How to Sell a 12 Employee Company for $17 Million

Transcript

Disclaimer: Transcripts may contain a few typos. With most episodes lasting 60+ minutes, it can be difficult to catch some minor errors.

John Warrillow:

Welcome to another edition of Built To Sell Radio. My name is John Warrillow, and my job here today is to help you punch above your weight when it comes to negotiating the say of your company, which is something that my next guest, Rafael Zimberoff, did with great skill.

He built a company called ShipRush, up to around 12 employees, when he sold it for $14 million in cash, plus a $3 million earn-out. Not bad for a business with a dozen people. Lots to learn from Rafael in this episode. What I loved about this conversation was how he thought about gaining negotiating leverage, by removing his dependency on one of his key business partners, Stamps.com, and I’ll get him to describe that in detail. You should take away from this conversation, that if you can get yourself into the payment stream, in other words, making your customer believe that you are their provider and not just kind of somewhere along the supply chain, you’re going to increase your leverage in a negotiation to sell your business again. Rafael will describe that in much more or clarity than I just did.

He’ll talk a little bit about how he convinced customers and even potential acquirers, that they would be better off buying his product or company, as opposed to trying to compete with them or building it themselves, which is probably something you’ve considered as well. He’ll talk about how to pick an M&A provider and I think share some great wisdom on that front. Lots to take away from this episode. Here’s to tell you the entire story, is Rafael Zimberoff.

Rafael Zimberoff, welcome to Built To Sell Radio.

Rafael Zimberoff:

Thanks for having me here, John.

John Warrillow:

ShipRush, can you describe this company in layman’s terms?

Rafael Zimberoff:

ShipRush. Well, ShipRush is both the name of the company and the name of the product the company made, which was an online parcel shipping application. So if you send out parcels, which typically means you’re either in E-commerce, wholesale or retail distribution, have your own website or you sell on a marketplace like eBay or Amazon or considered marketplaces. If you put your merchandise up there for sale-

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

… you need to generate parcel shipping labels for all these orders coming in. And ShipRush is a tool that lets you connect directly to all of these things, to the Amazon and eBay marketplaces, to a Shopify web store, or Magento or other web store you may have set up, pull all your orders into one place, generate shipping labels, packing lists for all of those things, to automate what we call the back-end of the E-commerce process.

And remember there are many businesses that are hybrid. Someplace may have a brick and mortar store or a retail location of some kind, it could be a Pilates studio, it could be anything. And you may do some portion of business online where you’re actually shipping out product. So the range of businesses that consume a product like ShipRush is really broad. Everything from a crafter on Etsy, to somebody who has 20,000 [inaudible 00:04:39] selling spare parts for power tools.

John Warrillow:

Sure. It’s massive.

Rafael Zimberoff:

Yeah. Big range. It might just be a one-person operation out of an apartment in Manhattan, or it could be a whole facility and in a commercial zone [crosstalk 00:04:53]-

John Warrillow:

So how did you guys make money? What was the business model?

Rafael Zimberoff:

Well, in tech, there are two or three dominant business models when you’re selling a software product, that’s on a website, right. We call these SaaS applications, right, software as a service.

John Warrillow:

Sure.

Rafael Zimberoff:

We all use them. Whether we’re using something like Slack or QuickBooks online or FreshBooks or any of the tools we use-

John Warrillow:

Yeah. Our listeners would be used to those sorts of platforms, because they’re running-

Rafael Zimberoff:

Right.

John Warrillow:

… businesses. So QuickBooks, HubSpot, Slack, all that stuff, they’re all-

Rafael Zimberoff:

Right.

John Warrillow:

… so SaaS, I’m familiar with 99 bucks a month and you get access to the software or whatever-

Rafael Zimberoff:

There you go.

John Warrillow:

… is that the model you guys used or what was…

Rafael Zimberoff:

That was absolutely our retail model, but the ShipRush business was actually pretty sophisticated, because it’s a different kind of software. When you use something like a QuickBooks or FreshBooks or any of these other tools we’re mentioning, you are really just buying access to use that website, to use that app on the web.

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

Because [inaudible 00:05:57] ShipRush, you print a shipping label, that shipping label actually costs money. Costs five, 10, 20 bucks. If you’re doing freight with ShipRush, which ShipRush also did if you were shipping your goods out on pallets, either you were selling wholesale to retailers, you were selling big old barbecues-

John Warrillow:

Sure. Sure.

Rafael Zimberoff:

… that went on a pallet, that shipment could be a few hundred dollars. So every time-

John Warrillow:

Yeah. When you said, the label has, you mean the physical label because it is a direction to a shipping company and-

Rafael Zimberoff:

Right.

John Warrillow:

… prepayment to a shipping company-

Rafael Zimberoff:

Right.

John Warrillow:

… to move box from A to B, the actual piece of paper has value?

Rafael Zimberoff:

Yeah. It’s like a postage stamp. It’s like a big old postage stamp that instead of being worth 50 cents, is worth many dollars. So all these labels, whether it’s a FedEx label or a UPS label or a priority mail label-

John Warrillow:

Yeah. I get it.

Rafael Zimberoff:

… or a bill of lading for a pallet or five pallets that are going to go on a truck, that is a business transaction, and ShipRush obviously doesn’t have the truck that’s going to come and pick up your package, it’s FedEx or UPS or what have you, that’s actually going to do it. So because the ShipRush technology product was at the center of this larger business transaction, there are other revenue streams available to a product like ShipRush, beyond the 50 or $99 a month subscription fee, that everybody can see you when you go to ShipRush.com, Oh, I can get it. This plan is 39 a month. That plan is 79.

John Warrillow:

Okay. So how did you guys make money? I’m still curious.

Rafael Zimberoff:

Well, one of the things ShipRush did differently in our space… so our space has a handful of companies that make web applications similar to ShipRush. ShipStation is very popular, ShippingEasy, ShipWorks, ShipRush, there are a couple of others that are smaller. And something that ShipRush did differently than other players in our space, is we took the technology we created, and we licensed pieces of it to much larger companies. So an example of this, is the QuickBooks accounting software has UPS, FedEx shipping built into it, and it has had that already since 2004, 2005. And that was done using technology licensed from ShipRush.

We also licensed technology to FedEx, to eBay, to Pitney Bowes, to Stamps.com, so we knew that we could take our product to market, but we also knew that we could help solve problems for much larger companies. In the tech space, and not every business has this, but you can find things like this in the construction industry, for example, where you come up with a workflow or a tool or an approach, that you can take advantage of, and that you can sell yourself, but that there are other larger organizations that can even take bigger advantage of it.

John Warrillow:

Yeah. And just, I guess-

Rafael Zimberoff:

And tech is particularly good for those kinds of licensing arrangements.

John Warrillow:

… That makes a ton of sense. So, in the case of a QuickBooks, and I’m hearing brands like FedEx and others, these companies have virtually unlimited resources.

Rafael Zimberoff:

Right.

John Warrillow:

I mean, their stocks are through the roof-

Rafael Zimberoff:

Right.

John Warrillow:

… in particular, any SaaS app like QuickBooks. I mean, why don’t they just do it themselves? Why do they need a little company in Seattle-

Rafael Zimberoff:

Right.

John Warrillow:

… no disrespect whatsoever in saying that-

Rafael Zimberoff:

No, it’s fine.

John Warrillow:

… but really, if you’re QuickBooks and you wanted to integrate a shipping app, why on earth would you license somebody else’s stuff, when you could just send three guys into a back room for a year with lots of coffee-

Rafael Zimberoff:

Yep. Yep. Yep.

John Warrillow:

… and make it themselves. Help me understand that.

Rafael Zimberoff:

It’s a very, very good question. It’s something everybody asks. There’s always the buy it or build it kind of math that happens particularly in tech, more so in tech than in a lot of other segments. And I can illustrate this with a simple story.

John Warrillow:

Sure.

