How to Sell a 30-Person Consultancy for $162 Million

Transcript

John Warrillow:

Hey guys, it’s John Warrillow. So 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 Secret Hacks for Exiting On Top is now available. 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 acquire 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 acquire without looking like I’m desperate to sell?

John Warrillow:

How many companies should I approach? How do I separate real acquires from tire kickers? When in the process do I reveal my numbers? When and how do I tell my employees? 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 acquires, including how to defend yourself against Re-trading, acquirers who intentionally set unattainable earn-out goals, financing and acquires 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 acquires use in negotiating to buy your business stuff like tipping basket, covenant, downstroke, escrow, indemnification, earn-out, QV, reps and warranties, churn. I’m just about to throw up just using all 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:

So my next guest, Greg Alexander built a little 30 employee consulting company, not a big company, but a pretty successful one, which he sold for $162 million. How do you sell a 30 employee consulting company for $162 million? Well, Greg is going to tell you his secrets. And what I think is amazing about this story is he did it all without having to sign on for an arduous earn-out. He got 100% of his cash at closing. A couple of things he did that he’ll we’ll describe, which are productizing his service, how he got to the point of having a million dollars of fees per employee. He’ll talk about how he created a winning corporate culture in a very unorthodox manner. He’ll talk about Re-trading and how that almost sank his deal. And I’ll also describe an $80 million mistake he made in building his company. Here to tell you the entire story of his amazing exit is Greg Alexander.

John Warrillow:

Greg Alexander, welcome to Built to sell Radio.

Greg Alexander:

It’s great to be here.

John Warrillow:

SBI stands for Sales Benchmark Index. What did you guys do?

Greg Alexander:

So we were a management consulting company. We specialize in business to business sales effectiveness about 30 million in revenue, 30 employees when I sold, which was in 2000-

John Warrillow:

30 employees and 30 million in revenue, you had a million in revenue per employee.

Greg Alexander:

Yeah. We were clearly a premium provider for sure and that was part of the business strategy, which I’m sure we’ll get into.

John Warrillow:

Wow. So 30 employees, 30 million revenue. Okay. I got to dig in there. So I am Xerox and I want to get more out of the sales guys and girls that I have, I’d hire you guys to do what exactly?

Greg Alexander:

Oh, a variety of things. So the general pitch was this, a big company like Xerox they have thousands of salespeople, somewhere between 10 and 25% of their top line revenue is invested in salesforce. So even small marginal improvements and the effectiveness of the salesforce, which is typically measured in revenue per sale set, made a huge impact onto the business line. So the type of work that we got involved in is determining which accounts to pursue, how to pursue them, how many salespeople to hire, what type of salespeople to hire, where to deploy them in terms of sales territories, how to set their quotas, how to write their incentive compensation plans? It was a whole basket of things that we did to improve the productivity of the salesforce.

John Warrillow:

Got it. And so how did you bill for your services? Was this project-based time and materials? What was the revenue model?

Greg Alexander:

Yeah. 100% fixed bid by design.

John Warrillow:

Fixed bid. What does that mean, Fixed bid?

Greg Alexander:

So there was no charging on billable hours. So customer would come to us and we said, we will do X for you and they paid us a flat rate.

John Warrillow:

Who’d you compete with?

Greg Alexander:

The structure of the industry was, they were the big guys at the top. So most commonly Bain, McKinsey, Boston Consulting Group, then they were the mom and pops. And in this industry, the sales effectiveness industry, it’s a cottage industry. There’s-

John Warrillow:

Turns every sales manager, he gets fired as a sales effective as trainer.

Greg Alexander:

Exactly. And then in the middle, there were some boutiques. So there was us, there was a company called ZS Associates, there was a company called The Alexander Group, ironically, no relation and where we positioned ourselves, and I think this is the reason why we had such great revenue per sale set, was just below the McKinseys, but above the other boutiques. So we were the premium boutique.

John Warrillow:

Got it. And what was the magic behind getting to a million dollars of revenue per employee? Because I got to understand the structure, because in most consultancies you’ve got the partner engagement manager, a bunch of associates, the classic Christmas tree, and there’s a lot of headcount rolling up to a partner’s salary. So what was your structure from a headcount perspective?

Greg Alexander:

Yeah. We didn’t have any of that. So, and again by design. So the labor market, if you think about it, like you would any market, in the area of sales is highly inefficient. And what I mean by that is I could hire a VP of sales from one company. In that company, that VP of sales is working for, thought that that person was worth, I don’t know, $250,000 based on 20 years of experience and maybe some stock options. They really had no idea what that person was worth because that person was probably working say 60 hours a week, 48 hours a year, just for easy math call it 3000 hours. So on an hourly basis, the employee was getting killed. He was better off working at McDonald’s, basically no lie.

Greg Alexander:

So I was able to take that employee who was extremely capable and just because the market was inefficient, take him out of that position, and instead of making him or her captive to a single company, I made him or her now have the ability to serve a dozen people. And because we were so efficient as the way we did everything, we productized all our services. His output or his value to those businesses was equal to, but then times twelve, in other words, he was delivering equal value to 12 companies as he was to one company. And as a result of that, I was able to bill for it.

John Warrillow:

You mentioned productizing. In what way did you productize the business of sales consulting?

