Archive for category: Case Studies

Mark Carlson bought Minnesota Mailing Solutions in 1998 for around $1M and grew the business over 10 years, eventually selling it for $4.5M.

It was his ability to stay unemotional and focused on business fundamentals that ensured he walked away with the best offer possible.

In 1998 there was still a very large market for what Minnesota Mailing Solutions was offering: products that supported large-scale automated mailings for companies (think folding and inserting machines, with giant meters at the end of the assembly line).

Mark took the 6 employees and the inventory the business came with and went about growing the business.

In 2008 Mark saw two developments which triggered a desire to sell. The first was consolidation within the postage meter industry.

A merger shrunk a field of four USPS-sanctioned players to three. The second was a major and ongoing decline in the volume of first-class postage and sale of equipment.  

This led the three remaining players to look for profits as growth slowed. That’s when the idea of opening their own corporate stores that would compete with their own dealers (like Mark) became attractive. Indeed, they were able to track from an entire history of numbers just how well certain markets could do.

Mark decided to bring in a broker to help him navigate the sale unemotionally and thoughtfully. When the broker first solicited offers, both buyers lowballed, trying to get the most for the least. After declining both of the offers (around $3M), Mark and the broker went back to the fundamentals. How was the business being valued?  

Mark was using the same reasoning as when he originally bought the company: around 1X annual EBITDA plus inventory. He was doing around $4.5 million in annual revenue and had a small inventory and that was what he wanted. They went back to the buyers with the reasoning and the buyers also had realized now that they were bidding against each other.  

The smaller player between the two had been Mark’s dealer for 10 years, and their fatal mistake was in thinking this was an emotional play. At one point, the remark was made to Mark’s broker, “Mark is loyal to us; he’ll never sell to them.”  Them, in this case, was the biggest player in the industry and had been Mark’s direct competition for years.

Despite his broker dropping numerous hints that the bigger player had come in higher, that company didn’t increase their bid, and Mark took the better offer, which was greater by a magnitude of $500,000.  

He got a 98% payout with 2% contingent on the inventory holding up in an audit, which it did, and three months after the deal closed he got that 2% as well. He also stuck around for three years on salary, transitioning the company into the new products and the buyers’ way of doing business.

An unfortunate epilogue to this otherwise happy ending for Mark, who had built great value in a business that traditionally featured 15% net margins, was a frivolous lawsuit from the buyer who had lost out on the deal.  

Like a spurned lover, they reacted emotionally (precisely what Mark had avoided) and accused Mark of taking trade secrets, etc. After about a year of depositions and $100k in legal costs, the case was (unsurprisingly) dropped after the tantrum ran its course. But it’s a good thing to note that even if you’re able to remain unemotional, others may not.

Key takeaways:

1. Know your numbers. The reason Mark was able to get even more money after receiving offers for 3X what he paid for the company was because he truly understood how his business worked, even in a declining market.
2. Watch for signals. Mark saw the writing on the wall and rather than panic or avoid action, he moved and capitalized.
3. Know your values. Everyone will approach the “loyalty” question in this story differently, but Mark didn’t decide his values during the transaction. He knew ahead of time, and they guided him to a successful conclusion.

Before Jeff Hoffman became a cofounder of the Priceline group of companies, he built Competitive Technologies, which was one of the first business intelligence companies in travel. He’d had a suite of products that would help companies manage and reduce travel expenses.  

He got his first break with Exxon-Mobil, which spent $40M USD annually on air travel alone. He knew that such a large company wasn’t simply going to offer money to an unproven startup, so he asked for an office and a negotiated percentage of savings (much like how freight auditing works).

He saved Exxon a lot of money and went on to add other features which were on a monthly subscription plan. He went from no revenue to $5M and was at $12M by Year 3.

It wasn’t long before he and his firm got the attention of the biggest player in the space by far, and that was (and is) American Express.

They reached out and asked to do a licensing deal, as some of their clients were asking for products that only Competitive Technologies was offering. The speed of adapting and ability to change had beaten out the nearly infinite money and resources that AMEX had.

But Jeff knew that licensing to AMEX would kill his business, and so he countered with an offer to sell…lock, stock and barrel. While AMEX was initially a bit shy about the idea, Jeff went “on offense” and started calling Thomas Cook and other competitors to stoke the fires with AMEX.  

He also went to a tradeshow that he’d previously not planned on attending, acquired the booth across the way from AMEX, and got everyone to come by the booth…friends, clients, everyone. Later on AMEX would tell Jeff that the idea of losing a deal to a competitor, as well as seeing the popularity of Competitive Technologies at the tradeshow, were what moved them from “interested” to “serious” in the acquisition process.

Jeff even went “on offense” with his M&A firm, as he couldn’t afford their full retainer at the time and offered them a kicker based on the final outcome of the deal in addition to some cash up front. One of his largest investors also offered to add a travel agency he owned into the deal as well so the total deal was around nine figures.  

But, as they entered negotiations, it became clear that AMEX normally did 3-year earnout deals on acquisitions and Jeff simply wasn’t going to take that deal. When this issue became a sticking point in the deal he started to reach back out to competitors and again went “on offense,” at one point literally getting up from the negotiating table at the hotel and saying, “We don’t think you’re serious, and we’re going to move on to pursuing an acquisition by one of your competitors.”  

He and his team walked out and he turned to one of his mentors (also the largest shareholder) and asked, “What now?” …“We’re going to walk to the hotel, but they will call us before we make it there.”  Sure enough, AMEX called him while he was still on the sidewalk, and they closed the deal.

