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One Bold Move That Can Make Your Company More Valuable

March 19, 2021 |  

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Henry Hyder-Smith and Steve Denner started UK-based Adestra in 2004. Adestra is a digital marketing software that helps big companies handle email campaigns, among other things.

The company grew nicely. By 2016, it had around $9 million in revenue and a client list that featured some of the U.K.’s best companies. Hyder-Smith and Denner decided it was time to go beyond their borders and enter the U.S. and Asian markets. To fund the effort, they raised $7.2 million from the Business Growth Fund (BGF), one of the U.K.’s largest private equity groups. BGF’s investment valued Adestra at around $35 million — a little shy of four times revenue.

BGF’s investment was contingent on the inclusion of a “key man clause.” It stipulated that if they were going to invest in Adestra, the company would be required to make board member Matt McGowan its president. At the time, McGowan was employed full-time by Google as their head of strategy on the YouTube brand. McGowan had helped other companies go global before. The BGF folks thought he was one of the keys to fulfilling Adestra’s aspirations.

McGowan hesitated to give up his senior position at one of the world’s biggest companies but was enticed by the opportunity to own a piece of a promising young company. He joined Adestra as President and shareholder, and within two years, doubled the company to approximately $18 million. Then in December 2018, Adestra was acquired by Upland Software for $61 million.

Suppose you have considered bringing in a professional manager to help run your company. In that case, you’ll take away a lot from McGowan’s perspective, including:

  • How to structure an incentive plan for a President that aligns with your goals as a founder.
  • How to minimize the conflict between a founder and a hired gun.
  • Why customer concentration at Adestra almost turned McGowan away.
  • How to evaluate the seriousness of a Letter of Intent.

Hiring a president is a great way to improve your score on something we call “Hub & Spoke,” which reflects your company’s dependency on you. Find out how you’re performing on all eight drivers of your company’s value by completing the Value Builder questionnaire.

Our guest

A born and bred New Yorker turned Torontonian; Matt has lived on 3 continents, worked alongside many of the world’s best-known and thousands of lesser-known corporations including; brands, agencies, and technology companies.

Matt is the Director and General Manager of Snapchat, Canada; the camera company that owns Snap Inc., Spectacles, Toronto based Bitmoji, and Zenly.

Currently, Matt sits on several boards for tech, media, marketing and advertising, including; Strawberry Frog, Banff World Media Festival, as well as for CPA Ontario. Previously, Matt served as President and a member of the Board of Directors at the SaaS juggernaut Adestra; an enterprise martech Email Service Provider and Marketing Automation Platform. Adestra was acquired by Upland Software in Dec 2018. Prior to Adestra, Matt focused on expanding Google and YouTube’s leadership in the advertising and marketing space.

Matt has an MBA from the University of Oxford, a BA from Lafayette College, and is also a husband, parent, adviser, board member, shareholder, LP, mentor, and volunteer. Twitter: www.twitter.com/matt_mcgowan

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Transcript

John Warrillow:

So do you remember Sully, the guy who landed the plane on the Hudson River? He had done everything there is to do in an airplane. He was even a trainer of other pilots, yet he had never had the opportunity to land an airplane on the Hudson River. He had one shot at greasing that landing and he nailed it. When it comes to selling your business, you’ve got one shot, one shot to make sure you punch above your weight when you go to sell your company. One shot to make sure you don’t make some of the most common mistakes that entrepreneurs make when they sell their business. That’s why I wrote the book, The Art of Selling Your Business. It’s a field guide for anyone looking to sell their company. You can get it along with some gifts for my listeners at builttosell.com/selling.

John Warrillow:

Have you ever thought about bringing in a president, CEO, someone to run your company with you, for you? My next guest, Matt McGowan is that individual. He is a professional leader of companies, who was brought in by two guys who built a $9 million software company and wanted to sell it. They thought by bringing in Matt, they could bring in some professional talent, and ultimately, grow the pie much larger. That’s exactly what happened.

John Warrillow:

Years later, Matt sold the business for $61 million. What I thought you might find interesting is the journey, what it’s like to bring in a professional manager. I wanted to get inside Matt’s head so that you would have the benefit of what is going on inside the head of a professional manager if you, as a founder, bring someone like that to the table.

John Warrillow:

So Matt shared, with tremendous candor, what it’s like to be a president, an outsider brought into a founder-led business that has the mission and vision to sell. Here to tell you the entire story is Matt McGowan. Matt McGowan, welcome to Built to Sell Radio.

Matt McGowan:

Thanks for having me, John. Good to be here.

John Warrillow:

I would like to start at Oxford University. Because I was looking at your profile before we started, and I noticed that you went to Oxford. That’s a pretty cool university to go to. So how did that come about? How did you get to Oxford?

Matt McGowan:

That’s a long story and a great question, and I’ll keep it short. I was trading on Wall Street. I got transferred to the San Francisco trading desk, working early hours in San Francisco in the late ’90s, not happy at all in life. In the late ’90s, you had this thing called the dotcom phenomenon going on at San Francisco. I switched a small development shop, which we eventually, within about a year and a half of me joining, sold to a UK-based business called Pearson, the guys who owned The Financial Times. While we were doing diligence, as I went back and forth between San Francisco and London, I learned about the business program at Oxford and fell in love.

John Warrillow:

Neat. You went to England, and the rest is defining in terms of your story, for sure. I would like you to define something called a key man clause. If you wouldn’t mind, use it as a way into the Adestra story, how you came to become part of the Adestra team.

