BETTING ON YOUR SUCCESS (Searchfunder Interview)

BETTING ON YOUR SUCCESS

SEARCHFUNDER INTERVIEW OF MAX SADLER, PART I

Were you primarily searching in Nashville?

I conducted a national search out of Somerville Massachusetts. I had LOIs in Michigan, Missoula, Montana, Nashville, etc.  I was very industry focused. I believed in getting deals under LOI relatively quickly.  A deal that wasn’t under LOI is a bit like trying to ask someone out without knowing if they have a partner or significant other.  She can be the most beautiful girl in the room, but if she’s got a husband or a boyfriend then she’s probably not that interested in a date.  I was trying to weed out the companies that just wanted a free valuation at my expense and weren’t for sale, considering that the vast majority of my process was proprietary.  I had to figure out if they were for sale, which was by handing them an LOI and talking price.

Tell me about investor relations during the search phase?

Communicating with the investors during the search is important because you are selling yourself and you are selling your ability to raise money and run the deal.  So, at least in my experience, I didn’t know some of my investors who had invested in me in my first round.  It gave me an opportunity to get to know them better.  Also, the part of the process that I hadn’t thought about – or hadn’t been presented to me – was that some of my first-round investors are going to say no to the acquisition.  Every time I had a deal under LOI, I had to very quickly gauge my investors’ interest.  I needed to have a relationship with them to be able to predict the chances of close.  For example, Investor X doesn’t like software deals, so the chance of him following on are slim.  Is that okay because Investor Y or Z take up the slack? Having relationships with people outside of my first-round base was important because the majority of my second-round capital for the acquisition actually came from outside.  Between the time I raised my search fund and the time that I bought my company, institutional money entered the search fund space that hadn’t been there just a year before.

Wouldn’t institutional investors have a different lens from the search fund investors?

This was institutional money that was search fund savvy.  I hadn’t met these people. They had never received a quarterly report from me while I was searching. We didn’t have a history.   I don’t know if that history would have been meaningful or not. 

How often were you communicating with your investors?

As the LOIs came up.  Keep in mind, though, that I wrote 7 LOIs during my 11-month search. 

You were searching in 2010 as we were pulling out of the recession. Did you feel like there were bargains to be had?

There were bargains to be had.  We paid less than five times, but debt was hard to come by.  We bought the business in 2011.  It didn’t look like the global economy was going to go off a cliff.  To put it in perspective, I recall the Dow was about 11,000 to 12,000.  Debt was harder to come by.  The world was very different then.  It’s all cyclical but I hope we never get back to that again.

Did you have interns?

I had a good number of interns.  Being in Cambridge/Somerville made it easy to find interns. I had better success with Babson, Boston U and Brandeis interns than Harvard interns.

 

Looking at the LOIs that didn’t make it to final close, are there issues that stand out for you?

Each one is different.  One of the companies we looked at would have been the one of the most successful search fund deals – had we bought it – because six months later it was bought by Dell.  It was a crazy deal. It was a 5-person software company in the Pacific Northwest.  It was printing cash – 75% EBITDA margins – with recurring revenue.  I remember when I was there in October 2010, the search fund community wasn’t having that kind of deal.  Perhaps, now we would have been able to close. It was 4.5x EBITDA.  Search fund investors were not paying over $13 million for this little strange recurring revenue company, even if it was growing fast.  I think it would happen now, but it was just ahead of its search fund time.  I couldn’t raise the money. 

 

What about other LOIs?

I had another deal under LOI that another searcher had had under LOI a couple years earlier.  Neither of us could get comfortable with the seller.  The seller has since gone to jail for fraud.  You can find a copy of his mug shot on the internet. I recall killing the deal on a Friday.  He was asking me if there was any way we could continue the deal and he could in essence get $1 million out of the deal.  I remember running the numbers and wasn’t able to do it.  It was a good company on paper but he was sketchy.

 

Tell us about transitioning from searcher to operator?

On my first day, my Sellers had told a couple of the longtime employees beforehand.  Two of those employees went out and got drunk in the middle of the afternoon.  One of them heckled me, while we were announcing the sale.

 

How long did that person last at the company?

I was ready to fire him that day, but the Sellers told me he was indispensable to the operations of the company.   So, he stuck around a little longer.  This person acted out again in some other way.  I asked one of the Sellers who stayed on for a period of time to do the firing.

 

How did you handle it in the moment with the rest of the team? Were you concerned that the other employees wouldn’t take you seriously?

