Why would a founder accept a risky earnout deal?

I knew I had to close a deal or else risk losing a lot more. I founded Ekkill and we bootstrapped it for over 20 years and not take any more risk of growing slowly. >> Were the buyers privy of your cash crime against the lender? >> The negotiation became hard. We walked away, took it to market again. Sometimes consider raising money or selling not when you need to, but when you're looking really good. What would be the negotiation tactic when it comes to selling your company that you'd want to pass on for founders to consider or be very aware of when selling their company? >> I think one of the best ways to bootstrap a company is to find >> everyone. Welcome back to $100 million exits. Today we have Eric Friedman on the show, founder of Eskill, built the company for over 20 years and sold it last year after trying to sell it for over, you know, three different periods. Eric, I want to just jump in for our audience and kind of walk through, you know, why did you take the deal last year and why did you take the deal with the earnout? Hey, Jason, great question. Uh, after bootstrapping 20 years of consistent growth, I become very comfortable that I could just keep on doing this. Uh, the product we were doing, which was skills testing for employers, I decided one day, I want to get a lot bigger than this. I want to become a behavioral testing company too. And I leaned pretty hard on our software development partner who had some of our equity. I still had the majority share of equity in my company which was a nice luxury to help finance that. And there came a time when their new ownership couldn't do that anymore. So all of a sudden I had cash flow pressures. I didn't have an incomplete potentially massive product and working capital dried up and interest payments to start making on what I had piled up. So our cash flow situation changed very quickly and that and we were paying these bills but that was getting in the way of growth. So at that moment I realized it's best to sell the company, pay off this debt and not take any more risk of growing slowly. So there's a couple things I want to add some color to and I want to talk about the earnout as well for the sake of the audience that doesn't know like you had a development partner that was like kind of like a dev shop that built a lot of the technology so you didn't have to invest cash they took equity but they essentially sold and their new ownership had a different agenda and so what you thought was a sure thing good relationship good partnership was kind of pulled out underneath you and you had to act fast. Um, so you kind of realize the market horse like what walk us through kind of the the realization you had when the we sort of see those cards unfold and and how that might impact your business strategically. >> Sure. Well, I knew for a while when we're building out this big product, I would see every month, you know, we are adding another 100,000 $200,000 to our obligation to our debt to the software development company which had become a very substantial company. It seemed like to me they could absorb it. They had about a third of my company's equity. Their principles did. And in the end, this would all be worth it to everybody. Uh, but it went on longer than I thought. I didn't know enough in advance how much to budget for, how long, for, you know, sort of an open-ended project till it was done. So, eventually I was told uh that I'm sorry, but the the new owners of the software dev company are not willing to support this anymore. we're cutting off the working capital and the amount that you have you're going to have to start paying, you know, some sort of uh significant interest on. So, at that point, I realized that my comparatively luxurious position of being able to have without other outside financial investors, this kind of support, which has helped our company grow over a long time, um, uh, had dried up and so that was new. And that's when I realized that we had to sell. I decided to go for a sale rather than raising money at a and trying to pay that off because at that point it's become kind of complicated. I've been doing it a long time. So we found an investment bank in New York and ran the first of say three processes to find a good buyer. walk us through the the decision on picking an investment bank. What did you do to pick the investment bank? Oh, can I add to it a little bit? >> Yeah, that's a great question because when you reach a certain level of size, you know, say about 10 million in ARR or so, you start to draw attention from investment banks and they start pitching you their business. And for a long time, I wasn't planning on selling. So, I would, you know, talk to them, meet them. So much really I thought depends on the skill of the uh business development rep who works for them. Their ability to convince you that they have people at that bank who've worked on similar companies and have succeeded and here's the track record of a similar transactions they've done. Uh and ultimately that's sort of how I chose how I initially chose uh the ownus partners. Uh and they were and in the end I was very very happy with their their work for us. Uh so it started with that and then ultimately it comes to you gel with the your lead banker and they do a good job telling your story um and crunching all your data. Like the toughest job they have to do is