Serial Entrepreneur: Secrets Revealed! – EP81:

[00:00:00] 

Hello and welcome to Startup Club again. Almost 1 million members strong. Our club is Hey Pierre, How you doing? Hi guys. How you doing? Hey, you jumped on quick. I, I knew I had to be quick today because, uh, it’s important that we open the room. Michele, I’m gonna set you up there as a moderator as well. Well, I have excellent tell you.

I’m so excited about today’s show. Uh, as I was mentioning, uh, Startup Club’s, almost a million members strong. You can check out. Nice. Yeah, you can check out, uh, start www.startup.club and actually join our email list as well. Our club is run by our CEO here, Michele Van Tilborg. Uh, Mimi Ostrander, who writes great blogs for Startup Club, and Olivia Valdes, who runs marketing.

Uh, my fellow moderator as well, Jeffrey Sass, he might be coming on today, I believe. And I’m Colin C. Campbell. And you’re [00:01:00] listening to Serial Entrepreneur. Secrets Revealed. Yes, we have rebranded to that title. It used to be Serial Entrepreneur Club, but we have rebranded Serial Entrepreneur Secrets Revealed, and you could find that in your favorite podcast channel.

Yes, we are a live show also, but we syndicate through podcast and, uh, I think I, you can get it from Apple, iTunes, uh, Amazon, whichever, whichever podcast format you use. The, the team here has done a great job of just making certain the show gets syndicated. We have so many great speakers like Pierre come onto our show.

And, uh, I, I wanna make a special pitch for last week and, and, um, Michele, I don’t know if it’s alive yet or not. Hey Jeff. I dunno if it’s live yet. Last week’s show and the podcast network, but, uh, you know, if not, you can get it here on the replays. It is, it is. All right. That’s great. Yes. We had just such a phenomenal time with Jeff George Wal.

Who, uh, talked to us about power talking came up with about 50 very unique [00:02:00] phrases that really can have a huge impact on your life. So if you get a chance, consider listening to that episode. It is, it was a killer episode and I know it’s gonna be like that today as well. We’re all talking about the exits and I’ve been fortunate to have exited more than 10 companies in my life.

Uh, last year, Jeff and Michele and I, uh, sold.club to Goad. I mean, it was a circus, It was a four month circus pier. So, uh, craziness. I can’t imagine. Yes. And uh, you know, it was funny cuz it was like, you know, one lawyer on our side and then we had one outside council, eventually added a second outside council and they had like 30 people on their side, uh, trying to buy this company and, you know, going through due diligence and going through like, uh, the contract negotiations and then going through, um, schedules and finding every document and.

you know, So I’m really hoping today that you can help us sort out the chaos when it comes to an exit and, you know, what should [00:03:00] we be doing from the very beginning when we start the company. Um, so we’re excited to have Pierre, I’m gonna maybe hold back saying your last name. Yeah, no worries. That’s after this exactly.

Etbi. I actually have a somewhat of a French background, Etbi Canadian, French, uh, a private equity and m and a professional, and he’s gonna help us figure all this stuff out. Before we jump to you, Pierre, Michele, and Jeff, I’d love to hear like what your thoughts were about the exit. We’ll kick it off with ladies first, Michele, about with.club, and you know, your thoughts on it and the stress that you went through and everything.

And then, and then Jeff, And then we’ll hit you. Hit hit, hit it with you, Pierre. All right. So I’ll go ahead and start. Um, Yeah, I, I’m gonna say, I have so many questions for you, Pierre, but as Colin asked, I’ll, I’ll just give my a few comments about what we just recently experienced. Um, for [00:04:00] me, I, I will say it was very, um, Gratifying.

I know that might seem weird. It was stressful, but I found it extremely fun. Um, I will say the reason probably I found it fun was a couple of reasons. We knew it was a really great company that we were selling, but we also had a very strategic buyer. So what I really took away from the whole process, other than the usual, you know, operations mechanism, you know, excuse me, mechanics of the whole process being organized was, is that we had an amazing team.

We had been working with GoDaddy from the very beginning, so it was very, uh, rewarding because it was something actually that we had been working toward from the very beginning, which was at the exit. We really wanted to make sure that we [00:05:00] found a buyer that truly could. Take the company to the next level as well as, um, people that we, we like to work with and talk to.

So, you know, we continue to work with GoDaddy, um, you know, on a certain level. And I would say if you can, you know, think in the beginning what is your true value, right? And who could you add the most value to? And for us, we knew it would be somebody like a GoDaddy. So we really nurtured that partnership and that relationship and it was for the benefit of all the shareholders and the employees.

So that’s my takeaway if at all possible. Just when you’re even starting, think about who your partners are because you know what, They’re your best candidate for your acquirer. Thank you. Clearly are. I think it’s great that you managed to, uh, get that thinking of. Thinking about the exit and making sure that you [00:06:00] have this relationship with the potential strategic partners.

Cause it’s so, it makes the old conversation so much easier and the old process so much easier if you have a previous relationship with them. And I’m curious to, to know, like talking about that exit that you had, what were the main pain points and the main thing that surprised you during the process?

Why don’t we give Jeff a chance to, um, Jeff, he’s not gonna, Oh, go ahead. No, I, I’m here now, but I, I have just a few minutes and then I tie it up a few minutes and ah, okay. But, um, the, the, I think what, you know, the point that Michele made too, there’s two things that I wanted to mention. One is these things take a lot longer than you think.

It appeared to people that this deal we did with Thought Club and GoDaddy happened very quickly, when in fact, you know, the, those, the seeds of those discussions were planted, you know, literally years before the exit actually happened. And that ties into what P R U and Michele are talking about, it being a strategic, um, deal because that partnership, um, [00:07:00] started very early and discussions and hinting toward a potential transaction happened very early.

The other thing I wanna mention is, you know, when you have an exit, it’s part of your legacy as an entrepreneur. So it’s important to think about not just a good exit. But a good future for the company, even beyond your continued involvement. You know what’s really exciting is when you have an exit that is, um, beneficial for you, your employees, your investors, but at the same time truly beneficial for the future of the business you created.

