How This Service Business Got Almost 20 X EBITDA

Transcript

Jonathan Shroyer:

Customers are the heart of their company. And if they want the heart to be healthy and the body to grow, then they have to listen to what the customers are saying. They can’t just push them to decide and do just enough to keep enough engaged, to keep the numbers going. If you want to be a market leader, you have to take care of your customer.

Colin Morgan:

Hi there, and welcome to another edition of Built to Sell Radio, the podcast designed to help you punch above your weight in a negotiation to sell your business. Now, as you were probably well aware at this point, I am not John Warrillow. I am not the host of Built to Sell Radio. My name is Colin Morgan. I am the new executive producer here of the podcast. Now, not to worry, John will continue to do all of the interviews here on the podcast. He’s the one going to be talking to the guest, asking the questions. I will take on more of a co-host role here for the podcast. So, while John is out running his company, I am solely here for you to provide you with as much value as I possibly can. Now, today on the show, we’re going to be hearing from Jonathan Shroyer who sold his service company, Officium Labs. Forget this, around 20 times EBITA.

But before we jump in to today’s episode with Jonathan, I just want to make a quick note. You’ve probably been hearing this from John for the past few weeks, but we are really making an effort to improve our show notes page. So, you can head to builttosell.com/radio. And there you’re going to find references to everything that is mentioned here in the podcast today with Jonathan and John. Now I’ve not only added the references to today’s podcast, but you can also find the official press release of Jonathan Shroyer’s sale in there, along with the definitions of today’s podcast. So, some of the lingo that John and Jonathan are going to be talking about, I’ve myself found super helpful to head over to that show notes page. So, you can kind of follow along and get a better understanding of the language that is used during today’s podcast episode.

Lastly, before we get into today’s guest, I want to let that if you have an idea for a guest, I’d love to hear from you. I do all of the research about potential guests and who I think would be a great fit to come on the show and talk to John. And each week, John and I sit down and chat about who would be a great fit. Therefore, if you know of a cool story or even want to nominate yourself, you can head over to builttosell.com/nominate and get in touch with me there. Okay, so now let me tell you about today’s guest, Jonathan Shroyer, who, along with this co-founder Scott McCabe started Officium Labs. Now, Officium Labs essentially helps clients turn contact centers into profit centers. And after two years of seeing some incredible growth, they were approached by three investors to acquire Officium Labs.

Jonathan ultimately ended up selling to a rise for, as I mentioned above around 20 times EBITA. Now, during this episode with John and Jonathan, some of the things that they’re going to cover in today’s conversation are things such as how to increase the lifetime value of a customer. How to choose the ideal time to sell your company. How to maintain happy and healthy relationships with your suppliers. How to structure and earn out to minimize your risk as the owner. How to ensure employees don’t rebel against your acquirer after the sale. How to avoid getting bullied by an acquirer by asking the right questions. How to maximize your shot at hitting your earn out, and how to prepare yourself emotionally to be acquired. Here to tell you the entire story is Jonathan Shroyer. Enjoy.

John Warrillow:

Jonathan Shroyer, welcome to Built to Sell Radio.

Jonathan Shroyer:

Hey, thanks, John.

John Warrillow:

Okay. So, Officium Labs. Dumb this down for me. Explain the business to me like I’m a child. What did you guys do?

Jonathan Shroyer:

Well, essentially, my co-founder and I Scott, we worked in the services industry for about 20 years. And one of the biggest challenges that we found is that it was difficult for service leaders to communicate the revenue opportunity that service teams create inside of a company.

John Warrillow:

Got it. So, if I’m running the call center at Delta airlines and the CFO just looks at me as like a call center and a call center, I should say. And you’re like, “Well, no, hold on. If that Delta person can upsell a business class ticket, they’re not a call center anymore, they are a revenue generator.” That’s requires-

Jonathan Shroyer:

That’s right. That’s part of it. But the other part of it is that Delta representative can protect future revenue by delivering a great experience to that customer who’s really angry because their fly was delayed or their luggage is missing or whatever. So, it’s that concept. And so, I invented a framework called the service tech maturity model and the framework essentially helps companies create best in class service operations to prove out revenue, we call it revenue protection or revenue attribution. So, think of it like protecting the revenue from your current customers. And then revenue attribution is when you have future revenue that could come from that current customer because of good experience.

John Warrillow:

And was that like scratching your ridge? I know you ran CX teams for big, large enterprise customers. I mean, did you have the experience of the CFO look at you and saying, “Come on man. Why are you so expensive?” And you had to demonstrate, with a spreadsheet, why you are worth it kind of thing. Was it was sort of scratching an itch if you will?

Jonathan Shroyer:

Jonathan Shroyer Yeah. I mean ever since ’97, ’98, when I started for 20 years, it was just like, why do we have to spend so much money. Outsource here, move this here, move this. It was always about optimization. And I always look at like services in two ways as a startup founder. One is protect. You want to protect the customers, you acquire. Protect, meaning, keep. And then the second is optimized, and optimize is you want to deliver the most efficient cost experience to deliver the protection. But protect should always be number one.

John Warrillow:

Yeah, for sure. How did you guys make money? In other words, what was your business model at Officium?

Jonathan Shroyer:

We started off with licensing the maturity model and then building out consultative services around it. So, we’d go in, we would do an assessment of the operation. We’d let them know where they’re best in class, where they weren’t. In the maturity model, we have 100 features of CX. We won’t go into the details of that, but there’s 100 features. And so, we’d identify with clients like how many features they had across the different buckets that we had developed. And then we’d let them know which features they needed to invest in and if they wanted to deliver protection, attribution and so forth.

John Warrillow:

I don’t want to go into 100, Jonathan, but I would love to know, just so the listener can kind of get it. Can you give me an example of one of those features that was in the maturity model?

Jonathan Shroyer:

Yeah, for example, in our engagement pillar, we have, if you’re best in class and engagements, you have what we call agent AI assist. And what that basically means is that you have a hybrid AI slash human agent that services the customer so that you can get a cost-efficient experience. So, the AI writes 80% of the response, but then the agent comes in and reviews it, customizes it, personalizes it and sends it off. But you only have to pay half of what you’d normally pay for a human because the AI does most of the work. So that’s an example of the feature.

