Why would a founder accept a risky earnout deal?

Jason Kirby (04:01.313) Everyone, welcome back to a hundred million dollar exits. Today we have Eric Friedman on the show, founder of eSkill. Built the company for over 20 years and sold it last year after trying to sell it for over three different periods. Eric, I want to just jump in for our audience and kind of walk through. Why did you take the deal last year, and why did you take the deal with the earner? Eric Friedman (04:53.869) is a great question. After bootstrapping 20 years of consistent growth, I become very comfortable that I could just keep on doing this. The product we were doing, which was skills testing for employers, I decided one day, I want to get a lot bigger than this. I want to become a behavioral testing company too. And I leaned pretty hard on our software development partner who had some of our equity. I still had the majority share of equity in my company, which was a nice luxury. To help finance that, And there came a time when their new ownership couldn't do that anymore. So all of a sudden I had cashflow pressures. didn't have an incomplete, potentially massive product and working capital dried up and interest payments to start making on what I had piled up. So our cashflow situation changed very quickly and that, we were paying these bills, but that was getting in the way of growth. So at that moment I realized it's best to sell the company, pay off this debt. and not take any more risk of growing slowly. Jason Kirby (05:56.802) So there's a couple of things I want to add some color to, and I want to talk about the earner as well for the sake of the audience that doesn't know. Like you had a development partner that was like kind of like a dev shop that built a lot of the technology. So you didn't have to invest cash. They took equity, but they essentially sold and their new ownership had a different agenda. And so what you thought was a sure thing, good relationship, good partnership was kind of pulled out on for underneath you and you had to act fast. so you kind of realize the market was like what walk us through kind of the, the realization you had when the, sort of see those cards unfold and how that might impact your business strategically. Eric Friedman (06:35.821) Sure. Well, I knew for a while when we're building out this bigger product, I would see every month, you know, we are adding another $100,000, $200,000 to our obligation to our debt. Took the software development company, which had become a very substantial company. It seemed like to me they could absorb it. They had about a third of my company's equity, their principals did. And in the end, this would all be worth it for everybody. But it went on longer than I thought. I didn't know enough in advance how much to budget, how long for. It was sort of an open-ended project until it was done. So eventually I was told that, I'm sorry, but the new owners of the software dev company are not willing to support this anymore. We're cutting off the working capital and the amount that you have, you're to have to start paying, you know, some sort of a significant interest on. So at that point, I realized that my comparatively luxurious position of being able to have without other outside financial investors. this kind of support, had helped our company grow over a long time, I had dried up and so that was new. And that's when I realized that we had to sell. I decided to go for a sale rather than raising money at all and trying to pay that off because at that point just become kind of complicated. I've been doing it a long time. So we found an investment bank in New York and ran the first of, let's say, three processes to find a good buyer. Jason Kirby (08:10.219) Walk us through the decision on picking an investment bank. What did you do to pick the investment bank? And I'll kind of add to it a little bit. Eric Friedman (08:19.137) Yeah, that's a great question because when you reach a certain level of size, you know, about 10 million in ARR or so, you start to draw attention from investment banks and they start pitching you their business. And for a long time, I wasn't planning on selling, so I would talk to them, meet them. So much really, I felt depends on the skill of the business development rep who works for them, their ability to convince you that they have people at that bank who've worked on similar companies and have succeeded. and here's the track record of similar transactions they've done. And ultimately that's sort of how I chose, how I initially chose Leona's Partners. And they were, and in the end I was very, happy with their work for us. So I started with that and then ultimately it comes to you, Gell, with your lead banker and they do a good job telling your story. and crunching all your data, like the toughest job they have to do is take over your Salesforce data and other metrics, which are in format sometimes only your team knows, and quickly digest it, process it, and pitch it as best they can, most positive way. Jason Kirby (09:34.081) What was your experience? Like, I imagine you met with, you said you met with multiple bankers. You always chose Leonis. What were some of the attributes that you liked and didn't like about some of them? What were some the best things that were just like, clearly you didn't like it they didn't get it or didn't have the chops for you. Eric Friedman (09:51.79) I think the biggest