Transcript – 3 x EBITDA To 13 x EBITDA In Just 2.5 Years
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John Warrillow: Hey, this is episode of Built to Sell Radio is brought to you by the Value Builder System. I had the opportunity to interview Stephanie Breedlove the other day. She sold her nine million dollar payroll company for a cool 54 million dollars. How did she do it? She focused on the eight things that drive company value. Things like, what we call the Switzerland Structure, monopoly control, recurring revenue, all things you’re going to evaluate in your own business using the Value Builder Score. Takes about 15 minutes to complete the survey. Go to ValueBuilder.com
John Warrillow: Next up you’re gonna hear from Jeffrey Feldberg and Stephen Wells the co-founders of Embanet which they built over a seven year period to 18 million dollars of EBITDA. They ultimately sold the company for 13 times EBITDA for a final result of more than 200 million dollars. There is so much good stuff in this interview, guys, I don’t know where to start but listen to the way both Stephen and Jeffrey talk about constraints. How they liked being constrained by cash and they kind of take pride in being a cockroach startup in their own words.
John Warrillow: I love the way they talk about budgeting and the fact that budgets were something that they learned to hate. They talk about having an eight month cash balance. Jeffrey talks himself about being a control-freak. You know, it’s a really interesting story when you get into and when we get into the details around the sale and how they used their investment banker to drive up the ultimate price of the business. Talking about how they played one off the other, how they mitigated or minimized the odds that they were gonna get a bait and switch deal after an LOI before closing.
John Warrillow: Lots of good stuff in this interview with Jeffrey Feldberg and Stephen Wells.
John Warrillow: Jeffrey Feldberg, Steve Wells, welcome to Built to Sell Radio!
Jeffrey Feldber: Hey John, good to be here.
Stephen Wells: Hey John, good to be here as well.
John Warrillow: So this is a first. This is a three way call which is great. I understand both of you guys were in this business together, Embanet. So maybe Jeffrey, do you wanna start and give us an overview of what Embanet did? What was the problem you were trying to solve in the world?
Jeffrey Feldber: Absolutely. Embanet was an evolution. It initially started as solving the problem of how do you help schools to get online? And so we help schools do the hosting, we help do course conversion, technical support, and we did that so well that our customers came back to us and said hey guys, our retention rates are terrific, we’re now the rock stars at the university, but the problem that we’re having right now is where do we find the students? We’ve got this thing called the internet that’s come along and it’s more difficult, more expensive to find students and it was because we listened to the customers, we had regular conversations where we’re always mindful of how do we put ourselves out of business? What’s gonna be Embanet 2 to put Embanet 1 out of business because we’d rather be the ones putting ourselves out of business than someone else and it was really that marketing request, help us fill the seats that began a journey which we had no idea where it would take us or if it would even work but through lots of trial and error and experimentation we really perfected a process where at the end of the day what we say is hey, we’ll help you fill the seats, keep the seats filled, and ensure that you’re profitable from the very first student that you enroll.
Jeffrey Feldber: And we geared that towards high end institutions like Vanderbilt University, Boston University, George Washington University, and it was just a terrific partnership.
John Warrillow: So how did you price that model? Was it on a per student basis?
Stephen Wells: Yeah we shared in the revenue with the university so we took on the cost of converting curriculum and marketing and gave the student the same degree that they would get if they were in the classroom. We had some unique ways that we structured the curriculum and we had very kind of groundbreaking ways how we found the students and then we shared in that revenue over a period of time.
John Warrillow: And how did you guys deal with the emergence of the kind of fake diploma that you write away to some P.O. box in Tucson, Arizona and you get like, all of a sudden you’re a doctor of law or whatever. Doctor of medicine or a lawyer. Did you guys fight against the emergence of this sort of sleazy underbelly of online education?
Jeffrey Feldber: For us, the magic of being an entrepreneur is to take what’s out there, what’s topical, what’s a big problem for many people and to feel that pain and to solve it so that came out. It was a big issue in the industry but for us the timing was perfect because here we were, we were really serving two audiences. One audience was the working professionals so people like us who have a full time gig going, they can’t go back to school but they wanted a degree to advance their career, to take it to the next level, maybe for vanity reasons, but they wanted it from a legitimate school and they just couldn’t do that.
Jeffrey Feldber: And on the flip side, the institutions wanted to get out to that audience, set the record straight, and continue their dominance and on both ends it was well, how do we do this and how do we make that happen? And that’s really where we entered. We were the matchmaker to put these two audiences, these two groups together in a way that worked for everyone, that brought legitimacy, the real results, and we did it in as painless as a manner as you can.
Stephen Wells: And you know, John, just quickly the obstacle for us was not that impression that we were providing to the consumer. The original obstacle was we were probably if not a new category, ground-breaking and very unique. They were afraid to adapt a new delivery system so we had to convince top tier universities like Jeffrey had mentioned, that this is a legitimate way to have education and your outcomes aren’t gonna be any less, in fact they’ll be better and they did end up better so we were kind of in a unique space.
John Warrillow: So let me get this straight, so you go to a university who’s got content and who’s trying to get online and you would say look, we’ll underwrite the costs of developing the online course, basically interpreting your content in an online context and we’ll also underwrite the cost of getting students and then on the back end we’ll share the revenue.
Stephen Wells: Correct.
Jeffrey Feldber: That’s correct.
John Warrillow: So it sounds like an expensive business model. How did you guys finance it?
Jeffrey Feldber: It’s a great question and a good story. One thing, John, just to make very clear to the listeners, that was the end result but there was a lot of failure. We didn’t just wake up one day and say hey, this is how it’s gonna be done. We tried a lot of things and failed a lot and to tie that into your question from Embanet 1, to take the profits, we had just turned the corner in Embanet 1. It had been five years in the making, finally started to put some profits away and have a nice little war chest and then we put that all at risk again when we did the Embanet 2 and to get things out there and trial and error, we eventually found the way and were able to do that but we did two things. We bootstrapped the company from beginning to end and we ran what would now be called as a cockroach startup so we were lean and mean and a fighting machine in every sense of the word, watched every penny, and it’s interesting.
