Flying somewhere over the Atlantic Ocean, I wondered if I was making the right decision. I had just spent two weeks away from my business on my honeymoon, and the net result of my thoughts led me to believe that selling my web design business was the best chance I had at making a difference in the world. What made this line of thinking strange was that my web agency, HotPress Web, was growing more and more successful every day.
The web agency had made the Top 25 Denver Web Company list for five years running. Our revenues were growing by 40-50% each year. I was taking home some nice profits.
My clients spanned the globe, I was getting speaking requests to share my story from companies like Adobe, and our client roster consisted of really awesome brands. Leaning back in my airplane seat, I kept focusing on the vision of the next company I was soon to build: Create 1 million experts in the world. I wouldn’t be able to achieve that mission if I had HotPress on my hands as well.
“Yes, selling HotPress is the only option,” I decided.
High School Detention
The year was 1999 and I was a really big nerd. I carried a C++ book around with me. I was addicted to computers and had no shame about it.
Instead of working on school assignments, I spent my nights building PHP apps to keep track of our LAN party registrations. At the time, I had been running a small PC gaming website which I was having a hard time monetizing. It was my hobby in high school, but the server costs were outpacing my weekend job of stocking inventory at a local fabric store.
I needed to figure out how to make money doing web design. After a quibble with my calculus teacher about an ambiguously written test question, I was banished to a day of lunch detention. Apparently I “didn’t have the right attitude.” Sitting in lunch detention, a guy I had been an acquaintance with for awhile, Steve Thiel, was sitting across from me.
We got to talking, and it turned out that he was making some money online by selling email lists. I told him about some of the stuff I was doing and we decided it would be a good idea to go into business together. Fast-forward thirteen years: Steve and I had founded and started three companies together, two had failed, and the most recent, HotPress Web, was becoming a big success.
Why I Sold a Profitable Company
My primary customers for HotPress were small business owners and non-profits. A typical project brought in $5,000 to $30,000 paid up front, with some kind of ongoing maintenance, support, and marketing contract in the range of $100 to $2,000 per month. In 2010, we launched a website called BC Gurus to help train people on how to build and sell on Adobe Business Catalyst.
BC Gurus had a completely different type of customer. BC Gurus customers weren’t looking for us to build something or market for them. They were typically like us by profession — they were web designers, web agencies, web developers, etc.
— looking for education on how we built websites and how we did marketing for our HotPress clients. In our spare time, we would work on BC Gurus. Everyone at HotPress had a day-to-day operations role that supported it.
As a Managing Partner at HotPress, I tried to connect the dots for everyone, but with competing priorities, most of my team was left working long hours to meet the demands of both sides of the company. What’s more: I was also losing touch with our company’s vision. We were all running on fumes and a lack of focus kept everyone from reaching their potential.
So I took this problem to an adviser of mine. My adviser identified that I had two distinct customer segments. “This type of business is complicated to run and makes your centralized marketing message and internal directing very difficult,” he said to me.
“The pains of small business owners and of web designers are very different. It’s one thing to have a similar product and service that you sell to different markets, but your core service and product is completely different for each market.” “You are the cowboy riding two horses at the same time, which is fine if both horses are riding the same direction. But if one veers a hard right, you might be left with your face in the dirt.” Another indicator that alarmed me was our revenue numbers.
When we focused on the service side of the business (HotPress), those revenues would increase and product revenues would decrease. When we focused on the product side of the business (BC Gurus), product revenues would increase and service revenues would decrease. Not only did it affect company revenue overall, but customer happiness was also affected by the yin and yang swings.
When my time would shift to BC Gurus, I would start to see fires pop up with HotPress. When I would shift to HotPress, customer complaints with BC Gurus would flair up. I realized that focus was at the root of all major successes, and that most failures are due to a lack thereof.
So what I did next was what anyone in this situation should do: I got married and took two weeks completely off to sit on the beach in St. Lucia and ponder my goals and have the most amazing time of my life. But in all seriousness, getting out of the daily operations of my business was a major boon for vision development.