Rafael Zimberoff:

So Intuit, when they had the idea of doing parcel shipping, they talked to some people at FedEx, and FedEx said they should consider collaborating with ShipRush, which they did. When we completed that and that went live, we were not under any kind of exclusivity. So I went and approached Peachtree Accounting Software, which used to be the main competitor-

John Warrillow:

Sure.

Rafael Zimberoff:

… to QuickBooks. And I knew the folks over at Sage, which is the parent company that owned Peachtree at the time. And I said, Look folks, you can do this yourself or you can license it from us. And here was the pitch I gave them. I said, Why don’t you scope out doing it yourself and whatever it comes out to costing you, just offer us half, we will say yes, and everyone wins. So, that was the pitch I gave them.

So they went off and took a few months. And the story I’m telling right now is very common in tech, parts of it, all the different parts of it. They went off and scoped out the project, right. Figured out whether they going to need three guys like you proposed, or six or five months or 10 months, they scoped the whole thing out.

They called me back and they said, Look, good news. We’ve scoped it out. We know how long it’s going to take. We know what it’s going to cost. But the bad news is, we don’t have a dime to pay ShipRush for this tech. We’ve got budget for our staff engineers to do it and we’ve got calendar time for our staff engineers to do it, but we don’t have any money to write a check to an external company. So, even though you would take half the money this is actually going to cost us, we aren’t in a position to do that. You got to love big companies, right?

John Warrillow:

Oh God. I’m just getting squeamish, just remembering. I used to run this company that worked with big technology companies and research companies, and we helped them understand the SMB market and so forth. And all this kind of nonsense about, I don’t have the budget, but if I steal it from this budget and characterize it as this-

Rafael Zimberoff:

Right. Right.

John Warrillow:

… So I can be… It’s just like, Oh my God, how do you guys make any money ever?

Rafael Zimberoff:

[inaudible 00:12:05]. It’s amazing companies function, right?

John Warrillow:

It really is.

Rafael Zimberoff:

Really, when we think about this, how does business even survive with all these restraints and handcuffs, right.

John Warrillow:

Okay. Back to Sage, they’re like-

Rafael Zimberoff:

Back to Sage. So the-

John Warrillow:

… we’ve got money, but not the right…

Rafael Zimberoff:

… Right. But not coded the right way to be able to have this conversation with ShipRush. So they went off and did it themselves. It took them two or three times as they expected, right. So it blew their budget by a hundred or 200%.

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

They finally got it built. They got it in the product. But now you had a huge Delta already, which is that people who built it were perfectly competent software engineers, but they had never built shipping software before. Whereas the stuff we built, was built by people who only did shipping software and had been doing it for years, and knew everything there was to know about shipping software.

So their solution was missing certain key things they didn’t think about, that shippers knew were key, so nobody used it. So they spent not just double what they would’ve spent on us, they spent four or six times more in dollars. They spent four or six times more in months in calendar time, because we would’ve delivered to them in weeks, instead it took them over a year or whatever-

John Warrillow:

And then came back to you and…

Rafael Zimberoff:

… Well, by then they’d already bled. They’d already made all the effort they were going to make and no one was using it. So how could they possibly justify further investment, right? This is what happens in tech, is that in tech-

John Warrillow:

Sure. In that example, did they buy from you?

Rafael Zimberoff:

… No, never.

John Warrillow:

Isn’t that funny.

Rafael Zimberoff:

And they ended up killing the feature in their product a few years later, and putting those customers on our external shrink wrap product, because they had a very small number of users, that they could not justify maintaining the feature. And this is one of the things about shipping software that’s also different. It’s about software in general, it’s one of the things that makes software different than construction. Is that in tech, the amount that one invests when you’re a business owner, in maintaining the tech, exceeds the amount you spent to build the tech.

John Warrillow:

Yeah. I’ve seen that a few times over.

Rafael Zimberoff:

Yeah. And that’s a difference where it’s not really a capital expense, that it requires ongoing care and feeding and everybody who’s built a website learns this. You stand up the website, you make this big effort and expense to stand it up and get all the pieces of it built. And then you discover you can’t just walk away from it. It needs this ongoing investment and maintenance forever basically, and that’s the nature of tech.

So anyway, that’s how that path went. And so to back up to your original question, why would a FedEx, why would an Intuit, license from us, it’s because they recognized that we could deliver on a predictable dollar number, on a predictable [inaudible 00:15:01] calendar. And they would be paying us an ongoing amount of money. It wasn’t a one time investment, it was ongoing because we were going to need to give them updates multiple times a year, forever, and maintain all the latest and greatest stuff that UPS and FedEx add to their service. They add adult signature, they add this option-

John Warrillow:

Sure.

Rafael Zimberoff:

… they add that option, right. So, that was an ongoing relationship. So it turns it into a turnkey. And that’s what we were offering these corporate entities. We were taking all the risk away, the schedule risk, the cost risk that the Peachtree guys encountered firsthand. Everyone in tech has experienced that, everyone building an extra room on their house has experienced it.

John Warrillow:

Sure.

Rafael Zimberoff:

Right?

John Warrillow:

So what would one of these big tech companies pay to license ShipRush from you on an annual basis, ballpark?

Rafael Zimberoff:

We charged a lot. It was hundreds of thousands a year.

John Warrillow:

Hundreds of thousands a year. Okay. [crosstalk 00:15:57] And was that multi-year contracts or one year renewal? How did you structure your contracts?

Rafael Zimberoff:

Yeah. Multi-year. Typically it’s multi-year upfront and then it may go year-to-year downstream.

John Warrillow:

When you say multi-year upfront, did they pay for multiple years upfront?

Rafael Zimberoff:

No. No. They would commit two or three or four or five years upfront, and then the deals often went year-to-year after the initial period.

John Warrillow:

Got it. And so what kind of churn rate did you have? I’m imagining it was pretty sticky. Once people sign up-

Rafael Zimberoff:

It was very sticky.

John Warrillow:

… would you have lost customers very frequently or…

Rafael Zimberoff:

Well, on these big licensing deals, we lost close to zero. One of the keys in structuring these deals, it’s not even the size of the deal in dollars that’s important, as it’s the long term success of the deal, right. It doesn’t do us any good. And this is when actually this gets… I’m going to come to a question underneath the question you just asked.

John Warrillow:

Sure.

Rafael Zimberoff:

Many times when people would want our technology, they would want to do a revenue share with us or a pay-per-user. Now the problem with an architecture, a business architecture of that kind for us, is that we don’t have access to their users, only they do. So what if they fail to market it? What if they fail to promote it? Why should that roll back to us? So the keys to success, the only thing we could do to make it succeed, was to make sure that ShipRush worked and did all the things it was supposed to do, and was a valuable tool for their users.

Actually getting it in their users hands was not in our control. So a good example of this, is the UPS and FedEx shipping that’s been in QuickBooks for a long time. If QuickBooks fails to promote that feature, saying, Hey, this is in here, right. This is in here. You can print a UPS label-

John Warrillow:

Sure.

Rafael Zimberoff:

… right, from inside our app. If they fail to tell anybody, they won’t have enough users and the project won’t look like a success, but not because of anything we did or didn’t do, our part could be done perfectly, right. So this is where I come back to however you architect the business terms, needs to lean toward success and allocate the risk appropriately.

John Warrillow:

Sure. So in your case, you didn’t do rev share-

Rafael Zimberoff:

Right.

John Warrillow:

… you did these multi-year licensing deals. To me, that sounds like you’re not carrying any of the risk. The QuickBooks or the enterprise company is-

Rafael Zimberoff:

Right.

John Warrillow:

… 100% taking the risk inside the multi-year deal.

Rafael Zimberoff:

We’re also not getting the big gain, right. We’re not getting the big gain. If this thing may makes zillions of dollars-

John Warrillow:

Right.

Rafael Zimberoff:

… at 15,000 users, we aren’t going to see that. We aren’t going to get any benefit from that. But our downside risk is completely managed. We are getting paid reasonably for what we’re delivering, and we’re getting paid enough that we can continue to invest in the thing we’re giving them. If you price it too low, you find yourself a year or two in, saying, Oh, we can’t put any more time on this, it’s not worth it.

