TSI002: Life Style Business to Growth Business

 

THE SOPHISTICATED INVESTOR EPISODE 002

 

TRANSITIONING FROM A LIFE STYLE BUSINESS TO A GROWTH BUSINESS FOR THE EXIT

EP: Hello, everyone. This is Edwin Epperson, your host of The Sophisticated Investor. The Sophisticated Investor is an incredible community, which is focused on education, training and collaboration to help each of our members, and that includes you, to build, protect and preserve your families generational wealth. Now, I believe that we truly have a unique and one-of-a-kind educational community. For one, I believe that there are four primary markets, not just one. I believe that those four primary markets include your personal finance and mindset market. I believe the second market is your hard, tangible asset market. I believe that the third market is your stock and paper market. I believe the fourth market is your business investing market. Now those four markets are imperative to be able to understand and then call yourself a sophisticated investor. Today, we have an incredible guest who is going to educate us on their preferred market of investing, as well as the assets that they like to invest in. Please join me as we welcome today's guest.

EP: Hello, everyone. This is Edwin Epperson, host of The Sophisticated Investor. Today, we have with us a CEO and coach, Richard Milam. Richard, thank you so much for being on the show.

RM: Good to be with you, Edwin.

EP: Excellent. Now, Richard is here to talk to us about the business that he built and then position to exit. You just had an exit from that. You sold the business. What we mean by exit, you sold the business just this past year, correct?

RM: We closed at the end of February. That's correct.

EP: Oh, this year. Literally just a few months ago then. Fantastic. We're going to dive into how Richard set his company up to be able to sell it, some of the key components that he considered as he was preparing the company to sell. I think Richard, I believe Richard is going to bring a lot of good content and value for those investors that are specifically interested in purchasing, or investing in businesses and how they can position themselves and their investors to make a profit and to do it wisely. Richard, just real quick, wanted to do an introduction. Now for those of you who are listening and are not familiar with Richard Milam, he is a pioneer in the robotic process automation. He actually had his hand in the development of the ATM, as what you have told me. Then you had founded EnableSoft, which was the company that you just sold in February, correct?

RM: Correct.

EP: Okay, excellent. Richard, you actually – you also served in the United States Navy on a nuclear – you were a nuclear-trained engineer and you were on submarines, correct?

RM: That's right.

EP: All right. Well, thank you for your service.

RM: Thanks for yours.

EP: Richard if you will, tell us a little bit more. I'd like to dive in on two things, if you don't mind. I'd like to dive into the ATM networks, how that was structured, and then you working through and with, I don't know, were you a co-founder, you developing the ATM?

RM: I actually worked with the guy who then and his company who invented the automated teller machine and then own the patent on the magnetic stripe on the card. Huge entrepreneurial adventure there. Not for me. I was an employee, but I got to watch it and participate in it. In those days, technology adoption was way slower than it is today. It took over 20 years to get a ATM adoption above 25% of the public. That happens a lot quicker these days as you know.

EP: It took 25 years for the ATM concept to really catch on?

RM: Yeah. Right. Because people took them a long time to build up trust in technology in those days. Probably as good reason, there was a lot of pioneering going on. For one of our first supermarket retail customers actually took deposits at an ATM. If you could imagine, people taking their bank deposits to an ATM and leaving them there and then having the supermarket figure out how to clear those deposits through banks was quite a feat. They abandoned that effort after a few years, by the way.

EP: Obviously. You worked as an employee with, what was the name of the company for the automated teller machine company that you were working with? What was the name of that development company?

RM: The company was called Quadstar and it was sold to Citicorp five years after I started.

EP: I see. Then when it was sold, did you stay onboard, or did you after being underneath, or working with this gentleman and watching him be the entrepreneur and just develop this from the ground up, now when it started to dawn on you, like this is something that you wanted to pursue?

