I frequently hear stories of founder-led companies that are acquired in “add-on acquisitions,” and after the transaction, the founders themselves are basically tethered unhappily to some role, frustrated and often agonizing over the way things unfold going forward.
This is not always the case. I have had the good fortune to know many founders who sold their companies to strategic buyers and not only welcomed the transaction but also stayed active and thrived after it. In this piece, I wanted to take some time to focus on how this happens. Why are some founders miserable post-acquisition, and others not? Is there a secret to a successful result? What does success post-acquisition even look like?
According to Pitchbook, add-on acquisitions accounted for 68% of all private equity buyouts in 2019[1].This means it is much more likely a founder’s business will eventually be acquired by a sponsor-owned strategic rather than be acquired as a platform by a private equity fund directly.Yet, I rarely see stories how the founders of these “add-on acquisitions” successfully navigate the pre- and post-transaction roles.
To uncover some answers, I asked three founders who I have worked with to share their experiences.Each founded a growing, profitable software businesses and, amidst a set of good choices, decided to sell their businesses to strategic buyers where Strattam was the majority investor:
·Chris Palmer, founder & CEO of Neocog, sold his company to Doxim in 2014 and stayed there as VP of Product Vision & Strategy for 5 years, departing in 2019. Neocog’s customer relationship management software became a core element of Doxim’s community banking platform.
·Brian Maloney, founder & CEO of GoSimple, sold his company to Blacksmith Applications in 2018, where he now serves as General Manager of the GoSimple product line. GoSimple’s trade promotion management software enabled Blacksmith to serve mid-market CPG companies.
·Jason Kiesel, founder & CEO of CitySourced, sold his company to Rock Solid Technologies in 2019, and now serves as Chief Product Officer of the combined company.CitySourced’s mobile 311 offering became a critical component of Rock Solid’s citizen engagement platform for municipal governments.
All three of these men not only were pleased following the transactions, but they also were able to reconnect in various ways with their companies and take on new roles that provided them personal growth and meaningful new challenges. Through the lens of their experiences, I have outlined four common themes I believe will set the stage for founders to have the best possible outcomes following an acquisition, both for themselves and for their companies at large.
Be clear about what you want and what it takes to get there.
For Brian Maloney, the decision to sell GoSimple to Blacksmith started with the realization that he was no longer doing the work he actually wanted to do.
“When you work for yourself, you get used to wearing too many hats,” he explains. “But it occurred to me that my whole day was becoming consumed with payroll and trying to learn different state tax codes and HR rules. I could never seem to make my way back to what I wanted to do in the first place, which was to build a cool product.”
Maloney knew that getting back to product development meant exploring the avenue of acquisition, so his team could gain access to greater resources and leverage a larger company’s expertise. “With Blacksmith, I knew we’d be able to plug into an existing team that not only could fortify those areas where we needed help—like HR, Accounting and Sales—but that also was part of our industry and already knew our language,” he says. “In turn, we would then be free to focus on what we're good at, which is building products.”
Chris Palmer of Neocog had a similar experience. “What always drew me was the building of stuff, and I got to be a big part of that back when we were a small company with just a few people,” he recalls. “But then you get more clients—which is awesome—so you have to hire more people. Somehow it just got harder to get away from that administrative work, and it was only going to get worse as we continued to grow. I liked the idea of joining a bigger organization like Doxim because it would allow me to focus on building again.”
At the same time, however, Palmer also wanted to ensure his customers would be happy with the acquisition.
“We're not sexy tech, and we’re not Silicon Valley sneakers and t-shirts folks,” he jokes, “but most of the companies that contacted me before Doxim seemed very stodgy, very old school. They weren’t a good fit for who we are and who we work with. Part of the acquisition process has to be about what you think the clients will feel comfortable with, too. When Doxim came around, and I knew them and who they served, I had a high degree of confidence that our clients would be comfortable.”
Jason Kiesel of CitySourced says the primary objective in his acquisition journey was taking care of his own team—and he wanted everyone to know it. “I've heard so many stories where, once they buy your company, they own you, they own the intellectual property, and they don't have to employ you anymore,” he states. “It was important to me to specify in advance that the team would not be broken up and that no one would lose their job.”
For Maloney, the fact that he clearly communicated what he wanted paid off for all parties involved. “After we had those initial conversations, and they understood what I wanted, I could see the vision for being able to get back to what I loved,” he says. “We plugged ourselves into the Blacksmith sales engine, and I think our client base has multiplied five times over. So now we get to focus on keeping the product fresh, and the sales team gets to focus on what they do best.”
Ask for transparency up front.
Of course, communication during a transaction is a two-way street. These founders were clear about their own goals for an acquisition, so they expected transparency in return. If a company didn’t reciprocate, it was a huge red flag.
Jason Kiesel of CitySourced recalls one potential offer early in his company’s life that just didn’t add up. “They had a really good offer value, but half was up front, and they said we could earn the other half on the back end. But they wouldn't tell us how. They just said, ‘We've got a plan.’”
Kiesel wanted more information. “I told them I wanted to see details. Would it be sales-based? Because if it is based on sales, they’d better be giving me resources to hit my numbers,” he explains. “But they wouldn't tell me more. There was this kind of ‘cloak and dagger’ routine, and they wouldn't let me peek behind the curtain. That presented too much risk.”
