Ep 480 Exit Story: The $80M Deception—How Kevin Wagstaff Walked Away and Won
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Hi there, and welcome back to another edition of Built to Sell Radio, the podcast designed to help you punch above your weight in a negotiation to sell your company. I'm the executive producer, Colin Morgan, and today on the show, we are joined by Kevin Wagstaff, who's the co-founder of Spectora, a SaaS platform that transformed the home inspection industry by digitizing the process and saving inspectors hours on every job.

Kevin and his brother bootstrapped the business from the ground up, growing it into a dominant player in their niche. When the time came to sell, they had what seemed to be a dream offer, an $80 million deal on the table. But as they were about to close, something changed. The acquirer made a last-minute move that left Kevin facing an impossible choice. Take the deal as it was, now structured, or walk away entirely.

This episode is a masterclass in knowing your worth, spotting red flags, and standing your ground in high stakes negotiations. Without further ado, here is Jon and Kevin Wagstaff. Enjoy. Kevin Wagstaff, welcome to Built to Sell Radio. Hey, thanks for having me, Jon.

It's great to have you. This company, Spectora, sounds cool. Tell me the origin story. How did this come about? Yeah, so my brother and I, back in 2016, we knew we wanted to start a business together. We just didn't know what it was going to be.

And we read the Paul Graham essays. We followed a lot of people in SaaS in Silicon Valley, and we kind of knew we wanted to start a SaaS company, but we just didn't know how big or have an idea. And we had a friend whose dad was a home inspector, and he came to us and asked us to join his vision for building a SaaS player in the home inspection software space, of all things. And we thought, huh, okay, this is a small niche, small TAM, which we liked.

We necessarily didn't want to compete with any big VC backed companies or shoot for them. How many home inspection companies are there? It's about 30 to 40,000 by different estimates in the US and Canada. So it's something we could wrap our head around. And so we said, yeah, let's take a look at it. And so sure enough, we started doing diligence, saw lots of stagnant players in the space.

and decided to give it a go. And the other two co-founders ended up dropping out pretty early, well before launch. And my brother and I were left with this kind of idea and concept to run with. And so that was how we got started. When you say dropped out, did you ever formalize their ownership? Did you have a shareholder agreement? Like how did you kind of from a

legal perspective, make sure they were fully out or did you? Yeah, great question. Luckily, it was early enough before launch, before any real formation of business entity. But we did have them sign away kind of any rights to anything they did work on.

It really got to a point where my brother and I were in the Slack room all day, every day. We were obsessing over this because we were ready to go. We were ready to be all in. And they still had pretty good tech jobs. And so they kind of saw the writing on the wall and voluntarily said, hey, look, we're not going at the speed you guys are going at because we turned into maniacs pretty quickly in 2016 going after this.

This is one of those businesses where I think like, are you telling me there was nobody out there with a SaaS platform from home inspectors? Like a very tight niche. They all have similar needs. They all go in and like, you know, most people listening to this show will have used a home inspector, right? You buy a house, oftentimes contingent on inspection. You bring in the inspector, make sure the HVAC and plumbing is all good working order.

So most people kind of know the business. I'm like, you mean there weren't like a hundred other companies already out there? We were shocked. So there, there were more than we initially thought. So I will say there were dozens and dozens, many of which we called zombie companies, whereas a guy in his basement, maybe still keeping it going. Um, uh,

a direct app to PDF output, not necessarily a SaaS platform where you manage everything that's holistic. But there were a couple of players. There was one, you know, one player, HomeGage, who we thought, okay, they seem to have a lot going for them. They have a good reputation. But no one where you do your diligence in a space and you're like, okay, they figured it out. They got 50% market share. We'll never catch them. We saw many fragmented weak players.

a lot that were like downloadable CDs, desktop installable, but only one or two true SaaS players and they were lacking feature set from our early interviews of customers. And so we were like, okay, let's do this.

I remember when I had my last home inspection done, oh gosh, it must be a while ago now. It might have been around the time you guys got started, maybe 10 years ago. And I got this like big binder, right? Like this giant binder with like the physical tabs in it. And it would have like, you know, here's your HVAC system. And they're like literally like drawings of the...

So are you taking that binder and making it a digital product or what was the SaaS offering that you had? Yeah, that was part of it. So I was a realtor also five years for five years prior to this. And so I remember getting some of those physical binders and reports and thinking in 2015, there's no way this is still happening. You know, even the carbon copy yellow piece of paper you get. So that was one big pillar of what we saw was, hey, this all needs to be digitized in a place you can reference it.

queryable data structured data for a future vision of platform but then also the user experience we saw was lacking i saw firsthand i saw home inspectors using point-and-shoot cameras and then they'd go home spend six hours dragging and dropping those into a pdf or a word doc and now we're like okay something's really broken here if this is not happening through an app with structured data that creates a nice web-based experience for the home buyer and agent

And so that was kind of the original thesis where like all of that together, no one was really doing all of that. Did you start with a mobile app? Yes.

Okay, so inspector takes a picture, it gets sucked into the software and then that gets generated out. Smart. And you're right. I can visualize the inspector with like a physical camera taking pictures and I can imagine the time you saved the average inspector. Oh, it was our calling card. It was the whole initial pitch was 90% of your report should be done on the mobile device. You get home and proofread it for 15 or 30 minutes.

And you're done. And we've gotten so many testimonials over the years of guys saying they get more time with their family, they get more time to grow their business. That helped some of the word of mouth early on was saving them time. And what did you charge for it? It started off $79 a month, and then we raised it to $99 a month per user after a couple of years.

And the average home inspection company, I think of it as like a guy in a truck. I know that's probably a pejorative way of thinking about it. How big was the average home inspection company? Are they just single users or did you get...

multiple users. About 90% of the industry is mom and pop, one guy. One guy in a truck, typically the wife helps at home with the back office. But then over the last decade, we've seen the rise of these multi-inspector companies. And so there's a growing segment that are anywhere from two to a hundred inspectors, big metro areas, but it's largely fragmented. Okay. So how did you acquire customers? Because from my understanding before hitting record and doing a

This feels like everything you've said so far would suggest to me you must have raised a truckload of money, you know, gone the private equity route at some point. Well, we'll talk about the private equity later, but you must have raised a bunch of money. My understanding is you didn't. You did this on your own. Yeah. $2,500 each that my brother and I put in to get the domain name and to stand up AWS servers and get going.

So my background also was in SEO. I worked at HomeAdvisor, Angie's List on their SEO team. Sales, marketing, real estate background. And my brother on the dev side was the technical piece of it. So he started building basically prototype. And for the year prior to launch, I knew we'd need to build up our SEO presence. So I started making YouTube videos. I started writing blog articles.

just about anything related to the home inspection space in the broader real estate industry so i'd crank out an article or two a day put it on the put it on our blog and of course no one read it no one no one found it right away you know it's the whole tree falling in the forest thing but i stuck with it for a year knowing that hey after we launch six months later a year later we need to rank first for the term home inspection software which is what people search when they are looking for home inspection software so that was one big pillar was our seo

really ramped up quicker maybe than the average company where it could take a couple years if not at all. And I also offered home inspectors a full SEO audit with recommendations of how to boost their presence just to get software leads. So initially, I was basically on our landing page saying, hey, I'll do a full software audit for you with recommendations and basically give you help

running your SEO and marketing for free, just in the hopes they would try all the software. So that was a little bit of a lead funnel early on. Weren't you also, in a way, kind of competing with them? Because I know you wanted home inspection software, but I'm assuming the words home inspection is a very competitive set of words. And to some extent,

You were probably competing with them on those words, weren't you? No, because it's a different intent. So when you just type in home inspector Denver, you get the list of home inspectors that can perform them. When you type in home inspection software, you see Spectora. And so I was really talking about blogging, about how they can run their business, how they can grow their business in the hopes they'd find our articles and then say, oh, you have software? Okay, let me try all the software.

What was HomeGage's reaction to seeing you guys starting to rank for some of this home inspection software leads? You know, a couple of our... We had a few different competitors. Didn't really take a series for the first year or two. They thought...

