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- [00:00]
Will Smith
In December 2019. Today's guest was three weeks from closing a sale of the software business he'd acquired with a traditional search fund. This was to be a fantastic exit for Raj Mahajan. And just like that, his biggest customer publicly announced it was building a competing product. His buyer walked. What followed is a story about what concentration risk looks like when your biggest customer not only chooses to stop supporting you, but actually starts stealing from you. Raj bought Super Salon in 2015. It was point of sale software for multi location salon owners. He converted it from on prem software TO cloud based SaaS, tripled annual recurring revenue and took it to market at the right time in a hot category. Then came the unraveling a whistleblower, a lawsuit filed mid Covid, and a settlement that Raj describes as the hardest thing he's ever done. Listen for his reflections at the end of our conversation. Reflections originally written when he thought a big exit was three weeks away and revisited. Now on the other side, Rod shares his insights on hiring, on culture as armor, and on my attitude is my decision. By the way, Raj is now searching for another company to acquire to get back in the game as a search
- [01:34]
Interviewer
fund CEO, we hear why.
- [01:37]
Will Smith
Here he is. Raj Mahajan, former CEO of Super Salon how you structure your acquisition the entity, the deal itself has tax consequences that can follow you for years and they're much cheaper to get right up front than to fix later later. So in a webinar tomorrow Tuesday, attorneys Bill Barlo and James David Williams are hosting a webinar with special guest Joshua Siegel, a tax attorney, to walk through entity and deal structuring issues and their tax implications. Among the topics you'll learn asset versus stock sales, F reorgs, QSBs and S corporations versus partnerships. Expect this one to get into the weeds a bit, which is exactly where you want your attorneys before you sign anything. The webinar is Tax Issues, Entity and Deal Structuring and it is tomorrow, Tuesday, July 28th noon Eastern. Link to register is right at the top of this episode's show notes or
- [02:46]
Interviewer
on the Acquiring Minds homepage. Acquiringminds co.
- [03:01]
Will Smith
Welcome to Acquiring Minds, a podcast about buying businesses. My name is Will Smith. Acquiring an existing business is an awesome opportunity for many entrepreneurs and on this podcast I talk to the people who do it. Buying a small business sounds simple. Find a company due diligence, get a loan close. In reality, you wear every hat just to get the deal done. And then the moment you close, you have to throw those deal making skills out the window and learn how to operate. You shouldn't have to rebuild this infrastructure from scratch and you definitely shouldn't do it alone. That's why Walker Deibel created Acquisition Lab, which started as an accelerator, has expanded into a complete ecosystem for acquisition entrepreneurs. Over six years, the lab's 1200 members have acquired over a billion dollars in businesses. The Lab puts everything under one roof. An active community, deal reviews, post close services, and a dedicated fund helping experienced operators buy larger businesses. If you're serious about buying a business, come see why Lab members have a 40% success rate. Learn more in the show notes or at acquisitionlab.com acquiringminds
- [04:30]
Interviewer
Raj Mahajan welcome to Acquiring Minds.
- [04:34]
Raj Mahajan
Thanks. Happy to be here. Appreciate you. Appreciate you hosting me.
- [04:39]
Will Smith
Raj In 2015 you bought a software
- [04:43]
Interviewer
business in what ended up being a hot category. So you were sitting pretty there for
- [04:49]
Will Smith
a minute, then the rug was pulled
- [04:52]
Interviewer
out from under you by one of
- [04:54]
Will Smith
your customers, no less.
- [04:56]
Interviewer
This is one of the more dramatic
- [04:58]
Will Smith
search stories I've heard.
- [05:00]
Interviewer
Let's get into it starting with some background on you, please.
- [05:02]
Raj Mahajan
Rogue Absolutely. So I guess I'll start with I grew up in California in a small town in Los Angeles, if there are small towns in Los Angeles. And then I went to school back east in Boston at Boston U and was a finance guy and went to, went the normal path after college and went to New York and worked at Bear Stearns on their trading desk for a couple years. Realized that wasn't the path for me, just wasn't my personality. It was exciting, it was fun. I was in the middle of Wall street, this is the early 2000s, and then decided I wanted to go to investment banking. And I ended up finding an opportunity at a company called Hu Loki, working in their telecom and financial restructuring group. Did that for a few years, enjoyed the work. But at the same time I decided I knew I wanted to go to business school. I ended up taking a year off and traveling in between my job and what I thought was going to be business school. During those travels I ended up getting an offer to basically run the finance side of a family office. I was young and it was a, it was a amazing opportunity, you know, hundreds of millions of dollars to help manage and run and do that and kind of like my first quasi entree to search as I was looking for deals for the founder and the guy whose money we managed. I signed and July of 07 started in September of 07. Meanwhile the market was going in a tailspin and it lasted about 13 months before we parted ways. And then I decided I wanted to Go back to business school. Even though, like when I was going in 07, I withdrew my applications to take that offer. And then Post, I, I moved back to London where my brother was, stayed with him for a few months. Decided, you know, just to relax before grad school. And I rented an apartment on the Amalfi coast and lived for 12 weeks and hung out. And then I started at USC. I did mostly like entrepreneurship and strategy and communications was kind of my field and the classes I focused on at USC and Post, I didn't think I wanted to be a banker, but a few guys I worked with at Houlihan had gone to another firm and I decided to join them. And I did that for a couple more years doing financial restructuring. But I got to a point where I was like, this isn't where I wanted my career to go. Nothing against the profession. I just, this is not what I wanted for myself. You know, I kind of been in the advisory role for 10 plus years and I wanted to go like seguent to, from coach to quarterback. And I started hearing about Search, this is back in 2013, because a friend of mine from grad school, he had done it. And this is when it was pretty quiet. Like there was maybe, I don't know, 10 to 15 of us in 2011 that were really doing it. Most of them came out of Harvard or Stanford or Wharton or some of those schools. And he was kind of the pioneer from our school, from USC or one of the really early ones. But as I talked to more searchers, I was like, you know, I gotta do this. And so in 2014, I ended up leaving my, my banking job and decided to go out and pursue a search.
- [08:06]
Interviewer
And what, what so appealed to you about it, Rog?
- [08:10]
Raj Mahajan
It was, you know, just every conversation I had with a searcher on how they kind of looked at the world, kind of what your exit opportunities were. And I don't mean from buying a company, but let's say I didn't buy one. You know, you learn to talk to CEOs, you learn to raise money, you learn to analyze opportunities. You have to the, the mental fortitude you have to go through the emotional journey. Like all of it was building on who you are as a person. And it just was exciting. And you get to control your own destiny. You know, I just worked a job for the last 10 plus years where I'm doing a hundred to 140 hours a week or some silly number, you know, and you make more than your peers, but you give up a lot too and it just didn't, it didn't, it wasn't where I wanted to go. I wanted to have more ownership on my destiny. And so, you know, I just kept hearing about the search and I was like, you know what? I was at the right age in life and I just said, you know what? I'm going to do this. What's the downside? You know, I can always go back to banking. I'd already kind of, you know, proven myself in the finance world and the respect of like, I'll get a job if I need to. But this entrepreneurship opportunity really just appealed to me. And, you know, and I looked at corporate venture capital, hedge funds, private equity, I talked to friends and all in all of them, and I asked them what they liked about their job, what they don't, all that sort of stuff, and just did that self deep dive on which one resonates and search fit for me. And traditional search was kind of still nascent and self funded was. It didn't really exist. This, you know, 12 years ago is really small. Maybe there were some franchisees, but it was more people at the end of their career trying to find something than people at the beginning of. And so as I just talked to more and more people and I just was like, I gotta go do this. And so I'd made the leap and.
- [09:57]
Interviewer
Wait, sorry, Raj, chronology again. How long out of business school were you?
- [10:01]
Raj Mahajan
I was about three years out. I graduated in 11, I started the search in 14 or I started the fi. The fundraising.
- [10:08]
Interviewer
And I heard you say that you wanted to go. You basically get closer to the action from quarterback, from coach to quarterback, Right?
- [10:14]
Raj Mahajan
Yeah.
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Interviewer
Yeah. So there, so part of it was also that, that there was something about, in finance feeling like you're on the sidelines more than actually in the game.
- [10:23]
Raj Mahajan
Yeah. So when you're in banking, like, you know, you're creating value by, you know, let's say you're taking a business to market in the M and A world. You know, you're creating value by creating a process by. But once you sell the business and all the things that you projected would happen and you worked with the company and management, your job is over. And that was it. You kind of delivered the, Delivered the report, delivered the package, made the sale, and you move on. You didn't actually build the company, you didn't take it and execute on those things. That, those are the things that excited me. It's like, how do you go hire the right team? How do you go to a new strategy? Like, do you want to go geographic, do you buy another company? You talk about all these potential levers of growth, but you never actually execute on them. And I wanted to go execute.
- [11:05]
Interviewer
Great. Okay, so you decide to search. Is there anything to say about your fundraise or searching process before we get to the business itself?
- [11:15]
Raj Mahajan
I mean, because I didn't come from a big school, it took me a lot longer than probably most. You know, I didn't come from the traditional search schools and had to learn it from just asking and talking to a lot of people. I mean, I must have talked to 30 to 40 searchers or post searchers or operators or anyone in the space, those that had closed down. I drove around the country to. Flew around the country to meet people and sit with them, kind of understand their environments.
- [11:46]
Interviewer
Former searchers, you mean?
- [11:47]
Raj Mahajan
Yeah, and current searchers too. Like, if there were multiple in the city and usually the hubs like Boston, San Francisco, Chicago, you can find more of an influx of people. So I just sat with them and I was like, look, I love to understand how your search process goes, what this model looks like. So, yeah,
- [12:06]
Will Smith
great.
- [12:06]
Interviewer
And then the fundraise itself took longer again, but you. And you kind of just networked your way into the traditional search fund investors who were active at the time.
- [12:15]
Raj Mahajan
Yeah, I created a big list, the database. Again, this is like where you found one. Because there used to be, like, only a handful of search fund investors, and you find one. And a lot of the search fund websites look the same. Like, here's my team, and you find one, and then you find all the other 15 other people that were in it, and you create a table and you just start to see who's really active. Like, you know, the, the Pacific Lakes, the search fund partners, the anacapas. Like, you start seeing their names over and over again, and you can start to create, like, who's a real search fund investor and who's someone's uncle, you know, that's done one deal. And, you know, it was kind of a dog with a bone. Like, people said no. And I said, okay, we'll start there, but I'll come back. And so I had many people that said no. And I came back and said, okay, I appreciate that, but I'll see you in a few months. And, you know.
- [13:02]
Interviewer
And how many of those people did you convert?
- [13:04]
Raj Mahajan
I'd probably say about half, because there was like a resilience and a persistence. I think that they, they, they liked, you know, like, I just, I had to get it done. So it was just constantly going back And I had a couple, you know, it was in month six of my fundraise, and they were like, hey, Raj, are we going to do this? And I said, yes, yes, we're going to do this. I'm going to finish this. I ended up finding a not fully traditional search fund group. Like, I had my neighbor, I had some family member, I had an old boss, other people that knew me that could validate that maybe the pedigree of Stanford or Harvard didn't have, but the work ethic that they would put their money behind too.
- [13:46]
Interviewer
And do you see yourself as a dogged person in general?
- [13:52]
Raj Mahajan
Yeah, I think so.
- [13:53]
Interviewer
I'm pretty always or you've become that as a professional?
