A key component of Accusoft’s strategy for growth has been through acquisition. In this episode, Trusted Counsel’s Evelyn Ashley and John Monahon spoke to Jack Berlin, CEO of Accusoft. Accusoft is a leading document and imaging software company based in Tampa, Florida. Founded in 1991 as Pegasus Imaging Corporation, it’s a privately held company that has grown to approximately 160 employees. The company has gone through several acquisitions and now provides a wide array of technology solutions to developers worldwide.
Looking back, the early days for Accusoft, were tough. In fact, two of Jack’s four business partners were gone within the first 18 months of founding the company. When the business plan nearly failed, the company had to reconsider the big picture. In order to stay afloat, it was decided to embark on the acquisition path. Along the way, the brand was reinvented several times, the service side was dissolved and a focus on technology became the number one priority. Jack said, “…by combining into a larger entity we would have more market clout, build a better business and a faster growing business, and lastly a more profitable business under the same roof.” Since their first transaction in 1997, Accusoft has completed multiple acquisitions.
“Out of all of the acquisitions that we did, the 2004 acquisition of TMSSequoia was one of the scariest things I ever did in my life, but in retrospect, it was one of the smartest things I did,” Jack said. His team knew it would be a smart deal. At the time, TMSSequoia was a public company and its history can be summed up as a merger gone bad. It had gone through five presidents in six years and was poorly managed, hence the negotiations for Accusoft were fairly easy. The transaction created major customer extension opportunities and access to top engineers for the company – and made Jack and his executive team understand the value and importance of growth through acquisition.
This was a terrific discussion as Jack walked us through each and every acquisition. During the course of the podcast, CEOs, business owners, and C-level executives will learn:
- The acquisition challenges that Accusoft faced
- Lessons learned from three deals that actually never closed
- Accusoft’s strategy for finding businesses to acquire
- Accusoft’s communication strategy regarding employee change management
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How I Did It: Growth Through Acquisition
Jack Berlin, CEO of Accusoft
(c) Trusted Counsel (Ashley) LLC. All Rights Reserved.
Speaker 1: It’s time for In Process: Conversations about Business in the 21st Century with Evelyn Ashley and John Monahon, presented by Trusted Counsel, a corporate and intellectual property law firm. For more information, visit trusted-counsel.com. And now with In Process, here are Evelyn Ashley and John Monahon.
Evelyn: Hey there. It’s Evelyn Ashley-
John: And John Monahon.
Evelyn: … from Trusted Counsel, and welcome to In Process. Today, we are starting a new series called Growth Through Acquisition. This is a topic that many, many clients are interested in, also participate in, and find it to be a great way to actually expand a revenue base, expand a product or services line, and often to get some really great people that you wouldn’t necessarily have access to. Our first guest for this podcast is Jack Berlin, who is the CEO and founder of Accusoft, formerly known as Pegasus Imaging Corporation. They’re headquartered in Tampa, Florida, founded in 1991. They are privately held with over 100 employees and they are in the imaging technology industry. Accusoft has completed eight acquisitions and we’re going to talk to Jack a little bit about those, and we’re also going to talk to him a little bit about some acquisitions that they attempted to make that, unfortunately, they did not close for a variety of reasons. So Jack, welcome to the show. Will you tell us a little bit about your background and what led you to found Accusoft, formerly Pegasus Imaging?
Jack: My background is just general business. I got my MBA a long, long, long time ago, and thanks for pointing out 1991 so everybody can guess how old I am.
Evelyn: I was there too. It’s okay.
Jack: I got the technology bug early on in my career. As I was coming out of graduate school, the Apple II and the IBM PC were just really starting to flourish. I started working in the high-tech arena fairly early in the ’80s and saw an opportunity to start my first business in the mid-’80s building communications hardware cards, and I learned a lesson of never doing hardware ever again, sold that business in the late ’80s and tried to figure out what I was going to do now that I was really growing up and starting a family. And at the same time, I fell in love with … I saw the first digital camera, believe it or not, at a COMDEX show there in Atlanta, and fell in love and decided I was going to start a business working in and around digital photography.
