Best Practices When Selling a Business

23:16So give me a good reason why. The reason why is that I already knew everybody. I was already in touch with everybody. I already knew where they would be from a price standpoint. I had said all this to them. I was like, guys, there's nothing for you to do here. You're not going to come up with names I don't know. You can't get to somebody I can't get to. Both great reasons to hire a banker, by the way. Three, I don't need you to do a bunch of valuation work and other things. Here it all is. I've already done it. But if you don't have those skills, great reason to hire a banker. Now, look, what they did do is they took a lot of the brunt of ADP's diligence.

23:51That is another reason you do not want to run this process by yourself. That to me, though, is not do I have to hire like a brand name banker and pay them millions of dollars. That's hiring a boutique of some sort with a bunch of junior people that can just put together the data rooms, answer all the questions, build incremental models that they need or do whatever. That I would never want to do myself. My statement to the board was, I will put together a teaser. I will go formally to these 20 companies. I will see if there's incremental interest. I will run a quick process. But then I will need to hire two or three junior people to man the data room, get all the documents, build incremental models, because I can't do that.

24:34And none of my staff internally work market has those capabilities. Without question, there's a role to be played for a banker. It's just, what is the value you are getting? And I didn't think in that circumstance that it was necessary. And it is my opinion that in that circumstance, it was not. That is an opinion, though. That is not a fact. Yeah, what you're describing is more of a tactical resource, which you'd expect to pay contract hourly for, just pay for the time, essentially. What does add value in the deal? Like, you got the banker there, the lawyers, like, who's really adding value to help you do the deal?

25:07I think the junior bankers are adding a huge amount of value in getting the deal done. I think the senior bankers, if they can introduce new players, if they can get to players and be taken more seriously than you could. Like if I didn't know any of the heads of CorpDev and Strat, and I was just trying to get to them, and they were like, who are you? Why am I talking to you? Then the banker plays an unbelievably integral role, right? Because that head of CorpDev and Strat knows that banker. They've known each other for 10 years, and they've been talking deals and gotten deals done. That currency is invaluable.

25:39I didn't feel I needed that currency because I knew those people and we already had a relationship. A banker coming in with incremental people to be like, actually, there are 10 different companies here that are very interested in this space because they're not directly in the space. You don't know them. I'd say, oh my gosh, huge value add. Didn't know that. Hey, and here are the people we can get on the phone tomorrow. You will spend a month trying to get to them and they still won't take your phone call. Huge value add if they could do that. in my circumstance, there were no incremental players and shoulder industries looking to get into it for a host of reasons that I won't bore you with.

26:13And I already had all the relationships. That gives you a lot of leverage when that time comes because you did that work ahead of time. Yes. The legal part. I think that's an interesting one because I've seen deals where they just didn't have the right legal counsel and that could throw a lot of haywires there. How'd you get the right legal counsel? And was there any other consultants or advisors? So ADP had a lot of other consultants and advisors. There is a team of about a thousand people from ADP. Sounds typical. Let me say this. ADP is one of the most well-run companies on the planet. They dot every I and they cross every T because they are paying a massive percentage of the world's workforce and they need to be perfect every time.

26:52And every criminal on the planet is trying to get into their systems to get into that payroll flow because they move more money around the world than most banks do. And so everything they do perfectly and that works incredibly well for the business they're in, It doesn't work well in an M &A process. It doesn't work well for an innovation standpoint, although they are getting tremendously better at the innovation. From ADP standpoint, they were just doing their normal thing. For me, I was like, oh my God, how many people from Deloitte are coming to my office right now? What is happening? But from our standpoint, we had our counsel that we had from day one.

27:22We used WilmerHale up in Boston. Nice. From day one, they had been our attorneys. We had gone through three different attorneys because first attorney left, went to a different firm. Second attorney left, became the head of legal at WeWork and eventually the president at WeWork. Amazing woman. And then the third person that had been with us had been our head counsel for a couple of years. There wasn't a question as to who we were going to use. We were going to use WilmerHale and that team. That's cool. We actually use WilmerHale too. They're a great law firm. It is a great law firm. And I think it is reasonably priced.