John Warrillow:

Yeah. I’m glad you mentioned investment, because I was going to ask you, how did you finance the growth of ShipRush? Did you raise outside money or…

Rafael Zimberoff:

Good question. We never raised outside money. We started in the nineties as a networking consulting house-

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

… Back in the nineties that was a big thing. And so we were a networking consulting house. Originally it was just me and then brought on a couple of people. We started reselling a product called GoldMine, which was a customer relationship management-

John Warrillow:

Know it well. Yeah.

Rafael Zimberoff:

… Okay. So we were one of the big GoldMine houses and we started in writing software by writing add-ons to GoldMine.

John Warrillow:

No. Interesting. Okay.

Rafael Zimberoff:

And that was our transition, our pivot from a consulting house into a software house, was writing GoldMine add-ons. And so we were completely bootstrapped. We never went to VCS. We never went to Angels. We just took everything that we made and kept reinvesting it.

John Warrillow:

Who’s the we? I understand there was another Zimberoff, is that your souse or…

Rafael Zimberoff:

Yes, that was Anya. Anya was never involved in the business actively-

John Warrillow:

Okay.

Rafael Zimberoff:

… but the LLC was owned by both of us. And the business was really me and whoever my chief engineer was at the time-

John Warrillow:

Got it.

Rafael Zimberoff:

… which was my brother-in-law for the first few years, and then was an engineer we brought on in the late nineties. And the approach always was to take out as little as possible and keep investing in the product, because that was the only road to something ultimately useful. It’s easy to cut expenses and milk the business, but the business isn’t going to be very happy if you do that.

John Warrillow:

How did that impact your relationship with Anya? Because you were at this business from ’93, when it was Z-Firm-

Rafael Zimberoff:

Right.

John Warrillow:

… as I understand, ’92-

Rafael Zimberoff:

Mm-hmm (affirmative).

John Warrillow:

… all the way up to 18 months ago.

Rafael Zimberoff:

Yep. Yep.

John Warrillow:

It’s a long time not to pull out money out of the company. And I know a lot of spouses who are like-

Rafael Zimberoff:

Mm-hmm (affirmative).

John Warrillow:

… this was a nice little project for you, but I’d like you to get paid properly now, because there’s things we want to do in our personal life, like buy a house, buy whatever.

Rafael Zimberoff:

Mm-hmm (affirmative).

John Warrillow:

And it creates all sorts of tension, if one spouse is putting all the money back into the company and the other is like sitting there saying, When is this company going to start paying off? How did you guys handle that conversation?

Rafael Zimberoff:

That’s a good question. There really wasn’t any money until the last handful of years.

John Warrillow:

Mmm.

Rafael Zimberoff:

And so certain things we did do. We did buy a house early on. We did a bunch of things. Anya went to grad school and was in grad school for several years getting a doctorate, in the earlier years of the business. So we were in food, we were in a house, we were meeting our needs and there wasn’t any serious money to tap into until the last handful of years. So we were able to pay off the house-

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

… before the sale years, before the sale of the business, we were able to pay off the house. We were able to pay off Anya’s student loans, things like that we were able to do. So while I owned the business, that was really not a material issue that I can recall.

John Warrillow:

How big did you get ShipRush in terms of revenue or some proxy for size-

Rafael Zimberoff:

Mm-hmm (affirmative). Mm-hmm (affirmative).

John Warrillow:

… before you decided to sell?

Rafael Zimberoff:

We were 12 to 18 people, depending on how you count the contractors-

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

… for more than a dozen FTE’s that were real, FTE’s 12 or 13 and then another handful of contractors. So 15 to 20 total head count at the time of the sale.

John Warrillow:

And are you able to share revenue?

Rafael Zimberoff:

No, I don’t believe I am.

John Warrillow:

Okay. That’s okay. Yep. That’s…

Rafael Zimberoff:

And in tech, remember one of the issues is that in certain segments, and this is not restricted to tech, but you find it more frequently in tech, where there are different valuation paradigms. So there’s a classic valuation paradigm of some multiple of EBITDA, which is classic, normal CPA’s approach-

John Warrillow:

Sure. We talked about it a little bit. Yeah.

Rafael Zimberoff:

… to business valuation. In tech, if an arrangement can be seen as a strategic kind of deal, then EBITDA falls aside and it becomes a multiple of gross or a multiple of nothing. So it’s just a number.

And so this is one of the keys in any space. I mean, this can happen, even if you invent some new power tool, it doesn’t have to be software. If it’s perceived by the acquiring company as strategic and especially if there are multiple possible acquiring parties, then things like, what was your profit, what was your EBITDA, blah, blah, blah become less relevant.

John Warrillow:

Yeah. I want to get into that now, because again, as we talked about, you have been in business for yourself since ’92, Z-Firm and then ShipRush, what changed? You mentioned it was profitable towards the end, there was money on hand, was there some trigger that made you want to sell ShipRush?

Rafael Zimberoff:

Was there some trigger? Big swift kick in the behind. You got a minute for this-

John Warrillow:

Yeah.

Rafael Zimberoff:

… because this is going to take a minute. So our business space, and this is kind of not every situation works like this. When we got into doing parcel shipping software, that was in the late nineties, there was no such thing as E-commerce, right. And we originally built our parcel shipping software for things like GoldMine and Act-

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

… and Outlook, places where you had lists of addresses that you’d want to ship to. And then it was only in 2005/6, that we started building it for eBay and E-commerce and just moved in that direction. Well, so the kick, and then I’ll explain what led up to the kick, why the kick was such a kick.

The kick was in 2014, Stamps.com acquired our number one competitor, which is a company called ShipStation. And this was really shocking to us, because we had a very large business relationship with Stamps.com. They were buying a ton of our technology. Starting in 2009, Stamps.com did their first licensing arrangement with us in 2009 to connect their own shipping app to E-commerce systems like eBay and Amazon, Shopify, WooCommerce and what have you. And then in 2011, they bought more ShipRush from us on these multi-year licensing deals. And then in 2014, out of the blue to us, they announced this large acquisition of our number one competitor.

John Warrillow:

How much of your revenue on a percentage basis, would you have been getting from Stamps.com at that time?

Rafael Zimberoff:

At that point, it was double digits, between 12 and 24%.

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

So it was a big chunk of our revenue and it was a big part of our-

John Warrillow:

And what happened, I mean, did they just call you up one day and say, We’re giving you notice that all of the contracts…

Rafael Zimberoff:

… No. No. They didn’t terminate the contracts. They bought ShipStation, but did not do anything in their relationship with us that day or that month or even that year. But six months after they bought ShipStation, they bought our other primary competitor, which is a company called ShipWorks. And so our first realization was, we’re not at the top of their list for an acquisition. How’d that happen? And then to discover we’re not even number two, after selling them millions of dollars of tech and servicing thousands of shippers together, that was a really, really big kick for us that the space was changing.

That’s the key thing, one of the things about business… I have a friend, his business philosophy is he says, you just need to build up cash reserves larger than you ever think are reasonable to survive all the downturns. And the whole point of business is just to stay in the game long enough for it to become interesting. And if you stay in long enough and he’s thinking five, 10, 15, 20 years, he’s not measuring in months, right.

John Warrillow:

Yep.

Rafael Zimberoff:

Stay in long enough, you’ll sooner or later find a cycle where you’re making money. And so the opposite of that… Now his business is commercial real estate, which has these big cycles, right, and he went through the dotcom crash and the 2008 crash.

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

So in tech, what happened is that we happened to in a space, which was E-commerce facing, and the whole E-commerce landscape goes through these big shifts every three to six years. And this was a shift, that all of a sudden companies like ShipRush were hot commodities to certain kinds of acquiring entities.

John Warrillow:

Got it. So I don’t want to put words in your mouth, what was your first reaction when you learned Stamps.com had made the first acquisition in ShipStation? What did you say to Anya that night?

Rafael Zimberoff:

At that point, then that first acquisition, it’s like, Okay, we thought we were at the top of the list, but we were wrong, we’re just near the top of the list. So it’s okay. We were probably next.