Matt McGowan:

So a key man clause is inserted in documents and it… again, I’m going to butcher this, and I’m not a lawyer, but it identifies an individual who is considered very important or key to the transaction. It limits that person in some capacity. So for me, I was on the board of Adestra at the time we decided to take our series A, our one and only round, with a private equity firm out of the UK called Business Growth Fund.

Matt McGowan:

In the 11th hour of that negotiation, everything was ready to go. Both parties seemed extremely happy. They dropped in, in the red lining process, a key man clause.. First I’d learned about it then too. It stated, in summary, that everything was good to go as long as Matt McGowan joined the business in three months. So the monies would be transferred if I joined the business in three months, and be the custodian.

John Warrillow:

Why was BGF, Business Growth Fund, so keen to have you as part of Adestra?

Matt McGowan:

That question will haunt me too. To be fair, it’s a great question. Again, I’ll probably butcher this as well, but I’ve been through the kind of zero to infinity game before with a few early-stage companies, and the founders of the business had not. In the negotiation process, it was clear that I played important role in the business as a board member, and BGF in their infinite wisdom, decided that I should play even a bigger part than-

John Warrillow:

So you were, at the time, leading corporate finance for the YouTube division of Google? Is that right?

Matt McGowan:

No. I was leading strategy for YouTube at Google, and I was very comfortable. I had just had a child and I had just moved to Toronto from New York, and I had just gotten married. So a lot of things that happened in that year. You could say another big event happened as well and answered that clause. I had to have a sit down with my wife and have a big talk.

John Warrillow:

So you’re at YouTube, part of Google, and you’re leading strategy. It’s not the same as corporate finance. I think strategy is generally acquiring companies, but it’s broader than that, right?

Matt McGowan:

Right.

John Warrillow:

Everything in the direction of the company.

Matt McGowan:

Companies like Google have the luxury of hiring internal strategy operations consultant types. So they have like their own Mercer or their own Bain or McKinsey internally. I got brought in on that team. Yeah.

John Warrillow:

It’s funny. So, you were brought in to Adestra. We should define, by the way, what Adestra does. Can you, in layman’s terms, explain the business to our listeners?

Matt McGowan:

So Adestra is a software company, and it worked with enterprise clients, fortune 5,000 types, across a variety of sectors to help those companies, empower those companies communications with their customers.

John Warrillow:

Got it. I think a lot of… Let me ask you… I’m going to ask that question later. So what was your personal reaction when BGF, Business Growth Fund, this private equity group, raised the specter of you joining? You’re a YouTube guy, you’re on the board of Adestra. Did they drop it into a conversation? Was it literally in the document that you saw it for the first time? I’m assuming they’d raised it with you over a beer where it’s like, “Hey, would you be up for this?”

Matt McGowan:

You would have hoped so. Actually, one of the Adestra’s founders called me and told me that this was coming, and then the very next day, it was dropped into the document.

John Warrillow:

What was your… So the Adestra’s founders were Henry Hyder-Smith and Steve… I don’t know Steve’s last name. Henry and Steve are the founders.

Matt McGowan:

Yup.

John Warrillow:

So was it Henry you called you, or Steve?

Matt McGowan:

Yeah, it was Henry.

John Warrillow:

So what’s that conversation like? What did he say? How did he position it? I mean, you’ve got this cushy job at YouTube. I’m like, this is great. I don’t know how cushy it was, but that’s a pretty big company.

Matt McGowan:

Listen, there was a lot of security, a lot of job security where I was. Like I said, just having bought a house here in Toronto, having a child and getting married, a lot of change had happened that year already. So this was another big drop. It was interesting because Henry first proposed it to me as like, “You won’t be working for me,” but I was. He’s the founder and CEO of the business. But he’s like, “It’s not that I’m asking you to come work for me, I need a partner. I need someone to work with and help us grow this business outside of the current footprint in the UK.”

Matt McGowan:

To be fair, I spent a career building businesses. This would have not been my first time. Google was the outlier in my career, not Adestra. I got excited, to be fair, but then I decided not to make any commitment to think about it. Before we even got into remuneration and all those kind of discussions, my wife and I had the chat about it, because with this young family emerging in a new city where I’m on a visa, employment visa, I was in a really good role doing really interesting things with an exciting business like Google. It’s kind of like when you have two choices, a choice can get difficult. These were two really different, but fantastic opportunities. And one was a bit unknown, Adestra, because I had not worked as an operator in that business before, only as an advisor.

John Warrillow:

What convinced you to join? So Henry says, “Hey, I’m not asking you to come work for me, but we need a partner.” What was the straw that broke the camel’s back that got you over the hump?

Matt McGowan:

I wanted to do it from the second they asked me. You should know that. I had been a customer of Adestra years before. I sat on the board for a couple of years. I saw the path I could. It was in my head. Every board meeting, I’d get more and more excited about this business. I had an idea of where this business could go and how we could get it there. So for me, it was more operationally… As you can imagine, Google pays pretty well… making sure that my mid to long-term opportunity was on par with where I was, if not greater, because of the higher level of risk associated with it.

John Warrillow:

So did BGF twist your arm? Did Henry say, “Come on, man, do it?” How did it go from, “Interesting, I wonder how that’s going to work,” to you signing the paper?

Matt McGowan:

It’s a good one. So Henry said, “I’m not even going to negotiate with you. I’m going to pass you to BGF.” Because I had known Henry for a long time. We had been friends, colleagues. One of my biggest worries about coming on board was we had a really strong rapport, we were very different people. And I didn’t know if we were going to mesh well together. When things don’t mesh well at the top, that’s a disaster, if you ask me.