John Warrillow:

So that’s super helpful. So, if I’m getting this right, like when I take my car to the mechanic, they pitch me like, “I’ll give you the 100-point inspection.” And like, “We’ll do your tires. We’ll tell you if you need oil these days, or whatever.” So, you would, in a much more sophisticated way, work with an organization and do this 100-point audit called the maturity model where you would identify and give them marks, give them the face, in fact give them a score on each of these 100 different things. And then you could par that back to, or show them the report and say, “Look, you’re underperforming on these things relative to your peer group. You might want to invest in this or that,” if I got it basically right.

Jonathan Shroyer:

Yeah. I mean essentially that, and then we create a game for their leadership team, because I mean, there’s always more than you can do in a year. Usually, we find 20 to 30. And normally you can only introduce maybe nine to 12 features in a year or 18-month period. And so, we create a game with a monetization an economy where they can only buy one third of the features, but they have to work together as a team to determine which third of those features that they want to buy. And then that informs the strategy and the roadmap that we build for them that they can then execute against.

John Warrillow:

Got it. So, revenue stream is licensing the maturity model and then the consulting services on the sort of back of that. Was there a third revenue stream?

Jonathan Shroyer:

Well, that’s how we started. And then as we kind of started with a number of large gaming companies, what we found is they’re like, “Hey, you do this cool thing over here, helping us build the future. Can you also support our customers with the actual human beings and the agents that talked to?” And so, then we launched our second line of business. At that time, it was called Connect. It’s now called Arise Gaming, where we have thousands of frontline resources that provide the best-in-class services to engage and talk with the players of the games and so forth.

John Warrillow:

I’ve heard that JetBlue was recruiting people who were out of the workforce or coming back into the workforce. And were like, “I don’t really want to go to like a big office somewhere, but I’ve got four or five extra hours while the kids are at school or whatever.” I want to use that time. And so, they sign up and become like a JetBlue representative. So, you’re effectively a staffing agency for these people. You’re not hiring them full time and then reselling them effectively to these brands. You are enabling the transaction, but they’re billing effectively by the hour. Is that that the model or…

Jonathan Shroyer:

Yeah, I mean, essentially, it’s similar to that. So, you can kind of think of it as the gig CX model, where we have these decentralized resources across the globe. I think we’re in like 11 or 12 countries now. And we provide them an opportunity to leverage their time. To get interesting experiences and make money, but also to live where they want to live. A lot of companies’ force, even post COVID, they’ll force you to go back in the office, move closer to one of the tech hubs or HQ or whatever. But here we’re like, no, let’s, let’s diversify wealth across the globe and give people opportunities wherever they want to live.

John Warrillow:

But how did you make money on that job?

Jonathan Shroyer:

Sorry, go ahead.

John Warrillow:

No, sorry. I was just going to say, how did you make money on the staffing piece? Did you take a cut of all the hours that you out? Was it sort of…?

Jonathan Shroyer:

Yeah, so we do a two-prong approach. One is we do kind of an hourly rate, but we do an outcome-based pricing, which is really new in the industry. So, we don’t believe that you should just pay us, let’s say it’s $20 an hour or whatever, we’ll say 20 for this example, don’t pay us $20 and hope that we’re going to deliver a good service for you. Why don’t you pay us less? Why don’t you pay us 13 or 14, but give us the opportunity to earn 23 or 24 by overdelivering or delivering against that expectation? So, we call it outcome-based pricing. And so, it enables us to deliver and be motivated, incentivized to in our kind of service partners to be motivated, incentivized to do a better job,

John Warrillow:

Man, that is like the holy grail for anybody in the consultancy space or IP where it’s like, I want a piece of the upside here if we can have an impact. Especially folks who believe in their product. The challenge though, is always like, how do you measure it? And if there’s an improvement in customer experience or lifetime value of a customer or longevity of a customer, it’s always like, yeah, but that was the product, or that was better marketing or like whatever. How did you measure that no, no, it’s our impact that is moving the needle here and not some other element of the business?

Jonathan Shroyer:

Well, I think there’s a couple different things. So, what we traditionally do with a client is we service them for about three to six months and that gives us the data set to come back and say, “Okay, based off of our experience, these are the metrics that we can really improve, move and manage.” And if they align with that, then we all can, “Okay, these are the targets that we need to achieve over the next year.” And then we move to outcome-based pricing. In some cases, we already know because we’ve been doing their consulting for a while, so we already know the metrics. And so, we can just start off with outcome-based pricing. But for a new client, because we don’t want to over promise under, deliver, under promise, over deliver. We want it to be really impactful to their business, but even so the number one thing that most gaming clients and other clients they suffer with is unexpected spikes or unexpected volume.

And so, because we have at Arise, we have 75,000 global workers globally, or service partners is what we call them, but we can flex up and down. So, service level, that response time, how fast do you respond to the customer, is one that’s everywhere, regardless of the business, response time is key. But when it gets a little bit difficult it’s okay, well what after response time? Is it a customer effort? Is it customer satisfaction? And what is it? Quality scores. What is that’s going to move the needle for that particular customer? And so, we customize that with each client.

John Warrillow:

So cool. And I’ve heard firsthand experience with this recently, because of course the pandemic, hopefully a little bit more in the rear mirror now, we’re traveling more. And of course, the travel industry destroyed because people have left, and so you wee times. Like renting a car back in March was like, you’d have these long lineups, you get a phone to try to change a flight, it’d be like you’re the hold for hours. So, to your point, the ability to accordion sort of style up and down is huge. I think I understand the business model. I mean, what I find amazing is you guys started in 2019, you and Scott, if I’ve got this number, correct me if I’ve got this right. And then sold in 2021, 2 years later, I’ve got a couple dozen employ, like 25 employees, something like that, that’s hyper growth over two years.