Greg Alexander:

Yeah. So, we never sold any one-off projects. We were very tight as to where we were going to play and how are we going to win. And every service that we had had a procedural manual, literally step by step. So when I was scoping a project, I knew exactly, what my level of effort was going to be to deliver the work. And therefore I knew exactly what my cost was. So I could sell something for $1000 an hour and deliver for $100 and pocket the spread. That’s what I mean about productizing the service. Our industry competitors, they didn’t do it that way. They had very much a classic structure. As you mentioned the pyramid partner engagement manager associates and their model was very time-based, it wasn’t value-based. Our model was value-based and that was a real big distinction for us. And that’s what allowed us to get that revenue per head number that I mentioned to you.

John Warrillow:

I think it helped listeners if we just took one of those products, those service offerings that you productized. So can you give me an example? Was there like a specific product that was a good seller?

Greg Alexander:

Let’s take a segmentation analysis. So what would happen a lot is that a big consultancy would get hired to segment a market. And they would say, “I don’t know, Mr. Software company, you guys should sell to mid-sized financial services firms in the United States.” And then they would hand that over. And it was usually handed over to the executive team, the product team. And it’s like, okay, so this is part of our strategy, but then it would go to the sales reps. And what would the sales reps do with that? They can’t call on the market. They have to call on an account and they have to call on a buyer. So we would take this market segmentation, we’d take it all the way down to the account level and then within an account, we would identify the buyers and the users and the influencers that would be involved in the purchase decision.

Greg Alexander:

It was largely a analytic exercise. It was softwares analytic tools. It was spreadsheets, algorithms, things of that nature. And the way to do the work was the same every time. If you did it for company A, you could do it for company B, you could do it for company Z. So when we would sell that work in such a way with a standard set of deliverables so that when we won the business, I could hand it to a delivery team and do it extremely efficiently.

John Warrillow:

We were joking earlier about every washed up fired sales manager becomes a sales efficiency coach, but I would be curious to know how you convinced… First of all, where did you get your customer facing people, the people that interacted with your customers, where did you recruit them from?

Greg Alexander:

Directly from the target companies. So we would pick up the phone and I’d call the head of sales. And I’d say, “Listen, you’ve been doing this for 25 years. You’ve had 12 jobs. Every two years, you lose your job because every two years, when the sales numbers are off, they blame you.” They forget that their pricing wasn’t competitive, or they were trying to sell a bad product or they weren’t competitively positioned against… it was always a sales guy’s fault. So most of these sales leaders, although not all of them, but most of them were very talented people.

Greg Alexander:

They just were put in a situation where they couldn’t succeed. Now, I would tell you that most CEOs really don’t understand sales effectiveness at its core. So when the sales number was off, they just thought it was a people problem. And very often it wasn’t a people problem. It was an environmental problem. So I would go to that head of sales and acknowledge what his skills were and say, “I can take you out of that miserable existence,” and it was miserable and I could put them into my environment and let him truly be successful because we eliminated those environmental factors.

John Warrillow:

How did you do that without undermining your relationship with the company?

Greg Alexander:

Well, I didn’t hire from my clients. There’s 11,000 B2B companies in the world and we might do, I don’t know, 30, 40 projects a year. So there was plenty of people to hire for sure.

John Warrillow:

Got it. That’s helpful. And how did you retain them? Because I would imagine the temptation from time to time was like, what am I going to give all this extra money to Greg when I’ve got this skill set. I’m a 25-year veteran. I can do all this consulting stuff. I don’t need the umbrella of SBI anymore. How did you retain these guys?

Greg Alexander:

Yeah. We had an incredible ability to bring in clients. So we had a few people who left our firm and tried to start their own firm, but they just couldn’t bring in the clients like we could. We drank our own champagne. We taught our clients how to sell and how to improve the effectiveness of their Salesforce. And many of the times we demoed our capability during the sales campaign in pursuing them as a client. So, if you quit SBI or some other company, you hang your own shingle, you got to go generate your own clients. We were a machine at that. That was number one. And number two, I paid everybody more than what the market rate was all the time. And I pay for performance and because they delivered an outstanding performance as evidenced by that revenue per head figure, between the amount of money they can make with me and the steady stream of clients that I can bring them, we really didn’t have a retention problem. That turnover rate and consulting, in general, is about 30, 40%, depending on the sector, we ran it less than 10.

John Warrillow:

Fantastic. So who’s the we, who owned SBI?

Greg Alexander:

Yeah. So I was the founder of the company. I started in 2006. Actually, I should say I was a co-founder. I started it with a classmate of mine. We came up with the idea together, or we were getting our MBA at Georgia Tech, and then we launched the firm and then about a year into it, we brought another guy that I used to work within a previous life. We brought him on board and that was those three people, we were the nucleus and we weren’t aware of it at the time. But we were very much following the model that you read about in things like EOS, where you had the visionary and the integrator. And the way that we did it is I was the visionary and the guy that brought in the work in the beginning, then we had one individual who was excellent at delivering the projects. And then we had one individual who was dedicated to productizing our work so we could scale. And then as the business grew, we almost stumbled into being organizer functionally around those three major functions. So, that’s how it evolved.

John Warrillow:

And how did the capital structure evolve over time? Did you start to bring in additional partners or was it the three of you guys till the end?