Matt McGowan:

So I spent a good few weeks negotiating with the team, Sarah and James, over at BGF, their investment team. We came to an agreement. I had to stretch them a little bit, but we came to an agreement that made sense for my family and I, and I got even more excited, you could say, because now this was becoming a reality.

John Warrillow:

Funny, because in a funny way, when you were on… You were on the board of Adestra before joining, correct?

Matt McGowan:

Yes.

John Warrillow:

I think of a board member as… Clearly, there’s a legal definition of that, but there’s an also, I feel like, a mentoring relationship or advising relationship where your opinion is being sought by the CEO. It’s kind of weird. It’s like… I don’t know what it’s like. You tell me what it’s like. Did it feel weird to all of a sudden be brought into a company where you were the advisor and then more like the hired gun? Do you know what I’m getting at?

Matt McGowan:

Yeah, 100%. That’s why Henry and I didn’t negotiate, and that was my biggest concern. I knew Adestra inside and out, or so I thought I did, at least from a financial statement’s perspective and a relationship’s perspective with the leadership team and the team below that, who I had met over the years when they sold us and then I joined the board and so on and so forth. But my biggest worry was, I was coming off the board to be an operator, I’m exposing myself, right? It’s easy to talk the talk, it’s hard to walk the walk. I was literally putting myself in a position where I had been looked up to, for sure, and now they were going to find all the little dirty secrets out about how I really can operate, or how I can’t.

Matt McGowan:

As I mentioned, when you’re at Google, there’s someone like you in different markets, there’s backups to backups. Like, you’re one piece of a larger puzzle. Brought into Adestra, while I was a piece of the puzzle, I was much more of a key man individual in that business. I found my lifestyle change, right? Adestra is a British business in the UK. We have aspirations across North America and into APAC. We’ve got something called time zones. We’ve got long travel times. There wasn’t an office in Singapore that I could lean on, or an office in New York or in Paris. Someone had to get on a plane and go have these meetings, and build these partnerships, and open these offices and sign the leases, and so on and so forth.

Matt McGowan:

That was one of my other concerns, because I had a young family at home. I think you can make the excuse that you’re doing all this travel for work, but you’re doing it at a cost, and the cost is your relationship at home. That was something that I was very cognizant of going in to this and something I watched closely while I was in the business, but it was very difficult to manage. Not being home Monday to Friday, three to four days a week is not ideal.

John Warrillow:

It’s interesting. I did an interview years ago now with a very similar situation where you had a founder who reached a plateau… and I’m not suggesting that Steve or Henry reached this plateau, but they needed more professional management. This individual brought in a CEO. In fact, he brought the person in as a COO, and it never worked. There was always this weird ambiguity around who was leading the company because it was the founder, chief shareholder, and then the COO. The COO didn’t have quite the mandate that they thought they were going to have.

John Warrillow:

Ultimately, it came to a head, and the COO basically said, “You’ve got to make me CEO, and you’ve got to step down out of an operational role,” he said to the founders. “Because this is untenable, the way we’re structuring it.” How did you guys structure your relationship between Steve, Henry, the founders, and you? What was that like? Did you run into any of those issues? If you didn’t, how did you avoid it?

Matt McGowan:

It’s a great question. I can think of so many stories that accentuate this, but what we ensured that we did was we made sure that we built a document, literally, we called it the swim lanes. Steve and Henry were definitively well-defined in their roles pre-me. I took a little bit off each of their plates.

Matt McGowan:

Then we ended upbringing in a CFO. We hadn’t had a CFO. That was something that was out of scope for the three of us, especially when you looked at multijurisdiction tax law across planets. We brought in regional operators as well to take care of some of the day-to-day, but we planned this out ahead of time. We agreed that this is probably not going to be the way it will actually play out, but that we’ll agree that this is the beginnings of this document. It’ll be a living document that will change. And required lots of time together. Often, it was at odd hours because of various locations around the world, but we spent a lot of time together discussing this stuff fully open in an environment where there was no consequence for a bad recommendation.

John Warrillow:

What was the most acrimonious area where the swim lanes seemed to cross over one another?

Matt McGowan:

Probably more Henry and I. So Steve Denner, very product-focused. He had the chief operations officer title. Henry had the CEO title. I was coming in as president. In reality, Steve was more of a chief product officer. Then the CFO, when we brought him in, took over a lot of the operations, so to speak.

John Warrillow:

HR, legal, blah, blah, blah.

Matt McGowan:

Exactly, exactly. But Henry and I had the most overlap, and that was in our go-to market strategy and how we were going to actually spend the dollars we had efficiently. The thing that was different between him and I was, his experience was very local British, UK. I guess I had gone to Oxford. By the way, the business is based in Oxford, so that’s a whole other story.

John Warrillow:

How fun.

Matt McGowan:

But it was always nice to go back every month. But the North American and APAC markets were new to him. So we, early on, identified where he was strong, where I was strong, where gaps existed, where overlaps might exist and might happen. To be fair, I think it worked because Henry is one of the highest emotional, intelligent people I’ve ever met. I call him an introvert, but when he’s out and about, he’s gravitational.

Matt McGowan:

We just had a really good rapport, which allowed us to make the micro-movements that we needed to adjust to each other’s strengths and weaknesses, and then the business’s needs. So, yeah, go-to market. I would say sales and marketing if you have to look at it functionally were where we probably overlap the most.

John Warrillow:

How sensitive was Henry over the Adestra brand?

Matt McGowan:

I mean, it was his brand. He could tell you why the logo looked the way it looked. He had his founder story. He loved to speak to… When we sold the business, Henry had the… it was 15 years of his life. So Henry’s now… he’s in his mid 40s. We sold the business a few years ago. So you’re looking at late 20s to early 40s. It embodied everything. It was how he identified himself.