reason I would turn a bank down was that they seemed too small. Like some of them, would be like almost like a one-man band, like at a larger bank, and they were the &A guy. So it didn't seem like people would really take it that seriously. And then there are other banks that seemed they had a good name, people knew who they were. But then you'd be too small for them. They would talk to you, get your numbers and say, we're going to pass on this engagement. So in the end, Leonis had done a transaction, or one of the people on our team had done a transaction for a similar company to ours a few years before, not a conflict of interest. And he would have been on our team and that was like, okay, that's fantastic. He knows our industry. He's ready to go. Jason Kirby (10:38.465) OK, that's good context. And then when it came to running three processes, imagine it wasn't your preference to run three. So what happened there? Why did it lead to three processes? And what was that timeline from start to finish? Eric Friedman (10:52.213) Okay, well, we started in 2022. This was in the fall of 22. Interest rates were still like really close to zero. Valuations on multiples were still very high historically. And so, you know, we had very optimistic expectations of what we would get. You know, how many tens of millions we would be getting for our company at a smaller size than we actually sold for. are revenues were when we did sell. And we got an LOI that I thought was good. It was healthy. And around the time we were doing due diligence in the fall of 22, interest rates all of a sudden began surging 75 basis points a month. And so 45 days into all that, we checked in with the private equity buyer and they came back with a 15 % retrade. And they didn't say, Oh, you know, we've our cost of capital has gone up because of these interest rates and that's causing us to adjust the valuation and we give your company that would have made I would have been disappointed. That would have made some sense. Instead, they came back with these very fuzzy assessments of risks. What's the risk that your head revenue is going to leave your company and take all the customers or the risk that these are all things that could have sat on day one. So I didn't I kind of lost faith in their. This was a good faith negotiation. And plus they wanted me to work for them for five years. And so I wasn't getting a great taste for this relationship. And because we've grown every year to that point and we are self-sustainable, we walked away. I didn't want to continue that conversation. But that's sort of also when we began to get a lot more cashflow pressure. So in 23, we had another buyer come to us, not from the investment bankers, but someone who knew people in common. They gave us a pretty healthy LOI, not quite as much as the first one, but still pretty good. And we opened up our data room to them. And this was around November, December of 23. And they never went into it. So all of a sudden they kind of went poof. So we signed an exclusivity. We opened the data room. Now they didn't have committed capital. So one thing I understood, they had to go back to their backers to try to get... And when they finally unproved... Jason Kirby (13:08.096) Mm. Eric Friedman (13:19.103) in January at some point, like where have you guys been? thought we were having a holidays aside. They said, well, our backers want to see how you do over the next like three quarters. And I said, OK, well, I'm really looking looking. Jason Kirby (13:32.578) after you get years of business, you know how you're gonna do. Eric Friedman (13:36.75) You know, one of the somewhat frustrations that I've had, mean, in 20 years of eSkill, we've had tough years with headwinds. 2009 recession. We only grew 9 % that year. COVID 2020, we only grew about 9 % that year. 2021, we grew 20%. 2019, we 40%. So you look at the history of the company, you know, we had a strong and ultra property advantage with like almost a thousand skills tests. Yeah, some years are good, some years are bad. It doesn't mean the company... is a rock star forever or a dog forever. But in you're getting evaluated for a sale, you're often only as good as your last 12 months. And that's what everything sort of hinges on that one freeze frame of your growth. So yeah, that was a little I understood that there's they want to the risk, but I kind of wish they'd said that upfront. So that didn't happen. And bankers usually say if you run a process and don't do a deal, don't stay shut. Don't keep shopping because then you'll get shopworn. So just go away. for about maybe three quarters, try to build your business, look good, and then come back on the market, which is what we did from 22 to 23 and then to 24. By 2024, you know, it was just, it was extremely tight. Every month we had to sell and collect enough to pay all of our obligations, all of our vendors, of course payroll and these, the debt payments. So it was a very, very stressful time for me and I knew I had to close a deal. or else risk losing a lot more. Jason Kirby (15:10.881) And that debt was all just that partner, right? There was no other debt, was there? Or was there other debt? Yeah. Eric Friedman (15:16.779) No, had never, we didn't have any credit card debt, we had no debt. Now look, the new owners of the software development partner we had were completely rational. So I don't, I might have been frustrated, but I can't blame