That was a business plan that nearly completely failed, which is why we really sort of embarked on the acquisition path that we did, and we’ll discuss that a little bit later on. But two of my first four partners were gone within 18 months, and we had to, I guess the buzzword now is pivot, but we had to change our direction pretty quick because we quickly found out there wasn’t a lot of money in digital photography. Everything was given away for free. So we got involved in other things, and some of that was through acquisition. That’s kind of how we got started.
Evelyn: Tell us a little bit more about the product line that Accusoft has. I think our listeners would be interested to hear that. You did transition, and so what is it that Accusoft provides?
Jack: Sure. Well, it’s sort of, as I said, we’ve reinvented ourselves, or to be buzzy, pivoted a couple of times. We went from digital photography to medical digital imaging, which actually pays a great deal better, and we still have a huge market in that segment today mostly around CTs, chest x-ray, ultrasound, and cardiograms. From there, we launched into document imaging, which is scanned pieces of paper, which we would refer to as fax files or TIFF files, and in the process started our own document imaging integration business, which you well would remember Miss Ashley, which also led us down a path that was too diverse. One was technology and one was services.
So in the late ’90s we actually split off the … We’ve done divestitures too. Not only have we done acquisitions, but we did a divestiture to a VC firm. It took about four years to complete. They were a bit difficult, but we got rid of the services side of our business and focused on our technology side of the business, which we’re focusing, trying to focus more on document imaging, which was really taking off at the time. And some of my first acquisitions were in and around the document imaging play at the time.
Today, we’re trying to realign ourself once again and actually trying to get the word imaging out of our descriptions. That’s sort of an interesting inflection point for us.
Evelyn: Interesting. So Jack, tell us a little bit about your first deal, which we kind of are calling a joint venture, which was ImageFX, Image Software Solutions and Rivet Software forming a separate company called Pegasus Software. How did you actually identify those people? I understand you were trying to pivot and grow the technology piece of the business, but tell us a little bit about the progression there that led to forming that JV.
Jack: Sure. Part of the reason we formed the JV was because we had venture funding at the time and it was making everything on a corporate level very difficult to do because we were trying to back away from the VC money, and at the same time we were trying to grow the technology side of our business. Those three companies had what was called software development toolkits, and many of their products already used lower-level technology that Pegasus offered. So what we saw was an opportunity to move higher up the food chain, to have more products to sell to more people.
They were small, underfunded organizations and I felt like, and has proved to be the case, that by combining it into a larger entity we would have more market clout and we could try to build a better business and a faster growing business, and a more profitable business under the same roof. Then after we did finally split off the services business, got the ownership of the VC out of Pegasus Imaging Corporation, we then merged in Pegasus Software, and that was really a two-step acquisition. One was forming the JV and then secondly, then merging it into the parent corp by 2001, I believe.
Evelyn: Tell us a little bit about Pegasus Software, because I know from working with you during that time that there were some major challenges that you faced from that combination. What do you think your learning was from that experience?
Jack: Well, the biggest thing there was having four entrepreneurs trying to run the business at the same time and only … I learned something. I took into all my future acquisitions that you announce who the new sheriff is, and the new sheriff is the new sheriff. As you’re well aware, we went through a couple years of pain of trying to compromise between various owners of small companies involved in a JV. Ultimately, all of the employees of all three of those companies had to be let go. It was not a fun process. It was a difficult time. We were, of course, underfunded in the process.
Not only did we have to replace what they were doing on the business side, but we had to replace what they were doing on the technology side, which meant bringing in and training and learning source code. So there were a lot of lessons learned there. The first lesson that everyone should take away from this broadcast is don’t go into any venture completely underfunded and on basically a shoestring budget. That was where we were forced to be and it worked out okay, but it could’ve certainly not worked out okay.
John: Did you foresee any of those issues at the time that you entered into the transaction?