take over your Salesforce data and other metrics which are in format sometimes only your team knows and quickly quickly digest it, process it and pitch it as best they can most positive way. What was your experience? Like I imagine you met with you said you met with multiple bankers. You obvious chose Lyanna's. Um what were some of the attributes that you liked and didn't like about some of them? What were some invested banks that were just like clearly you didn't like or they didn't get it uh or didn't have the chops for you? >> I think the the biggest reason I would turn a bank down was they seemed too small. Like some of them it would be like almost like a oneman band like at a larger bank and they were the M&A guy. So, and it didn't seem like people would really take you that seriously. Uh, and then there are other banks that uh seemed they they had a good name. People knew who they were. Um, but then you'd be too small for them. They would they would talk to you, get your numbers, and say, "We're going to pass on this engagement." So, in the end, Leonus had done a transaction or one of the people on our team had done a transaction for a similar company to ours a few years before, not a conflict of interest. uh and he would have been on our team and that was like okay that's that's fantastic he knows our industry he's ready to go. Okay, that's good context. And then when it came to running three processes, I imagine it wasn't your preference to run three. So what what happened there? Why did it lead to three processes? And what was that kind of the timeline from start to finish? >> Okay. Well, we started in 2022. This was uh in the fall of 22. Interest rates were still like really close to zero. Valuations on multiples were still very high historically. And so, you know, we had very optimistic expectations of what we would get, uh, you know, how many tens of millions we would be getting for our company at a smaller size than we actually sold for. There were our revenues were when we did sell. Uh, and we got an LOI that I thought was was was good. It was healthy. And around the time we were doing due diligence in the fall of 22, interest rates all of a sudden began surging. 75 basis points a month. >> Damn. >> And so 45 days into all that, uh, we checked in with the the private equity buyer. Uh, and they came back with a 15% retrade and they didn't say, "Oh, you know, we've our cost of capital's gone up because of these interest rates and that's causing us to adjust the valuation we give your company." That would have made I would have been disappointed. That would have made some sense. Instead, they came back with these very fuzzy assessments of risks. What's the risk that your head revenue is going to leave your company and take all the customers or the risk that these are all things they could have said on day one? So I didn't I kind of lost faith in their you know this was a good faith you know negotiation and plus they wanted me to work for them for 5 years and so I wasn't getting a great taste for this relationship and because we've grown every year to that point and we are self- sustainable we walked away I didn't want to continue that conversation uh but that's sort of also when we began to get a lot more cash flow pressure so in 23 we had another buyer come to said, not from the investment bankers, but someone who knew knew people in common. They gave us a pretty healthy LOI, not quite as much as the first one, but still pretty good. And we opened up our data room to them and this was around November, December of 23 and they never went into it. So all of a sudden they kind of went poof. So we we signed an exclusivity. We opened the data room. Now they didn't have committed capital. So, one thing I understood, they had to go back to their backers to try to get and when they finally unpoofed in January at some point, like where have you guys been? I thought we were having a holidays aside, they said, well, our backers want to see how you do over the next like three quarters. And I said, okay, well, I'm really looking >> 20 years of business, like you you know how you're going to do. You know, one of the somewhat frustrations that I've had, I mean, in 20 years of ESKILL, we've had we've had tough years with headwinds. 2009 recession, we only grew 9% that year. Um, COVID 2020, we only grew about 9% that year. 2021, we grew 28%. 2019, we grew 40%. So, you look at the history of the company, you know, we had a strong intellectual property advantage with like almost a thousand skills tests. Uh, yeah, some years are good, some years are bad. doesn't mean the company is a rock star forever or a dog forever. But in when you're getting evaluated for a sale, you're often only as good as your last 12 months. And that's what everything sort of hinges on that that one freeze frame of your growth. Uh so yeah, that was a little I understood that there's they want to take the risk, but I kind of wish they'd said that up front. So that didn't happen. And bankers usually say if you run a process and don't do a deal, don't stay don't keep shopping because then you'll get shop worn. So just go away for about maybe three quarters, >> try to build your business, look good, and then come back on the market, which is what we did from 22 to 23 and then to 24. Uh by 2024, you know, it was just it was extremely tight. Every month we had to sell and collect enough to pay all of our