You know, there’ve been many situations where someone may have a financially successful exit and then after they’re gone, the company is shut down or absorbed or dismantled by the acquirer. And, you know, while that’s okay financially, perhaps for the founders, um, from a legacy perspective and just from a satisfaction perspective, that might not be as good.

So I think you want to find a partner and a transaction that’s gonna both benefit you, your [00:08:00] employees, your investors, and at the same time benefit the future of the company.

Yeah. Okay. So I’ll try to add some pain points into there. Michele, did you wanna go first? Again, I know you were ripped to jump in. Well, I was just gonna add on to what Jeff was saying. I’ve been also a part of several acquisitions and one thing Jeff mentioned was employees, and that can be, you know, a sticky situation because the fact that the matter is, is quite oftentimes employees do not stay with the acquisition and that presents a lot of anxiety for them.

So what I would recommend to people is you’d be very clear as quickly as possible with the, um, acquirer and then when it’s appropriate with employees and treat them well. And that really, um, and I’ve, I’ve experienced it both ways, very poorly and also done very well. It really [00:09:00] does help and it makes everyone much happier.

Thank you.

Yeah, I’ll just throw it a pain point cuz Peter, you asked us to think about pain points that we had during the exit. Uh, I think one of them. Was that the negotiations went much longer than we thought. Jeff alluded to that in what he had said, and, uh, the level of the contracts, um, were very, very high. And it just took a lot of resources from the company.

And what that did is it takes us off our game. You know, we’re no longer expanding the company and focused on that. We’re focused on just getting through this process, which I would estimate it was about four months, four to five months, the entire process. And there were no weekends and were no evenings.

And, uh, it was just, it was very, very intensive. And there were moments when I had to kick out one of the lawyers out of the room and, and they said, Look, I’m suspending you for three days because you didn’t do your [00:10:00] job or whatever. It was just very intense. Um, and, uh, the stress. And I think the way that, that, that you go through that as an entrepreneur trying to run the business and at the same time you’re trying to sell the business.

Um, and there’s also a lot of emotional aspects around it too because this business has been your identity for the last 10 years and now it’s gone. You no longer are, um, the founder of this company anymore. So Pier, I’m, look, I’m curious from your perspective, like what you think, uh, some of the other pain points are, are during an exit and then we’ll, we’ll, we’ll move on to hey, maybe how can we actually help avoid these pain points?

But I’m curious if you know of any that we haven’t covered. I think all the points that you’re making at are great point. Cause they happen on every transaction and they’re also one of the reason why it can be very important for, for you, you know, to have an advisors of Severals. Because first, as you say, you are emotional emotionally involved cause that’s your company.[00:11:00] 

So having someone that kind of act as a third party and can be the bad guy in the negotiation without impacting your relationship with a seller, especially in the case where you continue working post ion with a seller, uh, In itself is super important. The second one is helping you focusing on the business.

If you can delegate and have someone really doing all the groundwork on the negotiation so that you don’t have to think about it there night, and you can still grow the business while the transaction is happening, it’s also great value. Uh, and generally a lot of people underestimate the time. The transaction will, uh, will take for several, several reason.

The first one is negotiation, as you said, because you feel, you feel like once you’ve negotiated the price and you’ve negotiated maybe like the net debt and how long it will take you to get, uh, to get paid the structure slash earn out, you think you’re done. But generally, this is only [00:12:00] the first step of the negotiation.

To get to the LOI phase. Once you’ve signed the loi, that’s when real things are starting to, to get nasty. Cuz you start having to deal with the lawyers and to, to go through every point of a sales and purchase agreements. And if you just look at the price that, um, you’ve agreed on, it’s at that stage you still haven’t covered.

Okay. What’s your current networking capital? Which has an impact on the final price, which is paid? Cause generally when you talk about price, you talk about enterprise value and what you’re actually going to get on your, on your bank account as a founder, as a seller, is going to be your equity value. And your equity value is impacted by your net debt, by your networking capital, and could be impacted by off balance sheet items as well.

And so for Yes, Pierre? So you’re sort of like Yeah. Two big concepts there. The first one I think you’re talking about is, um, the idea of having someone else help you [00:13:00] with the transaction. So, It’s very interesting. I’ve used brokers many times on, on my exits and sometimes I haven’t used brokers. And it was a very unique, it was very unique that we did not use a broker for.club.

It was on, I think it was only cuz we had established a relationship with the buyer, um, from GoDaddy registry. I should be clear. It’s not GoDaddy, it’s GoDaddy registry. But we had established the, uh, relationship and we were able to do it with, with that, um, do the transaction without a broker. But I’ve used a broker a lot as well.

And most of the times the broker’s been great at really cleaning the, cleaning us up and not the other way around is more like cleaning us up and, and show, you know, presenting us in the best lights with the best type of numbers and those kind of things. So Can you talk a little bit more about broker or not to have a broker?[00:14:00] 

Yeah, clearly. And, and, and I will actually start by making a differentiation between the three types of service provider that you have in m and a. Generally you start with brokers. Uh, that’s, I would say generally I compare them all to real estate agents. You know, they’re here to kind of clean the house to to, to, uh, reach out to as many people as they can to facilitate the conversation.

Uh, they will help a bit with, with the numbers, but depending on our professional they are, or how much financial background they have, they may only be the middle men or help you a bit with a number, but, uh, just only to a certain extent. Then generally you have the next one, well, next level, which is going to be the tic, where generally it’s going to be more profess.

And again, some, some brokers actually do the same job as, uh, boutique. Right? So, so in situation by situation, basically, I’m just trying to give the [00:15:00] general, uh, landscape. So m and a boutique, you generally have several people working on the company. They’re really going to do their research to understand the full company.

Uh, they’re going to do a full Im with these 50 pages being as they be able to pitch the company almost without you. Sorry, Pier. Im, Im, Can you give, what does that mean? What that you said the full I. I, Oh, sorry. Yeah, yeah. No, don’t hesitate to jump in every time. I, Yeah, no, I’m gonna do that. I’m trying to translate your language, right.