- [13:56]
Raj Mahajan
I think I've. I've pick and choose. What I become stubborn about, I don't. There's not every hills I hill to die on. But for something like this, it was just like, this is what I'm gonna do. Like, there was only one answer then. I wasn't gonna stop until that happened. So even after six months, it still wasn't like, I'm gonna, I'm gonna pack it up, I'm gonna go find a job. And just kept going and finally got it done. Thanksgiving of 2014, and I started my search in January of 15. I took a month off. I went to Australia and took three weeks and dove and surfed before I got my head right. And then I jumped into the search. January of 2015.
- [14:34]
Interviewer
You like to travel in these in between moments.
- [14:36]
Raj Mahajan
I do like it. I do.
- [14:37]
Interviewer
It's.
- [14:38]
Raj Mahajan
It's my happy place.
- [14:39]
Interviewer
Tell us about the business you found.
- [14:41]
Raj Mahajan
So I found a business in point of sale software for the salon industry. So, you know, if, if you've ever heard the investment banker to hair salon software operator story, you've. You've heard it a thousand times.
- [14:58]
Interviewer
A second.
- [14:59]
Raj Mahajan
Yeah. So the way I got there was really. I mean, search is an interesting game because you go around and you're kind of. You're looking at all sorts of things and what makes the world work and like, oh, like, you just. Your mind opens up. I sitting on a plane, shockingly, and I'm looking at, you know, the Runway, and you see the lights on the Runway and you're like, oh, somebody's got to install that. Somebody's got to service those. How many FBOs are there in the world? How many airplanes are there? Like, how many? Like, how's the market size of this? Is this something that I could do? Like, could I run this business? It's probably recurring Contract. You know, you start thinking about that, you're driving down the street, you see the, the cones and stuff, you're like, somebody's got to put those out. Who manufactures them, what's the logistics? It's got to go from here to crosstown to main street, you know what I mean? Like you're just, your mind goes this way, you know.
- [15:43]
Will Smith
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- [16:58]
Raj Mahajan
and so about 12, about 10 weeks in, you know of the search. In this March, I was with a friend of mine at a, I was, we were out grabbing a beer at a bar in Santa Monica and it's one of those places that have like sawdust on the floor kind of place. And I saw that they had a cash register and in my head all of a sudden I'm like, wait a second, why don't they have a point of sale? And then it started to click that, oh wait, the point of sale is the brains of a small business. You can't really run that business efficiently without it. So the very next day I just started googling point of sale companies on Capterra. I mean there was no grata, there was no invent, there wasn't any of those databases. So I went on grata and they're not Capterra and G2 and just started downloading.
- [17:44]
Interviewer
These are software review sites. And so you were, you were looking at the category of point of sale.
- [17:49]
Raj Mahajan
Exactly.
- [17:50]
Interviewer
And get. And getting all the names of the players to reach out to them.
- [17:52]
Raj Mahajan
Yep. And then I had a freelance person on Upwork that I would send that list to. They would get me the CEO's name and maybe email and fire that list over. They'd send it back. And then I just started, you know, dialing for dollars and started typing up emails. And I had one gentleman that ended up saying, like, yeah, I'm happy to talk. It was the most clunky conversation I've had, like, you know, in all of it, I was like happy to talk. And it was. That was the end of the email. And then it was like, how about next week? Sounds great. It was just like there was like one sentence responses. And then finally, you know, I found this. I started talking to him and I started understanding what the business was and what they were doing. And you know, he. They basically, they did point of sale software for salons. So if you think about what that is, is that they. If you go into a Super cuts and they check you in and check you out and they do the inventory and the scheduling, all of those pieces of the whole infrastructure, that's what they did. And so his story was that he was a franchisee for Super Cuts and he had six stores in Alaska and they're all about 30 miles apart, and he couldn't get to each one. So he had to figure out a way that he could ensure that, you know, the things were audited correctly. So like, Stylus takes a. Takes a customer but says that the customer canceled, the stylist keeps the 20 bucks and he gets zero, impossible to track and all that stuff. So he started, he hired, you know, a couple high school kids, maybe early college to sit in his lobby and just develop a workflow so they could see how that went. And then he started building it and selling it within the SuperCats franchise system because there were a bunch of people like that. And so there was no consistency of point of sale in the super. In the game when he started. And so he basically just kind of went throughout the entire franchise system of supercuts, sold his salons and became a point of sale provider. And so he kind of gave me the background and he was kind of getting to a stage where he was ready to retire. You know, he'd had a good run, he had somebody in, but he wasn't exactly like thrilled in the direction it was going. And with all the things I kind of came along at the right time, right. The amount of serendipity to find him. He was building a house in Hawaii. You know, he was ready, his. His wife was ready for him to step back. And we just started talking and we got on really great and you know that. And then we just kind of went off to the races from there. But so my search for US was pretty short and it was all very serendipitous and lucky.
- [20:26]
Interviewer
Was he still based in Alaska?
- [20:29]
Raj Mahajan
No, he actually had, he had moved to Chandler, Arizona. It was one of those like, you know, he basically had hard times in 07 as like some of his like everybody did and he basically he was, he went virtual and he decided he didn't want to be in the cold anymore and moved down to Arizona. Very like, you know, he's a great guy and a very interesting story. And after he got rid of the offices, a bunch of people from Alaska actually moved down to Costa Rica. Lower cost of living, better weather, all that sort of stuff. You know, he moves to Arizona and next thing you know in 2008, 9, the business starts growing again and he's got a virtual company before it was in fashion and a labor, a labor pool that the people from Alaska that met people in Costa Rica. He started really building out a big offshore nearshore operations where customer support implementations, a lot of expats, also a lot of chicos became like, you know, English speaking time zones. Like it ended up being a very, very efficient operations that he built all by necessity.
- [21:38]
Interviewer
And so he was running. The only business interest he had at that time was the software business. Yeah, he was a former franchisee at this point and so were most of his customers or effectively all of his customers. Other franchisees in this one franchise system,
- [21:53]
Raj Mahajan
Supercuts, it started that way but then he started branching out as he got to know more and more people in the space. I mean the industry gets pretty. After you get in it, you start to know different franchises again. There wasn't a, it was a very nascent industry for baby in its infancy. Not even nascent. It was in its infancy back then because nobody had a really good tool, especially when you had multiple locations. So like if you think about the icp, it wasn't all salons. It was people that couldn't get to their salons in a day. So if you have one you can go in. If you have five or four or three, it's a lot harder to go to each one. And unless you hire somebody and then you've got now reporting controls and all that sort of stuff. So he. So his ICP was anybody in like multi location salons. And so that, that's. So that made it attractive to other franchises. So like we also had fantastic Sam's. We were a big player and.
- [22:47]
Interviewer
And so from his customer base, what percentage was concentrated would you say in Supercuts?
- [22:53]
Raj Mahajan
So Supercuts is probably about under the umbrella, it was probably about 60%. Okay, meaning. And I say umbrella because there were corporate stores that were owned by the parent company of Regis, or which is Regis. And then Regis had Supercuts and a few other brands, but there were corporate stores, Supercuts, franchisees had its own. Every franchisee had its own contract, and they weren't necessarily connected. Okay, so, but I say under the umbrella, call it 60%.
- [23:24]
Interviewer
Okay, well, we'll find out here in a minute why I keep pressing on this particular detail.
- [23:31]
Will Smith
And Raj, what did the business look like?
- [23:33]
Interviewer
Can you give us some numbers around it?
- [23:35]
Raj Mahajan
Yeah, we were about 7 million a top line, you know, with about 4 million of recurring, give or take when we bought it. And we're a profitable business with pretty healthy margins. Again, efficient capital structure. Obviously you knew the concentration and. But it was fully recurring. You know, it was a really simple model. Like, it was very easy to understand. Like, you know, if you think about what the business does, it wasn't, you know, genome testing and things like that that have to move around. It was a haircut. It was like you could go down the street and touch it and see it. And, you know, that's how I did a lot of diligence. I just walked in and talk to a stylist or a front desk person.
- [24:14]
Interviewer
When you say it was 7 million top line, four of which was recurring, what was the other three?
- [24:19]
Raj Mahajan
What was the service?
- [24:20]
Interviewer
Non recurring revenue.
- [24:21]
Raj Mahajan
So we had a license and maintenance model. So where you pay a lot for it up front. Think about like the Microsoft CDs. It's like you bought the CD for 200 bucks and then you paid quarter or monthly for a service support. It was that. Okay, so this is again, before SaaS was a thing, before virtual was a thing. It was all. It was a very different landscape back in 2015.
- [24:42]
Will Smith
So it.
- [24:43]
Interviewer
Was it on prem software or was it not SaaS?
- [24:46]
Raj Mahajan
It was on prem.
- [24:48]
Interviewer
Oh, so you'd have to install a machine, so you installed it locally.
- [24:53]
Raj Mahajan
But it also, it also would sync to the cloud. So, like you could operate if the power went out, it still operates. But if you were at home and you wanted to manage it, you could see real time or within a few minutes the data going back and forth. So it was kind of like a hybrid. So it had an on prem component and it had a cloud based component. So all of the back office, so the owner of the business or franchisee or whatnot could actually see everything happening up to the minute, which customers canceled and all that sort of Stuff but at the same time, if the, if the system went down, you didn't lose operations. So it had a fail safe because a lot of these salons were in strip malls and strip mall powers go out, somebody hits the wrong pipeline. I mean it's, it's more common than you would think. Even I was shocked. I thought it was like, who doesn't have it? Yeah, but I also lived in Boston and New New York and la, where it's pretty robust. But when you start going out to, you know, less populated cities, like it's a lot less stable, if you will. Especially back then.
- [25:57]
Interviewer
Well, but still by this point, 2014, 15 SaaS was well on its way and it was just about to hit the kind of inflection point of being the hottest category. But it was not, it was hardly a novel business model. And so on prem software, even in 2014, 15 would have seen, would have seemed a little bit old. And so were you thinking that one of your plays here would be to convert it to fully cloud?
- [26:24]
Raj Mahajan
It was the very first thing we did. Well, the first was the model, first was the pricing model. It was like first we got rid of the license and maintenance model and went straight subscription every month. So you know, and then we started saying, okay, well let's start moving some of this stuff to the cloud. What can we move, what can we keep? You know, that sort of stuff. So that took a lot longer. That was a bigger lift than I was expecting. But that was, that was one of the early tenants of like how we were going to create a go forward company.
- [26:52]
Interviewer
Okay. And, but just, and then going back to the transaction. So as I just said, this was I guess before SaaS got super hot. So you were able to, or software broadly, you were able to get your hands on it a few years later if you, you probably wouldn't have been able to. So you're correct. I mean this wasn't. Yeah.
- [27:11]
Raj Mahajan
I mean back then we bought on an EBITDA multiple. So you, you bought on profitability. So four years, five years later, the profitability was a nice to have, not a need to have. It was all about recurring revenue, you know.
- [27:24]
Interviewer
Right. And so what to just double click on that, what that means for the listener is that SaaS businesses were often bought on ARR. Annual recurring revenue. So purchase based on a multiple of top line as opposed to profitability, which is of course, whatever.
- [27:41]
Raj Mahajan
It's.
- [27:41]
Interviewer
I think we, we, we may return here to a world where software companies are bought on ebitda. Right.
- [27:48]
Raj Mahajan
I think, I think so.
- [27:49]
Interviewer
But certainly those ARR multiples are coming down.
- [27:51]
Raj Mahajan
Yeah, I think so. It was. It was. I mean, it was. It was a healthy business. It was a great business. Again, never would have expected it, but in a lot of ways, dumb luck that I found it and I found the guy, the right guy at the right time, who was a. A great partner to have. He was on our board for two. He was supposed to be on our board for two years through his earn out, and he stayed for set almost seven, you know, because he was constantly, like, helping and giving value and, you know, and he understood the business, obviously. He lived in it for so many years. Um, yeah, gave him something to do, you know, every 90 days at a board meeting. Um, but yeah, so we did the SAS conversion. You know, we probably would have done it faster had he not been on the board, because I think he understood how often these things go down. You know, like the. The system goes down and how. How impactful that is to the stylist and the franchisees. So we had to leave certain aspects of it on prem so that it would have that redundancy aspect.