John Warrillow:

I want to explore that. So, you thought you were at the top of the list. This is going to resonate with some listeners because I think a lot of people think, Oh, well, when ABC company wants to make an acquisition, of course they’re going to come to us.

Rafael Zimberoff:

Right. Right.

John Warrillow:

So when you say you were at the top of the list, I mean, had you had any conversations regarding acquisition with Stamps.com in the past? Had they sort of raised the specter of the possibility before?

Rafael Zimberoff:

Nothing serious, but here was I believe, my mistake and perspective, is that I was looking at it from my chair, which is that I was a technologist and I was selling them technology that was successful. They were not backing out of deals with us because we were failing to deliver. They were staying in the deals with us because we were delivering.

John Warrillow:

Sure.

Rafael Zimberoff:

And I thought that that meant that we had proven ourselves, and that we would be at the top of the list. And what I failed at, was that that was actually not their framework for acquisitions. They were not the kind of company to acquire partner organizations that were providing critical technology to them. They were the kind of company that was looking for business revenue growth curves. And I didn’t understand that, that ShipStation had a much more aggressive growth curve than we did and were much more marketing and revenue focused than we were. And that was more interesting to Stamps.com and I failed to recognize that.

John Warrillow:

Got it.

Rafael Zimberoff:

So that’s part A. Part B was that ShipRush was a relatively complex business. We were selling a product on the street that you can see at ShipRush.com today, which looked more or less comparable to what ShipStation was selling on the street. But so much of our business was doing these white label technology deals with the FedEx’s of the world-

John Warrillow:

Sure.

Rafael Zimberoff:

… that our business was actually very nuanced and not something that you could look at in half a page. You could not summarize our business on half a piece of paper.

John Warrillow:

And that makes sense to me. I want to go back to this, the de rationale, the strategic. You thought they would be interested because you delivered great technology.

Rafael Zimberoff:

Yep.

John Warrillow:

What you came to learn was that Stamps.com wanted new S-Curves, new revenue-

Rafael Zimberoff:

Right.

John Warrillow:

… new exciting revenue sources-

Rafael Zimberoff:

Right.

John Warrillow:

… What happened to make you realize that? How did you become aware that Stamps.com wanted different things in their acquisitions?

Rafael Zimberoff:

Just thinking about the acquisition of ShipStation and trying to come to a rationalization for it, trying to get out of my shoes and my perspective and think about it from their perspective. And then when they acquired ShipWorks, realizing that, Oh, they’re building a portfolio. So then it’s like, Oh, it’s like General Motors. We don’t care if you buy a Buick or a Chevy or an Oldsmobile or GMC, [crosstalk 00:32:31] or like a sort of a Cadillac. So you’re coming to us either way, right.

John Warrillow:

How’d that work out for them?

Rafael Zimberoff:

For Stamps or for GM?

John Warrillow:

No, for GM. [inaudible 00:32:43].

Rafael Zimberoff:

Oldsmobile and Buick are gone. I’m realizing why I say that though. I’m mentioning things that are ancient history at this point. So, but it worked out for General Motors for decades. I mean, let’s be clear, all of these approaches work for have their cycle.

John Warrillow:

No, absolutely.

Rafael Zimberoff:

Business is a story of cycles. So, they were building this portfolio and they were buying the number one company of each portfolio flavor, whereas ShipRush was kind of the number two in three different flavors. So we were the only company that was doing these licensing deals, that was selling our technology to others. Nobody was doing that, but that’s a very nuanced place to be and was not something they needed.

John Warrillow:

Got it. And was your assumption that… let me not give the answer to the question. What were you assuming your exit to be at this time back in 2014? Was it your assumption that you would’ve actually be acquired by somebody?

Rafael Zimberoff:

I always used the approach of increasing success by lowering expectations. So I really was not thinking in terms of an exit, especially once the business became reasonably profitable, it’s like, Oh, another several years of this and I’m happy. I’ve made enough out of the business and I’ve succeeded. And one of the things that helped me have that perspective, is that we were bootstrapped. We’d been in the game for a long time. We didn’t have investors who were looking for an exit-

John Warrillow:

Sure.

Rafael Zimberoff:

… Which that’s obviously going to change somebody’s perspective a lot, who’s running a business. So until 2014, an acquisition was not at the top of my list. Once 2014 came to a close, it’s like, Oh, if we don’t sell, we’re going to be up against this marketing machine, because Stamps.com is an excellent marketing organization. That’s always been their claim to fame in the parcel shipping ecosystem. So if we don’t sell, we’re going to be up against this marketing monolith that will be very challenging. Now the flip side to that is, Oh, well, that’s fine. We’ll just be selling our tech to everyone else who needs to compete with them. So there’s still a place for us in the world, we think.

John Warrillow:

Who else was out there? I mean, I think of Stamps as being the giant gorilla. Who was the biggest competitor of Stamps at the time?

Rafael Zimberoff:

Well, so the competitor to Stamps, until 2014, until these acquisitions, Stamps.com was based in Los Angeles, Southern California, and the competitor to Stamps.com was in Northern California, in Silicon Valley, called Endicia. And part of the ShipRush business for a number of years, had been playing these two players off of each other, because they were unique. They were the only two companies that were licensed with the postal service to provide technology to print postal shipping labels. Because we were talking before about how that’s a postage stamp that’s money-

John Warrillow:

Sure, sure, sure.

Rafael Zimberoff:

… So it’s very, very regulated to print these labels. And these were the only two companies that were licensed by the postal service to provide technology to tech companies like ShipRush and ShipStation and everyone else, to print these labels. And we’d made a whole business playing these two firms off of each other saying, Oh, we’ll move our users onto your tech with these business terms or move them onto your tech for these better business terms. And every couple of years, we would move our users around.

And then in 2015, a really big thing happened, which is Stamps.com acquired their competitor, Endicia.

John Warrillow:

Mmm.

Rafael Zimberoff:

And that was when we knew we would either sell or be gone in a couple of years. I went through about a period of about a year, where I understood, because they knew who all our customers were. Endicia and Stamps knew two thirds of our customers. And we saw them go after smaller players and take those customers, put them on ShipStation. And so we knew at that point that we were in a truly existential crisis.

John Warrillow:

Did you create any bad blood with either Endicia executives or Stamps.com executives, by kind of playing them off each other over-

Rafael Zimberoff:

By doing what we did?

John Warrillow:

… the years as you’ve described? My point is-

Rafael Zimberoff:

Mm-hmm (affirmative).

John Warrillow:

… once Stamps had acquired Endicia, I’m wondering if you’re playing one of them off each other over the years-

Rafael Zimberoff:

Came back to bite us?

John Warrillow:

… created some bad blood. So they’re like, Okay, we’re going to put these guys out of business because we’re sick and tired of our rates being jacked up, et cetera. Did you get any of that blow back or…

Rafael Zimberoff:

It was very complicated. We did not get the direct kind of thing that seems obvious here. It’s like, Oh, yeah, now we’ve got them where we want them, et cetera, et cetera. ShipRush was too big a player to really mess with in a bad, bad way, because the acquisition of Endicia was a huge ripple. It was a huge tidal wave. One of these waves going across the ecosystem that the people in the ecosystem felt strongly, but people outside it wouldn’t have understood, wouldn’t have impacted them directly-

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

… because everything kept working. So in that five year period, that was the single major event to occur in this parcel shipping technology space. And it went through antitrust review. Like I asked-

John Warrillow:

I was going to say, weren’t the people in Washington [inaudible 00:39:01]?

Rafael Zimberoff:

… Yes. They were. There was a whole antitrust review. The whole acquisition was put on hold for a number of months. I was actually contacted by the folks at the Department of Justice or the Department of Commerce, I’m trying to remember-

John Warrillow:

Commerce probably. Yeah. Probably is Commerce.

