It’s Not an Acquisition
From the article series on running Raft, a small Amsterdam based design consultancy.
At the end of 2018 I received a call from Mark Rolston, the Chief Creative Officer of argodesign, who I had previously also worked with at frog design. Mark had been one of the people I talked to at the start of Raft for advice given he had established argo a year earlier. We would catch up once or twice a year on how our companies had progressed and I would often look to him for advice on a variety of topics.
Mark called to say that he and his business partner were coming to Europe for company meetings and they wanted to meet and discuss the potential of us joining argo. At this point we had already had two other companies reach out and talk to us about acquisition / aqui-hire. We had turned down the other two companies on a premise of culture and fit. However, argo was another pure design firm with people who were from a similar cultural mold and strategic programs that fit our profile. This was a call I had personally been waiting for. We could have sold out to another company and most likely received a more favourable cash return, but realistically the culture clash would have been so high that I can’t imagine we would have retained any of our people. For us as the founders, the most important thing was ensuring decisions we made were right for the company. Within a design consultancy, a near commodity space, one of the only differentiators is the people. Therefore the right thing for the company was the right thing for the team. With argo, this wasn’t a massive company buying us out. This was another small company looking to join forces to create something bigger and do amazing design work. It was a way for us to exit and continue to grow in a way that was inline with our goals and ideals.
Mark and his business partner (also Mark) came out to Amsterdam and we had lunch with the Raft founders. Right away they moved into the idea that Raft could become the first European studio for argodesign. There was a combination of elation and skepticism. The latter may appear surprising, but it’s the best one to explain in depth. The idea of elation is simple. Within any profession, I believe one of the best rewards is to be respected by your peers. This was not only peers, but old mentors coming to us saying what we had done was on par with them to join their company. Simply having the ask to join argo company in itself was already enough to make us excited. So why the skepticism?
Essentially if we trace the short four-year history of Raft, we had been growing by a solid 30% revenue every year. We had turned ourselves into a million euro company by our third year and our fifth year would have put us [theoretically] into the multi-million euro annual revenue category. By all measurements, looking at a spreadsheet of our business, anyone would ask “why would you join argo?”, and by a spreadsheet, standard this would be the obvious question. However this is where the knowledge of the founder(s) comes in very handy. As the main person running business development, two key things had happened. First, I had run into near the end of my core network. This meant I would have to start looking at new ways of building my business development network. This was certainly possible, but it doesn’t come with fear of failure. Second, I was simply run down. I don’t consider myself a natural businessman and running business development for four years, ensuring we always had great business, had taken its toll on me. I do love it, but I was excited to have more seniority to better guide the office and learn from. When I looked forward to years five and six, I thought how I would need to pivot to continue to bring in work and if I could bring in the amount of work needed to continue sustained growth of 25–30% per year.
People often make the mistake that continued success is guaranteed. However, as discussed in the section on Business Development, this couldn’t be further from the truth. Success is gained from working extremely hard to achieve a focused goal. With my core network tapped, and entrepreneurial fatigue setting in, I explained that success may not continue on the same growth trajectory we have had thus far. We agreed that we weren’t going to get a better exit as argo was the right culture, programs, and people. We leave on top, we built a great story, and we join a company with an amazing set of talent, leadership, and most important, business development pipeline to continue to drive and sustain our growth targets.
For the purpose of writing this, and within Design Consulting, or we could say smaller consultancies of any nature, let’s assume they are purchased or interesting for mergers for a few reasons.
- The People — the most obvious. In a commodity market such as design consulting, you’re hiring for the people and their network.
- The Brand name — in a particular region, a brand could be larger than the parent brand. However this is fairly rare in talking to people.
- The sales funnel — again, could be region specific, but it probably has to do with the people there.
Most people ask if negotiations with argo were the most difficult part of being absorbed into another company. In all honesty, the negotiations were fairly simple. As a smaller company, I wouldn’t expect anything too complex. Before setting out to negotiate, I talked with two friends who had experience in both selling and acquiring small design consulting businesses. We weren’t being acquired due to legal reasons, but rather “joining” argo. I got multiple models for anything from direct acquisition to acquihire to simple absorption. I thought these would be interesting to share here to provide radical transparency into everything we learned.
Potential models for acquisition / acquihire for design services company
Again, for clarity, for anyone asking “which model did Raft exit with”, we didn’t use any of these. Due to a variety of legal circumstances, we “joined” argo. This meant Raft BV went into a more-or-less dormant state, and we started a new company called argo design BV. We then moved over all employee contracts. There was no big “cash out” for those waiting for us to all buy new cars with doors that open vertically. It was an exit predicated on the right company to join and the desire to become a part of something larger. It was the desire to provide our team with the chance to move from a small unknown company of “Raft” to a growing well known global company of “argo”. There is a lot more here I’ll explore in future podcasts or articles.