- [28:46]
Will Smith
Ah.
- [28:46]
Interviewer
So the fact that you had to move slower because of his influence was a positive.
- [28:51]
Raj Mahajan
At the end of the day, it was because had we done it faster, I think we would have alienated or hurt our customer base. And so I think his. His ability to get us to slow down on, like, hey, I don't think that's the best idea. But he also understood where we were trying to get to and where the world was. So how do you bridge that, that divide? And he was good at it. He helped.
- [29:11]
Interviewer
Well, Raj, before we hear more about your ownership and operations, anything that you can share on the acquisition terms, I
- [29:19]
Raj Mahajan
mean, it was pretty. It was pretty clean. It was. You know, we had. We bought it on a multiple of. Of ebitda. I wouldn't say it was rich, but it was. It was healthy at the time. You know, I mean, it wasn't like a 3-4x. It was a little bit. It was more than that, but it wasn't also like 10 to 15. Um, but it was like. I think people were like, okay, this is a healthy company, but we've got great margins. People were really nervous about a couple things when I bought it. One was customer concentration. What does this movie look like? Which I'm sure we'll talk about. And two was it was virtual. You know, how do you create a culture? How do you do all these things? The world wasn't used to that at the Time there was, I think, a fully remote business. Fully remote business, not one office.
- [30:05]
Interviewer
It's so funny. Like, I have to, I have to make sure I even understand what you mean, because now we just take it for granted. But yes, at that time, they were. There was, I remember there just being a couple tech Silicon Valley businesses that were companies that were fully remote and they just got a lot of attention. They go on podcasts about how it was that they were successful being completely 100 remote and here we all are. But go ahead.
- [30:26]
Raj Mahajan
I think it was. And I called all of those guys because I, when I was raising money, that was one of the bigger things. Like I was a new operator. It's like, how are you going to create a culture if you can't even see the people and you can't talk to them and, you know, you got people. And we were in like 12 countries and 15 states and know you, you've got, I don't know, 4,000 locations of customers. Like, how are you going to create this? And I remember calling a lot of those Silicon Valley companies and I think it was the WordPress person. I think I'd read somewhere that he liked wine and I was trying to offer him a bottle of wine to sit and chat with me about how he did it. Because I could use that to try and influence my investor base to be like, look, this is how it gets done. These are the people I've talked to, you know, just hustling and trying to get every bit of fact of like, how do you do this? Yeah, because I had zero experience. Right. So it's trying to stand on the shoulders of giants and talk to those guys. And ultimately, like, we did get there. One of the things I had to do was I had to promise that I would build the headquarters and so I would set up a shop and I would introduce management and, you know, where I wanted to be and all of those things. That was part of the, like, okay, on top of like the SaaS move. It was you have to set up, set up shop somewhere and start building a headquarters. Kind of seems silly today, but at the same time.
- [31:45]
Interviewer
Exactly. So you had said the customer concentration or the concentration in this one franchise network. I assume you mean the remote, fully remote nature of the business, which was newfangled at the time. Any other weaknesses that you or your investors were worried about?
- [32:01]
Raj Mahajan
I mean, it was other than that it was kind of like a normal search company. It was largely founder led, meaning, like, management was thin as far as, like, kind of like, you know, how to scale and grow this business. A lot of the operations were you know, kind of word of mouth more than like a true go to market strategy and you know a proper development cycle. It was, there was a lot of these things were not in place. They were good enough for the time, but they weren't. It was like this will get you here but it won't get you there. So there was a lot of that but it was things that we walked into eyes wide open. We said okay, these are the things that we can do. We need to hire a management team that makes sense. We need to invest in the systems. We can't be working on Google spreadsheets. And it was not what we need to do is what order we needed to do them in and what's going to make the biggest impact. And I think the very first we had a brought in a fractional CFO to kind of help make sure at least if we know the numbers again I finance guy, if we know the numbers, we know like that we're going to be okay and we can make good decisions. And so let's make sure that we're profitable. Let's make sure that we understand our business before we start going and changing
- [33:10]
Interviewer
it because well a case of a lot of these quote weaknesses in the business also being your levers. These are, these are, you know, you want to find the weaknesses. It's, there's no perfect business. And so you look for businesses where the weaknesses are. The are, are those that you can fix. And so it sounds like there was a nice juicy long list here. You just had to figure out how to prioritize them. That's right. Great. Okay. Returning to then your ownership. So you agree with the investors that to do this deal you have to take it from a remote business to a hybrid business where there's some had some physical headquarters. Carry on from, from that point.
- [33:48]
Raj Mahajan
Sure. And so basically I moved to Minnesota because Supercuts was based there. And I said look, I want to be spend six months here. I'm the new guy. This is really important obviously the customer concentration. And I decided to sit there and I moved in January of 16. So I moved from Culver City, Santa Monica, 75 degrees to Minnesota. January, I think it was January 14, 2016. So it was a 95 degree drop in that three hour flight, four hour flight. It's very cold and you know, well, I live in Boston. Minnesota is a different, it's a different beast. And I didn't know a soul. Um, you know, so I, I but I Moved there. And I was like, look, I'm gonna make my relationship. And then the way that I thought about it was I would take a protractor and do a two hour flight outside of la. Cause that's where I'm from. And somewhere in that arc would be where I put the headquarters. But for now, let me just go meet the people of Regis and Supercuts and like, you know, learn the business and all that. So I ended up doing that. And then I think it was maybe May of 16, the board asked like, hey, so where do you want to put a headquarters? And I don't know if you've ever been to Minnesota in May, but it's, it can be beautiful. And so they got me on the right day, right time. I started making friends. You know, I was playing in a baseball, a men's baseball league, a 35 and over group. And it was, it was just beautiful out. And I was like, here's great. You just forget about the winter. And I just said, here, here's great. And I just decided to put the headquarters in Minnesota and I started networking and talking to people and finding a space and you know, we had some dingy little thing that I paid maybe a thousand bucks a month on the high end, but with the promise of tenant improvements and fast forward that story, it turned out to be one of the most beautiful spaces I ever paid for and had for nothing. And landlord was great. It was, it was one of the best places in Minnesota. Like best offices, you know, exposed piping, brick walls, warehouse district. It was great. But I did end up hiring a management team. I did do all those things in Minnesota and I just. Minnesota went from a house to a home.
- [36:02]
Interviewer
And Raj, what was the, the vision for the team that you were going to build on the ground in Minnesota? You talk about management, but say more like, are we just talking of the core five or six leaders of the business or more than that.
- [36:17]
Raj Mahajan
We started there. We started with like a couple of the key tenants. So the part that I didn't type or didn't mention was that when the founder was selling the business and had put in the CEO that he just wanted to go a different direction and wasn't exactly thrilled with all that. I kept the CEO and moved him to the COO seat and he was helpful and so I was able to learn from him a little bit about what was happening. And so that was kind of the start of management, if you will. There's two of us now in one centralized location. And then it was. We brought In I think a head of technology because I was again I wasn't a tech guy by trade and she was fantastic. And then we brought in a finance person because again as opposed to the fractional person, we had enough bills and it was a bit messy and making sure that the collections and all the other processes were going. And then we brought in someone else and then it was, I tried to delegate a little bit more about what do they want because if only we were to hold them accountable is to build the team that they want. And we all wanted to make sure that we were maintain profitability, we continue to grow, are we doing the right things? So I had to leverage them first starting with management, then deciding do we want them next person in house or not and who made sense. So it wasn't. We're putting everybody there because I think certain roles were great to be remote, you know, like customer support for example. I, I didn't need to sit with them every day. You could make the argument and people have of like what if you can walk around management by walking around is a thing maybe. But that wasn't the culture that we had for the last 10 years before I bought the company. So sure it didn't make sense but we didn't have a great development cycle so we might have brought a developer in house to be like show me how things are working, let's do a test here, that sort of stuff. So those types of things. So it just depend is what I would say. But it wasn't, it was just start with management and go from there.
- [38:15]
Interviewer
Well, as we also now know about the dynamics of remote businesses, it's, it's, it can be corrosive to a culture to when everybody is working remote and then to tell them they have to go to the office.
- [38:28]
Raj Mahajan
Yeah but you remember this is also everybody back then was self selecting like everybody back then like you, you knew how to work. If you had do remote work, you were self selecting on knowing how to do it. The problem that I think the world faced in 2020, 2021, you had a bunch of people that weren't going to be good at it. Being forced to go remote, finding out how to hide and then being asked to go back. And that, that just wasn't in their DNA. Had they never had the opportunity, they never would have taken it. These are people that were living in Costa Rica expats. They were already conditioned. Like I've got my work day but I want, I want, I want to be able to go on the beach and I can Actually work and be productive because most people were in office at the time.
- [39:09]
Interviewer
Right.
- [39:09]
Raj Mahajan
So.
- [39:10]
Interviewer
And none of those people. Were you going to mandate that they move to Minnesota?
- [39:15]
Raj Mahajan
No, no, I wasn't.
- [39:16]
Interviewer
We're gonna keep everybody remote. Was going to stay remote. It was just net new employees that
- [39:20]
Raj Mahajan
were gonna be working and not even all net new. It wasn't everybody. It was by. By, by role, if it made sense. So, I mean, I think at our peak, we only had. I mean, when I bought the company, we had about almost 100 people. We ebbed in flow between 80 and 120, depending on implementations and support. But at our peak, we might have had 10 people in the office. That was about it because it just never materialized. Because the way the business grew and evolved, I think the board and investors started to get more comfortable that, hey, this can actually work. So the pressure to move fully in house or fully in location or on site kind of started to wane.
- [40:03]
Interviewer
Yeah. Yep. You know, and what of the being in the backyard of your biggest customer of Supercuts, or as you. As you refer to them, Regis. Regis is the sort of parent umbrella which we'll cut. We'll call them. Being in Regis's, you know, backyard had that relationship. What did it look like?
- [40:21]
Raj Mahajan
It was strong at the time because, like, everybody was there and like, they were. It was a great Minnesota company, you know, doing, Doing good things. You know, the people there became close friends. Like, we'd go out and. Because we worked so closely together, because we wanted the same things. We wanted the franchisees to be happy. We wanted them, you know, the happiest customer was the one that didn't call you kind of mentality. But, like, we're supportive and we're like, how do we build? We put together focus groups for them and be like, what's going to move your needle? Like, you know, your business. And we tried to do everything we could. And I think we worked pretty well together with this, with that management team, you know, this, this. They had gotten a new chairman, if you will, kind of before, and the stock was kind of flat and things started to change. And I'm sure we'll get into that, but the original team were fantastic Midwestern Minnesota people that I love grabbing a beer with or I loved, you know, going out to dinner with. We met every quarter with our team and their team and sat and talked about, like, what went right, what went wrong. You know, they weren't. There was never like a, you're doing great and you're not doing great. It was like, hey, you're not doing great here. We were very honest about how we were performing because we needed to perform for the franchisees and the customers. But it was, it was, in my opinion, a great relationship.
- [41:46]
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- [42:57]
Interviewer
well, Raj, because of kind of the drama that we're about to hear about, we're gonna fast forward through the healthy bits. So give us the bullet points of your tenure as CEO and the progress you make from 2015is through 2019ish.