Matt McGowan:

So the brand was very important to him. That was another piece. We didn’t make any… We had a strong marketing team. We made some changes over the years to how we go to market, but it all went through him first.

John Warrillow:

Give me an example of the level of oversight he had on the brand. Could you send a mass email to customers without him looking at it?

Matt McGowan:

It’s a good question. We were in the email business amongst other channels, so we would never send a mass email to customers, but [crosstalk 00:21:30].

John Warrillow:

Okay, that’s bad question, but you know what I mean. If you were going to do a communication to your customers, would he have had to approve that or release with you?

Matt McGowan:

No. No, he wouldn’t know. That changed over time also. Early days, I would very much lean on him for his thoughts on decisions, and over time, he was able to move on to other things and let us focus on what we needed to focus on. That said, we probably talked twice a day for three years. So it would be rare I would have sent something that he didn’t know about.

Matt McGowan:

He may not know the details of it, but I was… When we spoke, we covered off on a wide range of topics, but anything critical, he would know. Then, operationally, we used things like… We were on Microsoft, so the One Drive and such. He had access to everything just like I would have. We were always kind of poking around, but he brought me in, for sure, to let go, which was, I think, probably the genesis of a strong relationship. And he wanted me there, which also helped. It wasn’t being forced on him like I thought it might’ve been. I honestly believe that one day, I will find out that the key man clause was his idea, not BGF’s.

John Warrillow:

Really?

Matt McGowan:

I have that assumption. It’s never been spoken, but I bet you one day, over a beer, somewhere in the world, that story will surface.

John Warrillow:

That’s awesome. I would love to know that, for sure.

Matt McGowan:

I’ll let you know.

John Warrillow:

Yeah. I guess a lot of people listening to this are in Henry and Steve’s shoes a while ago. They are 100% owner-operated businesses. One of the things they are contemplating, I think, is bringing in, quote-unquote, professional management, right? Some of them are doing that to get to the next level, others are doing that because that’s what they think they need to attract an investment.

John Warrillow:

I’d be curious to know if you were talking to Henry and Steve, circuit 10 years ago, or 15 years ago prior to that, what advice would you give an owner operator who is contemplating bringing in really serious professional management?

Matt McGowan:

That’s a good question. I think there’s a few things. Bringing in professional management is definitively one of the probably most important or most impactful decisions a founder can make. I think another one, business continuity in case something happens to the founder, what happens next or where the body’s buried, so to speak, all the documents signed.

Matt McGowan:

Listen, we had a strong rapport, Henry and I, and this wasn’t the first time that he had come to me to join the business. It’s interesting, when we sold Incisive Media and before I joined Google, we had this conversation. What I had told him was, “I’m not ready nor do I think the business is ready for me, but I’m not going to tell you no. I can’t tell you yes, but I’m not going to tell you no.” He’s like, “What does that mean?” I’m like, “I want to be involved, but I don’t want to be an operator at the moment.” So I joined Google, and he put me on the board.

John Warrillow:

What was the revenue of I knew of Adestra at the time? Like, ballpark number of employees, that kind of… just sizeish

Matt McGowan:

Yeah, it was about half the size. So the business doubled in two and a half years I was at Google.

John Warrillow:

Okay. So you sold 18 million in top-line revenue, so you were ballpark around eight or nine?

Matt McGowan:

No, no, no. Sorry, half the size of when I joined.

John Warrillow:

Oh, I’m sorry. Okay, I’m sorry.

Matt McGowan:

It was a young business in its infancy. I had a few clients. One of the things… Listen, I’m not big on advice. Especially when you’re speaking to a large group like this, everyone has their own needs. If I left any advice, I’d say, follow your gut. You’re going to make the right choice if you make… The right choice is to make a choice.

Matt McGowan:

But I would say, for what worked for me and for Henry was our rapport and our relationship. If you had drawn this out on a chart, Steve and I probably were the most complimentary because we had very few overlapping skills. Henry and I overlapped significantly on quite a bit, as we spoke about. What made it work was the relationship and the focus on a common goal and an incentive plan that helped us focus our energies.

Matt McGowan:

So, with respect to what worked for Henry was… I’ll add another thing, actually, another about trust. Because I had known Henry for so long, I had built credibility with him over time. He knew about me. He knew about things that had gone well in my life, things that had not, setbacks I had had personally or professionally, successes I had had. We had a rapport, and that really… Listen, this doesn’t work for everyone. In all cases, this is not always ideal, nor is it possible, but that relationship was the catalyst that allowed us to do the work we did.

John Warrillow:

You mentioned incentive plan, and I obviously don’t need to know the exact numbers in your incentive plan, I’d love to know if you can share how you structure the intermediate and long-term… I’m assuming you had a salary. Was it annual bonus? Was it shares? How did they structure it so you guys were aligned? You mentioned the shared incentive plan or something to that effect.

Matt McGowan:

So a couple of things. There was definitely a salary, and that was a bit below where I had been at Google, but cashflow is a real thing and salaries are getting away on that sometimes. The incentive plan, there was an incentive plan on an annual basis if we hit certain KPIs, and the KPIs were around accelerated growth, not necessarily just achieving the target.

Matt McGowan:

The largest portion of the plan was equity, and that was the piece that was a non-starter for me. So, when BGF approached me and Henry parlayed me off to them for negotiations, I said, “We can’t even have this conversation unless we’re aligned on the exit.” That to me is the most important piece, because like I said earlier, I truly believe I see the path to this is not only supercritical business function, our partners rely to us in ways that are hard to explain in terms of how we connected their customers and drove revenue for them and pass all that information back to them.

