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The Clean Exit: 7X Revenue, No Earn-Out

April 8, 2022 |  

About this episode

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After graduating from business school, James Benham interned at one of the large accounting firms. Benham quickly realized corporate life was not for him. Instead, Benham started a business and lived on less money than he made as an intern for ten years.

After a decade-long slog and several failed product ideas, Benham stumbled on SmartBid, a software product designed for general contractors to solicit and manage bids from their trades.

SmartBid took off and in 2018, Benham accepted an offer of 7 times Annual Recurring Revenue (ARR) in cash at closing. In this episode, you’ll discover how to:

  • Bootstrap your business without raising outside capital.
  • Minimize your downside when launching new products.
  • Create a steady flow of new leads through speaking engagements.
  • Avoid the temptation of exiting too early and figure out the ideal time to sell.
  • Decide when to share your list of deal killers with an acquirer.
  • Avoid an earn-out.
  • Keep your team after you sell your company.

Show Notes & Links

Dave Ramsay’s Financial Peace University

Company that acquired James’ company SmartBid

Harvesting Intangible Assets by Andrew Sherman

ISqFt software

Rob Nixon

Entrepreneur’s Organization

Entrepreneurial Operating System

James’ website

 

Definitions


Confidential Information Memorandum (CIM): “A Confidential Information Memorandum (CIM) is a document used in mergers and acquisitions to convey important information about a business that’s for sale including its operations, financial statements, management team, and other data to a prospective buyer.”
From: https://corporatefinanceinstitute.com/resources/templates/word-templates-transactions/cim-confidential-information-memorandum/

 

Minimum Viable Product (MVP): “A minimum viable product (MVP) is a version of a product with just enough features to be usable by early customers who can then provide feedback for future product development.”

From: https://en.wikipedia.org/wiki/Minimum_viable_product

About Our Guest

James Benham

James started his journey as a tech entrepreneur in his Texas A&M dorm room in 2001 and has harnessed his passion for innovation to bootstrap multiple businesses to financial sustainability. James’ most successful bootstrapped exit occured in 2018 when he and his team sold their construction bid management software, SmartBid, in a groundbreaking deal with ConstructConnect.

James is a sought after consultant and speaker at the forefront of innovation in the insurance industry. His no-nonsense style and love for “geeking out” on technology has landed him keynote opportunities on over 400 conference stages in the last 15 years.

When James isn’t working hard on improving companies—his own or his clients’—he keeps himself busy as a Regent at Texas Southern University or with his many hobbies as a pilot, musician, Star Trek fan, tech gadget aficionado, and Lean Methodology “life hacker”.

 

Connect with James:
James’ website

Watch the interview

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 back to another edition of Built To Sell Radio. The podcast designed to help you punch above your weight in a negotiation to sell your company. I’m your host, John Warrillow. Today on the show we’re going to hear from James Benham who sold SmartBid for seven times revenue.

Get this, he had no earn-out, and he was able to take his employees with him as part of the deal. Pretty cool story. Before we get there though, just a couple of points. Number one, I want you to go to James’s episode page at BuiltToSell.com.

There, you’re going to get a whole set of references, show notes, definitions of things we talked about today, links to things, James’ references. Make sure you go to BuiltToSell.com to check that out. Number two, I just want to make a big shout out to Rob Nixon. Many of you know Rob. He is a legend among entrepreneurial circles.

RobNixon.com. He recommended James and our best shows, I think I can say with a fair degree of certainty come from you. People who listen to the show, who hear about entrepreneurs who have sold their company and say, “You should really get this guy or gal on the show.” Thank you, Rob.

If you would like to make a nomination, please go to BuiltToSell.com/Nominate. Let’s get into James Benham and his episode. Look, as I mentioned in the intro, you are going to learn how James sold his business without an earn-out, and was able to carve out most of employees and take them with him to his other business.

How did he do it? Well, listen for the way he designed his short list of potential acquirers once he knew would likely be okay with the deal terms that were most important to him. Also, listened to how he bootstrapped his business. Didn’t take outside capital to a large extent. Really self-financed the entire business.

He also had four or five failures in the very beginning and listen to how he minimized his downside on some of those early products. He also created a steady flow of leads through speaking. Some cool ideas there. We talked about the temptation of sucking cash out of your company in the early days.

He talks about how he avoided that temptation and deciding when to sell his business. Here to tell you the entire story is James Benham. James Benham, welcome to Built to Sell Radio.

James Benham:

Man, thanks for having me on. I really appreciate it.

John Warrillow:

SmartBid, I got to tell you stories. We got some work done in our home and the guy, the GC on the job did an amazing job. He is really, really top. One of these guys who’s been doing it for 40 years, which is why I was so surprised when I got the invoice. It was literally on a Word document.