- [43:13]
Raj Mahajan
Yeah. So the business was, did. We started to execute on all the things again, you hired the right people. We start moving a lot faster and like, some people had to move out, move on things like that. Like, the business evolved and you know, my first, the first departure was always the hardest because you're like, how does it work? Then you start to realize that, hey, it's going to be okay. Like, just, we're prepared for things like these. And that was great. And like, you know, the business model of Supercuts, from the corporate to franchise, they started to move everybody over, which was great for us from a financial standpoint, but we had more responsibility. And what that means is they sold corporate stores to franchisees because they go to a fully franchise model. We started working on our marketing to get more people outside of the Supercuts and Regis ecosystem. We started to do stuff for people. We started putting, you know, crazy, crazy things of marketing. And, you know, we had funny sayings like hugs, not handshakes, which was if your customer sees you down the street and they give you a handshake, you lost them, they should give you a hug. Like, that's just, that's the culture that we had and wanted and promoted. You know, I think I told. I think I've mentioned I've. We wanted to be the toaster. I don't know what toaster I have because it works. You know, like, that was just kind of how we approached life, like, but we're important and you know that. We saw franchisees. It's really easy when, you know, the phones are ringing because the software doesn't work or whatever for some problem that happens to be like, oh man, everyone's just complaining. It's like you kind of step back and make guys. A lot of these franchisees took out their 401ks or leveraged against it to go start this, this entrepreneurial journey. We have to respect it. And they're not mad. They don't. Not like John. They just don't like the situation they're in because the software is not working.
- [44:59]
Interviewer
It's.
- [44:59]
Raj Mahajan
Don't take it personal. And so as they move, we started to evolve and we got bigger and better and stronger and all those things. And we had like, you know, done a great job growing the business. We had almost tripled it in that time. And we decided in 19 to go to market
- [45:16]
Interviewer
and Roger, let me, let me pause.
- [45:18]
Raj Mahajan
I was gonna ask you when you talk about that part.
- [45:20]
Interviewer
Not yet. So you all.
- [45:21]
Will Smith
You tripled it, you said.
- [45:23]
Interviewer
Yeah, just about almost tripled it.
- [45:24]
Raj Mahajan
Yeah.
- [45:25]
Interviewer
So we heard you say 7 million top line when you got into the business. And so you were just high teens. We were just over.
- [45:31]
Raj Mahajan
No, but so we moved to the fully SaaS model. Right. So we had gotten all recurring. So we'd gone to about, almost, about, almost 11 million of. Of recurring.
- [45:41]
Interviewer
So from the four base that you mentioned, four of the. The original seven was recurring. That was now at about 11.
- [45:47]
Raj Mahajan
Give or take.
- [45:48]
Interviewer
Yeah, give or take. Okay, great. That's fantastic. And you had successfully navigated this move to the cloud, which is itself hard and takes longer than everybody thinks it will.
- [45:58]
Raj Mahajan
Yeah.
- [45:59]
Will Smith
Great.
- [46:00]
Interviewer
So really you're firing on all cinder cylinders. Give us the, Give us the, the context too, of how Point of Sale in, in various verticals is becoming a kind of a Silicon Valley darling. I may be overstating it, but I remember some of the, some of the very hot businesses in like yoga studio, point of sale sort of thing. So give us that kind of.
- [46:22]
Raj Mahajan
Yeah, I think Mind Body was the. Probably. That was the first one. That was the very first real, like cloud production platform. And they were the only ones that I think had gone public at the time. I'm trying to remember when when it was. But they were the only ones that really had gone public from that perspective. And I think people started to really open their eyes to be like, hey, wait a second, here's a recurring business. All the, all the reasons why I bought it, but it wasn't public. It was, you had to really think about it. And what they also started to see was like the payments angle was really big too because there's a fintech play underneath the software is that you, you have billions of dollars running through your platform of payments and there's a real monetization part. And I think mindbody really opened people's eyes to that. And people started to say, wait a second, this is fully recurring business. There's this great margin on payments, pretty big, it's sticky, you don't want to swap it out. And I think it was like 2018, 19, you started mindbody bought Booker and then you started to see a little bit more traction in the M and A side. I think Vergaro had started was that might have been 2020, but people started like there was private equity starting to dig around. I think Day Smart was bought by lll Parthenon. Like it was starting. People started seeing this safe, beautiful assets that were SaaS based, recurring, really good margin, big markets, all those things, all the reasons my investors got behind me.
- [47:52]
Interviewer
And as consumers, we're all also starting to see it. And so like I think the, the biggest company that, that people will recognize is of course Toast.
- [48:01]
Raj Mahajan
Yep.
- [48:01]
Interviewer
Which is the restaurant point of sale. And that there were, I mean that must have been a very crowded category that's really obvious to go after. But it feels like today it's really consolidated and I don't, I couldn't name you another one other than Toast.
- [48:14]
Raj Mahajan
I mean back in the day because the Toast was. Toast was tiny when it started because it was still all NCR and Aloha on the restaurant side, but they were super dated and antiquated. NCR and Aloha and Toast came out with this slick platform that just. And Revel was the other one that I think started. And they started raising money and they put in these nice little iPads. And so if you think about like just the general math and statistics of small businesses, a lot of them go out. So you go from this big infrastructure of computer and systems and all that to like an iPad, of course. And it works. Of course you're going to go that way. And then they start making money on payments and those just started to peripheralate the market. And there was this Big changing of the guard starting to happen. And you could start to see the tailwinds and the wave and more money started flowing into it. Interest rates were still low, so debt was cheap. Venture capital was all over it. So, yeah, Toast was a big one. Mindbody was probably the first one. And the other part to your point on the consumer was that we signed and we were the second one to sign. But this is when, like, you started getting restaurants near me. We were the first ones or second ones to do haircuts near me. So this was. We signed with Google. And so now all of a sudden, it became the booking engine and like the ability to get Yelp became even bigger because they started to get more reviews. All this stuff started to change the landscape. And then the integral nature of point of sale became that much stronger because you had inventory, you had tips, you had reviews, you had customer data, you had payments, you had all these different things. It's like, man, you can't get rid of that. It's hard.
- [49:54]
Interviewer
Yeah, yeah, yeah, yeah. Great. In other words, so so much of business is starting to come digitally.
- [49:59]
Raj Mahajan
Yeah.
- [50:00]
Interviewer
That these modern POS will tie into that whole kind of web funnel as well.
- [50:05]
Raj Mahajan
Exactly.
- [50:06]
Interviewer
And, and in your category of salons, who were there other big players?
- [50:13]
Raj Mahajan
There were some. There were a bunch of players that were been around for a long while and some of them still are. But when we competed, it was really against. At the time, it was like Millennium, which was there, which was kind of like the big one. And they, they're another player and they do more high end salons. There was like, you know, Vergara, but they did single. So like in our category, there was only like two or three that we really competed against. And we might have traded, one of which we ended up acquiring a little bit later. We did the customer list. The guy wanted to exit. We had overlapped in portfolio, so it was just kind of rounding out ours. The customer acquisition, not my favorite acquisition, but one that we did just was distracting for the moment. And those were kind of the big ones in our specific space, but one that was kind of percolating was a company called Zenoti. And they were on the spa side. So beauty, wellness, same category, but they focused more largely on massage and spa. And then they were, I think they were founded in 2012 and they started getting, they started out of India, then they started moving a little bit more. They raised money from, I think, Excel, and Excel said, hey, if you want to be a big player, you have to move to the US And Then they started the same thing, and very similar to the founder of Super Salon. They were franchise. They were owners of a massage business. It was a guy that worked at Microsoft, him, his brother Sudhir and Diraj, and they owned a massage place and they said, the software is not going to work for me. And they went and built their own.
- [51:48]
Interviewer
Oh, wow.
- [51:48]
Raj Mahajan
Yeah.
- [51:50]
Interviewer
Nothing like eating your own dog food to build a successful product.
- [51:54]
Raj Mahajan
Yeah. And then they just started growing it. And so they were kind of the other ones that we started to see in 2020 and they raised a bunch of money from Adventure TPG and then eventually Tiger Global.
- [52:09]
Interviewer
Wow.
- [52:09]
Raj Mahajan
So. So the whole landscape started to change and move in our space.
- [52:14]
Interviewer
I would think you at this point must have been very excited because salons are an enormous category. I mean, if Mind Body is owning the yoga studio vertical, that's got to be a much smaller category compared to salons. So if you can. If you see a path to dominating salons being the POS for salons across the US that is tens and thousand tens of thousands and more of possible locations that you could be in.
- [52:46]
Raj Mahajan
Yes and no. And the reason I say yes and no is that if you look at salons as its own category, it's massive. But if you start to drill into your icp, it gets a lot smaller because we did multi location. If you're looking at all salons, you have single locations. So companies that, like Vergaro and Rosie and a few others really did well in. They also churn them out faster because they. The small business failure ratio is much higher. So we had a churn of, call it 4% a year. 3% of that was uncontrollable churn, meaning store closures. And maybe it was a little bit higher, but it wasn't. It's directionally right. Whereas the sba, I think, says if you. Your first year odds of success are 70%. If you get to year two, your odds of success are like 87%. And if you get to year three, it's like 98%. But that means like 30, like half of your base is gone in the next. In the first two to three years, you have to constantly fill the engine. So, yes, it's big, but you. I don't say leaky bucket because they're not leaving you to go somewhere else. They're going under and they just don't survive. So when you start taking the franchise slash multi location, it gets a lot smaller. Yeah, but it's still very attractive. Like, don't get me wrong, like, it's like, you don't need 100% of the market to have a good outcome. You just have plenty of market to go after.
- [54:05]
Interviewer
And so what was it that precipitated your decision to consider a sale in 19?
- [54:12]
Raj Mahajan
It was just, everything was in place. We still had energy, we had a good management team. We had great metrics. You know, I built, we built the company to have those things. When somebody goes back and looks, they see a lowering customer acquisition cost and they see increasing lifetime value. They see like contracts for everybody. They see, you know, like the path was there, it was visible, it was clean. That was very transparent. And so I think when we got to that and then we started seeing multiples get go up because we saw a few of those transactions happen. And it was like, look, if we're going to sell to private equity, I have to stick around because that's just the way that it's going to work. It's probably not going to go. There wasn't a strategic at the time that made sense. You know, maybe a pe back strategic, but not a proper strategic other than maybe mindbody but code stacks, places. It wasn't a good fit. And so then we're like, well, let's go test the waters. And we did. And we had, you know, we were going to get a great return. We went to market. You want me to go, I can go into that part of the story.
- [55:16]
Interviewer
Let's do it.
- [55:16]
Raj Mahajan
All right. We, you know, we, we decided to take the business to market in, in 19. And we went to a lot of buyers. We had some really good, good firms, largely private equity, that were like, hey, they saw the payment side, they saw the growth side, they saw the market side. I mean, it was, it was easy to find because you also have to think about the meat on the bone for them to win too. If we kept growing and we were selling, doing a wholesale there, how are they going to make money? And then you have to think one layer deeper, which is like, who are they going to sell it to? Because that's what they're thinking, well, if I grow it to here with the meat on the bone for the next guy. Yeah, maybe it's your guy. Once you get to two, you probably, you probably want to worry about three, because once you get to three, you're at some other business.
- [56:02]
Interviewer
But I'm sorry, what do you mean,
- [56:03]
Raj Mahajan
but doing like the third buyer. Because I'm looking at my buyer and then I'm thinking about my buyer's buyer. Right, right when to sell.
- [56:10]
Interviewer
And so why why do you not play that? Why can't you play that game infinitely?