them. They came in, they didn't have interest in my company. Their job was to have their new portfolio company do well and have good cash flow, not subsidize some special interests customer of theirs. So. Jason Kirby (15:41.228) Yeah, that definitely makes sense. it's just tough. So out of curiosity, if you can share, you gave the step shop and then their partners a third of your company. but they were also kind of accumulating this debt against you. that, those two separate transactions or two separate value sets? Or was that kind of like together? Like they were getting the equity interest and are they converting their debt to equity at some point and then they stopped converting? Like how did that kind of come apart? Eric Friedman (16:09.549) Well, the early years of eSkill, we basically offered this dev shop, which was, it started around the time we did. So they grew with us and they became a really big nine figure a year business. They subsidized probably a million dollars worth of software development in our earlier years. And so for that, I gave the principles of the company, you know, equity. And it worked really well for a long time. So, but what of course they took on new majority owners, they have the equity, but the new owners have the control and they had no equity. So it was tough position for the principals, but they couldn't do anything about it. Jason Kirby (16:55.521) Well, looking back and, you know, talking to the founders, cause I deal with founders all the time and they consider dev shops as a way to kind of same problems, you you solved with one and just kind of get, get to market a little bit faster and you kind of get a little creative. You're not necessarily paying payroll. You have maybe some more flexibility and payment options. Um, but looking back, would you have stuck with the dev shop or would you have considered hiring in-house? Eric Friedman (17:21.803) Also a great question. Working with that dev shop, they were good and we really gelled with the principles. For many years, that was the right solution. If I could live my life over again, I probably would have said once the people who really were my partners no longer had control. At that point, we were a big enough software company. We shouldn't be outsourcing software development anymore. The only reason we doing it was because we were doing it with someone who had a strategic interest in us. when that goes away, it's much better and more cost effective to hire directly. Jason Kirby (17:58.433) Yeah, that's just something I do with all the time. see founders, especially in the early days, you know, Hey, we got this dev shop and it creates such an unknown despite, employees can also be complete unknowns, but, uh, I've seen some deals unravel and, or at least in the VC side, they don't amount to being able to raise money because VCs have seen this playbook roll out where dev shops cause more problems than good. Um, But it's great to hear that this was the right Dev Shop and this was a good partnership because sometimes it's not always the case. that's, you have a personal relationship with the partners beforehand? Eric Friedman (18:33.963) I know only in context of eSkill, but they were in some ways partners in my business. We got along very well. We shared the same vision for what eSkill could be. So I think one of the best ways to bootstrap a company is to find a dev partner who can grow with your company. That's the key part because you'll always need software developers. And so you have someone who has an entrenched, like a deep interest in seeing you do well. Jason Kirby (18:36.48) Okay. Eric Friedman (19:01.237) even more so than milking your monthly revenues. think that can be a really good place where you outsource. Jason Kirby (19:09.217) So what would you buy? there's some good attributes. What would be some other attributes that you'd want to share with our audience to consider when partnering with a Dev Shop? Eric Friedman (19:20.109) Well, if you've known in advance the kinds of things you're going to need, like eventually we needed to be type sock to type two compliant. We need to be an Amazon web services. Uh, we needed to have single sign on. So is this a dev shop that understands those roadmaps and has worked with similar? I mean, I didn't know this stuff back then. I'm lucky that they could grow with us, but knowing it again, especially if you're going to sign with someone as an equity partner, dev, do they know these concepts? and they know how to get there when the time comes. Jason Kirby (19:54.027) So appreciate the insight there. think it's good for founders to kind of know different ways to scale a business to an exit. And there's so much information out there frowned upon in terms of the VC world, bringing on DevOps. And here you are proving a bootstrap use case as to kind of the pros and cons for founders to be aware of. But I want to take a step back and go back to the exit conversation. So we were last talking about you running three processes. You finally found your You're better than I was going to take it home all the way. And you also kind of mentioned you chose the earn out. so by inferring from that conversation, have multiple offers. So kind of walk us through the process that was run in terms of like, all right, you're in market. How long were you in market? How many people did you talk to? How many LOIs did you get? And, we'll start there and then want to