Greg Alexander:

Yeah. So my co-founder and I cut up the pie in the beginning. I would love to tell you there was a lot of science behind it, but there really wasn’t. But we were happy with it. Then when we brought the system-

John Warrillow:

Is this 50/50 down the middle? Did you guys put the capital in or-

Greg Alexander:

It was 75/25. 75 myself, 25 him.

John Warrillow:

How come he got so much less?

Greg Alexander:

He was much younger. He wasn’t going to contribute to the revenue stream early on. He didn’t have any intellectual property, but he was somebody I trusted and was very bright and someone who I thought could help the firm going forward. And he did. And he was pretty outstanding. Then we brought a third partner on fairly early and inside of the first year. And he was a gentleman that I had worked with at my previous spot at EMC. And I cut him in for 24/1/2%. So I told those guys that I wasn’t willing to go below 51% because I wanted to have control and that if we were to add any other parties in the future, it would have to be out of their end. And we all were okay with that. As years went on we did add additional partners. We made everybody buy into the partnership. So like the firm was worth something at that point. And they structured a mechanism to allow the firm to be valued and allow them to buy into the firm. And as the firm got really big they were able to finance the acquisition of some of these junior partners and things like deferred compensation, et cetera. So that’s some-

John Warrillow:

You just went way past my pay grade. So you got to slow down for me here. So if I think about the fact that you were allowing people to buy into the company, what was the valuation methodology you use to value the company as a going concern as a multiple of EBITDA? Or what was it?

Greg Alexander:

So in the spirit of don’t do this, here’s the first don’t do this. So first off is I just mentioned, I deluded myself 49% inside of the first 12 months. That was an $80 million mistake.

John Warrillow:

Why do you say that?

Greg Alexander:

Well, we sold the firm for a little over 160 million at exit, and I gave up 49% within the first year. Now, the people that I gave that money up to were they worth it? Yes, no doubt. Did they contribute to the firm? 100%. Did they contribute $80 million? Not a chance, right? So if I was to do it over again, I absolutely positively would advise having equity partners, but I’d be very, very careful as to how much equity you give up soon. And in my new businesses now, I don’t do it like that at all.

Greg Alexander:

I put my hand on the stove, I burned my hand and now I’m not doing that anymore. So when we valued at the firm in the beginning, there was nothing to value. Literally it was just, okay, this is what we’re going to do and we wrote this very crude operating agreement and that’s how we governed ourselves. Then the firm’s started becoming worth something. So we developed a formula based on trailing 12 months revenue, which is also incredible mistake because it was crazy. We were so profitable yet we were valuing ourselves in a multiple of revenue. The going rate in the industry was 1.25, so the people that bought in early, they got the deal of a century.

John Warrillow:

So let’s just break that down. So the trailing 12 months you were valuing the company at 1.25 revenue, and what profit margin would you make in a typical year?

Greg Alexander:

52% EBITDA margins.

John Warrillow:

Wow. And so on a multiple of EBITDA, what did you think it was worth?

Greg Alexander:

Yeah. We sold just under 11 times EBITDA and I mentioned we had $30 million in revenue, so 1.25, what is that? 40 million bucks. So, we undervalued the firm by almost 100%.

John Warrillow:

Got it. So for folks falling along at home, the sale price was 162 million. The revenue was 30 million. So if you were valuing it at 1.25 times 30 million, it would have been about 40 million bucks.

Greg Alexander:

Yeah. Right.

John Warrillow:

If you were valuing it at 11 times 500 or $15 million, it have been roughly 160 million bucks.

Greg Alexander:

Yeah exactly.

John Warrillow:

Got it.

Greg Alexander:

Yeah. But these things are all would, could’ve, should. Do we have any idea that the evaluations were going to be what they were and we sold? No. The multiple expansion in our space was enormous. When we started in the business, there was no institutional money. So private equity groups, private lenders, nobody was investing in people driven businesses. It’s for all the reasons we met, no assets, et cetera. So then here we are in 2017, about half of our client rosters is made up of the world’s best private equity firms. They had an incredible appreciation for what we did for them in their portfolio companies. And they had so much money. They had raised so much money, they needed to put it to work. So they started doing deals in asset classes that they historically had never done before. So they started investing in consulting companies.

Greg Alexander:

So the supply and demand equation got out of whack, right? There was a ton of money chasing a few deals. So all of a sudden we could… when we went out to market and we hired a banker and he ran an auction the whole thing, once everybody started competing with each other the price kept going up, up, up and up. When we started the firm in 2006, that was before the financial crisis of ’08 and ’09. There’s no way the firm was worth that. So, the guys would come on your show and they say, “Here’s what I did.” What I wish they all would start with is luck has a huge part of it. There’s no question about it. Right? So I’m the luckiest guy you’ve ever met in your life. Now I made the most of my lucky breaks thank God. However, luck played a huge role in this, and it plays a huge role for everybody.

John Warrillow:

Yeah. We’ll get to that for sure. So let’s go back to the math here. So the second part of what I was trying to dig into was, as it relates to the new people coming on, you mentioned the two partners, the minority stakeholders that collectively had 49/1/2%. When new partners came on, did they have to effectively sell some of their shares? Or did you sell some of your shares?