I felt that remaining cool in the moment was the way to go. I was scared of making waves. I am not from the South.  I was 31 years old and trying to run a company.  I wish I had been stronger and more decisive.  Searchers and business people do not like to talk about being afraid a lot.  But, it is a fear inducing situation, I am walking into the unknown and people are going to be judging me. 

 

Did the culture of Advanced Networks Solutions fit your style given that you are not a Southerner?

The culture was okay because it was a tech company.  The average age was pretty young.  Engineers are pretty much the same wherever you go.  It’s about the type of job you do.  

I overestimated the quality of the culture in the business because the sellers told me so.  I didn’t realize there was some discontent under the hood. There were some duplicitous employees in the background.   Things weren’t all on the up and up. I might have been a little naive in seeing where the loyalties lie.  I didn’t pull the trigger fast enough on people who were undermining our vision. 

I think that’s true in a lot of places.  I’ve been consulting with multiple search funds and small companies.  I see it in virtually every search fund deal and company. Those people exist – those who are loyal to the former owners.  No matter what the new ownership does they will not buy-in or will undermine it or will long for the way it used to be. Operators are scared to remove those people due to institutional knowledge.  Those people are a cancer. 

I’ve been on both sides of it and people long for how it used to be.  The employees always give a lot of praise the former owners.   I’ve never said it, but sometimes, I want to shake them and say, “You know the seller sold your jobs?” I’ve had my job sold in my career.  It’s not a good feeling, but at the end of the day the owners did what was right and my job was a casualty. 

It might be a little bit of the devil you know versus the devil you don’t?

Of course.  I had a job I loved sold to a publicly traded company.  The sellers aren’t to blame because they sold it to the highest offer.

 

What did you think the benefits are of making personnel changes more quickly?

You get the people you want into the company. I think institutional knowledge is overrated.  As the operator, if you are doing your job and everything is well-documented, then no single person can hold the company hostage. Ultimately, it’s the belief that the company will fail if a single person quits. I’ve never been part of a company that actually falls apart if a single person quits – although that’s why we’re taught not to have our name on the door of a company. 

I should have fired the drunk employee in front of everyone.  Being drunkenly heckled at the company I am the CEO of is unacceptable behavior and I should have fired him on the spot.

 

Do you think it would have set a different tone for the company that was a good one?

I don’t know if it would have been a good or bad one – but it would have been different.  I regret I didn’t make that decision because I went against what I believed was right and deferred to other people.  It would have set the tone that I meant business.

 

On the other hand, searchers are told not to rock the boat for the first six months to get to know the company.

That’s true.

 

It turned out this guy wasn’t as critical as you were told, but what if he had been the linchpin holding the whole thing together?

Yeah, I let fear drive the boat. 

 

I’ve definitely seen some close calls.

There are some close calls. That’s why you have non-competes and non-solicit agreements with key people. Identifying key employee risk early on and locking those people down is important.  If it becomes abundantly clear that that person is a cancer and undermining you, being able to honestly say,

“I made a promise to my investors that I would work my hardest to get this company to X million dollars in revenue in 5 years. If this person is going to prevent me from reaching that goal, then why am I betting my career on this person? After all, this person is not betting on me.”

Keep in mind I’ve made this mistake. I think it’s the biggest mistake searchers make.  The person who is employee number 4 who grows the company from 0 to $10 million is not going to be the same person who is going to grow it from $10 to $20 million.  That is the search fund hypothesis.  So, we shouldn’t think that all of the employees who got it from 0 to $10 million will get it to $20 million.  For example, to go from $10 to 20M, you don’t need a bookkeeper, you need a controller or CFO.  You don’t need 1 sales person who takes all the in-bound leads, you need a sales team with a sales leader.   A search fund purchase is a great opportunity to upgrade the leadership.  Many searchers, including myself, are afraid to disrupt the apple cart.

 

After about a year, you switched over from CEO to VP of Sales. Was that part of the recognition of needing to switch for the better of the company? 

The Chairman of our Board who was local to Nashville wanted to be the CEO of the company for the best of the company.  The company grew really quickly recurring revenue-wise.   We wanted to build out sales and marketing to continue that growth. At that point in my life, I preferred not to be the #1 guy at the company.  I stepped aside and let him run it.  I built out a repeatable sales and marketing engine at ANS.

For Part II of this interview: The Importance of Coaching & Mentorship, go to https://www.searchfunder.com/article/viewarticle/1957 .