Rafael Zimberoff:

… who were doing this. I was part of a couple of conference calls, these attorneys at one of the agencies in Washington had a whole list of questions of the things they were concerned about. And as we know, as we’ve all talked about in all these different contexts, their concerns were not my concerns, right. Or my concern was having multiple companies offering this tech, that was just not their concern. Their concern was how much Sally was going to pay to buy a pair of shoes online.

John Warrillow:

Okay. So… Sorry. A lot of our listeners won’t really want to know the plumbing of the shipping things-

Rafael Zimberoff:

That’s fine.

John Warrillow:

… which is cool, but they would definitely identify with the sense that an 800 pound gorilla, if they turn their sites on them, has the potential to put them out of business, which is triggering their decision to sell or at least the decision to get on their front foot and start thinking. So it did, in your case, these two guys merge-

Rafael Zimberoff:

Mm-hmm (affirmative).

John Warrillow:

… and you’re in a vulnerable spot. I think you used the words, if we don’t sell, we’re out of business within two years.

Rafael Zimberoff:

Yeah.

John Warrillow:

So what next? Did you hire an M&A firm? What was your next step at that point?

Rafael Zimberoff:

Our next step was to hire an M&A firm. And the process is almost more important than the action. So I’d never done this before. So I called an old, old friend of mine who was an M&A attorney and said, Hey friend, I need an investment banker. And he said, Oh, talk to firm such and such in downtown Seattle, which I did. We hired them.

Just to give some context for how this kind of thing goes. They say, Oh, well, we charge an upfront fee. We only take people who are serious about selling. Their upfront fee at that time was $10,000 one time. Check to get them on your side, paid the fee. They asked for a list of companies from me that I thought were likely acquisition folks. I gave them a list. They worked that list, which was maybe half a dozen companies. As part of that, we had two, maybe three management presentations, right.

The way it works is the investment banker shops you around, the interested parties say, Okay, we want an hour or two on a Zoom call. Even then it was on Zoom. One of them was in person. And you go through a whole presentation with them, answer their questions. And that firm did do at us a lowball offer from one of our existing licensees. So we got one offer in that process, it was really low. It was from one of the companies on the list I’d given them. It’s like, I didn’t need you guys to call them. I could have called them. And, and the way it’s-

John Warrillow:

You say lowball offer, why do you say lowball? What multiple of revenue was their offer?

Rafael Zimberoff:

Well the offer was for maybe one to two times our gross revenue at the time.

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

But the reason it was lowball, is that Stamps.com had created a market, right. They had done multiple acquisitions and kind of established what a multiple could be [crosstalk 00:42:39]-

John Warrillow:

And what were those multiples with Stamps? What was Stamps paying for this [crosstalk 00:42:41]-

Rafael Zimberoff:

… their multiples were, I don’t know this hard, but it was kind of in the six or seven to 11 times gross revenue.

John Warrillow:

… times revenue. Right-

Rafael Zimberoff:

Top line, big numbers.

John Warrillow:

… So big numbers compared to one, two.

Rafael Zimberoff:

Yeah.

John Warrillow:

Okay. So the M&A firm goes out, gets a customer to give you a lowball offer and you’re like, ah, not [inaudible 00:43:03]. What’s the next step?

Rafael Zimberoff:

Well, at that point, what happened is that the senior partner at the M&A firm, was almost literally pounding the table, telling me, take the deal. And, here’s one of the key things, right. You pay an M&A firm a success fee typically 5% of the deal-

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

… It’s going to be three to six, but four, five is normal. And here they had gotten us a lowball offer from a company that I had brought to them that I easily could have called myself. And they’re not comparing it to the other deals like I am. They’re just saying, take the deal. I said, No. And we ended up firing them and going back to the drawing board to become independent of the Stamps and Endicia technology. Because that dependence was bad optically, it was bad for the future of the business, it was just bad at every level. And the offer was low enough that we just didn’t feel there was downside risk and staying independent for another couple of years and seeing what we could do with the situation.

John Warrillow:

So help me understand that. So, in what way were you dependent on the Stamps and Endicia kind of platform? I guess their labels were what-

Rafael Zimberoff:

They were the only ones who could give us the tech to print a priority label map, [inaudible 00:44:38] label, and remember in B2C E-commerce, right, business to consumer E-commerce, 60 to 80% of the shipping volume was going on the postal service.

John Warrillow:

… And so you were dependent on them, because they had the license with the US Postal Service and you didn’t?

Rafael Zimberoff:

Right. Right.

John Warrillow:

So what, did you apply for a license yourself with the US Postal Service?

Rafael Zimberoff:

We did a couple of magical things. One of them is that two companies had early stage technology to compete with the Stamps and Endicia technology. And those things surfaced at just the right moment. And they were an early pre beta whatever, but because we were well connected in the space, they approached us said, Hey, by the way we have this. It’s like, you do? We are definitely interested. And so that happened. And the other thing that happened, is we changed our business model.

In the past when our software used Endicia or used Stamp, the customer opened an account with Endicia or Stamps and paid those companies and we were not in the payment chain. We were not in the revenue stream. There was a red stream to us, that where the customer paid us $50 a month for our software. And then the customers actually buying the labels directly from Endicia or Stamps. We changed the model. So they bought the labels from us and we bought them from the backend technology. So we were in the payment chain, so that we could be truly independent of this tech, because we’d been so burned.

And the reason this is momentous is two things. A, as a business, we had very consciously avoided being in the payment chain for 15 years. We’re like, we don’t want those headaches. We don’t want customers calling us, telling us their account is $4 off. We just don’t want that. And we don’t have the business office to handle all that cash flow. So we changed. We said, No, we’re getting into it. We understand it’s complicated. We understand it’s messy. We’re all of a sudden going to be in the payment chain of millions of dollars a month of parcel shipping flow. This is a serious commitment to build the infrastructure and to take on this role. It’s two serious hats. It’s a tech hat and it’s just a role hat, a business responsibility hat. So we were going to do it. And we spent a year and we did it. And then we shopped the business again and we hired a new banker.

John Warrillow:

This is such an important point. I want to make sure everybody listening is capturing this idea. If you are in the chain, but you don’t control the chain, ultimately you don’t own the direct relationship with the consumer.

Rafael Zimberoff:

Yes.

John Warrillow:

You are in a much more vulnerable position.

Rafael Zimberoff:

Right.

John Warrillow:

Whereas if you are-

Rafael Zimberoff:

You’re in the payment chain.

John Warrillow:

… If you’re in the payment chain, in particular, the customer thinks of you as the provider, that puts you in a power position when it comes to an acquisition. And so you made that change-

Rafael Zimberoff:

Mm-hmm (affirmative).

John Warrillow:

… to put yourself in, as you described, the payment chain-

Rafael Zimberoff:

Mm-hmm (affirmative).

John Warrillow:

… and what next? So you did a year, then you went, sopped the business again. Where did you take it-

Rafael Zimberoff:

The key thing is that I took a few months to find the right banker. And I would say this is one of the biggest takeaways from my experience, is that the right banker makes all the difference, all the difference.

John Warrillow:

Couldn’t agree more. Right banker, you’re referring to an M&A professional-

Rafael Zimberoff:

Correct.

John Warrillow:

… who helps you.

Rafael Zimberoff:

Correct.

John Warrillow:

Okay. So how did you find the right banker? Because a lot of people are listening to this saying, Okay, well how did you find him or her?

Rafael Zimberoff:

So I’ll describe the process I used. And this is going to vary for each industry and what have you.

John Warrillow:

Sure.

Rafael Zimberoff:

Early on in my process, back in 2014, a friend of mine who worked at a much larger tech company and had been involved in a bunch of M&A stuff, had referred me to, he said, Oh, we have this M&A guy who’s amazing. He’s Australian. And he’s really known in this little niche that we’re in and he did deals for us like you wouldn’t believe. So I started talking to this guy. This guy’s a one man show. That’s one of the crazy things, at least in tech, and I don’t know if this is true in other segments, but in tech, a lot of these M&A firms are little boutique organizations of 1, 2, 3, 4 people who exist purely on their reputation. It’s quite remarkable.