I think he’d typed up and I just laughed when I was reading a little bit about SmartBid I’m like, “He really needs this product.” Sending an invoice on a Word document doesn’t instill a tremendous amount of confidence. Tell us about SmartBid. What did this product do?

James Benham:

Maybe a little earlier than you getting the invoice it was about bidding. In 2006, we had a bidding system for printing companies, so that ad agencies could bid out their printing work and get bids on from all the printers. Nobody wanted to buy it. A friend of my fathers said, “The construction business actually needs a better bidding system.”

We pivoted this print bidding software into construction bidding where a general contractor would buy and use our software to send out invitations to bid to their subcontractors. The sub would be able to download the plans and the specs and any additional documents or photos.

Prepare an estimate and then submit it through our portal. Then we, because of our connections at our mothership JBKnowledge with the insurance industry, we got into pre-qualification, because that became a big deal after the ’08 collapse. We got into pre-qualifying subcontractors so we knew they’re financially side to bid on the work.

It became a pre-qualification platform and a bidding platform, but not for residential. The only residential that used our platform were big, big, big homes, millions of dollars and up because functionally those projects are so big they’re commercial jobs.

We had heavy highway industrial commercial and super big houses. We had about a third of all commercial construction projects in North America bidding through our platform when I sold it in 2018.

John Warrillow:

Let me see if I understand it, if I want to build a Home Depot and I’m the GC on the job, and I want to get a roofing company to do the roof. I got an installation company and framing. It’s a huge project and so-

James Benham:

Huge job.

John Warrillow:

Each of these sub trades would bid on the job. They’d look at it online and they’d say, “It’s 20,000 square feet.” They put their bid in. The insurance piece is important.

James Benham:

It’s a sealed bid system. It’s important to understand that. The subs, it was not an open auction. That was tried multiple times in the last 30 years and it never works out well in the end. It’s a sealed private bid system. When insurance companies started cracking down on GCs, because subs started defaulting in ’08 after the Lehman collapsed, and the housing market bust, subcontractors started defaulting and then walking off jobs.

For GCs to get builders risk insurance, and really for them to get surety bonds and for them to get SDI sub default insurance, they were required to start pre-qualifying subcontractors. We built a pre-qualification system to make sure they were actually financially qualified to be on the job before they were allowed to submit a bid.

John Warrillow:

I guess there’s a lot of fly by night operators

James Benham:

Yeah.

John Warrillow:

Bid on these giant jobs that have no business doing that. Your software platform, it almost sounds as I hear you describe it a hybrid between a software platform and a marketplace of sorts. Would you agree with that [crosstalk 00:07:39]

James Benham:

Yeah. 100% because we had our own database of subcontractors that the GCs could tap into subs could register and participate. Subs could bid on jobs. We introduced subcontractors to GCs as much as we provided workflow tools for general contractors.

John Warrillow:

How did you get the money to start this company?

James Benham:

Well, 2001, I was in my dorm room at Texas A&M the world’s finest institute of higher education. I go Aggies. I had interned twice with PricewaterhouseCoopers as a security consultant in their audit division. They offered me a full-time job. I said, “I don’t want to do that. I want to start my own business.” I went to my dad and I got him to participate.

John Warrillow:

What does that mean? He invested?

James Benham:

Yeah, he invested a grand total of $68,000. $5,000 initial investment, a $63,000 loan. Then he invested the two phone calls day plus of mentoring me every day for a very, very long time. Then I hooked up with my buddy from high school who was from Argentina, Sebastian Costa. Sebastian joined on with me in ’01 as well.

We started a business. The grand sum total net investment was $68,000. We paid the $63,000 loan off in the first two years. The total paid in capital was $5,000. We bootstrapped this some gone all the way up. We started building websites and ’01. Did custom software ’02, ’03, ’04. I landed my first insurance client in ’04.

Then I started focusing on insurance. Then in ’06 we had this pivot on the bidding system into construction. Our service company is called JBKnowledge. The product company was called SmartBid. They’re separate entities. Certainly, the funding all came from JBKnowledge. It generated profit. We used that profit to start SmartBid.

John Warrillow:

You’ve got JBKnowledge, which is doing custom software projects.

James Benham:

For insurance, yep.

John Warrillow:

Those margins are fat and good cash flow.

James Benham:

You have decent margins. It’s a very competitive because you have a lot of offshore and nearshore outsourcers that are in there, but they’re good enough for us to invest it. The reality is John, that we invested all of our profit for years. I lived off of less money than I made as an intern for about 10 years.

The wife and I ate a lot of ramen and tomato soup, and mac and cheese. Took weekend trips to the La Quinta at 14th in Seawall and Galveston for $69 for one night, because that’s what we could afford. We put all the money, everything we had to building product.

John Warrillow:

What gave you the confidence? Look, first of all, let me just back up. Jason Fried, Basecamp, a famous example of doing exactly the same thing. Building websites by day and taking all the money and creating Basecamp as a product. It’s a strategy that I’ve seen work, and you played it beautifully.