obligations, all of our vendors, of course, payroll, and these uh the debt payments. So it was a very very stressful time for me and I knew I had to close a deal or else risk you know losing a lot more >> real and that that's all that debt was all just that partner right there was no other debt was there or was there other debt they >> I'd never we didn't have any credit card debt we had no debt >> now look the new owners of the software develop partner we had were completely rational so I don't I might have been frustrated but I can't blame them they can they didn't have interest in my company. Their job was to have their new portfolio company do well and have good cash flow, not subsidize some special interest customer of theirs. So >> yeah, that definitely makes sense. It's just tough that. So out of curiosity, if you can share, you gave the step shop and then their partners a third of your company. Um, but they were also kind of accumulating this debt against you. Was that were those two separate transactions for two separate value sets or was that kind of like together like they were getting the equity interest and are they converting their debt to equity at some point and then they stopped converting like how did that kind of come apart? >> Well the earliers of eskill uh we basically offered this dev shop which was they started around the time we did so they grew with us and they became a really big um nine figure a year business. uh they subsidized probably a million dollars worth of software development in our earlier years and so for that I gave the principles of the company you know equity and it worked really well for a long time. Uh so but when of course they took on new majority owners they had the equity but the new owners had the control and they had no equity. So it was a tough position tough position for the principles but they couldn't do anything about it. >> Well looking back and you know talking to other founders because I I deal with founders all the time and they consider dev shops as we a way to kind of same problems you know you solved with one and just kind of get get to market a little bit faster and you kind of get a little creative. You're not necessarily paying payroll. You have maybe some more flexibility and payment options. Um, but looking back, would you have stuck with a dev shop or would you have considered hiring in-house? >> Also a great question. Working with that dev shop, they were they were good and we got we really jelled with the principles for many years that was the right solution. If I could live my life over again, I probably would have said once the people who really were my partners no longer had control at that point, we were a big enough software company, we should have had our own, we shouldn't be outsourcing software development anymore. The only reason we were doing it was because these, you know, we were doing it with someone who had a strategic interest in us. When that goes away, it's much better, more cost-effective to hire directly. >> Yeah. Something I I deal with all the I see founders especially in the early days you know hey we got this dev shop and it creates such an unknown despite you know employees can also be complete unknowns but uh I've seen some deals unravel and andor at least in the VC side they don't amount to being able to raise money because VCs have seen this playbook roll out where dev shops cause more problems than good. Um, but it's great to hear that this was the right dev shop and this was a good partnership because sometimes it's not always the case and that's um, did you have a personal relationship with the partners beforehand? >> Uh, no only in the context of Eskill but I >> they were in some ways partners of my business. We got along very well. We shared the same vision for what Ekkill could be. Uh, >> so I I think one of the best ways to bootstrap a company is to find a dev partner who can grow with your company. That's that's the the key part because you'll always need software developers and so you have someone who has an intr like a deep interest in seeing you do well even more so than milking your monthly revenues. I think it's a that can be a really good um place where you outsource. >> So what would you So those are some good attributes. What would be some other attributes that you'd want to share with our audience that consider when partnering with a dev shop? Uh well if you've known advance the kinds of things you're going to need like eventually we needed to be type sock 2 type2 compliant we need to be Amazon web services uh we needed to have single sign on so is this a dev shop that understands those road maps and has has worked with similar I mean I didn't know this stuff back then it I'm lucky that they could grow with us but if knowing it again especially if you're going to sign with someone as an equity partner dev do they know these concepts and they know how to get there when the time comes. >> So, appreciate the the insight there. I think it's a it's good for founders going to know different ways to scale a business to an exit and there's so much information out there frowned upon in terms of the VC world bringing on dev shops and here you are approving a bootstrap use case as to kind of the pros and cons for founders to be aware of. But I want to take a step back and go back to the exit conversation. So, we were last talking about you running three processes. is