 RM: Yeah. I did stay on briefly. I went to South America to work with the sales team down there. Did not like being with the big company and was feeling entrepreneurial pangs, so I started some consulting work. Realized very quickly that I needed to develop some sales skills in order to do anything too entrepreneurial. I got a job selling bank software for one of them, what is now one of the big three bank software companies. Did very well at that. Had found myself about five years after that, while working with a banker that worked with the software company, helping banks try to move data from acquired savings alums. I don't know if you recall the 90s, the Savings and Loan industry in the United States was basically shut down overnight when the government took away what they called goodwill, which means they're basically – their loans were over-collateralized for the properties they were featuring. They were all pretty much insolvent overnight and they were selling those off to the banks. The software companies couldn't convert the data fast enough, but the Resolution Trust Corporation said, “Now you got to get that data onto your system in three months. We don't care how you do it.” People are basically sitting around keying in names and addresses and account information in bank boardrooms, from rebar reports and as I was helping the banker figure out how to organize that and use technology as much as possible, having studied computer science in college after the Navy and worked as a programmer at Quadstar, I had some tools. I ended up, that resulted in me coming up with the concept of this – essentially a software robot that a person could teach to do what a human does to enter data and interact between systems. I took that to market. That was actually the first commercial company that is now what first commercial sale of technology that is now called robotic process automation and is quickly becoming a six billion dollar industry. That was 25 years ago. Probably about seven or eight years ago, many of these companies that outsource labor overseas to have people in other country do manual daily tasks discovered this technology and with wages going up overseas, people decided they wanted to automate things in-house, versus send them overseas, plus with all the data breaches that people didn't want their data leaving the building, let alone the country. That was a prime moving force for this robotic process automation. We were we were in the right place at the right time. I had not become as large as my competition, because I didn't get into this outsourcing wave. I was just diligently working on technology that was easy to use, but essentially the citizen developer and financial institution. We had over 650 customers, most of those banks, a third of the largest 1,000 banks, five of the 15 biggest. We had 50 major healthcare companies. All of them doing this automation that enabling people to automate manual processes and lemonading spreadsheet jungles that they grow up around systems that won’t do what people want them to do. Then, so as it turns out, what this up-and-coming in an artificial intelligence and Industrial Revolution, that's about 10 years down the road, these software robots are necessary to prepare the fields for that AI revolution. RPA and AI are closely linked. The reason for that is that in order for artificial intelligence to actually be useful, you have to have a lot of good clean data, a lot of it. You have to have an automated enterprise, digital enterprise if you will, a lot of data scientists. Well robotics, software robotics enabled the first two things to happen.

EP: Interesting. The clean data, that's something I – you look at some of the data aggregate sites on the web specifically. For instance, let's say Zillow, which is aggregating data on a consistent basis. They are they are providing a enormous database with information that's categorized and it's easily accessible to where you could then build, which people are doing right now, build software to go in and then extract that information to be able to create further on analysis and like you said, automate the process of data input, correct?

RM: Correct. Yeah. Yeah. Obviously, essential that the data be good. When you have human beings and human hands in it, that introduces errors and data corruption issues. The more things can be automated with software robots, the better the data is going to be.

EP: Interesting. Going back to when you were creating EnableSoft, and I'm assuming during this period that you were developing the concept of robotic processing automation 25 years ago, did you know that you're going to – I'm assuming you did not know that you were going to build this into a large business and then be able to sell it 25 years later. When you first started the company, it was simply to answer the need that was in front of you, correct?

RM: Yes. I was just trying to solve a business problem that I saw before me. I saw the need not only for these bank conversions, but when I worked in the back room of large banks and medium-sized banks, I saw that there's hundreds of things that people do manually every day, that if they don't do them, then they just don't get done. Things like, when a loan officer changes and leaves, they got all these accounts that are categorized to that loan officers. You've been in the mortgage business. All those had manually re-keyed over to the new person, or split up. That process is there's thousands and thousands of those in the back office of every organization, whether it's processing invoices, or one-off type new product type offerings that the core software vendor doesn't support yet. There is this need for the person close to the problem in an organization to be able to automate it without resorting to have a piece of party all weekend.

EP: Oh, my goodness. Yes, I can definitely relate to the having to transfer data from one key holder, if you will, to another, simply because they're no longer in the organization, or they've been fired, or whatever the case, maybe they've moved on. When they have their hands in the pot, it can present quite the challenge. Speaking on that, how if a small business right now is looking to grow and scale, and let's say that they have their business could be automated. I mean, we're seeing automation in everything now. I mean, we've got automation ordering. You can go to McDonald's and just order on a screen. I would not imagine that too far in the distance – not too far in the distant future, we're going to have robots and machines cooking the meals that you order on a machine and everything's – so many things are going to be automated. How does a business that maybe cannot afford and because when I hear this, I think of a lot of cost in developing the software, testing the software, how does a business – is this something that a small business just waits for the big players to foray into an area and then latch on to that?

