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6 Lessons From Selling Your Company to a Growth Equity Investor

February, 5, 2021 |  

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Despite starting with just $10,000 in 2004, Jon Morris built Rise Interactive, a digital marketing agency, to more than 100 employees before deciding to sell part of the business to Quad, a global marketing services provider.

After two years with Quad as a minority partner, Morris decided to sell the remaining chunk of his equity to Quad in a second transaction. Morris recently left Quad after his two-year earn-out was up. In this episode, Morris shares what he had learned about the process of building to sell, including:

  • The simple acid test Rise used to ensure each of their 250 employees lived their brand.
  • What he found most challenging about raising money.
  • The challenges associated with negotiating with “follower” investors.
  • How much of a growth capital partner’s investment you get to keep.
  • The unique way Quad incentivized him to stay through his earn-out.
  • The three things that should be in your operating agreement with investors.

During the interview, Morris revealed how raising an investment round from friends, family, and a growth equity partner made him focus on earning his backers a return by growing his business’s value. If you’re looking to boost your business’s value, it starts by benchmarking where you’re at and identifying the levers you can pull now to maximize your value in the future. Get started today by getting your Value Builder Score.

About Our Guest

Jon Morris is the founder and CEO of Ramsay Innovations. Previous to starting Ramsay Innovations, Morris was the founder and CEO of Rise Interactive. Under Morris’ leadership, Rise received recognition for excellence in client service, innovative marketing campaigns, and commitment to culture, including acknowledgment from Inc. 500|5000 Fastest Growing Companies (nine-time winner), Ad Age (Best Places to Work in Advertising), Fortune Magazine, and more. As a leader in the digital marketing community, Morris has mentored several entrepreneurs, with a significant focus on the University of Chicago’s New Venture Challenge, a renowned business plan competition where Rise itself got its start. Morris earned an MBA with high honors, graduating first in his class from the University of Chicago Booth School of Business, and a bachelor’s degree from Kenyon College.

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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 this 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 transferable lessons among that small cadre of winning exits. I’ve put those into an action plan, a bit of a just 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:

So you’ve probably been pitched by these guys, growth capital or growth equity partners, right? The pitch is, “Hey, we’ll invest some money in your business and we’ll grow it together and it’ll be worth a whole lot more after we invest our funds.” One of the questions I’ve always wondered, is when you take money like that, can you put anything in your jeans? Or do you have to invest all of the outsider’s money into your company? My next guest, Jon Morris answers that question, along with many other questions because he took two rounds of investments on the way to selling his company. He built it up to a 250 employee digital marketing agencies. Lots to learn in this episode with Jon Morris.

John Warrillow:

Listen for the acid test he used to evaluate hiring employees, love that. He talks a lot about raising money and some of the difficulties he found raising money in particular working with these follower investors he refers to. He’ll talk at length about what a growth capital partner is and the investments they make, and why he decided he was ready to sell. Here to tell you his entire story is Jon Morris.

John Warrillow:

Jon Morris, welcome to Built to Sell Radio.

Jon Morris:

Hi, John. Thanks for having me.

John Warrillow:

Tell me about Rise. What did you guys do?

Jon Morris:

Sure. We were one of the largest independent digital marketing agencies. So we built websites, helped drive traffic to those websites and make sure that it was the right traffic and converted it to customers.

John Warrillow:

Got it. And clients would have been big companies or small or what was the idea?

Jon Morris:

Yeah, we were generally dealing with medium to large corporations. It started with smaller companies, but as we scaled, it became larger at the end of the day.

John Warrillow:

And billing model, were you billing by the hour project? How did you structure your commercial relationship with clients?

Jon Morris:

So there’s basically three divisions, there’s the analytics division, the media division, and the web development division. The media division, generally would be a percentage of media with a floor. So there was some type of retainer based on the scope of hours that we would put into it. The analytics and the web development were generally fixed fee projects based on estimates of how many hours it would take to complete one of those projects.

John Warrillow:

Got it. So both the analytics and the web development side of the house was met. Competitive space, how did you guys set yourselves apart because digital agencies are a dime a dozen? I don’t mean that in a pejorative way, I mean, there’s a ton of competitors.

Jon Morris:

It’s a couple things, one, when it comes to differentiation, as you said, it’s a very crowded space. But I always say that you have to have an and to your question of what makes you great. So our vision was to be the leaders in leveraging data to help brands make smarter marketing investments. I promise you, if you line up 50 other digital agencies, they are all going to say they’re data driven.