Jonathan Shroyer:

Yeah. I mean, we started with four people and our only funding mechanism was $150,000 loan. And we just said, let’s go and see what the market says. And in two years we made over 10 million in gross revenue and we were kind of at the… So, it was super, super high growth for the first couple years of a services startup. But then we were like, “Hey, we need to go to that next level. We need to go from like 10 million in two years to how do we get to 100 million book of business in one year?” And so that’s where we started to look at, should we go the VC route? Should we go the loan route? Should we go the acquisition route? To see what was the right mix for us to be able to scale, to build $100 million gaming consulting business.

John Warrillow:

And I want, I want to get to that next because I think it’s such an interesting inflection point for a lot of entrepreneurs. So early in their journey, they realize the business is working, there’s a lot of upside. Do they self-finance it and grow perhaps more slowly, retain all the equity or bring in a partner and grow? And I think a lot of our listeners are in that fork in the road right now. And I think, that’s huge. This is a goofy question, but I’m curious because of course, how things are financed are critical. Your $150,000 loan, who backstop that? Was that equally cost time by you and Scott, or did you have a silent partner or who kind of fronted that if you will?

Jonathan Shroyer:

We incubated inside of a company called Forte Labs. You might have heard of them recently because I think they got several hundreds of million dollars in their latest series. They’re the cryptocurrency gaming platform. So, we actually started off as their customer success service team. And then I had a conversation with Kevin Chui, who’s the chairman. And I said, “Hey Kevin, we should spend this out and we should do this decentralized services, revenue-based services for everyone.” And he agreed. And so, he gave us $150,000 loan and that’s how we spun out. And then Forte was our first customer and then Rally and another spun out of forte was our second customer. And then we just kind of grew from there. And in two months we had four or five customers and we were profitable. And so, we’re like, we think we’re onto something.

John Warrillow:

I love the fact that you in incubated inside a company, because it obviously reduces your risk and you got the client. Did Forte take a piece of equity for that?

Jonathan Shroyer:

Anytime that you have that investor that’s willing to give you money, there’s always, always going to be equity on the table.

John Warrillow:

That makes. So, you had Forte, you and Scott as the equity holders, any other sort of outside equity holders?

Jonathan Shroyer:

No.

John Warrillow:

That makes sense. And you were able to get to over a two-year run, 10 million. Was it sort of five and five or were you more on the hockey stick growth like two and eight? Do you know what I mean?

Jonathan Shroyer:

Yeah. It was more hockey stick. I think the first year we were in the neighborhood of, I think it was around three and a half. And then the second year we went kind of hockey stick, six, six and a half. And then this year, I’m part of Arise so I don’t think I’m allowed to say my revenue anymore, but this year you can imagine that the hockey stick is continuing to grow.

John Warrillow:

I want to get to Arise because I think it’s a a really cool story. Before we get to those, so you’re you were getting into this sort of description of what triggered you to think about maybe partnering with someone. So, it’s you and Scott, you’ve got Forte as partner, non-operational. You are you’re at this fork in the road where you could grow organic. I mean, you are successful. Is the company sucking cash at this point to finance the growth or were you able to keep the cash flow model positive despite the growth?

Jonathan Shroyer:

No, we had really good liquidity. And so that was great. That’s one of the biggest challenges of a startup I think, is liquidity. It’s not profitability. It’s keeping the business running because-

John Warrillow:

Exactly. Because you charge for the licensing of the maturity model kind of upfront or like… How did you keep the cashflow positive?

Jonathan Shroyer:

Well, some of it’s upfront and then some of it’s like net 30, net 45 or payment. So that’s why you need the liquidity. And then a lot of times, if you don’t charge upfront, liquidity’s going to either be your best friend or your worst enemy in the early days of a startup. But no, we really thought about how do we scale the business sustainably? When we built our set of core values, sustainability was a key component to Scott and I’s belief. I was part of Postmates in the early days before Uber acquired them. And when I was with them, they were growing 10% per week.

John Warrillow:

Unbelievable.

Jonathan Shroyer:

And so, it was insane, but it was difficult to sustain. The CX experience was difficult to sustain other things. And so, I really wanted, I was like, we could grow and we could burn a lot of cash and grow or we can grow sustainably and build a solid book of business. And so, we decided to grow sustainably. So, it could have been a faster growth pattern, but we decided not to go faster.

John Warrillow:

What was the cashflow model on Connect? So, I’ll make up a name, Delta Airlines for fun, and I say, “I really want the Connect product. I want you to give me like a flexible workforce, the gig CX team.” Did you charge Delta front and then pay the individual partners at like 30 days later? Or how did that happen?

Jonathan Shroyer:

No, no, we didn’t pay as you go with the clients. And we would just pay the partners, I think it was every week or two weeks or something.

John Warrillow:

But after you received your cash, I’m assuming.

Jonathan Shroyer:

No.

John Warrillow:

Oh, okay.

Jonathan Shroyer:

If you want to keep loyal service partners, you have to pay them right after they do the work. I mean, there’s so much competition out there in the globe for decentralized workers. If you wait to pay somebody a month or a month and a half until you get the pay, you’re not going to get loyalty. They’re going to leave you for the next brand. And that’s one of the reasons why when we launched the Connect brand, we did it six or seven months after we had the transform brand, it’s what the maturity model is. Because then we had enough liquidity in the bank where we could front load those costs without her having to worry about additional funding.

John Warrillow:

It’s funny because I did a Built to Sell Radio episode, oh gosh, three or four years ago, with a guy who owned a staffing agency and I appreciate their differences between your model and his. But the similarity was that client would pay him and he would then pay these employees. And he was growing quickly and the timing almost killed the business because he was paying the workers weekly. And then he was waiting 30, 45, 60 days to get paid by the brand. And he was like growing like stink and thinking things were great, but he was his cash balances were dropping dramatically and he ultimately almost killed himself.

So that’s maybe why I was asking more specifically about the cash model, but it sounds like you guys had it much more dialed in. Got it. Excellent. That’s super helpful. So, you’re growing, you’re financing successfully, was there a kind of a straw that broke the camel’s back or like a triggering event that lit the match that said, “No, we really need to find a partner here?” Like, was there a day of the week that you can remember sitting down with Scott saying, “We really need to find a partner?”