get into the details of the LOI. Eric Friedman (20:44.214) Sure. Well, as the investment bankers run the process, it's about, usually it's in my experience, about three months. First, they engage either buyers who already found you or new buyers that they've identified. This is after they've spent maybe two or three weeks with you updating your Salesforce analysis, your marketing materials, your pitch deck, and things like that. So they pre-pitch maybe 20 to 30 different potential buyers. some private equity, some strategic. That was how it panned out. Then there'll be a subset of that, maybe say 15 or 20 that are interested. And then you sort of have a series two or three a week, often if not more, where the management team, me and my main executives, will have a presentation and a Q &A with these various buyers. And they'll ask all the questions they want to ask. When that's done, The bankers usually tell all the parties that are still in the game, okay, IOIs, indications of interests, which is a verbally conveyed valuation for your company, or LOIs. IOIs are due this date, and then maybe a week after that, we want to see LOIs, which is a documented, more fleshed out version of your enterprise value they're going to pay and the large terms around that, like an earn out. So that whole process was about three months. Jason Kirby (22:12.884) And how many people, how many parties did you have ultimately engaged in your process at the end? Eric Friedman (22:18.252) We had, I'd say six IOIs and four I thought were a reasonable valuation and two were just low wall. Jason Kirby (22:30.112) There's always the little balls in there. They always try to throw their hat in the ring, hoping no one else is at the party. And so what led it to you taking the earn out? Cause you mentioned you had some maybe all cash options. What about this deal stood out to you to kind of take the risk with an earn out? Eric Friedman (22:32.426) Yeah. Eric Friedman (22:49.932) Okay, also like none of these deals were the deals I would have envisioned a few years before. They were all less than 2022, significantly. So, but at this point, my priority came, I need to close the deal. And this was a positive outcome. mean, everyone's getting their money. So it was a positive outcome I needed to make sure. So I went with the party that had done the most homework on our data. prior to submitting their LOI. Because I had seen LOIs, it's like, go poof. LOIs came to mean very little to me. You can put any valuation you want on an LOI, sound great, lock up a seller for an exclusive for two months so that all other buyers are told to go away. And then you can readjust that offer whenever you want. So really, the buyer has a lot of power in that moment. And I wanted to go with the one that had the least likelihood of a retrade and the least likelihood of just walking away. Jason Kirby (23:24.576) you Eric Friedman (23:47.424) having experienced both of those. So that's the one we went with. Jason Kirby (23:53.447) And what would be your advice to founders that might consider, you know, their company? What would be the, the things to be attentive to in this process and the, maybe the terms to look out for, or the things that you thought would be useful to share. Eric Friedman (24:08.854) Having seen a lot of insubstantial offers and LOIs, I would really pay attention to, well, it might sound weird, the kindness of these buyers as you meet with them and as they ask questions. There's definitely a few different attitudes out there. Some people grill you, like it's an interrogation. Of course, they want to learn about the company, they want to do their math, but you're probably working with these people. Is this the kind of... boss you want to have? Is this the kind of partner you want to have who is going to treat you like just a, you know, a cog in the machine of making them and their limited partners money? Or do they engage you like someone, hey, I would love to work with you. And of course, we need to answer these questions to tell me about it. So that's one. And then two, like I had said, our buyer did the most homework. They grilled my CFO politely. grilled my CFO on every aspect of the P &L and all the questions they had in our Salesforce data before they made their LOI. And that gave me lot of confidence that, they understood our business a lot better. So they're much more likely to stick to that valuation. And indeed, there was very modest retrade. They did what they said they were gonna do in the timeframe. They said they were gonna do it. And that was very impressive. Jason Kirby (25:30.923) That is pretty meaningful. It's amazing how sometimes some of these deals, as you said, like they, gets exciting. You get these offers, know, it's going to happen. then some of these buyers are either don't have the cash or, you know, are fishing or, you know, kind of want to come into low balls and or worse lock you under exclusivity and don't, you know, kind of relinquish that control. And then they start retraining and changing the numbers and then What can happen in two, three months as you were kind of experiencing with your situation at that? Actually, let ask you that. Were the buyers privy of your cash crunch against the lender? Eric Friedman (26:09.366) That's a great question. Yes, we were transparent about that. We didn't like talk about it obsessively, but yes, they saw that we had this promissory note. They