27:51Look, my issue with lawyers are always going to be the fees and the incentives. I know lawyers that will say to me, it took me 50 hours to do this. I would say, yeah, but a better lawyer could have got it done in 10 hours. So I'm paying for the fact that you're not that good. Like, I don't understand. I will pay you a fixed fee for a job. And if it takes you one hour to do it because you are so smart and you have so many resources, awesome. If it takes you 100 hours to do it, that feels like a you problem. I am not a fan of the hourly bill and never have been and never will be. Yeah, we went through the same thing.

28:22We had a fair estimate. I got the engagement letter. My heart skipped a beat when I saw the hourly amount, but then got reassurance. And it's like, don't worry, we're still going to meet that amount. So obviously, they were very efficient with their time they bill for. I am a huge fan of the estimate. And if there's anything... Look, if something happens that nobody anticipated and you had to spend more time, then of course, I'm going to pay you more money. We're not unreasonable people. But I just don't like the... Anytime I get on the phone with you, it's going to cost you$1 ,000. Like, no, no, no.

28:49How do you negotiate that? Is it, hey, we got to stay in this sort of range? Or do we try to create some kind of fixed price around this? I always say, what do you think is a fair fixed price to get this done? And I think the word fair there is super important. I'm not trying to take advantage of anybody. And I do want people that are very smart and they're feeling to know what they're doing, because I think a very good lawyer is worth it. But I just will never get my mind around, spend as much time as you want and bill me for that. And they'll all say, oh, no, of course, we won't charge her for time, this and that.

29:21I just don't believe them. And I'm not going to sit there and go through and argue every single bill, every single hour. Be like, did you need to spend this? I don't want to do that either. I don't want to kill the brain cells. And so the same, what do you think is fair to do a deal like this? But I think you get the pushback. I don't know how long it's going to take, Jeff. It really depends how complex this gets. You know, it really ranges here. Sure. And I'll say, great. Give me some ranges and we'll pick the middle range of what is the middle of the fairway. And if it takes longer, I will be reasonable.

29:49And if it takes less, I won't come back to you. So pick something that's fair. Cool. I like that. That way you at least gauge how much you're going to be investing ahead of time versus getting a surprise bill. Nobody likes surprise bills. Let's move through this process. You're going through diligence at this point. Let's go to LOI. When you get to the LOI point, you mentioned negotiations and you had about 35 % lift on it. Walk me through what that negotiation was like. We certainly pretended the process was much more robust, that there were people chomping at the bit. We had actually in between their sliding of a piece of paper across the table, we had bought a company and that had increased our revenue like 30%.

30:26We were like, we're now bigger, so you should pay more. That is what drove the most of the incremental value from ADP. Okay. We had that conversation, but there wasn't a huge amount of back and forth. They came back. I thought their initial offer was fair, quite frankly, from a revenue multiple standpoint, if you looked at where things were trading. And then when they upped their offer after we had bought this other entity, I felt like we have pushed these people as far as they're going to go. And so I don't remember, quite frankly, if the bankers know we should go back for another bite at the Apple.

30:59They may have said it, they may not have. But I remember thinking and probably saying that we're not getting anything else here. And now we're risking them walking away. ADP doesn't buy a lot of companies. It's not like we're dealing with this incredibly inquisitive entity that is used to doing this. And ADP at the time traded it maybe three times revenue, and they were paying 10 times revenue for us. I was conscious of that. And I didn't think we could get more. And I do know subsequently that we were a little bit beyond the envelope as to what they were willing to do. Certainly, you know, you talk with the principals after because now we're all friends and they're amazing people.