Greg Alexander:

The agreement we had, the reason why I said, listen, I’ll give you guys each 24/1/2% right now, if you agree to the fact that this is it. If we bring our future partners down the road, it’s coming out of your end not out of my end. And they were fine with that. So when we added partners, which by the way, I should mention, we didn’t add a lot. We had one absolutely essential employee who is now the CEO of the firm and who we could not have done any of this without. And as he proved himself to be a complete rockstar, we gave him an opportunity to become an owner. And that structure, that deal was between my two co-founders and him. And he was buying into them, based on this model, then as years went on a few others were added, but not a lot. The grand total is probably less than a half a dozen.

John Warrillow:

Was there tension between you and the original co-founders? You saying, come on guys, we got to share some of the pie here. We got to bring really good quality people on and them saying, Oh, that’s like 25%. You throw it away for…

Greg Alexander:

I give them a lot of credit. We knew that the difference between being a king and getting rich. We had no problem sharing the wealth and the people that we shared it with earned every dime. And every time we created an opportunity for people. When those people took advantage of the opportunity to make money. We made 10 times that money. So it was a win for everybody.

John Warrillow:

When you talk about 52% EBITDA margins, I’m assuming that is before distributions, obviously to you, your co-founders and your other shareholders. That’s an operating margin before distributions, is that right?

Greg Alexander:

No. It’s after distributions.

John Warrillow:

So after you take your salary and your bonuses, you’re still earning 52%.

Greg Alexander:

Yeah. We were incredibly profitable. For example, we had no offices. Today, we’re all working from home, I’m talking to you from my home office. Back then, there was the belief that you weren’t a legitimate firm unless we had offices and if you look at any P&L statement for a services company today, about 10% of their costs is going to rent, or it was before COVID, we didn’t do any of that stuff. We ran incredibly lean. For example, the entire time that I had the business, there was no HR leader. There was no IT department, there was no CFO. I didn’t let any overhead creep into the business. My opinion was any dollar that we spent had to directly impact the growth of the firm. If it wasn’t going to impact the growth of the firm, we weren’t going to spend it.

John Warrillow:

And what we did that compromised your business, what impact did that have on your efficiency as a company, your structure. Let me push there because a $30 million company, everybody working from home, working with customer data, weren’t you exposing yourself to risks even on a compliance, a security, all that jazz.

Greg Alexander:

I’m a risk taker. My attitude was if something goes wrong, sue me and let’s see what happens in court. I think sometimes a lot of people get nervous about problems before they actually happen. Also keep in mind the way that consulting business work is our consultants left on Sunday night. They came home on Thursday night. They spent all the time on the client’s site. So, then those are extremely secure situations in insecure environments. So, if I was going to tell somebody they’re going to travel 80% of the time, and then when they were home, I was going to make them go to an office, it would have been crazy. Plus it allowed me to recruit all over the place. I can’t tell you how many superstars I was able to hire, because I told them they could live wherever they wanted. And they were living in some dry forsaken city because that’s where the job was. And then when I told them that I didn’t care, they could live wherever they wanted. They take our job and they would move and they’d be a hero at home. And it worked out for everybody.

John Warrillow:

How would you characterize the SBI corporate culture?

Greg Alexander:

It was very competitive. We were a group of sales leaders who believed in winning and you’re only as good as your last deal. Let me tell you a little story about that. And you can edit this out if this is violating language rules, but every Friday we had a contest called the fuck-up contest. And what the fuck-up contest was is the person who had the biggest fuck-up that week could get $1000 bonus. And we had a firm-wide conference call and the person would get on the phone. And we’d say, “Here’s how dumb I am. This is the mistake that I made.” And then everybody would laugh hysterically. And we would say, “Okay, what did you learn from that mistake, et cetera.” And then literally our fuck-ups were our heroes and the culture that, that permeated through and that’s one example of many is that we wanted people to swim for the fences.

Greg Alexander:

We wanted people taking massive risks. There was no fear whatsoever. In fact, the quickest way to get fired at SBI is if you were playing it safe. So we ran really hard. We played really hard. It was a very what’s the word almost locked room, like type of setting. Not for everybody. The reason why we had such low turnover was people would go through the interview process with us and within five minutes they would say, “I want in,” or they would say, “Don’t ever call me again.” They knew right away who was right for us and who wasn’t right for us.

John Warrillow:

Why, what would you ask that would reveal that?

Greg Alexander:

They could feel. I’ll never forget, I had one person tell me, they said your culture is still so thick. I could almost cut it with a knife over the telephone. That they could just feel it as to who we were. And it was incredibly numbers driven, opinions didn’t matter, we stole this from somebody, but it was something like, in God we trust all else bring data. If you made a comment, you better be able to back it up. It was that type of environment and that worked for us. That led to our outstanding success. I will say that, after I left the world changed and they did so well that they sold again, which I want to make sure we talk about that because I think the thing that I’m most proud of about our company, and maybe even myself personally, is how well the business did after the founders left.

Greg Alexander:

Because I think so often the founders leave and the business go in the tank, but just the opposite happened. The founders left and they perpetuated itself. But when they went through the process to sell again, there were all these questions, like diversity questions and proper compliance question. So I do think when you get to a certain size and you’re dealing with a certain type of buyer, maybe the culture needs to change. But in the early days when I was there, it was the wild, wild west.

