Case Study #93: Tad Fellows’ Eight Figure Exit with iLab

Photo by Louis Reed on Unsplash

In 2006 most people had no idea what SaaS (Software As a Service) was. That meant that Tad Fallows and his business partners at iLab had to not only build a company but also educate their customers in this new way of buying and building software. Their hard work paid off and ten years after starting the founders had a very handsome exit.

Origins

One of the founders was working in a university lab and when catching up with Tad he would complain about how he had to spend a lot of time building software to keep track of all the experimentation in the labs. This is eventually the software that iLab would build, but before that time they were functioning as a procurement company for these universities and hospitals to assist with their research. Their biggest customer came to them and told them that they would pay them a significant amount of money to build software that would help them keep track of all their experiments and that iLab could keep the IP and sell the software to others. Who could say no to that?

Tad and his team asked for a 12 month subscription paid upfront and they started growing. This model led to great cash flow, but first, Tad had to learn how to deal with the pace that universities would pay invoices. “If you know that the University of Michigan pays 120 days after you invoice them, just send the invoice 90 days before it’s due,” he quips.

Not Ready for Primetime

The partners had always said that they would sell if someone offered them more than they thought the company was worth. They got an offer from a competitor in the space that was 3X revenue, which is low in the SaaS space. They turned the offer down, but the offer itself inspired them to ask for help, which they sought from a company that specialized in software-focused investments. The consultant looked at what iLab had going on and said they would offer coaching over the next year, and if they wanted to sell then, the company would have a good shot at selling for more than they had already been offered.

In the coaching, the advisors focused on three aspects:

1. Revenue: They told them to grow the company 50%. That sounds like a lot, but that was about the pace that they had already been growing, and at their ARR, that number sits in the median of comparable companies.
2. Expand TAM: at this point, iLab only had US customers, but the advisors noted that even if new countries like Germany and Australia got added to the customer list and represented as little as 10% of revenue, that would still be something that an acquirer could get excited about.
3. Clean up your data: make sure that you have clarity on how you get and keep your customers, so buyers have a very clear sense of how you are growing and what opportunities lie ahead.

One Year Later

Tad and the team did as they were told, and a year later they went through the process just as they were informed it would go: emails to 100 potential buyers, of which 30 would go a bit deeper, of which five would make an offer. Tad reminisces that he had negotiated a lower commission with the advisors over five companies with whom he was really well acquainted, and thought were most likely to end up acquiring iLab. His advisors told him that none of them would end up offering, and true enough, none of them did. The eventual acquirer, Ajilent, was a strategic buyer. They had a strong pharmaceutical presence, and they coveted the strong academic presence iLab commanded.

The Deal and the Aftermath

The company had 75 employees at the time, and 74 of them transferred into the new company, which had 25,000 employees (they didn’t need the HR person, who was given a severance). Tad and the other owners were given a time-based earnout, meaning that as long as they stayed, they would get additional stock options outside of the upfront cash that was delivered at closing.

This ended up being the best option because Tad really had no control once the deal closed. There was no alignment between the business development team who had seen iLab as a great option, and the website and sales departments who didn’t really know the best way to fold iLab into their current processes, and as a result, new sales, which had previously come in through an optimized website, floundered when that website was folded into a larger corporate one. But after some initial bumps, iLab got back on track, and after his earnout period was complete Tad moved on, though a lot of his employees are still at the new company to this day.

Lessons

As always, we look at three lessons to take from this acquisition story:

1. Whales are great. The most important part of iLab’s story was having a key customer come to them and say we will pay you a lot of money to do this thing we need and you can feel free to sell it to others. This software ended up having more potential than what the company had been doing previously, so it led to a pivot.
2. Find advisors. Tad and his team knew they needed help to get to the sale price they really wanted, and they did what was necessary to drive that higher price.
3. Tie an earnout to time. We don’t often hear of earnouts that are not tied to revenue or earning milestones so the wisdom of an earnout tied to time means that there’s no serious stress after the acquisition: the owners simply need to work within the constraints of the new company, without the agency they had when they were the shot callers.