31:37Joe Borelli that runs M &A at ADP is exceptional, professional in person. And so he was like, dude, that was beyond what we were comfortable with. Like, great. What was your approach on the presentation of these offers? Is it, I remember the old days, you got a fax machine coming in with your offer that you're waiting for and looking for the final price on it. Or is it just here's an email? Do you get a formal phone call and conversation that they're walking through what they're presenting? And how do you reciprocate with that counter as well? Unfortunately, there were no more dinners where pieces of paper were slid across to me because that was just a fun experience.

32:12Subsequently, there were phone calls between myself, Joe, and a few people from their side. We would just talk. So they would prep it saying, this is what we're going to send you. Okay. So you know ahead of time what you were going to get sent. Oh, yeah, yeah. It wasn't like they just sent an email over like, and with a subject line, new offer. They'd call me and we'd talk it through. I think there were really only two rounds of back and forth on that. It was going to be a stock deal. It was going to be for cash. And then it became, what is the escrow? What are the holdbacks? a host of other things in terms of the baskets within and then all of the nuances within the deal.

32:46But that really became lawyers to lawyers mostly because we just did a very standard deal. There was nothing magic about it. It was 10 % escrow. It was a two-year hold. We negotiated pretty high thresholds. There were only two or three things that could potentially trip us up. None of them came to be. And we got almost all the escrow back. Pretty straightforward. Any other variables you're looking to negotiate on the LOI? The working capital adjustment. That's an interesting one. I fully will fall on my sword here. I did a bad job. Our bankers were pushing for more refinement. And I thought, this is not going to be an issue.

33:21And it didn't end up being a huge issue, but it ended up costing us six figures, low, low six figures, but six figures that I think if I had sharpened my pencil further and pushed them, we would have kept out of the escrow. So the working capital adjustment is something that twice in my career, because it was certainly true with the purchase of that entity that we bought right before ADP bought us, there were just things that I did not anticipate well enough. And they both ended up costing me low six figures. What would you do to resolve that? Would you define that LOI? I think you got to fight like hell for those points.

33:56there are points that especially with big company buyers they get very wrapped around the axle around what if this happens what if that happens and i think you go okay guys i'm going to give on all of those points because you know that there's like less than a 0.1 percent chance of that happening and i'll take that risk all the time but things around hard dollars that are going to get determined x days right after they actually aren't as overly concerned and they end up meaning more to the seller. And so I give on some of the big points in retrospect and go back and be like, we got to lower this working capital threshold and make sure that there's basically no adjustment.

34:33Got it. So LOI gets signed, you're moving through conformatory diligence, got Deloitte and crew doing their work. Did you get an understanding of how they were adding value in terms of what they were doing with the myriad of consultants they provided to you? They came in and they had a bunch of opinions. They're like, oh, we think work market needs to be doing this and you're not doing this right and that right and i was like and i remember one of the not deloitte but one of their attorneys and i don't mean to pick on deloitte deloitte's great firm one of their attorneys was like we don't think you're allowed to do this i'm like so you think i'm really not allowed to exist is what you're saying you think that everything i've done up to date is illegal they're like well no i'm like that is what you're saying because you're saying you think i need a banking license and here are all the reasons we don't lawyers and people going through confirmatory diligence their job in life is to find problems they're not looking to find solutions.

35:21So there was a big conversation around sales tax. We were not charging sales tax. And I had a very well thought out logic as to why that was that I came up with. And I couldn't hire... I couldn't afford to hire Deloitte or anybody else. I just read through the stuff and I came up with it. Very proud of this. And Deloitte came in. They said, well, you need to be charging sales tax. I was like, no, we don't. They're like, you absolutely do. And I said, all right, let me come in and let me walk you through why I think we don't. And so I spent an hour and I walked through the logic, walked through how we applied I didn't walk through the different statutes and why I thought what we thought.