you finally found your your bidder that was going to take it home all the way and you also kind of mentioned you chose the earnout. Um so by inferring from that conversation you had multiple offers. So kind of walk us through the process that was run in terms of like all right you're in market how long were you in market how many people did you talk to how many LOI did you get and um we'll start there and I want to get into the details of the LOI. >> Sure. As the investment bankers run the process, it's about usually it's about in my experience about three months. First, they engage either buyers have already found you or new buyers that they've identified. Uh this is after they've spent maybe two or three weeks with you updating your Salesforce analysis, your marketing materials, your pitch deck, and things like that. So, they pre- pitch um maybe 20 to 30 different potential buyers. some private equity, some are strategic. That was how it panned out. Then there'll be a subset of that, maybe say 15 or 20 that are interested. And then you sort of have a series, two or three a week, often if not more, where the management team, me and my main executives, will h have a presentation and a Q&A with these various buyers, and they'll ask all the questions they want to ask. When that's done, the bankers usually tell all the parties that are still in the game, okay, uh, IOIs, indications of interest, which is a verbally conveyed valuation for your company, or LOIs. Well, IIS are due this date and then maybe a week after that, we want to see Lois, which is a documented, more fleshed out version of, you know, your enterprise value they're going to pay and the the large terms around that, like an earnout. So that whole process was about three months. >> And how how many people how many parties did you have ultimately engaged in your process? At the end, >> uh we had I say six six IOIs and and four I thought were uh a reasonable valuation and two were just lowball. >> Yeah, there's always there's always the low balls in there. They always try to Yeah. >> throw their hat in the ring hoping no one else is at the party. Um, and so what led it to you taking the earnout? Because you mentioned you had some maybe all cash options. What about this deal stood out to you to kind of take the risk with an earnout? >> Okay. Also, like none of these none of these deals were the deals I would have envisioned a few years before. You know, they were all less than 2022, you know, significantly. So, but at this point, my priority came. I need to close the deal. And this was a positive outcome. I mean, everyone's getting their money. Uh, so it was a a positive outcome. I needed to make sure. So, I went with the party that had done the most homework on our data prior to submitting their LOI because I had seen LOIs. It's like, go poof. LOIs came to mean very little to me. You can put any kind of valuation you want in an LOI. They sound great. lock up a seller for an exclusive for two months so all other buyers are told to go away and then you can readjust that offer whenever you want. So really the the buyer has a lot of power in that moment. Uh and I wanted to go with the one that had the least likelihood of a retrade and the least likelihood of just walking away having experienced both of those. So that's the one we went with. Real quick, if you're a founder doing over 5 million in revenue and want to know what the best hund00 million plus founders are doing to fuel their growth, then make sure to subscribe to our $100 million exits newsletter. Get the playbooks that are proven on how to fund, grow, and sell your business. I'll even give you a curated list of investors that want to invest in your business. It's totally free. All you have to do is click that link down below. Subscribe. Do it now. I promise it's worth it. You won't regret it. You got nothing to lose. Go ahead, subscribe now. back to the show >> and what would be your advice to to founders that might consider, you know, selling their company? What would be the the things to be attentive to in this process and the maybe the terms to look out for or the things that you thought would be useful to share? Having seen a lot of again insubstantial offers and LOIs, I would really pay attention to one, it might sound weird, the the kindness of these buyers as you meet with them and as they ask questions. There's definitely a few different attitudes out there. Some people grill you like it's an interrogation. Of course, they want to learn about the company. They want to do their their math, but you're probably going to be working with these people. Is this the kind of boss you want to have? Is this the kind of partner you want to have who is going to treat you like just a, you know, a cog in the machine of making them and their limited partners' money? Or do they engage you like someone? Hey, I would love to work with you. And of course, we need to answer these questions. So, tell me about it. So, that's one. And then two, like I had said, uh, our buyer did the most homework. They grilled my CFO, politely grilled my CFO on every aspect of the P&L uh and and all the questions they had and our Salesforce data before they made their LOI. And that gave me a lot of confidence that okay, they they understood our business a lot better. So, they're much more likely to stick to that valuation. And indeed, there was very modest retrade. They did what