Case Study #42: Cash From the Cloud
When Aric Bandy joined Agosto in 2007 the company had already been in the managed services business for seven years. Managed services was a saturated and capital-intensive space, and Aric saw an opportunity in a then-emerging market that we take for granted now: the cloud. While he didn’t know then that a big exit was in his future, he knew there was the possibility of one if he moved with intentionality.
Demand
From 2007-2014, Aric only saw demand for cloud services and the support related to them increase, whereas the market lagged to keep up with demand. He knew there was a finite window to expand his firm to fill that gap, and managed to encourage the company not only to divest its managed services division, but to plow the majority of those profits back into the company to expand its cloud offerings.
The “cloud” market has three big players, Google, Amazon, and Microsoft. Even with their large investments in the space, they weren’t equipped to handle individual accounts. They relied on certified and trusted partners to use the infrastructure they provided to cater to individual client needs. As such, Aric often found himself walking into boardrooms of big companies, many in the Fortune 100, side-by-side with a Google representative. He was able to bask in that brand halo and become a trusted vendor for these companies.
Exit Thesis
Unlike many business owners, Aric was obsessed not only with the idea of selling, but with the way to do it right. He wanted to engineer his business to yield a premium valuation.
Key components of this “exit thesis” included:
- Audited financial statements. He hired a reputable firm at significant cost to make sure they had squeaky clean financials that would stand an audit.
- Assignability. Since he had contracts to manage the cloud services of many firms, he needed to make sure that those contracts could be transferred to a future buyer. In the early days of growing the business, he wasn’t as serious about the wording in the contracts. But in 2016, as he got ready to go to market, he went back to tighten up all those contracts.
- Growth possibility. He had developed loyalty with his existing customers and they wanted more services than he could provide. That meant that there was good growth potential with the right partners/acquirers.
- Timing. He had to be willing to walk away from offers if he didn’t feel the premium was right. This happened on more than one occasion when they went to market and got offers they weren’t happy with.
Notice that all of these ideas of Aric came from a place of reflection and patience. He wasn’t in a hurry to sell the business, but that didn’t mean he put off thinking about how to do it right.
Blood In the Water
What changed things was the strategic acquisition of a competitor in the cloud space, for 13-14 times EBITDA. Suddenly other players woke up, and the offers that Aric and his team were dissatisfied with before this acquisition suddenly got a lot better. He went exclusive with one buyer in December 2019 and closed in April 2020, in the middle of lockdowns and a global pandemic. At the time of closing, Agosto was providing services to 360 companies, 80 of which were in the Fortune 100.
Key Lessons
- Be on the lookout for where your industry is moving and see if you can’t move there first. Aric ditched the comfortable model of managed services and leaped into the opportunity of cloud services.
- Have your paperwork and contracts in order. This is probably one of the first three questions we always ask people who come to us to sell: do you have your financial paperwork in order?
- Have a plan. Aric didn’t just wait to get tired of running the company. He planned for a future exit for almost 13 years. And he got a corresponding reward for that planning and patience.
- Be ready to walk away. If you don’t have to sell, you have the freedom to refuse an offer if you feel you can continue to grow the company and get a better value.
If you need help with any one of these lessons so you can plan for the exit of your dreams, give us a call.