Jack: No. I mean naïveté, or blinders, or I tend to see the good side of folks, and boy, I saw some darker underbelly. In the middle of that process, as we spun off the services side, which was three quarters of our business, it was the bulk of our business, and we lost our venture funding at the time, we went through a pretty cash-strapped period of time. This was ’99, 2000, 2001, and in the midst of that we went into a recession in the United States, just to make things more fun.
In 2000, we actually were approached, this was the other side of a deal, we were approached to be acquired. That complicated things a great deal because the other partners involved in this JV saw the money on the table, which was all stock, but they weren’t doing that math, and they started counting how many cars they could buy and what they could do with the money, and it was riches beyond their wildest dreams. When that deal went south, I want to say early 2001, the company that was trying to acquire us, their stock was plummeting and when, with your help Evelyn, we basically said we needed more guarantees. We needed more cash on the table. We needed some protection for our shareholders. The deal fell apart and at that point in time the anger really flared up between myself and my partners.
The lesson there is make sure that the power structure’s more delineated. I was the largest shareholder, but I had, you know, lawyers had to be involved and we had to extricate ourself from the relationship and then merge that joint venture into Pegasus Imaging, which the lesson there I took forward in the next one. When I went into it TMSSequoia in 2004, my first announcement was, “Like it or not, we’re in charge, and I’m the boss.” That was a lesson that I learned and I’ve retained.
John: The acquisition of Pegasus Software, was that a cashless transaction on that or was there money involved in-
Jack: There was a little bit of debt. The owners of the three companies basically got paid out. It’s an embarrassingly small amount, looking at the value that we are today, but that was their choice, not my choice. I think about my original partners who didn’t us like pivoting, and then of course them … We’ve had people along the way that wanted to go in different directions than I have, and you can only go in one direction. So far, we’ve either been lucky or fortunate. There was a small amount of cash paid out as debt, and that was the end of that deal.
John: Then it looks like in 2004, as you just mentioned, you ended up acquiring TMSSequoia. Was that your first, I guess, acquisition with cash at that point?
Jack: Yes. Yes. That was one of the scariest things I ever did in my life, and in retrospect it was one of the smartest things I ever did in my life. But at the time, we were about a four and a half million dollar company. We were buying about a two and a half million dollar company. The amount of money just seemed like where was it going to come from, and we knew it was a smart deal. We looked at it six ways from Sunday, and Evelyn and her team had looked at it, and consultants had looked at it and it still scared the absolute bejesus out of me.
But they were a public company. It was interesting, because they were a merger gone bad. The TMS and Sequoia were Sequoia Data Systems merging with TMS, and it was San Diego, California merging with Stillwater, Oklahoma. And at the end of the day, they went through five presidents in six years, and took their top line from I think eight or $9 million down to two and a half. And the nice thing about them being public is that all their dirty laundry was out there to look at, so it made negotiation for us fairly easy.
Jack: They couldn’t hide their problems. And they had a great customer base. They actually had all the things we typically look for. They had great products. They had great customers, and they had some pretty good engineers. Matter of fact, their lead engineer is still my lead engineer, whatever that is, 14 years later. We moved him to Tampa and he’s still here.
John: So what was it that made you so confident? I mean, you just named some really great things, but also at the same time, they’d had a history that was very public, and it obviously was going down. I mean what convinced you that you could really make a success out of this acquisition?
Jack: Well, I guess the same exact thing that you got to be careful of, which is cockiness or ego. I just believe they were so poorly managed, going through so many CEOs. The CEO at the time we acquired was, they had promoted their CFO solely for the purpose of selling the company. They just could not get their act together. It was funny, in the months after acquisition we would call some of their customers and they would say, “Gosh. We were wondering when you were going to call. We need to place more orders.” That sort of took the pressure off.
As a matter of fact, on that deal, I wish I’d done more of them because the closing took place in Stillwater, Oklahoma in December of 2004 after their shareholder vote was finally in. We actually took over their bank account and wrote the first deposit on the purchase out of their bank account-
Evelyn: Out of their bank.