Jeffrey Feldber: I don’t want to go off topic here but it’s worth mentioning. When Steve and myself have done other ventures and we haven’t had those financial constraints, we haven’t been as successful in those ventures so a lot of entrepreneurs are saying hey, if I don’t have the money I can’t be successful and I can’t do a business but for us it was the opposite. Those constraints were everything because it took us to a place we probably never would’ve gotten to had those not been in place.
John Warrillow: So essentially you funded the movement into Embanet 2. You took cash from the Embanet 1 business and funded the new business.
Jeffrey Feldber: That’s correct.
Stephen Wells: And we also built the business in maybe a way that’s kind of controversial to some specific bean counters. We didn’t run off budgets. For instance when we were really going fast and furious, we would tell our marketing managers, listen, you can spend however much money you want. You have no limit. All we have to do is prove the model and we had a very rigorous methodology for finding an audience, proving it, testing it, failing a lot, then when we’re ready to pull the trigger we were with the 95% predictable results so we knew what we were gonna get.
Stephen Wells: So we were very disciplined in how we did that but we were very, very free on how we would spend that money ’cause you don’t wanna spend too much but you don’t wanna spend too little but we were gonna find those results.
Jeffrey Feldber: And John, just a quick story and Steven I’m sure you’ll have a chuckle with this. So Steve oversaw the marketing and we would always be testing different things and as the company grew and we had more employees that became part of the team, you can only do so much so Steve, I don’t know if you remember but there was a very short period of time where we actually said okay, you know what? Why don’t we try what the bigger companies do, we’ll put some budgets in place and I’ll never forget. We had this one marketing manager who was getting dismal results. I won’t name the source of where we were marketing, the particular company, but it was failing every single time yet every single month she kept on putting in the same amount of money and when Steve found out about this he pulled her aside and said hey, what’s going on?
Jeffrey Feldber: Well, I have this budgeted and I know if I don’t spend the budget it’s gonna be reduced the next time so I just keep on putting it there so I can spend my budget because that’s the money that you gave me. And we had a good chuckle, we abolished the budgets that day and went back to just spending as was needed and just kept on growing.
John Warrillow: How did you guys, I mean the obvious question is, how did you guys not go bankrupt? Without budgets, without any sense of how you were spending on month to the next, how are you guys keeping the lights on?
Jeffrey Feldber: Great question, John and it’s something that we spoke a lot about. When we did Embanet 2, we looked around and we said okay, what’s going on in the marketplace? How can we survive? What can we do? So the first rule of thumb that we had was we always liked to have enough cash for at least eight months to operate so that if no revenue came in through whatever unforeseen emergency, we could operate for eight months. But the next thing that we said, look, if we’re gonna do it, let’s do it right and Embanet 1 had really been more for the budget conscious type of consumer, if you will. It wasn’t expensive. It was a grind every single day.
Jeffrey Feldber: So for Embanet 2 we said let’s start from the top, let’s work with the best. Let’s have a high ticket item and let’s do whatever we can to become as profitable as we can and one of the things that we did very specifically, we were both the seller of our services but we were also the manufacturer of our services and everything was virtual so it gave us the advantage for that but here’s what that meant. We charged fair market value. In fact, we were probably charging even a little bit less than what market value would be but because we were in control of everything and we manufactured everything and in many ways it was like the Apple model, the profits were significant.
Jeffrey Feldber: So there was a big upfront investment, no two ways about it to get a school up and running, but once the school was running because we had revenue coming in and cash flow and it would drive the bean counters nuts because we didn’t follow the gap, the general acceptable accounting principles, we were able to float the company through the cashflow until we were able to get into profits and once we were into profits we never looked back and were able to build up a nice war chest.
John Warrillow: And did you ever take on any outside investors?
Stephen Wells: No.
Jeffrey Feldber: We never did. No. And that was very deliberate.
John Warrillow: Why?
Jeffrey Feldber: You know, I won’t speak for Steve, I’m just a control freak and for me I didn’t want other people to come in to tell us what to do, how to do it, and for myself as an entrepreneur, I’ve always wanted to just change the social fabric of society. I love to help people. That’s really my DNA and Embanet was a way for me to combine my love of technology, my love of education, and my love for helping people and I didn’t want to sacrifice the experience, even though I knew that came at a cost and the cost was we didn’t grow as quickly. But we had full control to do whatever we wanted to do and to either fail as much as we wanted to or become successful as much as we wanted to so for myself that was important but Steve, what about yourself? What would you?
Stephen Wells: Well, I agree and we had some other experiences after Embanet where we had plenty of money and we had some failures there and this has been my experience that I don’t think money is ever the issue on success. Certainly you might have to finance, you might have something, some capital costs, but I think sometimes money really clouds the issue where lack of money makes you very, very focused and you are very attuned to what is going to bring you the most value, maybe the quickest.
Stephen Wells: So we’re a service business, we weren’t really manufacturing so it might give us some advantages in that way but that had been my experience.
John Warrillow: And walk us through sort of the evolution. How big did you get Embanet before you decided to sell? Big I mean in terms of revenue or number of employees, that kind of stuff.
Jeffrey Feldber: Steve, you wanna grab that one?
Stephen Wells: Sure, sure. That’s another, we’re at a little bit counter thinking. Those were metrics that were important but we looked at the bottom line before we looked at the top line so that’s how we kind of judged our success and we measured our marketing, if not daily, weekly and our cost so we were looking at a lot of metrics but maybe different metrics than people look.
Stephen Wells: At the end of they day, and we’ll talk about why we sold later, if you want, but we were running around 200 employees. We had built that up in about seven years, I believe. I think that was right, Jeffrey, and we had an EBITDA of around, something like 18 million.
John Warrillow: Just incredible. That’s, on it’s face, that’s just an incredible performance in seven years to go from basically, and that seven years dates back to the beginning of Embanet 1 or is that when you made the conversion to Embanet 2?
Stephen Wells: That was Embanet 2.
John Warrillow: Got it.
Stephen Wells: Jeffrey-
Jeffrey Feldber: Go ahead Steve.
Stephen Wells: No, I was just gonna say Jeffrey, you’d already started Embanet 1 but go ahead.