John Warrillow:

Sounds like it. Okay. So let’s get into the sale itself. So why did you want to sell? You got this great culture-

Greg Alexander:

I didn’t want to sell. So here’s what happened. This a funny story. So I was grow, grow, grow, grow. I literally would have ran over my grandmother to grow an extra 5% and part of our growth strategy, as we started to throw off all this money was to start doing some acquisitions. And we noticed that a bunch of money was being spent by clients in product management, particularly in software. Software was a big vertical industry for us. And there was this company at the time called Our Pragmatic Marketing. And they had this consulting/training product. That was really incredible. And they pretty much owned the product management office in software and in the product management budget, any type of discretionary dollar that was spent there to improve operations, went to that. So, the founder of Pragmatic Marketing whose name is escaping me right now hired an investment banking firm called MHT.

Greg Alexander:

And they brought the deal to us and they said, “Hey, this would be a natural extension for you guys.” And my co-founders and I were like, “Yeah. It would.” And we bid on it. We submitted, I think it was like a $22 million bid. And they sold for like 80 mil. Our bid was comical. And after we lost, I went and had a drink with a banker. His name was Alex Seys, and I said, “Why did we lose?’ He told me, “I’m like, you got to be kidding me. I’m like, if you’d get $80 million for that business, what could you get for mine?” And he said, “Well, let’s find out.” So I left that meeting. I went back to my partners and I said, “Listen, I think we should float a trial balloon out there. See what we might fetch. I had zero intentions of selling. I put my hand on the Bible on this. I had no idea what it was worth.

Greg Alexander:

And at that time, because I was no longer selling and delivering work, the guys that were in the business, they said, “You’re right, Greg, we should,” because a big part of our client roster was private equity firms. And they were getting asked all the time, “Hey, if you guys ever go out to market, let us know. We’d like to make a bid.” And I said, “All right, let’s give it a try.” And that firm, MHT, which is now, I think they say they pronounce it Cowen C-O-W-E-N or Cowen. We called them up and we hired them and they ran the process. And I was fully expecting it, not to materialize. I was curious as to what we would learn.

Greg Alexander:

I valued going through the process and having somebody kick the tires on our business because I had never been through due diligence before. And I’m sure that strategically, I had all kinds of holes in my business and I wanted them to point that out to me, so that we could use that as strategic input and get better. But then the numbers started coming and I’m like, “You’ve got to be kidding me.” I couldn’t believe it. So that’s how it happened, honestly. I thought I was going to die in that place. We’d have a company event every year. We called it the ideal life conference. I’ll tell you about that in a moment, I used to tell people that my partner was going to do my eulogy. They said, “When are you going to exit?” And I said, “When I go in the coffin.” I’ll be 85 years old, they’ll put me underground and Erin Bartells is going to sit over here and give my eulogy. And then the church is going to be 500 of you.

Greg Alexander:

I thought that was my exit plan, but then the world went nuts. The valuation is out there right now, even that are crazy. So that’s how it happened.

John Warrillow:

You mentioned the ideal life conference whats that?

Greg Alexander:

Yeah. So we had every employee go through an exercise called the ideal life exercise, and it was a 360 degree view of their life. Where do you want to live? What work do you want to do? What type of guy or girl you want to marry? How much money you want to make? What food do you want to eat? What music do you listen to? It was comprehensive and it represented perfection. And we said, “Okay, so that’s the perfect life you want to live, how close to or far away are you from that now?” And almost inevitably, it was like,” I’m a long way away.” I’m like, okay. How can you in that instance, getting you to living your perfect life, or is it hurting you? And almost every time it was like, “Yeah, work’s a major problem.”

Greg Alexander:

And we said, “Okay, well, how do we turn work, us or the people we were recruiting you from a problem to an opportunity. How do we design your job in such a way that we help you get to your ideal life?” And they would tell us, and we would design their jobs that way. Now, could we get there every time? No. Could we get 80% of the way most of the time? Yeah. So everybody had this thing called the ideal life. And then this great book came out from the founder of LinkedIn. It was called the Alliance and they turned it into a military construct called the Tour of Duty. So we took everybody’s ideal life and we put a three-year window on it called the tour of duty. And when we made our numbers, every year, we went to these big, exotic places, resorts in Mexico, all over the place. And we had a big boondoggle and we celebrated the ideal life. We allowed everybody to bring their spouse and it was a big party. It was worth it. We had some incredible times. Those are glorious days.

John Warrillow:

That’s awesome. Okay. So let’s get into a little bit more on the deal itself. So you have this trial balloon to go back to pragmatic marketing you offer 22, I’m assuming you were using the one, one, one and a quarter times top-line revenue to come up with that.

Greg Alexander:

That’s what it was, yeah. So we had in our head this antiquated way of looking at things, and that’s when we first learned about that these businesses were trading off of multiples of EBITDA, which in our world was phenomenal because all consulting businesses are hugely cash flow positive, because it’s very little cost to run the business. So that was a big, big change. And then you know that the lenders started lending into these deals, which changed everything.

John Warrillow:

In what way?

