrillow:

So you closed at 12 times EBITDA with no earn-out, unbelievable. Well, congratulations.

Pete Martin:

Thank you.

John Warrillow:

I think that’s incredible, incredible. And I’m grateful for you sharing the story. Where can people find you? What are you up to? If people want to reach out to you, what’s the best way for them to do that?

Pete Martin:

So I’ve been helping business owners for a long time, and I put a four little business around it, it’s called AskMyBoard, www.askmyboard.com. And I just love sharing my story, and I love helping out other people. So I do that. And I’ve actually got an online voting business that I do kind of separately, so it’s keeping me super busy, which is great.

John Warrillow:

Awesome. And fortunately, or unfortunately, you’ve got a relatively common name, Pete Martin, M-A-R-T-I-N, so we’ll put a link to your LinkedIn profile in, is it okay if we put that in the show notes-

Pete Martin:

Yeah, yeah

John Warrillow:

… so people connect with you on LinkedIn?

Pete Martin:

Yeah, and my e-mail is pmartin, P-M-A-R-T-I-N, @askmyboard.com if somebody wants to direct.

John Warrillow:

Awesome. That’s great. Well, Pete, it was great to have you here, and I appreciate you sharing the story. Congratulations on your sale, it’s amazing.

Pete Martin:

Thanks, man, appreciate that.