Obviously most of us aren’t going to deal with AMEX nor are we going to consider walking away from a nine-figure deal. But the lessons are there for us to apply in our own circumstances:

Innovation – Jeff had created something that a big player coveted.

Strategic Action – Jeff increased the desire in his buyer through smart plays.

E-myth – Jeff had created a business that didn’t depend on him.

And finally….

Patience – He was willing to wait for the right deal, up to and including walking, and that showed AMEX they were dealing with an equal, and they treated him as such.

John Bowen was the CEO of Reinhardt Werba Bowen (RWB), a financial services company that was acquired by Assante Capital in 1998 for $25M.

While the exit was ultimately a happy one, it started inauspiciously. Why? Because John was the object of a “fishing trip” from a competitor.

What’s a “fishing trip”?

Sometimes a firm that’s in the same space or looking to come into your space will put together a Letter of Intent to start the diligence process. The goal is to get a better sense of your business and your direction.

While there’s an outside chance of a sale actually closing, most times that’s definitely not the goal. The goal is to fish for valuable insider information.

Why did John’s firm want to sell in the first place?

John and the other two partners (they each had ⅓ of the firm) didn’t have the expertise or capital to scale up their growth. As they went out into the private equity sector to raise funds, they found that most weren’t interested in this expansion of theirs. Instead, they wanted to buy the entire firm outright.

At one point, a global bank offered a terms sheet with the number $37M at the top. Given that the EBITDA of the firm was $1.6M (not normalized for owner compensation), this seemed too good of an opportunity to pass up.

What were the warning signs?

The biggest warning sign was the slow walk from the acquirer. We’ve said over and over that time kills deals, and this buyer was very slow in its due diligence. What else?

• RWB was based in Silicon Valley. The acquirer was based in New York and they would never send anyone very senior to California, but always demanded that all the principals come to New York.
• RWB had quickly built a practice around Silicon Valley entrepreneurs and this firm had almost no experience in that space, AND
• They were almost entirely focused on strategic questions. They wanted to know how the business ran, what kind of software was being used, the differentiators RWB was using, etc. And they had almost no questions on financial modeling or the P&Ls (the classic due diligence questions).

“Never gonna happen”

John finally got wise to the strategy of the acquirer. This happened when a trusted advisor looked over the terms sheet and was briefed on the process so far. “If you don’t have the agenda, they do.”  John ended the process with the big bank. Next, he went back to the drawing board and focused on what the company was worth and why.

It was now known that RWB was for sale and some firms presented themselves as interested. They got an unsolicited term sheet from a firm that eventually ended up closing the deal. John noted that the entire process was so different.  “They said they wanted to put this together in 6 weeks, and we did.”  The momentum and intent was obvious.

Of the $25M exit, $15M was upfront and another $10M was in an earnout. John managed to escape being the victim of a fishing trip, close out a sale, and share his lessons with all of us.  

Sold to a Competitor

Andrew Yang was the CEO of Manhattan GMAT when he sold to a competitor, Kaplan, in 2009.  

At the time of the sale, the company was doing $11M annually. Andrew stayed on post-acquisition and added an additional $6M a year in revenue before departing to start a non-profit.

What is the GMAT?

The GMAT is a computerized standardized exam (think ACT or SAT, but much harder) which students take in order to enter the top business schools.

Manhattan GMAT only hired instructors who scored in the 99th percentile on that test. They then paid them $100/hour as a base salary.

How did Andrew get involved?

Andrew was first asked to help create a curriculum for the one-man band that was the kernel of what would become Manhattan GMAT. He did just that and from 2001-2005 helped grow the company to $2M in annual revenue.

Why did he decide to sell?

The seeds for the sale were actually sown during a legal exchange. The general counsel at Kaplan had sent a letter identifying a question that was on one of Manhattan GMAT’s online forums. This question bore a close resemblance to a Kaplan question. Andrew was asked to remove the question.

Andrew responded promptly and said he would take the question down. He said also that he hoped future interactions would be around more positive issues. This took the general counsel by surprise, who subsequently shared the positive experience with the CEO of Kaplan. A few weeks later, the CEO of Kaplan asked Andrew to lunch.

Andrew had no plans to sell at the time, much less have the business sold to a competitor. Kaplan wasn’t offering to buy, but they were direct competitors. Kaplan’s CEO indicated that he would like to be part of any discussion for acquisition if and when Manhattan GMAT decided to sell.

Key lesson here: Being courteous when complying with a legal request isn’t hard and it may lead to wonderful results.

A year later, as more investment offers had come in, a financially-based offer from one of Kaplan’s competitors, Princeton Review, came in. Andrew let Kaplan know that a deal was in play.

Kaplan came back with a strategic valuation which offered roughly 40% more than the financial offer. There was really only one choice at that point. Andrew accepted Kaplan’s offer.

What was the toughest part of diligence?

Keeping the process from his staff. Andrew prided himself on transparency. He was having to produce all the necessary due diligence documents personally, though it seemed he was making strange requests of his staff for obscure and old reports.

Manhattan GMAT had been the tough, scrappy underdog, and now they were going to sell out to the “man,” the biggest corporate behemoth in the space.

Andrew made up for what he considered a departure from a core value of the old company by setting aside 10% of the earnings of the sale to pay out his staff based on service and loyalty. He particularly remembers that one of the team members used that payout for a down payment on a house.

Andrew now runs Venture for America, which places top college graduates in startups for two-year periods to help build the next generation of entrepreneurs. That venture grew directly out of his time building Manhattan GMAT.  You can learn more about it here.

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