At some level as your family matures, like you mentioned your spouse and at some level there’s this temptation to start taking some money out of the company. It’s like, “I thought you were six successful. We built this great business. “Why can’t we take some money and enjoy ourselves?”

Help me understand what gave you the confidence that SmartBid would ultimately be worth the bet because a lot of people, life is tempting. If you’ve got a business and you’re making money, it’s tempting to buy the car, the house. You didn’t do that. What was it that gave you the confidence that was the right decision?

James Benham:

Well, growth rate is everything. JBKnowledge and SmartBid were both growing. I tried and I guess you could say failed to grow four or five products before SmartBid. I had smart content, smart, e-commerce, smart intranet, smart project, smart enterprise.

I can run you through all and I would spin up a product. My dad always told me to make mistakes small so that you could pivot and not lose all your belongings. I would spin up an MVP, roll it out to market, but I didn’t really understand the most fundamental thing about software, a SaaS business building and that’s sales and marketing.

Functionally, SaaS businesses are software financing companies and you’re there to sell the market the financing of this product that you built. I didn’t understand how to really sell in more market SaaS. That was really where I was learning my lessons. We had some good product, but I did not scale it.

With SmartBid, I had worked long enough for the advertising industry building websites for them that I understood how organic and paid search worked back in ’05, ’06, ’07 way before it was really if thing that the mass market understood.

When we discovered this untapped, I’ll call it relatively untapped niche in construction bidding. I went after it on Google and nobody was bidding on Keyworks. We just ran the table for years on organic and paid search. Just cleaned up on lead flow and when I saw our numbers, our first year out of the gate, we had eight customers.

Second year, we had 32. Third year, we had 60th. Fourth year, we had 100. It was bonkers. Once I saw that the growth rate was going to be there, it was definitely an all-in moment where, where you’re going, “We got to put every dime into growing this thing now.”

John Warrillow:

Did it create tension in your marriage?

James Benham:

Interestingly, no. I married the right person for this endeavor. My wife grew up pretty poor. She grew up the daughter of a school teacher and a “professional billiards player.” Billiards players [crosstalk 00:14:50]

John Warrillow:

Professional air quotes.

James Benham:

I’ll give air quotes on that. They didn’t have any money. She was used to stretching a budget and just didn’t phase her. She wasn’t after me for more money, really ever. I kept waiting at for that to happen for her to just get fed up with it. It just didn’t happen. I saw it happen to a lot of my friends and family members.

Inevitably, money becomes the stressor point. And I was a hardcore, no debt Dave Ramsey guy. I took Financial Peace University a long time ago. My dad was a hardcore any debt guy. My dad could have bailed me out by the way, all along the way. He owned and sold four companies.

He had the capacity to give me a salary or to bail me out and he refused to, and I’m glad he I’m glad he refused to. The beauty of businesses in the struggle. If he had bailed me out, when I was short on money for groceries, I wouldn’t have learned the lesson. The reality is we always ate.

We always had a roof over our head and I’m sure he would’ve come in and helped me out if we were homeless or without food, but he didn’t. He wanted me learn how to build a sustainable business. Thankfully, I married a person who just didn’t care as long as there was some food.

I remember one time I told her to ratchet it down the expenses and she started cooking tomato soup and ramen a lot. Finally, after four days of it, I’m like, “Not that much.”

John Warrillow:

We can live a little, honey.

James Benham:

She used to call me at the grocery store asking if we had money for food. She didn’t ask me in a way that was demeaning. I can’t remember a single time when she made me feel bad about the fact that I wasn’t bringing money in the door. I just don’t remember it.

John Warrillow:

It sounds like in building SmartBid, Google search, organic search, was a big driver. You’re laughing. It was the driver.

James Benham:

It was the organic and paid search. The other thing that really helped me is in 2004 or ’03, I was selling to ad agency’s website development services. I started going to the American Advertising Federation and speaking at local chapters. It turned out I had a knack for professional speaking.

They started inviting me to speak all over the country and paying me to speak all over the country when I was 24, 25 running around, talking about outsourcing and technology and advertising. I, very quickly had refined some abilities in speaking. In ’07, when we rolled out SmartBid, I said, “Well, I need to leave that.”

I stopped speaking to ad agencies that turned down all the offers. I started speaking at American Society of Professional Estimators, because that’s who uses bidding software. I started speaking, I spoke to almost every chapter they had. I think I spoke to over 40 chapters in three years.

I went from having no customers in the room to having half the people in a room every time on SmartBid in about four years. Organic search was all in and still is our number one lead generator, page search, number two, speaking, number three.