John Warrillow:

I was going to say wounds kinda similar. Yeah, I’ve heard that before.

Jon Morris:

Yeah. So to me, it’s the and, it’s the follow up that matters. So in order to get a job at Rise, you have to take an analytics exam. It has a 22% pass rate, you are not allowed to even interview with us if you don’t pass the exam. The second thing is, data driven is a very broad word. What type of data do you mean? There’s media data, there’s customer data, there’s pricing data, there’s inventory data, there’s competitive data, I would say Rise, although is power users of all data is probably the best at leveraging media data than any other company out in the industry.

Jon Morris:

We are well into the eight figures of building a proprietary framework that brings in dozens of different data sources. And what that is able to do is identify waste that you’re spending in media at a faster rate than anybody else can. And it’s also able to help you redeploy that media to areas that are scalable, that are generating a positive ROI. So-

John Warrillow:

How important was that proprietary analytics platform in the sale of Rise?

Jon Morris:

My instinct is it was probably pretty big. At the end of the day, we’ve had tremendous success at growing the organization, the financials are great, the numbers are moving in all the right direction. But what you’re looking for is something that’s sustainable, and something that is unique, that doesn’t make you a generic digital agency. And that’s what connects the technology we built was really able to do.

John Warrillow:

And what was the capital structure? Did you have partners? Did you have investors? How did you structure the financing?

Jon Morris:

Yeah. So up until 2016, it was 100% owned by me, it was bootstrapped. In 2016, we took a minority investment from a company called Quad, it used to be Quad/Graphics, it’s the largest printer in the United States. And then in 2018, we sold a majority ownership to Quad. And ultimately, now the capital structure, it’s predominantly Quad.

John Warrillow:

Got it. As you were bootstrapping the business, prior to 2016, what was your sense of what it might be worth not a dollar amount, but more as a percentage of revenue or multiple of earnings? Did you have any sort of benchmark that you were working off of what you thought it might be worth?

Jon Morris:

Well, my original exit strategy was, I was going to die one day. I am a big believer that you build a great company, you don’t worry about the exit. And to give you a little bit of a philosophy I had of Rise is, I used to run a ton of marathons. And when you do marathon training, it’s 18 weeks long. And every week, you do a long run, and your first long run is six miles. And then the next week it’s seven, and then it goes down to five, and then it goes up to nine, and then 10 and then down to seven, it keeps on going. And I took that same approach to running my business where I thought of it as a marathon as opposed to a sprint. And rather than weeks, I thought of it as years, and rather than miles I thought of it as dollars.

Jon Morris:

So the idea is that every June, I would think about the investments that I need to make to put up a phenomenal year, the next year. So the way I look at it is, a typical agency makes about 20% EBITDA, relative to revenue as a ratio. We were between zero and five for many, many years. And-

John Warrillow:

Zero to five percent EBITDA?

Jon Morris:

Exactly.

John Warrillow:

Okay.

Jon Morris:

And the reason why is, I really thought of myself as a private equity investor. So I was taking that 15 to 20% and investing it back into sales and marketing. One of the things that I am actually really proud of is, I believe our ratio of sales and marketing relative to revenue had to be one of the highest in the industry. And I always explain that you can’t wish growth to happen, you have to make it happen. And so by having this determination to continually invest in sales and marketing, and then make sure that you’re getting smarter and smarter at how you invest that sales and marketing, you’re able to fuel growth.

John Warrillow:

What conversations happened between you and your spouse around that strategy? Here’s the thing. One of the things about being a service company owner is the margins are great. And usually you get to pull a lot of that money out of business to buy fancy house and take kids to whatever.

Jon Morris:

Yeah.

John Warrillow:

But when you’re pouring it all back in, there’s limited resources. So how did you guys come to terms on that?

Jon Morris:

I can’t tell you how many times she said, “Couldn’t you just take the revenue from this clients and have it go to us?” I look at it as every year, we were able to increase compensation every year, we were able to do well, because the company was doing well. But the answer was, she is beyond amazing from the very beginning. When I first started dating her, I had a budget of $17 a day did not go into debt. A lot of our dates were at fast food restaurants in the beginning years. So she’s been by my side and weathered a lot in terms of me wanting to invest in the company.

John Warrillow:

And so where does that come from? I’m just trying to square two edges here. So on one hand, you’re saying, your thought was that you’re going to build the business forever, you’re going to die in your boots or whatever, I can remember you said, die at your desk.

Jon Morris:

My exit strategy is that I will die one day.

John Warrillow:

Yeah.