Jonathan Shroyer:

Well, we had, I think two or three kind of aha moments. I think one was for anybody that has gone from like 10 people to 50 people, to 100 people. The GNA and the S and M, sales and marketing, and the general kind of support cost, they go up demonstrably. And so, we started to look like, okay, we’re continuing to scale and grow the company, but legal costing, more finances costing, more IT. We’re starting to become a target for fishing and other things. So, we got to do all those support services in a best-in-class way, HR, those types of things. So, we were like, we got to figure that out. And we don’t have anybody in the company that has that kind of expertise. And so that was one kind of aha moment, that I could think about.

The second one was even though we were super successful, our credibility to market was still young. I could go and get business from people in my LinkedIn network that I’ve heard personal relationships from, but I could not go and get business from Delta, since we’re using Delta today, I don’t know anybody at Delta because I don’t have a credible enough brand to just go in and Delta be like, “Oh yeah, I’ve heard of Officium.” They’ve been around for 20 years. I want to go do business with them. So, we knew that we had a credibility problem. And then the other thing is we were coming up on two years and most of the staff have been with us for two years and you get to that point where they’re like, “Hey, when do I get a raise? What’s my next career move? When are we going to Institute bonuses? The shares are great, but…” That kind of stuff.

And so, we look at those three things and we’re like, “Hey, if we want to continue to kind of get a $100 million book of business or a company size, we have to figure out how to solve for these three issues or opportunities.” And so that’s what kind of led us down the path of, we looked at VCs and there are a lot of interest there. We looked at loans, not so much interest because we were less than two years old or two years, even though we had good revenue banks, they don’t tend to give business loans of the amount that we wanted because of our side.

And so, then we’re like, “Well, who’s a great acquisition partner.” And so, we got three offers, and we picked the one that we thought was the best commercially for the shareholders but was also the best to hit those three things that we talked about to help continue to grow and scale. And also, one other area that we needed to think about was a platform for our service partners. And we wanted to make sure we partnered with someone that had a scalable platform. So, all of those things were super important and helped us make our decision.

John Warrillow:

That makes total sense. So just let me summarize them. Staff wanting the next career move. Credibility to get into a whole bunch of new fortune 500 companies. Because this is really a fortune 500 play, these are like large enterprise global companies that need this. So, you need that credibility. SGNA expenses going up and you wanting a platform that sort of scales to the next level. That makes-

Jonathan Shroyer:

Those are the tension points. And then the decision point was we also wanted to find somebody that had a similar culture to ours. We felt like we had a really good culture. We got plus 65 on EMPS for employee satisfaction

John Warrillow:

EMPS for employee?

Jonathan Shroyer:

Yeah. Plus 65. And so, we wanted to also make sure wherever we went, that there was a good culture and a good experience too. So, it wasn’t attention point, but it was a decision factor.

John Warrillow:

It was one of the criteria. That makes sense. Let me just nibble at the edges of this for a second, because a lot of companies would have the same growing pains. I’ll characterize them as such at whatever, somewhere in the five, 10 million range of revenue, they’d be like… They’d have some of the same experience. The founders’ personal network is tapped so they’ve got to sort of professionalize sales and marketing. I’ve heard these things, yet some founders still, I guess, are so obsessed with control and maybe willing to make the tradeoff of growing slower.

And just so passionate about owning it all that they say, “Well, I’ll just put the brakes on and slow down. But I don’t want a boss.” That’s the decision they come to. I guess in both you and Scott’s case, I took a look at your bios, both of you guys have worked in lots of companies. So, you’ve been a part of an executive team before between a manager team. Did that give you an additional sense of comfort that you knew what it felt like to be working within the context of a larger company? Do you know what I’m getting at?

Jonathan Shroyer:

Yeah. I mean, I think that was part of it. I think when you go back to one of the first conversations that Scott and I had, we’re like, “Hey, let’s try this startup. We’ll take the $150,000 loan. We don’t know if it’s going to work. If it doesn’t work, we’ll go back to corporate environments. But if it does work, we could build something special.” And so, we never had… I talked to some founders and every founder’s a little bit different, like what motivates them and their passion. But a lot of founders become like, I want to build a unicorn. I want to build a billion-dollar brand. And Scott and I were like, “Hey, if we build a 10 million brand or a 30 million brand, that’s way more than we ever expected to from a 150,000 loan, right?” The company grew five X faster than we expected it to.

And so, when we got to our decision point, for us, our personalities weren’t so much of like, hey, let’s control this and create a billion-dollar brand. Our personality was more like, hey, we’ve tapped into something pretty cool here, everybody that got involved is better commercially because we’re going to do the sale and everyone’s still going to have a job. And by the way, we’ve worked in corporate environments so we know how to operate in executive areas and know how to negotiate those things. So, for us, it was a comfortable thing. We’re both, Scott and I are both over 40. We’ve been in the business for a while. But different founders have different motivations of what they’re trying to achieve. Also, I don’t think this is my, I mean, I’ve done two startups, right?

So, this isn’t my last startup. So, I also know every startup in my opinion, maybe you get lucky and you get the Facebook or the Uber or whatever. But most folks go through a few startups before they get the one that goes big. And so, I was like, hey, this went a little bit bigger than I expected. Let me use that foundation. So, in five or six years, when I do my next one, my second PhD in startup plan and I’ll go for the third one and see how it goes.

John Warrillow:

No, I think it’s great. And as you talked, it’s occurred to me, I’ve done the show for a while, it’s occurred to me for the first time that co-founders, by the very nature, they have each other have already signaled to the world and made a decision that they are okay collaborating. They’re not these sort of swashbuckling control freaks. The lone wolf persona entrepreneur. They’re like, no, no, I’m happy to collaborate with someone else. I’m part of a team that’s part of… And so, I’m going to now test that theory in future interviews because I think it actually makes, sense intuitively. Got it. So, I get I think the triggering event, the rationale, let’s get to the process. Did you hire an M and A professional and sort of shop it? How did you get the three offers? I guess is my question.

