I ‘Made It Up’

Jason Blumer, and I met up last month for a quick drink in Greenville. My friend Casey, who is very unconventional, joined us. In between Casey interrupting us with stories of free solo mountain climbing (no ropes) and making something called “biochar,” Jason and I talked shop. I shared with Jason a recent win I had helping my client Operation Barkley, LLC (fictitious name) sell to a large strategic buyer. Mike, the then-owner of Operation Barkley, agreed to pay me based on a percentage of the sale price. It ended up being about $870,000 (plus some additional tbd money from a 2023 earnout). Jason seemed interested and asked about the terms of the deal. As if I wasn’t embarrassed enough from Casey interjecting himself with weird stories, I was even more worried that Jason would hear about the convoluted deal terms and realize that I’m just faking it, and I don’t really know what I’m doing.  

Deal Terms: 

  • 1% on the first $25 million, 2% on everything above $25 million. The sale price calculation was reduced by fees paid to investment bankers and attorneys. 
  • Four-month fee vesting (e.g. Mike could cancel at any time like one month and only be on the  hook for 25% of the fee). We included this because he wasn’t totally sure if I would be committed given how busy I always seem to be (surely everyone in Thriveal can relate). 
  • If the business did not sell this go-around, I would get a small, sad fee of only $30,000. This would be a huge loss and might amount to something close to minimum wage based on the hours I needed to commit.  
  • If the business sold within the next 20 years, I’d get an additional $220,000, no more. Mike set an odd 20-year sunset in case his kids wanted to take over the business someday. 

So, there were a lot of weird terms like the vesting schedule and the small minimum. Any real advisor reading the agreement might sniff out an imposter and declare “He doesn’t know what he’s doing!” Jason, in his normal lighthearted way, put me at ease. He summed it up by saying: “We accountants make it up as we go.”  

We do make it up as we go, right? Our Thriveal community is especially creative (in the good sense of  the word) versus other advisors. We’re not afraid to try new things and stray from traditional practices.  We are flexible and open to learning from one another. I think that’s why we are more successful than most. The Operation Barkley sale was certainly a great learning experience, and it opened my eyes to the potential of taking on more contingent-pricing gigs. There are times when we can mine gold with a contingent-fee project. What a fun way to level up! So, with that in mind, I would like to share the story, and some lessons learned. Hopefully, this is helpful for those of you that would like to lock in higher-paid project work. 

Operation Barkley (code name) is an online SaaS-based education business that helps subscribers pass their licensing exams (like the CPA exam). Mike, the founder, built this company as a side hustle to his day job working as a professor.

In January 2022, Mike casually mentioned during one of our check-in calls that he thought the company was worth several million and that the timing might be good to sell. The timing could not have been worse for me however – it was tax season. 

It is hard to take a project like this on, even outside of tax season. It’s a big-time commitment and it could fail for a hundred reasons outside of a person’s control. There’s a major risk of earning very little money if a deal does not happen. On top of that, there’s lost opportunity cost from allocating all your spare bandwidth and having little left to take on new clients or improve your practice. Lastly, you could screw something up, resulting in the deal failing, legal action, and unrecoverable embarrassment, like dropping one of those fly balls during the World Series. I felt in my gut though, that this might be worth the risk. Mike and Operation Barkley were clearly the best in the world at teaching people how to pass a specific licensing exam. He was smart, hardworking, and trustworthy, and his team of employees and contractors loved working together. It felt like an opportunity that only comes around every few years.  

Lesson 1 – Recognize the Opportunity – Slow Down and Really Evaluate!  

We miss big project opportunities in three ways… 

  1. We don’t pause to recognize the opportunity. 
  2. We don’t pause to plan out how to capitalize on the opportunity. 
  3. We don’t pause new commitments from creeping back onto our task list and thus taking us away from the big project opportunity.  

So, the lesson in short is: pause. Give the opportunity real attention and be ultra-conscious of what you are doing and why. Don’t be afraid to say no to others and risk losing a client. Everything is about opportunity cost. If this project is the most important thing, then why are you putting your limited time on less important stuff like a tax notice or cleaning up a chart of accounts?  

Mike and I agreed in principle to work together toward a sale, but he dragged his feet on signing the actual compensation arrangement. It took three weeks for him to finally sign. His first objection was that he wanted to be charged based on an hourly rate. I countered by saying that I should be paid like an investment banker – with a percentage of the sale price. This aligns everyone, and it would incentivize me to push for an optimal deal. His second objection was that other advisors had shared that the work was worth about $100,000 max. I had to explain that he was not buying normal accounting work. He was buying a partner that was going to be living Operation Barkley for the next six-plus months, literally helping with everything related to the deal. I went on to talk about my lost opportunity cost and that I would have to free up time and pass on any new clients. He was surprised when I mentioned that one new client alone can have a lifetime value of over $100,000. 

There were times when I had to really check my impulse to push him for a signature on our deal. It was tough to let the sales process breathe and to be patient. I found creative ways to get his attention, like when I offered to enroll the company in the Inc. 500 Fastest Growing Private Company Award (again  making it up as we go). Ideas like this helped to demonstrate atypical value. I used a couple of these types of ideas to smoothly segue back to my compensation discussion. Finally, with patient persistence, he signed and we were in business.  

Lesson 2 – Long Sales Process 

To negotiate a contingent fee arrangement, it needs to be a long, patient sales process. If it’s not, you might find yourself: 

  1. Taking on too much risk; 
  2. Underpricing;
  3. Overcommitting your time; or 
  4. Disappointing the client. 

There needs to be time to talk through everything, evaluate how serious and capable the client is, understand your ability to free up the necessary bandwidth to do the work, and gauge the environmental factors so you have a reasonable shot at being successful and getting a large payday commensurate with the value you’re delivering. 