Jon Morris:

Yeah.

John Warrillow:

Yet at the same time, you’re reinvesting everything. So that doesn’t seem to square I’ve seen that from a lot of companies where they reinvest a ton in sales and marketing, to have an exit. Likewise, I’ve seen people say, “I want to die at my desk.” But they’re scraping out all the profits. So, that doesn’t make sense to me, help me get through that?

Jon Morris:

Well, a couple of things is, I believe a job of a CEO is to grow an organization. I always talk about, there’s two versions of an individual who owns 100% of a company, and also as the CEO. You have to recognize that you hired yourself as the CEO, and the CEO’s job is to maximize shareholder value. Although I’m not necessarily looking for an exit, I’m looking to create something great. And if you don’t invest in innovation, and you don’t invest in your brand, and you don’t invest in building a sales and marketing infrastructure, it’s hard to build something great.

Jon Morris:

So I think it really comes down to, “I’m a builder.” And I was like, “I wouldn’t be satisfied if my company was just stagnant every single year, and maybe I was taking good money out. But we weren’t building something special.”

John Warrillow:

Yeah. That makes sense. So what changed in 2016 when you brought in Quad? What were the triggering events there?

Jon Morris:

The main triggering event was, if you are looking to build technology, and you want it to be real, and you want it to be a true differentiator, it’s just expensive. And we did not have the money to invest in sales, marketing and innovation to the degree that I wanted to build it. And so I had to do some soul searching. That’s a big, big shift from bootstrapping an organization. But going back to I wanted to build something special, I felt that it was the right time to do so.

John Warrillow:

And so how did you guys think about valuation? Again, we don’t have to get into the actual number itself. But there must have been some process through which you put a price on the business, what was that like?

Jon Morris:

At that time period, it was much more, can I get a multiple of revenue? Which I think every entrepreneur really wants to focus on, can you get a multiple of revenue? The reality is that when it comes to an agency business, your multiple is generally going to be between five and 15 times EBITDA. In the first round, I think it was more revenue focused, and we were explaining like, “Look, we’re investing, I’m not going to sit there and do all the things that people do to maximize EBITDA during a specific time period.” And so, it was more of a, I think a very fair valuation based on our growth rate, based on where we were headed, based on the investments in technology is how we were initially structured.

John Warrillow:

And did you guys try to normalize your profit and loss statement and say, “If we scrape out all the sales and marketing we’re investing in to grow, look how much profit we get.” Did you make that argument or what was that like?

Jon Morris:

I believe we did. It’s going back now five years, but we put a really good financial package together that was incredibly well detailed, it explains our gross margin incredibly well, it explains all the investments that we’re making from sales, marketing and technology. So there was really good insights in terms of how we structured, how we invested everything.

John Warrillow:

And did you shop the deal? Were there other potential investors in addition to Quad or was it just Quad at that time?

Jon Morris:

We did, we shopped the deal quite a bit.

John Warrillow:

And how was that process? I’m always curious to know, because every acquirer looks at a business differently and has different value drivers and things. What was the range in valuation? You don’t have to actually talk about the number itself. But was there a big range between the buyers or the investors at that time in terms of how they valued the business? Was it like 10% plus or minus? Or was it like 100-

Jon Morris:

I would say that it was probably plus or minus 15%. It was-

John Warrillow:

Pretty close.

Jon Morris:

Yeah, we were reasonably in the ballpark. What I would say is couple things. For anyone who is looking to raise money, it’s hard, just to be honest. I consider myself a really good salesperson, at a great company, at a great product. What you learn about investors is, especially when you go to institutional investors is that they have LPs, their limited partners who put in all the money, and they make promises of, we are going to invest in these types of businesses. And so as someone who’s brand new to this, it took a long time to find companies that are interested in investing in service businesses versus technology businesses. I had one person that it was extremely interested but had a conflict and couldn’t invest in it. So, it was a lot longer and harder than I thought it would be to put the original fund together.

John Warrillow:

It sounds like it was hard, because number one, this is your first time through and number two, it’s a service business and sometimes investors are looking for technology businesses as an example.

Jon Morris:

Yep.

John Warrillow:

Did you try evolve the positioning of the business and say, “Yeah, we are a service business, but let’s look at all the technology we built.” Did you make that case?

Jon Morris:

I tried. I think of one person who’s incredibly sharp, and he sat there, and he looked at our retention rate of customers, and he compared it to the retention rate of software companies. And it’s like, at the end of the day is like, if you have the right person who’s asking the right questions, or if you look at the margins, like the financials, and the data generally doesn’t lie. So for a sophisticated investor, you can try to make the argument, but at the end of the day, we have incredibly solid margins for a service oriented business that’s technology enabled.