Jonathan Shroyer:

It’s kind of interesting. They kind of came out of the blue, kind of all at the same time. So, we didn’t shop the business per se. But some folks reached out to me on LinkedIn, maybe they heard that we were going through VC, talking to VCs I’m not sure, but they reached out and they were just interested. They were like, “Wow, you guys have kind of come out of nowhere.” And we had huge social proof. We were at conferences, we were doing blogs, podcasting. Nate brown, who is our kind of chief customer experience officer at the time, now it’s 10,000 Twitter followers. So, we had a lot of social proof and oftentimes people talk about how we were fighting above our weight class a bit from the marketing and social proof side.

So, we were known. And so, people were like, “Oh, what’s going on here? I want to talk to you.” And then they heard our story and they’re like, “Hey, I want to buy you because we think that you’re a great supplement to our brand.” So, the three offers that we got, we weren’t shopping for them, but they happened, and we had the conversations and then we kind of went with the one that we thought was best. And then there was a due diligence process and all that kind of stuff.

John Warrillow:

Before getting any of the three offers, did you and Scott have any inkling of what it might be worth on a multiple of EBITA basis? Had you guys gone back and forth at all and said, “You know what, I think we can get X times profit for this.”

Jonathan Shroyer:

When we looked at the market, I mean, if you’re in a services space, if you can get 12x EBITA, that’s really good.

John Warrillow:

I see. That’s huge for a services company. That’s unbelievable.

Jonathan Shroyer:

8x EBITA, I think is the standard. And we got well above 12x EBITA. So, it was a win-win for everyone, I think.

John Warrillow:

Got it. So, you and Scott are like, “You know what? We should be able to get something north of eight, 12 would be amazing.”

Jonathan Shroyer:

Yeah.

John Warrillow:

Got it. And so, what did you find when you got these offers? What were the offers kind of coming in at relative to the eight versus the 12?

Jonathan Shroyer:

Two of them were in like the eight to 10 range. And then there was one that was well above the 12 and-

John Warrillow:

Like as high as 20?

Jonathan Shroyer:

Yes. As high as that. And so, when you look at it, the one that was Arise, not only was the commercials really good, but we do something that they didn’t do at the time, which was gaming and consulting. So, we’re bringing something to the table for them. They do something that we didn’t have at the time, the platform. They’d been around for 27 years, 75,000 service partners, credibility, scalability. They have a established leadership team with SGNA, all these different types of things. So, we felt even outside of the commercial bit, if they all would’ve come in around eight or 11, we still probably would’ve gone kind of with Arise because we felt like they were the best fit of all three of the companies across all the parameters, intentions, as well as decision factors that we were considering.

John Warrillow:

Now most times with a service company course, there’s a fairly big proportion and an earn out. How did you guys’ structure it relative to the earn out piece or did you take equity in Arise? Or how did they sort of structure the deal?

Jonathan Shroyer:

Yeah, it was definitely there’s some upfront percentage and there’s RNL percentage. It’s probably what you might expect in a normal services company. I mean, because it’s not IP based, your multiples are a little bit less. And so, the way they make their money on the initial buy is they structure where they give you maybe, I don’t know, 50, 60% up front, and then 40% as earn out or something of that nature. And that’s traditional with most all services companies.

And Earn outs are harder to achieve, most founders would be like, well, I don’t want to do Earn outs. That’s fine. I had plenty of people to tell me, told me not to do an Earn out. But I felt like, again, it wasn’t about Scott and I becoming super rich or whatever. It was about how do we build on our core values and take care of our people, build a good culture and then help scale towards where we wanted to get with 100 million. And so, when we looked at the numbers, the opportunity, we felt the Earn out approach was the best approach for us.

John Warrillow:

What was it about the 100 million opportunity that was meaningful to both you and Scott? I mean, I get that it’s a round number, but what was it about that, that is motivating for you and Scott?

Jonathan Shroyer:

I think, for me, $100 million demonstrates industry credibility recognition impact. It also demonstrates, since we’re a decentralized team, the ability to move wealth from the tech hubs to local communities. I think if I were to speak for Scott, Scott’s less interested in the money and more interested in the impact that the jobs or the opportunities that we can give people to get purpose, to be part of a great culture, and to be able to scale. Scott and I are like yin and yang. I don’t want to like oversimplify him or me, but I’m the visionary that wants to get stuff done that loves to envision the future. And Scott’s the, hey, this is how we do it. Wait, should we do that? Should we not do that? Are we taking care of our people? Are we…? So, it’s a really good balance that we had with each other. But I think that it takes both those types and, at least in my experience.

John Warrillow:

Sure.

Jonathan Shroyer:

I couldn’t have done this without Scott, probably Scott without me. And so, for us, it was a perfect match of bringing different things to the table so that we could stay true to what we believed were the core values.

John Warrillow:

It also forever and a day vindicates you, at all those meetings 20 years ago where you’re like, “It’s not a call center. It’s actually an opportunity to make money and preserve revenue.” It’s funny. Have you ever heard of or read David Goggins’ book?

Jonathan Shroyer:

I have.

John Warrillow:

David Goggins is an ultra-marathoner, Navy seal, an incredible athlete on every measure. He had an absolutely horrible childhood growing up and he describes it in the book. And he describes all these feats that he accomplished in his career. And he revealed to the reader that in part, he was really trying to exercise some of those demons. Achieving those goals, allowed him to prove that they had it wrong. And certainly, if you guys got to 100 million, you would certainly go a long way to showing that folks had it wrong all those years ago.

Jonathan Shroyer:

Yeah, I think so. I mean, even just getting to 10 or 20 or 30 million, it demonstrates. The fact that we can show a company how they’re making or preserving millions of dollars through their service experience. There’s very few companies out there that can do it right, less than like maybe two or three. And so, giving that power and authority to the service teams to go and then have those influential conversations with the power cores and the executive teams of companies, it’s amazing. It changes the dynamic. And to be honest, in my opinion, it changes the profitability of some of these products because it eventually gets to the product team and they make different decisions because they realize that customers are the heart of their company. And if they want the heart to be healthy, and the body to grow, and then they have to listen to what the customers are saying, they can’t just push them to the side and do just enough to keep enough engaged, to keep the numbers going. If you want to be a market leader, you have to take care of your customer.