Greg Alexander:

Well, so for example, when we got together and decided to go to market, the banker that we hired, which we hired, MHT a guy named Sean Terry who’s now over at Cowen. If anyone’s looking for a banker, he’s the Michael Jordan of investment bankers. He said, ” Listen Greg, you’re an interesting guy,” He goes, “Here’s my fear. If I take you on as a client,” because these guys work for commission, “We’re going to get to the 11th hour and you’re not going to be closable.” And I said, “What do you mean?” He said, “Someone’s going to put a deal on the table. Everyone’s going to stack hands. You’re going to keep asking for more and more and more and more.” And he was right. I was never going to be satisfied because I need you to tell me the terms.

Greg Alexander:

This is the first time. This is how inexperienced I was. Terms are more important than price all day, every day, you talk about that in your book. What are the terms that you’ll do a deal? I said, “Okay, here are the terms I want no earn-out I’m not rolling any equity. I want all the cash upfront. I want to leave the day of the closing. And I want my restricted covenant agreement not to exceed three years,” because I knew what I wanted to go do next. I had a vision for my future, which I’m not doing with my new company, which I’ll tell you about at the end of this interview. And I said, “There it is.” And then he said, “I’m not going to be able to pull that off. And I said, “Great, I’ll go find someone who will.” And he goes, “No, no, let me give it a shot.” And sure as shit he pulled it off. So those were the terms and those were the reasons why I eventually ended up agreeing to the deal.

John Warrillow:

There’s a lot of real estate theory that would suggest that you should never actually give your bottom line to your real estate agent when you’re selling your home because they’re going to basically use that information against you effectively. They’re going to basically make sure you get that, but not a penny more. What was the risk in telling your investment banker that you wanted, all those terms? Did you risk anything in belaying it out for them before he went to market?

Greg Alexander:

I understand that, when I was doing this. I had no idea what I was doing. Literally, no clue. So in hindsight, I look back at that now and say, “Greg, you were foolish.” So in many ways, I’m a cautionary tale.

John Warrillow:

In what way do you think you were foolish?

Greg Alexander:

I shouldn’t have told him what my terms were.

John Warrillow:

Why?

Greg Alexander:

For the real estate theory that you just talked about, that he would have managed to those terms. I should have kept my mouth shut. However, if you look at it now, it worked out for me pretty well.

John Warrillow:

I was going to say-

Greg Alexander:

Yeah. I’m glad to do it. Here’s the thing that’s unique about my story thing. I didn’t think we were going to sell. I literally had no intentions of selling it.

John Warrillow:

But Greg, there’s got to be a risk in that, right? Like taking your business to market, you’ve got this cash cow, 52% profit margins. You are absolutely killing it to take it to market risks telling everybody in the world all the inside secrets of what you’re doing, including your profit margin. Weren’t you worried that you were basically opening your Komodo to all your competitors?

Greg Alexander:

No, I actually wanted that. I viewed this as a marketing exercise, right? So I told him because we were doing so much business with private equity firms, and yet there were thousands of private equity firms didn’t even know who we were. So I said to him, “Listen, I want you to show up this soccer to everybody, because it was a way for me to get in front of all these people. And I had a feeling that these people would look at our business and they would say, “We’re not going to buy you.” And then I would follow that up with, “Great, let’s talk about your portfolio companies because it’s a consulting gig. I want to say, literally that was the thinking. And then as it relates to my competitors, listen, I firmly believe this, execution trumps all. You can look at all my financials and my margins and my strategy and blah, blah, blah.

Greg Alexander:

But at the end of the day, when we get in the street fight, who’s going to win and it’s going to be me. I’m going to out-hustle you. So I didn’t care about all that stuff. There’s nothing proprietary in the consulting world. There really isn’t. We can all go read the same things. We can go pitch the same stuff to clients. When we can all forget. It sound like I’m splitting the atom here. There’s no intellectual property. So to speak, that’s going to turn me into the next Google. So I wasn’t really worried about all that stuff. And I also wanted to go steal my competitor’s employees. So they started shopping this stuff to my competitors and they started looking at us and they bumped into things like the ideal life. Maybe they want to come to work for me.

Greg Alexander:

I had this hilarious dinner with Accenture, which those guys are clowns. It’s 505,000 of them now, but my God, this BD guy, this corporate development guy, he flies me to Dallas and takes me out to this fancy dinner at this place called The Mansion and blah, blah, blah, blah, blah, and all this kind of stuff. And he was telling me how great I was going to love it there in all the perks that you get as a partner at Accenture, I’m like, “Dude, not to be arrogant here, but I’m making more than Tony Romo,” who was the starting quarterback of the Dallas Cowboys at the time. I’m like, I really didn’t care about your partner perks. And it was comical.

Greg Alexander:

So I didn’t care about any of that stuff. I was reckless with all that. I knew the growth of the firm and their sales benchmark index is still in existence. They are the best in the world of what they do. They’re growing like a weed. They’re going to be a billion-dollar company someday. The opportunity in front of them was so great that the risk was extremely low in this scenario.

John Warrillow:

Awesome. So let’s get into the actual deal. So you shop the deal almost on a lack, it sounds like and sure enough, you get offers. How many offers did you get?

Greg Alexander:

You’d have to ask my co-founder Zach because they ran the process, which I think is an important distinction here. And I got to give them bankers all the credit in the world. When I gave them the terms, the most important one was that I wasn’t going to stick around and under any conditions. They completely removed me from the process. They told me, “Listen, you cannot communicate with any of the buyers at all, because if you do, they’re going to want you to be involved after the deal.” And I wasn’t even willing to sign a consulting agreement or anything. I was ready to move on. So all of that stuff, I literally was transparent. Now I started hearing the stats, they reached out to X number of firms and then there was X percentage of interest. And then it got down to like what’s the word? Their indication of interest. I think it’s called-

John Warrillow:

Well, there’s a letter of intent and then IOI, indication of interest.