Matt McGowan:

But to me, I wanted to… that was the only reason for me to leave, was there was some sort of exit, and I pushed really hard on an oversized portion. Oversize in their mind, not necessarily mine.

John Warrillow:

The equity piece, because it sounds like… Help me understand. One of the things that we’ve heard a lot on this show is, once you take outside money, especially from a private equity group, the clock is ticking. They don’t invest to hold for 50 years, they want to exit. So presumably, the exit conversation was one you had before signing. The intent was that you would be structuring Adestra to be sold.

Matt McGowan:

The best thing about large private equity firms is they have lots of analysts who can push out lots of models and show you all sorts of exit scenarios and what it might be worth to you. They definitively did that. Whether or not you’re going to achieve those scenarios, it’s all up to you, supposedly.

Matt McGowan:

So for me, that was all discussed and inked. You’ll notice I joined the business about three months after the equity was announced. That was a time for me to do my notice period at Google, and also to make sure that this was all locked down. So yeah, all that was very clear, signed off. I had audited financial statements before I joined. As a board member, I knew pretty much what I was getting involved in. Therefore, we could have all those conversations, which was nice.

John Warrillow:

You mentioned the revenue was around eight or 9 million at this point when you joined?

Matt McGowan:

At this point, yeah.

John Warrillow:

Got it. So what was the mandate? What did you see as the one or two things you needed to do in order to boost the value of the company?

Matt McGowan:

Again, a lot of this… at the time, what we spoke to quite a few KPIs. One was to grow our business outside of the UK. 99% of the dollars were coming in from UK. They had no reputation, footprint, feet on the ground, anything outside of the UK. But as a software company who is living in one of the most constrained data environments on the planet, in the UK-

John Warrillow:

With the GRS or whatever it’s called.

Matt McGowan:

GDPR. Yeah, 100%. With all this, Adestra had solved for… like Canned Spam in the US or Castle in Canada, they had already solved for a lot of the data requirements and other jurisdictions in markets, but they didn’t have any experience operating in those markets, so no one knew about them.

Matt McGowan:

So growing that footprint… And we had put basically stakes in the ground that X% of dollars should be coming out of the US. Well, actually, at the time, it was North America by a certain time and then APAC shortly thereafter. So that was the big one. To do that required building teams, because people say some of these things sell themselves, but unfortunately, they don’t. So sales teams, customer service teams, client solution teams, who could build and script software integrations for the business locally, marketing, you go down the list. The teams get rather robust relatively quickly. So that was priority number one.

Matt McGowan:

Priority number two is global business, making sure we were all working in concert, making the right decisions. One of the things about software is, if you update it in one place, it often updates everywhere. So keeping that in mind. Then three, just building the profile of the organization and making sure you’re on the right maps, making sure the business checks the right boxes, is in the press at the right time with the incumbents. Through the marketing automation and marketing tech industry, there’s a few incumbents that are David and Goliath compared to us.

Matt McGowan:

You got your Salesforces, and your Adobes, and your IBM’s that we were going up against, no small feat. So just getting a meeting was tough for Adestra. Luckily, I had operated in these markets before, I had relationships, and that definitely helped getting in the door. The software took it the rest of the way.

John Warrillow:

You were hugely successful because, as I understand, the business grew from 9 million in 2016 to 18 million. So doubled in two years, which is incredible.

Matt McGowan:

I think about 90, if I remember correctly, 88, 90% of that was annual reoccurring. It was actually monthly reoccurring baked into an annual deal, in many cases, multi-year with monthly minimums and overage.

John Warrillow:

Wow. It sounds like a recipe for a fantastic exit. So let’s get into that. What triggered you guys to decide to sell? Was there an event of some sort that triggered?

Matt McGowan:

With GDPR and Brexit, many of our developers were from Eastern Europe than they were in the UK. There were these macro-events happening that worried us. Let’s just leave it at that. We didn’t know how they were all going to fall, these massive legislation. Couple that with founders who’ve been in the game for over 10 years and saw that they were sitting on a large amount of equity, but not wanting to mess up the cap table by selling it off, so to speak. They were looking for some cashflow.

John Warrillow:

Personally.

Matt McGowan:

Personally. We also weren’t the only game in town, right? So there were other challengers on the market who had received significant investment. We took a small amount of money, but we were going up against companies that had taken 10 to 20X what we had taken, and they were moving quickly. Let’s leave it at that.

Matt McGowan:

So when you couple all that together, it felt like the right time. I would add also, we were receiving a ton of inbound. When I joined and we started really making some headway in North America with some major brands like Domino’s Pizza, et cetera, we were on the map and people started sniffing… companies, private equity firms, strategics started sniffing around. So we found ourselves, for a couple of months there, getting distracted by them, having conversations with really no direction or understanding of where we wanted to go.

Matt McGowan:

So what we did is, we built a proforma response email. Basically said, “Thank you, but no, thanks. We’ll keep you on file. When we’re ready, we’ll let you know.” Pretty short. It sent them off, kept everyone on the side. We were sitting at a board meeting, there were some major acquisitions happening in the space at the time, and our appetite got wet. So we held a little dance, so to speak, for advisory firms. We found an amazing fit.

John Warrillow:

Hold on, before… I want to get there next, but you’d seen, in the emails marketing space… I’m trying to think of some of the big acquisitions, but HubSpot bought some stuff. Salesforce.com bought some stuff.