I am, I am is basically investment memorandum. So that’s all the documents that you use to pitch your company. You generate have two main documents. The first one is your teaser, which depending on how you want the process run, uh, most of the time is confidential. It doesn’t include the name of your startup, and that allows you to approach everyone you want on the market without compromising your confidentiality or, or the data you don’t want to share with everyone.

And then you have the full pitch [00:16:00] deck or food investment memorandum that clearly articulate the story of the company, shows the numbers in the best light possible, and, and really is a main pitch document that, uh, buyer will use to form an opinion and, and, uh, and, and basically offer a price or not on your company.

So it’s a very important document. And got. And you said there’s a third, you said there was a third level. Yes. Yeah, exactly. And then the third level is going to be the investment, uh, bankers, which in nature do a very similar job than boutique. So many difference is boutique. You generally, uh, have just a couple of advisors was investment banking.

Uh, they’re generally banks who have, um, a presence in different countries. So they have larger network, uh, and they can reach out to more people. And they’re generally also involved in bigger transaction. Because they’re more used to to, to [00:17:00] run like a bigger, bigger process. But generally speaking, from my experience with investment banking, you’re going to have the larger network, uh, with boutique there you are going to have more seniority on your deal cuz the more senior people will help you out without your deal.

And with the broker, you have the lighter version, which can be fine, especially if you save below 5 million. Uh, in, in annual revenue. That’s a good question too. Like what, is there a size where you’re too small to hire a broker? Is that, is that what you’re saying? Where, what size do you hire the, the, the broker?

And what size do you go to a boutique? In what size do you go to a, an investment You. I, I think there is not a size where you, you wouldn’t benefit from having someone helping you out, except it’s, you are really, really, really small. Uh, especially because generales are going to to charge you a percentage of, of the price you get out of the transaction.

But most of the time, if they’re good broker or MNA advisors, uh, you are more [00:18:00] likely to have a higher selling price by using them. So most of the time times they actually pay for themselves. So that’s a no brainer on, on that front, as long as you can, uh, you can find a good one. Of course, generally speaking, say for if you sub 5 million in, in annual revenue, uh, you are going to look at either broker or m a boutique.

M a boutique is going to be more expensive cause most of the time brokers are on a success fee. When boutique have a retainer because they have more resources, they spend more time on it. So yeah, they’re going to charge you anything from say, $3,000 to up to 10,000 a month just to, uh, to help you out, plus a success and investment banking, I would say you start looking at them if you are above 5 million, 10 million in a new revenue.

Got it. Got it. So, and then what percentage commissions, like [00:19:00] roughly would you be paying out to your broker or m and a or mini? Yeah, whatever. It also highly dependent on the size of the company. Um, I’ve seen several brokers for the focused on the microcap market. So internet companies that do less than 1 million in revenue, they charge up to 12% of the, of the sale price.

Holy shit, that seems to look high. That to me, that seems like you work your whole life and they, they come in at the end and they get 12%. Exactly to, to be fair, coming more from the m ands side and m a boutique and private equity in the investment side. I thought 12% was insane, but they actually managed to, uh, to, to chart that.

And also, I, I guess the upside of it is when you have people like F International for instance, they’re, they’re like, Sorry, can you say that again? F F what? F F E F E International. Okay. Yes. Yeah. They’re one of the, of the famous online [00:20:00] brokers. And, and they, I do like a pretty good job. Uh, I’ve seen the, Im, they’re fairly standardized, but, uh, they, they do a pretty good job, uh, overall and they have like a huge network.

Cause they manage to build that network of, um, of investors, basically. Of buyers. So if they already have the marketplace, sure you’re going to to pay them 12%, but you are more sure that your business is going to be sold fast. I think, however, generally speaking, if you go above. 1 million. Um, you are more going to be looking at between say, 4% to 8%, um, uh, success fee.

And, and if you start, uh, looking at companies that sell for say, 10 million plus, then, then you can go down to two to 4% of the transaction. All right. Well, I’m gonna change the conversation here a little bit. You know, a lot of us, we have smaller startups, [00:21:00] but they are significant, right? For an exit. And oftentimes the way it ends up going is, you know, not that we’re sending out, um, a memorandum like you mentioned, but people approach us and a lot of our companies are that way, where people.

You know, are approaching us all the time asking us to discuss selling the company. So I’m really curious, you know, to ask you what you would recommend to us. Um, you know, oftentimes, you know, if they want you, you do an NDA and then they just start asking you for all this information. Like, what would you suggest to people that are getting emails or calls and, you know, folks are just trying to discuss, hey, you know, what would you sell your company for?

Like, what, where would you start if you were, you know, let’s just say a small to medium size startup and people are asking you [00:22:00] what your price is.

So the first thing I would do first. Keep an Excel file or, or any file where you keep the contact of all these people with their emails. Right. Um, I know it doesn’t answer your, your direct question, but I highly recommend you to do that because if you’re not thinking about selling now, but people keep on coming to you and two, three years down the road, the day you want to sell, it’s going to be super helpful to have that list of people you can just reach out to immediately.

So super valuable to do that and, and not free time consuming. Now, in term of how do you end those calls? Uh, it depends. It really depends on, on your state of mind. If you, if you already have a number in mind and, and you’ll know that you are that stage where you love what you’re doing. Uh, you don’t want to sell, uh, right now because you can continue growing the business, which is, is the best, uh, position you can be in.

Then you can ask for like a crazy [00:23:00] number and basically say, Oh, I don’t know, like, I don’t want to sell now. Right now selling will, I would be selling at eight times, 10 times revenue, for instance. So then you, you just shot your shot and, and that’s it. And generally speaking, if either you have a very good strategic interest for the buyer and is going to entertain the conversation and then happy days for you, or is going to be above expectation and, and they’re not, you’re not going to waste any more time.

And you just keep the conversation going by the relationship alive by saying, Look, we’re not really looking to sell at the moment. We’ll contact you later, generally speaking. Also, when people ask you for, for how much you want, if there’s the one reaching out to you, I mean, you don’t really need to give them a number.

At best. If you are, if you want to give them something, just give them a range, right? Of. But at the end of the day, if you are really thinking about sending your company and you are privilege [00:24:00] enough to have enough inbound interest, then start structuring the process a bit, either by using a broker, as we say.