- [56:13]
Raj Mahajan
What happens that you get to the point of, like, there's enough pivots in the road, like, maybe you decide to go geographic, maybe you decide to go to fitness, maybe you decide to go somewhere else. There's enough things that you can't really think too far out and think it's gonna. And then it's just like a mental exercise is gonna go nowhere. Yep. You know, it's a mental treadmill.
- [56:31]
Interviewer
Fair enough.
- [56:32]
Raj Mahajan
But you get the ones you can see. Like, what do I think this business needs to double? Then if this doubles with that owner, who's the buyer after.
- [56:41]
Interviewer
Exactly.
- [56:42]
Raj Mahajan
After that.
- [56:42]
Interviewer
Exactly.
- [56:44]
Raj Mahajan
And so, you know, so we go to market and everything's going great. Bunch of people interested. All that's, you know, up into the right. We're all excited. I wouldn't say we were counting our shekels, but we were. There was zero reason to think that it was not going to work out, you know, because documentation, like, everything was clean, you know, audits, QVs. I built it for that. Because the less questions or more answers you have, the less risky the business. De risks the business for the buyer, and they get it. And, you know, 99% are on contracts. Here's every contract, here's every relationship. Here are my, you know, if you want to talk to customers, here are people that will talk to you, so on and so forth. Well, December of 19 and December 23rd, I think it was Monday before Christmas. I got a call from the bankers that the buyer backed out. And so this is where the story goes. We were in documentation with one of the private equity groups. And so we were like, okay, we're three weeks away from closing. Everything's good. The reason the buyer backed out is my biggest customer. Regis decided they want to get in the point of sale game. And now I'll back up about six months or so. Regis decided to let go of that whole management team that we had signed on with because their stock was kind of flat, wasn't really making a move, and they thought that they needed to restructure. Some of the things that they did were actually beneficial to us. And this was the movement from corporate to franchise. But there was also some things that weren't so great. But the new management team kind of came in and they decided, hey, we were going to get. We saw. They saw the same multiples that everybody else did. Tech is getting crazy multiples. Let's go be a tech company. And so they decided they wanted to get in the point of sale game. They decided to go public with that. The buyers that we had decided, hey, we're not going to. We're going to leave because of this kind of risk.
- [58:45]
Interviewer
Wow.
- [58:46]
Raj Mahajan
I was like, you know, I wasn't overly concerned, and that's because Regis had tried to do it multiple years before, and it's really hard. So I was like, you know, but all of a sudden, like, you have this, like, you know, really nice exit. Everybody's excited and all that to, hey, wait a second, is something bad going to happen? You know, like, are we getting. They get. People get nervous.
- [59:06]
Interviewer
Well, you're.
- [59:07]
Will Smith
You.
- [59:07]
Interviewer
You've lost your top buyer and your key customer is going to go to start competing with you. Correct.
- [59:16]
Raj Mahajan
And there. But we had contract, so it's kind
- [59:18]
Interviewer
of a double loss here.
- [59:20]
Raj Mahajan
Yeah, but they're competing, but they didn't have the ability to make everybody move to their platform. So they would have to. They would basically be another competitor in the market that we had to fight against. It just so happened that they also happen to be the parent company of our customer. This is very awkward situation. It's like you couldn't make John move over to your software because you're the franchisor. It's the way the agreements were written. But you could tell John he has to move, and John can say, no, I want to stay where I'm at, or, you know, it's just another competitor in the market. Yeah, things got uglier later and I'll get into that part. But at the moment it was like, look, it's going to take them forever to build this stuff. They've tried before, it's never worked. And every time they do it, they move a few people over. The people that go over don't like it.
- [60:06]
Interviewer
It's.
- [60:07]
Raj Mahajan
This is also pre AI. So this is like proper coding and 20 years of errors and bugs and fixes and learnings that go through it. So it wasn't vibe code type of operations, you know, so.
- [60:20]
Interviewer
Totally.
- [60:22]
Raj Mahajan
So I was like, okay, well, what are you going to do? Like, well, look, let's keep going. Our path has not changed. We're still going to the right. We're still where it's another competitor in the market. Was kind of my mentality, let's just figure out how do we be. Let's. We make decisions based on five years from now, not today. So let's keep building a better and better company, and in five years we'll turn around and be like, I'm glad we made Those decisions and didn't acquiesce to the moment, you know, not all.
- [60:49]
Interviewer
I'm sorry, that means you decided not to sell at all.
- [60:51]
Raj Mahajan
You took the market. Well, the sell wasn't there, but it was like, we have to get through. We have to prove out that Regis is not going to be an issue for the next buyer. And so it's like, good. I was like, look guys, this is the next case study. It actually makes our case even stronger that like our biggest customer could try to move everybody and fail. Then we've got a proof point on like the customer concentration, risk.
- [61:14]
Interviewer
Exactly right.
- [61:15]
Raj Mahajan
So it just kind of validates. Like again, it's like how you look at the problem or situation that you have.
- [61:20]
Will Smith
It's.
- [61:20]
Interviewer
Did you have any doubt about that, Raj? That's a nice line. And the CEO saying that and, you know, rallying the troops. But like in the back of your mind where you're like fully believing that.
- [61:31]
Raj Mahajan
I, I fully believe that we were, that they weren't going to win on that. At the time I was like, there's no way. Because I just know everything that goes. I knew everything. And I wouldn't say every customer because that'd be ridiculous. But I'd say like, we, a lot of our customers liked us. They wanted us to win and they didn't trust. No franchisee likes the franchisor just by definition, because it's like every franchisor could do more for them. I don't want to give them my data because they're going to go market my south store and in Madison, Wisconsin to the guys in Milwaukee because they only care about total portfolio. They don't care about my little stores, you know, those sorts of things. And like, you start to see these dynamics that you would never, I never really thought about. So like, for example, Regis did the sport. MLB sponsorship seemingly makes sense except for two really distinct facts, which is, you know, arguable, which is you're only helping 32 markets. So you have customers or franchisees in, I don't know, 200 markets. So only 168 are getting ignored because it wasn't triple A, double A, single A. It was just mlb. And so that's a rub, right? For the net, for the mat, for the marketing spend. And then the second is, is like your biggest competitor is sport clips. So kind of makes you think that it was sport clips when you think of them, not supercuts when you think of who's sponsoring a sports team or sports. So, you know, things I wouldn't have thought about until they happen. But that said, there's just this general. So we're like, look, franchisees don't want to go over there. It's a silly thing for them to want to do. Let's let them go and fail. And we'll just keep building and we can go back to these guys once we prove that risk out. And we had energy and time. The part that it changed was in March of 2020. That's when it was like, hey, we've got a problem here. So between December, it sucked. We lost the deal. And it's like, whatever, it's fine. We'll carry on. Because I'd only been in the business like four and a half years at the time, so it wasn't like I was super tired. Now I'll fast forward a little bit. March of 2020, I'm sitting in the office and my head of sales comes in and tells me that, hey, there's a call that came through the support line that I think you need to hear. So I went and I pulled the recording because I left a voicemail and listened to it. And it was basically like, it was a developer at Regis that called to tell us that Regis was stealing our software to make their compute competing product. Like, and that's not cool. And so I was like, wait a second. So I called him back. He was in the Bay Area. I jumped on a flight the next morning and I was like, hey. Or I was like, hey, can we meet? Let's meet tomorrow for coffee.
- [64:11]
Interviewer
And this guy was a spy or he.
- [64:14]
Raj Mahajan
No, he was a developer. And then he just didn't feel good about it. He didn't feel good about it.
- [64:20]
Interviewer
He worked for Regis.
- [64:21]
Raj Mahajan
Yeah, he was a whistleblower. Yeah, but I. I don't.
- [64:23]
Interviewer
Okay, maybe not spy that you had placed, but he was basically.
- [64:27]
Raj Mahajan
He was just a whistleblower. He was like, hey, this isn't right. Yeah, we shouldn't be doing this. And you mentioned the on prem part. The way that it was going was that they were basically going into the back end of a franchisee system to find out how the database schema was organized. And so for the listeners. And what that means is think of it like a parking lot. They got to know where every car had to get parked in order to move people so that there was no loss of information. So if you calculated hours in the same way on one system, it has to be the same on the next. Otherwise you'll have this disconnect and it makes migrations harder. So I went And I sat with him and, you know, he told me everything on how it was working. And so I called the board and I called the lawyers because I was like, I don't know what I'm allowed to do here. You know, like, never expected to be in this situation where someone's stealing our stuff and, you know, they're telling us they're stealing our stuff, and what do we do? And that was kind of the, oh, oh, snap moment of like, all right, we've got a real problem here. Because at the same time, this was probably March 9th of 2020, this whole, like, Covid thing is percolating. Like, you start hearing about, like, this thing happening called Covid. So I was actually supposed to go to the Dominican Republic to go see our support team. And I was like, hey, I don't feel good about that, because if this Covid thing's real, I'm. I'm not. I don't want to be stuck. So I didn't go, but I went to San Francisco anyways, kind of moving forward on that. It was like, okay, well, we called Regis and said, hey, guys, we're getting wind that you're stealing our stuff. You're trying to copy your database schema and all that. And their answer was basically, pound sand. Like, you can't keep up with the legal bills. That's not going to work, guys. Just bias, because we're currently for sale. You could have the revenue, you could take your time, you can own the code, blah, blah, blah. And they were like, no, we'll just take it from you was kind of their answer. And they're like, and, oh, by the way, we have, I don't know, 4,000. I'll make up some. I don't remember the exact number. 4000 franchisees using your software. And with COVID we need you to help them. And it's like, you're going to tell me to pound sand. You're going to continue to build and steal my software, and now you want me to go help your franchisees. This is a very awkward Wednesday.
- [66:54]
Interviewer
And Rod should be clear. This is a company that you had a great relationship with. But there had been. But this was new management. So these were kind of a different team, different people. Yep.
- [67:05]
Raj Mahajan
They had fired everybody, basically. They had gotten cleaned house.
- [67:11]
Interviewer
You. And you call them up and basically, I assume, somewhat delicately, call them out on the software theft or database schema theft, and they say, up yours and go help our franchise franchisees. And we're. We'll bury you in legal bills.
- [67:26]
Raj Mahajan
Yep, that Was basically.
- [67:28]
Interviewer
Wow. Wow.
- [67:29]
Raj Mahajan
That was basically it. And like, you know, my. Obviously, I didn't do this myself. I. This is one of the powers of search is I did have some very strong board members that were very helpful, impactful, like, you know, because, like, at this point, you also have to imagine I was also pretty emotional about all of it. I was like, you know, someone's trying to steal my, like, rob my house and do everything. We've just built everything. And they're trying to do all this and, you know, they don't care. And, you know, Regis is at the. When I bought the company was a 700 million market cap. When I bought Super Salon, regis was a $700 million market cap company. Meanwhile, they were also going the wrong direction. And so they're trying to. They're. They're fighting for their lives, which is.
- [68:12]
Interviewer
So all the franchisees are closed.
- [68:15]
Raj Mahajan
I would say that. Except if you look at just the numbers, and this is not me opining, this is me just straight numbers, which is during COVID you would think that a lot of salons lost business. But if you look at their competitors, Great Clips and Sport Clips, they've doubled. Like, so you can't say that it's Covid only because then it should have hit everybody. But if certain other ones are winning, there's strategy. There's a bunch of stuff involved. On, like, why these organizations like Sport Clips and Great Clips are doubling and Regis is contracting. Right. So that's. That's the challenge. And it's like, why is that one versus the other? And I'm sure there could be. Anybody could do a lot of finger pointing. It's because franchisees don't listen to a franchisor. It's because franchisors don't help us. It's because the market's tough or it's because we can't. Our, you know, our logos are old. Like, pick your thing. It could be a lot of reasons on why, but I can't chalk it all up to Covid. It's not. It's not. It's just. It's not fair because.