Matt McGowan:

It’s all acquisitions. So IBM acquired Silverpop. Salesforce acquired ExactTarget. Campaigner went to Adobe, HubSpot picked up a bunch of the private equity firms, insight venture partners and such, owned quite a few. You had your CRM wars going on, and part of the CRM is the communications, the email piece. So the space was going haywire. It was really hard to keep up on it, to be fair, and run a business.

John Warrillow:

Did you get a sense of what… Because some of those deals would have been made public, certainly, the bigger ones. Did you get a sense of what they were trading at in terms of a multiple of their annual recurring revenue?

Matt McGowan:

Yeah. Yeah. There was a spectrum. So we were an enterprise player. We worked with a smaller number of bigger clients. There’s SMB players like MailChimp that work with millions of smaller clients. So, more client risk on our side than on their side. So the smaller SMB players were getting much higher multiples than the enterprise players, just because I believe their customer profiles and such.

John Warrillow:

What percentage of your revenue did your largest customer represent at the time?

Matt McGowan:

When I joined, a double-digit percentage. When we sold, under four.

John Warrillow:

Wow.

Matt McGowan:

Yeah, that was one of my major concerns, actually, joining the business.

John Warrillow:

Interesting. But you’ve got it down because you reduced their billing over time or because you increased the revenue so much that on a bigger base, their percentage became smaller?

Matt McGowan:

I would say their billing was pretty flat, maybe slightly down. It was a large old media company. My son says old school, but a large traditional media business in the UK that wasn’t really growing, that was managing growth via costs. It scared me. Let’s put it that way. One of these media companies, you could go belly up tomorrow, but they were really smart in the way they communicated with customers, and they’re still an Adestra customer today. I don’t want to say… We were very strategic in their survival.

John Warrillow:

But even though it was down to the top, the largest customer being just 4% of your revenue, you still felt that your valuation was somewhat discounted by the fact that you had customer exposure. In other words, selling to an enterprise meant that if you lost one customer, it was a much more material event than… MailChimp loses customers all the time.

Matt McGowan:

MailChimp fires customers all the time. Yeah, definitively. Longer sales cycles, more barriers to closing, integrations and such, and more risk. So those were definitely some, but also our size. At just under 19 million in revenue, there’s thresholds in these models. 10 million is a big one, 20 million is a big one. Whether or not that’s-

John Warrillow:

In revenue.

Matt McGowan:

Yeah. Whether or not that’s right or wrong, we would get that… Interestingly enough, many of the acquirers who poked around that we actually communicated with thought we were bigger than we were, because we had done such a good job of making a slash and getting out in front of customers. It was often a little bit humbling when they found out that we weren’t as big as they thought we were. Similarly, with the private equity firms. So it wasn’t just our clients, everyone thought we were bigger than we were.

Matt McGowan:

Interesting enough, we had a large pipeline. We were really good at pipeline managing, and we actually… that was an interesting carrot. If we could keep our close rate going the way it was, what has it been? Two and a half years now. I bet you, we would have been closer to 40 million today.

John Warrillow:

So what were you seeing in the marketplace as it relates to valuation multiples? What were you seeing in the other deals being done? Did you get a sense of a multiple of revenue or multiple of EBITDA that seemed like the market rate, so to speak?

Matt McGowan:

We ran the business at pretty much breakeven, investing every dollar back. It wasn’t really an EBITDA multiple, though we could have backed into one. Three to 5X for a company like us seemed about right.

John Warrillow:

X being top line ARR, right?

Matt McGowan:

Top line. Yeah, ARR. Then 1X anything that was like one-off. So if 90% of the business was recurring, you’d get three to five. Then the services dollars, which come along with software, often they’re outsourced, we kept them inside. Those dollars were closer to maybe 1.2 top line. If you go downstream to the SMB players, you’re looking at the high end, probably 15 to 20, and on the low end, around 10X all based on growth.

John Warrillow:

Yeah. Because you guys were growing fast, 50% a year.

Matt McGowan:

You know what? I thought so. You get in these conversations and they’re like, “Oh, only 50, or only 48?” You’re like, “Really?”

John Warrillow:

Really? You try it.

Matt McGowan:

I think as an exec looking to sell your business, I think that’s one of the things you have to be ready for, is that they’re going to poke holes on everything you’ve done. You can’t take it personally, but it’s all a negotiation tactic at the end of the day. They’re talking to you for a reason. That’s the way I always looked at it, but do not take it personally.

John Warrillow:

What sort of holes did they poke at you guys?

Matt McGowan:

Growth rate’s only, why isn’t it 75? I don’t know. Why isn’t it 95. Then there’s retention numbers, like health of customers. So having a big client at 4%, that, many would argue, may not be that healthy. I don’t know, newspaper businesses, you tell me. That’s a hole, because that client can be around in two years, so let’s discount that piece. Like that sort of stuff was probably most of it. That was most of it.

John Warrillow:

So you hired an M&A firm out of the UK?

Matt McGowan:

Out of Boston, Shea & Co. Great company.

John Warrillow:

Okay. So what was the reaction like to Shea & Co’s work? How many folks nibbled on the offer, and how many actual letters of intent did you get?

Matt McGowan:

So we spoke to five or six advisory firms. Oh, you mean the acquisition? Yeah. Sorry, as far as the sale?.

John Warrillow:

Yeah.

Matt McGowan:

So we have four LOIs, and they came from strategics and private equity. It’s amazing how different companies value your business. The range and offer was… I’ll share. It was some down in the high 30s, and there was-

John Warrillow:

In terms of high 30 million.