John Warrillow:

How many employees did you have at that stage around the time you were negotiating the first round with Quad?

Jon Morris:

I’m guessing 125 to 150.

John Warrillow:

Okay, so you were already a good sized company at that point?

Jon Morris:

Yep.

John Warrillow:

Got it. What else was hard? Or maybe I’ll ask it a different way. What else was surprising to you? I’ve looked at your bio before the interview, and I noticed that you went to one of the top business schools in the country. I’m assuming fundraising was part of the curriculum.

Jon Morris:

Yeah.

John Warrillow:

What surprised you about the process, when you actually went from doing it academically to actually fundraising in a real situation?

Jon Morris:

I think that what was surprising was not understanding the investment community. And going back to what I was saying before that, people have their thesis of what they’re willing to invest in, and that they’re not willing to change that thesis. I’ll put it this way, in a five year period, Rise has doubled or more, from when that initial investment round was asked for. So we clearly did a good job. But, you couldn’t convince people that you could scale a service oriented business, you couldn’t convince people.

Jon Morris:

Another big challenge that we ran into was service oriented organizations are generally horrible at building technology. And there’s a lot of learnings in a whole nother meaning I could explain why. And we actually are phenomenal at building technology. And I couldn’t convince them of that. My big point was, so what an amazing differentiator we’re going to go up against service companies that are not good at building technology and we are good at building technology, wouldn’t that be a reason to invest? But they just had these preconceived notions that you couldn’t really get around.

John Warrillow:

How would you characterize the private equity investor, the people that you were pitching? If you could use adjectives to describe them, what would you choose?

Jon Morris:

I don’t know if I’d have one bucket. There were some people that I’ll consider followers, where I had one group that was basically, “We’re in if these people are in.” And then those people went in, and then those people went out. And so they went out. And so whatever those people did, they did. And I think they thought of that other group is their due diligence arm.

Jon Morris:

I don’t think it’s like any other business. I met some incredibly impressive, really sophisticated people that I learned a ton about. And some people I wondered, “How are these people doing as well, as they’re doing?” It was like a head scratcher of… Their methodology just doesn’t seem to be overly sophisticated.

John Warrillow:

Yeah. You shared earlier that you didn’t really have an exit strategy yet. I’ve heard from other entrepreneurs, and certainly investors that once you take that first round of outside money, whether it’s from friends, family, or in your case, institutional investors, the clock starts ticking, right?

Jon Morris:

Absolutely.

John Warrillow:

Did you feel that?

Jon Morris:

I don’t know, if I’ve thought the clock ticking, Quad is amazing. They are a wonderful partner, they’re very patient, there was no pressure on them, they’re not looking to sell Rise, as far as I know. So, it’s not like a private equity, where they have limited partners, and they have a time period where they have to give money back to the LPs. So that was one of the reasons why I chose a strategic. But once the cap table changes, and you have responsibilities to all these other stakeholders, your mindset does change.

John Warrillow:

In what way?

Jon Morris:

For me, I felt a huge responsibility to all the shareholders and wanting to maximize value. And so that’s one way. But the other way is, you recognize that at some point, everybody is going to want their money and you have to provide liquidity in some way, shape or form, if you’re going to take on a minority or a majority investor.

John Warrillow:

When you say all the shareholders, I’m confused by it, because I think of Quad as being one shareholder. Are you talking about the limited partner?

Jon Morris:

There was a few employees that had shares in the company, and then there was a friends and family round that got grouped into that 2016 round.

John Warrillow:

Okay, got it. So you’ve got Quad, some friends and family, a couple of employees with some stocks?

Jon Morris:

Yeah.

John Warrillow:

Got it. Okay. And then you felt that responsibility of like, “I got to get a return for these guys.?

Jon Morris:

Yeah.

John Warrillow:

Yeah. What happened in the window between, you mentioned 2016 is when you raised the first round, and then you actually exited the majority position in 2018?

Jon Morris:

Yep.

John Warrillow:

What happened in that window in the business?

Jon Morris:

We had tremendous growth, which was great. You don’t know who your partner is going to be until you know who your partner is going to be. Quad, going all the way up to the CEO, Joel Quadracci, to Eric Ashworth, and Kelly Vanderboom, who were on the board with me, they’re all just fabulous people. They truly care, they’re going to have your back when things are tough, they’re just great people, and I felt really good about working with them and deepening the relationship. So it just felt like not only was the time right, but we also needed more investments. And so, I decided to jump in with them and go that route.