RM: Yeah. You're not going to be able to wait. If you can't automate in 10 years, or five to 10 years, you will be left behind. The ability to create your own automations is here today and it's going to be even more extent as this time goes on. You've got to create a culture and hire people that know how to use these tools, that are now becoming available to automate processes, get your data clean, be able to react to business challenges, like regulatory compliance issues, as well as cease opportunities to automate and create new products and new offerings as the market demands. If you're going to wait for your vendors to provide those solutions, you'll be left out. I'm talking about the business bonds, but the vendors, there are technology solutions, like the one I created that is a software robot that you can – much like using Excel, you can teach your knowledge workers, your citizen developers, if you will, and learn how to create these automations using off-the-shelf technology today.

EP: Wow. What you just said, I mean, that should ring some bells for a lot of these small business owners and medium-sized, even large sized business owners that have maybe not gotten onboard with the whole automation movement, because it's as the traditional saying is, that's not the way we've always done it. In 10 years, what you're saying is that in 10 years, it's in-game for those people that are not fully and actively pursuing to have automation involved in their business, correct?

RM: I'm saying that. It’s not just me, because I know that from being a student of the research in AI, that's coming pretty fast. It's not here yet. Really, the only thing that's artificial intelligence is commercially ready is voice recognition, facial recognition, some of the buying algorithms are there, but are coming along. A lot of it is going to come along in the next 10 years and it's going to change business and it's going to require an automated business with people that can use the tools to take advantage of those offerings. I'm going to qualify that further and say that it's technology and automation is not going to just take over. It is a dance between the human and the technology. The most effective things going forward is when you have a culture and a workforce that knows how to interact, use the right tools at the right time to do the right things. That's some big IT star chamber deciding what's going to happen.

EP: Oh, so Skynet may not be within the next 10 years.

RM: I'm not betting on that.

EP: Well, this is very fascinating. You can see how things are moving in this direction for sure now. At what point did you start looking at your business, Richard, and saying, “You know what? I want to position my company, so that I can sell.” Was this and I'm assuming just by speaking with you briefly today and the other day when we were on the phone, that this is something that took some time, some thought, some intuitiveness on your part? At what point did you decide that you wanted to position your business to sell it, and then what were some of the steps that you started to implement that maybe you had not implemented up to that point to prepare for that exit?

RM: Very good question. I had a nice product with good-paying customers and I had a nice little life stuff in this for a while, but again, I didn't really know what we had. I didn't really see the transformational impact of these this process automation technology until about eight years ago. That's when I started to transition the business from a lifestyle business to a growth business. I started to work with my CEO roundtable groups to try to understand what was going to be needed to create the company that would be valuable without me. I read a lot. I read a lot of great books and studied best practices by people like Verne Harnish and the guy who wrote Traction, Gino Wickman, and start to get a picture of what a business needs to look like, that's agile, growing and of value. Five years ago, I started to put the team together to enable us to do that and specifically, the leadership team, realized that very quickly that for a company to have value number one, it can't depend on me as the visionary to operate and grow on its own, has to have a good solid product team, a good solid sales team, a good marketing strategy. You have to have an operator; a person that Traction caused an integrator. This person that can operate the business and get the business very focused on a few things too that are critical to get to drive the growth of the business to be in a place where you can do, and you can do a successful exit. Two years ago, I finally brought that guy on and had the team in place. We focused, like a laser beam on – we switched totally to software-as-a-service and we changed all our agreements to annual software fees that are the same every year. Not a large upfront and 20% maintenance by the same fee every year. Then we focused on a laser – everything we did in the company was around getting our annual recurring revenue to a certain point, certain target amount. Everything, every decision was made was focused around that. If it helps that, then we did it. If it didn't, we didn't do it. That got us to a place where the stars aligned. The RPA market got very, very hot. Our competition was getting valued at 30 times revenue, essentially. We didn't get that valuation. We weren't playing in that game. We got a nice valuation in a nice transaction. We focused on. I can go into more detail of how the process work, but I think I answered your question.

EP: Yeah. No, you did. Would love to get into more detail. Real quick question. In my mind for some reason, I was thinking that this was a very long process and it – so you said that eight years ago, you started to look at it. You look at the business and say, “You know what? I wanted change. Take it from a – you said a lifestyle business to a growth business.” I am assuming is a pivotal moment in you deciding in your mind, “Okay, I want to position my business to be a different business. I want its purpose, or what we're doing here as far as what I'm doing in the company to begin to change,” correct?