saw that we had a rising schedule of interest payments over time. So they knew we had pressure, but would they also. One of the that happens when they buy our company, that debt gets paid off by the sellers, by us. So we suck that up. They acquire a debt-free company. So from my point of view, that's a huge opportunity. It's totally unshackled from all the headwinds and things that may have been impeding our growth the last two years operation, and they can take it away. Jason Kirby (26:51.698) No, it's a great, capture value capture on their part for sure. But I was just curious. It was like something. Yeah. So. Eric Friedman (26:56.064) Yeah, they were aware. So it didn't really help our negotiating position, but again, what helped us is that we had multiple offers. Jason Kirby (27:06.43) Yeah. Well, I would say that's, that's one of the always key pieces. You got to have multiple parties at the table in order to keep anyone honest. and when it came to, and one thing I was going to say about that situation, you know, with that cash crunch, like that's often seen as a way for people to treat retrade after the fact of you got no other options. can't go back to market. so it's great to see that this firm did not kind of put you in that predicament, but Ultimately, you an earn out. I know there's some things you can and cannot share, but, know, enlighten the audience about your, your earn out to the degree that you can. And what would be your advice to founders when negotiating an earn Eric Friedman (27:53.193) Okay, earn outs, fair enough. You want to see how the company performs. Make sure the metrics attached to the urinal are something that you've delivered before. In this case, the metrics attached to the urinal were well within, if you look at the past five years of the company's history, there were years we did that and better. Years we did worse, but free of the debt with no macroeconomic headwinds like COVID or a recession. I didn't see any reason that we could not have achieved all those earn out growth figures. And it was all based on revenue growth for the most Jason Kirby (28:33.184) Okay. And that's pretty fair. Like a revenue based earn out is far more advisable than say a profit or an EBITDA line. Cause a lot of things can happen after to get to the bottom line. Eric Friedman (28:47.36) Sure. So that's why I agreed to it. And again, I felt like these guys were the best chances ahead of closing. And, or not or not, this is the deal I'm going to go for. Rather than something that may have been a little more nebulous and where they might have said, hey, you want to say, how you want to do over the next two or three quarters, you know, or done a big retrade. I didn't sense these guys were going do that and they didn't. Jason Kirby (29:14.464) good. And what happened after that? So you agree on terms, you ran a three month process, you signed the LOI with these guys. How long till close and then what did you do after close? Eric Friedman (29:26.988) It was about two months, maybe two and a half, it a little longer because frankly our Salesforce data was fairly jumbled. We had set up Salesforce in an age before that when think setting up Salesforce was a profession. So our salespeople set up the Salesforce to work on a daily basis. So not every sale was categorized the exact consistent way. It could be hard to tell what's an ARR transaction versus a one-time transaction, things like that. So that required extra analysis to draw out. So that took another couple of weeks, but fair enough. But it was less than three months. I think it two and a half months where we had multiple sessions. The one thing, we didn't do it in this one, but one piece of advice that I would definitely would give that happened from the first process we did, we negotiated as part of the LOI that 45 days into the due diligence, the buyer would have to reiterate the price they're willing to pay. They couldn't wait till the very, end and then surprise, we're only gonna pay half of what we said. So that's how we found out that first year that there was a 15 % retrade that otherwise we wouldn't even have known about until we're even deeper into the process. So that's something I think is always worthwhile to try to negotiate. Jason Kirby (30:51.242) That's a good, good negotiation, tactic. Kind of forced them to be honest to the price before the final hour, after you drag everything out for, for so long. all right. So been two and a half months deal closes. What do you do to celebrate? Eric Friedman (31:07.532) It's really funny. didn't I was just so relieved to just not feel the stress of worrying is going to close and making sure the company now had a future. The debt was paid those, you know, so everyone who had taken that risk and investment was paid off. So that's was a relief. Did I really celebrate? I don't think so. I went to nowhere. But I'm. on a new subject, I knew during this process that I was not going to be the CEO anymore. You the buyer was in a different state and they wanted local C-suite executives. So they had someone that was in their inner circle who was, this is going to be the CEO. It's like, fine. I've been it a long time. You know, I don't know everything. Maybe these guys with their, you know, SaaS experience and playbook will do things with my company that I never, I couldn't afford to do or didn't know to do. So that seemed fine. And that was part of like, So even though