Jeffrey Feldber: Right, so Embanet 1, again, was a very different model and had its own set of circumstances but the one thing I would just put out there to the business owners and it was something very deliberate for both myself and Steve, we never cared to be the biggest company. We cared to be the best and the most profitable and that really was the focus and Embanet, to the marketplace, was an enigma because relative to our competition we were a fraction of the size but when you looked at our profits, we were a giant in the industry and probably one of the best kept secrets in the industry, which was deliberate at the time, and we can talk about the pros and cons a little bit later of that but for us the focus was never what’s the top line because listen, you can be a hundred million dollar company but if your expenses are 105 million it doesn’t mean anything.
John Warrillow: An important lesson for sure. So let’s get into the why you sold. And mean, generally 18 million dollars a year is not a bad paycheck for anybody but what was it that made you consider exiting?
Jeffrey Feldber: Steve, you wanna start and I’ll add to that?
Stephen Wells: Sure, there are some points but first when we looked at where we were, we started in a blue ocean. We weren’t the very first people to create online learning but we created it in the model in a very unique way that really was hardly done at all.
Stephen Wells: So by the time we’d gone downstream a ways, we looked at it and we thought we’re kind of at the top of the bubble. We see some competition coming in. We had a very attractive business model. We had ten year contracts and we thought this may not be the way that things are gonna go in the future so that was one point.
Stephen Wells: And I’ll give one more and Jeffrey, you can pick it up from there. We also looked at our skillset. We are entrepreneurs. We got that company to a [inaudible 00:18:35] and we’re looking around and going wow, what’s gonna be required going forward to build this? We’re kind of zero to something type guys and we’re already at something, substantial something and how do we go further? What’s gonna be required?
Stephen Wells: So I’ll let you continue from there, Jeff.
Jeffrey Feldber: You know, similar to Steve, John, those and the other few things that I would add and Steve touched upon it but it’s really worth digging into. When I first began as an entrepreneur I never understood entrepreneurs who had a business and they deliberately kept it at a certain size and never went beyond that because in my mind it was hey, if you have something successful, go, go, go. Built it. Get it out there. Get it to the top and do as much as you can. But to that point, what we quickly realized was to go from where we were to the next level would require a huge amount of capital. Not that we didn’t have the capital coming in and that we could’ve done that, we could’ve but at the same time we said, okay, what are our strengths? I’ve never been a believer in taking my weaknesses and trying to make them bigger. I’ve always played to my strengths and ignored my weaknesses and the whole corporate march, if you were running a corporation and becoming a bigger corporation, for me I’d be like a bird in a cage.
Jeffrey Feldber: And so when we’d have regular meetings, we’d have vision meetings and we spoke about we oh okay, where do we see this going in the next five years? In the next ten years? What’s Embanet 3 gonna look like? And when we looked at that we realized okay, for us to continue growing, likely there’s gonna have to be some acquisitions that will be in the mix to get that out there. Because we’re successful, competitors are now gonna start coming in, it’s gonna start becoming crowded and so we identified what Embanet 3 was gonna be and we said to ourselves, okay, let’s hedge our bet. We can begin to do Embanet 3 but at the same time, let’s at least consider what it would be like to sell the company and sell the company either to have people come in and take it to the levels where it’s not our strengths but would be their strengths and be involved, or do an outright sale and that really began our journey where we hedged everything and did a number of different strategies at the same time.
John Warrillow: So when you generated the 18 million dollars a year at EBITDAH, are you able to pull out, for a lifestyle perspective, a big chunk of money for yourselves or are you pouring all that money back into the business, into growing the company? I mean how’s your lifestyle evolving as this business goes from nothing to 18 million dollars profit?
Jeffrey Feldber: For myself, it modestly changed but not a whole lot. For me, it was growing the company, supporting the company, keeping the money in the company. Sure, I drove a nicer car. Yes, I lived in a larger house, but that was the extent of it. For myself it wasn’t anything crazy.
John Warrillow: Steve, you were the guy who blew it all, right?
Stephen Wells: Yeah, I went to Vegas and Jeffrey came and flew out and bailed me out. No, you know, we are a little bit different in age. When we sold the company Jeffrey was 37 and I was 51 so we’re in a little bit different places in our life. I had been through a lot of companies that I had and I didn’t really know how to monetize a company and what you’re doing, John, is what I kind of needed back then. I’d start things, stop things, and so when I got to this point, I was very, very excited about the possibilities that we had come upon and we also, while we were very profitable and we did give ourselves funds, we kept the company hungry so while we had a lot of money we didn’t really want to throw it back in there because we, again, as you can tell, our philosophy is hungry people make wise decisions and work hard and we kept ourselves and we kept everybody else hungry ’cause it kind of gave us the edge, we felt.
John Warrillow: So guys, if you’re not giving it to the company and you’re not drawing it out personally, where’s the money?
Stephen Wells: Well, I mean we’re holding it. We’re not completely reinvesting back into the company and we’re not completely just liquidating it for ourselves either. We’re kind of holding it.
John Warrillow: I find it-
Jeffrey Feldber: John, let’s [crosstalk 00:23:06].
John Warrillow: Go ahead.
Jeffrey Feldber: Let’s just say that when you need the banks they don’t give you the time of day and fortunately it was the flip side. Our door was being knocked down by the banks, as you can imagine, because we were cash rich in wanting to work with us. Life is funny. We didn’t need the banks and they were only too happy to work with us.
Jeffrey Feldber: But it was, let’s not kid ourselves either, to say that it wasn’t a rind it just wouldn’t be what it was. It was hard work. It took a lot of our time and our attention and something that Steve mentioned earlier that’s worth revisiting, we really created a new category. It’s not that, we weren’t the first to invent it or to do it but the way that we put it together, the way that we went to the marketplace with it really was a new category and like anything, when you’re creating a new category or a new anything, it’s a lot of time. It’s a lot of travel. It’s just a lot of effort to get people to understand what it is to accept you and embrace you so you can get out there and work your magic.
John Warrillow: I find this fascinating, the age difference between the two of you guys because from what I’ve experienced, when there’s an age gap between two partners, there can be different priorities based on the company. So a cliché would be, the older of the two would like to draw out more money to fund a more lavish lifestyle, they’re at a different stage in life, maybe they’ve got more expenses and they’re just at a stage where they feel like they’ve kind of earned it, where as the younger of the two partners often wants to kind of put all the money back in and keep growing, and keep growing, and keep growing. Did you guys struggle as a partnership with any of those sort of decisions?