they said they were going to do in the time frame they said they were going to do it. And that that was that was very impressive. That is pretty meaningful. And it's amazing how sometimes some of these deals, as you said, like they it's it gets exciting. You get these offers, you're like, "Oh, it's going to happen." But then >> some of these buyers are either don't have the cash or you are fishing or you know kind of want to come in at low balls and or worse lock you under exclusivity and don't you know kind of relinquish that control and then they start retrading and changing the numbers and then you know a lot can happen in two three months as you were kind of experiencing with your situation at that. Actually let me ask you that did the were the buyers privy of your cash crunch against the the lender? That's a great question. Yes, we were transparent about that. We didn't like talk about it, obsess over, but yes, they saw that we had this promisory note. They saw that we had a a rising schedule of interest payments over time. So, they they knew we had pressure, but what they also, one of the things that that happens when they when they buy our company, that debt gets paid off by the sellers, by us. Yeah. >> So, we we we suck that up. they they acquire a debt-free company. >> Yeah. >> So, from my point of view, that's a huge opportunity. It's totally unshackled from all the headwinds and things that may have been impeding our growth the last year's operation and they can take it away. >> No, it's a great great capture value capture on their part for sure. But I was just curious as like >> they were aware. >> Yeah. So, >> so it didn't help our negotiating position, but we again what what helped us is that we had multiple offers. >> Yeah. Well, I would say that's that's one of the always key pieces. You got to have multiple parties at the table in order to keep anyone honest. Um, and when it came to one thing I was going to say about that situation you with that cash crunch, like that's often seen as a way for people to retrade after the fact of you got no other options. You can't go back to market. Uh, so it's great to see that this firm did not kind of put you in that predicament. But ultimately, yeah, no out. I know there's some things you can and cannot share, but you know, enlighten the the audience about your your earnout to the degree that you can. And what would be your advice to founders when negotiating an earnout? >> Okay. So, so earnouts, fair enough. You want to see how the company performs. Uh make sure the metrics attached to the yearout are something that you've delivered before. In this case, the metrics attached to the year now were well within, you know, if you look at the past five years of the company's history, there were years we did that and better. Years we did worse, but free of the debt with no macroeconomic headwinds like COVID or a recession. I didn't see any I didn't see any reason that we could not have achieved, you know, all those earnout growth figures. And it was all based on revenue growth for the most part. >> Okay. And that that's pretty fair like a revenuebased earnout is far more advisable than say a profit or an ebit line because a lot of things can happen after to get to the bottom line. >> Sure. Uh, so that's that's why I agreed um to it. And again, I felt like these guys were the best chances I had of closing and earn out or not, this is the deal I'm going to go for rather than something that may have been a little more nebulous and where they might have said, "Hey, you want to say how you want to do over the next two or three quarters, you know, or done a big retrade." I didn't sense these guys were going to do that and they didn't. >> That's good. And uh what happened after the so you agree on terms uh you ran a three-month process you signed the LOI with these guys um how long till close and then what did you do after close? >> It was about two months maybe two and a half is a little longer because the our frankly our Salesforce data was fairly jumbled. Uh you we had set up Salesforce in an age you know before that when I think setting up Salesforce was a profession. So our sales people have set up the sales force to work on a day-to-day basis. So not every every sale was categorized the exact consistent way. It could be hard to tell what's an ARR transaction versus a one-time transaction, things like that. So that required extra analysis uh to draw out. So that took another couple of weeks, but you know, fair enough. Um but it was less than three months. I think it was two and a half months uh where we had multiple sessions. You know, one thing we didn't do it in this one, but one piece of advice that I would definitely would give that happened from the first process we did, we negotiated as part of the uh the LOI that 45 days into the due diligence, the buyer would have to reiterate the price they're willing to pay. They couldn't wait till the very very end and then surprise, we're only going to pay half of what we said. So that's how we found out that first year that there was a 15% retrade that otherwise we wouldn't even have known about until we're even deeper into the process with them. So that's something I think is always worthwhile to try to negotiate. >> That's a good uh good negotiation uh to have to kind of force them to be honest of their price before the the final hour after you drag everything out for