Greg Alexander:

Yeah. And then there was like a dozen of those guys. And then there was a fewer of them that did management meetings. And then there was this whole waterfall process. And I know that’s important to your audience, but I also know what I can share and what I can’t, I’m not an expert in that. I didn’t run that process. The guys that were going to stay after the sale, they ran the whole thing. Rightfully so because they were deciding who to get in bed with and they wanted to drive that whole thing. So, I literally never met the buyers. I didn’t sit in any meetings, didn’t review any documents, didn’t negotiate any terms, nothing.

John Warrillow:

So when you got to the IOI stage, what was your reaction to the offers you were getting at that point?

Greg Alexander:

Well, my reaction at home to my wife was holy chic, can you believe this? Honestly, she was there from the beginning and I started this business from my kitchen table in my boxer shorts with no employees, no company, no customers. I had made some money in my life because I was an earning employee at a tech company. We did really well. I pushed all the chips into this business. So like the two of us were like, this was a life-changing thing. I like to tell people I’m a short fat kid from Peabody, Massachusetts. There’s nothing special about me, right? And we couldn’t believe. Now what I told them, of course, it was very different, “Hey baby, we’re worth more.” And they’re not getting this piece of our value proposition and then they’re missing this growth opportunity that’s in front of us, all that kind of stuff.

Greg Alexander:

Again, this was by accident because I’ve read your books, which are excellent by the way. And I’ve read others in your category and they talk about making sure that you know why you’re selling before you’re selling. And I will tell you, I knew that. I was crystal clear on the fact that this was a great 11-year journey. It was over for me. I wanted to close the chapter. There was a new part of my life. When I sold, I was 47 years old. I knew what I wanted to go new next. I was definitely going towards something as opposed to running away from something. So I looked at it through the lens of, will this sale fund what I want to go do next. That was it. And the answer was yes. And I will tell you that when the business got soft or actually I haven’t mentioned that.

Greg Alexander:

As we were going through it, it took us nine months to sell the business, in like month seven, because all of my partners were completely absorbed and distracted by what we were going through. The business got soft.

John Warrillow:

What do you mean the business got soft. What does that mean for folks who don’t understand that term?

Greg Alexander:

So the revenue numbers started coming down. We grew at like 30% a year for like 10 years or something like that. And next thing you knew, we were going to like 17% or 20% something like… and that spooked the guys that were doing the spreadsheets and they were valuing the business on estimated future cash flow and they were using that discounted cash flow analysis to do that. They had to redo their models and they came back and Re-traded the LOI based on that softness.

John Warrillow:

What do you mean by Re-trading the LOI?

Greg Alexander:

In the LOI, there was purchase price and there were terms, and then the business got soft. And by the way, this is the other thing the bank did great. When the business started softening a little bit, there was a group of people that were interested in buying the firm and they started falling away, left and right because they got spooked about the business because our business, there was no recurring revenue. It was all project-based, et cetera. So, I started wondering whether or not it was going to happen. And my banker kept saying it only takes one. It only takes one. It only takes one. And he was right. So they came, they lowered their number. They came back and they lowered their number, but it was still a number that far exceeded what I wanted for it.

Greg Alexander:

John, one thing I’ve learned from you and listening to all the work that you’ve done, this is the difference between what the business is worth and what the business is worth to you. And this is a really important lesson. And even with the lower number that they offered us, they were paying me a lot more than what the business was worth to me. So I agreed to sell it.

John Warrillow:

What was the difference between the original LOI and the Re-traded amount?

Greg Alexander:

I think it was like 10 million bucks and I’m not avoiding the question. I honestly don’t remember it. That was about right. It was in the $10 million range and it caused a little friction because when my partners and I agreed on how this was going to go and who was going to get what, my co-founder was going to get some cash at closing based on the original deal. And then the deal got Re-traded so to speak and the cash at closing got reduced. So I went to him and I said, “Hey, I’m only going to do this if not I’m getting all the cash at closing and you’re not, you’re signing up for the next bite of the apple. Are you okay with that?” And he was because he believed in the next bite of the apple.

Greg Alexander:

So then the deal closed and he didn’t get any cash at closing. About a year later, he got amnesia and he was upset with that and said, “If I knew, then when I know now, I don’t think I was treated fairly,” which was a real shame because it fractured our relationship. And as luck would have it a couple of years after that, they sold again and he ended up making a ton of money. So he was very wise in doing what he did because he probably made more that way than he would have my way. So in the end, I’m very glad that it worked out for everybody. But that did happen, that was a moment of great stress right there at the 11th hour.

John Warrillow:

What was the most stressful part? Because it sounds like your partner was capitulated easily and said, “Yes, sure. I don’t mind rolling my equity effectively. What made it so stressful?