You know, they say, oh, people come and go every year. Well, you know, they'll be, I read, I read everything. I was on the forums every day, interacting with inspectors, trying to answer questions, just learning. You're on there online all the time, learning. And you see the pot shots from competitors. And so they all, they're new. Everyone's, you know, plenty of people have tried this before. They'll be gone. And I'm a competitive person. I have a background in athletics. And so I was like, okay, we'll see. We'll see about that. And so we hung around and it worked out.

Yeah, well, you certainly did. So as you think about the growth, so early days, you got heavy SEO. I mean, you're putting sweat equity into this business, right? You're SEO, your brother on development. So you get the first iteration up. A lot of people think about inflection points or decisions that you made along the way. Do you look back and think, yeah, that decision that we made?

was seminal, like that was the right decision at that point. Do you look back, was there one of those inflection points in your journey that you now look back in retrospect and think, yeah, that made a lot of sense? Yeah, definitely. So I would say, so we launched 2017, January 2017. Got two users in the first month, three users in second month.

And each user we treated like they were the only person we'd ever see ever. We answered their emails within minutes, product requests. Sometimes we're done overnight. I'd follow up with them, multiple demos. And so we were like, hey, word of mouth is big in this industry. We need to nail that. And so mid-year, we were probably 40 users in June of 2017. And then we said, hey, let's do a sale. Let's grandfather people in for life and just see...

If you know that's a no-no, lots of people say that's a no-no. Yeah, like it's a cardinal sin. At times, we regretted that in the future. But we did a sale and at the end of that first year, we ended up with 200 paying users because we did a sale mid-year in June and then we did a Black Friday sale. But we locked in people to try the app.

And then we got feedback and then we iterated on their feedback. And then that word of mouth really grew from there of, hey, these guys, Kevin and Mike, they actually listen to us and they're actually implementing changes. And we didn't sleep that whole year because we just were up, ready for feedback, constantly asking for it and implementing it at a high velocity. So yeah.

That first year, once a couple users that were really tapped into the industry, they started telling everyone in Facebook groups and forums. And then it was like, okay, we're on the scene. I would imagine you mentioned word of mouth is huge in this industry. It just seems to me that local home inspectors aren't competing with people in different cities. So they have no reservations sharing online about what works, what doesn't, what are you doing?

And imagine the forums are pretty vibrant. And they drive around in a truck all day by themselves and they're in houses by themselves. So the community they seek online, huge. And pretty much every day someone says, hey, what software are you guys using? Do you like it? Does it have this feature? Does it have that feature? So robust online communities. And once you get a good reputation, it's worth its weight in gold. Was that part of your...

uh evaluation of the industry when you were just figuring it out you looked at the total addressable market and you thought well there's 30 000 of these folks were you also considering was that sort of a happy coincidence after the fact that you realized they were pretty connected online well when we were doing our diligence we saw okay there's a there's a couple forums there's facebook groups so we know they're accessible at least and we know they like to talk so we kind of we noticed it but we didn't realize

how powerful the word of mouth wave would be month after month, year after year, until we saw it kind of snowball. How did your pricing model evolve as you grew? You mentioned $79.99. I mean, is that where the product sits today or has it expanded from there?

So still at 99. But basically we had add-on inspectors that were a lot cheaper early on. So add-on accounts were, I think, $49 a month to start. And that's ramped up over time as the product has become more valuable to them. So now it's $99 for the lead user and 89 for add-on users. But then we have added on website hosting because we also built websites for our inspectors early on. That was...

Part of my role, the first couple customers that I did SEO audit for, they said, hey, I don't like my website. Do you build websites? In typical founder mode, I was like, yeah, of course we do. And then I went and figured out how to build websites for them. And so we had a couple hundred hosting users in the first year to kind of float us. It actually was more revenue generating than the software. So we went from agency to hybrid to kind of just full SaaS.

Wow. And so how did you say goodbye to the hosting customers? We still have them. So we still run the hosting for the websites. We have about, I think, 2,000 websites that we host to this day. And so it's a nice line item. It's probably 15% of revenue currently. And sticky too, right? Because people are not big fans of changing their website.

providers in that on that and they're not technical and you kind of realize people don't want to make changes to their website they don't want to it's just a hassle to them and so by doing edits for them we do like free lifetime edits that come with the hosting charge um it's been a nice piece to the business how did you stick handle the classic challenge of

being like a service provider as well as a SaaS company? Because service providers, especially something like website hosting, often comes with a bit of scope creep, right? Some customers want you to do more than, you know, how did you sort of put governors around it or did you? Well, it was a push and pull over the years. There was times where I think we over indexed on trying to service those customers and thinking, hey, let's grow this out.

But our core philosophy was you're not going to get the same multiple on agency business on not true SaaS revenue. And so we said, hey, stick to what we're good at, which is hosting websites, building kind of somewhat static, not custom sites, know when to say no, be okay losing customers on that front over the years. And then we weaned off the SEO agency business after the first year or two, because I was managing about two dozen websites.

full, full bore SEO. I was writing content and managing their local Google, my business. And then it was like, okay, we got 200 customers for SAS. We got to wind this down. So we kind of phased the true agency model out after about two years and then just kept the hosting because that actually was scalable because most of them, it turns out, didn't need edits. Um, and they would pay $500 a year, um, for us to host their site and be there on call.

Yeah. Yeah. You mentioned the multiples better in SaaS. At what point did you and your brother start to think about like what this could be worth and how, you know, are we going to like sell it at some point? Like, was that like, I'll let you answer the question. Yeah. Yeah. So two years in, so it was 2019.

Basically, end of 2019, we had about 2,000 customers, 2,000 subs, about $2 million in revenue in 2019. And that's when the PE emails started coming in. And I later found out they have a number of ways to scan, but they also see LinkedIn headcount. They track a number of things to see when companies typically cross that couple million in revenue threshold.

So I got an email that sounded interesting from main sale partners. They're a great, great PE fund out of San Francisco. And so I said, you know what, I'll take the call, see what they have to say. And I learned about the growth equity model that day. I had a call with them and they said, Hey, you don't have to sell it all at once. You could sell a chunk of it, minority, majority. And then in three to five years you sell again and you do even better.

And I went to my brother and I said, "Oh, this sounds kind of interesting. Like this seems like you could have your cake and eat it too with this model." Explain growth equity for someone who's never heard that term before. Yeah. So basically it's a piece of private equity that is not like the stereotypical private equity that comes in, clean shops, fires everyone, leans up the company, outsources support to another country. They're basically, I would call venture capital for

more of bootstrap SaaS companies that are growing anywhere in the 10 to call it 50% year over year. And so what was this BlueSail, is that the name of the company? MainSale. MainSale. What was their offer to you? Yeah. So at the time, I believe we were crossing three to 4 million in annual revenue. Um,

And I think by the time we got to an offer with them, it was a year, a year or so after the email. So they really like to build that relationship. So when you get these emails as a founder, um, maybe take some of the calls. I wish I would have taken a few more of them early. It's felt like a distraction and it is.

But I think you learn a lot if you ask them kind of like, hey, what do you look at? What metrics are you valuing us against? But they valued us at $60 million. And that was around 2020, I believe. $60 million on $3 to $4 million in ARR. Yeah.

Wow. Granted, it was for a majority stake. I think it would have been for 65% of the business at the time. So 2019, they're saying you're worth 15 times revenue? Yeah. That's insane. Yeah.

Pretty wild. And we definitely thought about it. What was your reaction to that number? Basically like, hey, we're growing fast. We basically have been doubling, you know, every year since outside of the first year, we 5X, which is easier to grow. And we thought, man, this sounds great. Like, but we didn't want to sell majority. We thought we had a lot of runway left on growth.

So we said, okay, this is interesting, but like, let's, let's keep going. But, but that's, I mean, that's, that's like, I'm trying to think of an appropriate analogy, like, you know, a kid discovering that their, their mom or dad or, you know,

Some famous entrepreneurs. I mean, that is a huge amount of money to discover you're sitting on when the business itself at three or 4 million in revenue. Like what did you have? Like 20 employees, maybe 15, 20 employees. Yeah. Right around small.