for so long. Um all right, so been two and a half months, deal closes. What do you do to celebrate? >> Uh, you know, it's really funny. I didn't I was just so relieved to just not feel the stress of worrying it was going to close um and making sure the company now had a a future, the debt was paid those, you know. So, everyone who um had taken that risk and investment was paid off. So, that's was a relief. Did everybody celebrate? I don't think so. I went to Newware. But um on a you know on a new subject, I knew during this process that I was not going to be the CEO anymore. You know, the buyer was in a was in a different state and they wanted local uh seauite executives. So they they had someone that was in their inner circle who was this is going to be the the CEO. It's like fine. I've been doing it a long time. You know, I don't know everything. Maybe maybe these guys with their you know SAS experience and playbook will do things with my company that I never I couldn't afford to do or didn't know to do. So that seemed that seemed fine and that was part of like I so even though I accepted the year out I also said that I had no control anymore over the execution leading to the yearout >> and sharing what you can share. Um how's been that progress? Have you completely removed yourself from the business? Are you an adviser? Are you just completely hands-off? What's what's kind of been the role post acquisition? >> Well, formerly, I was invited to stay on for three months as a transition there. I uh didn't have much of a role during that time. And after that, that's pretty much it. It was really just if the new leadership occasionally had a question, they would ask, but nothing really substantial. Uh, so no, it was um weird to sort of just all of a sudden, you know, you go from running a company and meeting with executive team multiple times a week to just nothing. And then the, you know, you're a a decent chunk of what you've spent all these years building is now in the hands of other people. It's up to them if you get that earnout or or not. And um now I'll mention that I know a handful of uh product SAS product CEOs that sold their businesses. Uh sometimes they stayed CEO um of or at least of their unit. You know, earnouts are not common to to get the year out. I'm going to put it that way. So, I think that if you get an earnout offer, you have to expect that you are most likely not going to see the earn out. And don't assume that you at least don't assume that you are. So, factor that in. I want you to keep going because I want you to explain this in more detail because this is something that I believe in as well is the the the idea of now a slightly higher valuation maybe a little carrot or sweetener on top sounds appealing but the reality is it's the most latigious part of any transaction um after you know post-transaction. So what else can you share from from that perspective? Well, some cases like ours, one one of the offers that we got that would have been all upfront uh came in after we had signed exclusivity. So, part of me would have loved to have said, you know what, that's the better offer. Let's do that. But I I stuck to my word. I signed exclusivity and I told that other buyer who had known us for a long time, they just were late with their LOI. Uh that we I'm sorry. it's it's too late and we've you know we sign the susivity and as long as that stays on track that's so in the end you know sometimes that's the the cost of you know sticking to that but um I don't know maybe that other buyer would have not there might have been a massive retrade so I can't say that would have worked out perfectly at all these guys who did buy us they did follow through they closed when they said we're going to close almost very very modest retrade that I can say very positively. Uh I would advise anybody who an earn can either be at the same level as other deals that are all cash or the ear now could be on top of that here's a bonus. >> In my case it really wasn't a bonus. I would say the now would have brought us to the same level as the other IOIs that we had gotten. So really had to evaluate this. This is part of the core deal. There's some risk attached to that. Uh I would advise, you know, people who are getting considering an earnout deal, you know, ask the the the buyers, can you send me two CEOs that you've bought from, two owners you bought from that if they had an earnout, got their earnout and talk to them? And I didn't do that. >> They probably can't answer that question. They might not be able to, but I I would I would ask because I bet if they if they could, maybe they would say, "Well, you should at least talk to these two guys." I'd be curious what they had to say. Anyway, they did send me I I did get referrals. I spoke to the other people I was referred to. Not about earnouts, but they had positive things to say, so I didn't really think about it. But I guess that's one thing I'd be a smart question to ask a buyers if they could point to other instances where they the seller took the risk and it worked out and you know you had um a stake of what was the enterprise value not the bonus because yeah it's like hey if you hit these milestones we'll pay more which is kind of more of a performance incentive uh which has its appeal uh versus or I see other deals where there's a kind of like a hold back of 10 or 15%. Which some is just a time lapse. So they're going