But if you want to do it yourself, try to set, set a timeline to everyone. Um, talk, talk to each individual in bond that, that, that came to you and try to put them in competition basically. So you, you, you would prepare first the data, send them out the data as a need. Uh, and based on that, ask them to do evaluation of your company or to come back to you with a proper LOI offer.

Uh, before dedicating any more time to it. It’s all a balance between being able to give them enough so that they can value your company and not spending too much time, um, putting together data that takes you away from your business. Yeah, that’s, that’s great. And, uh, sorry, Jeff. No, I had another question.

Kind of the, almost the flip side of valuation [00:25:00] is if you had any thoughts, Pierre, on, on determining how much money to raise? Because in my experience, I remember we were going through a raise for one of the companies I was involved with and, you know, we were, the amount of work, everything that you described, Pierre and everything Colin and Michele have been talking about all the work involved in preparing for and executing, uh, an exit.

It’s the same amount of work, whether you’re raising $5 million, $500,000 or 50 million, The work is, is almost exactly the same. Yeah, true. But the only thing different is the numbers. So if you’re gonna put the work in, you know, how do you determine, you know, what will your recommendations be to determine how high you should go in terms of what amount you should be raising?

Well, uh, uh, as a financial advisor, I generally. Pull out my Excel file and put the number in Excel when I’m trying to figure out out something like this. Cause as with everything, this is as art. It’s not a science. And you will never have like the perfect answer and you [00:26:00] will never have a one answer if fits all.

Cause the balance is between exactly what you’re saying. The fact that it takes a lot of times to raise money. And on the other end of the balance you have, um, trying to maximize the delusion. So the number of equity you are giving out at, at the point in time. Cause obviously if you raise 5 million now and 5 million in, uh, in two, The second 5 million are go, are likely going to be raised at a much higher valuation.

So if you raise a 10 million now, you are going to dilute yourself way more. And, sorry, and it was a bit of, of value of the company. So it’s all about finding the balance between what your, um, sorry. First, figuring out what amount of money you really need, What do you think will be the value you will get out of that money, And [00:27:00] trying to find the perfect amount that will keep you going, but also allow you to really reach the next step of your, of your company to, uh, to, to have a significant gap in valu.

In said otherwise, if you think that with 1 million you can increase your sales and develop a product so that, that you think you can maybe win 10% or 15%, uh, in term of valuation, maybe it’s not worth it to go through two, uh, subsequent rates. If you think that with a certain amount of, of money you can double or triple the value of the company, then maybe it’s worth it to, um, to, to raise only the amount you need and, and raise a subsequent round two or three years later.

Pier, Pier, I think we’re gonna have to bring you back for another show. So we can talk about raising capital cuz you have an enormous amount of experience in both the exit and the capital race. But bringing it back to the exit, um, who’s like, how do you find the [00:28:00] buyer? Like, you know, does the broker go out and get the buyer?

Now I’m obviously, I know a little bit of this area as well, but I’m sort of setting up the question. But does the broker go out and get the buyer? Do you bring the buyer to the broker? Do you pay a different commission rate if you bring the buyer? Can you talk a little bit about that? Yes, for sure. Um, so, so I’m going to try to answer your different questions.

Us 2 0 3 in the same one. So first, how do you find buyers? So the main, it’s not rocket science to be, to be fair, I’m not even going to pretend that we have a secret formula to reach out to buyers. First people from your network that you know, because the more you’ve been in business, the more you’ve talked to people, and it’s especially true and easier to do with private equity groups because, you know, they’re, they’re investing in a wide array of industries.

So if you already have the connection, it’s much easier to reach out to them. But you, you’ve talked also to different [00:29:00] Strat strategy buyer, and you have people in your network that you’ve never used until that point, but you know, that work in the industry that you can reach out to, to get an intro, et cetera.

Then the second one is, Simple, uh, uh, outreach the way, same way you would do sales. You identify all the main strategic that you think would be, uh, great addition to the, to, to the buyer list. Uh, you are trying to really think outside of the box because some, sometimes you have strategic that don’t seem that obvious, but thinking about it, they, they’re big enough that they may have a specific department or a specific strategy.

You’re not even aware of where your startup and your product would fit well. So you are really trying to build as a piece. And then you do co either intro through doing through, sorry, through LinkedIn because you have connection in common or you do call out outreach and uh, and you can use Twitter, you [00:30:00] can use LinkedIn, you can use email the same way you would do outreach to, uh, uh, to, to customers.

And the other way here, who are we outreach reaching to? Are we outreaching to. , uh, competitors? Are we outreaching to private equity or are we outreaching to strategic buyers? Um, I know obviously it’s, from my experience, selling to a strategic buyer gives you the highest multiple. Um, yes, it does. Private equity, the lowest, in my opinion, lowest in competitors a second.

Uh, and we can deepak that maybe later on in the show, but like, who do you reach out to? Like, which, which of those groups do you focus on? It’s hard to, it’s obviously hard to find strategic buyers cuz they’re not even in your industry. They’re coming in and they’re, you know, they’re trying to find ways to leverage their customer base and, and attach your services to that.

But what are your thoughts? Yes. Uh, so to figure that out, the first thing I do is actually have conversation with a client, with my client, with a business owner. Cause they’re, they’re the one who knows the business and the industry is the best. [00:31:00] Like, we never claim that we’re better at this in the market that they are cause they live in breath.

On their market. So there, there’s a better position to tell you the top 10 or top 15, uh, best case scenario buyers out there. Based on that, then you start expanding. So looking at the competitors or of the strategic, looking at similar industries, looking at di different geography as well. Uh, depending on whether you are specialize in an industry or not, you can also as mean advisor, be aware of who is very active on the market, who buys out those type of company, et cetera.

But, uh, generally speaking, except if the, if the seller have super specific needs for, for selling these companies. And you talked about, you guys talked about legacy before. I have clients who are like, Oh, I only want to sell to a strategic, I don’t want to sell to a P guy because I really want, you know, my, the name of my [00:32:00] company to thrive.