Had you had some inkling in advance of that, that SaaS companies trade at enormous multiples, you must have sort of had at least an inkling that it was worth something. Yeah, for sure. We had an understanding, okay, five plus X on ARR is kind of what we're looking at depending on...

what the next tier up of our revenue would be. We did have a bigger vision for not just the home inspection industry, but more of how to help the homeowner post move in with things like insurance, contractors. And so with my background at Home Advisor Angie's List,

We knew that was an untapped market. And home inspectors, oddly, are the second person besides the real estate agent that knows someone's going to close on a house. And so that early access and understanding of a new buyer was very interesting to us. We just kind of knew, okay, there's something there to crack. We don't know what yet or how we're going to do it, but there's value there to an end buyer. What was your churn rate?

About 3% consistently a month. And so it turns out pretty in line when it comes to home services, trades. But it is a low barrier to entry industry. Only about half the states in the country regulated at the state level. So like in Colorado, I could go be a home inspector tomorrow if I wanted to. So you get lots of tire kickers, lots of part timers, lots of in and out of the industry.

We were always alarmed by it. So anyone listening, it's like churn is what keeps us all up at night, man. It's like we each month, we had little pie charts of our revenue breakdown by experience, by how many inspections they did likely to churn.

And we were like, we cannot lose top of funnel because with our churn in this industry, it's a scary thing. I listened to an episode you did recently, and he was talking about that churn rate and I'm saying, got to keep top of funnel going. And the pressure was always on.

Yeah, so I'm just reading between the lines here saying at 3% a month, that's 36% annually. If I'm doing that math right. That's a third of your customers going out the door every year. Therefore, to continue to grow at the rate you were growing, doubling every year, you must have just been an utterly like killing it on new customer acquisition.

Because otherwise, the leaky bucket is just pouring so much water out of the back door that you could never continue to grow. So acquisition was just a monumental focus for you, I'm assuming. Yeah. And we did it really efficiently given the SEO. We started to, I think, rank first for the only keyword we cared about, which was home inspection software, probably by year two. We went to every conference we could find.

to shake hands, work the booth, kind of traditional trade show. And then we lived in the forums on Facebook. Me and my brother basically were up all day, all night answering questions, winning over people one by one. So we were doing hundreds of new inspectors a month basically in new business. And then as the months went by, we started to understand, okay, we're actually getting higher quality, stickier inspectors.

Because the bottom third just churned. You think the bottom third, they fall out, they come in, they fall out, they come in. But the top two thirds that stay in the industry, we kept winning more of those over. And so churn got a little better, little better over the years. And it's probably sub 3% at this point. But in the early days, that was the worry was we're getting new guys. They drop out after six months. How do we solve this? And we just basically went upmarket.

How did MainSale react to that number? It was a concern. Yeah. And then pretty much every other PE that we met with, because we eventually didn't go with MainSale, that was what they pressed on and said, hey, if we were to knock some off the valuation, it would be for this. But we really pointed to basically all the offsetting factors, which is moving

Moving up market, getting bigger and stickier customers because once they start using a software in this industry, they typically don't change. They really don't like changing software. But to your own point, there's a TAM of 30,000 businesses. There are only so many companies.

larger ones, right? This is still going to be a lot of the people, a guy in their kitchen table. Yeah. Yeah. There's a lot of lifers that are solo inspectors that never want to grow. So that is a majority of the industry, but then the big companies, it's kind of, they've only gotten bigger in the last decade. So we have a lot of companies. We got them when there was two or three of them. Now they have 20 inspectors and they're doing a million a year in business.

And that payments revenue has been great and kind of ballooned over time as well. Got it. Got it. Did you think about things like net revenue retention or net churn taking into consideration like upgrades in addition, like subtracting that from gross churn? Did you track those kinds of numbers? Yeah. So we, in our best years, which was shortly after COVID, after that took off, we probably got up to 110 NRR.

110%. Oh, wow. And it's because of hosting, payments, revenue, and then we had an advanced add-on product for experienced inspectors. And we charged per inspection on that. So that was $3 per inspection.

It's an enhanced suite of tools for basically the more sophisticated businesses in the industry. Basically better metrics, better CRM capabilities, routing in the field. So if this type of inspector does this type of inspection, okay, he's eligible to be booked online. So basically that complex set of rules. So those three or four add-on products, we really focused on selling hard to kind of offset.

Yeah, yeah, yeah. And what was your selling system for upgrades? Did you have customer success people or account managers or like, who did the selling? Or is it all product-led?

Very heavy product led. Yeah. We didn't really add account managers until about three years ago. Um, and so we very product led, um, try to do everything in product. Um, we used intercom for our kind of chat support and we did a lot of selling through that. Uh, just when customers would write in, um, we'd have them. And so we'd open up that dialogue, start the conversation, poke around the account. Um, and then we just constantly stayed in front of them with things like the podcast. We

We had active blogs. We had a Facebook group. That was huge for us, was our Facebook group. The engagement we had from users on there. And then we would, anyone that started a new trial, we'd invite them in the Facebook group. So then they could see the conversation around the product, how much our team is in there and cares. And it's kind of sold for us. So our own customers would help us sell new customers.

That's interesting. And again, this dynamic of them not necessarily feeling super competitive. If you're a home inspector in Denver, you're not too worried about somebody mowing your lawn and satiating you. That's not really a big concern. Got it. So you...

This main sale company says, hey, you could be worth 60 million bucks. And if I understand it correctly, they were offering to buy a minority of your company, right? Not a majority recapitalization. It was a majority. Yeah. The early offer was for, I think, 65 or 70%. So it was the standard deal that I think most of these PDs I've learned prefer. Based on a $60 million valuation. Yeah. Okay. Yeah.

How on earth do you turn that down? I mean, I mean, like, you know, you're a young guy, your brother's a young guy. This is more money than you'll ever need ever in your life for five lifetimes, probably. Yeah.

why not hit the bid? Like that just sounds incredible. Yeah. It's a great question. I'm looking back at my notes here. We may have been more five, 6 million in revenue. So it may have been a year later. So the multiple may not have been as rich as I initially said, cause I, I just checked my notes. Um, so even it's like 12 times, it's still huge, still a great environment. Um,

And they flew us out to their CEO summit. It was in Napa and having good wine and food, talking to other founders. And we're like, this is the life, man. Why would we not do this? And we really strongly considered it. And we spent lots of nights deliberating, talking about it. You get the money in your head. You start seeing it when you wake up. You start seeing it in your account. Yeah.

But we just really saw how fast we were growing. And we had some initiatives on the table for the next year or two that we felt so strongly about that we were going to continue to grow. And we said, you know what, these will only get better as we continue to grow. And so we really had a commitment to get to a certain level. We kind of had an arbitrary number of getting to $10 million in revenue.

you know, is it a round number? Is there something behind that? I'll have to think about that more. But I think we had a bootstrapper's pride to say bootstrap to get to 10 million sounds really cool. Let's see if we can pull it off and double down on ourselves. But it wasn't the first offer we said no to. So we had a large competitor. We'll call it a home services marketplace company that competed with HomeAdvisor came to us when we had

I think 300 customers and said, "Hey, we'll give you 100 grand each, a million in stock, or we'll just build a competitor and make it free and wipe you out." And we were terrified, John. We were like, we didn't know what we didn't know. We were young bootstrappers at the time. And the CEO flies out to tell us this to our face, by the way. It was a terrifying meeting and he was really polished, this guy. And so he

And we thought about it. We said, wow, a million in stock in this company that may or may not make it because they have a lot of debt. This is one of the home service companies that evaluates, lets you give a five-star rating to your local plumber. Yeah. Yeah. Their home service marketplace, like a Thumbtack or Home Advisory, Angie's List. Yeah. Yeah. Yeah.

