Ryan Rutan: Welcome back to the episode of the Startup Therapy podcast. This is Ryan Routan joined as always by Will Schroeder, my friend, the founder and CEO of Startups.com. Well, we talk to founders about acquisitions all the time, right? People are getting term sheets, putting things out with broker dealers, shopping their things around, stuff's happening. Of all the founders we talked to, approximately what percentage have realistic expectations going into the sale of a business?
Wil Schroter: I'd say give or take 0%,
Ryan Rutan: 0% with a plus or minus of 0% error on that
Wil Schroter: 0%. I look, I, I look at it, it's nobody's fault. I mean, nobody's ever done this before, right? And, and just like when people raise capital, they're like, oh well, you know, here's what I think it should be, and when people People go to sell a company, they have these expectations about what the startup's worth or how the process works, or who the buyers are and all this stuff that are so far out of whack. And again, it's because they've never done it before. If you're an investment banker, this is what you did for a living, you you know all this stuff. But if you've never done this before and you're thinking about starting a company or or selling a company, or even you're like, hey, I wonder what my company would be actually worth in a sale, not like a. venture around, it's way different than what you think. And so today we will dig into the actual details of where the value comes from, you know, where you're beings way off the mark, what you're competing with, you know, in the market, things like that. Yeah.
Ryan Rutan: We've done this a couple times. What are we, are we at half a dozen now? We'll be able to say 12 soon. We're at a dozen on this, right? Just on the buy side. Let's be
Wil Schroter: clear, we're not making any of this up. Like we've been on the buy side in The sell side, many, many times, to be specific, just so we're not talking amorphous terms, at startups.com in our history, a little over 12 years now, we've acquired 6 venture funded companies. But when people hear that, it is a lot. It's a lot of companies to acquire to go through that entire process. But we've done diligence on over 100. So like the 6 that we bought were just the completed deals. It doesn't talk about how many deals we were involved in. How many founders who worked with, to be fair, Ryan, you know, I'm sure you recall this, we made exactly 6 offers and we got exactly 6 deals done. So, you know, we were 6 for 6 in the end, but you know, getting up to the offer stage was hard. But
Ryan Rutan: I just pause on that for a second, man, because I think that's actually that's an important thing for for founders to understand because when they're on the sell side and they're approached by somebody or they approach somebody, which both happened to us, right, we went after some deals and some deals came to us and like you said, we've evaluated over 100, we've bought 6. Right, we closed on 6 deals and so just tempering your expectations. I think that sometimes founders end up with like, you know, somebody shows up with an offer, maybe even a term sheet something, and they're like, oh this is going to happen, right? Some something's going to happen, but it's not necessarily a transaction. And so I think that's it's really important. I think some people assume it's like it's sort of this binary thing where either nobody ever approaches me or somebody does and then it's a foregone conclusion that will eventually start that deal and and everything will be great. It's just not the way it works.
Wil Schroter: So hard to get a deal done, like I actually get the deal done. Let me talk about our other side in our experience, like, in my 30+ years, I've had 5 exits, right? The most recent one we had just recently in Q4 of last year was sold virtual, and so we've been on both sides of this table, and we understand it pretty well. I mean, all things being equal, it's kind of hard not to do it this many times. I learn a lot about the process, but also we work with thousands and th Thousands of founders who are going through their own journey. So one of the cool things about our job at Startups.com is we get to live a lot of lives, right? Like we get to live and see through the eyes of lots and lots of founders,
Ryan Rutan: lots of
Wil Schroter: rooms. That's what I'm saying, right? And, and, and we get to see like firsthand how many different deals get put together, how they fall apart, what the expectations are, you know, we're, we're fairly deep in this stuff.
Ryan Rutan: Oh man, you said it once and I, I will never forget it. It was probably desert. deal and it was, you know, that 5 o'clock meeting on Monday morning where we got together in the conference room, and I think at that point we had all kind of like said, OK, yes, let's proceed with it as as far as we can and understand at this point, yeah, but you said it, he was like, look, we'll we'll proceed, but he's like this thing will die a million times before it actually lives, if it lives at all, and you were absolutely not wrong and I think that's that's par for the course across all the deals we've done. They, they continuously die and come back to life, die, come back to life. Some of them actually make it, but most of them did not.