And I, I only think a strategy could do that. So, If you don’t have any specific need and you just want to find like a buyer have the best offer, then you reach as many people as you can. So you are looking at competitors, you are looking at uh, um, uh, product of substitution. You are looking at even, even some, sometimes subdivision and sub department of, of bigger group, which happen a lot.

For instance, on the internet, internet industry cuz you have like huge companies, SAP for instance, SAPs, they have corporate ventures, like if you don’t know that they may have sub department you’ve never heard of. And that actually investing in the specific, uh, industry that, that you’re on. So it’s worth it to do your research and trying to understand who’s active in the, on the space and.

Most of [00:33:00] the, most of the time when you do that, you will have people that you don’t necessarily see it. You know, you are not sure whether they’re a good fit or not. My base, uh, approach is to say, Okay, if you’re not sure, just put it in the list. Cause at first that’s why you have the teaser. You have the teaser to reach out to them.

And then based on those first conversation, then you are going to be able to go and to judge whether they’re actually a good fit or not. And you, you can get there without sharing any confidential information. So it’s just more time and generally that’s your advisor will put on that, uh, that extra time.

Wow. We’re getting a wealth of information today. This has been really good. Let me reset the room, and I know there are some in the audience who would, I’m certain want to come up and ask some questions. Uh, if you are interested in coming up, please raise your hands. It’s time to, to come up, ask some questions.

We’re gonna shift a little bit here, um, uh, towards, you know, What can we do [00:34:00] from when we start the company to make that process easier? And I, and I always say it’s important to think about the exit the day you start. Yes. And, uh, try to visualize it a little bit. And there are some things you can do. And, and I’m curious, Pierre, what are, you know, can you give us five tips or six?

I don’t know. You got the number in your head probably, but what are the things we should do when we start a company? True. Well, always good to, to keep it in mind, to think about the exit from the start. However, from, from experience. Because I’m more from, from a world of, uh, like being cooperation with a lot of processes where every time I do something, I’m trying, you know, to think five years ahead of time, making sure everything is, is neat and organized.

Uh, honestly, now that’s been all more on the entrepreneur side for, for the past three years. I think it’s important at, uh, at the beginning to really focus on your product. [00:35:00] Getting product market, getting out there rather than spending too much time, uh, uh, focusing on the process or on getting to structure.

I think it’s more important to generate your first dollars at first than getting structured. However, as soon as you start generating those dollars, then. Adding more processes because it’s really going to, to help you grow. And specifically regarding your exits. So one of the first thing is, um, is to, to, to put some effort into your financial reporting.

Like we, the main thing we see, even with company, like I’m working with a company that does 5 million in arr. Their accounting is not that great. Their reporting is not that great. They’re not able to give me like a very specific or precise C customer, sorry, customer acquisition cost. Uh, so metrics that are super important, even those, they’re rich consider, uh, I mean sizeable size in terms of revenue, [00:36:00] they’re not still perfect.

So if you can do that, if you can focus early on, on having a clean reporting, understanding what goes into, into your number is going to help you first. when you sell, because people can trust your data. And I think one of the number one, um, factors that will help you sell your company is whether the buyer trusts you and trust your number so early on.

Try to to, to make sure you structure that. Second, if investors or buyers look at those data is because it help them understand your company. And if it helps them understand the company, it should help you understand your company. So structuring your company from a financial and data reporting perspective is not just only beneficial for your exit, is going to help you manage your company as you grow, really understand where you’re creating value, where your pinpoint are [00:37:00] and where you should be focusing on.

So from that perspective, I think it’s, it’s super important for, uh, for, for a lot of different reasons to, to focus on that. And you don’t need a CFO from the start. Just get, I know head of finance at least, or uh, a financial fpa, like even a fp ana analysis, someone who’s used to, to work with accounting used or to work with Excel who can put together a few analysis and help you clean your data and make sense out of it, would be super valuable.

Um, the second thing is, Sorry. Sorry. You want to say something? Well, you know, I, I, I’m gonna give you a chance to take a breath here, right? Yeah. Uh, and maybe you can, if you have a couple more of that would be great and we’ll jump down to Daniel next. But, um, you know, one of the thing pet peeves I have about every company I’ve sold, it seems, it seems like every freaking, I thought we were ready for.club, um, and we weren’t.

And you [00:38:00] can’t find this contract. You can’t find that contract, you can’t find this document, that employee agreement. I believe from day one, you should set up a virtual drive. It’s almost nothing whether it’s, um, the Microsoft one. Um, or whether it’s a Dropbox, I don’t, I don’t care what it’s organized and organized virtual drive, which eventually can be your due diligence box.

By the way, if you had everything uploaded and organized from the beginning, I mean, you could just give them access to this box and they could go in. If there’s multiple buyers, they could just go in and review, review, review. And it’s so easy. And I can’t tell you how many weeks or even months we spent trying to clean up this stuff, you know, at every, at every company I’ve ever sold.

Um, so virtual drive from the beginning within with insist that if you have an admin on staff, that they scan every document. Now, I know today everything’s virtual, but that could almost be worse because at least we used to have a filing cabinet. Now [00:39:00] somebody will say, Well, where’s the agreement that we had?

Well, it’s in my email. Well, my email deleted. Oh, you know, I’m just saying a virtual drive organized. I think that’s, that’s, that can be one of the. The, that can be maybe number three or four of your, of the ideas here. And, uh, and I’ll, I’ll let you add a couple more and then we’ll drop, we’ll go down to Daniel for a question or a comment.

Perfect. Wellno another thing. It’s all, it is mostly regarding the acquisition itself is a lot about the quality of the information and, and the, the organization and also what you’re mentioning. I think those documents is also going to be useful if you have a tax audit, for instance, you’re all going to, to do it and you don’t really want to be cut off guard if you, you start getting audited.

So at the end of of the day, it also helps you prevent any malfunction in your, in your business if you do it for, from day one. Sorry. Uh, another thing that can help you [00:40:00] sell is if your value proposition is very clear cause. Uh, sorry, I’ve been talking like at Web Summit, so it’s starting in total method.