The models here are different exit models we found when talking to others who had also exited. I share them purely for informational purposes.
Exit — Multiple of EBITDA
- Typically 5–9X EBITDA
- Growth and profitability push the multiple to the higher end
- Multiple can be as high as 12X for: bigger firms (100+), unique capabilities, location or prized accounts
- For a 20–30 person shop:
- 20–30/ppl x $200K (revenue/per) = $4M-$6M
- $4M-$6M x .15(15% EBITDA) = $600K-$900K
- $600K-$900K x 7 (typical multiple) = $4.2M-$6.3M
Exit — Multiple of Revenue
- Typically 1–2X
- Growth and profitability push the multiple to the higher end
- Multiple can be as high as 3X for: bigger firms (100+), unique capabilities, location or prized accounts
- For a 20–30 person shop: 20–30/ppl x $200K (revenue/per) = $4M-$6M
- $4M-$6M x 1.5 (typical multiple) = $6M-$9M
Exit — Per Employee
- Typically $250K-400K/person for designers
- This is a common model with client-side acquisitions, acquihires
- Rate can be higher for desirable engineering capabilities
- For a 20–30 person shop: 20–30/ppl x $300k (typical price/per) = $6M-$9M
These are of course general formulas. These are also formulas from SF/Seattle — being in Amsterdam, we obviously have a bit of a different bill structure and client model. If you read this in hopes of one day applying one to your company, understand that each one of these is effected by location, brand, culture, purchasing company, etc.
Additionally, each of these would be nuanced by showing consistent revenue, client roster, tenure of business, etc. However, I would like to provide people who had never seen anything like this a starting point.
For those who read the above and think “I could get money quickly”, it’s also not that simple. Realistically, capital (money) is spread out in a variety of ways over time to ensure the team that is brought on board stays together.
The best conversation I had on this was a simple explanation that for a design consulting (services) company, there were three ways to be compensated for what you had built.
- Money up front — pay out immediately upon “sale” of the company
- Money per person retained — this was a typical acquihire scenario
- Revenue sharing post acquisition— Money on projects and revenue brought in and completed during the years after “sale”
While I won’t explain the exact details of the negotiation, I’ll explain we did not receive any money up front — and I want to explain why. Simply put, it was the reasons above. My network was getting tight, and we wanted to provide the team a chance to be part of a larger company with more interesting programs. We had an amazing run, but I had to think about the future and the people who counted on us for careers. This shocks most people, but I fully believe we negotiated a deal that was the best for the company and team as a holistic entity. If we wanted to sell out for money, we would have done so earlier to a different company willing to pay more (or anything)… and that would have also been remembered by our team — that we only wanted money. Would anyone want to come work for founders again when they sold out in a situation best for them, but not for the complete company? Doubtful.
The lessons we always worked with was doing the best thing for the company as a unit.
What was always bothering to me, if not downright annoying, was the number of people who wanted to provide input and explain what we “needed to do” or how we “needed to negotiate” who had never done this before. Most of their information was culled from articles on sales of product companies — not services companies. It was shocking to hear people tell me directly how I wasn’t getting the right deal, when they have never even run a company, let alone negotiating an exit. My advice, if you’re a person who is running a company, and looking for acquisition or merger, talk to people who have done it. They are the only ones worth listening to, understand what it will take to get the deal done, and the different types of deals that can be made.
Even now for myself, I would only dare offer advice for other small companies in the service or consulting space. I couldn’t effectively advise on companies of hundreds of employees, or product companies. I’ve found going through this process also makes you more humble and self aware, understand much more of what you don’t know.
Put simply — don’t advise what you don’t know. Or if you do advise, do so in an open and discussion oriented format. Not in a directional and hardline format.
For others going through a similar process, there was one piece of advice we got while starting Raft, we should have heeded more while in the negotiations with argo. Get everything in writing. The better friends you are, the easier you have conversation, and the more you can want to avoid uncomfortable conversations. There were many conversations in passing where ideas were discussed that I wish we had documented in writing after the final negotiations. I feel this would have set clearer boundaries and goals for both companies. I’ll need to expand on this in future writings further into the company integrations.
The announcement
We worked together with argo to plan out a timeline for the internal and external announcements weeks in advance. Once we had agreed on becoming part of argo, we didn’t want to wait long before telling the team. The simple reason was as follows — if someone inside Raft had asked us, we would either have to lie, or tell the person and ask them to keep it secret. The first issue with lying, which is often what happens in companies, is never good because once you lie once about something, it erodes confidence in your future answers. If you tell the person, you run the risk of it leaking, no matter how much that person wants to keep it quiet. Once we completed the negotiation, we wanted to quickly announce. We had planned to do it during the middle of the week, but the Friday before the announcement a small slip up occurred, which made us decide to simply announce on that day.
The mailman delivered a letter, which was collected by an employee and was addressed to argo design BV. While it may not have been 100% clear on what was happening, that small event made us decide to simply announce the same day to avoid the dilemma of lying or leaking mentioned above.