Jeffrey Feldber: You know, it was interesting, there’s actually a third partner and just to put it out there, it was the wife at the time and now my ex-wife so Steve, it was an interesting dynamic because the two of us were obviously younger than Steve but amongst the three of us, we never got into an argument. We’d agree to disagree but it was done for what’s best in the business and we’d always talk things through and because the three of us really came from different perspectives, so Steve, his archetype was really known as the teacher, the educator. [inaudible 00:25:30] she was known, she was the third business partner, she was really known as the profit. My archetype was the money guy and amongst those three archetypes, it just worked really well within the partnership to say okay, what’s best for the company, what’s best for the partnership, what’s best for us, and it just worked. The chemistry either you have it or you don’t.
Jeffrey Feldber: We were blessed that when we came together as partners, that was there to begin with otherwise, obviously, it would not have worked and it would’ve been an issue.
John Warrillow: Steve, from your perspective?
Stephen Wells: Yeah, no, you know our relationships and relationship now is very unique, I think, in business. You hear about a lot of people having difficult partnerships, we just made magic. We complement each other and we’re similar in some ways, we’re different in other ways. We can do a show like this and not even talk to each other really about it and you can kind of see, we kind of know what the other person’s thinking and we just function together and I think when we have two people in this case, we can make that third entity better than we could’ve done individually and of course back then we had three so I think all three of us made something that no one, as an individual, could’ve accomplished as well.
John Warrillow: Jeffrey, at what point did you divorce your former spouse?
Jeffrey Feldber: Oh, from the business to the personal.
Jeffrey Feldber: It came out well after the sale but everything, it was very friendly. To this day we’re still business partners in other areas and-
John Warrillow: Oh wow!
Jeffrey Feldber: -all is terrific because we’re business partners, we’re also parents and we never lost sight of that and since we’re on the personal, it’s gonna be this upcoming September two years will be my wedding anniversary. I got married about a year and a half ago but everything’s been great. It’s very unconventional but it works and everyone is smiling.
John Warrillow: Yeah, that’s great. Congratulations on your marriage, by the way. The reason I was asking was relative to the dynamic of a partnership, if you had already made that split, I was curious to how that effected the partnership, the romantic split if you will. Clearly it had not happened yet and I also wondered, Steve, from your perspective, did you ever feel kind of ganged up on? Like your two partners kind of live together so at some point they presumably could have ganged up on you or talked about you behind your back. I mean did you ever feel that way?
Stephen Wells: No, I never did. All of a sudden in my mind I got this visual. I guess I’ll tell it. It sounds kind of strange. It’s not meant to be that way but we functioned so well. I lived in, or still live in Orlando, outside Orlando Winter Park and Toronto is where the company is based so I’m going up there all the time and really out of convenience and just we were communicating all the time, I stayed with Jeffrey and [inaudible 00:28:43] in their house. I was on the phone, in Winter Park, every day for 15 hours a day and communicating but I would come up there, just kind of a funny sideline, people would say I wish you’d go back ’cause we could actually talk to you better when you’re back there ’cause everybody wants to see you when you come up but I would stay in Jeffrey and [inaudible 00:29:02] house and I remember, you remember this Jeffrey, one time we’re all watching, we’re like laying on their bed and the lights are out, we’re watching a movie [crosstalk 00:29:13].
John Warrillow: Okay it’s getting weirder.
Stephen Wells: I know, and there’s two big labs there and all of a sudden the movies over, the lights are out, and I’m sitting there, everyone’s asleep and I kind of sneak out of their bedroom, not disturbing them but I mean, I know that sounds weird, it wasn’t meant to be weird, but that’s how close we were. We lived together in a sense of we were on a mission. That’s the beautiful thing about, I know many of your audience, you’re on a mission and in the midst of that you’ve got a lot of trials and you’ll back and some of those difficult things that you’re gonna say well that’s how I learned and that’s how I grew the most and we had the same situation. We’re fighting every day to make this thing happen.
John Warrillow: I love it. You guys went through an interesting, you called it a dry run, in the form of an acquisition. Tell us about that story. You got approached by somebody?
Jeffrey Feldber: You know it was still early on when Embanet 2 was out there and we’re still proving things and getting things out there and we had come on the radar of a fortune 10 company who had approached us and before you knew it there was talks of hey, why don’t we see if we can partner together and from there let’s see where that can go. So the three of us as partners we met, we spoke about that, and we agreed on two things. We said okay, we’re not ready to sell but this company approached us, we didn’t go to them. They want to explore and see what’s going on so why don’t we do it? At the very worst, we’ll spend some time just going through the process but at the very best we’re gonna see where we’re weak and where the blind spots are and we’ll come out of it wiser, better, and stronger.
Jeffrey Feldber: And John, I got to tell you that when we did that whole process and for everyone who’s listening in, if you have the opportunity to do it I would say do it. Yes, it cost some money because we had to get legal and accounting involved for reports and getting everything ready but what we learned from that experience was huge and that actually began our journey because we became intrigued and fascinated with okay, is that really what selling a company’s all about? And if it is, what can we do to better prepare ourselves so that the next time the opportunity comes we’re actually ready? We weren’t ready for it. The value would’ve reflected that had we taken that value at the time and I suspect a lot of people may have because they see money and they just can’t help themselves. It would’ve been substantially, much, much lower than what we had with our nine figure exit.
Jeffrey Feldber: But the ability to do a dry run, for us, was everything because it made us smarter, wiser, and more prepared when the real deal came.
John Warrillow: So let’s get into it. So it’s a big company that made an acquisition. What did you learn through the process? What was it that wasn’t ready for prime time? What parts of your business were not ready to be sold?
Stephen Wells: I’ll jump in. There were a lot of things that weren’t ready and some that we never really solved completely but one of them is we didn’t have the right data. We had not, because as you’ve noticed, we weren’t concerned as much of as running a tight accounting. We had tight accounting but we weren’t getting financial statements, audited financial statements. We didn’t have what they call when you sell your business a put together data room. Just that one point alone is hugely valuable for you to maximize your exit.
John Warrillow: What else?
Jeffrey Feldber: I would say to build off of that point, because of the way we ran the company, the company year ends were an after thought for us. We only did it because we had to for tax filing and otherwise we had no use for them so the whole mindset of the company was different so financial report wise we weren’t ready. Even the management team, we could’ve done a much better job of having a management team that was more of them and less of us over the years so that was something that we really weren’t great at doing.