John Warrillow:

How did it work with the cash you got from selling a first tranche of equity? I’ve never done that. So I’m genuinely curious, are you able to pull out some of that money and put in your jeans personally? Or, does it all just roll into the growth of the company? How does that work?

Jon Morris:

It’s actually very common. I’ll go to the private equity route, but there are a bunch of growth equity investors, and they recognize, when you start your company, your company has basically no value, right? I started with $10,000. So I guess the value is $10,000. All of a sudden, over 12 years, all of my wealth is tied up into a private non-liquid asset. And so it’s very common for growth equity investors to come in and they will invest in the company, but also help you reduce that risk, so that you do not have everything tied up into one asset.

John Warrillow:

So let’s just do the math on a hypothetical right, this isn’t your company, I want to make clear that we’re not talking about your company, but just so I understand this growth capital thing. So let’s say you built your business from 10,000 to 10 million. It’s 10 million in revenue, and you’re going to trade at one times revenue. So, the valuation is 10 million bucks.

Jon Morris:

Yeah.

John Warrillow:

Growth capital comes in and says, “Okay, we’re going to buy a minority stake 30%.”

Jon Morris:

Yep.

John Warrillow:

So they’re going to give you 3 million bucks.

Jon Morris:

Yeah.

John Warrillow:

Do you get to put the 3 million bucks in your jeans?

Jon Morris:

No. You get to put a portion of the $3 million.

John Warrillow:

How do you determine what portion?

Jon Morris:

Let me rephrase that. Possibly, it all depends on the negotiation. Generally, though, a growth equity investor wants as much money as possible to go into the business to fuel the growth. So, would it be half a million out of the 3 million? Would it be a million out of the 3 million? It really depends on the negotiations. It also depends on who the entrepreneur is, where they are in their stage of life, what their reasons were why they want to take the money. Those are the things you need to think about.

John Warrillow:

What is that called? Like, in that scenario you just described where-

Jon Morris:

Called a secondary.

John Warrillow:

What’s that?

Jon Morris:

It’s called a secondary. So, when you take investments, and some of it goes into yield, I believe the technical term is a secondary, that goes into the pocket of the shareholder.

John Warrillow:

Got it. The 500k in the example that we just talked about. Yeah.

Jon Morris:

Or the founder.

John Warrillow:

I would think you’d have to have a pretty good secondary, because, yes, you’ve got some growth capital, but, you’ve grown to 125 employees on your own, you know how to do it. And, you’ve given up the vision of just dying in you’re desk kind of idea. So, I would have thought that the secondary would have had to have been pretty meaty to be worth it, if that makes sense.

Jon Morris:

Without going into the details, once again, I’m a builder. So, my goal was to build something special and to build a large organization. So to me, the secondary could be important, but also building the company was important. I’m not going to give you any clues in the ratio.

John Warrillow:

Yeah, yeah, totally fine. I get it. And I think you raised a really interesting point about the age of the owner, right? If you’re 65, that might feel differently if you’re 35.

Jon Morris:

Exactly.

John Warrillow:

And that makes sense. That’s good. Okay. So, you take the round friends and family, Quad, the business grows like stink, what triggered you to want to sell … Did they have an option to buy the majority stake when they invested in the first round? Is that what triggered the second round or?

Jon Morris:

No, they did not. So we approached them in the second round and they then chose to invest, but they did not have an option. But then when they did buy majority ownership, I was put on earn-out for a time period. And so, what it really came down to was, I made the decision, I stepped down last year, April, one was my first day of not being the CEO of Rise Interactive. I made the decision about October, before that, that I was going to do this. And at that point, basically, my wife and I were the only ones who knew that I was going to be doing this.

John Warrillow:

Doing this, meaning?

Jon Morris:

I was going to sell the company and step down as CEO.

John Warrillow:

What triggered that for you?

Jon Morris:

It really came down to, every year in January, I always call the first business day of the year, game day. And every year, I’m so excited for game day. I spent six months worth of planning on what are we going to do to make the next year amazing. And when I was starting to look at the playbook, the playbook started feel very similar to the year before, which felt very similar to the year before and all of a sudden, I know for a fact that Rise will have an amazing year this year. We have a playbook that is just solidified and solid. And we know how to invest our money incredibly well and we know how to take care of our people and we know how to take care of our clients, but for me, the complexity really wasn’t there anymore. And I wanted to personally grow and figure out what’s the next strategic thing. So, knowing that I just wasn’t really excited about the playbook, I decided that it was time.