Matt McGowan:

Million, yeah. Then there was one in the high 50s and a strategic, and that ended up at 61 million. But it was interesting, the range of offers and how private equity versus strategic value in the business. None of the offers were where we thought we should be. We thought we should be higher. I think that’s always the case, unfortunately, for the most part.

John Warrillow:

What did you think the company should have been worth?

Matt McGowan:

I don’t know if it really mattered. There’s a little bit of sellers remorse, I think. For most of us, at the end of the day, we negotiated. Again, it’s not just the dollars, it’s how are those dollars going to flow? So what does the business really… You can settle on a number, let’s call it 60 million. Is that money going to be paid upfront? Is it all cash? Is it in equity? Is it paid on a schedule over time? Is there an earn-out? All of that played into it.

Matt McGowan:

When we started having discussions with potential acquirers, the all-cash upfront offer seemed like it would be worth more to us than something tiered over time, especially considering that we… I think, at the end of the day, it was time. It was time to sell. The founders wanted to do new things, so they didn’t want to be locked up for years.

John Warrillow:

Got it. So if I’m doing the math, the sale price… I think because Upland Software was the ultimate winning acquirer, and they reported it as being $61 million, I believe, 18 million revenues. So roughly, 3.6 times ARR, and 3.3 times revenue. So in the range that you thought may be a little on the lower end, but who knows?

Matt McGowan:

Exactly, who knows? It was interesting, in the letter that Jack McDonald sent to our board-

John Warrillow:

Who’s Jack McDonald?

Matt McGowan:

The CEO of Upland Software. I’ll never forget this, which I actually was very endearing and, I must say, set the right tone. He wrote something to the tune of, “I’ve completed 40 successful acquisitions over 15 years against 43 or 44 signed LOIs, demonstrating a strong track record of certainty to close,” or something like that. He went on to say that he was the decision-maker, he was the chairman of the board. There wasn’t a larger committee that didn’t have to run through… and that he only wanted a short, I think it was six weeks, 45 days of diligence.

Matt McGowan:

When you put an offer on a table like that, sure, maybe you think 61 is not enough. Maybe you want 80, but who knows? Just because an offer’s made, it doesn’t mean you’re going to sell the business. He made it as simple as possible. That was valuable. There was value there for us.

John Warrillow:

I’m so glad you shared that because certainty to close is… Oh, man. I just did an interview with somebody who took the highest offer from a private equity group, told his employees, blah, blah, blah, blah, blah. Ultimately, the private equity group didn’t have the money to close. They didn’t close. It ruined his business. It was a disaster.

Matt McGowan:

That’s a tough story. That’s a tough story.

John Warrillow:

Yeah. So certainty to close has, certainly, a material value, and it sounds like you had a track record of doing it and a 45-day of diligence. Take me inside the boardroom. You’ve got yourself, who’s been with the business for two years and presumably has, obviously, added a tremendous value in two years. You had Henry, founder, and all the emotional elements of that. And Steve also. That piece, it would be life-changing for them clearly as well. Then you had this sort of professional money, the BGF, Business Growth Fund, the private equity group who probably do this stuff all the time. It’s just like a yawn for them. So tell me a little bit about… Take me inside the boardroom when you’re looking at these offers, these four LOIs.

Matt McGowan:

So BGF had James Austin, their chief investor in the room, he was on the board, and they had an observer, Sarah, who I had negotiated with years ago before. They had appointed a non-exec director, Pete Opperman, who didn’t work for the company. Non-exec, didn’t work for BGF either, but has made a career on boards and done very well. Then on Adestra’s side, Steve, Henry, and myself, our CFO, our regional director of APAC, and our commercial director, another Henry Smith, believe it or not.

Matt McGowan:

So we had a decent number of opinions and people in different stages of life, in varying levels of commitment to the business, you could argue. Reality is, it wasn’t a perfect room. It was a room of the best that we could muster. That’s often the best you can do. Everyone in that room, the thing we had going for us was a strong rapport. We’d over-invested in time together so that we all understood our individual needs and our individual bonds and desires.

Matt McGowan:

As honest as they… assuming everyone was honest. Over the years, you get to know people. It was a very friendly group. The interesting thing is that Steve and Henry still own the majority of the company. So we’re all there as a board, and we have a vote. But at the end of the day, they were the two key decision-makers, along with BGF, that could make or break this deal. They spent time together on their side, making sure that they… As recommended, “You guys go off and come together as one to this meeting. Not separate. Don’t come to the meeting with two different opinions, if you can. Come with a unified thought.”

John Warrillow:

So BGF was a minority investor, but did they have more votes on the board, or just the one vote?

Matt McGowan:

They could have killed the deal if they wanted to. Yes. They could have killed the deal. It was a rather… Everyone was on board. It was one of these situations… Like I said earlier, I’ve been through a few of these, and they’re not always this way, but this was like, “The time is right. The money’s right. It’s not as big as we thought it might be, but it’s significant and it’s game-changing.” Given the market place, the environment, the amount of time and energy everyone was putting in to build this business, it felt right.

Matt McGowan:

We had also, which I hadn’t had a chance to speak to, enrolled out an employee stock options pool to everyone. So we were able to carve enough off to reward everyone for their service. I think that was the biggest piece, at the end of the day. If I remember correctly, Steve and Henry, they were like, “The money is right for us. I want to make sure the team’s taken care of.”

Matt McGowan:

So we went down this discussion with BGF about what are the levers we can pull to make sure that if this deal goes through, in a few months, teams lose jobs.” Family business, these guys are friends. They’d hired friends and family over the years in various parts of the world. This wasn’t going to be the last time they were going to see these people, and they truly cared about their teams and, like I said earlier, identified with this business. It was part of who they were.