Jack: … back to their shareholders, so it turned out to be a pretty nice deal.
Evelyn: That was pretty brilliant, Jack. You were using their money to basically buy them. It was very cool.
Jack: I’ve never seen anything like that, because normally you buy a company and they take all the assets that are liquid out of a company you’re buying. You’re buying an intellectual property and you’re buying rent and leases and other contracts, but this was a situation, to sell it to their shareholders, which were just diverse and everywhere with nobody owning very much percentage. They had to come up with the highest valuation possible, so we bought cash dollar for dollar. We bought rents dollar for dollar. We bought management guarantees dollar for dollar. And then of course, the second we bought them, we negotiated ourselves out of leases and out of management guarantees and never had to pay out on most of those things. So that was, I had some brilliant help in Mr. McKeon on that one, too. I’m not taking full credit for that.
And the thing you’ve got to be worried about, that almost endangered my next acquisition because I felt like I had become a genius, and you have to be careful about that. But that turned out to be a really great acquisition and we went from four and a half million to, less than two years later, we were a $10 million organization.
Evelyn: That’s excellent. Talk to us a little bit about the Accusoft Corporation acquisition, because that was another one that you kind of went down a path, and that was kind of swallowing a pretty big fish there.
Jack: That was. That was, my timing was impeccable on that one as well. If anybody remembers what was going on, our original closing date was September 2008, and bankers were jumping out of windows in New York at the time. So it was right during the crash. We had lined up lines of credit to do the acquisition. We had signed, you know, everything was signed, sealed and delivered in August with our bank, and then they just yanked the line in September and we sat there scratching our heads. TMSSequoia was really about market share for us and expanding into the document imaging market. Accusoft was our first hints of trying to not only do market share and market clout, of course, they were at one time the largest document imaging toolkit provider out there. They had also had some rough patches and we had grown to be larger than them, but we saw this as the way to be a dominant market share provider in this space. But we also saw some other things there.
But they had a CEO that was a little bit better negotiator than the TMSSequoia folks. So we just went back to him. This was a just under $10 million purchase. They were just under a $5 million top line company. It was an expensive acquisition from our standpoint, perhaps not from a VC standpoint. From our standpoint it was expensive, and we just went back and we said, “Look, our financing’s yanked. If you want to close this thing, you’re going to finance it yourself.” So we borrowed a little bit against buildings and we took some of our own cash, but most of it was owner financing.
Evelyn: Yes. That did work out pretty well, once the-
Jack: And we paid him back. We paid him back early-
Jack: He, luckily we built up trust over the years in each other because you typically aren’t going to get owner earn-out or owner financing in the multiple millions in a transaction like that. But there was no money to be had in late 2008.
Evelyn: Yes, and he was ready to sell.
Jack: He was.
Evelyn: I’ve always been impressed with that aspect of you, Jack, the fact that you hate debt, and so even if someone else is financing it for you, you pay them early.
Jack: Yes. I do. I don’t like debt.
Evelyn: Accusoft Corporation, that ended up being a good purchase for you, too. Yes?
Jack: Yes, a little bit more difficult than TMSSequoia. We weren’t quite the geniuses that we thought we were. We had some … The original project manager that we put in to get the transition going, they were in Boston, Massachusetts and we were going to maintain the office there, at least for some period of time, and we put a project man in charge of getting communications and IT infrastructure and everything going. We also were going to retain the sales staff.
We have a policy here of not letting people go between Thanksgiving and Christmas. We just do, and that also happened in early December, so we decided we’d give some of their staff an opportunity to succeed. The first week of January, I flew my VP of sales up there and he basically fired most of the office except the engineers. It just wasn’t working out at all. I mean it was all about, “We still want to do it the way we used to do it.” and again, new sheriff in town. I was never going to make that mistake again. So, we gave people some nice exit packages and decided to move on, and we’ve ultimately, just recently, closed the office up there. We have a couple of employees in Boston that are legacy employees that work out of their homes, but I’m not a big fan of remote offices, either. In a smaller company, people working together is really important.