John Warrillow:

Were there competitors for the product at the time? It sounds like greenfield, but I’m sure-

James Benham:

There were competitors. The reason we got in was because of I would call it a botched M&A deal. Company called iSqFt, which is now called ConstructConnect, which is owned by Roper, which is the company that ended up buying SmartBid. They acquired a company called BuildFax back in 2004, ’05.

BuildFax was the progenitor. It was the granddaddy of bidding software. It was DOS-based. It would use a fax mode on a computer to robo dial faxes and transmit invitations to bid.

John Warrillow:

It’s an unfortunate name for product in retrospect.

James Benham:

BuildFax, yeah. Everybody used them because it was better than standing at the fax machine and dialing all the numbers. Then they built a Windows-based version. Then they were thinking about web-based and then they ended up selling to iSqFt.

ISqFt instead of creating a migration path for those clients, they sent them a notification they were seizing support for BuildFax, and they needed to migrate. They really did like a big bang forcible migration on BuildFax customers and BuildFax customers were pissed. They didn’t want to be told what to do.

When they looked at the web-based product, they weren’t happy with where it was. Our very first customer was in that exact situation. What we were able to pull and cobble together in ’06 was much closer to what they were used to in BuildFax. It turned out by chance that what we had built for printing was very similar to the bidding process that BuildFax followed just from a workflow perspective.

We didn’t spend a lot of time looking at BuildFax. We didn’t copy it. We didn’t look at it. We just listened to what their workflow was and said, “Let’s build this.” We did and it sold like hot cakes to anybody who had been on BuildFax inevitably would prefer our software.

There was iSqFt, there was GradeBeam. There was a few pipeline. There were a handful of product. There was a lot of greenfield. There was a lot of people using fax machines and Excel spreadsheets.

John Warrillow:

At what point did things start to improve on the cashflow perspective? It sounds like in the early days for eight or nine years, I think in your own words-

James Benham:

Pretty thin.

John Warrillow:

It was pretty thin. Do you remember what changed? Was there a point which really changed for you guys?

James Benham:

Well, first thing after about three or four years, SmartBid started feeding itself because we got big enough that we were able to generate enough cash to pay for most of its own bills. Then at the same time my outsourcing company JBKnowledge, we landed some good size clients in ’08, ’09, and ’10. It all turned right around ’07, ’08 or ’09, ’10.

You’re like seven, eight, nine years into the business when it started turning. SmartBid started being able to create its own food. JBKnowledge started generating more revenue and profit. Both those things happened at the same time. The other really important thing is I had been following Dave Ramsey’s debt snowball on my personal credit card debt and cars and house, and everything else.

I was able to pay off all of my debt following his principles before I really made any money. Then I paid off some equipment we had gotten in the of business where I’d taken loans from Dell to buy servers and because cloud wasn’t really a thing yet. At the same time, we increased revenue, increased profit, paid debt off, and got out of personal debt.

Then, Lehman collapsed in September of ’08. The economy collapsed a month later. Then we actually saw our first slight revenue decline, but we had so much more free cash flow because I personally had no debt service and then the business had no debt service.

Then everything started growing again in ’09, ’10, ’11. That’s really when it that’s really when it got better.

John Warrillow:

As you recover from the financial crisis call it 2012, ’13, ’14, are you starting to get a sense of what valuation multiples would be?

James Benham:

Yes.

John Warrillow:

What are you seeing in the marketplace? What’s your sense?

James Benham:

They’re pretty low back then. We started to getting offers on the business. I remember the first offer I got was for balance sheet cash because they thought I was desperate or something. I don’t remember what it was, but someone really misread my situation and they called me bottom fishing.

It was really before. Now, all the PE and VC shops have boiler rooms where they just churn and burn calls and emails. They make everybody feel like the pretty girl to dance. They’ve really burned out entrepreneurs on this whole thing where entrepreneurs don’t care anymore about inbound calls.

At the time, that hadn’t started in earnest. I started getting offers on SmartBid probably by 20, probably about three or four years in because people saw that we were gaining traction in market share and they wanted it, but they wanted to bottom fish because they saw that I hadn’t raised any money.

They thought I was vulnerable. My first offer was for balance sheet cash. The second offer was for a little bit better than that. iSqFt, I think made two offers over a 10-year period before the third one, when we actually ended up selling, we sold as part of a process. They were one of many people that were at the table.

That was really the key thing for us was just resisting the temptation because I had never seen numbers like that at that point in my life. My dad just said, “That’s nothing after taxes that’s nothing. The business is going to be worth a lot more than that.”

He really helped keep me at bay from giving into the temptation to exit early or to raise money. Both of which I’m really glad I didn’t do.

John Warrillow:

It sounds like that was pretty tempting. On a multiple of revenue basis, what were the two iSqFt offers that you turned down?

