November 1, 2018
ServiceCentral Technologies, Inc’s. - Growth Through Acquisition
Steve Teel, President and CEO
(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.
John: Welcome to In Process. I'm John Monahon.
Evelyn: And I'm Evelyn Ashley.
John: And we are with Trusted Counsel. Today we're talking about growth through acquisition. So this is an interesting topic for a lot of our clients, particularly we're focusing on privately held companies that are trying to grow through acquisition. So they've made a decision, either strategic or otherwise, where they find a company that they would like to acquire, and there's different considerations I think when you are a privately held company than when you are a public one. So we're talking to CEOs and seeing what went into their thought process.
John: Today we have Steve Teel, the CEO of ServiceCentral. ServiceCentral is located here in Atlanta and was founded in 1991. They focus on service management and repair software. They particularly have deep experience in the telecom, cellular, wireless, cable, and consumer electronic industry. So, Steve, welcome to the show.
Steve Teel: Thank you for having me. It's a pleasure to be here.
John: Absolutely. Now, can you give the listeners a little bit of background, your personal background, and also the history of ServiceCentral?
Steve Teel: Sure. Personally I've been in the IT business for about 25 years. I started my career as a software developer and kind of went from that into a more of a general management track, and that track took me into the wireless industry. Through the years with the wireless industry because of its requirement to have consumers with a working device in order to them their subscribed services, taking care of those devices has always been a real key issue for the industry. How do you make sure that the customer's devices are working? When it's not working, how do you service it very quickly? So a lot of my career has been spent around that space. How do you make sure what's called aftermarket services and support is very efficient. So from an IT background, I moved into operations management around that space.
Steve Teel: Joining ServiceCentral in the early 2000's, which was a company at that time focused on mostly backend repair depot activities. So we had a software product that was a pretty generic software package back then that companies used to manage large buy ins of returns coming to a centralized facility. They would receive those devices and they would go through them, decide they're no good. So let's throw that away. This unit can be repaired. Get it repaired. But over the years, as products become more and more expensive, now we got a $1500 iPhone coming out, right? So we get more and more attention on how do I take care of that consumer's device and keep him in that single device versus historically it used to be a trade out model. Give me your bad device, I'll give you a refurbished one or take yours and get it repaired.
Steve Teel: So ServiceCentral over the past 10 years has really started focusing more on how do you make the customer experience side of service management efficient. How do you make that an experience that the consumer remembers to keep them loyal to that brand. Apple's done a great job with their products and their supports of making service operations a part of their offering. That's right. You got the Apple ecosystem, right? They're going to take care of you. So more and more companies are looking at that.
Steve Teel: So ServiceCentral over the past 10 years, we've started providing our product in a more customizable, configurable platform that allows companies to build the systems and the processes to match how they want to service their customers. So it's still over the 10 year period a lot of that activity happened in centralized repair depots. So they would take the product, typically in at a retail store, box it up, ship it off to a repair center. So those repair centers who are using our product, they receive the product. They take it through a work flow process, which at it's root that's what ServiceCentral is a workflow management solution geared towards product solutions. So they would manage those repair processes, and then take the product and either redistribute it back to the retail channels or put it in inventory for future deployment.
Steve Teel: What we've done over the past three years is start focusing more on the consumer aspect, as we talked earlier, that companies are wanting to get same day, same unit repair. And that doesn't really fit a centralized model very well because you got transportation, logistics, you got time it takes to get the product back. So that's what we've been focused very heavily on for the past three years.
Evelyn: So, Steve, what is it that as part of kind of running ServiceCentral, what made you decide and make the recommendation to your board and shareholders, because we know you do have external shareholders in the company, to do the acquisitions that you have? What was your thinking there?
