John Ratliff started Appletree Answers in a spare bedroom of his house in 1995 and by 2012 had grown it to 650 employees and 24 locations when he decided it was time to sell.
John Ratliff was able to scale Appletree Answers by buying small competitors for around 3 times EBITDA using borrowed money. He quickly went from 1 to 650 employees in less than twenty years while his EBITDA went from nothing to more than $5 million a year. Then one day, he got a call from a strategic acquirer that would change his life forever.
About John Ratliff
John Ratliff founded Appletree Answers in 1995 in his two-bedroom apartment in Wilmington, Delaware. It was a traditional telephone answering service, and he grew the company through a series of acquisitions to 24 US-based locations and 650 employees before selling it to a strategic buyer in June 2012.
Appletree’s high retention rate allowed the company to manage its exponential growth while driving tremendous EBITDA and revenue gains. As one sign of its employees’ enthusiasm, the company won the We ♥ Our Workplace Video Contest, run by the prestigious Great Place to Work Institute. Ultimately it was Appletree’s focus on employee engagement that drove its exit valuation.
Ratliff speaks frequently with companies of all sizes to diagnose problems in their employee retention and morale and to drive improvements. He also brings expertise in using a business’s operating system to leverage the effectiveness of the management team.
Key Lessons Learned
- It’s critical to have a third party to help mediate the sale, someone with perspective and distance that can help foster a productive negotiation.
- John states that he would have been more thoughtful about the post-sale experience prior to exit.
- An inbound, high-touch customer service call centre used by companies to take phone calls, emails, web requests, etc.
- Appletree basically acted as their customers’ entire back office and gave their customers’ clients the best possible service.
- John grew the company organically for 8 years, and then did his first buy side acquisition in 2003.
- By 2011, he had done 23 more, using a blend of a highly focused organic growth program and an acquisition program.
The Trigger Event
- Over 18 years, John grew the business to 30 times the size of the typical player in the industry and all his personal wealth and assets were tied up in the company.
- Then an S&P publically funded company started to pursue a roll up in the industry; they were the first enterprise level buyer to enter the space and they were able to pay a strategic valuation as opposed to a financial valuation.
- John hired an investment bank, went down the traditional path, put together a book and did an outreach program.
- When you’re involved in a transaction 1 to 1, there’s no good cop / bad cop; there’s no fallback position; there’s no third party to help mediate.
- When you have an investment bank to help mediate, it’s that necessary third party—someone with perspective and distance that can help foster a productive negotiation.
- Of course that comes at a price, like 4 million or so, but that was more than recouped in the added value in the transaction.
- The LOI wasn’t tough; it wasn’t contentious. The biggest challenge was –and this is true 9 out of 10 times in deals—around legal and reps and warranties in the deal.
- As for the LOI, obviously we pushed and pulled to get to a number – not contentious, but just back and forth – probably 6 or 7 times back and forth on the valuation.
- John was able to get about 3 or 4 times what the industry averages were – so definitely a strategic valuation as opposed to a financial valuation.
- The number 1 strategic driver they brought to the table was a strong focus on employee engagement—18% voluntary employee turnover, in an industry that averaged 100%.
- Number 2 was: after doing 24 bi-side deals, they had a good acquisition strategy, and they took the companies they bought and quickly made them cash flow positive.
- They had great senior leadership team and a great middle management team, so the buyer got a lot of talent.
- com was an innovative company, but the number one lever was the whole platform piece and the company’s acquisition strategy.
- It’s a psychic shift going from having an economic engine that’s producing outcomes, and this machine is funding your lifestyle and everything else, and then you end up with a lot of capital but no income and no economic flow.
- You suddenly have a lot of free time and you can feel guilty about your free time. You get calls from lots of people and you can end up doing a lot of free consulting.
- John decided he needed something to keep himself entertained and busy. He was a strategy guy; he loved strategy; so he went to work with the M&A firm that managed his sale. He’s now an investment banker doing self-styled M&A.
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