Uh, like several things I’ve seen with, with, with business I talk to is people launching several products which are totally unrelated under the same company. And so they start pitching to you, um, that they have a $1 million company, but effectively they have like one product and they’re generally SaaS product because I mostly work with, with SaaS companies, one SaaS product that does 300 k one SaaS product that that does 700 K.

But you as an investors, you even an choir, you mean be interested by only one of them. And so if they are keep kept from a legal perspective, the product separate, that would make it way more clear, way cleaner to, [00:41:00] uh, to be able to buy the, the product you want. because instead of having all shared costs, cuz that’s generally why you, you want to have several products under the same entity is because, so that you have your fixed cost, your admin costs, your legal costs are shared, but you can share those costs and still, uh, and still have two legal, uh, legal entities.

And then you just need to re recharge as, as a cost. But for each of them you have a clean p and l, which is, makes it way easier for anyone to, to buy out your business.

Wow. That’s, that’s, that’s amazing. All right. Uh, Daniel, you’ve been patient. Uh, do you have a question or do you have, uh, exit story? And, and by the way, I didn’t mention that earlier, but if you are in the audience and you’ve exited a company before, this would be the time to share. Look, this is Friday afternoon.

We’re all having fun on stage and, uh, I know there’s a lot of experience in the audience here. And if you, if you really wanna share that, please raise your hand and, and come on stage. [00:42:00] Um, Daniel, do you have a questioner or an exit story? Hi, Colleen. Thank you for having me here on stage. Um, I’m surprised the value that you guys are bringing and I, I wish we had like 500 people because don’t worry, we’re gonna get there.

We’re gonna get there and, and what we’re happy to know that the, the podcast is starting to take off too. So, you know, it’s like live radio, you know, you do a show and then it takes off through different channels as well. But, uh, really you, I, I agree with you Daniel. I think the, every week we come like Pierre’s amazing, and it is taking his time to share this with us.

And then Mimi takes it and she puts it into a blog, and, uh, and we have recordings on startup.club. Uh, this is brand new though, right, Daniel? So we’re building it up from here and we’re gonna, we’re gonna, we’re gonna hopefully help a lot of aspiring entrepreneurs. Absolutely. And that’s why, you know, I’m amazed the value that you guys are bringing, I think is gonna take off in a really, you know, catalyst way, like Pernova, because you guys are [00:43:00] bringing amazing value, but you know, I just wanna say thank you for the value first.

Uh, secondly is, um, yes, I have a question. I don’t have an exit, um, unfortunately, but I have to be prepared in the case that will happen, right? Um, the, the startups that I’m launching are not, I’m not planning to launch my startups and my projects to exit them. I’m planning to go with them and grow with them, but it’s, it’s always better to be prepared ahead, right?

Just if there is something that comes along the way and then you decide to go in another soon. But, so that’s why I think, um, this has a lot of value and, and we can prepare as much as we can, and there’s always things that we’re gonna find out along the way. Um, so my question is, um, [00:44:00] When is a good time for a company to decide to exit?

Um, so for example, let’s say your first year you are profitable. You’re making you, you’re made your first, let’s say a hundred K or whatever on sales, and then the next year you make 200 K. So when you see a growth on at that level, like you, you, you see your, you have a growth and you know, you can potentially continue to expand that growth to other levels if you continue right on that direction.

Yeah. I understand Sometimes scalability, you know, is a, you get to a point that you have to go for funds because you need to, but when, but before you get to that point that you, you have no other choice. It is. , what do you realize? Okay, this [00:45:00] is an opportunity, this is a good time, uh, for me to look for an exit.

Thank you. So there, there are several, um, way you can think about that. Several type of answers. The first one is, psycho. Psychologically speaking for you as a founder, I will not do you enjoy what, what you’re doing. And the way, the reason why I’m very familiar with that is one of my flatmates asked for me to start and we had a conversation with him last month.

Basically, the guy has raise series E A, no, he is raising his series B. And we ask him, Okay, is there a price right now at which he would be selling? He said, Oh, 500 million. But even at 500 million, he would not be happy to sell his company because he love so much what he’s doing. That what he was actually saying is, I would only sell for an insane amount of money cuz.

My life is great. Um, uh, I’m at a point where I have a decent pay. I, I live well, but most of [00:46:00] all, I’m obsessed with what I’m doing. I truly believe what I’m doing can change, uh, the landscape on which we’re, we’re going our company, I think we can become the next, you know, maybe not Facebook or the next Twitch.

And basically, he is not even for him now is not the right moment to sell. So for someone like that who’s really passionate, the best moment to sell is when you start being a bit annoyed with what you’re doing, being a bit tired about what you’re doing, uh, feeling like you know, you, you, you would like to move on to the next project, then that’s now a good clue.

And that’s from the psychological, uh, point of view. The second answer would be from a financial, uh, perspective and how to optimize for, for financial exits. . So it’s all about the balance between risk and reward. As always. You always think that you can grow your business faster and most of the time, you know, the, you have some indication to think so, [00:47:00] but you know, that also bear a certain level of risk.

And I think the past three years have really demonstrated how everything can change overnight, uh, um, because of things that are totally outside of our control. But overall, if you want to optimize the price at which you exist, it’s best to, to, to try, uh, selling your company when you are growing fast and you, you are profitable and you have great revenues.

Cause if you start having a decrease in your, uh, in your growth, then buyer will see it. So it’s much better and much easier for you to pitch the, the potential of your startup if you can actually demonstrate accelerating growth. And now. Yep. Yeah, and I actually wanted to add, add to what Peter was saying.

Sorry, Peter Pierre was saying that works. Um, yeah, there you go. Um, in regards to the timing for [00:48:00] sale, um, you know, one thing that I, I do think that every startup should think about is when they’re in a position to sell their company to a strategic buyer. When they’re in that position, then they should seriously consider the offer.

And I’ll tell you why. And I’ve been on both sides. I’ve bought probably what, 20, 25 companies in my life. And I’ve sold, you know, as a major shareholder, about 10 to 15 companies, I don’t even remember. But the fact of the matter is a strategic buyer is gonna come in and give you a valuation much higher than you can generate in profits on a go forward basis.