- [69:15]
Interviewer
So. So it was the. Regis was suffering anyway. The business was declining anyway.
- [69:20]
Raj Mahajan
Yep.
- [69:21]
Interviewer
Well, may. And maybe it was that management team. They didn't seem.
- [69:24]
Raj Mahajan
I fully think it was that management team.
- [69:26]
Interviewer
Okay.
- [69:28]
Raj Mahajan
The.
- [69:30]
Will Smith
The discovery that they're trying to steal
- [69:33]
Interviewer
your software would have been offensive to you morally. But did you. Why did it feel more threatening? You're like, why did it. Why did it make you feel, as you put it, like, now we have a real problem because it's still, if anything, it almost suggests even more incompetence in building software that they're trying to steal your database schema.
- [70:00]
Will Smith
Right.
- [70:00]
Raj Mahajan
So it's like, so what? So then the question is, what is it? What does outcome look like? What does good look like from where you're sitting? Are they going to give up? Probably not. You know, we filed the law, so that same. So going back to those conversations with pound sand and all that, the very next week, it was March 20th to 28th, if my dates are right. We went from, I don't know, call it 10,000 locations to zero because everybody closed. State shutdowns happened March 27th. We had to file the lawsuit so it would hit their Q1 earnings or their quarterly report as a material event because we were the biggest customer or biggest vendor. And so this whole time is like, you've got. We're in. We've, we've, we've. We're going to the mats. Right. Because we've got the lawsuit. It's public unless we can figure out a way out of this. But we have to fight at this point. You know, I was like, okay, was
- [70:55]
Interviewer
there an option to not fight
- [70:58]
Raj Mahajan
their. Only their, Their solution was just give them the business free. Free and clear. That was. Yeah.
- [71:07]
Interviewer
Oh, oh, no. Oh, I. Right. That's what they would have said. Like, if you want us to stop,
- [71:11]
Raj Mahajan
give us your business.
- [71:12]
Interviewer
But I mean, from your perspective, your side of the table, was there a strategic option here where.
- [71:19]
Raj Mahajan
Oh, we tried. We don't, we didn't want.
- [71:22]
Interviewer
Don't fight them because you said, as you said, you went to the mat. So you decided to basically go full throttle into a.
- [71:27]
Raj Mahajan
We, we tried. We. We did like, you know, our, our Batna, our best alternative to, you know, to negotiate agreement. We did everything. We tried to be like, hey, guys, it was a different way. They just weren't having it. They weren't playing.
- [71:39]
Interviewer
I see, I see. Okay.
- [71:41]
Raj Mahajan
And they didn't want to. And they were like, we're just going to get it for free. And they try to bury small company.
- [71:47]
Interviewer
Yeah.
- [71:47]
Raj Mahajan
And you know, and then like, you know, the. All this happened. So there was no other off ramp that we could find. Yeah. We had to just. We had to fight. We were like, okay, we'll try to continue to do a settlement and negotiations and all that stuff, but we're. We've got an existential threat here because if they are somehow successful in Covid and the shutdowns and April 1, you know, everybody that wasn't on. ACH stopped paying their bills and we didn't know about the PPP. I've got 100 people on staff and we've got customers, investors. Again, we just had this pinnacle of like, great, you know, MOIC return, you know, top quartile type thing to zero because no one's going to touch the business with a lawsuit on it. Meanwhile, we've still got a responsibility to everybody in the community, in our community. So it was, that was the oh, snap moment. Like we got a problem here. And also when co and Covid was real, right, because there was millions of deaths happening. And you're like, then California is where we filed the lawsuit and the state court shut down. So then it was like, okay, well we don't even know when our next court case is going to be. So we could be in this for six months, a year, two years, I don't know. Like, we didn't, we had no idea.
- [73:03]
Interviewer
Right, right.
- [73:04]
Raj Mahajan
So it's like, well, what are you doing? So we were like, okay, well let's just, let's carry on. We started and we did our strategic back and forths with, with, with Regis. And like, you know, we would offer, we give customers relief in exchange for contracts. We just couldn't get in the way of those because they, you can't, it's a, you know, torturous interference if they try to break those contracts. So we were like, okay, well you don't have to pay us now, but just sign up for longer and then in six months pay us. Because we had cash on the balance sheet and we were okay. We got ppp. We knew we were going to survive. We'd always run a profitable and healthy business so we could make things like those. And we signed three year deals and we did all those other pieces. Regis would try to tell franchisees they couldn't buy another store unless they move software. So it got ugly. And they're like, well, you can't move your software because it doesn't work. Because once we caught them, they had to stop. And production dropped off a cliff. Or development production dropped off a cliff.
- [74:04]
Interviewer
Yeah, yeah, yeah.
- [74:06]
Raj Mahajan
And so that's kind of how we continued to fight. And then meanwhile, the states that were opening, I think it was like June 2nd, I lived in Minnesota and then the George Floyd riots happened. So it was just a very emotional period. I've got a gas station burning. We've got the precincts going up in flames. We've got lawsuits, we've got, you know, bore a supportive board but yet a lot, a lot to go through. I had a strong team. That all was very, I was very transparent with and know exactly what was happening. They kind of got in the foxhole with me, which is immeasurably, immeasurable and awesome because I didn't feel like I was carrying the weight of the world in the shoulders. But honestly, every day was like a Harvard Business School case study. It's like, yeah, Raj is looking out the window and he has option A, he can do this or option B, he could do this or option C, what should he do? And so it was just being able to get through all of that. And eventually we tried in mediation that didn't go anywhere. And then existential crisis 5 or whatever number. Zenoti raised the 150 million from Tiger Global in December of 2020. So now VC had totally found our industry and, and they were like, yeah, we're going to enter the enterprise software salon market, which was pretty much us and maybe a couple others at best. It was like, oh great, this was
- [75:32]
Interviewer
the Indian guys or the business that had come out of India and they raised 150 million, okay.
- [75:37]
Raj Mahajan
a unicorn valuation and all that sort of stuff.
- [75:39]
Interviewer
So that seems like more of a threat even than Regis trying to build their own software.
- [75:47]
Raj Mahajan
It's more doubling down, like because you're weak. You're like, now you've got it on another front that you have to battle. Like, because the ones that aren't as Regis was only going after Regis, meaning their franchisees, Zenodi was going after all the non Regis. And so that became, you know, a competitive threat. And so we were in the thick of it in December and then finally in February, which is probably the hardest thing I had to do myself and a board member and their now new CEO because the second management team had gotten fired new. The next management team in my opinion was worse. But we ended up settling and you know, it was, we created, we locked ourselves in a room in San Francisco, myself and a board member, board member, their CEO, their general counsel. And we hammered out a short form agreement to get, you know, to stop, to put the guns down, if you will. And so we did.
- [76:41]
Interviewer
And what would that mean? That they would stop trying to develop the software.
- [76:46]
Raj Mahajan
So the way we did, they were going to continue. But we figured out a way that if we were to off ramp people, what that would look like. And there's obviously a financial component to all of that. And so then it was like, what do we do? So we've got the settlement Side. But then it was just like, okay, well, we'll off ramp people. We'll make it easy. We won't fight anymore. But if that happens, then there'll be some sort of kind of compensation, but we'll make sure it all works.
- [77:10]
Interviewer
When you say off ramp, you mean when a franchisee moves from your software to Regis's new software?
- [77:16]
Raj Mahajan
Correct.
- [77:18]
Interviewer
Okay, so they were successful. They had software. They, they successfully built something. Or they. Or they built something. Meh. But they were taking some of your customers.
- [77:26]
Raj Mahajan
They were. And again, they were like, if people wanted to buy more salons, they had to go to maybe like a level, like a not so complete software. You know, you'd have to ask people that were using it, like, is it really good? I don't think you'll get a very high NPS score. But it was what they had to do because they wanted to buy more stores. And so they deprioritized the impact of software and they said, fine, we'll go. Readers didn't move a lot of people in that timeframe. Like when we, after we settled, they didn't move a lot of people. But we were like, take your time, whatever you want. We're still going to perform, provide, do our stuff, and we'll continue to, you know, franchisees will continue. What we, what they pay us, we keep. When they move, you know, they go to you and figure out an offering. But then we had to figure out what do we do with the other side of the business because we had a non Regis side too.
- [78:16]
Interviewer
Wait, Raj, before you get there, you said this was one of the hardest things you've had to do or that you did what was and what do
- [78:22]
Raj Mahajan
you say more about it emotionally? It was hard because I had to settle. You know, it's like the people robbing your house and you have to be like, hey, wait a second, I'm gonna let you do this and I'm gonna try and make this fine. Like, the moral part of me was like, this is so wrong. And. But the leader part of me, as far as my team, my, my investors, customers, like, they're not benefiting from us fighting, right? And like me wanting to do more. And we still didn't know if we'd win because we. The courts weren't open still. This is in February of 21. The courts weren't open. They, let's say we win. They appeal, it gets pushed back another six months. You know, it's going to be a couple years before this ends. And maybe we get there and maybe we get it all back, but now Zenoti's coming after us. We've got the world landscapes changing.
- [79:12]
Interviewer
And so to be clear, we're talking about this negotiation. You and the board member for your side and the CEO and council on their side. The four of you are in a room hammering out this negotiation, and these guys are. On the other side of the table are the ones who told you to pound sand. They are, yeah.
- [79:32]
Raj Mahajan
It was their predecessors, but same. Same lineage.
- [79:34]
Interviewer
Okay, Same lineage. Okay. Okay. So you're in the room having to not make nice, but come up with some agree. Agreement between you all with the villains.
- [79:46]
Raj Mahajan
Yep. And this is. This was hard. I mean, it was really hard for me. I'm very grateful for the board member that I had that was there, that kind of kept things balanced and helped me.
- [79:55]
Interviewer
And. Was that a search fund investor?
- [79:56]
Raj Mahajan
It was that board member. It was in, like, you know, like, it was. He. He had gone through a lot in his own career, and this was a. You know, this was new for him too. But, you know, I think he just had a more pragmatic view because he wasn't. He was a board member not in it 24 hours a day, seven days a week.
- [80:16]
Interviewer
Less emotional.
- [80:17]
Raj Mahajan
Very, very much less emotional. And being able to keep me getting my head to think right. As hard as that was, you know, because it was like, I can't believe I wanted to, you know, I'm sitting across from table from these people. Like, there's nothing more I want to do than jump across the table. Obviously, obviously I did not. Did not end up in the news, but that was. That was pretty. That was a really hard thing to go through. Yeah, those two. Those two days in San Francisco were probably the hardest. But then once we were behind us, it was like, okay, there's no point in looking back. We are where we are. How are we going to move forward? What do we do next?
- [80:57]
Interviewer
You know, like, internally, did your team agree with your strategy of, you know, the agreement that you came to. With the. With these guys, with Regis?
- [81:07]
Raj Mahajan
I think they were probably more like me. Like, they don't like it, but we understood it.
- [81:12]
Interviewer
Yeah.
- [81:12]
Raj Mahajan
You know, I think everyone. Because, like, again, they were fully transparent. They knew even after, like, board meetings and things like that it was like, here's kind of what the temperature is, you know, but they would also, like, see me after hours being, you know, blowing off some steam. So they. They kind of saw what I was going through and they saw what it was like, and they. But they understood. I don't think anybody liked the outcome. Yeah, but I don't think, but I think they all respected the outcome.
- [81:40]
Interviewer
Yeah.
- [81:40]
Raj Mahajan
You know, if I could say that, and I don't want to, it's hard for me to speak for them, but that's just my read of the room.