Steve Teel: Well, we were kind of on a build versus buy analysis following that track of wanting to take service to consumers, consumers are looking for convenience, they're looking for same day service, and that's typically done, and you guys have probably seen around Atlanta, there's a number of retail repair shops that you can walk in, take your broken iPhone, take your broken Android product, and they'll replace the screen for you same day. And that industry kind of started as a mom and pop industry really doing unauthorized, out of warranty repair on people's units. The manufacturers would not authorize that repair. They wouldn't like that repair because they've got untrained, uncertified technicians opening the devices. But what we started seeing is that the industry was starting to look into this because it was growing very rapidly. Started seeing consolidation. So the mom and pops were being consolidated. You have some very large brands that are in the hundreds of locations now, if not thousands. Companies like You Break, I Fix, Cell Phone Repair, Experimac, companies like that you see around town. So the industry has sort of turned its attention this might be a viable option for us to direct our consumers to.
So we were rapidly trying to figure out how do we change our application to support that retail walk in traffic. We've always been able to transact the repair activity, but in a retail environment, you got point of sales, you got inventory management, you got appointment scheduling, you've got a whole bunch of things that our core application didn't have. So we started looking at let's build that, but at the same time we met other companies, RepairQB and One that had a product that fit very well that was doing very well in the industry. So we started forming a relationship with those guys, and got to the point says, you know what, we can acquire this platform and propel us in this search to service that market versus building it.
Evelyn: Building it yourself.
Steve Teel: And you got to go through the analysis. What's the cost to build versus cost of acquisition, but it's more than that. It's what's the cost to acquire the customer base? What's the cost to require the name recognition? So we factored all those in. It was really a no brainer. This was a great vehicle for us to get into that space to bring our what we call the service authorizes, those who own the obligation to provide the warranty repair, typically your OEMs or your wireless carriers. Put them in a connected environment with those who can actually provide the service. So it was a great fit for us.
Evelyn: Talk to us a little bit about, because we know that there was a relationship there before you actually even offered to make an acquisition of RepairQ. So tell us a little bit about that relationship and why ultimately the acquisition seemed to be more appropriate.
Steve Teel: Yes. That makes sense. So, as I said, we started with Jeff and James who were the founders of RepairQ. We started with them building a joint venture, if you will. More of a ...
Steve Teel: Yes, strategic relationship. Thank you. That we would integrate the products. We would just reference customers to their product through an integration to Service Manager, which is our core product. We would allow that data to transfer back and forth. But as we started to build that out, then you start get into what's the revenue share model? Who owns the customer? How do you sell this to the marketplace when you're two different companies? We just worked with the guys. It was a great relationship. We just realized putting this together makes a lot more sense than trying to divide the pie, right? And what it does, it also allowed us to both leverage our respected employees.
Steve Teel: Yes. Back off of services, we're able to combine some of those and gain some efficiencies there. We had some things that we did that they outsource. They had a very strong marketing team. We actually always outsource ad marketing. So we were able to leverage their marketing across our organization. So it was really, I hate the analogy, but it was a one plus one equals three type acquisition for us.
John: Yes, the second you told us about the deal, it made perfect sense. I thought it really closed a loop for y'all from a business standpoint. I mean, it really was immediately likable. You can see the value.
Evelyn: It did.
John: Now, who had to approach who though? Someone has to start this conversation in the room. I mean, who brought it up first?
Steve Teel: Good question. So I was in Las Vegas at an industry convention, the same convention the prior year where we first met, and I saw that they were attending. I introduced myself. I wanted to find out more about their product and who they were. From that first year we started talking about working together, just where there's a good business opportunity to maybe go after some common customers or, as I said, bring their customers to our customers. That made sense and we started doing those discussions over the year. When we got back together the next year at this convention, it's when I first said, wouldn't it be easier if we just put these companies together. They were out looking to raise capital. We had some good capital in our bank. So we were able to fund their needs, if you will, for their growth. So it was us approaching them and saying, I think this makes more sense than trying to figure out the joint venture.
John: Did they take you seriously? Or did they think you were just sort of throwing that out hypothetically?
Steve Teel: No, I think it was a serious consideration. I mean, it's like one of those when you're dating, it just feels right.
John: Mm-hmm (affirmative).