I stepped out of the urinal, I also said that I had no control anymore over the execution leading to the urinal. Jason Kirby (32:24.623) And sharing what you can share. how's been that progress? Have you completely removed yourself from the business? Are you an advisor or are you just completely hands off? What's, what's kind of been the role post acquisition? Eric Friedman (32:36.562) Formally, I was invited to stay on for three months as a transition there. I didn't have much of a role during that time. And after that, that's pretty much it. was really just if the new leadership occasionally had a question, they would ask, but nothing really substantial. So no, was weird to sort of just all of sudden, you you go from running a company and meeting with executive team multiple times a week to just nothing. And then the, you know, you're a decent chunk of what you've spent all these years building is now in the hands of other people. It's up to them if you get that earn out or not. And, I'll mention that I know a handful of SaaS product CEOs that sold their businesses. Sometimes they stayed CEO, least of their unit. you know, earn outs are not common to get the year now. I'm put it that way. So I think that if you get an earn out offer, you have to expect that you're most likely not going to see the year. And don't assume that you at least don't assume that you are. So factor that in. Jason Kirby (33:56.437) I want you to keep going because I want you to explain this in more detail because this is something that I believe in as well as the, the, the idea for now that a slightly higher valuation, maybe a little carrot or sweetener on top sounds appealing, but the reality is it's the most litigious part of any transaction, after, you know, post transaction. So what else can you share from, from that perspective? Eric Friedman (34:20.64) In some cases like ours, one of the offers that we got that would have been all upfront came in after we had signed exclusivity. So part of me would have loved to said, you know what, that's the better offer. Let's do that. But I, stuck to my word. I signed exclusivity and I told that other buyer who'd known us for a long time. They just were late with their LOI. That we, I'm sorry, it's too late. And we've, you know, we sign this activity as long as that stays on track. That's so in the end, you know, sometimes that's the cost of, you know, sticking to that. But I don't know, maybe that other buyer would have not. They might have been a massive retrade. So I can't say that would have worked out perfectly at all. These guys who did buy us, they did follow through the close when they said we're in close. Almost very, very modest retrade. That I can say very positively. I would advise anybody who, an urinal can either be at the same level as other deals that are all cash, or the urinal could be on top of that, here's a bonus. In my case, it really wasn't a bonus. I would say that the urinal would have brought us to the same level as the other IOIs that we had gotten. So really, I had to evaluate this. This is part of the core deal. There's some risk attached to that. I would advise people who are considering an earn out deal, ask the buyers, can you send me two CEOs that you've bought from, two owners you bought from, that if they hadn't earn out, got their earn out and talk to them. And I didn't do that. Jason Kirby (36:07.231) They probably can't answer that question. Eric Friedman (36:10.549) They might not be able to, but I would ask because I bet if they could, maybe they would say, well, we should at least talk to these two guys. I'd be curious what they have to say anyway. They did send me, I did get referrals. I spoke to the other people I was referred to, not about earnouts, but they had positive things to say. So I didn't really think about it, but I guess that's one thing I'd be a smart question to ask the buyers if they could point to other instances where the seller took the risk. and it worked out. Jason Kirby (36:43.429) then you had a stake of what was the enterprise value, not the bonus. Because yeah, it's like, hey, if you hit these milestones, we'll pay more, which is kind more of a performance incentive, which has its appeal. Or I see other deals where there's kind of like a holdback of 10 or 15%, which some is just a time lapse. So they're going to hold it for 12 months for any maybe litigation or lawsuits or exposure or risks that might be there. Or it's a part of an earn out where you have to, if you were hitting 30 % year of year growth, then you got to hit 30 % one more time or whatever the number might be. Or just not trade down, like not have a negative year. So it can always be negotiated on various different points. But being that you are no longer involved, was it like a... fade out like it just became less and less relevant or was it a Like thank you for your time Eric. You can have a seat over there now Eric Friedman (37:51.254) I was, yeah, it was like that. mean, it was a very sharp, I think I, I had the three months of transition and I think I was disconnected from the email system like the day before it ended. mean, you know, we're just fine. That's, that's gotta be, that's cause SOC two type two security. You really have to comply with that. So I joke about it. It's perfectly legitimate, but yeah, no, it was a very much of a, know, thank you very much situation and it's a new hands. But one day I say