Wil Schroter: I always make that discovery when we were selling virtual, um, which we sold to a private equity firm, right? I told that, you know, the guy who owned the private equity firm on the other side because we were negotiating directly. I said, look, this deal will die 1000 deaths before it ever gets done. So just, you know, before we even go down this process, let's just both understand that we're gonna hit a whole bunch of things where the lawyers are gonna be lawyers, right? And and they're gonna walk away and you know, you do all this stuff, all this grandstanding. And I remember I told him, and and and I think this could be valuable for folks listening. I said, let's establish a bat phone, right? And for those that aren't familiar, bat phone was was what Commissioner Gordon would use like in a in an emergency to call to summon Batman, right? And, and I said, let's establish a bat phone early on, which says if everything just sounds off like the attorneys are both, you know, on both sides are going crazy, let's both agree, you and I just get on the phone and we bring it back and let's not talk through the attorneys, right, to the extent that we can. And he really appreciated that and and we had to use the bat phone many times, right? You always have to, and when we've done acquisitions uh where we were the buyer, I established the same, you know, line of of communication with the founder. I said, look, we're looking to acquire a business. There are few places this is. Going to go wrong. I guarantee with all the investors you have, there's at least 1 if not 2, if not 3, that are gonna be giant dicks about this whole thing, right? And that's kind of just what they do, right? And I said, when that happens, not if that happens, when that happens. Just remember to call me, we'll work it out, you know, like, whatever. And so I think having been through this process successfully so many times, you start to really get a good feel for what's realistic and where the common pitfalls are, which again is is what we'll open up today.
Ryan Rutan: Yeah man, I'm going back to the the the giant jerks comment and like my first, my first exit started really amicably, right? It was like a founder to founder deal, right? It was very much a junior founder at that time. He was very much a senior founder at that time, and the discussion started and you know, it was like, I'm trying to remember if it was over beers. Was I old enough to drink? Yeah, I think it was over beers, right? It was like one of these like super amicable things we're tossing numbers around, you know, it was all just like high level and everybody was happy, everything was cool, and then he was like. OK, cool. Well, I'll send the team over to talk to you sometime next week. When those guys arrived. It was a completely different story. I was just like, I felt like I was getting just beaten, right? It was questions from every side, like it went from being like pure amicable over beers to just like feeling like I was getting waterboarded over the deal. It was insanity. What a turn of events that was. I mean, eventually the deal did get done, but God, it went from like, this is pretty cool. Like I like this. This is fun. I'm deal guy too, just like I am just the the. the butt end of everybody's worst behavior at this point.
Wil Schroter: You bet, you bet. So with that said, let's talk a little bit about a specifically, where do founders, you know, where their expectations go off the rails from the get-go. The most common one that I hear first is what I collectively call the white knight fallacy. And I think that I think that every founder falls into this, which is there is this dream acquire that has all Of our best interests in mind, it is somehow miraculously blind to all of the reasons that things aren't working, right? So in other words, we've raised, I'm just making this up, we've raised $10 million and you know, we burned through all of it. So we've got at least $10 million we gotta pay back in a preference, whatever. We never got past like $3 million in annual recurring revenue, and we're losing $100,000 a month. But I believe that there's a buyer out there that will probably buy us for anywhere between 50. to $100 million. I mean, which would be a huge discount from the valuation we raised that. So we're really doing them a favor.
Ryan Rutan: Right, of course, of course you are at that point.
Wil Schroter: Yeah, that's not gonna happen. I think we get into this idea that when we go to sell, the way our business will be perceived is similar to the way it was perceived when we were raising money. Let's start there. Let's start by by separating those two right out of the gates, right? When we're raising money, we're raising on what we can be. When we're selling a business, we're selling on what we are,
Ryan Rutan: are and have been, right? Like meaning they're going to look at your data, right? So like, if you are doing something that's significantly different than what you're doing a few months ago, what was happening a few months ago is still going to enter the picture, right? They're like, oh, but like this month we did 50K in new MRR and that's the only time we've ever done that, and we have no idea how, but it'll probably continue to happen for the rest of the business, right? So yeah, right, right, it's a very Very much more sober conversation when talking to buyers versus investors.
Wil Schroter: Correct. And again, for founders, we haven't had that opportunity up until this point to kind of have that role shift or phase shift and kind of how we're thinking or how we're perceived. But when we go to sell, yes, you know, there's there's some hope that the business will be something bigger, you know, for a buyer, etc. so some of that exists, but it is nowhere near, nowhere near. the kind of opportunity that investors will give us, because investors like, I'm putting money in so that you might become something. Buyers are like, I'm buying on what you became. And if what you became is a $3 million business that's losing a ton of money, I don't care if you raise that a $20 billion valuation. You didn't pull it off. This is who you are now, and that's what you have to sell.
Ryan Rutan: Yeah, I mean this, we understand this clearly on like the the open market. Right, the stock exchange, right? You were a $450 billion market cap. You're now a $1 billion market cap. I'm going to pay the pro rata share price of today, not what you were and not what you said you could be back when you IPOed, right? It's just, it is the reality situation. I think that is hard, you know, we talked about this in a couple other contexts, will, but I think that founders always being in pitch mode, even when we get into this point of sale. And I think that in the right conversation, the right times, it does make sense. We have to be in pitch. We have to be projected. We have to be thinking of the future. But there's some version of this, and I, I definitely fell into this trap myself when presenting the business, was that I was still in pitch mode. And I was talking about what it could be, what it could be, what it could be. Yep. And then I realized as like starting to listen to the feedback from their team, was that the way it came off to them was sort of like, it's not over promise under deliver necessarily, but there's a similar dynamic there, which is like, you're telling us all these things that it could be, but you're a long way from. And what I found it was like I dialed it down and just became more realistic about what I was talking about. The conversations went a lot better because otherwise if I'm like, it'll be this, and it's this now, they're like, OK, explain to us how you cross that gap so that we can buy into any of what you're saying. I was like, I don't have the answers for that. That's what you guys are for. That's that that happens after you buy it, right? Like that's that's what's in your hands.