And I'm not sure how long these NDAs last. That's why I'm not mentioning their name. But yeah, no, that's cool. But I think just so people understand the category. So this guy rocks up to Denver and fancy suit and so forth and says, we'll give you a million bucks in stock and our stock. Yeah.

and 100 grand each or we're going to put you out of it. We're going to squash you. Yeah. And did he say it with a smile on his face or was it threatening or how did you take it? He was very professional because he's a very polished PR. I've seen him on CNBC afterwards and was like, okay, he's a good PR speaker. He talked well. He's done this before. But it was intimidating, man. Yeah. We walked away and said like,

Should we do this? Could we grow faster under the umbrella of this company? It looks like they're rolling up companies in the space. They ended up buying our biggest competitor a couple of years later. So we've been competing with them. But it was a cool moment to kind of be shaking in your boots and saying like, you know what, man, F this. Let's double down on ourselves. We know what we have. We believe in our skill sets. F that. Let's do it.

What was your evaluation of their threat to compete directly with you? Well, we looked at everything they had going on. We went and looked at their financials because I think they were either public or soon to go public shortly after. So we said, okay, like they have lots of initiatives they're going after. They seem like they just want to buy things up as opposed to truly build in the space and invest in it. So we said, okay.

That's not going to come off as authentic to home inspectors. We have relationships. We were like, these guys have our phone numbers. We text with them. We know their families. We know the dog names. Like we're like, no, like that. Let's stick with the authenticity and building brick by brick. Um, if they want to roll something out and it's free and they can beat us product and authenticity wise. Okay. We might have to live with that, but we don't think they will. We thought, we thought there were shortcut in the industry by just trying to do the roll up. Um,

create a cheap product, give it away for free. And we're like, no, let's keep, let's stay premium and then let's raise prices. Let's go even more premium was kind of our counter narrative to it. Makes total sense. But it does underscore the courage to say no to a $60 million valuation when just previously you're threatened to be put out of business. Now you've got, you know, 60 million on the table and you're like, nope, we're going to...

we're going to double again and that's a pretty courageous move well thank you it we almost second guessed it when uh you know march 2022 when interest rates started going up um and we went did a formal process so we started i don't want to jump ahead too far but we

We started a formal process with Houlihan Loki, great bankers, Chris Goff. I just caught up with him a couple of days ago. He's been mentioned on your pod, I think by Tyler Smith or someone else like that. But

amazing bankers. We weren't sure if we were big enough to hire a banker, but we did some research on Reddit and a couple other forums. And it said like, okay, like if you're knocking on, you know, the door of 50, 60, 70, maybe 80, 90 million dollar valuation, you should probably get a banker and run a process to make it competitive. And so what was Chris's first reaction when you told him the numbers? He was excited. Yeah. Chris, yeah, they flew out.

him, Glenn Kruger, who's at Raymond James now, both amazing professional bankers. They were excited. They thought there was appetite for the deal. Granted, this was at the end of a 10-year zero interest rate policy environment. As you know, this was the beginning of, I think,

a rise of 5% in 16 months of interest rates, which we all know hit our industry really hard. So we met with them at the beginning of that interest rate hiking cycle, which is pretty gnarly in hindsight to think about. But they were happy to take us on and say, hey, let's basically get all your numbers tidied up, metrics. Let's get our story straight, create a deck, and we'll do a roadshow. You guys will come out to San Francisco, present to

A bunch of PE firms. And what was the number that they were most concerned about? Gross or net? Gross. Yeah. They said, hey, what is the story and the path to overcoming this and why does it happen? And when we dug into the numbers, it was people going out of business. So we lost at that time probably...

at most a dozen customers due to actually leaving us for another software. And so like once we dug into the reasons and the revenue of the companies that were dropping and we saw it for three, four, five years in a row, it was, okay, this is industry term. So the bottom third just replaces each other each year. And so once they saw that, they said, okay, as long as you're winning new logos that come into the business, that's what they, that's what the PEs eventually cared about. It was like, are you getting visibility to new logo growth?

And did you get a sense that you were like, how many customers are you at this point? Oh, let's see. So about 9,200 subs. So 9,200 subs against a total addressable market of roughly 30,000. Yeah. So you're already at a third of the market is using your software. Did anybody...

in that roadshow expressed concern that maybe you were reaching a point of diminishing returns and there was a point at which you penetrated the market, each new customer was going to become more and more difficult to acquire. Absolutely. So that explained, I think, the large range of IOIs that we got. So our IOI range was insane because some said, hey, limited TAM will give you 4X on top line. Um,

But then in some of those roadshows, part of the deck was like, hey, we have a best in class inspection product and home inspections. What about commercial? What about fire safety? What about environmental inspections? And so we tamed out all of these adjacent markets.

And then we also looked at the homeowner and insurance basically after the sale, what that could lead to. So we purposely mapped out a second and third act in our deck to present to say, hey, guys, if we max out our industry, say we get to 50% market share, cool. Maybe it's $150 million business. Maybe. But.

if we monetize the home buyer and have all these other products that we can stack on and go to adjacencies okay now we're in that 300 400 500 million dollar range it gets really interesting and so our bankers our bankers really helped us map out those scenarios

I want to make sure that my audience understands the acronyms you've thrown out. So IOI, indication of interest, usually a precursor to an LOI, a letter of intent, but a notional sense of what somebody might be willing to pay for a business, but it's relatively early and informal relative to an LOI, which is a bit more formal.

And then TAM, total addressable market. We've thrown that around a couple of times, but basically the size of the prize, how many customers are out there that you could go sell to. So that's helpful. So you're getting a range of sort of valuation, everything on the low end from four times revenue for folks who are worried about the size of the TAM. And then up from there, what was the sort of higher end on the IOI range?

Yeah. One thing I'll say too on the IOIs is it plays with your head because when bankers take you to market, you get these IOIs back, which mean nothing. They really look at it and do some napkin math and throw something out that's not binding. Yeah.

And so we look at this chart of IOIs. We got 16 IOIs after going to market and whittling it down, which was amazing. We were so excited. Oh my gosh, 16 people want to buy us. The top end of the range valued us at 130 million. And this is in 2022. So that was about a 12X top range, top line at the high end of the range. And then 4X. And this just goes to show

that time period when rates were stair stepping up, how no one knew what was going on. Like it was insane. Some of the smartest investors on the planet, I believe, are in private equity. And the range was our banker said they've never seen anything like it just because it was such an uncertain time. No one knew how long rates were going to be elevated for. And then our business was tough. Not the core business wasn't tough to understand. It was the second and third act, basically, like what's going to be our revenue add-ons in the future.

Some got it and some didn't. And so. And with regards to the adjacencies, and again, for my listeners, this idea of like second and third act is, I think for an audience of acquirers saying like, yeah, we've got this business, but what it could be is this plus this other thing, if you wanted to invest, et cetera. Were you, if a deal had fallen apart,

or didn't happen or you didn't get the valuation that you wanted. Were you serious about those adjacencies? Were those businesses you were going to go into regardless or was it more window dressing for the purposes, not window dressing, was it part of the packaging of the business? Yeah, we had done some initial light research to say, okay, once we capture our market and feel like we are doing everything we can to service it and do it well,

we will go into these to try to, I mean, that was our initial vision was like, keep growing the company, right? Where's the growth going to come from? But then once you understand private equity funds, you always need to have quote meat on the bone for the next buyer is what you always hear. And so once we understood that, it's like, okay, you,

You always have to be thinking of what that next leg up is going to be. But we saw the potential there early on, but it just felt so far in the future to us, you know, when you're just trying to survive and get more customers, like I'm sure a lot of your listeners are at, it's, you just want to keep growing in your core market first. Yeah.