35:51And they deliberated for an hour and they came back and they said, Jeff's right. And I was like, there are 30 of you. What was that like a$50 ,000 meeting? So look, I don't doubt that they do amazing work and I don't doubt that they are necessary. But they have a very specific point of view and they have a very risk averse approach as well they should for their clients. Fight like heck. You've been building your business. You know it way better than they do. You've studied it way longer than they do. They are trying to put your round peg in their square hole and you know better, usually. Was there any other do's and don'ts for that phase of conformatory diligence looking back?

36:30Not really. I was trying to keep my team shielded. We still had a business to run. There was still every probability that deal wouldn't happen. And if it didn't, I had to be ready for the day after. I would say to protect your team as much as possible and just always assume the deal is not going to happen. It's just an easier way to go through it. What does that communication look like? I like the reference of the tent. It seems like you got to let certain key people in the tent early in the process. And then you add more people as you go. What did that look like? Then how do you broadly communicate with your employees?

37:02Look, we had about 200 people, but we were spread out. We had an office in Toronto, we had an office in Boston, New York. And most of the people that were there were engineers or salespeople. So we had a very thin operations layer. So it was very clear who would be in the tent and who wasn't. I also was very conscious of the fact that a lot of the senior people we had hired weren't going to go to ADP. They had come to a startup. This one woman who was our head of marketing had left Nielsen with a$5 billion budget and a team of 1 ,000. She came to work market with a$2 billion budget and a team of three.

37:35She wasn't going to go to ADP. So I wanted her to understand what was going on. I don't know that she was necessary for the diligence standpoint, but it was necessary for her career. She would get paid. She made a good amount of money. I wanted to give her the runway to know that there might be time to move on. That's what she did. She stayed for a day. She's like, all right, I'm leaving. I'm like, of course you're leaving. So I wanted the senior people to know so that they can make the appropriate plans and we could make plans as to what we would do for the other tomorrow, which was day one at ADP.

38:06Who's going to be on this team? because we now have benchmarks I know I need to perform against because I'm now the GM of that business with an ADP. And I need to know who's here and who's not. And so the senior people were really the issue. But the same goes true for everybody. You go to a startup because you want that lottery ticket. And their lottery tickets all got paid. But now you're working at a big company. There's no more lottery ticket. And the one thing I knew happened is the day the deal got announced, every single person got 100 calls from recruiters saying, hey, now go to another startup and get another lottery ticket.

38:38And so keeping them was a challenge. And I think we actually did a very good job of that. Before LOI, who were the people that knew? Before LOI, it was the board and me. That was it? Yeah, there wasn't really anybody else that knew. And then from LOI to close, that's when you started working with the key leadership. Yeah. So that was the executive team, HR, legal, and then the entire accounting and finance team. You got Announce Day where you broadly tell everybody, was there an approach that you had to help with that retention? So I'll tell you about Announce Day. I came in that Sunday. We were announcing on a Monday morning, January 19th, 2018.

39:17And ADP was like, hey, we need access to your office because we're going to set up to livecast to your other offices and to the ADP offices worldwide and this and that. I was like, yeah, cool, sure. And keep in mind, we had multiple offices. So we livecast all of our meetings. I had a little webcam mounted on a wall in the right spot to be in the box from whoever was presenting. And that worked. They came in with 50 people and massive amounts of equipment. And I remember sitting there Sunday night, watching them set up and panicking and being like, oh my God, I can't do this. I can't work for a company that can't just set up a webcam.

39:52Like, I don't understand. Like the webcam is not perfect, but it costs nothing. and you're spending a million dollars to like bring in all these people and contractors and equipment and lights. And I'm like, why are you doing this? And I panicked. I couldn't sleep that night. Not because I was excited, because I was nervous. And oh my gosh, like I have to be there for two and a half years. I gave my word that I'd be there for two and a half years. There were no legal documents. I could have left the first day, but I gave my word. So that to me meant I was going to be there for two and a half years.