Wil Schroter: I think, you know, where we start to weave this tale is again, like you're saying, we try to take the same story we were selling to VC. Or investors as a whole, and think that the the open market, the buying market will buy the same story or even at the very least, pay the same premium, and it's not even remotely close. To put it in perspective, if I'm looking to buy a company, and I'm looking at what they've done so far, yes, I'm looking at what they can be, I'm looking at, you know, what it might be, with the whole idea that that's that's icing on the cake, right? Like that. If it winds up being something extraordinary. For example, one of the most common things I hear from founders when they're looking to go to sell mode is we have created some sort of asset through all this effort, etc. that we haven't monetized yet, not not in the way that we should, but we think the buyer will see that and want to pay a premium for that untapped jet,
Ryan Rutan: right? The buyer will start to value that asset. Same minute the market does.
Wil Schroter: Correct. And so we don't get to sell that the value of that to a buyer without having realized any of it. Now, again, again, I'm not taking it totally off the table. It's not that a buyer won't recognize some of the value, like they'll they'll look at that and say, oh yeah, that's that's definitely interesting to us. They're just not gonna pay a premium for it. It's like you've got this meal that was like half ready and you're and you're asking somebody to buy it for dinner, right? It's like. Might be good. I don't know.
Ryan Rutan: Um, but I'm not in mind. I was saying is like when you're at the grocery store, you've got an investor and you've got, and you've got a buyer. The investor is looking at the packaging going, wow, that looks amazing. I love the packaging of this thing. Let's let's buy it. It looks great. Yep, the buyer is looking at it and going, what's the cost per ounce, right? They're looking at the details, right? Like they're, they're gonna do the comparison at this like base stats level, not at like what it looks like, what it could be. What is the exciting part of this? What's the glitz? What's the glam? What's the hope? They're buying the reality of it, right? And if the reality is that your cost per ounce doesn't line up with their expectations of the of the purchase, it's not gonna happen.
Wil Schroter: Stick with the investors for a second because I think they become a very important part of this white knight fallacy because a lot of times, you know, I'll hear the entrepreneurs like, hey, I'm kind of at, you know, the end of my rope. I'm doing this for 7 years now, like I'm broke. Like I just need to get out of this thing, right? I'm just looking
Ryan Rutan: for a tired. I don't know what to do.
Wil Schroter: Yeah, yeah, yeah. Right? But the investors like, what are you talking about? Like, somebody's gonna look at this, they're gonna see the data we collect and then they're gonna want to pay a huge premium for it. Someone's gonna look at the product in the market we're in, it says AI and they're gonna want to pay a huge premium. And it's like, you know, again, pardon my language here, but fuck you, right? Like you don't get to say that. You don't get to just make stuff up, right? And and create some illusion and then force us to like, to go find your illusion. Right, and I see it all the time. I see founders just get drugged through the mud by the investors who create this bullshit idea of what the company might be and then force the founder through this and and our thing like by the time they get to. like, dude, just you got to get out of this. Like, that guy's fantasy is not the reality.
Ryan Rutan: That's the thing, it's not the reality, but I think the founders miss out on that, right? They miss out on the fact that's not reality. I had somebody I had somebody telling me uh some months ago, they were like, well, we've got a term sheet, right? But you know, it's really not even close to what our investors said we should get. Like, did your investor give you a term sheet to buy the company? I said, well, no, they just told us what they think it would be worth in in in America we're gonna sell it. I'm like, those are two different things. That's what, that's what they want. That's their self-serving agenda. They wanted to sell for that, sure. But all of a sudden they were comparing these two things as if like the real term sheet that they had, the offer they had from a buyer in the market with cash ready to go, was the same thing as the investors saying, here's what we'd like you to sell it for because this will benefit us more, of course, right? And look, right, I, right, it's, it's not entirely. off base for the investors to want that, of course, is what they want. That's why they got into it in the first place. Like everybody does have to also recognize the reality. To your point, if you know, you raised on a $100 million dollar evaluation, but you're now doing $30 and you're losing $100,000 a month, any offer is probably not a bad offer at that point, right? If if you really don't know where it's going from that point and it isn't arking up, nothing's happening, and you're exhausted, whatever that that number the investor threw out is probably pure fallacy. At that point.