John Warrillow:

Absolutely. Take me back to the Earn out decision. Obviously, you’ve heard some of the same stories. I have, “Never accepted. Treated as gravy, if you get it.” You hear these things. I’ve heard some very tactical advice over the years as well. One being, try to tie the Earn out to revenue because you sort of can more easily control that. And it’s less easy to fake or to monkey with. How did you guys think about some of those ideas? Did you tie to profitability or did you go revenue or was there some other way that you structured the earn out piece so that you got, you and Scott were comfortable that you could control it effectively?

Jonathan Shroyer:

Yeah. When we grew the business… I think there’s three main ways. You’ve got gross revenue, gross profit, and then you’ve got EBITA. And I think if you’re doing an earn out, EBITA’s probably the riskiest one on there on earn our phase, because there could be things that you don’t control inside the new company. So, from a seller standpoint, EBITA is the riskiest. Gross revenue is the riskiest from a buyer standpoint, because I could scale a business to 100 million, but then make no gross profit. And so that’s kind of risky. So usually what I find in most companies that I’ve talked to is the profitability. So gross profit tends to be that middle ground. And so most companies that I’ve talked to, or even buyers that were considering Officium, were most interested in that gross profit, because it was a happy middle ground between the buyer and the seller. And so especially for a services company that tends to be where a lot of people land.

John Warrillow:

That makes a ton of sense. Our show is all about helping owners punch above their weight when they sell. So, I’m always on the, like, yeah, I go for revenue, but I hadn’t really worn the other hat, which of course is the acquirer. But you could game the revenue just as easily as you they could gain them.

Jonathan Shroyer:

But it also depends on who your buyer is. So, I mean, our buyer is owned by private equity. And that’s very similar to, you might as well just be on the public stock exchange, because they’re very thorough in their due diligence, which is great, it’s great for the business. Other buyers may be a little bit less there on the due diligence and they just may want to scale. And they don’t care about profitability and EBITA because they’re going to buy you, because they’re counting on top line growth. And then there’s other buyers that care nothing but bottom-line growth. And so, they’re definitely going to push for EBITA, which will be harder for you to pull them away from. So, I think it really does depend on your buyer too.

John Warrillow:

How many years did you commit to in an earn out?

Jonathan Shroyer:

I think that’s probably confidential. But what I’ll say is most earn outs that I see in the service space is usually between 18 months to three years.

John Warrillow:

Okay. I’ve heard as long as… Can you believe? It’s seven years in marketing services, but that sounds crazy.

Jonathan Shroyer:

I don’t know anyone this day and age who stays at a company for seven years.

John Warrillow:

That’s pretty rare. Hey, this has been great. Do you mind doing a quick lightning round of just a few questions that I’ll just shoot at you and then-

Jonathan Shroyer:

Yeah, go ahead man.

John Warrillow:

You can give me a quick response. You had three acquisition offers. Had lots of conversations with different potential partners and investors, etc. What is the slimiest most underhanded trick an acquirer or an investor tried to play on you in the process?

Jonathan Shroyer:

I think, I don’t know if an acquirer qualifies, but I’ll tell you the thing that annoyed me the most.

John Warrillow:

Sure.

Jonathan Shroyer:

Is when they get kind of the CEO on the call, the CEO kind of tells you all this amazing stuff, really excited about you. And then when you send an email to the CEO, they never respond. Obviously, it wasn’t Arise that did this, Arise was great. But I was like, “Dude, if you’re interested in my company, you should respond to my email.” And in fact, that was the number one reason why I decided not to even consider that offer, was because that lack of respect or that disrespect was enough to me to say, “Hey, this is the wrong culture. I don’t want to put my people in a company like this.”

John Warrillow:

What an awesome acid test to know. Because you’re right, the CEO will pop into the meeting. Oh wow, John had great stuff, I’ll leave it to my team to really kind of work on the details. But if you ever need anything… You send them an email, doesn’t even respond. Awesome. Biggest mistake you made during your selling process that if you had it to do over again, you’d love a mulligan on.

Jonathan Shroyer:

I think I hired the wrong folks early on in the sales process. So, most of the sales, in the first couple years, just came from me as BD. And so, I went out to the market thinking that I could bring somebody on that could see the same vision and understand things the same way that I could. But I couldn’t. So, I should have doubled down more in my selling and my BD, and then leveraged that money for building used cases, as marketing collateral, a bunch of other things that I didn’t do till like eight or nine months later. Something, it was a learning experience. We have this kind of concept in our company from Nelson Mandela, Win or Learn. There’s no failure, it’s either winning or learning. And so that was a good learning experience for me.

John Warrillow:

I could see you walking to my office. “How’d you do today, John?” I’m learning a ton. So that’s super helpful on the whole journey over two years, my actual question was around the selling process. So, if you take those three offers and kind of negotiating with those three people, and structuring your deal with Arise, if you just take that window of time, if you could play it back and do it all over again, what might you do differently?

Jonathan Shroyer:

I probably would not have tried to sell my company right before I went on paternity leave. So, the LOI came in and then a month later I had a baby. And then I took three months paternity, but really, I didn’t because I was working, doing the due diligence and all that kind of stuff. So, I think probably if I were to do it in the future, I’d be like, wait, maybe we should wait till after the paternity leave so that I can keep focus on the things that were priority. I mean, I love my little guy. He’s amazing. I was able to spend a lot of time with him. But because of that distraction, I think some of the due diligence might have taken longer, some of my business didn’t get as much attention from me as it normally would. So that’s probably not applicable across other people who are listening to the podcast. Something that might be more applicable is, really make sure that you ask all the questions that are important to you in the beginning.

Just imagine that this is a relationship and that you have 100% the same amount of decision power as the other person, even though it may seem like the buyer has more like, just make sure you keep it equal. That’s something that I learned through the process and I don’t have any disgruntledness or any like anything of that nature, because I just learned a ton because I’d never actually sold a company at the level of value that I sold. My first exit was much smaller. And so, like I learned a ton through this acquisition process, but that’s one thing that I would say is, “Hey, make sure you have your whole list of everything that you want to ask and acquire and be very, very thoughtful and diligent about that before you go into the conversation.” We didn’t do that, we did it along the way, which is fine, but we learned some things along the way too.