Yeah. Yeah, for sure. And are you profitable at this point or like what's. Yeah. So we, we were raised by a military dad that put water in our orange juice, uh, water. And so he always taught us to never spend, um, only spend half of what you make. That was kind of what he ingrained in us. And so we, uh,

We were profitable since month three. And so we ran anywhere from 50 to 60% EBITDA margins, pretty much the entirety of the company. Up until these last year or two, once we, you know, with our PE partner wanted to spend a little more for growth. But we always paid ourselves well over the years. And because of our limited TAM, limited amount of inspectors, we were always kind of worried about overspending when we

And growing too fast, which is funny because if you remember 2017 to 2020, there was money flying around all over Silicon Valley. You couldn't, you know, you could raise as much as you wanted, have hammocks and see, you know, whatever in the office. We always purposely slow rolled growth and said, let's do it organically. Let's burst at the seams before we hire. And so we ran really good profit margins pretty much throughout Silicon.

And that's also why we were able to say no to that offer, John, was when you pay yourself well throughout the years, you're not doing the starving, sleeping on a couch, eating burritos. So like, let's take this money because we want to be rich.

we were living we were living well and so that gave us the clear head to say okay is this the optimal decision or can we just do it in a couple years and the outcome will be even greater because we're not longing maybe you know for that exit yeah like i'm just doing the math if you're like it i mean just let's do round numbers if you're 10 million there's 5 million to be put there

You and your brother can split a big chunk of change, I'm imagining, each year. Yeah. Yeah. There were some amazing years. And as an S-corp, it's like you pay the taxes on it regardless. It's passed through. And so it was pay ourselves or reinvest in the business. And if we were not 100% sure of how we would reinvest that money and get gains, we just paid ourselves. But then...

we put in sweat equities we're still working 80 hours a week to generate the growth and so we said we'll trade our time but let's secure our family's future first because you never know when a meteor could hit the home inspection industry or say this big player makes the free version and really wipes us out okay we got a couple million in the bank we we feel great about that we we this isn't for nothing so we were fortunate to be able to really be lean um

throughout the year. It's amazing. So where does it go from there? So you do this roadshow with Chris leading it. You've got indications of interest anywhere from four to 12, big range. What happens next? So late 2022, interest rates continue to go up. Money starts to dry up. So funds start sitting on their hands a little more. We get down to five LOIs. So we get down to five LOIs at the end of 2022. Five actual offers.

Basically ranging from valuing us at $65 million up to $125 million. And forgive me, I may have already asked you this, but roughly where are you on ARR at that point? Yeah, end of 2022, we're at about $10.5 million in revenue. Okay, got it. About 8,000 customers. So again, the offers are kind of 6 to 12 times. You got it. And a huge range.

Yeah, which again, at that time, some were adjusting ahead of the curve to the new environment, the slowing environment, basically money getting more expensive because some of them, some private equity firms do a lot of borrowing to fund these deals. And their cost of capital just went up threefold, fourfold from basically 0% to a lot higher.

And what kind of structuring did these offers involve? Were they all like, we'll buy 60% and you roll 40 or what was the sort of structure? Yeah, mostly 60 to 70% they wanted to acquire. A couple of them were clean deals as in most of the money would go to Mike and I is what they call secondary, often secondary offers.

And the story gets interesting here because, you know, the lower three offers, the lower two offers we didn't consider. The highest offer, 125, he flew out, we had dinner with him. We loved their ethos as a firm and fund, really excited about it. They drop out late 2022, the environment, they just kind of want to see how next year plays out. So we're heartbroken. We're just, you know, you start seeing that valuation and, you know, you do the math and

That's a lot, a lot of tens of millions of dollars. So he drops and then we're down to two. So we have two LOIs that we go into basically diligence with together. One of them wanted exclusive. Our bankers said, no, let's do diligence side by side, basically to the finish line. One was at 80 million and one was at 95. Again, structure? Yeah.

Pretty straightforward for both of them. Secondary, they just wanted to be in the business and wanted to ride up the growth. So I think one was 60% and one was for 65% of the business. Okay. And for my listeners, that indication that you're reinvesting the other 40%. In other words, you're becoming a minority shareholder company.

in a larger enterprise that has ambitions to grow again. And that's the... Yeah, and they say roll over your equity. So that would be like my brother and I still owning 20% of the business, continuing to operate it. A lot of them want that. But then they are the majority shareholder and can call the shots, control the board. Yeah, so 60% of 80 million is a check for $48 million. Yeah.

Divided by two like this is life-changing life-changing money, right? So we're we're excited that two got to the finish line We're kind of feeling like wow this environment is brutal You know, it's kind of a blog. Yes It's like here's how to sell your company in the worst possible time in history in modern interest rate history Right because if you rewind back a year and a half prior when we went to the main sale event we talked to their recent portfolio companies

and they were getting 12 15 x multiples on arr so our brain somewhat was still anchored to the past which was like where it was monopoly money getting thrown around everywhere um and that is not the case in 20 in late 2022. so you got two offers on the table bunch should fallen off so i'm imagining you're getting a little nervous one's at 80 that was at 95. uh where does it go from there yeah so one of them

has a very strong specialty in vertical bootstrap niche companies like ours. That was the lower offer. So they knew they would be the better partner for us, was reflected in the offer. The other was basically like a fund that spun out of commercial real estate investors. It just seemed like they wanted to splash some money around in tech. So we went with the lower offer actually and signed an LOI in December of 2022.

And so that was at 80 million EV enterprise value. And it was for 54% of Spector actually. I just double checked that. So early December, sign an LOI, basically go under heavy due diligence for the month of December. And keep in mind, this is an environment where after each month ends, you look back at last month's numbers and you're like, "Ugh, that's growth is slowing." Like lost more customers than we're used to.

So the environment's deteriorating while they're doing due diligence and talk about sweat bullets. Like you just, our bankers were like, we do not want to get to January because then they're going to ask for December numbers. And I don't think we want that. And we have higher churn in winter anyway. So we get to January, early January, they fly out this fund out of San Francisco, very reputable fund. We were told is very founder friendly.

They told us, oh yeah, we don't retrade. We don't play any games. We're pretty straightforward, founder-friendly. They fly out to Denver and meet us at the airport. We do a diligence readback. So you do a diligence playback with who you go under due diligence with.

I've never heard that term before. What is a diligence playback? Yeah. So, you know, they had their junior, their MBAs, their associates basically dig into every crevice of our business, every spreadsheet, every metric, every number. And they basically form their thesis on weak points, on kind of where we can go as partners. And they read back out to us their diligence basically. And so-

They flew a team out to do that. You know, we're joking, had appetizers and drinks, went through the deck. We were like, oh, man, this is they're going to be good partners. Like they know our business well. They have a good idea of what we can get done. They know the industry. And and we're like, all right, looks like we're going to close in about a week here. So we had a proposed close date. I think it was like on the 18th.

Send wire instructions even. So we are on track to do this deal. We send wire instructions. And then the night before close, we get an email from our bankers saying, hey, here's an updated proposal from the fund, from the company. And it basically adds in a seller's note, which is basically us taking debt out on our own business and

So the business would owe us this money. So that's part of our, our payout seller's note for 25 mil, um, an earn out. So they added an earn out, which was not, was not there, um, the night before. Um, so this is all the night before we're supposed to get basically a check for 12 and a half million dollars. Um, so I'm not, not done, John, I'm not done. So they added $10 million earn out. Um,

And then a call option, a call option in the future for three months to buy the business at basically a fixed valuation, which we would have for sure surpassed in three years. So it's a 36 month call option to buy more of the business at, I think, slightly higher than the 80 million. So a complete retrade if possible.

Wow. Literally the day before. Literally the night before. That's insane. Wire instructions were sent. We had kind of like, we had a kickoff meeting, I think, scheduled the next week. They go to their investment committee. So it's like, if you work with a PE, they're all going to take it to this committee that beats the deal up and finds reasons to say no. And in this environment where numbers were getting worse, this

The news cycle was terrible in January of 2023. So they come back and effectively lower the deal by at least $10 million plus an earn out, plus a seller's note. And was the earn out, if I'm understanding correctly, it was instead of paying you the $80 million that they valued it at, they were saying 10 of that you're going to have to earn.