Wil Schroter: And look, I don't think we blame the investors for wanting to want more out of their investment. I can't blame anybody for that, but that's not the same as what you're saying is realistic or achievable, right? So your wants and our needs are not whatsoever. The second thing that they'll look at or the founder will look at is what this multiple will be, right? And I call these the multiples of madness. It starts something like The founder is like, hey, I've seen other companies in the market get these multiples.
Ryan Rutan: Oh man, this is where it goes wrong. I mean, just like anytime you hear somebody start with, I've seen other, right? I just know we're like, here we go down the wrong path, right? Comparison kills every single time. It's such a horrible thing to do. Yeah,
Wil Schroter: and and like, look, it doesn't hurt to have some general barometer, nothing wrong with that. However, you cannot compare deal for deal because when it comes to sales, there are so few sales and they're all total one-offs. They are all total like, people think about the way they think of houses, right? They're like, oh well, you know, house sold for this market. for this, you know, value. So I guess other comparable houses sell. Yes, because that is a commodity industry where lots and lots and lots of houses sell and a lot of buyers like it's a very fluid market. This market is a total one-off every single time. Yep. So what one company got in their one-off sale, for whatever reason they got that, has no bearing on what you're likely to get. It sounds cool, it doesn't work that way in reality. The second part of that though, this, you know, multiples of madness, is no one ever says, I think we could get 10X top line, but I just saw a company get 3X top line, so I think that's what we're gonna get instead, right? In other words, always everybody always says I. Heard another company got something insane, and so I guess I can get something insane as well, right? A couple of just like reality checks. Number one, are you really the company that got that crazy multiple, right? They're like, oh, you know, Google bought this company, you know, that's in the same space. Being in the same space doesn't mean jack shit, right, right, yeah. It's, were you a $100 million dollar company that's what they were, right?
Ryan Rutan: Like I was. There's so many, so many things that make make these deals unique and individual from the, you know, the, the exact performance of the company that acquired them at the time, and the exact performance of the company that you were when you got acquired, the market you were serving, the way you were growing, the team you had, like, they're so damn dynamic, right? Like to your point, yeah, house purchases is a commodity, right? A car purchase a commodity, like get all these things, you're generally gonna use it for the same purpose, it's gonna have roughly the same value to you. Right, where we get into like the reason people buy companies, sometimes it's for cash flow, sometimes it's for, you know, a market penetration, sometimes it's for technology, sometimes it's for, it's for a lot of things. Right? And so that too is another variable where it's like, well, because they got this, well, what did that turn into on the backside? Do you have the same potential to turn into some type of strategic investment like they were, and in most cases like, well, no, but we still want those multiples. Of course you want the multiples, right? I want to win the lottery once a week and just give all the money away. That'd be super fun, but it's not gonna happen either.
Wil Schroter: Everybody's going into this for the first time, so I, I give everybody a pass. I know you do too. I get why people You know, kind of create these fantasies. I get it. However, just because we want it, just because we see it doesn't make it real. Well, we also, like, what we missed like, let's say Google bought a company in the same industry space, whatever you want to call it, right? Companies doing $100 million in sales, and they bought them for a billion dollars, which make up it doesn't matter, right? And there it goes 10 10x their their top line, right? You gotta understand that very few companies, like 1%, 2% of companies that are interested in selling. Have truly competitive marketplaces to sell, meaning when you get to $100 million number one, there are very few companies that can buy you.
Ryan Rutan: Stick on that for a second, because I think that's actually one of the key points. So it's like oftentimes when I look at a market and I go, somebody just got acquired in that market by probably the one acquire that exists, everybody gets excited like oh they bought them and we're kind of like them. I'm like, right. You're saying you missed your chance? because that's one way of looking at it. It's like if that transaction already happened, they don't need to buy you twice, right? They don't need you and that other company in all likelihood, and in in like as you said, like there are very, very few buyers, we get up to the top of these markets and especially the large transactions, there are so few buyers, maybe there's one buyer that's really gonna value you in that way. Maybe another requirer comes along and is like, OK, we need to keep up with the Jones a little bit, but they're not gonna pay the same premium that that first company did. It just never works out that way.