RM: Correct. Yeah, I realized that the time was coming. If I didn't create the company, didn't position the company to be a growth company and get the right places, things in place, we wouldn't be relevant when this time came. That was important. I was the 100% owner of the company. I opened myself to possibly raising money to grow the company. We decided not to do that, which put some headwinds at us, because it's really hard to compete when you don't have financial resources to competition does. We were a visionary. We're in that niche market. Again, the competition went after big IT, big money where they're going to automate the entire enterprise, more of a technical solution that required programmers. We stayed focused on creating technology that could be used by the person in the organization close to the problems, in other words, the citizen developer. We had to continue to make ours easy to use and not require IT to implement it. I think we were ahead of people in that thought line. We’re a visionary. Doing that without raising capital is changing the tire while the car is already on the road.

EP: If you had to go back and do it again, let's say, so let's go back to 2010, 2011. Knowing what you know now, would you have gone back and said, “Okay, let's put the team in place,” because you said, it almost took three years from 2010, 2011. You said five years ago from today is when you had the team in place. Then two years ago is when you actually brought on your – you found and hired and brought on your operator/integrator as its spoken about in traction. Would you looking back over the process and if somebody is in that position of where they can get a sense of where their market, their industry is going, they have a vision, much like yourself and they say, “I can see where this is going. I want to position myself in 5, 10 years to be able to exit.” Would you looking back, raise capital and go about it that way, or do you think that and I know hindsight's 20/20, right? Would you have raised capital looking back now, or do you think going about the way that you went was the smart way?

RM: Well, I'm happy with my result. We would have been way more competitive and bigger had I got the team in place six to eight years from exit and raised money, versus really just showing the team in the last couple years.

EP: I see. Okay. Okay. You also had mentioned though that – I mean, right as you were coming, the last two years as you guys were really focused that you said you were laser-focused, you knew exactly where you wanted to get your revenue up to to be able to meet that exit point that you had in mind. You said that right about this time is when all of this started to move in the industry to where you said, these big movers and shakers were getting 30 times revenue valuations. If you had put the team together as soon as you had this vision, do you think you might have gotten too close, or would you just help the company and continue to grow it and to this point that where these big players were getting those big valuations?

RM: Yeah. Well, it’s really nice to talk to a business guy that understands that, because timing is everything. There's risk in raising that money and getting ready on the go. If the market doesn't move with you, or the right time, you have to be willing, ready to compromise and one that take your lumps. It's hard to time the market. Yeah, but you have to be a little lucky and you have to be very smart like a fox.

EP: There you go. There you go.

RM: Or have a bunch of smart people around you that can read the tea leaves as well. If there’s no smart person in the room, you're in the wrong room, right?

EP: Absolutely. I was just going to start talking about that. I'm a huge believer in teamwork. Huge believer in teamwork. If you're a solopreneur, you're basically a one-man employee. Building that team around you, you obviously had many years in the business already. I mean, eight years ago you had almost 17 years, 18 years in the business. You had a pretty good idea of the leadership positions that you wanted to bring on and I'm assuming that you had contacts and you started to reach out and fill hey, who's available? who would fit within our culture in the company? To speaking to those small business owners, or the people that are at that stage where they're wanting to grow, what would you say to them about picking their team and which members of the team, because you went over a few key members, as such your production team, your sales team, the operator/integrator. What are some of the teams for small businesses and it may vary in the industry that they're in. As they're looking to grow, if there was one team member that you would suggest, man, if there is anybody that you bring on, you need to bring on somebody that has this skill set to help you take it to the next level, and that might not be an accurate statement, or a question, that just may not fit within the paradigm. Let me know your thoughts on that. What would you tell a small business owner that's looking to grow?

RM: Well, that's the integrator piece, the chief operating officer, the number two. Those people are rare. They're expensive. You're going to have to probably give up some equity, or put together a very nice deal. The hardest part about that for us people who actually created a business is you're going to have to let go. In fact, my integrator told me no, the first time I talked to him. He said, “I don't trust you to let go and you can't afford me.” Those are his exact words. Somehow we worked it out. We've met the enemy and it's us. It's because we were prideful and maybe we don't want somebody around that's smarter than us. It's a big leap to give them the control. I brought that guy in, I had to step back and I did some other jobs he needed done and let him take over the corner office and run the company. It's a big leap, but it's important.