40:20I was freaking out. And the next morning, they announced that at 8 a.m. via the press. and we were having this meeting in the office for my team to do a town hall. Hey, you're announcing it. It was me and the president of ADP. And I was coming to the elevator at 830. And one of our engineers is in the elevator. He's like, hey, man, good morning. I'm like, hey, good morning. And he's on his phone, check his ears. He goes, holy shit, did we sell the company? He found out like right in front of me on his phone. Because we had sent an email to our team at 8.01. I was like, yeah, yeah, that's the mandatory company meeting at 9am.

40:54And so I went in. I knew again that they were all getting calls from recruiters that morning. And I knew that a lot of them didn't want to work at ADP because they just didn't understand it. ADP, especially a few years ago, almost actually five years ago now, didn't have a great brand as a technology company. They still don't have a great brand. They've got a good one. They should have a great brand, by the way. They are actually an amazing technology company. The branding hasn't caught up yet. And so I sat there and the president of ADP is giving us talk and doing his thing. And I stood up and I said, Doug, I'm going to interrupt you here for a second.

41:25And I looked out at my team in New York is about 100 people. And then we've got another 100 people scattered. I was like, look, I know none of you want to work for ADP. And Doug was like, oh, I'm like, Doug, I'm going to land this plane. Give me a second. I said, look, I know that's your gut instinct. I'm going to tell you that your gut instinct is wrong. And being bought by ADP, you should be viewing it in your world as being bought by Google or Amazon or whomever. They're as good a technology company, as good a group of technologists as all those people. So you will all learn. But that's not why you should stay.

41:56You should stay because you want this experience. You all have worked together, some of you for many years, to build this company. And let's be honest with each other. We built it with bubble gum and duct tape, holding it together. This thing falls apart 10 times a day. This group is one of the largest, most well-run companies on the planet. And here's the story you want to tell in two years. I built it. I watched one of the largest, most well-run companies on the planet fix it and scale it. And now that I know how to do that, I want to go back to the beginning and build it again. That's the story you want to tell in two years.

42:32Not, hey, I built something and I walked away. Because if you can tell that, everybody is going to want to hire you. And so that's why you should stay. And they did. We had retention payments. ADP put together a very generous program, which I screwed up, which I'm happy to talk about if you want. I think they stayed for that experience. And a lot of them are still there because it is a great place to work and they are still learning. That's a great narrative. I can see that landing well. It sounds like it did. It did. It 100 % did. Look, some of our senior people left the next day. They didn't need that narrative.

43:02They already had done world-beating things in their careers. And they went on and they became the CTO of this and head of marketing at that. And they're amazing. But for most other people, our retention was higher within ADP than it was before we were bought. Tell me about the retention screw. So ADP gave me a pool. They said, look, here is an amount of money and you tell us how you want to divide it. And everybody told me, just pick your star players and give it to them. And I said, no. I said, everybody's important. Everybody should have some. And that meant that for the senior people, let's say it was a couple hundred grand.

43:35It's not enough. It's not enough to keep them for two years. And for the junior people, maybe it was tens of thousands of dollars. Not enough. It was too little for everybody. Whereas if I had just said, here are the 50 people that we really got to keep. And within that, here are the 20 that are critical and really loaded up on them. Look, we didn't end up losing them that much. Again, retention was higher, but we still lost some. We lost some because it just wasn't enough to keep them. And if I had done this more intelligently, as opposed to giving something to everybody, I think we would have done even better.

44:08So you wouldn't have casted it as wide, would have dialed it in to who are those actual key people? Yeah. One of my board members literally goes, you're an idiot. What are you doing? I'm like, I just think everyone should get somebody. Stop being a Boy Scout. It's not the way the world works. I'm like, you're wrong. Nope. He was not wrong. I was wrong. It's a founder thinking there. You get definitely attached with the people because that's who you grew and build a business with. Yeah. Look, especially as a non-technical founder, meaning I didn't build a single thing. I was just there at the end of the ship.