So, for instance, and this was a public deal, so I can talk about this one in the two thousands when we sold Hostopia, we sold it for 124 million and it sold for 17 times ebitda. Now just think about that for a minute. Uh, and, and remember, we still have to pay [00:49:00] taxes on our earnings, right? But so we might have been selling for, if you really think about it, 30 times earnings after tax.

Um, it would take me 30 years before I would get all my money back from the sale of this. Now, of course, you’re gonna have to pay taxes on the capital gains and, you know, not, you know, don’t wanna diminish the taxes. We’ll just try to remove that component from this conversation. But the fact of the matter is, it could take us 10, 20 to 30 years to get our money back, um, by not selling.

And why did the company buy us? They bought us because they had 3 million small business customers that they were gonna take our platform, our services, and leverage it across their platform. So I think that’s the first thing I’ll say about the timing of a sale. The second. Is that when things are good, you know, and I made this mistake as well, and I’ll be honest with you, you know, we were talking to two buyers last year@pod.com and we’re like, eh, we’re, you know, we’re inc 5,003 years in a row, we’ll just double it again next year.

And, and we we’re just gonna build [00:50:00] it up so we can get to, you know, a hundred million, 200 million whatever value. And yet what, what happened in the last 12 months? You know, you had a war, you had the economy crash, the crypto crash, the recessions coming, we’ve got inflation. E-commerce companies on the stock market went down 85% in value.

So the time not to sell for pot.com would be Now that’s a, that’s, that’s, that’s for sure because, you know, it’s, it’s a bad market for sale. The, the I p o window in 2022 has pretty much shut, you know, it’s pretty much closed. And when you see the i p window closing, this is a time to build. This is a time to find a way to grow and expand, But when things are frothy and everything’s going great, and you’ve been doing it and you know, you’re starting to get to maybe the edge of that then that, that, that also is, is, is, is a potential sign of a time to sell.

I say 50% of the value of your exit is when you sell your company. Exactly. And also, also [00:51:00] it, it also comes down to your, where you are in life as an entrepreneur and as an individual. What’s your financial situation? Cause try of, of course everyone try to, to maximize their value and always aim at the, uh, highest amount of money.

And that’s basically my job to, to optimize that amount of money. However, as an entrepreneur to know if it’s the right time to sell or not. If you get someone interested and you have an offer on the table, instead of trying to think, Okay, can I get a better offer or more money or, or if I would a bit try to look at the money at the amount.

Uh, as an absolute cause. If you don’t necessarily, if you have, sorry, If you’re not an eye networks individual and you have someone offering you 5 million, it’s game changer. So maybe you will wait and you could get 10 million, but you also take the risk [00:52:00] that, Yeah, ing me happens, a new product happens and instead of 5 million, then you, you get down to one and after tax then it’s not like getting 1 million is not as much life changing event that getting 5 million.

So just try to think of the impact of the offer on your personal, uh, wellbeing and per personal life, uh, to also make the decision whether to take the offer or not. Yeah. I’d like to talk about this a little bit more because it’s, uh, it’s a topic in the book that, um, that, um, we’re publishing next year with Forbes, um, called Start Scale Exit Repeats.

And two weeks ago, three weeks ago, I had a, Michele and I, I don’t think Jeff, you were there, but we had a, a dinner with, um, the gentleman who started Reebok. Mm-hmm. . And he asked me about my, my book, and I explained the concept. You know, it’s all about starting companies, getting to a certain level, sell the company, take some money off the table, and uh, uh, [00:53:00] you know, put that money away, start the next company, take some money off, sell it, take some money off the table.

I call it laddering up, laddering up your wealth. And it seemed to me, it seems like a much more, in some ways conservative approach. And he was the founder of Reebok and his company. Um, he spent 20 years of his life, the first 20 years building the company up to, you know, 5 million, and then managed to, uh, launch aerobics shoes in the United States.

And Jane Fonda wore his shoes and literally he, he got the big break at that point, and his sales went to 30 million. 300 million, 900, uh, 900 million. And he, the company sold for 3.6 billion to Adidas, and it was the only company he’s ever done. So he’s an example of someone who just sticks with it. But the problem, we, we don’t, you know, what people don’t see is this Silicon Valley carnage, you know, that occurs and how many companies have [00:54:00] tried to just, if you, I have, I’m working with one individual company right now.

They, the founder spent 15 years of his life trying to build, and because they raise $60 million of venture capital, it’s liquidation preference, which means they get paid out first. The, the entrepreneurs not getting anything, you know, and, and so this concept that we can just start a company and go. And then things happen.

Shit happens, right? We had the.com crash. We had the 2008 collapse. We’ve had the, the 20, uh, the pandemic. We had the 2022 crypto crash, nft crash recession, inflation, you know, we had the hurricane, we had the war. And, um, the fact is things happen. So when things are good and you’re at a moment that you’re ready to go and, and things are, they feel too good.

Almost. We have to do it exact opposite of our emotions, which is say, okay, exit stage left. Yeah, true. And, [00:55:00] uh, I think what you’re touching based on and explain right now is survivor bias. The all narrative of the Silicon Valley and of Tech Crunch and all media related to fundraising and successful exists always showcase those great entrepreneurs, uh, uh, with great story who managed to exist for several billion dollars.

But then you keep that in mind and as like, if you start having some success as an entrepreneur and you’re having growth, you are thinking you are the next one in line and you are. The same thing can happen to you because if you just sell now, you will never sell for multi billion dollar evaluation. But then it, it fails to reflect the fact that that’s one in a million.

It would be almost exactly the same as you are making your first million playing poker. And instead of just withdrawing from the table, you decide to take that million and just put it all on 37 red. . Sure. If that works out, then you are, you are going to know [00:56:00] the, to have like exceptional success and people are going to talk about you.

But the chances that you actually manage to, to turn it into like 50, 100, $200 million companies is really thin. So depending on where you are in your life and your financial security that you have, uh, I think it would be more pr statistically speaking, to get cash of the table. And honestly, that could be like a whole other, other topic.