Next, we needed to bring in an M&A group and a law firm to round out the deal team. Mike knew a retired M&A consultant that lived next door to his father’s house in Bethany Beach, DE. Although the gentleman was smart, experienced, and inexpensive, I didn’t feel like he would bring the contacts and resources necessary to close a deal with a strategic buyer. Normally, I would only share my opinion with a client one time, and then accept whatever the client thought best. They are the experts on their own businesses, after all. In this case, however, I pushed several times for us to interview other firms. This was met with some friction from Mike, but eventually he gave in. We ultimately found Tyton Partners. They are an M&A firm which specializes in working with online education businesses. Tyton created a competitive market and brought in big strategic players which bid the price up. Without a doubt, no other M&A group could have done better. My nagging persistence paid off…putting the “nag” in Nagy. 

In an example to the contrary, Mike wanted to hire Nick (not his name), a lawyer to handle the deal. His buddy used the same attorney when he sold his company. I again pushed back on this, advocating for a large firm with a deep bench of people. After two or three Zoom calls arguing this, it was clear that Mike was getting too annoyed. We compromised and agreed to start with Nick and reevaluate it in a month. No reevaluation was necessary, however. Using Nick ended up being one of the best decisions. He was very experienced and could move quickly. Time kills deals and the speed of the attorney was a huge factor in getting the deal done. I was wrong in this case but made the right decision to follow Mike’s wishes.  

Lesson 3 – Balance Leading and Following 

In our normal role as accountants and advisors, we often allow our clients to lead on the decision-making. We do a good job of explaining the issues and suggesting a path forward. But when the client argues for something else, it seems that nine out of ten times, we agree with what they want. When there’s a material decision to be made, however, I think we can do a better job of standing our ground and making sure the client doesn’t make a mistake.  

Mike started building Operation Barkley by creating little explainer videos and putting them up on YouTube. Being a natural teacher, he soon realized that animations would do a better job of teaching. As he built better and better animated content, students found his business. He put a lot of attention and care into building a highly successful company. Operation Barkley was Mike’s baby in a sense, and it grew into something special.  

It is hard to give up on something that you really care about. Throughout the process, Mike would second-guess his decision to sell. There were times when he would flounder and talk about the potential tax hit from a sale, and that the after-tax money was not worth it. Some days, he confided that he was thinking about waiting another year when the company would be worth twice as much. Mike, on occasion, would flip-flop and talk about hiring a CEO to manage things so that he could just cash checks and ride it out. Although these ideas had merit, I think they really stemmed from a fear of letting go of his baby. All of us can relate to the difficulty of letting go of something that we care about. 

Lesson 4 – Play Therapist When Needed 

People are emotional, and when we are talking about a big project like selling a company, you should be worried if your client doesn’t get a little emotional from time to time. When this happens, it’s important to play therapist. Ask good questions, get your client talking, and then shut up. Be a sounding board. Let them get to the deep-rooted issues that are creating conflict and potentially undermining the project. It’s not fun when they change their minds six months in and blindside you.

Mike, being a smart analytical guy, calculated his potential payout throughout the process. From the beginning with the initial Tyton CIM (i.e., valuation, etc.), to the various offers from would-be buyers, and ultimately the final inspection of the closing docs, he did the math. And as he calculated his payout, he would naturally have to compute my fee which comes off the top. When you are contemplating a big six-figure check, it is natural to ask if you’re getting good value. I do this every time my wife shops at Whole Foods.  

Lesson 5 – Remind Them Regularly of Your Value – AB Memo  

As the deal moves along, you want to be sure that you ultimately get compensated. Even the best-written compensation agreements can be subject to the risk of not getting paid. You can’t rest on the signed contingent-fee agreement being the finish line. You must get buy-in all the way to closing. Your client should understand the value that you are bringing throughout the process so that there’s no regret when they eventually write you that big check. You want to hear the words “best money I ever spent,” which incidentally is what Mike said to me when he handed me the check over a fancy Italian dinner and a bottle of Montepulciano.  

The way to manage this is by recording your good ideas as you go (you’ll forget if you wait). Every good idea that you originate can go onto an “AB Memo” i.e., Above and Beyond Memo. You can then share the memo with your client and go through it during a quick call. When sharing, I always joke about “my fragile ego needing a pat on the back” so that I don’t come across like I’m bragging. 

Download Operation Barkley – AB Memo Full memo: LINK

       I was lucky to get the Operation Barkley deal and learned a ton during the process. Admittedly, I must not have internalized all the lessons that I’m preaching about. A little over a year ago, a startup cyber security software client offered me a half-stock, half-cash deal to do some ongoing light CFO work. I mistakenly didn’t pause and give the offer real attention. Big mistake! They have been doubling sales every three months since then and already have a $7MM valuation which would be about $70,000 in stock value for me. Ultimately, not jumping on the stock offer may result in a seven-figure miss when they attempt an exit in a few years. Ouch!

The lost stock deal hurt, but mistakes are usually the most impactful way to learn. As I write this, another client, an MSP (managed service provider for computer networks) is acquiring a company. So, it is time once again to pause and be methodical, so that I don’t miss another opportunity! To start, I invested some free consulting time to gauge the situation and hopefully raise their opinion of me as an advisor.  Now, I sense that I am in a position to propose a creative contingent-fee arrangement of some sort. Can I do a contingent-fee based on driving down the sale price? I don’t know but this feels like another opportunity to make it up, yet again.  

Jason Blumer

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