44:40So I was very conscious of that. Like, these are the people that built everything and they should all get something. Post day one, what was your role? Were you part of integration? So ADP did an excellent thing and they put an ADP exec in as my number two. My mother used to call him my shadow. And he would keep all of ADP at bay, not only for me, but for as much of the team as he could. He was there such that for the first year, I ran the entity. And my promise to them is I will run it as if we were still independent. And I did. So I still didn't take vacation. I still was there every day for 18 hours.

45:18And then on the one-year anniversary, he took over. And he became the GM. And I just was like a guy there. And that worked. I would just get on the phone with customers. I'd fly to see customers. I just became much more just customer-focused, giving speeches, glad handling, and things like that. And I enjoyed it, but it was difficult to not be the one making the decisions and not be the one in every single meeting. And I appreciated that it was difficult for him because as the founder of the company, when we're sitting in like an executive team meeting, everyone still looks to me. I'm like, I don't have decision making authority.

45:49He does. Wow. Talk to him. And that was challenging for him. And so I started to come to fewer and fewer meetings. Like I wanted to strike that right balance where I'm here to support you in any way you want, but I don't want to be disrupted because I am going to leave on dates certain. and it all has to work without me. And so people can't look to me just because I'm in the room. What was that timeframe from close until you left? I sat down with the CEO of ADP a few days before the acquisition and he said, Jeff, I need you to come in here and break things. I was like, Carlos, two sets ahead of you.

46:18I broke three things on the way into your office. You're always a mess. And he laughed, but then he looked into the hallway and I was like, no, not literally. And he said, can you give me three years? I was like, no, I can't stay that long. I said, I'll give you two. He said, give me two and a half. Okay. So we shook hands. So I stayed for two and a half years. So it was the first year I ran the entity. The next year and a half, I didn't. And I just was talking to customers. I was doing big strategic thinking and a host of other things. I was helping out with other parts of ADP. I actually helped with the leadership of ADP Venture, an ironic place for me to spend my last months there as that was the place that started it.

46:54That was super fun. And then I left and I left during the pandemic. I ended up extending a few months because of the pandemic. So I left in September of 2020. and I left by just sending an email. There was no office anymore, but it closed down and we hadn't been in it since March of 2020. So that was really tough not being able to say goodbye. But in some ways it's fortunate because I would have been absolutely crying walking out of that office for the last time. So it was fortunate that all I had to do was shut my laptop that was ADPs, put into a box, send it back to them and then open this laptop actually that we're talking on now.

47:29That was my last day in my transition. Wow. There's a light way I feel like we can unpack in just that transition of the company, the large org, which may be a whole segue for part two of this interview. I got to ask before we wrap things up, Jeff, what's the craziest thing you've seen in M &A? What is the craziest thing I've ever seen in any M &A transaction? I think I walked into a room once and we were on one side, I was at J.P. Morgan, and the company and the sellers were on another side. I was with the buyer. and we walked in. There was a table and we all sat down and all of our chairs were pushed down to their lowest level and all their chairs were lift up to the highest level.

48:04And we walked in, we sat down and we were all like this. And I was like, what is going on here? And they had purposely done it. And I reached down and I raised my chair. I'm like, what are you doing? I thought it was so silly that they thought that would work. It's like, okay. It was the chairs. It's the chairs, Kisan. Oh my God. Somebody wrote some psychology journal that came up with that idea. Yeah. That's awesome. Jeff, thank you so much for taking the time and sharing a wealth of knowledge, helping to become a better M &A scientist. Such a pleasure. Those of you still with us, thank you as well.

48:37Until next time, here's to the deal.

48:50Thank you for taking the time to explore the world of M &A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M &A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email, Kisan, K-I-S-O-N, at mascience.com. Or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter.

49:35Again, that's mascience.com. Here's to the deal.

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