Evelyn: Right. Yes.
Jack: But yes, we grew, we took their over-bloated topline that they fibbed a little bit about and we moved ourself up to about 16 or 17 million pretty quick after that.
John: Actually now, you are Accusoft Pegasus. You eventually rebranded on that. Was there any thoughts about just keeping it as Pegasus Imaging Company, or you were ready for a change?
Jack: Well, I was very ready for a change. As I mentioned, two of my original four partners were gone within 18 months, and one of those partners was the one that came up with the name Pegasus, so I’ve never liked the name. And also, we had spun off the services company, which at the time was known as Pegasus TransTech, and is Pegasus’ contact lenses and Pegasus’ faucets, and Pegasus’ racing yachts, and you couldn’t get pegasus.com because that’s owned by the Sun Software folks and their sailboats. Yes, I was very ready, and Accusoft is just a better name. When we put Pegasus Imaging Corporation on our building out here in Tampa, I think people thought we were like an MRI facility or something.
I like the name better. It’s earlier in the alphabet. We had the .com. We had better trademark protection. We went to the ATT Cingular hyphenated thing for a couple of years and then we rebranded as Accusoft Corporation a couple of years later, so maybe 2011 I’d guess.
Evelyn: Accusoft Corporation didn’t really make you slow down at all when it came to acquisitions. Right? The next year, you acquired Tasman software.
Jack: Right. That’s a funny story, if you don’t mind me telling it.
Evelyn: Yes. I’d love it.
Jack: They had good technology. This was a three horse operation out of the UK with one really good developer, and really almost a hobbyist. But what we found out, and the reason for this acquisition is we were getting undercut in the market. They did barcode technology. We got very large contracts in the area of reading and writing all types of barcodes. It’s used very heavily in the imaging world as well as in the US Post Office and postal services around the world, so we have some large contracts there and we found we were being undercut by one of our competitors in the market space. When we started doing research, we found that he’d done a sweetheart deal with Tasman Software to use his pretty good code base of barcode technology.
The gentleman from the UK that owned Tasman was more of a technologist than he was a businessman, and he had done a fairly lousy job of protecting his IP, and he certainly had given away a sweetheart deal to our competitor. So we bought them out of spite. I basically acquired them and then canceled the contract immediately with our competitor, and that helped us both from a pricing standpoint in the marketplace, and it certainly ticked off my competitor a good deal as well, which was worth some amount of money to me. But the other thing, it turned out he did have some code in Java and some other places, and he had some algorithm improvements that we were able to incorporate, so we still use pieces and parts of that technology.
He did not stay on. We kept him on a one-year consulting agreement after we purchased them. It was a small acquisition. I want to say it was less than a million dollars, but the real reason I wanted to do it was to stop the competitiveness of his software in the market space and certainly hurt my competitor. But as it turned out, we also got some intellectual property as well.
Evelyn: That was really good. That was great strategy. Right?
Jack: It was fun.
Evelyn: Yes. Really cool.
John: Then after that, in 2011 you ended up acquiring Adeptol.
Jack: Right, and that’s a market shift play. I mean the others were about building more document imaging tools and getting more of a customer base and larger market share in document imaging, especially. Adeptol was a small outfit in Silicon Valley, which made their price little bit higher, with a very savvy owner and a savvy negotiator. My first several calls with him, I think I came back to my board here and I said, “There’s no way in hell we’re ever going to do business with this guy.”
But we wanted to get into the client-side document viewing, document manipulation space. Everything we did was more server-side, and he at the time had something that was close to what we wanted to build. So we saw it as a way to get to a market that we wanted to achieve faster, and we thought less expensively. I’m still not sure about that. We ultimately came to about a $5 million purchase on about $2 million top line sales that he had. And he actually stayed on for a little while, but we had to basically … The code was, let’s just say, less than commercial grade, and we had quite an effort over the next few years of hardening that code and rewriting that code, and bringing it up to standards that were supportable to our customer base.