Steve Teel: This just felt right, and I think they agreed too. Where we had shortcomings in some of our organization and we felt they could fill, they saw the same coming the other way. Jeff and James and Greg, who is the third partner, they're all very young. This was their baby. They incubated it. It was doing very well. It was growing very well. It had a lot of industry recognition. But it was growing beyond the capability of funding the growth. So they needed to raise money. But they had a lot of questions. All right. If we put these together, what's our role? Right? That's always a company being acquired, what's my role in the new organization. So we talked through that. That was a big part of the discussion. We had great roles for what their strengths were. So we said we can slide you into these roles. That clicked with them. That sounded good to them. We had people on our side we would have to move around too. As our business is growing, it made sense to start putting our people into more specialized salads as well.
John: Mm-hmm (affirmative).
Evelyn: Okay. So you say let's do this. They say, okay, lets. What are your thoughts on kind of what happened next? What surprised you about it? What drove you insane?
Steve Teel: Besides the legal.
Evelyn: Because I know that that happened.
Steve Teel: Besides the legal aspects.
Evelyn: Tax. That was tax.
Steve Teel: Tax. Okay.
Steve Teel: The evaluations, the first key thing, right? How do you get evaluation that both sides are satisfied with. Evaluations going to go both ways because on one hand, what do we think they're worth. In type deal we did, we got to say what are we worth and how do you come up with a common evaluation. I think we got through that fairly easily. We solicit some outside opinions on how to do a mutual evaluations that made sense. Then it's how do you do the compensation. How much is cash, how much is stock, how much is other considerations. And that went pretty well. I think we spent about three months on that topic, back and forth and some challenges here and there. But the most difficult part was the structure because of the way they were organized. You're involved in this. The way they were organized kind of forced us to not do so much as a straight merger, straight acquisition, but we had to do a fairly complex merger and reorganization of both companies in order to make it work.
Evelyn: And for a small company, it seemed quite odd.
Steve Teel: Right.
Evelyn: While we were going through it.
Steve Teel: Yes, I kind of told the story that about the same time we announced our deal, Amazon announced their deal to buy Whole Foods. They closed it a lot quicker than we did.
Evelyn: Well, they had fewer founders involved.
Steve Teel: Yes, perhaps.
Evelyn: So how has it gone? You're on the other side of it about a year.
Steve Teel: So we are actually one year ago this week that we closed the transaction, and I think it's actually, honestly, it's been beyond our best case scenario. I mean, in addition to being a great culture fit, and we'll talk about culture in a minute because I think it's a good topic as well. But the teams work very good together. The products are complimenting each other extremely well in the marketplace. Each product siloed, and again the two products being Service Manager, which is our historical product for ServiceCentral, and RepairQ, which was Brickwaters product. The combination has helped each gain better awareness in the marketplace and how we can work together on this concept that we brought the companies under, which is providing that end to end service management solution, what we call service network. We're getting a lot traction in the industry that I don't think we would've had had we not, on the other side, had we not done the deal.
John: Tell us a little bit about culture because you didn't make anyone move to Atlanta, right? Or didn't request them to. They still work. Tell us where they're working and how you manage first that.
Steve Teel: Yes. RepairQ is based out of Tulsa, Oklahoma, but a number of their team members had moved and set up shop in Bend, Oregon, just personal preference. They wanted to get out of Oklahoma. Bend is a beautiful area. So they migrated to Bend. So we have an office there with about 10, six people growing to 10, and then Tulsa has about 15 people in it, which was their headquarters. So you're right, we didn't ask anyone to move. One person moved from Tulsa back out to Bend. So we kept the teams where they were kept most people for the most part in their same jobs. The culture differences is kind of interesting. They were a much younger organization than we are. We've been in business for 25 years. Some of our employees including myself had been there for 10 to 15 years. So we had a much more mature organization, and they were your classic young startup, millennials working in a warehouse in open desk space. So very different cultures from that standpoint. We're in a galleria, they're in a warehouse.