John Warrillow:

You were bored?

Jon Morris:

Yeah. I want to say I was bored. There’s a difference between being bored and not being challenged. I love complexity, is the best way I could put it, I like being able to figure out how to do things new, and I needed a new playbook.

John Warrillow:

Yeah. And so what happened when you came to that realization? Take me through the next sequence of events, when you came to the realization, “My heart’s not in it anymore. I need a new playbook.”

Jon Morris:

Well, the first thing I decided was, was I going to sell or not? When I decided I want to sell, then I was like, “Well, do I want to run the company? Is this what I want to do with my time?” And it came all down to this complexity aspect. And what I will say is, the time period for when I decided, to the time period when I left, was actually a very unpleasant time. And what I mean by that is, it’s just stressful knowing you’re going to be doing something, and from October to January, Quad didn’t know. So I was like, I’m sitting there, I’m nervous about that conversation. And then from January to March, the employees didn’t know and I’m nervous about that conversation. And you’re nervous about the health of your business and how’s it going to do even though you know it’s going to do great. So, it’s a period of anxiety.

Jon Morris:

And it’s interesting, I’ve had a lot of CEOs call me up, who are in the process of selling their business and asking me what it’s like. And what I explain was this time period where … If you think about it, for 16 years, this is all I’ve known besides my family. I’ve invested my heart and soul into this thing. And so it’s very hard to see life after this company. What I learned is that, there’s just a lot of things I like doing. It’s like, life is going to be just fine. And I’m actually incredibly happy now, I don’t have that same anxiety. It all left, probably about a month after leaving Rise. Not to mention, I never thought me leaving Rise would start a pandemic.

John Warrillow:

I shouldn’t laugh. I get the timing for sure. So let’s get into the mechanics itself. So you had a minority shareholder in Quad and some other friends and family and a couple of staff?

Jon Morris:

Yeah.

John Warrillow:

Did you still have control? Were you able to control who you sold to?

Jon Morris:

Up until I sold majority ownership. Yes.

John Warrillow:

Okay. So you had minority shareholders, but you still had the majority voting rights?

Jon Morris:

Yeah. When we sold the majority ownership to Quad, we put a board together, we had an operating agreement, and they had three seats, I had two seats on the board. So they really controlled everything after that. And as I said, they are a wonderful partner. As long as I lived within the operating agreement, they really left me alone.

John Warrillow:

So did you shop the business to other potential acquirers or did you go directly to Quad?

Jon Morris:

I did not.

John Warrillow:

Okay. So how did that conversation go?

Jon Morris:

I think it went incredibly well. First of all, I’ve had two years of working with these people, so you know when you have a good partner. They’re honest, they’re wonderful people, they will come to your side when you need them to. So it was an easy conversation-

John Warrillow:

How did you handle it? What was your opening line?

Jon Morris:

I think I just said, I’m looking for bigger investments and looking to do some things, I talked to them about the things I wanted to do, and they were on board it probably took a couple months of time to get to it, but ultimately, we ended up doing, I think, a really good deal for our parties.

John Warrillow:

Did you consider shopping it? And if not, why not?

Jon Morris:

What I would say is that, when you have the right partner, you don’t need to shop it. I recognize that, yes, you can go and hire an investment banker, you can go shop these things, but you don’t know what you’re going to get until you know what you get. And in every single company you get involved with, there’re going to be pluses and there’s going to be minuses within that company. I knew what I had, I know the quality of the people, I know that they’re trustworthy. And so there was no thought about it.

John Warrillow:

Yeah. I know, we can’t talk about the actual value of the transaction.

Jon Morris:

Yeah.

John Warrillow:

I would be curious, however, the actual multiple that was used in the 2016 transaction, did that change in the 2018 transaction? Or was that roughly the same or lower?

Jon Morris:

It was more. Quad is a very EBITDA focused organization, and we moved to more structured, similar compensation structure of a typical agency.

John Warrillow:

So, in the first round, it was making the case, “Look we’re invested in a truckload in marketing, let’s use a valuation based on revenue.” Second time, it was more of a multiple of profit.

Jon Morris:

Yep.

John Warrillow:

Got it. Between 2016 to 2018, did you stop investing in sales and marketing in an effort to maximize EBITDA or?

Jon Morris:

No, definitely not. But we focused on putting the numbers together, fueling the growth of the organization, and we got to the point where we … The way we designed it in terms of the deal, it became an EBITDA focus deal.