We did land some great customers early on, and because of the code base perhaps, we ended up losing some of these great customers early on. But we’ve been able to build a reasonable business. We were able to be Yahoo’s viewer for a couple years with that code base, and of course they were acquired by AOL and kicked us out. But there were some fun projects there. Now it is, after some ebbs and flows, it’s got a pretty good growth rate, and we’re pretty pleased. So yes, the ROI was a little bit slower than we-
Jack: … had wanted to see coming from that, but the business there is north of five million, closing in on six million a year with a pretty decent growth curve. The problem for Accusoft today is a lot of our older toolkits, our legacy products, and growth rate there is single digit. One of the things we’re looking for in acquisition is not only new markets for existing products, but some new products and new markets to give us some growth opportunities, and that’s the reason we acquired Adeptol.
Evelyn: Interesting. How about edocr? Because I think John and I were both surprised that that company was even of interest to you. Tell us a little bit about that.
Jack: Okay. And you know, that’s another fun acquisition. It was not a lot of money. It was really bought as a proving ground of that Adeptol product, which we call PrizmDoc today. Edocr is a document sharing site, like a Scribd or a SlideShare, Speaker Deck. There’s a bunch of them out there. The big one used to be Docstoc and then Intuit shut them down a couple years ago. We never purchased that with the notion of it was going to be a topline contributor. We purchased them basically to prove out our technology from the standpoint of handling. I think right now that product, it’s an online service, they see 15, 16,000 page views a day, and it’s also to work on our scaling. We’ve built in some of the search capabilities. It’s basically a demo and proving ground for a lot of our-
Evelyn: Technology products. Yes.
Jack: … client-side technology. We’re actually going to be adding a free eSig, an eFill, because eForms is kind of where we’re moving right now. So we’re going to be adding some eFill and eSign free capabilities to edocr, again, as a proving ground.
Jack: I think that was under a half a million dollar purchase. I don’t think that was much at all.
Evelyn: Yes. It was small.
John: You know what I find really interesting about a lot of these transactions is normally when you hear about companies acquiring other companies, it’s large public companies who want to buy other companies because they cannot develop within. You actually have the ability to develop inside, and you said that speed was one of the reasons that you wanted to do this. I mean, do you think enough companies, privately held companies, should they be acquiring more instead of always trying to develop it in-house?
Jack: Not invented here is a horrible thing for software companies, probably for all companies, but I can only speak for software companies. That make/buy decision, if you ever ask your engineers, they’re always going to say make. I’ve never met an engineer yet that liked code from any other engineer. And that’s okay, but that’s not good business. When I looked at the business plan to build what Adeptol had, and remember that usually things take twice as long as what’s originally estimated, we were talking three, four years, which may have turned into five or six years. This market doesn’t wait that long. That would’ve taken us, today, we could not be launching this product today and expect to have any sort of traction in the market space.
Evelyn: It’s too late.
Jack: Yes. I have excellent advisors that are technical. You have to have good technical advisors, but you, if something comes from accounting or something comes from sales or something comes from your technical side, remember the biases that are just natural from those sides of the businesses and then hopefully make a more reasoned decision about the make versus buy decision. But yes, first of all, there’s never enough engineers to build everything you want to build, and the time frame, if you can buy an existing code base that works, with existing customers, and you can do it for the right price and with enough of the people there to continue to maintain that product, it ought to be a no-brainer.
Evelyn: So Jack, tell us a little bit about the three deals that never closed. There was one in 2007, another in 2015, and then actually just this year. What do you think is the most important element that came out of those experiences?