James Benham:

I don’t remember, honestly. I know that we started getting multiples and mind you multiples sucked in ’11, ’12, ’13, but I think we started getting multiples of everything in software as a service is multiples of ARR in your recurring revenue. No one cares about your EBITDA as long as it’s not too negative, they don’t care. They really just want to look at growth rate.

I think it was two or 3X ARR was a lot of them. They didn’t place as much value as they should have on the business. Our growth rate was good. We were in the early double, double, double phases of revenue where you’re doubling every year for the first set years, until you start hitting much bigger numbers, then it gets harder to double.

It gets way harder to double without injecting a lot of capital into marketing budgets and sales people that don’t always work out. My dad always had an analogy that growing a business is like rolling a ball down the hill. Gravity and friction are going to keep that ball rolling exactly at the speed that it wants to roll. There’s only so much you can do to get it started.

He said, “At some point you can’t apply more pressure onto the ball to roll it down the hill. Total addressable market share, you have competitive forces. You have a lot of things that come into play that eventually you can’t influence your growth rate as much as you’d like.”

John Warrillow:

You’re batting away these in your own low ball at least in the beginning.

James Benham:

It was like cash, balance sheet, 1X, 1.5X, 2X, 2.5X. I would have meetings just so I could learn how it went. As soon as they started talking multiples, we dismissed it and moved it on.

John Warrillow:

What changed? What triggered you to want to sell it?

James Benham:

A really good buddy of mine told me a story. I don’t mind saying who it was. This is my story so I’m not disclosing anything confidential. My buddy Rob Nixon told me a really great story about selling a cow. It really had an impact. Rob’s dad had a prize cow in Australia and it was worth a lot of money, a lot of money.

He got offered incredible sums of money. I want to say it was hundreds of thousands of dollars in the 1980s. He didn’t sell because he was convinced he could get more money the next year and the next year. After he turned down the big offer a few weeks later, the Australian beef market collapsed.

The cow was worth nothing. He said, “James, my lesson was that sometimes you have to sell the effing cow.”

John Warrillow:

Knowing Rob, he didn’t use effing.

James Benham:

No.

John Warrillow:

He actually extended that.

James Benham:

Yeah, he extended that and I looked at him, and I love Rob. Rob is such a good person. He really impacted my life. When I joined in my EO forum, I was convinced that I would never sell anything. I was just going to hold everything forever. There are those stories.

They are few and far between, but once I started visiting other tech companies and visiting private equity groups and DCs, I realized that not all the private equity groups were bad people. Actually, some of them really great. Not all the VCs are bad people, some of them were really great.

As a bootstrap entrepreneur, you get this island mentality, “They can’t be good if it’s not bootstrapped.” That’s just not the case. I started meeting a lot of people that were really good people that were involved in that. Then, I started having conversations around that. Then I started getting this feeling like we were probably going to reach our optimal value point.

The multiple of ARR are based on growth rates in SaaS. I started seeing growth go from 50, 40, 45, 30, 35 because we were doing larger numbers. I kept investing in plowing in, but I wasn’t getting the really crazy growth rates. I was like, “If I’m really going to spike growth again, I’m going to have to raise money or sell.

I don’t want to raise money because I don’t want to have a board. I don’t want to have investors.” Really, the optimal outcome for me was to keep almost all the people and sell the product. Well, it’s very hard to do. I didn’t want to be an employee of somebody else. That’s why in 2017 I started a process.

I found a guy named Andrew Sherman. Andrew actually filed the incorporating paperwork for EO.

John Warrillow:

Its funny you mention that. He’s EO long-time guy.

James Benham:

Andrew is one of my very, very close friends now. Found out that he’d written 26 books on M&A. He’d done over 330 transactions. He’s my Jewish brother from another mother, man. Andrew, I just love this guy. We connected, he flew down to Texas. For the first time, I was like, “I can do a deal with this guy.”

He picked my brain. He goes, “James, you already know everybody. You already know 90% of people that would be potential buyers. Then I’ll fill in the gaps and we’ll go target the nontraditional and nonconventional buyers.” We put together a deck and put together a process.

At that time, I was getting a lot of inbound inquiries, a lot. I knew that either I had to do something either I had to decide I wasn’t going to do it, and just hunker down for a long, slog out was some new and old competitors I had because the market got really crowded by this point. A lot more choice, a lot more competitors.

John Warrillow:

You’re growing roughly 30% top line year over year, 2017, 2018?

James Benham:

16% 17%. Yeah, somewhere around there.

John Warrillow:

16% 17%. Just to be clear 16% 17% top of dollar?

James Benham:

I don’t remember. It was somewhere around there, ballpark estimates. We’re still growing. Life’s still good. We’re still making money. We still have no debt, no investors. With the amount of inbound interest and with the competitive pressures I saw mounting, it looked like a good time that I met the right guy to do the deal with.

John Warrillow:

How many people did you go to? Did you do the classic anonymous teaser to CIM? Did you follow that process through?