Wil Schroter: You know, something that's really funny about everything we talk about here is that none of it is new. Everything you're dealing with right now has been done 1000 times before you, which means the answer already exists, you may just not know it, but that's a OK, that's kind of what we're here to do. We talk about this stuff on the show, but we actually solve these problems all day long at groups.startups.com. So if any of this sounds familiar, stop guessing about what to do. Let us just give you the answers to the test and be done with it. You've got a couple considerations. Number one, to your point, that may be the only buyer, OK? Number 2, of the few companies that get to the rarefied air that they're selling at that level, they're also not competing with other deals, right? I, I, I'll give you an example. A year or two ago, Figma. Had an acquisition from Adobe, and I don't remember exactly what Figma's revenues were at the time that I'd heard anywhere between $200 million to $400 million not insignificant by the way, like still that's a ton of jack, but Adobe tried to buy them, since it got canceled, tried to buy them for $20 billion. Now, if you're every company like Big Mom. Right, envisioned whoever else at the time. You're saying yourself, well damn, if Figma is getting bought from that for, you know, that kind of multiple, then I must be getting bought for that multiple because we do the same thing. No, you're completely wrong. Here's why. Number one, Figma was the number one company in its class at the time, right? Meaning they had a position that another company couldn't come in and say, if you buy us, you get that position, you're buying number one position. It's something Adobe was losing in a significant way. And they had to buy that position. If you were a company doing the same exact product, but you're doing $3 million in revenue, you don't matter. It doesn't matter. Even if you had literally the same product, you weren't fig, you weren't doing hundreds of millions of dollars.
Ryan Rutan: Yeah, because I think some people then get that wrong too. They're like, well, OK, yeah, we're a lot smaller than Figma, so just shrink, we don't need to sell for $22 billion. Hell, we could sell for 1 billion to be happy. It's not the way it works, right? They're going to go out, they're going to buy the market leader. They are willing to spend $22 billion because they realize that it has that kind of value to them. It's not that you have some scalar value if you was like, oh well, we're doing 2 million, so we're 1100 of them, so buy us for 11/100% of that. It's not the way it works. It doesn't matter to them.
Wil Schroter: Because most of the companies where you see those headline numbers where where we pull those, you know, multiples of madness from, we're comparing our state of the union to that that the acquire state of the union, the company that acquired rather, and they're not even remotely close. It's the equivalent of me saying, I think I should get paid what Patrick Mahomes gets paid because I threw way more touchdowns in my Sunday football league uh with other dads.
Ryan Rutan: Yeah, you sure? Yeah, probably not. Yeah, I always, I always, the analogy I always uses in the housing market, right? And even though it is a commodity market, we look at that and we go, OK, yeah, you're not the $22 million home on the hills in California, right? You are in Iowa and you're on a flat piece of ground, and it's a 3 bedroom, two bath with laminate countertops, right? It's not the same thing. It is also a house. It will house people. It does the same thing. But it is not the same thing, right? So I think this is where it's just, it's so hard, right? And and I think that oftentimes because we're the founders, right, and we're inside them, and we do see that we have the potential, we want to be where those things are, and we're again going back to that like in pitch mode like where we're projecting out and we're so used to thinking about the future version of our business that we could be figma and they could turn us into that and you know, if they just bought us then we would be their figA and it would all be great and they would give us a discount. It'd be work out for everybody. It's just not that acquisitions happen, it just never does.
Wil Schroter: You bet. And so, what we also don't understand when we think about those multiples, is we create this like giant inflated value of our company, as if if an acquirer wanted to spend money. That they had no other way to spend money. For example, anybody with any amount of cash, almost literally anybody, can put their money in the S&P 500 right now, and if you look at the last 10 years in the S&P 500, it's yielded about 12%. Last year was incredible, but like just generally 12%. So if someone's gonna pay you $10 million. Which would yield $1.2 million in profit by doing nothing, by the way, by
Ryan Rutan: doing nothing,
Wil Schroter: zeroing out, right? Yeah, almost zero risk and more importantly, zero effort, right? And it's still cash, it's still liquid, right? to make $1.2 million per year,
Ryan Rutan: right? The fact that it's still liquid at any point is a big deal because startups are not
Wil Schroter: 100%. Why in God's green earth would anybody give You $10 million for a business that makes no money, right? Like how would that make negative money
Ryan Rutan: in a lot of cases, right? We're still at that point
Wil Schroter: yeah we're
Ryan Rutan: like
Wil Schroter: we're like,
Ryan Rutan: well, if you give us a, we'll give you, we'll give you 10 times your ARR. Well, our AR is negative right now. Exactly. You pay us, we'll take the thing.
Wil Schroter: We've got to understand, you know, as the founders that we're competing with other ways people. Could spend that that acquisition cash. And one of the ways is just doing nothing but investing it. I want to take a moment just to zoom out for a second and point out kind of the spectrum of places you're likely to go to sell your business, OK, because again, most people have never done this before, so they don't really know. It kind of works out something like this. There's 3 buckets. Bucket number 1 is the white knight perfect candidate. And and all of us have who that would be. I'll give you an example for for startups.com, it's probably Intuit, right? You know, we've got 1.3 million companies on the platform. A company like Intuit would love to buy us because it would be a massive acquisition into exactly who they sell into, OK? Now it doesn't mean they will. I'm just saying like if I had to say who was an obvious buyer,
Ryan Rutan: if we're gonna, if we're gonna name our white knight, that's them.