Ultimately, he says, CitySourced passed on interest from several acquirers “because of ambiguity. I don't know how you can do business of this magnitude when one party is just so unwilling to be upfront. That was something we liked about Strattam and Rock Solid, and it’s another reason why I think the deal was so successful. For example, we negotiated an advance compromise that would ensure my place for at least two years. When all is said and done, the teams behind this acquisition have delivered on everything they said they would, and that’s saying a lot.”
Brian Maloney concurs. “We’d been burned before, and the last thing I wanted to do was go back to the team and say, ‘Well, here we go again. We're going to go through an acquisition, and let's just hope for the best.’”
That is why, when he was approached by Blacksmith, he noticed the differences right away. “Sometimes in an acquisition, they’ll say, ‘We just have to fit you into our current org chart, even if it adds work, or it doesn't make sense.’ But Paul [Wietecha, Blacksmith CEO,] took a more practical approach. He said, ‘We're only going to revamp where it makes sense, like HR, Accounting, and Sales. To this day, three years later, we're still running our own product management and our own roadmap. And all that was made clear before the transaction was done.”
Be comfortable being a team player.
While transparency about potential changes is vital, a founder’s willingness to adapt to those changes is equally important to the success of the deal.
Chris Palmer feels one of the more eye-opening adjustments was the idea of not being the boss anymore. “Before, if I thought something was the right thing to do, we would just do it,” he says. “After the acquisition, I had a team of colleagues, and I had to explain my ideas to sales or marketing or engineering and try to bring them along.”
“Fortunately,” he adds, “from a product and vision perspective, people seemed to get on the bandwagon very quickly. But once agreed, there was also the question of funding an initiative. How do we get the resources? I think the biggest challenge is trying to win other parts of the organization into the investment that needs to be made. If you are able to adjust to those things, it’s not difficult. I’ve never been uncomfortable in working with the leadership team or communicating ideas to the board.”
Jason Kiesel agrees that the transition from boss to team player requires some getting used to. “I had carte blanche pre-sale. I had full decision-making authority,” he recalls. “Now, even with the title of Chief Product Officer, I can't just make a decision on product. I always have to keep everyone else in mind and get buy-in, so that's a much different way of thinking about things. You have 11 years of doing whatever you want to do and then, all of a sudden, you’re having to get people's opinions.”
Still, Kiesel believes the process is worth the effort. “I've definitely grown personally. When it comes to relinquishing control of things, you just have to say, okay, not my problem anymore. Somebody else is going to deal with it. I trust that they're capable. And it’s actually nice having the resources, being able to say we're going to build this feature or that feature, and it gets done. I just weigh in on small things here or there, and eventually, hopefully, I'll even get out of that. We're getting there.”
Sometimes, as Brian Maloney discovered, the transition is about corporate, rather than personal, identity. “Because of this acquisition, our ability to have access to people in other parts of the industry than GoSimple did, we've pivoted away from relying solely on the food service side of our industry to be more focused on the retail side,” he says. “That’s a big change, but the current COVID crisis shows why it’s important. Food service businesses are really getting hit, but our retail clients are really busy. So it's helped us to have a broader market and spectrum of products. We would have struggled if this had all happened before the acquisition because we weren't in retail at the time. These kinds of changes might take some adjustment, but you really have to make sure your product is in several different arenas and not just stuck in one.”
Don’t set an artificial exit date.
It is common practice for founders to receive significant payouts tied to remaining with the acquirer, typically one or two years, after which the unspoken expectation is that they will move on. This structure can create a short-term mindset which makes it difficult to embrace fully the post-acquisition role. Joining with an open-ended personal timeline removes this artificial constraint, even knowing that no job lasts forever.This mindset makes it more likely to know when the moment is right for a transition. As Chris Palmer realized in 2019, one chapter must close before the next one can begin.
“By the end, it felt like that vision I had worked for was coming together, and it was the right time for me to exit,” he explains. “I know it might seem contradictory—I’m a builder, and I finally had the opportunity to build again, so why leave? But we had reached a point where we were just going into growth mode and, to me, that signaled that we had the platform established. Of course, there's always more work to do with software, but it was settled on the tracks, like a train that just has to keep rolling, rolling along.”
Palmer was ready to start something new. “That doesn't mean I don’t look back very positively on my tenure with Doxim and on working with Strattam,” he says. “There were real positives there for me, and lots of things that I learned. But I think entrepreneurs in general, especially technology entrepreneurs, tend to be builders like myself. Once we’ve built something and it hits that status quo period, that independent streak appears to remind you it’s time to do something on your own again. And there’s nothing wrong with that. It's good to have different experiences.”
Jason Kiesel and Brian Maloney continue to play leadership roles within the acquiring organizations. “It’s nice,” Kiesel comments, “still being involved in building great products, and being a part of something larger. Had I just sold and exited right away, I think it would be a much different story. I'm a bit of a workaholic, so I probably wouldn't know what to do with myself.”
“It's been a recipe for success,” Maloney says. “The sales team has been killing it.”
Often founders will receive shares in the acquiring entity as part of the transaction, which they keep whether they stay or not, that provide a sense of ownership and upside towards a future payday.“I’m happy with where I am, both with the product and the opportunities to grow and build,” Kiesel says. “But I’m definitely looking out for that second bite of the apple down the road, whether be it three, four or five years from now.”
For these three founders, their personal success in navigating the process also created success for a much wider group of employees, customers, and ecosystem partners.Over time, perhaps their stories can help with other founders facing a similar choice as well.
[1] https://pitchbook.com/news/articles/this-year-could-set-another-record-for-us-pe-add-on-activity