Matt McGowan:

So that tended to be where a lot of the conversation went, at the end of the day. Unfortunately, there’s not many levers you can include in a deal post-sale to guarantee that everyone will have a job.

John Warrillow:

Was anyone advocating for, “Let’s send Shea back out there and tell him to play one offer off the other and get these guys up?” Was anyone making that case or taking that position?

Matt McGowan:

I think I was the one making that case.

John Warrillow:

Okay.

Matt McGowan:

Listen, as a significant shareholder and a member of the board with a vote but not the final decision maker, but a part of the team making the decision, that was where I chimed in a lot. I was like, “Guys, this is a good multiple, there are better… We can push for more. Let’s get something going here.” But the appetite wasn’t there. I didn’t push it too hard. I didn’t continue to push it.

John Warrillow:

How did that impact your relationship with Henry?

Matt McGowan:

We’re close as ever. I think at the end of the day, while we may have left money on the table, there’s no real way of knowing, I’ve always lived. I did that always. The last 20 years, I’ve developed… I don’t like to live with regret. You can’t change the past. I often come across those who do, and it’s like it impacts their ability to move forward. For me, it’s like, “It’s a great deal. It was a win all around.” Pat myself on the back, pat the guys on the back. For me, I had no complaints.

Matt McGowan:

I’m not here to… While I might’ve pushed that needle a little bit in the conversation, I was quick to observe there wasn’t an appetite for it, and move on to other things. Life is a series of decisions, series of experiences. There’s no end game for me. I’m in this for the ride. And for me, I enjoy my years as a customer, years on the board, and years as an operator immensely. I built lifelong friends and colleagues that I trust because of it, and that’s good enough for me. The money’s great, but the rest of the stuff’s more important.

John Warrillow:

Yeah, no, for sure. For sure. There’s always that dynamic between… That’s why I was so curious about the professional money, so to speak, at BGF, the founders, life-changing professional. Anyways, it’s really interesting. You guys sounded like you had an amazing degree of rapport.

Matt McGowan:

We did. We did. That was important.

John Warrillow:

Mutual trust.

Matt McGowan:

Also, with BGF, BGF is the growth capital. They’re a British firm, not a valley firm. They’re not looking for home runs, they’re looking for lots of singles. They told us that in the negotiation upfront. Funny enough, that was another time when I thought the valuation wasn’t right, when we were taking money for them. I think we left money on the table when I was on the board taking dollars from BGF, and they know that. But, again, Henry was more about the rapport, the relationship, the ability to work together, the fact that they were smart money, but they were hands-off. All that stuff made more value to him than squeezing out the last dollar, whatever it might be.

John Warrillow:

What’s been like for you all post-sale? Before we hit record, we talked a little bit about this notion of seller’s remorse and how that can be a real thing.

Matt McGowan:

It was a good group of individuals, 180 or so of us across the planet. It was a special time. I think back fondly on all the relationships that I built during those years. So there’s a bit of remorse. We’ve all gone our separate ways, everyone’s doing something different. When you’re not working together day in and day out, and you have other things you’re doing, you drift apart a bit, you can’t communicate as much.

Matt McGowan:

So there’s that. There is a bit of, “Let’s get the band back together or something.” But definitely, that goes through my head from time to time. I’m loving what I’m doing now. I wouldn’t give it up for the world. So for me, that remorse is more personal, I think than professional.

Matt McGowan:

Across the board, those who I’ve stayed in touch with seem to be in good places. So I feel good about that sort of thing. The guy who was running my Dallas office bought himself a house. Amazing, right? Awesome. Go, Toby. I miss that kid.

Matt McGowan:

I think we were on a trajectory. We had a robust pipeline of opportunities. We were engaging and moving forward on. I think if we had stayed the course, it would be very plausible for our growth rate to have accelerated because the opportunities we were speaking to got bigger and bigger. You kind of work your way up. None of the big… The fortune 100 doesn’t usually jump on boards and the fortune 500 jump on board. We were working our way up and we probably could have kept it going, but you can’t change your past.

John Warrillow:

How have Henry and Steve fared post-sale?

Matt McGowan:

They appear to be doing really well. They sold off their houses. They put their kids through school, they got all their fees paid. They are getting involved in other endeavors. They still both live up in Oxford, not too far from each other. So I think they’re doing quite well.

John Warrillow:

Awesome.

Matt McGowan:

I’m not there. It’s hard. I’m not in the UK nearly as much as I used to be.

John Warrillow:

Well, it’s an amazing story. I’m really grateful for you sharing it with us. I know people are going to want to reach out, what’s the best way? Probably on Snapchat. What’s the best way to folks… Tell people what you’re up to now, and then what’s the best way for people to reach out to you if they wanted to say hi on social media?

Matt McGowan:

Please, yeah. I try and get back to everyone who reaches out. So I am more than happy to connect. Snapchat’s a great place to reach out to me. It’s McGowan Matt is my search on Snapchat. M-C-G-O-W-A-N M-A-T-T. I’m running Snap here in Canada. I’m the GM and part of the global object team, and very much enjoying this chapter of my life. You can also find me on Twitter, Matt_McGowan, or you can email me at mattmcgowan@gmail.com. So very, very easy to find and connect with, I believe. I try and keep it that way. It’s important to me.

John Warrillow:

Most important, McGowan Matt on Snapchat.

Matt McGowan:

Exactly.

John Warrillow:

Thank you so much for doing this.

Matt McGowan:

Hey, thanks for having me. This is wonderful. It’s nice to relive the experience.

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’ve 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.

John Warrillow:

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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