Wil Schroter: Yeah, it'd probably be into it, right? But there's Like into it maybe a couple other companies tangentially at that, and then that's it, right? So, so that bucket burns off fast, right? And you kind of either have it or you don't, and I always generally say if they wanted you, they would have called by now, right? Like they didn't forget you existed, right? The second bucket are kind of everyone else, meaning all the other companies in our space, tangentially in our space, etc. They are not going to pay a premium and they likely don't have the pocketbook at any given time to even do a deal. The third bucket, which is by far the biggest and the least understood, is private equity. Now, for those that aren't familiar, just 2 seconds on private equity. Private equity firm has one goal, buy stuff as cheaply as possible and shred all the costs inside it, translation people, and sell it to someone else. Yeah. There is nothing else to their strategy, no matter how they sugarcoat it, whatever, they are the merchant cash advance of startup companies. And just like merchant cash advance, they have a very predatory nature, right? Again, and I'm not knocking them for it. I'm just like, we sold a private equity company, we felt we got a great deal out of it, but I want to point out, like, we knew what we were getting into.
Ryan Rutan: We got a good private equity deal, right? We didn't get a strategic acquisition.
Wil Schroter: You bet, you bet, right? When we went into it though, we knew what to expect. For example, again, we sold Zvirtual. Zertual is a very profitable company. So we knew that a private equity company that would want to buy us would compare using that cash into buying virtual versus using that cash in the market. So we weren't gonna get a 100X like a top line, right? That makes no sense whatsoever, right? But the more important part about that bucket being private equity is there is a 90% chance that's where you're going to land,
Ryan Rutan: especially by the time you decide you want to sell. You've said this before, I think it's it's a truism, which is that the best acquisitions are when companies are bought, not sold, meaning that somebody comes to you for some reason you've done something, you've gotten on somebody's radar, they called you, you didn't call them. The minute we start calling people, uh, it's, it is a bit of a race to the bottom, and you generally do end up with private equity at some point.
Wil Schroter: So again, just to, just so people understand the process, private equity is awesome because like the merchant cash or payday advance folks, they've always got cash,
Ryan Rutan: right? That's they're specifically looking
Wil Schroter: for deals, right? Yep, you bet. They answer the phone, they'll look at doing deals when we sold. Virtual, we had initially hired an investment bank to run the process. And again, for those that aren't familiar, an investment bank is just a few people in a room, typically, who are working on your deal, and all they're doing is just spamming the same list every single time and then taking calls on your behalf, right? I'm I'm not knocking them and we were perfectly happy with who we worked with, but at the end of the day, they they do a lot less than you think they do. But they are in charge of your outcome. But mostly what they're gonna do is they're going to talk to a few strategics that bucket one, bucket 2, and then just carpet bomb every private equity firm there is, right? Yeah, right, and, and that's where a lot of deals end up happening, um, at the private equity side. Now, here's where it doesn't happen on the private equity side, just, you know, so people understand this process. If you have a business that makes no money, you ain't selling a private equity. Like that, that is not gonna happen, right? All private equity understands is the business makes this much. If we strip out costs, it'll make this much more, and we'll make a premium on that delta. That's it. That's what they do, right? And to be fair, Ryan, we acted as a quasi-private equity firm when we bought the company. Things that we did, right? Because in a lot of cases we're like, OK, this company makes X amount of dollars, but we already have the infrastructure, Ergo cost, already paid for, so we're just gonna take the asset, not the people or the infrastructure, which was always the founder's preference in those deals, and make more money. It's not complicated. Now that said, when folks say, say I wanna sell. The the founders say I wanna sell. Their first thought is white knight, 10X top line, you know, you, you name it, right? No one goes into it saying, man, I can't wait to sell this thing. I want to talk to a payday advanced private equity for pennies on the dollar.
Ryan Rutan: I want to go get nickel and dimed and have as much of my payments deferred over time as possible. That's.
Wil Schroter: What I would like, which is exactly what we're talking about. It's, it's the the part that isn't in the brochure, so to speak. But when we're looking at what's, what kind of multiple are we gonna get, let's just talk about two sides of the coin here. We're talking about top line multiple or bottom line multiple. Most startups that we talked to, Ryan, you and I talked to, by the time they're looking to sell, there is no bottom line multiple. They literally make no money. Right, um, they have no profit or have damn near, like, whatever multiple you'd apply toward their profit is insignificant. And just so people understand like what a reasonable multiple is, a reasonable multiple on your net income number is 5 to 7 times. Now, most people when they hear that, are like, are you kidding me? Like I was expecting 20 to 50 times net income on the top line, and again that depends on if you have a bottom line, it's usually around 3x top line.