Imagine for a second you climb out from a forest and up to the top of a mountain peak. There I sat, looking out in the distance. From this vantage point, I was able to look out at the other peaks.
While I wasn’t actively working during my honeymoon, I was running through scenarios of how I was going to make a dent in the universe. My brain was passively crunching through paths to tall peaks in the distance, and each of them had nothing to do with growing a thriving service business. I wanted scale.
I wanted to do something that helped make the world a better place. So I looked at my existing business. There were two halves: one side that received dollars in exchange for hours, and the other side that received dollars in exchange for knowledge.
One side could scale. The other side, not so much. I realized that if I wanted to make a difference in this world, I needed to craft a plan to help expand my Guru-vision beyond Adobe Business Catalyst and into the general web professional market, and then later into other markets outside of the Web industry.
Over the course of a couple of days, I wrote out a plan to overhaul our business and re-gear toward this greater vision. It went something like this:
- Pitch the new business direction to the team
- Make sure everyone is on board with the new direction
- Close out all outstanding web agency work
- Find a buyer for HotPress and sell it
- Incorporate as new venture, carrying over BC Gurus as one of our products
- Launch products to help web designers become more successful via uGurus
- Help experts in other markets become Gurus by helping them launch their own products
During my web agency tenure, I had bought and sold several books of business, essentially acquiring or selling a list of hosting and maintenance accounts. Each of these deals taught me one thing: Valuation is almost entirely based on existing client maintenance and recurring revenue streams, not new project revenue. Service brands are a dime a dozen.
Often it’s the people in the business that have the relationships and drive the new revenue for that business. So if those people leave, we can assume revenues will drop greatly. On each acquisition deal I did, I was able to drive the asking price down to what revenue would be on the books if zero new sales happened.
Basically, I ignored a web design company’s new project revenue when creating my valuation of that book of business. At the time, a big chunk of our revenue definitely came from new project work. This was work that I was out winning through networking, speaking, and blogging.
If I left, then most of this revenue disappeared. But in 2007, we had drawn a line in the sand around recurring revenue. Our mission at that time was to build up a recurring revenue stream that accounted for at least 50% of our total revenue base.
While we didn’t end up accomplishing that, because our project revenue growth way outpaced our expectations, we did end up growing a really healthy list of recurring accounts. That was what gave our web design business its value. I was able to show on paper exactly how much net earnings were coming in over the next twelve months without any additional projects.
I used that as a basis and then applied a multiplier in order to come up with a valuation. I was willing to take a lower multiplier if the offer was cash delivered on day 1, and a higher multiplier if the cash was delivered over a one or two year term. I was able to find multiple potential buyers (which is always a good thing), but I ended up deciding to avoid a bidding war amongst them.
One of the buyers was a better match for our customers, which was one of my top priorities in the sale. I didn’t want to put my customers in a bind by the decision I had made to move on. Ultimately, the transaction required a little legal glue, but it was pretty straightforward.
Once the deal was done, the transition was the next biggest hurdle. Most everything happened pretty quickly: exchange of accounts, key client introductions, support access, asset transfers, and client briefs. Some issues dragged out a bit, mostly related to open projects and things that had been stuck in limbo.
It’s important to note that I didn’t sell our physical assets. I only sold our revenue streams. My team, IP, office equipment, and liabilities stayed with our legal entity so we could bring what we needed to our next venture.
The biggest hurdle to the transition was with my own team. Stepping into the shoes of my team, I recognize that they were really brave. To hear them say “sounds good” when I told them that we were doing a completely 180o by selling half the business and working together in a completely new capacity was pretty damn cool.
Instead of making a group presentation, I decided to take each team member out of the office and present the new business individually. It took about five hours per person and allowed me a chance to fully explain how I saw each team member fitting into the new structure. Only one member of our team decided that the opportunity wasn’t for them.
The rest stayed. Since our existing product revenue didn’t fully support our current monthly cash burn rate, I needed to find some investors to help bridge the gap. Part of our asset sale helped this, but it wasn’t enough to give me the runway I needed.