James Benham:

Yes.

John Warrillow:

How many people on the teaser list [crosstalk 00:32:41]

James Benham:

It was probably pretty big. It was dozens. I want to say we had about a dozen people express interest back.

John Warrillow:

Signed the NDA and got the same?

James Benham:

Yeah.

John Warrillow:

Of the dozen, how many submit together an offer?

James Benham:

I want to say four or five, but together good offers. Then, there was a little bit of a bidding war and then we got where we wanted.

John Warrillow:

I want to explore the bidding war before I do that though, because you were quite clearer in your own mind, I believe preceding this process that you didn’t want to be someone else’s employee?

James Benham:

Correct.

John Warrillow:

You wanted to keep JBKnowledge separate. You wanted to keep the employees. Now, did you telegraph to or did you communicate that to the potential buyers that those were your hard lines in the sand? Did you wait further into the process to reveal that information?

James Benham:

Well, I waited because you never know. What if someone presents something to you that’s a non-traditional I didn’t know what all the structures were going to be like. I knew I wanted to be able to retain control over things. I knew it’d be challenging. I knew that would probably rule out private equity buyers.

John Warrillow:

Why?

James Benham:

Well, because the only people that would let me keep all the engineers is a strategic who wanted me out of the way or already had their own engineering teams. The private equity guys they’re buying a cash machine and the cash machine doesn’t run without the people.

They don’t have a spare team to throw in. A strategic would be the only real one that would give me the deal structure I wanted. I had to discount any interest from private equity groups pretty early, because I just knew that their multiples wouldn’t be as good.

That ended up being the case and their deal terms wouldn’t be as good, and that ended up being the case.

John Warrillow:

I know before we hit record, we talked about whether you could share the sale price, and I know you cannot. My listeners wondering why hasn’t he asked James about revenue? The reason I haven’t asked you about your revenue is we want to talk about multiples of revenue.

Obviously, if we reveal the revenue, then it’s easy to back into it. At this point, let’s not use revenue, but how big are you in terms number of employees or number of customers, some proxy for the size?

James Benham:

I taught publicly about customer accounts. We had the receiving bids, we had a quarter million companies receiving invitations to bid and bidding on projects. We had 1,143 paying clients.

John Warrillow:

That’s weird that you can remember that. That’s a weird, weird, weird thing to remember. How on earth do you remember that?

James Benham:

I don’t know. I really liked all of them.

John Warrillow:

You had 1,100 customers.

James Benham:

I had 143 of the top 400 in the world used us. We had a bunch of large in enterprise deals. We had built the software to scale and work well for large multi-billion dollar contractors.

John Warrillow:

How many employees dedicated to this SmartBid product?

James Benham:

Probably 60 or something, 60 or so. When you have a, when you have a multi company strategy, you have some shared overhead. That’s why I say or so, because the outsourcing company outsourced to the product company, and so you end up with some shared allocation.

John Warrillow:

What was your reaction to the four offers that came in?

James Benham:

I was excited. One of the reaction is it’s going to be one of your bigger sales you’ve ever done and you put together something, you wonder if people are going to submit. I’d heard countless stories. I still hear countless stories of people running processes and getting nowhere with it.

I hear stories about that all the time. You certainly wonder if all the people that say they’re interested are actually going to be interested once they get the CIM and course the reality is [crosstalk 00:37:02]

John Warrillow:

CIM is Confidential Information Memorandum, but basically a book about the business, all the details.

James Benham:

It was exciting. I was very nervous about whether or not we’d actually be able to execute a transaction. Like I thought it would, it came down to strategics and the strategics had some good serious offers. They bantered back and forth. Obviously, it was a not a public bid.

John Warrillow:

Those four offers, can you share range multiple of revenue low end to high end?

James Benham:

No, I don’t. They were all in a very close proximity because we ended up selling for 6.8 times ARR somewhere around there. After all the deal got done, it probably ended up being about seven times ARR, Annual Recurring Revenue.

They were all in the neighborhood. The real differentiator was the deal terms. What happened to me and what happened to my team? That was the big thing that I was concerned with is what happened to me, what happened to the team?

John Warrillow:

How did the offers to treat those two things?

James Benham:

Well, they’re very different. The one I picked ended up being the one that gave me the best terms that I wanted to have, which was the ability to keep my engineering staff, the ability to keep my support staff. The ability for me to not have to go work for the company, for my partner to not go work for the company. That was the big thing that I was really focused on.

John Warrillow:

It’s the dream exit for so many entrepreneurs.

James Benham:

The old terms are everything, because they either puts you in handcuffs and your team in handcuffs, or they liberate you. In this case, I care a whole lot about my people that work for me. If we were going to sell this asset and I believed, and I ended up being right in this case that it was at the right time to sell.