You have different ways to do that. You don’t, it’s not just black or white. You don’t have to sell 100% of your company. You can also get cash of the table by saving 20, 30% so that you, you secure that financial stability and you keep on growing your company, uh, expecting a way bigger, exit down the nine, you know, that could be a good way to, um, to get to beat the best of both world.

Jeff, I know you keep trying to jump in . No, I just, I mean we have to, we probably have to do another [00:57:00] session cuz there’s so much we didn’t touch on. One of the things I wanted to bring up and get Pierre’s opinion on, but there’s probably no time now and I don’t think we talked about it, is, is when you’re structuring your exit, what are your thoughts on cash versus stock when you have the opportunity for both if you, if you’re exiting to a public company and earn outs, you know, and, and, and, um, structuring earn outs and, you know, it’s a whole nother, we can do a whole show probably just on that topic, Colin.

Yeah, I can give you a very quick answer. I’ve actually written like a full article on earn out trying to, to define how do you best structure out and what to stick, think of and understand how the, the buyer think in term of earn out. So very short answer, the advantage of an earn out is to be able to bridge the gap between new evaluation expectation and what the bid is ready to give you.

Because if, if it’s, if they’re ready to pay 10 million but you want 12, having an out may allow them to agree to higher [00:58:00] potential payout if you, if you agree to, uh, um, condition it to, to certain, uh, stress old and, and certain performance.

Yeah. Yeah. Also, what would hold back, you know, I know I’m working on deal right now, it’s a 10% holdback. Is that the reasonable amount or not? I think it’s very reasonable. Only, only 10%. Like, uh, honestly, especially now given the, the additional level of risk because of the war having anything more than 70% of the price paid up front, I think it would be a pretty.

Like as an investor? As a buyer, I think I, I would ask at least 30% either deferred or earn out based, uh, on the deal just to protect myself from any downside that are, uh, outside the control of, uh, of everyone around the table. Yeah. I just find that [00:59:00] a bit odd based on my historical deals. Like, you know, I’ve seen as high as 20 and as low as 10%, but for hold, you know, for hold back.

Um, but I, you know, I guess if they’re smaller, maybe, I don’t know. You think that depends on size two, right? If it’s a bigger company, there’s better systems and auditing, audited statements and that kind of stuff in place, and maybe it’s a smaller company, there’s more risk. Is that what you’re. Uh, just to be clear and make sure that we have the same definition.

For me, old bags are like a specific way to, uh, defer the payment and they’re here more to in, in case something happened in the company, uh, that, um, that were not, was not uncovered during the, the time of financial, Correct? Correct. It’s not like an internet where, and I’ve done that on the buy side by the way, where somebody really wants to sell.

I’ll say, Okay, I’ll tell you what, I’ll give you 20% down. And then, uh, and I just did that. You know, I do that [01:00:00] sometimes when our businesses just aren’t really taking off. You know, I’ll just take a 20% payment and then I’ll take, and the one deal, like specifically thinking about is, uh, an advertising media company, and then we got a five year payout based on the revenue generated.

So I agree. Sometimes I’ll do those deals if my company just is struggling and just, you know, and you do that with your competitor, but if you got a successful company, it’s more along the lines of, you know, 10. I think the one of, you know, around around 10 to 20% hold back for 18 months or something like that for legal, you know, warranties and that kind of stuff.

Yes. But also, and that’s kind of part of, of the job of the PE guys. Sometimes they ask for thing under a certain name, like a old back where obviously the less cash you can put up front, the easier it is. Cause effectively your financing part of your deal through the cash generated by the company. So you may not call that old back or you may call that old back.

The [01:01:00] reality is they want to try to put as less, less, or the least cash up front as possible. Because as a priority equity fund, you are thinking in term of, in terms of irr, internal rate of returns, which are impacted by the level of money you put up front. And when you actually put the money and pay.

Well, this has been an amazing hour, and Pierre, I think we need to find a time for you to definitely come back. I would love to drill more into this. Um, I personally would love to hear more about, you know, the, the very, very beginning conversations and how to move that along in a very productive way for both parties.

So we’ve come to the end of our hour. Don’t forget, um, you can join our email list and you can get alerts when amazing people like Pierre, um, Joe [01:02:00] Foster from Reebok and others are joining us on Startup Club at the Serial Entrepreneur Secrets Revealed. Um, this show is every Friday at 2:00 PM Eastern, and we will be back next week.

So please be sure to visit our website. You can check out the calendar as well as get emails. So calling. You wanna Michele, take us Michele? Yeah. Yeah. I was just like, I know we have another big author coming in in a week or two. I just went to schedule on startup club. Couldn’t find the, um, I couldn’t find the date, but do you know the date when, uh, he’ll be coming on and I know it’s a good idea to go to the mailing list.

If you sign up to the mailing list@startup.club, then when we have these big authors, we let you know, right Daniel? So we’re gonna let you know when Joe Foster’s coming on. You know, we’re gonna let you know when this next author, the next author coming on is Mark Sharon. And he’s a [01:03:00] bestselling author of the book, Nice Bike and dozens of other business books.

He’s famous author. He’s talked to thousands of. Uh, or millions, I guess, of entrepreneurs of, of, of read his stuff and others. Um, so he’ll be on next, I don’t know, I thought it was the 18th or I just can’t find it right now, so Yeah, I don’t see it either. We’ll, we’ll make sure that we get that updated. Yeah, I think that would be useful for the members so that we know.

But, uh, get on that mailing list. I’m telling you, Daniel, you’re gonna love it. It’s, uh, you know, we had Mr. Wonderful on, we had Jeffrey Moore on, we had Bern Harish on, We had, you know, and sometimes they come on the day before they take, Hey, hey, can I come on your show? I can, Sure. Let’s just do something there.

But, uh, and it’s not just this show, it’s other shows as well. So have a great week. We’ll see you next Friday, two o’clock Eastern and on the Serial Entrepreneur Secrets Revealed. Thank you so much everyone. Be well. Thank you guys [01:04:00] for having me. Bye. Bye. Was Pedro. Thank you everyone. Thank you so much. Have a good one.