John Warrillow:

What question, and again, I’m asking this because I think a lot of our listeners will be going through this for the first time and aren’t sure what to ask. So, if you had it to do over again and you had your first conversation with an investor or acquirer, what are the top three questions you will ask next time and you would’ve asked had you known what you know now?

Jonathan Shroyer:

I would’ve wanted to do first thing is do an exec meetup between the teams, face to face. We couldn’t do that because of COVID. But I’d want do a face-to-face exec meetup where everybody could get to know each other, spend a couple days together and make sure that the fit is there. It ended up working out fine with Arise, but it would’ve been a lot easier if we would’ve been able to do that. So that’s one. The second thing is I think it’s important to understand exactly what the reasoning is, but why someone’s wanting to buy you. And make sure you drill down into that reasoning. It’s more than just this, this and that. Like drill down and understand like what is their model, what does success look like, what’s their five-year strategy, how do you plug into that strategy, those things.

And then I think the third thing to think about is depending on what you’re hoping to get from the relationship, make sure you’re drilled down in great detail a about that. To ensure that you feel super confident that once the deals signed, you’ll immediately start to get those things. And then I think I’d add a fourth, which is just make sure as you go through the due diligence process that you start to build out the integration plan at that stage. So, then you know how organized folks are on both sides to ensure that the integration can be successful. The Arise integration has gone really well. But I hear horror stories all the time that everything fell apart at integration because it wasn’t really well organized, there wasn’t expectation setting, there wasn’t buy in, communication, collaboration. So that integration piece is super important to do even before you finish due diligence process.

John Warrillow:

That’s really good. You’re so focused on the finish line, but of course, the clock starts as soon as you sign the share purchase agreement, certainly on the earn out piece. And if the integration is fumbled, it can be very hard to recover. So that’s a really great tip. I’ve heard selling a business characterized as a roller coaster before emotionally. And I’d be curious, what was the lowest point emotionally for you in this process of selling your company?

Jonathan Shroyer:

I think for me, the easiest way to explain it is like I created a baby, not a human baby, but like a business baby.

John Warrillow:

Well, you’ve done that too, but…

Jonathan Shroyer:

And I did that too. And I had to be okay with like letting somebody else take them from childhood to teenage. And it was my lowest point because it was the hardest decision to make, to say, “Hey, I’ve invented something. I created something. And now I’m going to sensibly give the reins of that away to somebody else.” Because that’s what you do, and you sell even if you have some influence and some control. And so that was the hardest moment. And I actually didn’t make that final decision until I was halfway through due diligence. Even though like on paper, I was ready to go, I had to emotionally be like, hey, I’m ready to be acquired. I’m ready to let somebody else have the reins. I’m ready to, I don’t really believe in the word control, but to give up some governance. And so that was the hardest thing. And so lowest in the sense that, oh man, I did something amazing and I’m going to let go of it. That letting go moment was tough.

John Warrillow:

And how did you reconcile in your mind the decision that you were ready to let go? Because I think as you described that as eloquently as you just did, people listening will be nodding up and down and going, “Yep. That’s exactly where I am.” They may have received an acquisition offer. They may be in the throes of negotiation and they’re asking themselves, but, yeah. Am I ready to let this… I’ll give you a personal story. We’ve got two kids. One is getting ready to leave for university next year. And I am going to be an absolute basket case. There is no way I’m going to get through that goodbye at the dorm room without breaking out of a massive puddle of tears, because I’m not ready. I know I’m not ready. So that’s a very different example, but I think what you’re describing is what a lot of entrepreneurs face. So how did you get your head around it?

Jonathan Shroyer:

I think everybody finds peace in different ways. And the way that I look at like my decision framework is I look at the priorities in my life and the priorities and the commitments that I’ve made with my team, my professional team. And I want to make sure that I can take care of my family as my number one priority. And my business team and my professional career, as my number two priority. And then, I want to make sure that I can be at peace with that decision. And so, as I went through my prioritization, I just had a new kid, I wanted to spend the next couple years with him. I didn’t want to be on the road 80% of the time being a founding CEO. So, I wanted to spend more time with my wife, it’s those first couple years. So that was like a personal important priority for me.

On the professional side, A lot of these people came on, they came and joined because they believed in me or Scott. So, I wanted to give them a good landing place. So that since I wanted to make this decision for my life, to de-stress my life, in addition to the commercial reasons to sell the business, let’s make sure it’s a good culture. Let’s make sure that’s a good landing place for them for the next few years. And until they decide what they want to do next. And then the shareholders, I wanted to make sure like these shareholders, the ones that invested, Kevin and the employees that believed in us, that they got some good commercial returns for that. And then for me it was partially about head, but partially about heart. I’m kind of a spiritual guy. And so, I did a lot of soul searching, along a lot of walks, a lot of thinking, contemplating, meditating, praying, those types of things. And I just came with a conclusion that this is the right time for all of that to be accomplished.

One of the things you have to know how to do as a founder is when do you pivot. Whether it’s pivoting to a different product, pivoting to a different geo or pivoting to selling your business. You have to know when to pivot. And I was convinced this is the time to pivot. And I talked with Scott, Scott had his own process that he went through and he’s like, “Yes, this is the time to pivot.” So, we aligned on it and we pivoted

John Warrillow:

And the forte guys, were they on board? Or they were like, why you guys selling so early? Or what? Did they-

Jonathan Shroyer:

They were super supportive.

John Warrillow:

Got it. What was the highest moment emotionally?

Jonathan Shroyer:

I think the highest moment emotionally was signing the agreement and knowing that the 15, 20 shareholders in my company just got a lot more value than they would’ve got in another way and over the last two years. Because if you can help somebody sitting next to you, that’s been with you on the journey, then I think that’s really powerful. And that was my highest moment to know, that just me signing this piece of paper. Not only gave long-term opportunities for people but gave them an immediate commercial boost. And in some cases, maybe it changes people’s lifestyle. That was the highest moment for me.