Ryan Rutan: Delivered this news, I think this is sometime last year and and the founder was like. Well, that'll be worth nothing to me. And I said that's because that's what it's worth to the acquirer, right? That's, that's the problem, right? This is where you're at, right? It's not worth anything to them either, right? That's the reason you're trying to sell it and but it's, it is so hard. Again, like you've put so much time, so much effort, and you had these dreams, it was going to do this, was going to do that in your mind for the acquirer, it still will, right? It's, I'm tired, but somebody else grabs the baton, they're gonna run the last 400 m way faster than I was going to, and it's all gonna. Work out, right? But that's not the way the choirs looking at it going, this is what it's doing now is what we expect to continue doing at the point of like your, your point around PE. They're gonna look at it and go, here's some things we can do to make this more efficient and drive a little bit more IRR, but that has a limit, right? Like we can only go to zero on cost. We can't go below that. We can't inflate this thing to 2030, 40X. Maybe we can get it to 4 or 5. That's it. A very
Wil Schroter: reasonable analysis would be, look if a team who is doing nothing but this with millions of dollars in funding couldn't get it passed. First base. Why would we be able to get it past first base when we're going to put some employee, uh, you know, to run this thing in our free time? Like, it doesn't work that way. And again, when I describe all this and I'm like, oh, you, you silly founder whatever, remember that Ryan and I are talking about this from experience. In other words, we were those expectations. Yeah, I remember this is years ago we got a call from Fiber, right? Fiber was about to go public this is, yeah, a while ago, right? Fiber calls us it's their head of BD. And conversation moves to uh they want to acquire us, right? This is virtual, and we're like, well, you know, here, here's where we think we are in the market and you know, we're we're expecting to get, you know, 5 to 7 times top line, and I'll never forget that the guy in the other laughed, right? Now he wasn't being a jerk, right, but he was wrong, by the way, just to be clear, right? He laughed, he's like, buddy, we're about to go public and we're not even getting that multiple. Yeah, he's like you're not going public, um, yeah, I was, I was like, yeah, you know what, you're not wrong about that. It goes to show, again, this is, I'm saying like, you know, being in the founder's shoes, you have those expectations, right? And it's OK to have them, but at which point you actually expect to get a deal done, they don't work very well. Yeah,
Ryan Rutan: look, I'm gonna go back to that that old phrase of my father's, which is aim for the moon but clear the fence, right? It's fine to want to hit the moon, but like at some point you probably are just going to clear the fence, right? It it but on a percentage basis at least, right? Of course there are founders out there who are gonna exit, they're gonna do quite well. I think a lot of that depends on the circumstance, but if you're actively trying to sell your business, you're probably closer to clearing the fence and hitting the moon.
Wil Schroter: The last point I want to touch on, because I, I think this gets easily overlooked for everyone, especially for folks who haven't done this, is whether when you do get paid, even if you can find somebody that be willing to buy the asset, how you get paid. I hear about so many deals where people like, hey, you know, you, you said I wouldn't get that great of a deal. Look how good this deal is, and, you know, whatever, like, OK, cool, let me, let me guess. They're not paying you in cash. Oh yeah, no, no, no, it's, it's deferred competence. It's gonna be some stock and we second bite of the apple and you know, all this stuff, and I'm like,
Ryan Rutan: all we have to do is grow more than we've ever grown before for 4 years consistently and we'll get these bonus payouts and yeah, it's, yeah,
Wil Schroter: yeah,
Ryan Rutan: so, so I just heard that a lot of devils
Wil Schroter: and like wait, what did you just say? There's 2 ways to get paid. Cash upfront and everything else, right? Cash up front is how no one wants to pay you because that involves the most amount of risk. So when we say, hey, the company is worth let's say $10 million right, and that that by by ebit multiples and in top on multiples, it all falls well within reason, OK? And you're like, oh cool, $10 million you know, I, I can make that work. And I was like, but how you get paid $10 million is a very different story. When we put visual up for sale, we had countless offers from countless people, but a lot of them were like for these huge numbers beyond what even we thought we could get. For monopoly money, which meant stock, which meant like future payout, whatever, right? The price goes up geometrically when you're not getting paid with cash, and so just to be clear, that means you're getting paid in stock, you're getting paid in incentive compensation where like the business hits these numbers, you're getting paid in essentially earn out, which is. Kind of the same thing, where you have to stick around and hit your numbers, which no one ever does. Most acquires, it's just in their nature, as an acquirer ourselves, you know, we're in the same boat, we want to do something that defers the risks, that's really what we're talking about, and you know, cuts down the cash compensation by paying you in some deferred structure over time. Now, sometimes you're like, I just wanna get out of this thing, right? You know, I just wanna to unwind this thing. Kind of don't care, you know, let it be whatever structure it needs to be. It sucks, but, you know, it's better than nothing. I'm I'm done.