So we recognized that the culture and challenges where going to be there, and so we formed a team. We call it the culture team, and they work together. We do contests. We do a lot of webinars where we bring the teams together. We match employees from one department to another department. So we have teams kind of co-mingled, and we've gone through about three or four different teaming trips where we bring their people here or we send some of our people to Tulsa. So we really try to focus on making sure we feel like one company. Frankly, there's still a lot of product identification. I work with the RepairQ product. I work for the Service Manager product. But they all work for ServiceCentral, and that's coming along easier than I thought it would be because I thought that would be one of our bigger challenges.
John: Did it bring a little shot in the arm to ServiceCentral with the younger people coming in?
Steve Teel: Yes, it did. I mean, we now have a cereal bar in our office at Galleria. We didn't have one before.
John: I'll have to go check it out.
Steve Teel: Yes. We serve breakfast there now, which we didn't do before. So things like that. Yes, I think it's been a good shot in the arm. I think the energy that RepairQ had, their employees were ... Not to take away from ServiceCentral employees or service managers side, but been working on the product for 10 years, we got a new group that's been working on the product for about three years. We just had a certain different energy about it.
Evelyn: That's nice.
Steve Teel: Yes. We were able to leverage that.
Evelyn: Opens up the opportunities for the future.
Steve Teel: Sure.
Evelyn: Is part of doing the deal, because you were acquiring employees over at RepairQ, did everyone know that the deal was happening from the RepairQ side?
Steve Teel: No. We disclosed it to the management team obviously who are involved in doing the due diligence and kind of looking at how we'd bring the organizations. We spent about three months prior to closing kind of creating our task list. What do we need to do from merging accounting to combining common vendors? We use Salesforce. They were using a product called Up Spot. Which platform are we going to use? What about healthcare? Healthcare was a big one, right? So we've traditionally had very good healthcare plans. So that was a really big benefit for the RepairQ side is that they picked up much better healthcare plan. But Yes, we disclosed it to the employees, and I think, frankly, the employees kind of sensed it because we had started down that path of working together in an integrated platform and people just started seeing we were doing a lot more than that. So people kind of figured it out. But we did a formal announcement about first of August, and we closed in October.
Evelyn: So did you lose anyone in that process?
Steve Teel: No. Didn't. I think people, again, were energized by the whole aspect.
John: Was that something that was important to everybody in the deal or was that a consideration?
Steve Teel: Yes. It was very important to RepairQ. Jeff, James and Greg, they wanted to make sure that the employees were protected. I mean, they were in a growth curve. I mean, they handed me a list and said these are the people we need to hire. So it wasn't so much just bring people, it's also and we need to bring these additional people on board with us. As I told you, they were looking to raise money for their growth. So they had already started down the path of identifying people to bring on board.
John: Once you acquired them, how did you announce it to the market? What was the next step? I mean, did you have a plan in place?
Steve Teel: We did. So we did a bit of PR around it. We did email all of our customers and their customers directly and announced the merger and what that was going to do to benefit them and how it would affect them if it did affect them. Really got some positive feedback from the customers. It sounds great. Glad to see you guys are making progress and expanding what you can do for us. We did press releases that went to the industry rags. There's a number of publications who follow the space that we sell into. We did some trade shows together where we went to the trade shows and talked about what we're doing.
John: Mm-hmm (affirmative). Were you ever scared during this process that someone else was going to swoop in, one of your competitors? Because you had this moment where you thought, "Hey, this is a good idea for the company." Were you ever nervous?
Steve Teel: Until you have a deal, you don't have a deal, right? So there's always the risk of you put a value, put an offer, they take the offer, and then shop it, right? They were an attractive company. Yes, there was always concern that another player in the industry maybe from a different perspective could see an advantage of acquiring RepairQ. So Yes, we had that concern. But that's why we value the company as we did. We thought it was a very fair value. We were trying to low ball the valuation. We thought this is what you guys can do. We didn't value it on prior revenue. We valued it on where we thought they were going. We didn't give them a reason to go shop it. But Yes, it would've been a concern of mine that someone much bigger than us could of stepped in and said, "Hey, I'll double what they're offering."