We collected the team and presented the news. We had worked on the key messages and Q&A with argo, therefore moving up the announcement wasn’t problematic and went smooth. About 2–3 hours with Q&A.
The week after the announcement, Mark Rolston visited the office to talk to everyone, give his thoughts on having Raft become the first European argo office, and share a little bit on the culture and drivers for argo. At the same time we brought in Tjeerd Hoek, who would become the Head of Creative in Europe in charge of expanding both clients and employees.
A few weeks later the press announcement went out along with announcement on all social media channels. I wrote the following email to the team the day after the announcement.
From: Joe Fletcher <@raftcollective.com>
Date: Wednesday, 27 March 2019 at 08:23
To: Raft All <@raftcollective.com>
Cc: [Removed]
Subject: argo AMS
Good Morning argo AMS!!
Today is our first full day publicly as the new office! Thank you to everyone for making yesterday a successful transition. As normal for our culture, it went through quiet, and like any other day :)
As we look forward with argo, I see our path continuing as it was before. What we have built culturally and in business (research / business / strategy focus) will maintain. In making us stronger, we will now slowly start to borrow the best parts from our US counterpart studios. We will continue to strive to challenge the typical design output in ways that brings the best value to our clients.
We have learned, even as a fledgling company, how to understand the European market better than many competitors. It’s a key reason why we’ve joined argo. Let’s never lose sight of that and continue to learn!
I’m excited to see where we might borrow from argo’s technology focus and capabilities in the future. We’ve always been looking for more to learn and strengthen us. argo will provide no shortage of that. I’m also excited to see how we can influence them on business and the European market.
The DXC + argo connection is both young and enticing. We have a chance to take early steps in shaping that as well, and building a robust partnership.
As we continue to transition and align, please bring any burning questions to myself or Tjeerd.
In the past, we have associated a word to each year to help us focus as a company. Our previous years (1–4) were Bootstrap, Diversify, Mature, and Grow. Ironically we selected “Change” for Year 5, not knowing what was coming — looking back it seems much too appropriate.
Thank you for everything, and can’t wait to see what Year 5 brings!
Joe
A month after the announcement we held a great opening party. I was fairly nervous if people would come, but admittedly it went great hosting a few hundred people. I decided to film it and clip together a fun video — you can see it on my instagram account — the_kieselguhr_kid (account)
Direct link — https://www.instagram.com/p/BxUFsZDgDhL/
The integration
When people ask about the difficulties of the negotiation process, I always explain the integration was surprisingly the much more difficult item. This was due to two primary areas. First, we were a European company merging with a US company. Everything from working style, to client engagement, to holidays, to taxes is completely different. While the end goal and result of our work for both companies is the same, the style in which we accomplish those goals can be completely different.
Here is a list of some of the quick [stupid] differences between countries we came across while negotiating and integrating. For some reason these slip your mind when you get into integration mode, but they are important for any cross continent company.
- USD v. EUR — it may appear as a small detail, but having different currencies can impact reporting, forecasting, business development pipeline estimation, expenses, and annual reports. Then of course you have taxes, of which each country will have different tax systems to be applied.
- Holidays — When using a program management and resourcing planning tool (we use 10K feet), you can’t easily blend in holidays and vacation time from different countries.
- Vacation — While in the US vacation is often 10–15 days in Netherlands 25–30 days is more normal. We provide the latter.
- Hiring and workers rights — One of the biggest deltas people who haven’t managed international studios may miss is different work rights policies in different countries. At Raft, all employees were put on a temporary 1 year contract before converting to what’s known as an “indefinite” contract. The reason is once someone is on an indefinite contract, firing them becomes extremely difficult. For those who think firing in the US is difficult, Netherlands and Europe in general is much harder. The further you move in the south of Europe, the more strict workers rights can become. This is also a reason I personally believe that the idea of “recreating silicon valley” in Europe is impossible.
At a future point, as we have totally integrated, I’ll need to write a much longer post on this process given its interest as a topic.
Remember culture?
Indeed this turned out to the best and the most difficult part of the integration. On the way back from my first trip to visit the other argo studios I wrote a post-it looking at the differences into how our studios were built, our values, and our styles. It may have been one of the best observations I’d made in recent memory and aptly captured deltas in style that we need to address as we integrated during the following year.
This became incredibly important because it represented how each studio thought and had given an understanding of how we could begin to better interact with each other.
As with the integration, I’ll need to write much more on this in the future as we continue to integrate.
Stay tuned for more — I’m writing this 3 months into integration and being a new argo studio. It’s super exciting and still so much to learn. I’ll share more as I learn more.
Claps are welcomed! We also have more articles on the story of Raft, a small Amsterdam design consultancy.
Instagram: the_kieselguhr_kid
Linkedin: https://www.linkedin.com/in/joefletcher2/