So this guy was very upfront from the beginning. He said, I’m not your banker. You can come to me with any questions, but I don’t know your segment for ShipRush. I don’t know ShipRush. I don’t know that world. I don’t do E-commerce. What he specialized in was technology for streaming media. That was his niche.

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

And he was known worldwide for negotiating M&A deals and representing buyers and sellers in that niche.

John Warrillow:

So did he refer you to someone though or what was…

Rafael Zimberoff:

Not quite. What happened was, I also then went to my attorney who had been my business attorney for many years. And this is also a very important thing in the picture, is to have a consistent legal person who knows your whole contractual landscape, because that attorney’s been doing it for you for a long time.

And my attorney went to an M&A attorney, and I started hearing this one name, who I then checked with the guy from Australia. And everybody would say, I’ve been referred to so and so and everybody said, solid, solid, solid, solid. And I was being referred to one name who turned out to be one of a team of three or four teeny little boutique firm, New York, San Francisco. I ended up not dealing with that guy so much, but with his partners in San Francisco, are Irfan Iqbal and Allen Kogan and they were amazing. They were also a lot more expensive. It’s classic, get what you pay for, I guess.

Just to help everyone understand like what this looks like, I was dead serious about being acquired. I now had multiple people saying these guys were really solid and top notch, people who I knew who were themselves top notch. And that’s one of the things, right. When I went to my friend the first time around who did some M&A work, it’s like a third of his work was M&A work. He wasn’t an M&A focused only attorney. Third of his work is M&A work and he refers me off to a firm that just wants to get a deal done, they don’t specialize in this industry. I didn’t know to ask that. I didn’t know what questions to ask. You really want to know, tell me the deals you’ve done in my segment recently.

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

Now tell me do you know?

John Warrillow:

You mentioned the first firm charged 10K upfront. What did Irfan and Allen charge you upfront as a work fee?

Rafael Zimberoff:

25,000 per calendar quarter.

John Warrillow:

Per quarter. And was there any cap on how long? How many quarters did they say it was-

Rafael Zimberoff:

I went into it saying, I want to spend six months on this, if we succeed, great, if we don’t, I want to move on, then refocus on my business.

John Warrillow:

And was that a nonrefundable work fee? Was it-

Rafael Zimberoff:

Nonrefundable, you were paying them 25K so they answered the phone for three months.

John Warrillow:

And was that deducted from their success fee?

Rafael Zimberoff:

Their stock terms were no, I negotiated it to, yes. I think going into it with a clear idea, look, these things take a lot of your energy as a business owner. So part of my thing was I will give this my attention for a number of months, but not for a year. I didn’t feel I had that to give it. I felt if there was a possibility here, that six months was a reasonable amount of time. And we were actually in lockup in six months, from the time I signed with them, to the time that we were actually had accepted an offer and we’re in diligence was right about six months.

John Warrillow:

Got it. And so let’s work through what Irfan and Allen did. You signed with them and what was the next step?

Rafael Zimberoff:

So these guys really have their act together. And that is something that I will say is, you know really early if an outfit like this has their act together, I guess, once-

John Warrillow:

What did they do in the first few weeks [crosstalk 00:52:58] act together?

Rafael Zimberoff:

… They did a pre diligence. Their first thing is they send you a whole huge long checklist of stuff they want to see, because they want to know how ready you are for diligence, right from the beginning, not from four months in. And day one, they want to know that when they get to the home stretch that you actually have your act together.

John Warrillow:

How did you handle the pre diligence? Did you hire someone to do it for you or did you do it yourself?

Rafael Zimberoff:

I did it all myself.

John Warrillow:

Wow.

Rafael Zimberoff:

I did all myself, but I could, because the business was clean. We had a lot of contracts, but I had them all in one place.

John Warrillow:

What was the most surprising thing on the pre diligence list? The thing that you’re like, Really, they want to know this?

Rafael Zimberoff:

Yeah. They want a copy of your HR manual.

John Warrillow:

You’re like what HR manual would that be?

Rafael Zimberoff:

No, we had one. We had one.

John Warrillow:

Did you?

Rafael Zimberoff:

Yeah. No. See I’m a third generation American small businessman, right. Both of my grandfathers ran businesses. My father’s father had a whole series of businesses. My father ran one business for essentially his whole career. He had a couple of smaller ones before that. So, no, I always had an HR manual. I had an HR manual when we had four employees. When there were four people in the office, I had an HR manual. What did I do? I called my dad. I said, Dad, I need an HR manual. I said, I’ll send you mine, doctor it up.

John Warrillow:

You’re kidding?

Rafael Zimberoff:

Yeah. So, I changed it, made it appropriate for my business. His business was a very different kind of business, so I had to change some stuff. And-

John Warrillow:

But still.

Rafael Zimberoff:

… I had one. Yeah.

John Warrillow:

Okay. So they send you the pre diligence. You feed them that information. Then what? Who came up with the list of potential acquirers?

Rafael Zimberoff:

The banker. So they asked me for my list and they asked me for two lists actually. they said, give us a list of companies that might be interested and send us a list of companies we should not contact, because in our space, I was very concerned. I was probably excessively concerned in retrospect. I was really concerned that if Stamps.com knew we were actively selling, that they would do something to make that impossible.

So there were certain players, even FedEx, right, FedEx and UPS had experienced this whole suite of their partners being acquired by Stamps.com of the biggest partners servicing the small, medium Business segment for shipping software. We’re all getting rolled up. Thats kind of intimidating, even if you’re UPS. So anyway, they asked me for two lists, but they then built a much longer list. And this is also one of the signs of a good banker, is that they were shopping us all these companies I’d never heard of. I’d never heard of Descartes, really I hadn’t. And most of the companies that they shopped us to, I had either not heard of or had not considered a candidate, and they shopped us-

John Warrillow:

Ballpark, how many names on the big list?

Rafael Zimberoff:

30 to 40.

John Warrillow:

On their big list after they took yours and they did their own-

Rafael Zimberoff:

I gave them a handful. I really gave them right around five. They went and did their work and came up with a list of something like 35 to 40. They built the teaser sheet, like a two-pager, two, three-pager that they sent to those 30 or 40. And then the interested parties from that, we did the management presentation.

John Warrillow:

… How Many of those do you think you did?

Rafael Zimberoff:

About a dozen, 10, 12.

John Warrillow:

About a dozen?

Rafael Zimberoff:

Yeah.

John Warrillow:

And then how many offers did you get?

Rafael Zimberoff:

So the banker then runs a process. When you have a situation like this of multiple interested parties, the banker says, okay, we’re going to be accepting offers, whatever it is, February 1st. And so then we had multiple offers. I don’t know if I can go into exactly how many, but we had multiple offers and we had multiple offers above the minimum threshold we were seeking.

John Warrillow:

Sorry. You said minimum threshold. You mean you had a number?

Rafael Zimberoff:

I had a target. I had a target.

John Warrillow:

What was your target in terms of multiple of revenue, because you got an offer of one to two?

Rafael Zimberoff:

My target in dollars was 10 million.

John Warrillow:

Okay.

Rafael Zimberoff:

That if offers over 10, I was really interested in and-

John Warrillow:

Ballpark. What kind of multiple of revenue? Because I’m just going back to originally the lowball-

Rafael Zimberoff:

I’m not sure I should go into that too much. I don’t know where exactly where my lines are, so I’m going to [inaudible 00:57:35].

John Warrillow:

… No problem. So assuming I’m going to just sort of make some basic judgements and assume it was higher than one to two. You don’t have to confirm or deny that, but that’s all good. But for you, it was a number. Interestingly, what’s magic about 10 in your mind? What was magic about 10 in your mind?

Rafael Zimberoff:

It would give me enough to give all the staff a good bonus and it would give me enough to say, maybe this is the only business I’m going to run in my life.

John Warrillow:

Mm-hmm (affirmative). Mm-hmm (affirmative). Did you go through what financial advisors tell you, take 3% or 4% and like you could live off that for X number. Did you do any of that math or was it more-

Rafael Zimberoff:

Not a ton of it?

John Warrillow:

… Not a ton? Okay.