Prior to selling the web agency, I had worked really hard to line up pitch meetings. Maybe in another post I’ll detail how I went about finding a group of seed investors, but the short version is I did it in record time. I secured funding, locked in the new venture, and for most of my team, they hardly missed a beat.
The company sale transition took resources for about three months before almost completely tapering off to maybe one or two emails a month requesting details. Now it has slowed to about one request every two months. Most of my clients were close contacts of mine; so I’ve had no issue providing them with follow-on support to make sure that they are all taken care of.
Is Focus Worth It?
I’m writing this about a year out from the genesis of what I think is a great vision to change how the world shares knowledge. Internally in the company, a lot has changed.
First, I got rid of all of our company phones and our collaboration is now completely virtual. I still have an office for uGurus, but our team has the option to work from home if they want. Second, there’s something truly energizing about a bunch of people working toward a greater good.
Before, with the web design business, we were each off in our own little silos working on various projects and only coming together to collaborate occasionally. Collaboration is now a daily ritual. Each spoke helps our wheel ride smoothly, and in the right direction.
Our energy is organized around launches and releases. I create celebrations around these so that everyone knows how important they are, and I regularly remind the team of the goal we are working toward. Third, culture only matters if there are numbers to back up the work we are doing.
Here’s how our monthly product revenue looks: By focusing on our product business and a single type of customer, we have created a snowball effect for our revenue growth. Our old business required more team members the more revenue we wanted to get to (dollar in, hour out). Whereas now, it’s all about innovation, problem-solving, and reaching a great market with a great product.
It’s less about how much we work and more about how we work. Although, I have to say, since being able to focus on a single idea, every single person on my team, including myself, has been putting in more hours than we used to. What matters the most is that our customers get a lot more of our attention.
Instead of being split between a bunch of different types of priorities, everything flows toward them now. We get to invest more time, money, and energy into helping make our customers a success. And they feel it.
That’s probably one of the biggest reasons we’ve seen a dramatic increase in our product revenues. Focus drives execution. Since making the transition, we have been able to:
- Completely overhaul our flagship site, BC Gurus
- Build our own CMS/e-commerce/marketing engine
- Launch a new blog in the general web professional market on uGurus.com
- Launch our first paid product helping web designers sell
- Launch a product teaching people how to make money with peer to peer lending
- Ink JV and affiliate deals with some of the biggest players on the Web
I have big things in store that are just beginning to catch momentum for all of our products, but so far everything has shaped together nicely post-sale. One million Gurus is the flag I have planted into the ground, and the further I get on this journey, the more possible it becomes (even though it sounds totally insane).
I’m not suggesting that every web designer out there should start thinking about how they can sell their business and start a product venture. However, what I have seen in the market is a maturity that leads to that as an option. I wouldn’t be able to execute ideas at the level I can today if I didn’t have thirteen years of web project and client experience.
My ideas about developing a product came out of that experience. For a long time, I was straddling two businesses and wasn’t sure which to jump on full time. This method of bridging a service business into a product business is not a new idea.
Building websites for people is great because you can earn revenue on day one. When you get your first deal, someone pays you up front, you do the work, and when you finish they pay you some more. If you know what you’re doing, you will also build in a recurring revenue stream for yourself that will grow over time.
Selling a product is different because you have to do all of your work up front and then hope that someone decides to actually purchase what you made. In most cases, the product requires some kind of initial investment. In my case, I have a team of eight people.
I don’t want to be in a situation where a launch fails and everyone has to go home without a job. If you are a bootstrapped web designer without a lot of cash in the bank, then you can use your skills to earn revenue and meddle with product ideas on the side. If something catches on, like it did for me, you can take a chance and run with it full-time.
If you’re struggling to come up with an idea of what kind of product to build, regularly brainstorm about the pains and problems you experience throughout your professional day. Try solving those problems by scratching your own itch. Then work to find other people who might be interested in paying you a little money to get that same problem solved.