Jack: Well, one I think I dodged some bullets there, not because I was smart, but because I got lucky. I’ll start with the beginning. Daeja, we actually had a handshake deal in our … He was also a UK company. Again, we were looking client-side code at the time. This was pre-Accusoft and pre-Adeptol, but we were already starting to look at the client side.And they had a Java document imaging code base used very heavily by IBM and some other large companies out there, and he wanted out. We had a handshake deal, and on the flight back to the UK he changed his mind and decided it wasn’t enough money, and we decided to call off our discussion. And I think a year or two later he sold to IBM and actually did make a bit more money, so it was a win-win for everybody.
Evelyn: Then in 2015 there was another deal that you were unable to close.
Jack: The issue there was not dissimilar to the Pegasus Software issue of the owners that were just smarter than I was, and trying to get to a … We actually were in the same ballpark from a valuation standpoint, but they wanted all the cash up front and basically nothing in arrears, as they showed us the spreadsheet with a graph that was going straight up.
Evelyn: Yes. My recollection is they had terrible books.
Jack: Well, and it’s funny because if you look, several of the projects that were going to make them a zillion dollars, don’t quote me on that, did not pan out and they’ve been dropped from their website, and it’s clear from their headcount they have not grown to the numbers … Going to one million is really hard. Going from one million to two million is easier, but as that denominator starts getting larger, it’s hard to keep a growth rate. And they felt like just because they had grown very rapidly, as we did, to $5 million they would achieve that same growth rate to 10 and to 20 and beyond and history would belie that a little bit.
The last one, just recently, was really a deal that went south because their books weren’t in order at all. As we tried to put more, or you did, tried to put more and more protection around, “Wait a minute. You’re not paying all the taxes you should be paying and you’re trying to classify some of these dollars in ways that we’re not sure the IRS would agree with.” we finally just had to walk away from the deal. I don’t think it was out-and-out dishonesty but it sure was shady enough that I’m glad we walked away. And I have not checked back to see how they’re doing, but hopefully the next one that we find will be a little bit cleaner deal than that.
Evelyn: Jack, how are you finding most of the deals? I know when it came to Tasman you said it was clear that you were being affected by the fact that they had done this deal, but the others are you’re just aware that they’re out there, or do you have someone who’s focused on this?
Jack: No. My product managers are all supposed to be keeping up with competitive research. It was one of my product managers that brought Adeptol to us when he was sitting in a meeting discussing how long it was going to take to build a product, and he raised his hand and said, “Hey. I think there’s somebody out there that already has this, or something close.” That’s how that one came about. I certainly knew of most … Matter of fact, TMSSequoia, when we were going through our bad period in ’99 to 2001, I saw them as an opportunity for us to sell to them, and little did I know that they were tailspinning much worse than we were until later. Then as I started looking at their books in 2002 and 2003, I realized, whoops.
So yes. We’re just tuned into the market. Different sized companies have different reasons for acquisitions. We were at under $25 million topline. We’re a hundred and, I don’t know, 60 people give or take. We don’t have deep pockets. I don’t like debt, but I like equity even worse because I just, I’m a control freak I guess, and I want to make sure the ownership is clean, and no one outside of this company owns one share. When people leave us, we take their shares back either by purchase or other means, so we want to make sure that any deal we go into has those three pieces that fit in. They have customers we can sell our products to. They have products that we can sell to our customers, and they have people to maintain those products.
If we can hit all those things and then we can get something in that sweet spot around two and a half times top line, we’d like it a little bit south of that but the market valuations have crept up. Matter of fact, they’ve crept up over three now, which is why we’re not as able as we’d want to to acquire. But we look at three times top line is greater than three year payback, and that makes us, that starts making us nervous. When you are a public company buying with printed pieces of paper, it’s easier to pay more. If you are a VC company with deep, deep pockets and you’re going to do some roll ups and you can get accretive value that way, but we’re operators. We’re not investing. We want to operate the business and we want the business to seamlessly integrate into our accounting, and into our support, and into our sales operation.
Evelyn: I think that makes perfect sense. It’s really good. How do you prepare your own people for when you’re about to undertake an acquisition or you’ve completed it so the employees, your management team, your executives, everyone just completely embraces? How do you mobilize to make sure that you are integrating these new people into your company and your culture, and have you done that systematically? How’s that worked?