Rafael Zimberoff:

No.

John Warrillow:

But you kind of had it, you knew enough that it would be enough.

Rafael Zimberoff:

Yeah.

John Warrillow:

If you [inaudible 00:58:23]. Got It. Got it. And so anything [inaudible 00:58:26] to 10. So you mentioned you got multiple offers, were there multiple offers above 10?

Rafael Zimberoff:

Yes.

John Warrillow:

Got it. Got it.

Rafael Zimberoff:

Yes. And this is where the banker does everything. I’ve seen situations in my segment where the business owner tries to be the banker and tries-

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

… to run the whole thing. And I knew a couple things. One, even though I was a very accomplished negotiator, because that was all these big licensing deals, I was doing at all, I knew that this was a deal I should not be negotiating, too much of my identity was tied up in this. And so I knew that that was a big part of why I knew I had to have a banker. And the banker’s running it all. When you have multiple interesting offers, the banker goes back to them and says and says, Hey, we have multiple interesting offers. Would you like to revise your offer?

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

And so they come back and that runs for a couple of days and then-

John Warrillow:

On a percentage basis, how much were they able to improve the offers on a percentage basis doing that?

Rafael Zimberoff:

… Oh, gosh, pretty good. I would say they probably went up another 10, 20%.

John Warrillow:

Okay. Okay.

Rafael Zimberoff:

Yeah.

John Warrillow:

By sort of playing one off the other?

Rafael Zimberoff:

Yeah. By telling folks that this was serious and that they had to do their best.

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

They did really well. I mean, that’s the thing, like on the one hand, 5% success fee, that’s a lot of dollars and you’re a small business owner-

John Warrillow:

500 grand [inaudible 00:59:58].

Rafael Zimberoff:

… Yeah. It’s a lot of dollars. On the other hand, there is no question that these guys more than earned that. Everything they did from all the companies they shopped us to, to the cleanliness of the process, to how seriously acquirers took us because we were represented and it wasn’t me doing the calling.

John Warrillow:

[inaudible 01:00:21].

Rafael Zimberoff:

That’s a totally different thing. If I call five companies and say, Hey, I’m looking to sell versus an established firm. These guys, their firm at the time was called Inertia Advisors, now they’re called Alantra. When somebody from Alantra or Inertia, who’s an established person, this is all they do. This is only thing they do. They’ve got a clean, clean, clean reputation. When they call the Corp Dev, right, because at big companies, the people who do the acquisitions are Corp Dev.

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

When they call Corp Dev, Corp Dev listens. This is an opportunity. This company is almost certainly going to be sold, right. The ShipRush in this case, the company being represented by Irfan and Allen and so if we actually want this, we better stop and pay attention.

John Warrillow:

That makes sense. And so who ultimately is at the stage of the game, if you can share. I know Descartes was there because they were the winning bidder ultimately.

Rafael Zimberoff:

Mm-hmm (affirmative).

John Warrillow:

Who else was in the mix? Are you able to share the other names or types of companies?

Rafael Zimberoff:

No. No. I mean, some of them were companies that we had business relationships with one kind or another.

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

There’s one interesting twist, which is one of these things that happens. There was one very big company that had told us from the beginning they wanted in on the process, they were interested in acquiring us. They wanted in on the process, they had actually been part of that first process in 2014. And I had to rent a room with the high-end video conferencing equipment to give them a whole presentation with the first banker. And they had eight people in the room on their side. We did this whole huge thing. And when I hired Irfan and Allen, they told Irfan and Allen from the start we want in, we want in, we’re interested.

And so we did the whole management presentation with them and everything. And they are very big, they’re a Fortune 700 company, very big company, billions of dollars of revenue every year, two weeks before the process starts, when we’re accepting bids-

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

… Senior, senior guy there gets me on the phone to say, Raf, want to let we’ve got some internal organization to do and we’re not going to be participating. It’s like, okay, nothing I can do about that, right? Okay, you’re not going to be participating. Your call. And Irfan and Allen do the whole process. We accept an offer. We’re now in the exclusive diligence period for 90 days, we’re about halfway through that and diligence is going, but it’s not going fast. The same big company calls me up, Raf, can you fly down to San Francisco for a meeting near the SFO Airport? Sure. Fly down. And here’s the same executive along with his chief henchman to say we got our internal stuff all organized, we’re interested.

John Warrillow:

Okay. But you’ve pre signed a no shop clause presumably in the lockup. So aren’t you kind of in breach of that clause to even meet with them?

Rafael Zimberoff:

I didn’t know what it was about.

John Warrillow:

Okay.

Rafael Zimberoff:

So the answer is, I had no idea what it was about when I flew down.

John Warrillow:

Yeah.

Rafael Zimberoff:

So I was okay meeting with them. But now, this is a very, very delicate moment.

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

Okay. This is a very delicate moment because if I say the wrong thing, I can blow everything up. Okay. So my answer to them was, thank you very much. I will let Allen and Irfan know, right. Because I am not doing this deal. And this is very key thing, right. This guy, why wasn’t he going through his Corp Dev to talk to Allen and Irfan to begin with, right? In retrospect, I don’t think I’ve even thought this thought until this moment. I don’t think I’ve thought this thought until this moment.

Why am I hearing directly from a senior executive, about a thing that their Corp Dev and my bankers have been talking about exclusively, I’ve never been in the conversation. I’m only really realizing that at this moment. And in a sense, he may have been trying to fish how the process was going, perhaps, I obviously don’t know. So, I let Allen and Irfan know, which actually has a very positive saluatory effect, because they’re-

John Warrillow:

What does salutary mean?

Rafael Zimberoff:

… A good, it means a good effect.

John Warrillow:

Okay.

Rafael Zimberoff:

It has a good effect on diligence, which is they’re able to go to Descartes that we’re in exclusivity with and say, we’ve received an unsolicited inquiry related to acquisition. Because what you’re obligated to do under the terms of this lockup period, the company that is for sale is acquired to let the acquiring entity know if any unsolicited offers come in.

John Warrillow:

That’s going to light a fire into Descartes pretty quickly.

Rafael Zimberoff:

So All of a sudden diligence went into high gear, right, because once that 90-day lockup ends, we could potentially say, we’re not renewing it, because we have this other interest party, right? So diligence went into high gear. Descartes, as you can see, they do a lot of acquisitions. Before the pandemic, they would do kind of two to four a year. So they are a real machine. They have a process that is very structured-

John Warrillow:

For folks who don’t know Descartes, what do they do in layman’s terms and what did they see in you guys?

Rafael Zimberoff:

… Well, Descartes is a logistics technology company. So when you think of moving goods, physical goods, they have technology that covers many, many parts of moving things around the world and around the block and around the city. So they have technology that helps book containers on container ships, to move from Asia to the US or wherever. They have technology to do customs clearing, to get all that container of goods through customs. They have technology to, if you have a fleet of trucks deliver, say you’re a chain of furniture stores, and you have a warehouse or multiple warehouses, and some couple dozen furniture stores, they have the software that will tell you what to put on every truck, to deliver out to the stores or to deliver to the customers who bought [inaudible 01:06:46]-

John Warrillow:

So this was just another compliment to what they were already doing?

Rafael Zimberoff:

Yeah. This was-

John Warrillow:

I’m surprised they weren’t on your first list in a way. I mean you know the shipping space as well as you do.

Rafael Zimberoff:

Because they weren’t that big in parcel. And US parcel at time, they hadn’t crossed my radar. They owned a company called OzLINK, which was adjacent to us. So I knew about Oz, but I didn’t know about Descartes.

John Warrillow:

Interesting. Interesting. And so this unsolicited bid from the Fortune 700 company, kind of lit a fire into Descartes and they accelerated due diligence. They went from kind of dragging their feet to, okay, let’s get this thing done.

Rafael Zimberoff:

Yeah. It got full more attention.