to hold it for 12 months for any maybe, you know, litigation or lawsuits or exposure risk that might be there. Or it's a part of an earnout where you have to if you were hitting 30% year-over-year growth, then you got to hit 30% one more time or whatever the number might be. Uh or just not trade down like not have a negative year. Um, so it can always be negotiated on various different uh points, but you know, being that you were no longer involved, um, you know, you kind of was it like a like a fade out like it just became less and less relevant or was it a like thank you for your time, Eric, you can have a seat over there now? >> It was Yeah, it was like that. I mean it was a very sharp I think I I had the three months of transition and I think uh I was disconnected from the email system like the day before it and I mean you know which is fine that's that's got to be and that's cuz sock 2 type2 security you really have to comply with that so I I joke about it it's perfectly legitimate >> but uh yeah no it was a very much of a you know thank you very much >> situation and it's in new hands but uh one thing I say they they they kept almost my entire entire employee base of like 30 people or so. I mean the the seauite changed over. Um but uh I take that as a compliment that they that they kept almost my entire staff and sometimes that's mission critical for founders selling their business because it's especially been building it for a long time. You build a relationship with these employees, they you know committed to it and you want to make sure they find a good home. And I've seen I've seen some valers take way less than they probably could have taken home in prioritization over uh other staff. So it's it's good to hear that you built a team that was not only worth keeping but must keep because obviously a lot of P guys want to cut whoever they can cut right away. >> We had a lot of contractors. We had our we at that point were outsourcing to marketing agency. So marketing was outsourced. So, we've gone back and forth over the years of having an in-house marketing team and an outsource to an agency and that time as you know digital marketing has become so much more complex with especially now with AI and AEO some people call it SEO um community building uh content leadership thought leadership that it's it's almost better to have a panel of fractional experts than three people who work inside your company are supposed to do it all but I think where where Eskill got cut the most was the outsourced uh partners uh in favor of bringing people inhouse with a better margin and more control and transparency. And I I can't say it's a bad idea. It really depends on your budget and experience for bringing those people in. >> That makes sense. So emails cut off. You're a free man. What have you been doing? Well, aides from having a you get getting married for the first time in May and having a new child, I joined this wonderful group you know about Postexit founders where we've global community of just really like giving and friendly approachable people with all different levels of as success but the one common goal. want to support each other and find exciting new things to work on together. Uh mostly that and I have been working on uh a new startup a hiring platform for the bluecollar skilled trades. That's separate conversation. >> Yeah, >> we definitely see a need for that. >> Uh but I guess going back to to ekll there there's so much potential to grow. Talent assessment will never get old. assessing someone's fitness for a job, skills, skills fit, behavioral fit, aptitude fit, and we always had the biggest skills library. And there's nine figure players in just the behavioral with a little bit of skills. That's the direction I was trying to take e- skill uh up until the time we sold the company. And I I hope we are supportive of the new owners taking ESkill back in that direction. That's more than a one-year time frame of return. That's probably more like a a threeyear and beyond time frame of return. >> Well, it would hopefully be nice uh many years down the road, you get to look back and see e- skills still continuing to grow and be meaningful and maybe still some original team there prospering from, you know, something that you've been spent 20 plus years of your life uh building and operating. um when it comes to advice that you'd want to give to a founder that maybe we haven't already you know discussed when it comes to evaluating the opportunity to sell and just getting ready for an exit and just mentally preparing for that. What would be your advice to founders? >> Going back to what I said earlier that often you're often judged only be as good as your last 12 months. Sometimes if you have a rockstar year, you may not think I need I don't need to raise money. You know, I don't need to sell. This is going great. Like I can almost guarantee there's going to be a year coming up that's not so rockstar and very stressful. So my advice would be sometimes consider raising money or selling not when you need to but when you're looking really good because you can always you know reap that outcome find the new project and start something new. Uh rather than waiting to see what will happen next. What'll happen next? especially for bootstrapping, especially if you don't have, you know, a deep well of working capital or investor reserve to pull from, which I didn't. You