Jack: Yes, well I don’t know that we have it written down as a policy and procedure, but it’s an ever-widening circle. It starts out as just my senior staff discussing it, usually VP of product, my chief of staff, Jim, and myself, and then it might widen as we do more diligence. But it’s really a need-to-know basis upfront because we probably signed nondisclosures, for one thing, and we certainly don’t want to tip our hand, but if we are closing in, and all the sudden there’s going to be strange people showing up at the office, we start disclosing to our employees what we’re planning to do.
So far, in all of the acquisitions, none of the employees of the companies we acquired had any clue they were getting bought, when we walked in there. I mean they’d just been told maybe that day or the day before, which was kind of spooky. But we don’t like to have secrets here. We’re a small company and it’s hard to keep secrets. It’s usually an ever-widening, you’re talking about, “Okay, how do we successfully integrate these products into our sales model, and what customers, and we’re doing those kinds of plans, and how do we support their product?”
But the other thing that’s really sort of critical in our situation, we’ve rarely kept anyone other than technical people. I have an aversion to having remote offices and remote personnel, even though we do have some, so we moved one accounting person down to Tampa from Stillwater, Oklahoma after that purchase and then she decided to get married and move back to Kansas. But the technical folks that we do try to move, we have offered to some people to come to Tampa and they’ve turned us down, but we’re not interested … We certainly did not want to have an office in Stillwater, Oklahoma. We got out of that as quickly as we possibly could.
They also had an adjunct office in Tulsa, which I negotiated my way out of pretty quickly as well. Accusoft, it was owned by the owners so one of the things we had to do was stay there for some period of time. But then we moved to a less expensive nearby space for some period of time, and then as that sort of worked out for us less and less, and his people sort of, the count, employee count there went down, we just made the decision not to try to staff that office and let it go.
We’re very careful. I think we typically know going in before we do the deal who we have to keep, who just is essential, and if we don’t get them signed up and onboard for transitioning with us through some sort of stay agreement, we just won’t do the deal.
Evelyn: Then you won’t do it.
Jack: Usually, that’s the chief architect of the software or some of the key coders that wrote the code. There’s nothing worse than getting a code base and nobody’s looked at it.
Evelyn: Right. Yes. Absolutely. Absolutely.
John: Well Jack, this has been wonderful. I mean it’s been great. I’ve been around for some of the transactions, but not all of them, so it was great to hear the whole history of how this has come about, and I think it’s … You’ve obviously done a fantastic job, so thank you for joining us on the show.
Evelyn: Yes, and I think it’s scary that I’ve been around for all of the transactions.
Jack: I was just getting ready to say. I was going to throw out an unsolicited shameless plug, because it is paramount. The one thing we haven’t talked about is professional advising. One theme that, the reason that this has gone right both in our deals that haven’t happened and deals that could’ve really gone very bad, and deals that have gone very, very well, the one theme there is Evelyn has basically taken care and watched my back on each one of those. And that’s really important to have the right to counsel, both business counsel and legal counsel, and for people that are listening that don’t know you, but they have representation as good as you, that’s great, but do not go into this thinking that it’s a simple process. Even the smallest deal is very complicated.
Evelyn: Thanks, Jack.
Jack: Well, you’re welcome-
John: I guess
Jack: … and I really enjoyed this.
Evelyn: We’ve really enjoyed it. This has been really good.
John: If anybody would like to know more about Accusoft, please visit accusoft.com. And Jack, I appreciate you joining us for the show.
Jack: Well, thanks for having me.
Evelyn: Thanks, Jack.
Jack: All right. Bye-bye.
Speaker 1: This has been In Process: Conversations About Business in the 21st Century with Evelyn Ashley and John Monahon, presented by Trusted Counsel, a corporate and intellectual property law firm. Are you interested in being a guest on our show? Email our show producers at firstname.lastname@example.org. For more information on Trusted Counsel, please visit trusted-counsel.com.