Jeffrey Feldber: Even with when we began the process, communicating with the employees. You hear about it, you read about it, but it’s how you get there. It’s just a difficult thing to do and we had terrific investment bankers and they spoke to us about that and helped with that but looking back that was one of our weaker areas and the thing that you have to remember as a seller, when you’re working with an investment banker and if you’re not working with one I think you’re nuts. I think it’s the only way to go if you want to maximize value for your company, but the investment banker is like a juggler. They have our interests in mind, they have the buyer’s interests in mind. For us and the investment bankers we’re likely a one time transaction for the buyers that they’re bringing in it’s gonna be many transactions so they have to balance all of that and sometimes what’s in the interest of the business or in the interest of the seller may not necessarily be in the interest of the process.
Jeffrey Feldber: So how you communicate with your clients before and after the sale. All of those, so the communication area and the whole data area, John, would’ve been areas that we just could’ve done a lot better on.
Stephen Wells: And just to clarify, John, quickly, when you talked about that first offer we had, we weren’t involved formally and we didn’t have an investment banker so what Jeffrey was talking about, when we had the investment bankers then a lot of those things got in place, obviously, and they created huge value for us and found huge potential. We ended up creating an auction for us so just I’ll try to clarify that point if it wasn’t clear.
John Warrillow: That’s great and I want to make a point as well to my listeners. Jeffrey, you raised a very important point and that is the investment bankers’ motivation. So on one hand you engage an investment banker or [inaudible 00:35:19] professional, they’re mandated to sell your company but that’s a one time transaction. They buyer is someone they might deal with on many, many occasions especially if it’s a private equity group, for example, or a corporate buyer who’s very inquisitive and they’ve gotta thread that needle between representing you but also not being so aggressive that they’ll alienate a relationship that could bear fruit for another transaction down the road. That’s a very delicate balance that they’ve gotta play. Sounds like you recognize that in the second go around.
Jeffrey Feldber: We recognized that and to underscore the point, it took us a year and a half to find the investment banker. I mean we just went out there and spoke to a lot of groups and did a lot of research to get to where we got to because we realized from the first experience, hey, left to our own devices we are our own worst enemies so let’s find someone who does this day in day out, who’s gonna protect us as much as one can and just get the value of the company to the highest possible potential.
John Warrillow: In the dry run did you guys actually get to a stage of a written letter of intent where they put a value on the business, what they were willing to pay?
Jeffrey Feldber: Oh it was, yeah, look John, the dry run, we called it a dry run but it was a real deal where we were flown out to the company’s head quarters, we were wined and dined. They gave us a letter of intent and then they came with a final offer. When we look back now, and we knew it at the time as well, to them we were really country bumpkins. From their perspective, hey, we’re these big corporate guys, we’re a fortune 10 company, but we’ve got these two entrepreneurs, they don’t quite know what they have but we do. We know better than them and so we’re just gonna, in their world, bowl them over with, to us was not a lot of money and it wasn’t-
John Warrillow: What was the number?
Jeffrey Feldber: You know, they came in I wanna say somewhere at around eight or ten million dollars. Steve does that sound right to you?
Stephen Wells: Yeah, I don’t remember. I mean it was not even close to what we ended up. Not even in the same sphere. I mean they’re looking at, yeah, it was ridiculous really.
John Warrillow: Eight or ten million dollars on the surface for a company less than seven years old, that doesn’t sound too bad for a lot of people. Why did you think it was such a poor offer?
Jeffrey Feldber: Steve mentioned this and it’s really worth repeating and to the listeners out there, Embanet was a way of life. It wasn’t just a business and not only was it a way of life but we knew where we were and where we were going and what was ahead. And when we spoke about it we said okay, let’s round it off to even ten million dollars, I don’t think it was that high but let’s say ten million dollars. So three and a bit million dollars for partner, yes that’s a lot of money, nothing to scoff at but it’s not gonna be a game changer and it’s not going to change our lives where we can just sit back and not have to do anything after that and so when we realized that we also said, you know what, just because you can hit a home run doesn’t mean you’re gonna hit a home run every time. In fact, you’re gonna strike out a lot of the times and if we leave Embanet and go off and do who knows what, there’s no guarantee that it’s gonna work.
Jeffrey Feldber: So we have a good thing going here, yes it’s a risk to walk away from that money, but we’re investing in ourselves and we’re taking the gamble in ourselves that we’ll be able to grow the company and get it to the level that we have in our mind in reality and at that point it will then better reflect what the actual value is and so that was the [crosstalk 00:39:02]. Go ahead John.
John Warrillow: Sure, Jeffrey. Do you recall what the multiple of EBITDAH was at that stage? I realize it was less than [crosstalk 00:39:09].
Jeffrey Feldber: You know, I don’t.
Stephen Wells: I don’t remember either and then yeah we’re ramping up so I don’t know if we’re doubling every year so this is probably, like we said, two years before we sold, maybe a little bit more. I’m real fuzzy but I mean the multiples might have been, I could be completely wrong, three what they’re offering and we ended up with like 13 or something. It’s exponential, the difference.
John Warrillow: Got it. And so why did the deal fall apart? At what stage did it fall apart?
Jeffrey Feldber: When they presented their offer which, interestingly enough, I believe their expectation was that we would sign it right there and then on the spot but when they presented the offer we just knew. We had talked about it ahead of time. One of the things that was important for us and for everyone listening, money is a funny thing because you have your vision, you have your principles ahead of time but when money comes on the table for a lot of people it just changes everything and they lose their North Star. For us we said, okay, guys, this is our vision, this is what we’re sticking to and we’re not gonna deviate from that so when the offer came in, we knew right away that it just wasn’t gonna happen and we were grateful for the experience, we were grateful for the learning, but we knew we had to continue on and to show to the world what we knew inside of ourselves of what the company was and where it was heading.
John Warrillow: Did you try to push them up? Did you say hey, three x is not gonna work but maybe if you got to eight x we could talk? Or did you just walk knowing there was no way to bridge the gap?