John Warrillow:

Got it. And then you mentioned the earn-out. So, did they buy the 100% of the remaining shares and then put you on an earn-out or did you keep some shares? Or how did that-

Jon Morris:

No, I kept shares, and the earn-out was structured based on EBITDA as well.

John Warrillow:

Got it, how long was the earn-out?

Jon Morris:

Two years.

John Warrillow:

What was that?

Jon Morris:

It’s good and bad. What I would say is, you’re incredibly disciplined, you’re incredibly focused on the investments you need to make, the health of the business, I think we did a really good balance of continuing to invest in the growth of the organization, continuing to invest in sales and marketing, but we added a … One of the things I’ve learned from Quad is they are brilliant, when it comes to financial discipline and the structure of how to run a company. I would say that, in the last two years, I learned more about financial management than my 14 years prior to that, and it’s really thankful to Quad. So, it was a good time period.

John Warrillow:

I imagine it was tough, because for 14 years, you called your own shots, you bootstrapped, if every i wasn’t dotted, every t wasn’t crossed, it wasn’t that big a deal. Now, all of a sudden, you’ve got this very, very disciplined financial manager, that can’t have been easy.

Jon Morris:

What I found was, it really wasn’t that hard. If I would take one complaint, it’s that the speed that a small company runs versus a large company, that there’s more decision making and more process that it has to go through to get things done. But ultimately, they really left us alone and they really allowed us to run the business. The numbers were really good. So I don’t know what it would have been like if it wasn’t. But what I would say is, the very first board meeting that we had and you’re nervous, you’re going into no board meeting to your first board meeting ever. They explained that the goal of the board was for them to figure out ways to help us. What an amazing board to have.

Jon Morris:

That’s a really cool feeling, when you’re anxious and you don’t know what you’re getting into. That was the opening attitude of, “Can we make phone calls for you? Can we leverage any of the resources we have? We are here to help you.” So, I felt that we had, as I said, a solid partner that was there to really … Had the best interest and really wanted to see good things happen.

John Warrillow:

I know a lot of entrepreneurs listening to this will have heard of the term earn-out. That’s something that we talked a lot about on the show. However, when it gets into the mechanics, it’s a bit fuzzy. So in terms of an earn-out, was yours kind of, or nothing like, if you hit the bogey, you got everything, if you came within an inch of it, you got nothing? Or was it staged, 80% if you hit this, 90% of you hit that? How did you guys structure it that way?

Jon Morris:

It was incentivized where, basically, my big fear is being a minority shareholder in still a private company. So we had good controls in terms of liquidity options, it really came down to, as you stay longer the multiple grows. So, there’s incentive to stay longer.

John Warrillow:

I’ve never heard that before. That’s interesting.

Jon Morris:

Yeah.

John Warrillow:

Because, of course, they want you to stay. Were you tempted to stay past the two years? Would the multiple have grown even more if you’d stay?

Jon Morris:

I was tempted. I think it really came down to a couple of things going on with me personally, at that time, and the complexity that I talked to you about, which was really the major decision makers behind it.

John Warrillow:

I’ve never heard the term operating agreement. I think I’ve actually heard it, but I have no clue what it is. What is an operating agreement? If you were coaching an entrepreneur to drafting an operating agreement, what should be in it?

Jon Morris:

So for example, how much can I invest as a CEO without board approval? Can I hire anybody I want? Or do I need board approval for hiring? Can I give raises? Can I give promotions? All of those things are structured of what does the board have to approve versus what control does the CEO have? So in our scenario, there was a lot of freedom and a lot of flexibility in the operating agreement that gave me the control to run the business without having to go to the board for every decision.

John Warrillow:

And was that operating agreement written back in 2016 with the minority investment, or was it written in 2018 with the majority?

Jon Morris:

No, we did not have a board until they took majority ownership.

John Warrillow:

2018?

Jon Morris:

Yeah, 2018.

John Warrillow:

Got it. And that’s when the operating agreement becomes exceptionally important, because you’ve got to decide how you interact with the board?

Jon Morris:

Yep.

John Warrillow:

That’s helpful. You can tell I’ve never had a board. Well, this is fantastic. I’ve learned a ton. And I’m really grateful for you sharing this with such candor. So you sold your company. Did you buy yourself a trophy was there like … I talked to a guy yesterday, I said, “What did you buy?” He squeamishly said, “Well, I bought a boat.” And I was like, “Oh, what kind of boat did you buy?” He said, “A yacht?” And I said, “What kind of yacht did you buy?” He said, “Well, a 60 foot yacht?” I said, “Okay, that’s good.” So tell me you bought a trophy. Give me a trophy.

