Photo courtesy of LinkedIn
Ryan Atkinson had already exited a staffing company when the opportunity to start CORE Resources came along. He didn’t feel like he had the energy to go all-in as he had on the last venture, so he was content to pony up capital and advice and be a background partner. His instincts paid off and eight years later, he and his business partner enjoyed an 8-figure exit.
CORE Resources primarily worked with banks, augmenting their IT workforce for large projects. The projects could be anywhere from 3-6 months to 3-5 years. They allowed banks to have a flexible workforce for these projects without the time and expenditure of onboarding and offboarding full-time employees. They also paid these contractors really well, keeping effectively an 18% average margin for themselves.
The idea for CORE came from Keith Bumstead, a former employee of Ryan’s at the previous staffing venture. Ryan had seen Keith work up close and knew he had what it took to run the company, but lacked the capital necessary to spin up a staffing company: while banks are reliable customers (they always pay their bills) the company needed a runway of capital while they increased their contractor head count. Ryan was happy to put up that capital in exchange for 50% of the company, and over the years, he ended up investing $2M.
Manager and Owner
One of the uses of the capital was a reasonable salary for Keith as the day-to-day operator for the business. To make sure there was alignment in the direction of a future exit, Ryan and Keith would periodically sit down and speak about the performance of “Keith the manager” and revisit how his pay package could be aligned with the overall goals of the business and of “Keith the owner.” Needless to say “Keith the manager” was incentivized to grow the business, and grow it he did.
While neither owner took any dividends for the first 4-5 years, in the final 3 years they owned the business, they took regular dividends. By those final years, they were starting to get noticed by other companies in the field, and soon enough, they had competing offers.
Cultural Differences
CORE was a Canadian business and a company out of Quebec had been having discussions with them for about a year when an American firm came out of the woodwork and put together an LOI within six weeks. Faced with the speed and seriousness of the offer, Ryan made a verbal commitment and went back to the Canadian company with the idea that they were going to move on with the Americans. The Canadians countered with a much higher offer, and Andy, already feeling guilty about a flip flop, told the Americans he would pursue the deal with the Canadian company and would let them know if anything changed.
Things, indeed, changed. During due diligence it came out that of the contractors that CORE had in place, 70% were strictly “IT” while 30% were “helpdesk” or other customer support roles. The acquiring company was publicly traded and IT-focused and felt the narrative of buying a company that was “only” 70% IT wasn’t acceptable and bowed out.
Somewhat embarrassed, Ryan went back to the Americans and asked if they wanted to speak, letting them know explicitly why the last deal had fallen through. If the Americans rebuffed, he and Keith had already had a heart-to-heart and were ready to grind forward for another 2-3 years and revisit the market again then.
Turns out the Americans were happy to honor their original offer and the deal closed for 75% upfront and 25% in an earnout. Ryan had his second exit, Keith his first, and at eight figures, it wasn’t a bad exit at all.
Lessons
Exits always offer valuable lessons. Here are three we can glean from this case study:
- Don’t make your business complicated. At the time of acquisition, CORE was doing $30M in revenue, with an EBITDA of around 8%, leading to a 7-8X multiple in the sale. And all because they connected willing contractors with companies in need and took a modest fee for the connection. All Keith had needed for startup was funding for an office and working capital to get through the first few months before clients started to pay.
- Partnerships always work best when the terms are clearly stated at the beginning and support is given all the way through. Ryan helped Keith de-risk his idea by providing the upfront funding, he de-risked his own investment by having a shotgun agreement that made sure his loans were paid first in any sort of separation. They also made sure to regularly examine the pay package of “Keith the manager” to make sure it was aligned with the goals of “Keith the owner.”
- Sometimes deals don’t work out, so cultivate multiple suitors. We’d all like to have parties fighting over our business, as happened in the case of CORE between the would-be Canadian and American suitors. Ryan had not rushed with the Canadian party in the beginning, which allowed both sides to feel comfortable with the acquisition from the start. But the reason Ryan was able to go back to the Americans when the deal with the Canadians was eventually abandoned was because he had been upfront and honest with the Americans, leaving the door open to work together in a worst-case scenario (which eventuated). Don’t say yes (or no) too quickly.
Are you interested in cultivating multiple suitors for your exit? We’d love to help with that. Reach out to us today.