they, they, they kept. almost my entire employee base. 30 people or so. I mean, the C-suite changed over. But I take that as a compliment that they kept almost my entire staff. Jason Kirby (38:37.055) And sometimes it's mission critical for founders selling their business because it's, especially if you've been building for a long time, you've built a relationship with these employees. They committed to it you want to make sure they find a good home. I've seen, I've seen some founders take way less than they probably could have taken home in prioritization over other staff. So it's, it's good to hear that you built a team that was not only worth keeping, but must keep. Cause obviously a lot of people you guys want to cut. whoever they can cut right away. Eric Friedman (39:09.685) We had a lot of contractors. had our, we at that point were outsourcing to marketing agency. So marketing was outsourced. We'd gone back and forth over the years of having an in-house marketing team and an outsource to an agency. And that time, as you know, digital marketing has become so much more complex with, now with AI and AEO, some people call it, SEO, community building. content leadership, thought leadership, that it's almost better to have a panel of fractional experts than three people who work at your company are supposed to do it all. But I think where eSkill got cut the most was the outsourced partners in favor of bringing people in-house with a better margin and more control and transparency. And I can't say it's a bad idea. It really depends on your budget and experience for bringing those people in. Jason Kirby (40:04.627) That makes sense. So. Email's cut off. You're a free man. What have you been doing? Eric Friedman (40:14.251) Well, aside from having a, you're getting married for the first time in May and having a new child, I joined this wonderful group you know about post exit founders, where we've global community of really like giving and friendly approachable people with all different levels of as success, but the one common goal we want to support each other and find exciting new things to work on together. Uh, most of that, and I have been working on a new startup, a hiring platform for the blue collar skill trades. That's separate conversation. We definitely see a need for that. Uh, but I guess going back to e-skill, I, there's so much potential to grow. Talent assessment will never get old. Assessing someone's fitness for a job skills, skills fit behavioral fit, aptitude fit. Jason Kirby (40:53.023) Yeah. Eric Friedman (41:13.835) And we always had the biggest skills library and there was nine figure players in just the behavioral with a little bit of skills. That's the direction I was trying to take eSkill up until the time we sold the company. I hope and will be supportive of the new owners taking eSkill back in that direction. It's more than a one year timeframe of return. That's probably more like a three year and beyond timeframe of Jason Kirby (41:41.152) Hopefully it'd be nice that many years down the road, you get to look back and see E-Skills still continuing to grow and be meaningful and maybe still some original team there prospering from something that you've been spent 20 plus years of your life building and operating. When it comes to advice that you'd want to give to a founder that maybe we haven't already discussed when it comes to evaluating the opportunity to sell and just getting ready for an exit and just mentally preparing for that, what would be your advice? to founders. Eric Friedman (42:12.351) Going back to what said earlier, you're often judged to only be as good as your last 12 months. Sometimes if you have a rock star year, you may not think, I don't need to raise money. I don't need to sell. This is going great. Like I'd almost guarantee there's going to be a year coming up that's not so rock star and very stressful. So my advice would be sometimes consider raising money or selling not when you need to, but when you're looking really good. Because you can always reap that outcome, find the new project and start something new. Rather than waiting to see what will happen next, what will happen next, especially for bootstrapping, especially if you don't have a deep well of working capital or investor reserve to pull from, which I didn't. It worked well enough for a long time, but I think not having deep pocket investors at some point when I was taking larger and larger risks from an absolute dollar point of view because now you're a much larger company. You're running a lot more risk that you were going to fail and there'll be no one to bail you out. Jason Kirby (43:27.143) I think it's fair advice, especially you had a bit of a hack with this partner coming in. They effectively took a third of the company. So effectively as if you raised money, they owed to some degree. And, know, lot of companies that raise money, they'll go out and get debt or, you know, continue to get other access to capital and then they'll be pressured, you know, in those situations. So it's, I think, you know, for a lot of companies, similar situation where it's they can take into consideration these other options of raising capital, bootstrapping, debt, whatever it might be. But I think you found a pretty good solution with this debt. I mean, not debt, the, kind of equity partner on the dev shop side. especially when it's a good partnership. and it sounded like it was