Jeffrey Feldber: They made it very clear that this was their best and final and we knew, based on the research we had done behind the scenes, we knew that where they were, that was the end of the road as well for that so we didn’t look to spend more time or effort or money trying to get it further. When you look at it and fortunately we did say no, to go from three times to 13 times is just huge and in part it’s us being prepared and us doing the homework but also having the right investment banker and giving the time to the company to grow and mature and get to where it wants to get to.
Jeffrey Feldber: But for us, that exercise, the other thing that it did was it woke us up to the fact that hey, if we are gonna sell this company, we gotta make sure that we’re gonna sell it in a way that if we don’t wanna have to do something we don’t have to and in speaking to other business owners or other entrepreneurs or you read about it, you hear all to often I got caught up in the process, I sold the company, and that was it and I realized after the fact that gee, it really isn’t enough for me and we just didn’t want to fall into that trap.
John Warrillow: I think a lot of people listening have received offers for their business and they’re not sure if that’s the first and last offer or if that’s the opening salvo and that there’s a lot of room left to move the acquire. What advice would you have for a fellow entrepreneur who’s got an offer and it’s not enough for them? How do they know if there’s more in the tank for the acquire? If the acquirer could double or even triple the offer versus when they should just walk away. Because in your case it sounded like you were pretty emphatic, you didn’t think about it a lot, you walked away, knowing that that was the best they could do. As an entrepreneur, how do we know? How do we know when the acquirer’s sort of maxed out their offer?
Jeffrey Feldber: Well [crosstalk 00:42:53]. Go ahead, Steve.
Stephen Wells: One quick thing, too. If you can, as in our case, when you have one option you only have one option and there’s, what is the pressure to increase the price on the part of a buyer is just your pressure that you exert. If you can have other market pressures or other competition, in our case we eventually had like 80 people bidding for our company so it created a huge pressure for those people who were serious, they’re gonna have to compete to get us. Maybe not everybody can do that but I think one thing is to just try to create competition, whether it’s marketplace or the competitors or other buyers and be prepared to maybe have other offers.
John Warrillow: Jeffrey, what would you add to that?
Jeffrey Feldber: I would agree. I have a saying, one is never a choice, two is a dilemma, three is when you really have a choice and when you can get multiple offers in, you’re now getting validation of where you are at that specific point in time. Now maybe tomorrow it can be double or triple but it could also be half or even less than that but when you get multiple offers in it validates where you are and what the opportunity is and for business owners that are listening in, I will tell you flat out and in speaking to other entrepreneurs who’ve also been through the process, you will lose some potential buyers who say outright, I’m not gonna be part of an auction. Not happening.
Jeffrey Feldber: And in our experience, I would say hey that’s okay. There’s plenty of other buyers that’ll be out there and the more that you can get into the process and the more that you can get to bid at the same time, the better offer you’re gonna be.
John Warrillow: Such a great lesson.
John Warrillow: So let’s jump ahead to the actual final sale. So you built the company up, 18 million dollars of EBITDA, you hire an investment banker, they get the data room done and so forth. Did they come up with the long list of potential candidates to acquire? Was that a collaboration between you and your investment banker? How’d you come up with the long list of potential acquirers?
Jeffrey Feldber: You know, here’s where I give full credit to the investment banker. John, I wanna circle back to one the things I said earlier on in that we were the industry’s best kept secret. And this is probably me more than Steve. I’m always the paranoid guy of hey, if other people find out about us maybe they’ll come in and start to compete with us so we really were a world unto ourselves and just a very quick story, when the investment banker first saw our numbers, they had never known us before. They kind of heard about us but didn’t really and when they saw our numbers they didn’t believe us. They had to run their own audit on us and just make sure that we were telling the truth and everything, of course, was what we said it was but they brought that value to the table
Jeffrey Feldber: And looking back, and I think a great take away for anyone who hasn’t sold the business or is thinking about selling a business, I would say today or even yesterday is the time to develop a relationship with an investment banker. Not to sell your company, but to do some consulting for your company and yes, it costs money and yes, it’s gonna be some time but had we done that ahead of time I believe they would have, obviously, had a much, they would’ve known us, they would’ve been more comfortable with us and I believe the value for the company would likely have been more had we had that relationship with them. But it was the investment banker that really, once we brought them in they did everything.
Jeffrey Feldber: They said okay, here’s who we’re gonna be sending it to, here’s the package that we’re gonna be putting together, let’s talk about how we’re gonna position you and once we had that they put that all together and got that out to the marketplace.
John Warrillow: And you said that you had 80 expressions of interest? How formal? Just like a quick phone call, yeah, send me the book versus actual 80 letters of intent?
Stephen Wells: Well it wasn’t 80 intent. Keep me honest here, Jeffrey, but I think we had 80 people initially on the list that showed interest and that got whittled down.
Jeffrey Feldber: It did but you know Steve, you’re not far off. It was at least 80 that were interested. I wanna put out there it was somewhere between I wanna say between 25 to 30 letters of intents that we received because again, we equated a new category and it’s the old model, if you can’t beat them, join them and that’s what buyers saw.
Stephen Wells: And then just to clarify even then the next level, there were probably around eight to a dozen people who probably spent in excess of 200,000 each just to do financial audits and then down to another half a dozen or four that’s probably spent close to a half a million to do audits.
John Warrillow: And so, it begs the question, I mean that’s a pretty wide auction. That’s a lot of information in the public although everything’s under NDA, I get that, but there’s still a lot of information being put out there. How are you controlling the message to your employees? Have you told them? How are you controlling the message to your customers? The universities and colleges that you’re working with, again, have you told them?
Jeffrey Feldber: It was a struggle for us. That, of the whole process, the before and after on the communication side was a struggle. With the employees in time we brought people up to speed and we’re very open with them of we’re looking at how we can take the company to the next level. We realize that we need some help with that and we’re gonna be speaking to different companies who specialize in that, who can help us get there quicker to make us bigger and provide more opportunities for everyone here. So the employees were excited about that.
Jeffrey Feldber: And on the client side, that was a little bit more of a slippery slope but again, we were open of we’re just exploring different ways of how we can grow the company and looking to work with different people who would like to speak with you and find out how we’re doing. Just be honest with them and share your experiences.
John Warrillow: Because at some point, I’m assuming, during the diligence your acquirer wanted to speak with the universities themselves, directly.
Jeffrey Feldber: Oh absolutely.