John Warrillow:

If only we could all manufacture an unsolicited bid during due diligence, our lives would be much better. But good for you for, A, not negotiating, because that would’ve been in breach and also it’s not [inaudible 01:07:38]. Well, that’s fantastic. And so the ultimate deal as I’ve seen, because Descartes was generous and actually published the deal. So it looks like it was $14 million cash up-front, plus a $3 million earn-out or potential for an extra $3 million. What was the earn-out period like? Did you hit your bogey or…

Rafael Zimberoff:

Yeah. We hit it. The way a lot of these deals in the tech sphere are, is they set top line revenue number target, and this was a two-ear thing. So there was a target for year one, there’s a target for year two. And if you hit it, you get it. And if you miss it, you don’t. My understanding is that in some of these deals, everybody kind of knows up-front the company’s not going to hit it. In our case, we had strong confidence we would, in fact, part of our came from the fact that this big company who had pulled out of the process and then put themself back in kind of, I was actively negotiating a big tech licensing deal with them during this entire period. And the announcement by Descartes came two days after I inked the deal.

So as part of diligence, we’re showing them drafts of this contract that hasn’t been signed yet, right. That’s not normal. Normally they’re seeing all the executed contracts, right, which is every deal has that. But here we were actively negotiating a pretty big for us licensing deal. So we had to surface that as part of our revenue projection was that we were going to land this deal. And, so here we inked the deal, whatever it was, let’s say it was on a Monday, the acquisition was announced on a Wednesday or Thursday. It was just a few days later. So here I’ve already hit, I’ve already goosed our revenue the day that the acquisition is closed, the big company, then of course calls me that day, saying, what the heck? We thought-

John Warrillow:

I’m sure they used business terms, by the way.

Rafael Zimberoff:

… Yeah. Right.

John Warrillow:

I’m sure they said, what the heck?

Rafael Zimberoff:

What the heck? We thought we were doing business with this small company in Seattle now, all of a sudden it’s this bigger logistics company. So they had to be calmed down and there were no problems with that licensing deal. Everything was delivered a-okay.

John Warrillow:

So you knew you had this in the bag this first year revenue bogey-

Rafael Zimberoff:

Right.

John Warrillow:

… If this contract came through, you could hit the one year. What about the second year?

Rafael Zimberoff:

Well, that wasn’t enough for the one year, we needed growth from other places too. That was just a piece of the growth we needed. We needed just to continue to execute and continue to grow the business.

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

There’s a lot of potential in the space. So we had a lot of confidence that we could continue to grow, even without marketing support, because we’d never had a lot of that on our own.

John Warrillow:

Was the earn-out structured so that it was either zero or one, like either hit it or you didn’t and your one hit it or didn’t?

Rafael Zimberoff:

Yeah. You did that percentage.

John Warrillow:

There wasn’t-

Rafael Zimberoff:

There are percentage earn-outs, but not in this one.

John Warrillow:

… In, in your case, it was like either you hit it or you don’t-

Rafael Zimberoff:

Correct.

John Warrillow:

… and you move on.

Rafael Zimberoff:

Correct.

John Warrillow:

And it sounds like you hit it in both of the years, which is great. Did they try to keep you at Descartes after the second year and say, oh, well you managed this division for us or was there any sort of negotiation to try to keep you on as an employee?

Rafael Zimberoff:

I kind of wish there had been.

John Warrillow:

Oh, is that right?

Rafael Zimberoff:

Yeah.

John Warrillow:

Why?

Rafael Zimberoff:

Well, I expected there would be, partly because one of the things that happens in these conversations, sometimes not always, is that the acquiring company keeps praise on the company they’re acquiring and maybe that’s just part of the dance.

John Warrillow:

Sure.

Rafael Zimberoff:

Now at this point I kind of say, oh, that must just be part of the dance. So it is in a lot of the bigger companies that do acquisitions, the Microsoft’s and Amazons of the world, Facebook’s of the world. They often structure the deal with longer term incentives for the leadership to stay that goes in 4, 5, 6 years, be outside of that top tier. You don’t find that as much. And a lot of it just has to do with what’s the strategy of the acquiring company as the acquiring company, trying to build a team or as the acquiring company have some other agenda.

John Warrillow:

But In your case you said you kind of wish they had, why? Would you have worked for Descartes?

Rafael Zimberoff:

I liked the team I was working with. We had worked together at ShipRush for 18 years. The core team had been together 18 years-

John Warrillow:

But you have to be the first-

Rafael Zimberoff:

… and we really liked spending time together. And so I had no problem going to work every day. I liked what I was doing and I liked who I was doing it with. I was not burned out. See my burnout stopped when I sold the business. Because when I sold the business, I didn’t have to worry if the power was going to be on. I didn’t have to worry if the data center was going to have a problem. So my life got so much better, the moment the transaction closed. So I mean, I wasn’t burned out at that level, but the heart of the core team has all moved on at this point.

John Warrillow:

… Yeah. Literally I’ve done 300 of these interviews or more, and you’re the first person I have ever interviewed… maybe you know what, Jay Steinfeld from Blinds.com, I think stayed at home Depot after, but I think literally everyone else has been ready to hit eject the day their earn-out ends. So you’re-

Rafael Zimberoff:

And so that is what I ultimately did. And that is what the acquiring company assumed I would do, but it wasn’t the path I thought I was on until the last couple of months.

John Warrillow:

… Interesting. But you do raise a very interesting point, which I’ve heard before, which is when the check clears and that money is in your bank account, and it can’t be taken away, you’re kind of playing with [inaudible 01:13:53] money a little bit, in the fact that you can get back to sort of just enjoying your work and not worrying about these heavy things-

Rafael Zimberoff:

Right.

John Warrillow:

… like such a huge percentage of your net worth tied to the outcome of this deal, blah, lah, blah, blah, blah, blah, blah.

Rafael Zimberoff:

Right. Right. You get so much head space back. That’s the thing, when you’re business owner, you’re worried about everything. Is someone going to call in sick tomorrow morning? Is the power going to be on? Is this going to happen? Is that going to happen? You’re managing 105 little things every moment of every day. And you’re worrying about it at 10 at night, not just at 10 in the morning.

John Warrillow:

Mm-hmm (affirmative).

Rafael Zimberoff:

And then once the check clears, like you say, the main thing that happened to me was, Oh, all I have to worry about is the software, the product that I’m in charge of, that’s it. [crosstalk 01:14:39] I only have to worry about the product.

John Warrillow:

[inaudible 01:14:43] you can’t probably enjoy as a technologist. Yeah.

Rafael Zimberoff:

Exactly. I don’t have to worry about the other hundred and five things. So that did absolutely increase my pleasure and work a lot.

John Warrillow:

Hey, Descartes, if you’re listening, Rafael is available. You can then… just kidding.

Rafael Zimberoff:

I talk to some of the guys over there, I’m in touch.

John Warrillow:

Oh, just teasing. This is so great. I appreciate you sharing the story with us. I think there’s a ton for people to learn. What are you doing now? Where can people reach out? Is there a website they can find you on or what’s the best way for folks to reach out as they’re listening in and want to find you?

Rafael Zimberoff:

The way to find me is on my LinkedIn profile, Rafael Zimberoff, with an F, on LinkedIn. That is my presence and that’s where I do my business communication. I am doing-

John Warrillow:

We’ll put that in the show notes as well.

Rafael Zimberoff:

… Cool. And I do help small business owners think about how their business is structured. Negotiation coaching is a strength of mine, and anything that has to do with technology and logistics is obviously my backyard.

John Warrillow:

That’s awesome. So it’s Rafael Zimberoff and if folks need to double check the spelling, BuiltToSell.com and you’ll see the show notes there, and you can check in with Rafael on LinkedIn.

Rafael Zimberoff:

Yep.

John Warrillow:

And I’m grateful for you sharing the story. It’s great. And I’m glad that it all worked out so well.

Rafael Zimberoff:

Thank you, John. This has been an interesting conversation.

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’ve 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.

Built To Sell Radio is produced by Haley Parkhill. Our audio and video engineer is Denis Labattaglia. If you like what you’ve just heard, subscribe to get a new episode delivered to your inbox each week, just go to BuiltToSell.com.