Gravytrain that could have kept going until they had a great outcome themselves. And then they lost control over that. Eric Friedman (44:17.087) Yeah. Yeah. And the proper thing would have done to simply at that point decouple as a partner, they can be your vendor or you can find a different vendor that's more cost effective for your scale. I think at that point, their average contract value and billing rates had gone way, way, way up more than a software company should be paying. But if you're like a large global company, like one of their clients would be, and if you're doing a specialized thing for them. So yeah, we should have that point. One of our Jason Kirby (44:28.136) Yeah. Eric Friedman (44:46.335) biggest competitors, of those nine-figure competitors as we're alluding to, they had bought an Indian software company. And so they hired all their engineers directly as employees in India. And that's almost like, that's about as good as it gets. As long as they're quality and you have good visibility of what they're doing, you're going to have the lowest rates, direct employment. Like that to me was a very impressive way of doing it. If you can maintain the right kind of hierarchies to control what they're doing. It's much cheaper than hiring here or even now in Europe. Jason Kirby (45:20.415) mean, Jess is talented in a lot of different ways. If you were able to kind of have that culture advantage, you know, overseas and everything. Um, and so when it came, you know, as a kind of parting advice, as you were just kind of mentioning, what would be the negotiation tactic when it comes to, uh, selling your company that you'd want to pass on for founders to consider or be very aware of when selling their company? Eric Friedman (45:48.35) Make sure your buyer really understands your business, understands your P &L, your customer data, understands your marketplace and your goals. One frustration I've seen is some buyers think they can slap the exact same SaaS playbook on anything that resembles a SaaS. No company is a SaaS. We are an assessment company. We're selling talent assessment versus sort of like a find your own insurance rate kind of company. They both might deliver. But each one's gonna have different customer needs, different customer types, price points. So sometimes you can't remove all the services. You need someone there to man phones, answer questions before someone will risk money on product that's very mysterious to them. Like assessments can be very mysterious. I want to hold someone's hand, have them tell me it's gonna be okay if you use assessment and test 10,000 people. You're not gonna get sued and it's gonna be predictive of success. And if they don't have that hand to hold on to, they just might not buy the product. It is much, it is high of a conversion rate. Cheaper to have the service model there and have a better conversion rate than cut them as a cost, have your conversion rate drop, your customer action costs go up and then say, my God, this business is a failure. So there's nuances to every, every kind of company that I think you want to make sure the buyer understands and hopefully appreciates that. Jason Kirby (47:10.291) Some great advice, Eric. appreciate you sharing that. And for the audience that would want to learn more about you, your experience, or maybe what you're working on next in the blue collar space, what would be the best way for people to reach out to you? Eric Friedman (47:22.795) I'm on LinkedIn. Just do a search for Eric Friedman and E-skill, E-S-K-I-L-L, or Eric J. Friedman, letter J, at Gmail. Jason Kirby (47:33.297) If you guys like an intro, feel free to reach out to me and I can, you know, introduce you to Eric anytime. Eric, it's been an absolute pleasure having on the show and just walking us through the details of negotiating your exit, dealing with earn outs, why you choose different paths over others. And what are those influencers that, kind of influence those decisions? So thanks again for, for coming on and sharing your story. Eric Friedman (47:56.703) No, thanks for letting me talk. Jason Kirby (48:00.128) Awesome. So we'll wrap it there. But before we part here, there's one thing I was going to ask you that just didn't come up and maybe we'll turn it into a clip or not. But did you have advisors or like a board or anything like that? Eric Friedman (48:16.043) Great question. When I first started eSkill, I was in Boston at a business school. I had some advisors who came from HR tech or other types of staffing. And the first few years were tough. Yeah, was a bootstrap. I went from microscopic to tiny, tiny to small. Like our first year, we did $25,000 selling $99 a month subscriptions. So mean, it was very granular. And when I moved back to New York City, where I'm from, where I'm right now, In 2013, I kind of dissolved my board. It just didn't seem like there was much of a mutual, you know, helping each other out anymore at that point. So I had my executive team, was really my best sounding advice. had come from different areas in the industry. I wish I had had a co-founder that's able to stick with the project that had complementary skills. And I wish I had maybe more SaaS advisors. With PEF, I could have, I didn't have PEF back then. Jason Kirby (49:13.439) I know, right? What a world now. Eric Friedman (49:17.887) Yeah, happy to talk more about that another time for sure. Jason Kirby (49:20.896) Good to hear.