Ryan Rutan: Acquisition sounds better than a wind down, right? We've heard that,
Wil Schroter: right, totally, and, and, and frankly, I give this advice to founders. In fact, I gave it to 3 different founders in the past month that were all going through. Different levels of sale. I said, look, based on where the business is at, certainly where the market's at, you don't get to call shots right now. It sucks, you know, you talked to me two years ago I give you a different answer, but right now, you know, State of the Union, uh, you don't get to call shots. The business is going down. It's got a certain lifespan to it. You're at a point now where you're not trying to land on the, the best piece of ground possible. You're looking for any life raft whatsoever that doesn't involve you
Ryan Rutan: dropping. Yeah, you have no leverage in this whatsoever. In fact, you are the fulcrum. You are under the entire lever. It's all both both sides of the lever pushing down on you. There's another hidden danger in this world that I've seen, and that's the around this like the equity versus or the the deferred comp, all of these other things that can come in basically the entire bucket of not cash, and that's that founders will start to compare those two offers, right? You'll have a, you'll have a a cash offer upfront and you'll have a bunch of deferred comp. And then they start to try to compare these two offers and going like, well, but we got so much more over here like we just need to get them to agree that like well they're not going to. Those are two absolutely different deals and in one case, you know, you're you're selling the cow for magic beans, um, hoping that the the vine grows and you get to climb it and then rob the giant. The other one you're getting cash, which you can actually go and use, right? And so I think it's super, super dangerous where that. Starts to create another one of these false comparisons. It's like looking at the person that got the the the 100 X multiple on their on their business and sold to a massive company even though you're not really anything like that company. Same kind of thing here, where all of a sudden we start to create this false comparison, and we start to use that to evaluate the the deal that is on the table, it's probably better for us because it's cash up front, we're gonna get paid, but all of a sudden we're like. But, you know, we could get 20 million over here and deferred com, yep, these guys are only offering us 5 in real cash. Well, guess which one of those is actually worth something in in the next two years.
Wil Schroter: It's just like, look, it's just so people that are hearing this, you know, if you never get on the phone with Ryan Knight and and we do an advice session one on one, I'll just tell you this, there's getting paid upfront in cash and there's just everything else, right? In other words, like, everything else is maybe get paid. Yeah. You always have a situation where someone got paid in the monopoly money, and that monopoly money turned out to be printed by Google, right? That kind of some, it's right up there with winning the Powerball, right? It does happen, it just happens so infrequently, it almost doesn't matter. In most cases, whatever you think you're going to get on the back end, multiply that by 25%, and that's your best case scenario. And and again, that is brutal news to process for founders. Founders hear that and like, you've gotta be kidding me. Are you saying that like, I just sold this for 10 million, walk away with more than 2. Other folks will hear that and say that's total bullshit, right? You're gonna get at least 5 million, etc. I don't know, man, you watched this happen enough times, you get way more realistic and by way of that cautious. About getting paid anything that isn't that upfront cash. I look at this in so many different ways and I always tell folks, no matter what their deals, it could be an employee exit agreement, whatever. I say, what you get paid upfront is pretty much what you're gonna get paid. Anything else is icing on the cake. Don't negotiate the icing. Negotiate the cake.
Ryan Rutan: That's exactly it's such sage advice and like, look, if you're hearing this for the first time and you're not already post deal, this is the right time to hear it, right? This is the right time to hear it so you can at least be thinking about it and knowing that this is the likelihood, this is what is likely to happen. Um again, other things do happen. Yes, there are other outcomes, sometimes they're big, sometimes they're not, but we want everybody to go into this with eyes wide open, right? The, the time to hear about that you might end up with 25% of what was agreed. is before you agree to it, so that you're at least going into that going, OK, I really need to think about this. That is not guaranteed money, that is potential, that is future, that is a lot of things. You're investing at that point, and this is a great way of thinking about it, you're investing in the person who's buying the company from you at that point, right? You have to think of it that way. Think of whatever that money that they're not paying you today is that you're giving them that money, hoping that they turn that into something that they can give back to you and and that's it, right? And most people wouldn't do that if they, if they were given that choice, they're like, OK. If we're gonna pay you the full 10 million up front, but now we want you to give us 7 of it back and let it, let us use that to grow the company. Would you do that? Hell no. It's the same damn thing you're doing if you take 7 million deferred comp. It's the same thing, whether you want to think of it that way or not, that is exactly what you're doing,
Wil Schroter: you bet. And so you touched on something, and I think it's, it's worth kind of like ending with this notion. The enemy of every deal isn't time, and it's time is definitely an enemy. It's expectations. It's our own expectations, which is what this whole episode was about, which is, it's not that, you know, selling isn't great or going through the process, you know, it's, it's challenging, it's, you're competing with your own expectations. If your expectation was to sell for a million dollars and someone was willing offer you $5 then the deal's gonna get done. When you expect to get $5 and you're only offered 1. You're competing with your expectation the entire time, and this is about being very, very cautious about your expectations, realizing that your own expectations or what you thought it was worth, doesn't make it worth that. And the longer you hold on to that at the at the at the cost of actual reality, the harder it will be to ever get a deal done and ever get the exit that you're looking for in the first place.
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