Exactly. So they weren't adding another 10 onto the 80 to make it 90. They were saying, no, no, of the 80, you got to earn 10. Yeah. They're saying part of this is now going to be a earn out and there's the sellers out. Oh, and we want the option to buy more in case you guys succeed. I mean, it was just, it was insulting, honestly, in hindsight. But at the time we thought about it, even we were, because when you get that close to the finish line, everyone was,

They count on you feeling that money in your bank account. So like a retrade, they're just hoping you've already thought about that, you know, $2 million, $5 million, $10 million. So we stayed up all night talking on the phone saying, because I brought in the counter perspective. I said, Mike, what if this is as good as it gets? Because this environment is getting bad. Like Fed funds rate is like 5%. Capital's drying up.

what if we stay here for a couple of years and growth deteriorates? Because the kiss of death we all know is like growing at like 5% a year, 10% a year. That's the kiss of death to private equity. So we thought about it. But then we said, no, I think it was like three days later,

we said you know what we're gonna go at it we're gonna triple down on ourselves um we're gonna triple down we're gonna defy the odds we're gonna invest in growth instead of paying ourselves we'll campaign ourselves um we and you literally walked away from the offer at the last minute okay i got so many questions here so um that email you got from your m a banker chris

Did he do anything like how did he position the retread? That's a great question. He was the consummate professional throughout this whole process. They obviously get paid when we do a deal. It's contingent. He always teed it up, gave us the facts, told us what they might be thinking, told us it's always our decision. And he...

He said, look, they probably went to their committee. It's more risk than they're willing to take. So they structured it to minimize their risk completely. And he didn't put pressure on us. And I always love him for that. And I told him that just the other day and I talked to him. So I'll never forget how professional you were, how you didn't make us feel pressure when your paycheck and bonus and your team's paycheck.

relied on this but i'm surprised he emailed it like to me when you're delivering bad news hey you know you've just been diagnosed with this terrible disease yeah it was a phone call too yeah yeah it was a phone call too okay i was gonna say it's just an email like hey let me know if you're good with this it was like let's get on the phone okay here's here's the here's the uh the term sheet for documentation okay got it um yeah but it was shell shocking so we we walked away yet again um i

at the altar, we felt like we got left. We were, we were pretty devastated because we thought this is the third time, man. So you've got the first time is like, we're going to kill your business. If you don't take a million dollars in stock for the next time, it's like, here's $60 million. No, no, that's not enough. Now we've got $80 million and that blows up. Like, I'm surprised you have any, like a heart muscle left at this point. And

Bear in mind, we're still growing through this. We're hiring leaders. You know, we're trying to find a head of sales, a head of marketing. We're spinning up account management. One of the most... Are they aware of what's going on at all? Like, are your employees aware of...

Of anything? Our leadership team. Yeah, we kept the leadership team because we felt an obligation and duty to them. Say, hey, you guys have to know what's going on with us because we're going to be in and out. We're going to be in diligence meetings. We're going to be needing documents left and right. Did they have stock or do they have options? Yeah. Yeah. So a lot of our leadership team had phantom equity, which...

Fast forward in the story, we fought to make sure they got paid out no matter if we sold majority or minority because typically it would only pay out in a change of control. Yeah. I'd be curious though, again, this might be getting into territory you can't talk about. I totally appreciate it if you can. And the reason I'm asking is I'm trying to see...

how material the payout would have been for them relative to the job security of working for you guys. So like these numbers on the table, 80 million, 90 million, like would that have equated to a year's worth of salary, half a year, two years, 10 years, like roughly ballpark it for me so I can get a sense of like how excited they were that you were doing this versus like begrudgingly giving you support. Yeah. Um,

For the earliest employees and the biggest contributors, we're talking a couple hundred thousand dollars, up to half a million dollars. Okay. So significant payout for years of work. And at the same time, not such a huge amount of money that I'd imagine that they would...

have have had and i don't want to put words in their mouth but like some mixed emotions about this because everybody knows when private equity comes their jobs are on the line uh you know it sounds like a lot of money but when you think about it as a percentage of your salary for like if i had if i if i get blown out here as a result of this like what were people how uh

excited versus not were people about doing a deal? Were they kind of neutral to positive or like, no, no, we, but give me a sense. I'm sure it ranged, but. Well, mostly not excited, given the perception of private equity. And so there was many heart to heart conversations. We even had our leadership team meet with

The fund we were going to work with and then the fund we eventually ended up working with. Lots of meetings, lots of get to know yous, lots of walks and heart to hearts of like, hey, look, you took this job largely because you believed in Mike and I and vice versa. Please know that throwing a smoke bomb and running out of the room is not our style of

We would not partner with someone who didn't share the same vision, didn't have morals, ethics. Trust me, we met with a few of those funds. We met with plenty where we were like, if we get an offer from them, it doesn't matter how much because they don't feel like they give a shit about us for one. And two, we'll just be one of 300 portfolio companies and then they'll clean people out and bring in their people. We're not going to do that. So there was a boundary there. You know, as much as people think like,

And more money is a no brainer. When you're in the room with these people and you can see what's going to happen, there's certain funds where like no amount of money would work. But did you get pushback from employees saying, but why do you want to sell? Like for folks listening online,

and not watching if you haven't seen kevin kevin's a youngish guy it doesn't look like you want to retire anytime soon maybe you do but you know what i mean like they would have been under the impression like like what are you gonna go do for the next 50 years why do we have to sell why don't we just gotta keep this thing going how did you how did you deal with that sort of question i'm older than i look too i'm 40 um but um you're not 70 like let's be clear a lot of them um

kind of pleaded with us and said, don't, don't do this. Like you don't need to, um, you know, like what's going to happen. Like, can you know, what reassurance can you give us? Um, some of them were like, Hey, look, I understand. I've seen how hard you guys have worked for the last seven years. Like I, I get your health suffered. I get your family suffered. So it was balanced and arranged, but we, we really explained to them that,

The sacrifice, the blood, sweat and tears, you know, we were still in debt as a family when we launched Spectora. I think I went back and checked. I had nine thousand dollars in the bank when we launched and forty five in debt.

from various things like a HELOC, student loans, things like that. So those were the kind of conversations of saying, look, I don't expect you to fully understand what it's like to be a founder that put it all on the line, showed up every day, stopped exercising, lost friends for years. That's probably relatable to a lot of people listening where you're like, this is everything to us. Lived and breathed it, truly did.

And that's part of why we're in business too, is to make money and to exit someday. And so like some of it was some hard truths for some people to hear that like our heart and soul can be in this. We can love you. And we also do this for money too. That's okay to say that an outcome, it can be a win-win all around. And that's what I think was hard for them because I think some thought that

If you get a bunch of money, company goes to shit. And I don't think that's always the case with some of these newer private equity growth funds who they understand the business more than you think. And they have operators on their team that actually integrate with your team of people that have worked in SaaS businesses, not just MBAs that live in spreadsheets. Big difference. All right, let's go back to the deal. So 80 million bucks...

The day before it's supposed to close, they retrade across three dimensions, totally changing the deal terms. Your M&A banker kind of walked you through their thinking. You decide to walk. What was their reaction to you walking? I'm so glad you asked this because I forgot about this fact. They said, let's go back to the original deal terms. Really? Yeah.

So wait a minute, they say, okay, we're gonna do $25 million seller note, $10 million earn out, the call options is over 36 months, so they could basically lock in

a buying price for more equity. Yeah. And then they literally said, okay, don't worry about it. All three of those go away. We just want to go back to the original deal terms. Yeah. That's all, that's worse than just the retrade. So the retrade, and then we say, we're walking. Then they say, no, no, just kidding. We'll go back to the original deal terms. And we were like, you can't be serious. Really? And then we said, we're for sure not working with you guys after that. Holy shit. This is crazy to me. Okay. So they literally basically just walked away from the whole thing. So,

Good for you for calling their bluff. Uh, but this obviously left you with a sour taste in your mouth. After, after that, we just said to, to go back and forth, um, and to add, to make it even worse, I think we had to push back the close of the deal. So if you go back to early January, um, because one of their investment committee members was on his honeymoon or something. So like there was, there was just a lot of weird stuff that led up to this whole, um,

Um, okay. Here's a worse deal. Nope. Just kidding. Here's our original deal. So we walked and said, nope, we're good. We're good. We really are good. We're just going to keep growing. Um, we're going to defy the odds this year. Okay. What did Chris say at that point? Cause he's like, no, I got you the deal. You want it. What are you talking about? You're leaving again. So professional. Not a hint of resentment. Um, he understood it. He understood it. Cause he, he was there for all of it. He, he talked with every fund we met with, um,

He said, look, I get it. We're in this business for the long term. We're all about relationships. And he stood on his word. And I'm glad he ended up getting paid when we did the deal later in the year. So...