Stephen Wells: Oh yeah. Yeah.
John Warrillow: Those would be delicate conversations I’m sure. So you had 25-30 letters of intent, what was the gap between the lowest, on a percentage basis, and the highest offer in terms of letter of intent? Were they relatively the same or how big a gap was there?
Jeffrey Feldber: You know, John, one of the things and here’s where having an investment banker, I mean it’s a two edged sword but it really worked for our advantage. We had done a lot of research going into this and one of the pain points in the process that we had learned about was a good old bait and switch. Somebody comes in with a terrific letter of intent, a terrific offer, you give them the nod, they come out with the diligence and they take the offer and they put it substantially lower. And so one of the things that we had spoken significantly about with the investment banker was a, with the people that you have a sense of who are likely able to pull the trigger or you have that kind of relationship with, please tell them that the bait and switch will be the beginning and the end of any transaction with us and it’s just not going to happen.
Jeffrey Feldber: And so that message was put out there and for the companies that we had the sense A, could get the financing to do it and B, had the where with all to pull it off, when we focus on those companies, they weren’t that far apart and this is where the investment banker comes in of leaning on their experience of where do they think the fit is and who’s going to be the most likely to take this across the finish line and so it was really a combination of all those factors that helped us decide with the letter of intent. Steve, would you add anything to that?
Stephen Wells: No, this is kind of along the same line but we incentivized our investment banker to, we gave him a tiered system so that the higher the price, the larger their percentage and instead of trying to negotiate them down, we negotiated them up and that helped, in somewhat, maybe mitigate that in inherent conflict of interest between the buyer and seller, between the investment banker. So that helped keep them honest and I think, in the end, get us a better price.
John Warrillow: So the investment banker is getting a larger chunk, the better the price they get.
Stephen Wells: Correct. We had a baseline price that we thought was a range that we wanted, have to have and they get a fee for that, obviously, but it was gonna be a lower fee and then we gave them extremely good fee toward the top end where we thought we wanted to be.
John Warrillow: What did you think it was worth? You ultimately sold for 13 times EBITDA, north of 200 million dollars as I understand it. What did you think the business should be trading at? Was 13 your number?
Jeffrey Feldber: For me, that was, I do a lot of things just by gut feel and I’m not so much a numbers guy but more in the other areas but for me that was within the range of what was there and John, something just popped into mind, just a very quick story. We were speaking with the investment bankers and they’re all the financial gurus and the experts and they said Jeffrey and Steve, it’s a very simple calculation. Someone’s gonna do it in an excel spreadsheet and that’s how they’re gonna come up with the value and I remember we spoke and I said to the investment banker, you know I hear you but I don’t believe that because everyone is human and we tend to make a decision with our emotion first and we justify it with logic later.
Jeffrey Feldber: Leave it to us. Let us get the story out there. Let us share our passion. Let’s make sure we have lots of contact with the buyer so they can see what the future is and what we’ve been able to do and we said offhand, where you are right now, throw us a range of where you think we are and I don’t remember exactly what the number was but they threw us a range and it wasn’t near where we ended up and I said okay, leave it with us and we’ll do the rest from here and sure enough when we were able to share our story and our passion, it got the buyers excited on the opportunity of what was there for them and for us it was helping to increase the value of the company just by getting the passion out there, telling the story, and telling what’s still left to be done.
John Warrillow: So what did the investment bankers say they thought the business was worth on a multiple basis?
Jeffrey Feldber: I would put it, I’m gonna say at around nine or ten.
John Warrillow: Got it. So they’re saying Jeffrey, be more realistic. Throw it in a spreadsheet, they’re just gonna discount your cashflow back to the present day, they’re gonna project it out, and it’s gonna be worth nine or ten times.
Jeffrey Feldber: That’s correct.
John Warrillow: And you’re like I don’t buy it, we’ve got a story to tell. So why did you hire that ibanker then? At some point if you felt like you were, I mean it doesn’t sound like much between nine and 13 but on, whatever it is, 18 million dollars of EBITDA, that’s like 60 or 80 million dollars of value gap. Were you tempted to find another investment banker?
Stephen Wells: They were the leaders in the industry. I mean they had the connections. They were doing, I don’t know, I’ll make it up, 70, 80% of the big deals in the education space so they were the guys to play with and they proved right. They really did help us and I think it was their connections and again, we’re in a blue ocean. We’re a new category and it took everyone a little while to kind of get their head and their numbers around who we were because they’re trying to value us on past models.
Stephen Wells: Once the saw the reoccurring revenue, the contracts, this whole new methodology we had, they could see that that had a lot of value and that had a lot of potential but it took effort on our part to show them that so they could show the potential buyer.
Jeffrey Feldber: And you know John, hands down the investment banker, the credit goes to them and we just believed in them so much. You have all these big companies and you have these big company names but you’re really only as good as the person or people that you’re working with. We believed in our investment bankers so much that when we did the agreement, in our agreement, you couldn’t get out of the agreement but we had one clause and that one clause was that if the investment bankers left that particular company, our deal was off. That’s how much we believed in the investment banker and we were literally putting our business future into their hands and so we wouldn’t have it any other way.
John Warrillow: So you had a binding agreement to sell the company with an investment banking firm with the one out being if your personal banker, the person that you knew left then that would give you an out. That’s interesting. It’s a fascinating trend. I’ve never heard that before.
John Warrillow: But it does beg the question though, if you’re a homeowner, for example, and you hire a real estate agent, you’re thinking of hiring a real estate agent and they come in and value your home at 70 60% of what you think it’s worth, a lot of people would find another real estate agent. I realize selling a business is nothing like selling a company but, and I also get that your banker was the leader in the industry but at some point did it provide, not sure what the question that I’m trying to ask is. I just find it fascinating.
Stephen Wells: Well you know John, I think what you’re kind of alluding to is, I mean our personalities are ones that were probably, we’re gonna push it anyway but we’ve talked to a lot of business owners and people who, I don’t know whether it’s fatigue of their business, they’re tired, they’re just gonna wanna take the first offer that comes along and not even work to hard to change that and that’s just not our personality and I would encourage any other business owner not, really they can extract so much more value if they can apply some discipline and then work on some things even though they’re frustrated, I know, and maybe they’re aging or whatever the problems are. They wanna get out. I think the effort will be worth it if they can stick it in.
