The Cost of Success: How Growing a Business Can Break Apart Even the Strongest Partnerships
We sold our business. We were millionaires. Little did we know this was the beginning of the end of our partnership.
Our interests were diverging. My partner wanted to do it again, to start another company. His reason was simple. He wanted to prove the first time wasn't luck. I was interested in learning how to run a bigger business. And post-acquisition, I identified a mentor to help me do it.
I was so impressed with Jim Porter. He was the executive who led the acquisition of our company. He was the first professional manager I’d ever met. Jim was running a hundred-million dollar business with multiple business units. He had management skills and business skills I wanted to learn.
How we got started
Back in 1981, we were selling to CPA firms. The CPAs we sold to were entrepreneurs just like us. We were building a software business. Our clients built service businesses. Some were talented enough to grow their business, but even these high achievers were struggling to become big businesses. And so were we.
Selling our business was timely. We were growing revenue, but our business' requirements were changing—more people, products, multiple distribution channels, hardware, inventory, and partnerships. To keep growing, we needed to become managers. My partner wasn't interested. I was.
Our growth called for new skills.
We grew the business to over $4mm in revenue. The skills and methods we used to get us there wouldn’t move us forward fast enough. We were sorely in need of experienced managers and were fortunate enough to find them in some key areas. However, my partner was still the CEO, and I was the VP of development and support. Oddly enough, we, the founders who built the business, became the weakest links.
But we had to grow the business.
Forty percent of the purchase price of our business was contingent on the next three years of growth. This is called an earn-out. To get there, we needed to grow the business and hit our forecast. But my partner and I were not aligned for the first time in our partnership. My partner chafed at the processes and demands of our corporate parent. I loved it.
This divergence in our personal interests led to us missing our first-year forecast. The earn-out was at risk. Toward the end of that first year, I approached my partner. "I think you should let me run the company. I can make this earn-out."
Surprisingly, he said, “Good idea. This isn’t me. But you seem to like it. You know our business well, and I trust you. Let me see if I can work this out with Jim Porter. I want my share of that earn-out money.”
This was going to be a sticky situation. Based on the purchase agreement we signed, if we left our employment before the end of the earn-out period, that person would forfeit his share.
Within a couple of weeks, we had a deal. I would lead our company with the goal of achieving the earn-out. My partner would move his family to California and become their M&A vice president in search of other vertical market software companies they could acquire. Looking back, I'm amazed at my partner's talent in gaining this agreement and grateful to Jim Porter for cooperating with him.
I achieved my goal, and so did my partner.
Jim Porter became my boss and mentor. He often visited Atlanta to help me develop as a professional general manager. I was an eager student. He was a great teacher. Together, we achieved ninety percent of the earn-out.
My partner loved this new family adventure in Los Angeles. He also enjoyed his new job. He was fascinated by our acquisition experience, and now he was leading the acquisition process for a company.
In addition to doing M&A, my partner was working on a new idea. He quit his corporate job on the last day of the earn-out period. He sold his L.A. home and moved back to Atlanta. Thirty days later, he started a new software company. Five years later, he went public on the Nasdaq with a nearly $100mm valuation.
He proved the first time wasn’t luck!