Evelyn: Plus they already knew you and you had already kind of created a strategy that they had not.
Steve Teel: Right.
Evelyn: It seems like that would've been a real reason for them to say this is the deal we want to do because ...
Steve Teel: That's a good point. I think for them it was important that they felt comfortable with who they do a deal with. There are some acquisition or some buy outs that will come in and they'll change up the whole management team, whether it's the right thing to do or not. That's just their style. And that would've been a concern for them.
Evelyn: Right, and you wanted them to stay.
Steve Teel: Right.
John: So we've talked to some other people that have had challenges with having founders of new people come in, but I've worked with all of y'all and you seem to get along great. I mean, what was your attitude dealing with them as founders coming in? I mean, did you have any rules for yourself as to how that would be transitioned?
Steve Teel: That's a good question. We didn't think so much about that. I think it was more just a comfort level. We knew where their strengths were. As founders, Jeff is a very, very strong IT, CTO type. He's also very strategic thinking. And James is a strong marketing and sales guy. Both areas we needed some strength on our own side from. So we saw those as being great additives to our senior management team. Greg is a product manager and a developer who built a lot of the RepairQ platform, and we saw that being a great strength for us. So we weren't concerned about having a position in them that something they would be effective at because we knew that those were strengths of theirs.
Steve Teel: Probably the biggest challenges frankly is now that we're part of a bigger company is there's processes and procedures to go through for things like procurement. You want to go acquire capital asset, you got to go through a process, and we put those in place just because it's a bigger company, we need those processes. And prior to an acquisition, they needed a new computer, they'd go buy a new computer. Want to take a trip, they take a trip. But now, because we're much larger company, we implement a processes. Those go through a control channel, and one of their guys actually is one who controls all the approvals of that.
John: Oh, nice.
Evelyn: So that actually helps perhaps.
Steve Teel: Sure.
Evelyn: If you're going to make change, but I'm the ones who's actually implementing the change, I guess it might actually put you in a different frame of mind.
Steve Teel: And as part of this, we formed a senior management team, and we meet weekly. We talk about procedures. We talk about policies. We do a lot of team decision making. So it's not a dictatorship. I think that helps.
Evelyn: Plus there's a ...
Steve Teel: Not always.
Evelyn: Well, there's an age differential too. Maybe I'll be naive about this, but because ... Sorry, Steve, but you are older. You're not that old, but you are older than they are.
Steve Teel: Sure.
Evelyn: It seems like and you have the title CEO so they are a little more leaning toward there's a seniority there that they know who's in charge.
Steve Teel: And that's a fair statement. I think they look to me, they look to Darrell who's my COO and Al who's our CO, they look to us as kind of being senior, been there, don't that kind of guys. So they are learning and leveraging off of that as well.
Evelyn: Right. It makes it a little bit easier to deal with really.
Steve Teel: Sure.
John: So what's in for the future for ServiceCentral? I mean, where do you see the next few years going?
Steve Teel: It's been crazy. I mean, the ride over the past 12 months post margin has progressed much faster than we thought, and there's some challenges because we are growing so fast. Our customer demands, as I said, sometimes we've out kicked our coverage in some areas. So we're trying to fill some gaps. We're in a hiring phase right now. We're going to be onboarding a new outsource development partner to help us with some of our product deliveries. We do have a pretty robust roadmap, and we are continuing to build out some customizations for some of our customers. So we'll continue to do that.
Steve Teel: Related to this topic here, acquisition, we'll also be looking at some fill in acquisition opportunities that can help fill in some additional gaps. It may be something that is external to what we do today but we see it as being on the strategic opportunity if you will to expand what we do to the same customer base. It might be some smaller segments of what we do but we don't do well. We might look for an acquisition that can do that better to fold in. We are looking to continue our growth.
John: Yes. What are some of the most important things for you now that you've been through the process, not just this time, but a couple times now but some of the front end questions that are most critical to you in any future acquisition that you might consider?