John Warrillow:

How did you deliver the news? I’ve heard entrepreneurs who say one of the most incredible moments of my life was actually walking up to an employee’s house, knocking on the door and literally handing them a check and watching them break down in tears. Did you physically hand each person a check in a closed-door meeting? Did you do it as a group? How did you deliver the news?

Jonathan Shroyer:

So, we probably didn’t have… That’s very dramatic and very interesting, handing somebody a check. It’s obviously COVID, right? So, there’s no in person stuff, but we did have one on ones with each of the individuals. We kind of walked them through what the opportunity looks like in the new company. What this means to them as a shareholder, as well as long term capability via earn out and those types of things. And I think by and large, and we just did our leadership offsite our first time in two years we met up here, this is our customer experience lab, so this is the office.

But we have a whole lab where we bring customers and do workshops, but we brought our whole leadership here, and it was just such a wonderful moment to reconnect, host acquisition, to remember who we are, what we built and how we’re different and amazing, and to kind of feel that energy and that power in kind of just the connection that we have. And so, I think it was… Going through an acquisition, everybody has ups and downs, but I think it was generally super powerful for folks to know that not only did I get this an amazing experience with Officium, but now I get to continue to do cool things with Arise as well.

John Warrillow:

For sure. As you approached the negotiation with these three offers, did you rely on, or did you tap into any resources? And I’m looking for practical things like a book, an online course, a conference, a webinar, a seminar. Anything that you could point people towards that helped educate you about the process.

Jonathan Shroyer:

So, when I started my company, I enlisted a board of advisors about seven or eight of them. And so, they were along, and some of them have different skillsets. Some of them are like grow the business. Some of them are sell the business. Some of them are exited founders. Some of them are CX leaders, industry experts, that kind of stuff. And so, as I went through the process, I just tapped into all my mentors. So, I had those six or seven, then I have an additional three or four mentors that I have used for the last 20 years. And so, I tapped into those folks and thankfully, they were kind enough to give me kind of mentorship for free. They didn’t ask for anything in return. And so, they just kind of paid it forward.

And I asked them this question. What do you think about this? What do you think about that? When I had my biggest moments of downs or my biggest moments of yays or whatever, I just talked through all of my mentors. And that way I could have a level kind of 360 view. Of course, I don’t know that I went to a specific book how do I sell the company. But I did read a lot of white papers and I studied and researched a lot on the internet of how companies are sold, how to do multiples, how to do earn outs, due diligence, integration plans. I did an enormous of research online. Mainly just either they gave me an advice or I Google search stuff and did that kind of stuff.

John Warrillow:

What trophy did you buy yourself to commemorate this incredible achievement?

Jonathan Shroyer:

Tesla.

John Warrillow:

Nice. Model X?

Jonathan Shroyer:

My wife was trying to talk me to get a Tesla for like five years, but I’d be like, “We don’t need a Tesla.” Because we had this beautiful Mazda CX5, we’ve had since 2012. And I said, “It’s running, there’s nothing wrong with the Mazda. It’s fantastic.” And it’s an SUV so it’s like enough space for the baby.

John Warrillow:

She’s like, sure, live a little man. You just sold your company.

Jonathan Shroyer:

I know. She’s like, “Hey man, when I get off on maternity leave, I want that self-drive from my hour commute.” And so, she finally broke me down and she’s like, “Dude, you just sold your company. Can we just please get a Tesla?” And so, we did. So, we got a Tesla.

John Warrillow:

Did you get the X with the fancy doors?

Jonathan Shroyer:

Unfortunately, the house is in the bay area, a little bit smaller, at least where I live. And then my house is built in 1928, so the garage cannot fit the X. The garage door is too small. So, we got the Y and there’s two inches on each side of the Y to get it into the garage.

John Warrillow:

Perfect. There’s all kinds of cameras that will tell you if you’re going to bump.

Jonathan Shroyer:

It’s perfect. I love it because I don’t have to worry anymore. 12 inches, 10 inches, 12 inches. And now, I can’t go back. I never want to drive the Mazda again.

John Warrillow:

There you go. Tell your wife, she made a good call.

Jonathan Shroyer:

I’ll let her know

John Warrillow:

Jonathan, thanks for doing this. I know people are going to want to reach out to you and connect. Can you point on where we’re online is the best place for folks to connect with you if they want to reach out?

Jonathan Shroyer:

So, you can reach me on LinkedIn, Jonathan Shroyer, you could just search me up there. Follow me, friend me. I’m also on Twitter @JJShroyer. So, Jonathan Jerry is my name, Jonathan Jerry Shroyer. So, @JJShroyer, I’m on Twitter as well. I love chatting with people, connecting, talking about best-in-class stuff, mentoring. I mentor four or five founders today. So, I love advising companies, too, whatever I can do to help. I appreciate the time, John. It’s a wonderful conversation today.

John Warrillow:

That’s awesome. Well listen, Jonathan, we’ll put all of that, your Twitter feed, your LinkedIn and the show notes at builttosell.com. Jonathan, this has been super fun. Thank you for doing it.

Jonathan Shroyer:

Thanks for the time, man. Have a great day.

Colin Morgan:

And that is it for today’s interview. We hope you enjoyed John Warrillow’s conversation with Jonathan Shroyer today. Again, as I’d mentioned in the intro, I put together show notes, including links to everything referenced today, along with definitions for some of the more technical terms that were referenced in today’s interview, which you can grab at builttosell.com. Again, if you have any suggestions for a guest who you feel like would be a perfect fit on Built to Sell Radio, or you want to nominate yourself, you can go ahead and visit builttosell.com/nominate and get in touch with me there.

If you’re a fan of Built to Sell Radio, then I would highly encourage you to head over to our YouTube page at Built to Sell Radio where we are going to be providing you with new special content that you cannot find anywhere else. This is going to include some highlights and clips from some of the most recent episodes, some of the biggest takeaways from recent and past episodes. So be sure you head over to YouTube and that is at Built to Sell Radio and subscribe to our channel there. Special thanks to Dennis LaPaglia for handling the audio engineering. And thank you to the entire community of certified value builders who help us bring our message to you. I’m Colin Morgan, executive producer here at Built to Sell Radio. Talk to you again next week.