- [81:46]
Interviewer
Sure. Well, and, and what I'm getting at is just this. This was not only where you had, I mean, you had to swallow your indignation, to put it mildly at these, at the Regis folks, to effectuate what you thought was the best outcome for the, for the company, but it, it meant swallowing pride, basically doing a deal with the bad guys. And you could, you could see how the soldiers, the optics of that could, could, might not be great and some of the soldiers might not like it, but it was, it was ultimately you were showing character, leadership.
- [82:24]
Raj Mahajan
And again, we still had, we still had to figure out there was no, it wasn't like an immediate impact. So we still had to think about like, okay, well, again, we've made this deal. They still have to finish building or do whatever they needed to do to onboard people, you know, and take the customers and do all that sort of stuff, which, well, you just weren't going to fight. They still had to do all the work. So it wasn't going to be like everyone was losing their jobs the next day. That wasn't, it was, hey, guys, this is going to happen over the next year or so, you know, and here's our plan. And so coming up with that and communicating and we used to hold monthly all hands because again, we were virtual. So, like, it was all hands of like, what's happening? And then open, open door questions I used to do. We used to do lunches with Raj so the team could come have lunch with me and just ask me whatever was on their mind. And I would tell them we'd do book clubs, whatever. I mean, everything we could to like, keep engaged, especially during COVID and high, high emotional times. Because it wasn't just work. I mean, millions of people died at that time. Like, you know, eventually. Like, actually my dad passed away from COVID So it's like we were all going through all of this. So people are locked in their houses and things like that. So it was, it wasn't just this. It was this plus.
- [83:43]
Interviewer
So you've got kind of two pieces of your business. You've got the customer base that is our Regis franchisees, and then you've got the everybody else. And this agreement with Regis applies to that part of your customer base. Then what do you do with the remaining customer base.
- [83:58]
Raj Mahajan
So that was the question. Do we grow it? Do we harvest it? I mean, then you go through each, like, business school answer, like, you grow the business, you harvest the business, you sell the business. Ultimately, we decided the best path because of the size of it, which was much smaller, we decided to sell it. So we actually sold it to Zenoti. And so part of that was me joining Zenoti as I took over as the head of M and A for them and Corp Dev. But we also negotiated a way that when I moved over and when franchisees and everybody came over and as the regis side of the business sunset, as people moved over to their platform, my staff that I worked with had a home at Zenoti. So I made sure that. Because usually in a strategic acquisition, people get fired, right? They're synergies. I didn't really want that to happen. So I tried to work with Zenoti and Zenoti was great about it. Like, I've got nothing but positive things to say. They. They, at times I get. Depending who you talk to is always a little bit of contentious, but I think the underlying intent of, like, bringing over whoever wanted to come to Zenoti had a home so that people got jobs or if they wanted to go, they could. And, you know, the person that I left behind to run out the settlement side, she was great. And she also put people, like, told people, like, hey, we're going to be letting you go in two months, so if you want to take a time to look, go for it. You know, happy to help in any way. You can go, or you can go over to Zenoti with Raj. And we worked together to try to figure out a good outcome for everybody. And then I was in charge of the migration at Zenoti to try and help move people over. And that migrations are hard, but, like, I was in charge because I wanted my franchisees and customers who I'd become friends with, and they were in the foxhole with me. Like, I felt more like an obligation and a responsibility to do my best to help make it as the best out of a bad situation. And so I ended up doing that. I can. I know I want to. I can take you down to, like, what kind of happened next or if there's any more in there. Got plenty.
- [86:13]
Interviewer
Give us the very last kind of chapter of the story, then we want to hear some of your reflections. Reflections on this whole. This whole saga.
- [86:20]
Raj Mahajan
Yeah, sorry for belaboring all of it.
- [86:24]
Interviewer
The.
- [86:26]
Raj Mahajan
When I moved over as the head Of M and A, Regis also was still having problems. And so what they ended up doing was they ended up firing all of their new. The second or third iteration of leadership, because their stock, as I mentioned, when I bought the company, they were at 700 million of market cap. Regis, my customer. Now, six years later, they were at 15 million, about to be delisted from the New York Stock Exchange.
- [86:53]
Interviewer
Wow.
- [86:54]
Raj Mahajan
So they lost 98% of their market cap.
- [86:56]
Interviewer
Wow.
- [86:58]
Raj Mahajan
Obviously, it's not all software. It's market. It's strategy. It's a lot of things. But if you look at their stock price, they went down to almost 50 cents from a $20 stock. So they lost a lot of market cap. A lot of people lost a lot of money. People got fired. And now, as the new head of M and A, when they put in the new CEO, Matt Doctor, I called them and I said, look, you have 90 days before the market decides if you keep the decisions of the past or you chart your own course. If you decide to sell the software, Zenoti could be a buyer of it. And so, in a funny, ironic full circle, as the head of M and A, I bought back the stolen software from by Regis for Zenoti and ended up having the entire supercuts population, plus my non regis population, back on the Zenoti platform after a couple years. And then after I did that final migration in mid 24, my daughter was born, and I took a beat and took six months off. And then I said and traveled, and I did not travel on this one. I couldn't. But after six months, I decided I should buy another company. So now I'm out trying to buy another company.
- [88:17]
Interviewer
Company.
- [88:18]
Raj Mahajan
Okay. Okay.
- [88:18]
Interviewer
Okay. So, Raj, the big winner here is Zenoti?
- [88:22]
Raj Mahajan
I think so. Yeah. I think they made them. They got the most value out of everybody now. Like, my investors, they all made money. Like, so nobody lost any money. I gained a ton of experience.
- [88:32]
Interviewer
They made money. Your investors actually made money. They didn't.
- [88:35]
Raj Mahajan
They all had a positive. They also had a positive return. It wasn't the home run, but it wasn't. Sure it wasn't. It wasn't a loss. There was zero loss to capital. Everybody ended up with more than they started with. A reasonable irr, you know, I guess.
- [88:49]
Interviewer
And what about you?
- [88:51]
Raj Mahajan
I got a lot of learning. I mean, I. I've made a little bit, but not enough to like, you know, retire or anything like that. Like, you know, my kids can go to community college. They'll be fine. We're all gonna work hard. No I think I got, I mean, I made a little bit, but not anywhere near what anyone would be like. This is why you get into this game. That's not why. But I also got a massive amount of learning and I don't take that part lightly. The school of hard knocks, the things that I encountered most people will never see, the emotional challenges, the strategic responses, the people, management, every bit of it, in order to get a very positive return for investors. Plus a staff that still calls me on my birthday and, you know, franchisees that came to my wedding years later, you know, like, yeah, I think I still got the win. Like, it just didn't. I didn't get the financial windfall that people expect. I got a bunch of other intangible benefits that I think have made me a better operator, leader and person generally.
- [90:02]
Interviewer
Yeah, yeah. Well, Raj, you actually put pen to paper back when it looked like you were going to sell. So 2019, time frame, your investors were. Everybody was kind of excited to. At this upcoming liquidity event or what they thought. And so they encourage you to put some of these kind of the learnings, your learnings, down on paper. You shared that with me and we can link to that in the show notes. So I want to. I plucked a few of those off of your list that I just want to ask you to elaborate on. But this was written before all of this horrible drama that happened then happened with Regis and in fact, the liquidity event didn't occur. And so on what we just finished hearing. So I'm going to ask you for a part two of this, of this document or just a thought or two, like, what should be on this list after having gone through all the, you know, the pain of the last few years. First, a couple of my favorite things that you'd written down back in 2019.
- [91:03]
Will Smith
Value of the board.
- [91:04]
Interviewer
We've heard you touch on it. It speak to it directly.
- [91:08]
Raj Mahajan
We, the board and I didn't always agree and we had a healthy, and we had healthy debates across, across the time. Like, whatever it was strategically what we were going to invest in. I would, you know, like, maybe some decisions I made, they were kind of questioning or whatnot. They did give me some freedom to make some mistakes, which was good. They didn't carry things with a heavy hand. Also, we were growing. Right. So revenue cures all sins. And so if you're doing that and like things are going well, they're going to leave you alone. But then when things got hard, I was actually, it was hard because, like, there was a lot of Truths that I didn't want to accept. Meaning like settlement didn't want to accept it, but they had to coach me into those. There were times where, you know, they'd read my emotional body language and be like, I can see you don't agree with that, Raj. And I was like, is it this? The flames coming out of my ears? Like, what part of you can you not see? But really working through it and like being able to address it in an open way that helped me get better and then being able to take a beat. They taught me lots of different things about how to manage the situation and making sure my blind spots are covered. And there were definitely times where I was like, you know, not having fun with board meetings and I talk and I, and then like, I'm always very grateful, despite how hard it was that I had board members that I talked to once a week for almost 27 months. I was like, that amount of that time that you get from someone, you would never get that. You can barely get that from your friends, much less a board member that's willing to sit there, that's got 15, 20 investments, 30, 50, I don't know how many investments anyone to talk with you. Like, I always respect the amount of time that they gave, but it was sometimes anxiety ridden. I already had enough things on my plate. Now I had to prep, Prepare for a 20 minute board call, whether it's just one board member or multiple. So boards are hard and like I think that the more honest and transparent you can be, you know, and be thoughtful and mindful, you can get a better outcome. But they, they are not your friend, but they're not your enemy. They're trying to help make you get the best outcome. And ideally they care about you, which I think that they did. But they also cared about the other people that they are trying to protect too, which is all of their LPs plus the other investors that are silent.
- [93:34]
Interviewer
Yeah, well, one of the features of traditional search funds is that there are boards and in most business there are boards. But for the self funded searcher, the SBA style buyer, they often, they often don't have boards. It's just a too small a business or the, the searcher entrepreneur doesn't think about it or doesn't want one because boards kind of translates to boss in some sense. How do. What would you tell those people?
- [94:01]
Raj Mahajan
I would tell them to join depending the size of business and area they live in. Join ypo, EO Vistage peers that have gone through it. You need a counterpart. You can't have this live in your head. Like whether it's a board or you're like board of peers, they're not your boss but like they're a group that you'll meet with and you'll go through things and you need, you need multiple perspectives. So I would say join one of those organizations. I've been a member of ypo for 10 years and it's been super helpful when I was going through all these things. I have friends that were in EO or Vistage. I think it's now in Tiger 21 maybe something like that. I think if you can get some like minded people that have gone through some stuff and experience share, you'll get a pretty good result or better than where you started. If not, if, if not the perfect result. So even if you're self funded, I would not and you're as you're growing and going through things, I would lean on the experience of others and approach it with humility. Like everybody goes through stuff.
- [94:58]
Interviewer
Another point from your document, quote, hiring is key. You can't do it all on your own and expect a successful outcome. End quote.
- [95:06]
Raj Mahajan
Yeah, that's my number one. That's my number.
- [95:09]
Interviewer
That was number one.
- [95:10]
Raj Mahajan
That was my number one. If, if I had to list all of the things, there was only one number one and that was it. Everything else is number two. You have to have a good team behind you like and with you and on your side and in front of you like all around you. You have to be surrounded by people that get the mission, want to do it, you know, they're in it for the right reasons. You can't do it by yourself. It's impossible. Like you just, you can't be the head of sales and fixing product and doing that like, and get like, you know, take this in our case the $4 million business to 10. Like you just don't have enough hours in a day and units of energy. And so the more, the better people you can get, the further you can go. And it's like what's that saying? Like if you want to go fast, go alone. If you want to go far, go together. Yeah, I think that's absolutely true. I think that the founder of the business built an amazing business. But where he got to, he was capped out because he couldn't do it all and he had done it all and that's why he got tired. I think that like he me putting in like the head of finance to make sure that we did that allowed us to make good sales decisions. Allow Us to make good product decisions allowed us to decide which things weren't profitable. And my eyes could be in a. I could ask a lot of good questions. And having the right leadership and. And even, like, junior staff, too. Like, we didn't have to constantly listen to phone calls every day because people were complaining about behavior. Like, we didn't. We didn't have those cultural issues. Like, we. Just because we hired the right people.