Steve Teel: You got to go through the make versus buy. What are you buying that you couldn't make yourself, and why does that acquisition make sense? I think you always got to make that. If I could build this and have the same market share as you have for 50% of what I'd have to buy you for, that maybe a better path. So that's one question. Second one is how sound is your product, particularly in software is it written in a good code base, is it stable, is it written with your own proprietary IP or did you incorporate a lot of shareholder.
Evelyn: Third party. Yes.
Steve Teel: Right. So that's one of the things we went through with RepairQ. We wanted to make sure they owned what they were selling, right? And then the third piece is how strong is the team and what do we gain from that team.
Evelyn: So, Steve, I don't think we discussed how you actually identified Brickwire because lots of companies actually think, "Oh, I have to go hire a third party who can actually find me a company to acquire." Did you do research inside or did you just know them because you had been out in the marketplace?
Steve Teel: A little bit of both there. I mean, when we set down the path of looking at the retail repair sector, we actually had started down the path of acquiring another company. We got as far, and you worked on this John. We got as fair as evaluation, and it was a much smaller company. Frankly, the platform was not nearly as good. That was more of a learning experience for us. But as we were teeing that up is when we met RepairQ. So it wasn't like we purposely went out and started shopping. We just met these guys and started looking at that application. This is a much better application. It's a much stronger customer base. It was geared towards our market space. The application was a fairly generic, out of the box, application. Yes, I think it's more through a relationship than we didn't engage someone and go out and search and find the right company.
Evelyn: Right. Right.
John: Think back at it, it's really interesting because it's funny. First call was I think there might be a white label relationship here. Then it's like maybe we'll do a resell relationship is the next call. And then actually maybe it's a joint venture. It just kept escalating until finally you're like, we think we're just going to buy.
Steve Teel: That's what happened, right? Because at first they were very protective. They didn't want us to market it in the U.S. because that was their territory. We're going to rut this for them in other markets. But then we started realizing well, a lot of our customers are in the U.S. So how do we do this? It's like the challenges of doing the partnership and resell relationship also help fuel, let's just do that.
John: Because it can be challenging, putting those together on paper for a team to work together but not be together.
Steve Teel: Right.
John: It's problematic, especially when you're dealing with IP and money on the backend.
Steve Teel: Yes. True.
Evelyn: Any other sage wisdom to offer our listeners on doing an acquisition? Maybe about the process or the decision or kind of maybe what you didn't expect.
Steve Teel: A few things perhaps. One is make sure you're doing an acquisition for the right reasons. Don't do an acquisition just to do an acquisition because they are timely, they're costly, they're distracting. And we did a small acquisition in the mid-2000's that didn't really pan out. We thought it was a good fit. Kind of rushed into it. It was a technology acquisition. We thought it would be a good compliment to what we were doing. The end of the day, we went through the process, and shelved the product. We rushed into that frankly. Make sure that the acquisition is being done for the right reason, whether it's strategic or for revenue growth or customer growth. Once you identify a deal, make sure that all your business terms are agreed to before you start the legal process. Because to do this negotiations as part of the legal process can add time and cost.
Evelyn: And breaks things down often.
Steve Teel: Right, and it very well could. Right. So you can get to a stalemate where they're asking for something on the buy side or the sell side that can't be agreed to and you've already months into a legal contract. So third thing, just be open. Make sure that you engage, if you're doing an acquisition, make sure you engaged the team you're acquiring into your processes. Because unless you're doing a buyout to take out the management, they are going to be part of your team. So make sure that they're a part of the decisions for the acquisition.
Evelyn: I think that makes great sense.
Evelyn: So this has been great, Steve.
John: Yes, thank you for joining us.
Evelyn: Thank you so much.
Steve Teel: Thank you for having me.
Evelyn: It's been really good.
John: If anybody would like to learn more about ServiceCentral, please visit servicecentral.com. Once again, Steve, thank you for joining us.
Steve Teel: Thank you, John. Thank you, Evelyn.
Evelyn: We'll see you next time.
Steve Teel: Take care everyone.
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 email@example.com. For more information on Trusted Counsel, please visit trusted-counsel.com.