So let's go there. So you walk away, where does it go next? So we just doubled down, tripled down, quadrupled down wherever we're at at this point. So we started hiring more leaders at that point to plan for growth, to plan for battle in 2023, which was a tough year for most of us in SaaS or in a lot of parts of the world, a lot of most industries.

Um, so we go to micro comp. Have you heard of that conference? Sure. Rob Walling.

And he's like, oh, yeah. Aren't you from Spectora? Like, we've been tracking your guys' business. So we, you know, we washed our hands and go out and he goes, I really think you should meet with our partner, Chris. I'm from Radiant Capital. We've been keeping an eye on you guys. We were in the process the first time. Would love to meet with you guys. He'll come to you.

And I was like, you know, his name is Barack. He's awesome. He's still there. I was like, Barack, we're not taking a deal, man. We just, we have PTSD. We got, we got left at the altar. You don't know what we've been through, brother. I said, we're just going to grow, you know, 20, 25% this year and go back to market, you know, next year. He was like, Chris, Chris will come to you. He was like, he'll. And I was like, okay, he'll come to the Starbucks down the street from my house. Sure. Why not? Yeah.

i didn't want to do it i was just like i'm so over it at that point um but he had a good vibe they reminded me of mainsail i was like okay these guys are they get us they're not big pe they they understand our markets um so chris comes out chris livingston um great guy iradian he's no longer there he went to vista just recently but he was so down to earth and he said look i love the business we've been watching this space we know the industry um

What do you guys think? I said, look, I said, we got chiseled down on the last one, got retraded. I said, we got to be valued at 100 or else we're not going to we're not even going to think about it. And he said, I think we can get close because we love the business where we have we're ready to deploy capital. They're a young, hungry fund, which I really liked that because they want these deals to work. They want companies to grow.

um you're still in that 10 11 million arr at this point so yeah this is mid 2023 so we're probably at a run rate of maybe 12. okay um at this point so eight times they are ish yeah yeah and so um basically i get my brother on the phone with them or then we have a lunch they come out again and then they send us a term sheet and they basically it's a non-filled in term sheet it has

You can have X amount of millions for X percent of the business, which is very interesting. It's kind of like fill in what you want. And it's like this. There's no way this is too good to be true. Sorry, they left it blank? Left it blank basically to say like, tell us how much you want for what percent of the business and we'll negotiate from there. That was their LOI. Yeah.

Indicative term sheet is what it's called. Indicative term sheet. I've never heard of that. This is like a really interesting. So he's like, we'll hammer out the specifics. And so we said, we want to be valued at a hundred million. And this isn't throwing shade at him. This is typical PE fashion. He goes, okay, if you want to be valued at a hundred, I'll send over a term sheet for that. It had like a three X liquidation preference on it.

So just know that PEs can value your business at whatever you want as a founder, but then they have so many ratchets and tools to basically chisel down the value. So 100 can really be 70 million based on them putting in liquidation preferences, meaning they get all their money back three times over before you get a dollar. So-

That we were like, okay, we see what you did there. Like, let's do one X. What would it be at that? And he said, it'd be at 90, 90 million. One X liquidity preference. Liquidity preference. Yeah.

Got it. So in the event that you sold a second time, you sold to him and then sold a second time, they would get all of their 90 million out first and then the remaining would be split commensurate with what? Waterfall. Your shareholding. Yep. Got it. And so we loved their vibe. We loved how hungry they were. We met with some of their ops team. Yeah.

My brother flew out to New York for their CEO summit, and they really won him over there by being so down to earth and authentic, sharing their journeys. And Mike was like, these are people I want to be in business with. Because I was already sold on Chris from when he came out and met with me. So they were going to do $90 million with a 1x liquidity preference. What percentage of the business were they willing to buy? 49.9%.

Okay, that's interesting. Usually these things are majority recapitalization. What was their thinking there? Well, our bankers later told us that they felt our numbers and kind of how efficient the business was and kind of market positioning based on all their diligence. They thought we were a top kind of quartile deal. And so they said-

You can ask for, you know, minority, see what they say. And we did. We said we want to maintain majority, maintain board control. That's the deal we're willing to do. Because we had money in the bank, remember? We said no deal in January. So we said, we're fine not doing a deal. We don't need you guys. And that ultimately is the biggest leverage is when you don't need a deal. And so that's what we learned. And so we said, we'll sell you a minority for $45 million.

And that went directly into your genes or was an expectation that some of that would be put into growth of the company? Most funds will fight for some of it to go in the balance sheet. They fought for that. They wanted that. The business was spitting off so much cash. We were putting a couple million in the bank a year. And so we said, no, all secondary and to our employees.

And then we'll continue to build up cash until we deploy it to growth. And so we said all secondary and all to... And what was their reaction to that? They were okay with it. Yeah. And did they have any sort of call options on the 51% or 50.1% that they didn't buy? Any opportunity to buy at a certain threshold? Okay, so you're...

Wow. Okay. So they're writing a check for a lot of money for 49.9%. Did they ask for additional board members or different classes of shares or anything? Literally, they were minority shareholders. Yes. You, the two brothers could basically overrule. Yep. Where does it go from there? So diligence again, diligence hell, you know, going through that again. It's a little easier this time, obviously.

So we closed the deal August 21st, 2023. I'll never forget the day. I celebrate it every year as a, you know, they call it Dessa Millie day or Deca Millie day or whatever. Closed the deal. The wire hits and it's forever money, man. It's unbelievable. Sitting in the very office. How did you tell your dad?

What's funny is that he's such a frugal kind of military guy that, you know, old school doesn't really talk about money much. I think like we told him for like weeks, I don't think he heard it or understood that the quantum, um, they were so proud. Um,

So happy. And I don't think it hit him until the benefits of it started showing up of like, hey, we're going to fly first class to Europe. You know, you're going to lay down and sleep for this flight. And then we gave them a big gift at the end of the year to say, go travel wherever you want. Please live your life. Enjoy the rest. Enjoy your retirement. I think it hit him over time. It wasn't I don't think he grasped it right away.

For a guy who's cutting your orange juice with water when you're a kid. It doesn't feel real. Yeah. Must have been a pretty big deal. It doesn't feel real. But yeah, it has become real the more generous we've been and just thanking them because of the values they taught us. We tell them all the time. They're the OG bootstrappers that taught us how to manage money, how to be frugal. And so all the credit to them. And what a cool experience for them seeing their sons achieve such incredible success.

It's one thing to have one kid be successful and obviously you hope all your kids are successful, but to see your kids do something together must have been very rewarding for them. They were just so tickled that we remained close, that we worked well together. Everyone always asked, "Oh, that must be brutal working with your brother." And this would go for any co-founder relationship. We had such complimentary skill sets and stayed in our lanes and only consulted on each other's lanes.

That it really was beautiful. And when you're so focused on winning, it's like what serves the goal. We didn't let our egos get in the way. Maybe it helps that we're pretty different. We grew up differently in different ways. And so, yeah, it was it was a great relationship.