know, I it worked well enough for a long time, but I think not having deep investors at some point when I was taking larger and larger risks from an absolute dollar point of view because, you know, now you're a a much larger um company. uh you're you're running a lot more risk that you were going to fail and there'll be no one to bail you out. >> I think it's fair advice especially you had a bit of a hack with this uh partner coming in. They effectively took a third of the company. So effectively as if you raised money they owe to some degree um and you know a lot of companies that raise money they'll go out and get debt or you know continue to get other access to capital and then they'll be pressured you know in those situations. So it's I think um you know for a lot of companies similar situation where it's uh they can take into consideration these other options of raising capital bootstrapping dev whatever it might be but I think you found a pretty good solution with this debt I mean um not debt but the uh kind of equity partner on the dev shop side uh especially when it's a good partnership um and it sounded like it was gravy train that could have kept going until they had a great outcome themselves and then that lost control over that. >> Yeah. And if the proper thing would have done to simply at that point decouple as a partner, they can be your vendor or you can find a different vendor that's more cost- effective for your scale. >> I think at that point their average contract value and billing rates have gone way way way up more than a software company should be paying. >> But if you're like a large global company like their clients would be and you're doing a specialized thing for them. So yeah, we should have at that that point one one of our biggest competitors, one of that one of those nine figure competitors I was alluding to, they had bought an Indian software company uh and so they hired all their engineers directly as employees in India and that's almost like that's about as good as it gets. As long as they're quality and you have good visibility what they're doing, >> you're going to have the lowest rates direct employment. Like that to me was a very impressive way of doing it if you can maintain the right kind of hierarchies to control what they're doing. It's much cheaper than hiring here or even now in Europe. >> I mean they're just as talented in a lot of different ways if you were able to kind of have that culture and manage you know overseas and everything. Um and so when it came, you know, as a kind of parting advice as you were just kind of mentioning, what would be the negotiation tactic when it comes to uh selling your company that you'd want to pass on for founders to consider or be very aware of when selling their company? Make sure your buyer really understands your business, understands your P&L, understands your customer data, understands your marketplace and your goals. Uh, one frustration I I've seen is uh some buyers think they can slap the exact same SAS playbook on anything that resembles a SAS. No company is assess. You we are an assessment company. We're selling talent assessment, you know, versus sort of like a find your own insurance rate kind of company. Yeah, they both might deliver, but each one's going to have different customer needs, different customer uh types, price points. Uh so sometimes you can't remove all the services. You need someone there to manes, answer questions before someone will risk money on a product that's very mysterious to them. Like assessments can be very mysterious. I want to hold someone's hand, have them tell me it's going to be okay if you use assessment and test 10,000 people. You're not going to get sued and it's going to be predictive of success. And if they don't have that hand to hold on to, they just might not buy the product as much with as high of a conversion rate. Cheaper to have the service models there and have a better conversion rate than cut them as a cost. Have your conversion rate drop, your customer action costs go up and then say, "Oh my god, this business is a failure." So there's nuances to every every kind of company that I think you want to make sure the buyer understands and hopefully appreciates that. >> Some great advice, Eric. I appreciate you sharing that. And for the audience that would want to learn more about you, your experience or maybe what you're working on next in the blue collar uh space, what would be the best way for people to reach out to you? >> Uh I'm on LinkedIn. Just do a search for Eric Freriedman and Eskill Essk L or Eric J. Freriedman, letter J, at Gmail. >> Perfect. And if you guys like an intro, feel free to reach out to me and I can uh you know, introduce you to Eric at any time. Eric, it's been an absolute pleasure having you on the show and just walking us through the the details of negotiating your exit, dealing with earnouts, why you choose different paths over others, and what are those influencers that uh kind of influence those decisions. So, thanks again for for coming on and sharing your story. >> No, thanks for letting me talk. >> If you were inspired by today's episode, then go ahead, watch this next episode. Promise it's worth it. And if you really enjoyed this last episode and you want to connect with the guest I had on today, make sure to leave a comment down below telling me why you would like an intro to this guest and I'll make it