EP: Wow. Okay. That's impressive. Man, that's so awesome. You set the company up, you went out and you had your team in place. I'm assuming that when you sold the company, that the team in place stayed onboard, or did – when the new owners came onboard, did they transition out leadership roles?

RM: No. Actually, they took my leaders and they put them in leadership roles in their company.

EP: Fantastic.

RM: They didn't need the operator, of course. They didn’t need the financial people, or the lawyer, or me, which is good, right?

EP: Okay. What is your – I'm sure, people are – For anybody that's an entrepreneur that wants to build a business to then turn around and sell it, now you think of these in the granite, the shark tank and other companies like Marcus Lemonis is the profit – it's a different strategy. It's a different way of investing in businesses. For the entrepreneur that builds a business, they've got their heart set on building it and then selling it and exiting, what are you looking at doing now? I mean, you've got – and this may – you may want to talk about it. You may not, I don't know what you're doing now, but you've spent the last 25 years building a company. It was your baby. You brought on the team, you release the reins, you watch this incredible business flourish and then you were able to exit. Are you just a retired God now? What's your plan now?

RM: Well, I call it rewiring. I promise, I wouldn't make any huge purchases, or join any boards for at least six months.

EP: There you go.

RM: Actually, we’re trying to let the dust settle. We'll do something. I'm passionate about mentoring and sharing the story and love hanging around CEOs and do some investing. I'm done starting up and growing companies by myself, I can tell you that.

EP: There you go.

RM: I wrote that book.

EP: Well Richard, it has been a privilege and an honor, sir, to be able to talk to you today. Thank you so much for coming on. I know that the listeners have been taking notes that it's going to be really good for them. You've covered some just great information. Just to go over it real quick, you mentioned solving a business problem. For those people that are – they believe they’re entrepreneurial at mind, or at heart and they want to build a business and they're trying to figure out where to start, for you it was simple. You were in a position where you recognized there was a problem and you wanted to create a solution to solve that problem. You mentioned that there's this 10-year window moving forward. That if people are not building a culture in their companies that are really targeting and bringing on these young forward-thinker visionaries onto their team that recognize and understand this robotic automation that is happening right now, that they could very well be in the dust. There's ands, buts, or ifs about that. You had mentioned a great book, Traction, which it is a incredible book. We'll make sure that is in the show notes for people that are wanting to read up. Is there any other reading that you would recommend that can help an entrepreneur be able to sow the seeds and reframe their brain work to go from a lifestyle business into a growth business, so that they can exit?

RM: Yeah. Well, everybody that has an entrepreneurial thought should be reading the E-Myth by Michael Gerber. Then the Built to Sell book, and there's a website and services, also a very good information along those lines. Verne Harnish has written a lot of great stuff, The Rockefeller Habits, which has all – a lot of those thought lines in it as well.

  EP: Excellent, excellent. Then one of the last points I want to cover is as an entrepreneur, for all the listeners, if you are wanting to grow a business and be able to exit, you have to be willing to let it go. I can imagine sir that was hard, it was difficult. You even mentioned that it was something you struggled with. Luckily, you had an operator that was willing to go toe-to-toe with you and say, “Hey, you need to step out and let me take this.” Thank God, you had the wherewithal to say, “Okay, my company is going the direction that I want it to go. I've got lined up my team. Everything is where it should be. I can step back.” I just think that's incredible. Thank you so much for coming on the show. We sincerely appreciate it. Look forward to hopefully talking to you later.

RM: Thanks, Edwin. Good job.

EP: Thank you, sir. Everyone, this is Edwin Epperson, host of The Sophisticated Investor. We have had an incredible conversation with Richard Milam. We look forward to presenting more business and financial knowledge to help everybody's acumen increase and we will be in touch later. Join us again on the next show of The Sophisticated Investor.

EP: That wraps up our show for The Sophisticated Investor. Thank you so much for joining me and joining our guest today, as we dove into the specific assets and the market that they invest in. Please join us again, when we dive into more investing techniques and strategies in different assets within different markets, so that we can help you, the listener and our community member build, protect and preserve your family's generational wealth. This is Edwin Epperson, your host of The Sophisticated Investor. God bless and have a great rest of your week.