Archive for category: Case Studies

Years ago Trent Dyrsmid was one of the principals of Dyrand Systems, a Vancouver-based IT firm.

He managed to build the company to $1.2M in revenue before a series of events forced a sale…and to a party he never expected.

Where they started

Like many IT firms “back in the day,” Trent was running a basic break/fix IT service.  There was still the notion of computers and technology being somewhat of a utility – like water or electricity – and the idea that you didn’t really need to worry about those things until something was broken.

But early in 2002, due to competition for a client with a much larger competitor, Trent came across “managed service,” in which a monthly recurring charge covered ongoing monitoring and maintenance.  These days, such a service is the industry standard.

Growth peaked

Trent had a lot of success growing the business, doubling revenues until they approached $1M in topline…and then things slowed down a bit.  They were in an odd place, as when they approached larger clients that already had IT staff, they were fought tooth and nail (because the IT guy didn’t want to get fired) and smaller firms were already paying at “budget” or above, because they didn’t really count IT as an integral part of their businesses.

Where things started to go wrong

Trent decided that “sales cure all” and told the management team that he was heading to Seattle to help build and grow an office there to push revenues. He didn’t really get buy-in from the management team and, though he was growing revenues, two months later he got an email from his co-founder offering to buy the business for $1M ($200k in cash, $800k in a note). In addition, an ultimatum was included that if the offer wasn’t accepted in 24 hours, the co-founder was going to quit.

The other offer

Before all of this had ever happened, a competitor in the space had offered Trent the same amount (but all cash) for the business.  Trent wasn’t really in the mental space to sell and so he simply turned down the offer, but continued to keep in touch with the potential buyer.

As he moved to try to deal with the fire in his backyard, he reached back out to the potential buyer, expressing a willingness to sell, but asking for more, since the latest quarter showed significant growth.  But the buyer smelled a problem and asked a key question, “How long will the co-founder stay on?” to which Trent answered “a year”.  But, because the previous answer had been “three years”, the buyer halved his offer instead of raising it, and Trent was now looking at a $500k sales price.

The wait

Due to advice from a savvy friend, Trent had informed the co-founder that there was a possible sale in the background and there was no need to resort to the drama of a 24-hour ultimatum.  The co-founder agreed but got anxious waiting for the buyer he thought was bidding at $1M.  When he called Trent asking for an update, Trent responded, “Well, you guys could always up your bid for the company and buy it yourself.”  That’s exactly what they did, but they never realized they were bidding against themselves.  Trent accepted the deal at $1.2M, or $700,000 more than was on offer.

Lessons learned

• Before you make a major decision, confer with your team rather than simply inform them of something already decided. You’ll get better buy-in and/or find out if you’re really headed in the right direction.
• Pay attention. The COO, who Trent had hired a year before all this happened, was the “snake in the grass” that initiated the entire process by convincing the co-founder to threaten to quit and offering to put up the $200k in cash.  But his performance had been nonexistent.
• Sometimes waiting helps. If he’d gone back to the co-founder in a panic with the much-decreased offer, he would’ve gotten even less than the original ask/offer.  Instead, he let the weaker party make the move first…and he won.

Trent now hosts a podcast and helps to coach other small business owners on exits.  To learn more details about his story, click here.

Apex is actively looking for Advisors to join our team. If you or someone you know would like to learn more, contact Doug Hubler at or 913-433-2303.

 

In 2012 Jason Swenk sold his digital advertising agency, Solar Velocity.

Solar velocity helped with websites and web applications for brands like Aflac, Coke, and LegalZoom. At the time, he took 50% of the sale in upfront cash and took the remainder in a 50% earnout.

What is an earnout?

An earnout is another way for a seller of a business to receive payment that is based on future performance of that sold business.

Why do some buyers offer them?

Sometimes they lack the cash or capital to buy the business for the entirety of the selling price, so asking the seller to, in a way, finance the deal through an earnout is a strategy. Many times there may be some skepticism as to the viability of the firm without the seller in position, the business may have customer concentration issues, or are using aggressive projections, so this helps “steady the ship” during the transition time as the seller is incentivized to do what he can to make his earnout provisions.

Why did Jason decide to sell the business in the first place?

It had been 12 years in the making, and at the $10M revenue milestone, he knew that the next level for the business would be $50M, and he didn’t have the desire to push on to that level. He wanted to do something new.

What were the terms of his earnout?

He had to stay on for two years and the company needed to hit certain markers throughout that time.

What went wrong?

The company that acquired Jason’s company was itself acquired nine months after Jason sold. The new company then construed the earnout timelines across those 9 months instead of the 24 in the original agreement, and he didn’t get any of the earnout.

The major failure here was from Jason’s lawyer and M&A firm that didn’t foresee the possibility of another acquisition and how the terms of the earnout would survive in such a transaction. That’s why it is so critical not only to get help in structuring your deal, but to think about every possibility, particularly in an earnout.

Before that, however, you must realize that when you’re bought, you no longer control the reins of leadership in the company, and when you make suggestions which will improve the likelihood of your targets being hit, those suggestions may be disregarded. Even if you have yourself covered on the contract side, you can’t control how management will work with you.

So if you have to do an earnout, what should you consider?

Given this experience, it’s not hard to imagine that Jason’s policy is “no more earnouts” should he sell a business in the future. But what if an earnout is part of a deal you are involved in?  You should realize that the best earnouts provide incentives for the buyer, not just the seller.  If you can make it equally beneficial for a buyer to hit an earnout marker, they may stay on the front lines with the seller to make sure those targets get hit.

And, as we noted above, make sure that you account for every circumstance during the earnout, including an acquisition of your acquirer.

Words of Wisdom

Jason’s gone on to bigger and better things since the sale, including authoring a book and creating a smartphone app, so this case study isn’t solely a cautionary tale.  “Build to sell, but treat your business like you never will” and “The grass is greener…on the side you water!” are quotes that indicate that Jason is the sort of person who learns from his mistakes. We hope you will learn his lesson, so you don’t have to re-learn it on your own.

To learn more about Jason, Solar Velocity, and this sale, click here.

Apex is actively looking for Advisors to join our team. If you or someone you know would like to learn more, contact Doug Hubler at or 913-433-2303.