John Warrillow: What kinds of things would you invest in, Steve, to ramp up the evaluation? You mentioned sticking it out and apply some rigor. What sorts of things would you?
Stephen Wells: Well, I mean we’re probably wrapping it up pretty soon, I mean we left money on the table. You can’t be 100% right, you know? We didn’t build up our management team soon enough. If we had had a more executive management team, but again we’re entrepreneurs, we run it a lot, it’s not in our nature to really hire CEOs and CFOs but if we had built that up, we definitely left I’d say 20 points on the table at least. If we’d had our data room in a better spot I think it would’ve sped up the process and I think that’s something anybody can do. I think they can look at their product. Kind of look at how they have their contracts. Are there ways to continue those contracts longer to create a more visibility for their income stream that people will value that higher and have more reoccurring revenue. I mean those are a few. I’m sure, Jeffrey, you’ve got some ideas too.
Jeffrey Feldber: Really much of what Steve has said but if you put yourself in the buyer’s shoes, really what are they looking for? They’re looking for, they wanna have the numbers. They wanna have all the, on the legal side, all the contracts and the agreements, everything’s gonna be in order. That, to me, is not what I call an order winner, that’s an order qualifier. You have to have that if they’re gonna even consider buying you but what’s then really important, for me, are two things. Can the company run without you? And on that note and to what Steve was saying, we were a little bit late in making it happen and so that was one of our weak spots.
Jeffrey Feldber: And then the second point is okay, now that we’ve bought the company as the buyer, what’s my upside? What’s the future here that you haven’t done or you couldn’t do or you’re about to do or you couldn’t think of, that I can now capitalize so I can go back in, not only recoup my investment but make a profit and a large one at that and when you can put all those in place now you have something.
Jeffrey Feldber: For us, a lot of those things were in place, we could’ve done a better job, I think, of moving it further along the line. But one of the other things, John, just very quickly to mention and this you’re not gonna find in an excel spreadsheet or cell but we just had a sense, we couldn’t tell you when, but we knew we were at the top of the market. Didn’t know when the market was, the bubble was gonna burst but we knew it was fairly imminent and from that perspective we said to ourselves okay, we can wait until we’re perfect although there’s no such thing as perfection, it doesn’t exist, but we can wait and try make ourselves better, miss the opportunity and have to wait another seven or eight years, maybe we’ll be around, maybe we won’t, we’ll make the best of what we have. We’ll make the most of what we have and work with the market and just go with the timing and make it happen.
Jeffrey Feldber: An interesting side note. We closed in June. It was June 2007. Two weeks later, in the markets that’s when the whole mortgage crisis started to hit. Had we been two or three weeks later, the deal likely wouldn’t have been done. So from a timing perspective, from a market perspective, we couldn’t have timed it any better. Not that we had any control of that but we went with our instincts and saw where that took us and in this case it was the right thing to do.
John Warrillow: Incredible timing. Do you ever feel any survivor’s guilt? I mean so many entrepreneurs went through the financial crisis and are really now only digging out of that ten years later. You guys timed it perfectly. Do you ever feel do you pinch yourself from the timing or any guilt? I don’t know if guilt’s the right word.
Stephen Wells: Well you know I feel a tremendous amount of gratitude and that’s a very long and deep subject which we don’t have time to talk to today and after the sale which is a whole nother conversation for another time, that was a foundational attitude for me to have gratitude and see what we were given. We worked and to put that in the right perspective in a day to day way.
John Warrillow: Jeffrey anything to add?
Jeffrey Feldber: I add to that, you can have the best company, you can be the smartest entrepreneur, you can have the best team, but what you don’t control is the market timing and we did a lot of things wrong, we did a lot of things right, from a market timing perspective, we just happened to be there and it was good, more than good. But to Steve’s point, at the end of the day when we look back and we look at what happened afterwards, I’m just so thankful and so incredibly grateful because it wasn’t just us. It was the entire team. It was all of our team members, what some people call employees, we call team members at Embanet, it was our customers. It was all of the accountants and the professionals and the advisors and the investment bankers. It was really just a very large team effort that happened to work. It could’ve easily not have worked but it did and for that to this day I am grateful and thankful and count my blessings.
John Warrillow: How did you choose to award your employees?
Jeffrey Feldber: Go ahead Steve.
Stephen Wells: We’ll both answer the question. I’ll start. We did a little surprise and we, unbeknownst to them, we took a lot of money and we just gifted it. It could’ve been a secretary who was just very faithful and didn’t even really have a lot of responsibility, up to someone who was a responsible manager. It surprised and shocked a lot of people that we did that. These weren’t performance bonuses or these weren’t golden parachutes, any of that, this was just after it was all done, out of our pocket, then we wrote some checks. I mean that was one way that we did it.
John Warrillow: Can you remember any reactions that you got from when [crosstalk 01:04:37]?
Stephen Wells: Yeah go ahead, Jeffrey.
Jeffrey Feldber: If we had a reality at the show, I mean, people just burst into tears instantaneously. Lot of just crying and hugs. I think we may have even had a person fainting one or two. It was just surreal. It was over the top and it was just our way of just giving back to the people and for many people it was a life changer. People paid off mortgages or people were able to do things that they thought they just couldn’t do or some of them happened to just be in a tough situation and it just changed their life and for us it was just our way of putting your money where your mouth is and in a real way saying hey, thank you. Couldn’t have done this without you, we’re just so grateful and appreciative.
John Warrillow: Well it’s an amazing story guys. I could talk to you for hours but I think we should probably wrap. I’m super grateful for you spending the time and sharing it. Jeffrey and Steve, what is the best way for people to reach out to you if they wanted to say hi on social media for example? What’s the best way to reach out?
Jeffrey Feldber: We’re both on LinkedIn. My last name is Feldberg, Jeffrey Feldberg. F-E-L-D-B-E-R-G. Steve’s a little bit easier to say. Steve go ahead.
Stephen Wells: It’s Stephen. S-T-E-P-H-E-N, Wells, W-E-L-L-S.
John Warrillow: And you guys are both LinkedIn. Well listen, it’s a great pleasure to have you both and congratulations on an amazing exit. It was great to have you here. Thanks very much.
Jeffrey Feldber: Thank you John.