And I understand there's a postscript to the story, which is that you more recently sold an additional tranche of the 51 or 50.1% that you didn't sell. Yeah. So we sold another 20% in September of 2024. And that happened, we fully intended to run the business and get it to the next sale. And

Once we got through the initial deal in 2023, we started operating, started learning how to put together decks for board meetings, run board meetings, work with a PE partner, speak the language. And we got into this cadence where it just didn't feel authentic, didn't feel fulfilling. We didn't know how money would change us. It didn't change us in a big fundamental way, but in terms of

what motivates you, what excites you. It really becomes real. And so the management, the OKRs, the KPIs, the meetings, the meetings, the meetings, we thought we're not serving, that we're truly not serving the business in the best way in terms of organizational leadership, organizational communication, lots of skill sets we didn't know we lacked until we felt it. And you're like, this is why professional CEOs get paid a lot of money. This is why they're great at this.

And so we came to Radian hat in hand and said, look, like we genuinely think there's a better person that can lead this company. We will still be around. We will still contribute. We have deep industry knowledge. We have, you know, departmental knowledge, but we think someone else could take this business to 30 million revenue better than we could. And they were great. They stuck by their word and were great partners. They were like, oh, we get it. We understand this happens. Let's do a search.

to a CEO search. But part of stepping down also involved selling equity. Those two things are different. So how did the conversation of selling equity come up? Yeah, it kind of coincided to say, hey, look, if we're going to be out of the day to day and not have as big of influence, we think it makes more sense to sell more equity and kind of let you guys be in the driver's seat, kind of make decisions, control the board. So yeah,

They thought that made sense as well to say. And how did the valuation multiple on that second tranche evolve since from the 49.9 one? Basically, we asked for a higher price because we said, hey, we think...

It's interesting to say, hey, because you guys are involved with the business, we think it's worth more. So it's asking them to essentially admit that they're worth their weight in gold, which they really were, which is the beautiful part of it. And the business continued to be resilient throughout 2023 and 24. So that helps continuing to hang in there at 15 to 20% year over year growth in some really tough years in real estate, basically a recession.

We thought, we said, hey, it's only going to be upside once rates drop. So we kind of want to round the same multiple. You know, we shot, I think we split the difference into that $110 million valuation for the next 20%. Got it. Series B, if you want to call it that.

I mean, what an amazing story with so many twists and turns. I am so grateful for your sharing in so much detail. It's fantastic. Are you up for a quick lightning round before I let you go? Yeah, let's do it. This has been fun. All right. So what's the slimiest trick? Sounds like the retrading was got to be up there. But what was the slimiest trick that you experienced recently?

an acquirer or investor trying to play on you on preying on your naivete? It's got to be that retrade days after looking you in the face in person, saying all the right things. And then just the way it went down. I love the fact that they asked for the wiring instructions. That's really, really good. You're living with that money. Yeah. You're committed mentally. And then to just say, nope, let's unmarry each other.

What's the biggest mistake you made in the process of selling your company? I would say having these conversations sooner with private equity to understand what they're looking for. Because you start talking this language when you meet with them and then when they start asking you in diligence and you feel off guard, you feel insecure, you feel like you don't know, you know, you feel like you're on defense the whole time. And so like,

Just being more direct with them from the start and not holding back and not being humble and not saying this isn't my place. We're just saying like, well, what would make us worth that? Okay. Like what, okay. What, what normally do you see? What are your, what turn, what's the average turn in your portfolio companies? Like make them say, I can't tell you that. Right, right, right, right. What was the emotional low that you experienced going through this rollercoaster? As you look back, was there a,

a moment or a memory that you think, wow, I really hit bottom end? Through all of Spector or the sale process? No, through the sale process. Sale process. It had to be the sobering moment of getting to the finish line and then saying no deal with an uncertain future, with an uncertain interest rate future where you were like, you're looking at the numbers, you see the millions and then it's like, no rug pull, it's gone back to work.

Back to long days, back to being in the trenches, back to not knowing when the next offer could be. Because stuff gets in your head. You know, I got advised by a dozen people and some are like, hey, there's no guarantee there's offers in the future. And then you're like, oh, my gosh, this could all go to shit. What about the emotional high? Do you remember the moment?

Yeah. Yeah. Um, so me and my wife love the show billions. I don't know if you've seen it. Um, so Bobby Axelrod, he put, they put, uh, um,

on pizza as their thing, kind of their ode to their roots, where it's just like a Brooklyn style pizza with some caviar on it. So after the deal, my wife and I went to Carlsbad for just a little getaway trip. And we went and did that on the beach. We put the caviar on the pizza and had a bottle of champagne on the beach just to celebrate and have our little chameleons moment because we enjoyed it. That's awesome. Where do you get caviar in Cabo? Is that like a...

We went to the, we went to a grocery store and they had it locked up. It was like, like a store employee had to come unlock the cabinet doors. Are you sure you have enough money for this? I know I didn't look like I'm a beach guy. So that's why I'm wearing board shorts. Uh, what resources did you use to educate yourself about the process of selling a company? Is there a, a book you can point us to, uh,

anything you can point our listeners to, to really get educated about this process. You know, um, never split the difference was a book my brother read, um, Chris Voss, great book. Built to sell a radio. I listened to one of the, one of your pod episodes. Um, I can't, I think it was maybe Tyler Smith, maybe I can't remember his name, but like hearing the negotiation process, hearing kind of the steps and how it went was great. Um,

And then lots of Reddit research. Interesting. So Reddit strings, I've never, I'm not a Reddit guy. So like there's strings on selling your business or? Yeah, there's, there's, there's strings where people are fairly like they're anonymous. So then they're able to be more forthcoming. In fact, that fire, I think there's maybe a couple of threads. Yeah.

And then our bankers. Our bankers were just such a great resource. And like some people say, I know on the lower end, like gross assets, they say don't hire a banker, but I'm like, they taught, I got an MBA from, you know, I learned from them. It sounds like it for sure.

So the trophy you bought yourself was this caviar pizza. Was there anything else you bought yourself to commemorate the win? Similar to one of your recent pods, I got a Tesla Model Y, which is not, you know, a terribly special, you know, vehicle. But like once I test drove it, I was like, this thing is smooth. The difference is I was thinking about a Porsche, Porsche Cayenne, Porsche Cayenne.

but I wanted the Miami blue color. So I got the Tesla model. Why wrapped it in Miami blue. So it's a little unique. It's kind of cool. So, so if I see some dude driving around in a Tesla model, why Miami blue and Denver, although it's me, exactly. Yeah. And I saved, and I saved like 70 grand by getting the Tesla instead of the Porsche. That's awesome. That's awesome. Well, I know people are going to want to reach out, um,

you, you've, uh, doing some work on X and some threads on X. What, what's the best way for people to reach you and say hi on social media? Yeah, probably Twitter X, uh, Kevin Wagstaff three. I don't know the first two Kevin Wagstaff's are, but that's, that's the handle I ended up with. Awesome. Okay. We'll put that, uh, your X slash Twitter, uh,

what's the word I'm looking for? Handle? Yes. It's a weird word. I'm like, I'm still not sure whether to call it X or Twitter. So we'll put it all in the show notes at builttosell.com. Yeah. But I just, I'm really grateful for you sharing this story. It is incredible story of resilience and, uh, success. So thank you for sharing. Awesome. Thank you for the resource and what you're putting out of the community. I think it's so important. There's not enough of it. Um,

And so, yeah, thank you for the work you do and happy to come back on and talk shop anytime. Well, guests like you make it easy. Thanks, man. All right.

And there you have it for today's episode between John and Kevin. If you enjoyed today's episode and want more stories of founders navigating the high stakes world of selling their business, make sure you follow and subscribe to this podcast. You can do so on the platform you're listening to or over on YouTube, which is at Built to Sell. Think of it as your negotiation playbook. Every episode gives you insights that can mean the difference between a great deal

or a costly mistake. So be sure to subscribe wherever you're listening to today's show.

For show notes, including links to everything referenced in today's episode with Kevin, be sure to visit his episode page, which you're going to be able to find over at builttosell.com. Special thanks to Dennis Labataglia for handling today's audio engineering. And thank you to our community of certified value builders who help us bring our message to you. Our advisors are experts in helping you build the value of your company. To get in touch with an advisor or learn how to become one yourself, head over to valuebuilder.com. I'm Colin Morgan, and I look forward to talking to you again next week.