Jon Morris:

I built my dream home.

John Warrillow:

Okay, great. Good for you.

Jon Morris:

Yeah.

John Warrillow:

Your spouse has sacrificed for years, and now you guys can enjoy this dream home together. That’s fantastic. When you were building it, did you do anything that’s kind of like, this is crazy, but I’m just going to do it anyways because-

Jon Morris:

Yes. When you build a company, you dream of what are you going to do after you sell? Okay? So, as I mentioned before, I used to do marathons. My dream was, I was going to take a year off, and I was going to train for four races. I was going to qualify for the Boston Marathon, I was going to qualify for the Kona Ironman, and I was going to do the Boston Marathon, I was going to do the Kona Ironman. That was my dream. That was in a younger version of my body. And-

John Warrillow:

It gets easier the older you get, man.

Jon Morris:

Yeah, exactly. So my new dream was, I’m just going to do a lot of mini trips. I have three daughters. I was going to do a mini trip with each daughter, I was going to do something with my wife, I was going to do something with my parents. And, of course I sold in the middle of a pandemic and the entire world shut down. Literally, golf courses are closed, restaurants are closed, can’t travel anywhere. So I never got to do any of those things that I was hoping to do.

John Warrillow:

How has that been psychologically for you?

Jon Morris:

I’ve been okay. As I said, going back to that anxiety time period, coming out of it, I decided not to do an Ironman, or marathon, but I did train for a century bike ride. And I started training with my roommate from college, where we started training and biking multiple times a week. So, I spent a good amount of time doing that. Of course, when I went for the Big Bike ride, my bike broke and ended up having to do the whole thing on a Pelotona. But-

John Warrillow:

Man, you get a break.

Jon Morris:

Yeah. But I enjoyed the summer, despite all the things that are going on. I feel very fortunate that we’re all healthy and happy here during a pretty crazy time.

John Warrillow:

But it’s got to be tough. It’s like a kid, you look forward to Christmas day for 364 days of the year, and it finally comes, is like, there are all the presents under the tree, you just can’t open any of them.

Jon Morris:

Yeah. The current CEO of Rise, who is the president when I was there, he said to me, “Jon, the really thing that I’m sad about is that you didn’t take any time for yourself.” Because I’ve jumped into a new business and looking back, he’s probably right, and I think that if the pandemic didn’t hit, I would have taken more time for myself. But, I didn’t really know what to do with my time. So I didn’t get that chance, where I think a lot of other people, will go take their 60 foot yacht around the world.

John Warrillow:

There’s still time man.

Jon Morris:

Yeah.

John Warrillow:

So tell me briefly, what are you doing now? And where can people reach you?

Jon Morris:

Absolutely. So, once I exited Rise, and I was having time to think about what I wanted to do next, I really came across two major insights. The first is, I love connecting with other entrepreneurs. I don’t care if you’re a two person organization, or a massive, multi billion dollar organization. I think being an entrepreneur is the hardest road traveled. And I love connecting with people who have gone on that journey. The second thing is, I recognize that what we did it Rise is a playbook that I think it’s very applicable to other organizations, regardless of industry. And so, we put executive coaching services together to teach people how to grow their businesses faster, generally, in the small to medium size space.

John Warrillow:

Fantastic. And the best way to reach you … Yeah, go ahead.

Jon Morris:

Our website is Ramsayinnovations.com. So the company is called Ramsay Innovations. And then, you can also follow me on LinkedIn. So Jon Morris is the name and I put out daily business growth tips.

John Warrillow:

Fantastic. And Jon is J-O-N.

Jon Morris:

That’s right.

John Warrillow:

Yeah. And we’ll put that in the show notes as well at builttosell.com so you can get all that there. Well, Jon, I really appreciate you spending the time with us today.

Jon Morris:

Thank you so much, John. I appreciate being on here.

John Warrillow:

Hey, if you liked today’s episode, you’re going to love my new book, The Art of Selling Your Business. The book was inspired by the cohort of my guests over the years who have been able to negotiate an exit far better than the benchmark in their industry, sometimes two or three times more than I would have expected. I was curious to understand the tactics and strategies of these entrepreneurs, and what they do differently from average performers. The result is a playbook for punching above your weight when it comes to selling your business. To learn more, go to builttosell.com/selling, where we put together a collection of gifts for listeners who order the book. Just go to builttosell.com/selling.

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