After I sold some other acquisitions occurred that ended up making it very hard to compete in that space. In this case, I ended up being correct on timing. It would’ve been bad for our business and bad for our teammates. The best thing for me and the best thing for the teammates in this case ended up being aligned. That it was the right time to move on from this for us.

John Warrillow:

What is your dad’s reaction to the four offers? What advice did he share with you?

James Benham:

He just always told me to have your number in advance. Just have your bottom line. He made me go through a process of having the bottom line before we went into it.

John Warrillow:

What questions did he ask you in order to arrive at the bottom line?

James Benham:

Didn’t. My dad is remarkably simple in his advice to me. One time I asked him how he dealt with the stress and anxiety of building and bootstrapping a business and he responded back, “I just don’t think about it.” I was like, “That is not helpful, father.” In this case, he just said, “You just need to have your bottom line. How much is it you’re going to make it worth giving up this thing that you love.”

I love SmartBid. I still love it. It’s still doing well in the market. From a multiple perspective, others sold for higher multiples, other venture capital back businesses sold for higher multiples than we did. I’m okay with that. They had to give up a huge portion of their deal proceeds. They got crushed down on their cap table. They had liquidity preferences.

They had multiple investor groups. You can go through a bunch of deals where they sold for higher multiples. There was recently a construction technology company that sold for 25 times ARR, 25 times. You end up wondering, we had competitors that sold for 13, 14, 15 times ARR.

You just can’t get hung up on it. My dad always told me that too, “You’re going to do a deal when it’s done move on and it’s over. Get over it.” That was definitely the case. I don’t care about those other deals. Those weren’t my deals. That wasn’t my cap table. My cap table had no outside investors on it.

John Warrillow:

It’s just you, Sebastian, and your dad.

James Benham:

I don’t care what their multiple was. I don’t care what their deal size was. I don’t care what their deal terms were because it’s not my company. It’s not my deal. This was my company. This was my deal. It was the best thing. If you look at the last four years of JBKnowledge and our new products that we built and our teammates, this was the best thing for us and the team.

It allowed us to focus on InsurTech. It allowed us to capitalize on a massive investment. We had plowed a lot of profit into this business. We had to get it out at some point. We either had to get it out through cashflow and we ran it at break-even in the last years. We had to come back at some point, otherwise it wasn’t worth it.

I was happy we sold. It was the right time for us. It was not nearly as high as some multiples I’m seeing now. I don’t care. It’s a really interesting emotion that you get. I loved the product and I miss talking about it, but I love my new products even more because it’s our new thing that we’re doing.

John Warrillow:

[crosstalk 00:43:09]

James Benham:

We started a new product called TerraClaim and it’s really starting to take off. We took a product that we already had SmartCompliance and we’ve almost quadrupled the size of SmartCompliance since we sold SmartBid in 2018.

John Warrillow:

How did the acquirer deal with your non-compete?

James Benham:

Well, that’s why I’ve stayed out of the construction bidding and estimating space.

John Warrillow:

So that it was confined to that category [crosstalk 00:43:43]

James Benham:

I don’t want to talk about get into specific deal terms, but there’s a reason I stayed out of construction bidding.

John Warrillow:

Are you ready for a quick lightning round of questions before we wrap?

James Benham:

Sure, yeah.

John Warrillow:

What was the slimiest trick a perspective acquirer used in trying to buy your business?

James Benham:

That’ll be a tough one. I think I had one that really led me on to believe they were going to submit a serious offer and they drag as much information out of me as possible and ended up acquiring a competitive company. That felt pretty slimy. It appeared that they had been talking to them for a long time.

I think that’s probably a more common tactic is people while they got a real serious one on the hook, they initiate an M&A process with all the competitors so they can gather as much competitive Intel as possible before their main deal is announced. That’s probably the one that felt the worst.

John Warrillow:

Biggest mistake you made personally in the process of selling your company, selling SmartBid?

James Benham:

I probably should have over communicated the process more once we announced it internally, I should have over communicated more to my team. We follow EOS in our company, Entrepreneurial Operating System. They say you have to repeat things seven times. I feel like during an M&A process you have to repeat it 17.

Just to make sure everybody understands what’s going on and who’s where, and what’s going to happen because it can be really traumatic to people. Even though they’re staying, they still want to know what’s happening. Nobody lost their job in this transaction. We had a few people that had to go with the company.

It was a small group of folks and I negotiated handling that to make sure they were okay. Had my team and everybody was set and nobody lost their job. It was still very traumatic for them and I could have communicated better.

John Warrillow:

Lowest emotional point you reached during a sale process?

James Benham:

The day the wire hit the account. It’s totally anticlimactic. I was on a commercial flight to our road show in Seattle and the wire hit. I was by myself and that was terrible. It was really bad. I wanted to be with my family.

It was tough to be by yourself when something that big happens. Then it was just exhausting because the race was over and that was a pretty tough day.