Greg Alexander:

There was less money and at that point in time, we had a number in our head and I was emotionally committed to a certain number and it was less money that you rattled me a little bit like, Oh, maybe I should wait a year. Maybe I should wait two years and in the end too, if I waited, I probably would’ve made more money, but I got some great advice at that time that you really can’t time the market. And I forget who it was, but somebody said to me, “Best time to save a business is when somebody wants to buy it.” And I ended up taking that advice, but that was stressful at that time.

John Warrillow:

Did it make you question the morals of the other side? Hey, we had a deal, we had a commitment, we shook hands on a number and now you’re trying to re-trade on it. Did you emotionally get sucked into that?

Greg Alexander:

No, they were right. Our growth rate came down. So the math said that they should offer less. They were correct. I was pissed that our business got soft at exactly the wrong time-

John Warrillow:

Just at who?

Greg Alexander:

And us as the company. We let the distraction of selling the business impact the business results. And that’s another learning for your audience is that, if you’re planning on selling your business, my recommendation based on my own experience, as I would pick some people in your company who are going to be responsible for selling your company, and I would isolate them, and that’s all they would do for that year and sell your company. And everybody else would be heads down in running the business and I’d have two teams. And we didn’t do that. We were all doing two jobs and that distraction was costly.

John Warrillow:

Yeah. It sounds like it, but again, it worked out enormously well for you. I’d be curious to know what the emotional impact has been of selling your company. You mentioned in your own words, a guy in a boxer shorts, starting a business from scratch. It sounds like there was some regret with the way it played out with your co-founder, at least at one point in-

Greg Alexander:

There was a period of time there. There was no regret on my behalf. You want to make somebody upset with you make them a lot of money. And a lot of people made a lot of money and everybody wanted to count everybody else’s money. So there definitely was some grief there. I honestly and I don’t mean to be cold about this at all. I didn’t care. I rested my head on the pillow every night, very peacefully, because everything that we set out to do, we did and then some, and we changed a lot of people’s lives in the process. There’s several millionaires that were created from that story, and there’s many more to be created as a result of that. So there was no regret there.

Greg Alexander:

The other thing that happened to me in lessons learned, big lessons that I learned is I waited too long. I thought that business SBI was the finishing line. And what I learned was it was a stepping stone. And once I was free of running that business, I was able to pursue my other dreams and the pursuit of those other dreams emotionally has been incredibly gratifying, way more so than running that business. I don’t think I realized it at the time, but with retrospection now I stayed too long. I probably should have sold that firm. I don’t know. It took us 11 years, maybe I should have sold that business in year six or year seven.

John Warrillow:

And had you done that you would have left many, many, many millions of financial wealth on the table.

Greg Alexander:

I know. You know what’s interesting about that. I drive a 2009 Cadillac. My wife drives a 2008 Jeep. We live in a nice home, but not anything extravagant. When I got my windfall, I thought I was going to buy all these toys and do all this stuff. And really, I did two things. First, I made a large donation to a Catholic charity that was very important to one of my co-founders. He was battling cancer and I wanted to do something for him. And he’s such an unselfish person that when I asked him if I could do something for him, he directed me to the Catholic church and I made a donation there. And then I funded my family office, I put all the money into that. It’s called Capital 54. And it invests in guys like me back then and invests in owners of boutique professional services firms.

Greg Alexander:

And we now have this community of members in this company called Collective 54. It’s an EO for professional services and we’re investing in them and then we’re helping them. And it’s so incredibly rewarding to help other entrepreneurs do what I did. And that’s the thing that I splurged on, which is crazy, but how many steaks can you… how many trips can you make that it’s like, maybe if I was older, I don’t know because I sold at 47, maybe if I was 65 or something, it would have been differently, but I was still so young and so into it that really, really pay attention to that, the listener should learn from my experience and really understand that whatever you’re working on right now, it’s not the finish line. It’s a stepping stone.

John Warrillow:

Well said, where can people find out about Collective 54, the book. Give us some websites where people can confide in you.

Greg Alexander:

Yeah. Cool. So, here’s my pitch. So collective54.com/insights is our podcast. So my assumption is anyone who’s listening to this likes podcast, check that one out. There’s also a book called The Boutique, How to Start, Scale and Sell a Professional Services Firm, which you can find on Amazon. And that’s a community for owners of professional services firms like an EO for just that one industry, that’s number one. Number two, our family office, which is our investment vehicles taught Capital54.com. So sometimes we’re on the other side now where we’re buying firms and making investments. So for someone who wants to sell all our piece of different reach out to us. Those are the two main areas that I would direct people towards.

John Warrillow:

Awesome. And I’m assuming you’re active on LinkedIn as well. Greg Alexander, we’ll put your profile in the show notes.

Greg Alexander:

Yeah.

John Warrillow:

Greg, I appreciate your candor and story. It’s amazing. And I’m grateful for you sharing with us.

Greg Alexander:

Well, Hey, listen, I want to say that I want to thank you for doing what you’re doing. The body of work you’ve built up is enormous. I also want to thank the other guests that have been on the show because these businesses, mine and others, they’re all small private businesses. It’s really hard to get this information out there. And I think you’re at 300 shows now. So it’s a really unique asset. So big shout out to all your previous guests, anyone who’s listening to this and wondering if they should be a guest, get over yourself and do it, huge kudos for you for being the ringleader of all this.

John Warrillow:

You’re very kind indeed Greg, thank you for saying that.

Greg Alexander:

Okay. Thank you.