John Warrillow:

That’s interesting. Oftentimes, it’s the highest point for a lot of people, but in your case-

James Benham:

No.

John Warrillow:

What was the highest point?

James Benham:

Probably, when we inked the letter of intent and I got the signature that they were going to buy it because then the due diligence process there’s all this excitement about due diligence, and telling people there’s a lot to do. By the time the wire hit, we had consummated the deal, we’d signed everything. Everybody had been notified.

We had done publicity. It was the thing that really matters is you got the money. The most exciting thing was definitely like inking the deal and agreeing to sell to these folks. They’ve been competitors of mine for years. In fact, we’d had a pretty tense competition.

The other side CEO and I had always kept a good relationship individually, and that really helped get the deal done. When it got tough, he and I got on the phone with each other and we sorted it out, which was really cool. It was the most exciting thing was getting the deal inked.

The most anticlimactic and I had a really hard time for a few months was it started when the wire hit.

John Warrillow:

Were there any resources that you turned to books, conferences, anything that you could point to that helped you learn about the exit process?

James Benham:

Andrew has written 24 books on M&A I want to say. I think one of his best ones is called Harvesting Intangible Assets. That’s a really good book. Other than that, I really leaned on EOS big time. EOS talks about the business life cycle and this being part of it. We just really clung to EOS and our methodologies, and our three-step process documenter. We really clung to that.

John Warrillow:

Last question then I’ll let you go. What trophy did you buy yourself? I think I know the answer to this, but what did you buy yourself to celebrate and commemorate this win?

James Benham:

2001 Piper Saratoga II TC. It was a six-seater. It was about a 17-year-old plane. I believe in buying used assets, I don’t buy anything new. It was a great airplane. I built a lot of hours in that.

John Warrillow:

You’re saying it past tense. What happened to it?

James Benham:

Well, I sold it and bought something bigger.

John Warrillow:

What do you have now?

James Benham:

We’ll keep that on reserve off the podcast.

John Warrillow:

What was the range on the Saratoga?

James Benham:

I think 600 miles or so. I would only fly at about two and a half to three hours comfortably and it would cruise at about 175 knots. I think the full range, but you would never fly it that far. I bought my dad’s old Piper Aztec from him and that has extended tip tanks.

I still have that plane because it’s been in our family since 1976. On that one, I can fly that plane for about seven hours without stopping. I call it the Az truck. If I do a lot of dog rescue flying, I fly rescue dogs around to get to their forever homes and I’ll pack the Aztec full of dogs and then go take them to their forever home.

John Warrillow:

That’s a hell of a picture.

James Benham:

It’s fun. I got a lot of pictures of it. I think I’ve flown probably I want to say now it’s probably over 70 dogs to their forever home. I’m doing another rescue flight tomorrow. Bringing a dog from Austin down to Tampa tomorrow. He got pulled out of a rescue shelter.

John Warrillow:

Good for you. You’ve got a book coming out. Tell us where to find that? What that’s about? I know your time is precious. Just a quick hit on the book.

James Benham:

You can go to jamesbenham.com. Sign up for more information. The book’s called The Bootstrapped Entrepreneur. It’s about all the lessons I learned in bootstrapping. I’m not the most successful bootstrapped entrepreneur ever, but we’ve had a good run of it. I thought it was good to write it all down.

Also, talks about how to, how to bootstrap innovation at large companies. I think that’s a skillset that’s been long lost. I pulled a bunch of case studies from people that I’ve worked with over the years on how to take a large company and bootstrap on a budget so you’re not always at the tiller trying to raise more money from your internal investment committee.

We talk about that at The Bootstrapped Entrepreneur, but my website is JamesBenham.com.

John Warrillow:

That’s awesome. Jamesbenham.com, The Bootstrapped Entrepreneur is the book. Thanks for doing this, James.

James Benham:

My pleasure. Glad to be on.

John Warrillow:

I hope you enjoyed my conversation with James Benham. For show notes including everything we referenced in today’s episode, the Dave Ramsey course, the Andrew Sherman book, Rob Nixon’s website just go to BuiltToSell.com. We also include definitions for some of the lingo and acronyms we used during the show.

Again, BuiltToSell.com. While you’re there, consider nominating a guest. As I mentioned in the intro, James was a nomination from Rob Nixon. If you have someone who you think would make a great guest, please nominate them again, BuiltToSell.com/Nominate.

If you’re wondering how you can support the show, a review on your favorite podcasting platform is the very best way you can give back to the show. Please consider that. While you’re there, hit the subscribe button so you never miss an episode. Today’s episode was produced by Haley Parkhill.

Special thanks to Denis Labattaglia for handling the audio and video engineering. Thank you to the entire community of Certified Value Builders™ who help us bring our message to you. My name is John Warrillow, and we’ll talk to you next week.

 

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