- [96:39]
Interviewer
My attitude is my decision. You actually, okay, hiring is your number one. But my attitude is my decision is when you say actually a couple times throughout the document. So I gathered. It's an important one as well. Yeah.
- [96:54]
Raj Mahajan
I think throughout all of this, like, I didn't ask for them to steal my software. I didn't ask for someone to eat a bat and Wuhan or however, whatever conspiracy theory you think about that Covid started. I didn't ask for Zenoti to raise the money and come into our kitchen. I didn't ask for any of this. I could be the victim or I could be like, this is what I'm dealt. What are we going to do? Like, and how I approach it. And I carry this in all sorts of things, like, whether it's driving a car to, you know, playing baseball and getting. Getting thrown out or something. You know, like, pick your thing. You're gonna have more at bats. And it was like, I think how your attitude. You're in full control over your. Of how you want to look at the situation. I could have been a victim, and I could have been like, woe is me. This is terrible. And at times, I. I did, but then I had to pull myself out and be like, okay, brush yourself off. Next thing kind of goes back to when I was fundraising. It was like. And so many people tell me, no, I didn't come from. From the school. I didn't know all the process. It was my. I could have said, like, too many people were telling me, no, I can't do it. And I just said, no, it's not. That's not the answer we're gonna like, that was my decision to keep going. And I kind of carry that throughout. So even throughout the hard times and the best and worst is your attitude is your decision, how you look at it.
- [98:14]
Interviewer
Well, it's easier. It's easier said than done, though, Raj. I mean, intellectually, it'd be like, yeah, next time in a. I'm in a bad mood or grumpy about something, I'm just gonna tell myself to stop.
- [98:22]
Raj Mahajan
Stop.
- [98:23]
Interviewer
But I find that that hasn't Worked,
- [98:25]
Raj Mahajan
I mean, but sometimes that's all you need to do is be like, does this matter? Can I, Can I make this stop? And what else can I do about this? If it's something I can't change, then now it's, how am I going to adapt? If it's something I can change, maybe I can make it make some sort of change. But what did I learn from it? And how are you going to move forward? Because it is, again, as I said, I did go into that, like, woe is me at times. But then after a few, after a bit, you have to be like, okay, that's enough. Like, if it's some. I read it somewhere. It was like, if you're in hell, it seems like a terrible place to stop, so just keep going.
- [99:02]
Interviewer
Yeah, I think that's the. I've always heard that attributed to Winston Churchill. Yeah, if you're going through hell, keep going.
- [99:09]
Raj Mahajan
Yeah, it's a terrible place to stop. And so I think. So that's where I go to, like, attitude. It is a decision. It heard that a long time ago and it always carried with me on how you want to approach. On how you want to approach things and how you're going to re. How you can rebound from them.
- [99:26]
Interviewer
Raj, those, as I said, were. Were some of your takeaways when you were riding high, when you thought you were going to have this great exit. Anything to add to that list now, on the other side of this, much more difficult four years.
- [99:40]
Raj Mahajan
Yeah. From a business context, there's a couple. One is, you know, the fragility of it all. Like, things. Things can happen. And you just have to recognize that, like, even when times are great, you can lose things. I'm sure a lot of entrepreneurs, all of them will tell you it's not linear. We almost lost the business. You know, all these things happened and we, like, we lost this big customer or if you're manufacturing tariffs kicked in and all of a sudden our production went to zero. Like, there's just all these things that can happen. So I think it's just understanding how fragile it is. And it doesn't mean, like, go sell the moment you can, but just understand that you need to reinforce constantly to make sure that you have your hands on things and aware. And that goes to kind of like point two, which is probably more a bigger point when things got hard. And I've said this in a different talk, which is you fall in the cultures and habits. You can't create them in the moment. It's like, it is. It's in your DNA. And so if you're. We had the hugs, not handshakes. Like, when times got hard, we didn't. We didn't waver from that. You know, that was always the thing. Like, we were still going to be good people and treat people well. We weren't going to. You know, we were going to be transparent and how we behaved, and we were going to try to own our things, but we were going to be like, you fall in your cultures and habits. So the further you get, if you like who you are and how you're behaving and all those things, even when you have to make opportunistic compromises to do those, if things get hard, that's what's gonna end up happening. Like, you can't. You can't change when things get hard. Like, you actually default and you regress. So I always say, like, I always like to think, like, if you've got a strong culture, like, constantly reinforcing it, because when somebody's out talking about you and a cus. An employee left, like, or you get into a lawsuit or you're, you know, people might want to consider leaving your product. They. They know that you're a good person and good company and all these things. You'll get a lot more slack from a business perspective. And if you go through stuff internally, like we did, like, my staff and the team, the people we have, like, nobody left. Like, we didn't. We didn't lose very many people in this whole process. And, like, they could have gone elsewhere. I know they. I know. I know a lot of them could have gotten poached and probably did, but they were just. They were happy. They knew we'd treat them well. And so I'd say, like, fall in your cultures and habits is probably the biggest thing. And that just resiliency, like, the storm passed. And, like, I'm. I'm. As I said, somebody's asked, like, would I changed it? I'm like, I don't know. I don't think so. Because, like, it's made me who I am. So sometimes embrace. Embrace the suck.
- [102:21]
Interviewer
Well, that is a perfect segue to my final question. We heard you say that. Now you're gonna go search again or you're already searching again. Maybe a counterintuitive choice based on how difficult the last four years of your previous experience were. Why are you doing it again?
- [102:37]
Raj Mahajan
Growth is fun. I mean, it's. If you think. And I don't mean growth like financial growth. I meant, like, we. I grew as a person we built teams, we built product. I built my, my, the people that worked for me. We built them, got them jobs. They, I've seen them over the last 10 years and grow in their careers and in their families and things. You know, some people have retired and all that sort of stuff. But like, it's fun, it's a really fun journey. You know, I think haven't found the right business yet. And like, you know, I think people, they call it a two year search. And I think a lot of them stop because they've never actually had the carrot. Like, they've never tasted it, they've chased it, but they didn't get there and they didn't find a company in two years. So they closed up shop. Right. Like, it's like they just, they're like, oh, I'm just not going to find it. My emotional cap. My financial capital is gone and my emotional capital is gone. I'm just going to go find a job. I, on the other hand, have actually tasted the carrot. I know what that growth was like. I know those problems now. I don't want all of them again. But I had fun in that period of my life that I really want. I really would do it again. And like I've gotten a med school education. It'd be silly for me to not go out and be a doctor. That's kind of like the best analogy I could give.
- [103:52]
Interviewer
And, and so when you, you reflect because basically it was an eight year experience. Right. And the first four years were good and the, and the second four years were bad. If I had to simplify.
- [104:02]
Raj Mahajan
Yeah, if we're simplifying, I think it's probably a little bit like first four or five years were good and then the last, then there was like a three year period, two year period where it wasn't so good. And then Ed Zenoti kind of on the last year and a half, it was fine. It was good.
- [104:17]
Interviewer
Okay. Okay.
- [104:18]
Raj Mahajan
So I call it a 10 year journey overall.
- [104:21]
Interviewer
Okay. All right.
- [104:22]
Raj Mahajan
Between.
- [104:23]
Interviewer
Well, it was, it was back weighted. The negative stuff was, was back weighted. And yet. So it's interesting to hear how you, from where you sit now that the recency of all that negativity isn't like overwhelmed the experience. You, you look at it as, in its totality, as fun is the word you're using.
- [104:41]
Raj Mahajan
Yeah, yeah. I mean it would to me, like it would be silly to stop. Okay. I know that sounds kind of crazy. And maybe I'm stubborn again. Going back to the stubbornness that I might be is like it just seems silly. Like I've learned all these things I like, how much better am I going to be in round two?
- [104:58]
Interviewer
Yeah, no, I think it makes perfect sense actually.
- [105:00]
Raj Mahajan
So that's why I'm like I can't, it's silly for me to go do this and bury the things that I've learned and working for an organization where I don't have decision making capacity and I can't extol these things and these learnings into the, into the ether and
- [105:17]
Interviewer
on the model choice. You're doing a traditional search fund again and did you consider other paths?
- [105:23]
Raj Mahajan
Well, it was a couple things. One, the benefits I had from having that group of investors and the first one was obviously played a factor. The second was that I originally set out to do software again to find a software company and you know, I was going to have to raise money if I wanted to close on one of reasonable scale anyways. And so the economic outcome, you know, between a self funded that raises or an independent sponsor that raises versus traditional wasn't meaningfully different from what I had gathered in my intel. Now if I was to do 100% like self funded and like buying you know, a business that I could afford with an SBA loan, but I just wanted to do a bigger and bigger business with probably in software. And so it just didn't make sense to. And I just had a new, I just had our first child and so it was like the stress of having that plus of having a new child and then saying like okay, well I got to find a company on my own dollar. You kind of would have been put in a situation where I had the potential to make a bad decision, whereas here I gave myself the opportunity to make a good one.
- [106:29]
Interviewer
Great. And Roger, your investors for this second traditional search fund, I assume same, the
- [106:35]
Raj Mahajan
same bunch, a lot of overlap, A lot of overlap the second time around. I actually obviously been in the search community for now over a decade. A lot of the guys that I've met throughout the years that have operated and like former searchers that have exited and all that and gone through stuff, I brought a lot of them in. So I have a lot more operator experience on the second go again to the things that you don't know. I just put myself in a situation. So I've got people that have grown geographically, people that have grown through acquisition, people that have grown different markets. So that way when I find the right business, I have the right people to pluck and say hey, this is like the really good path for this business. And you've got loads of experience. Come help me. Come help, like, guide me on this. Like, yes, I'll make the decision, but I'd really love your experience to see how this evolves and where we can take it. Because I think learning from people's experiences, hence the, the eo, the ypo, the vistage, other people's experiences, can really lead to good outcomes. And I think that that's, that's, that's kind of everything. Why, why? I have more operators on this one than just investors. I do have some great investors, too. I, I don't want to, I don't want to disparage anybody, but I really was conscientious about bringing more operators than Straight Capital.
- [107:53]
Interviewer
Well, we were introduced by Ned Tomasovich, who is a search fund investor, but also by way of being a successful operator and in Searchers Fund. He is very operationally focused and he has operating partners. Is that the word? But you're one of them. Yeah, Mentors. Operating mentors. You're one of them.
- [108:13]
Raj Mahajan
So, yeah. And I've known Ned since he was, since he started searching in 2013. 14 says Ned was one of those.
- [108:19]
Interviewer
And you searched together for a minute, right?
- [108:22]
Raj Mahajan
We overlapped, yeah. Yeah, we overlapped. Not as partners, not as partners, but we were. And we've been friends ever since. And like, you know, when he was exiting and I had my banking background, I helped look at his models and when I was buying a company, he was looking at my decks and, you know, things like that. So we've helped each other along the way. And so when he was starting Searchers Fund, I was like, look, I'm happy to help searchers kind of get good outcomes and grow as people. So I've, yeah, I've invested a little bit of money, but it's more about being an operating mentor for the other guys that. This is kind of fun, you know, this is growth.
- [108:57]
Interviewer
Perfect. Note to leave it on. Raj Mahajan, thanks for coming on Acquiring Minds.
- [109:01]
Raj Mahajan
Well, thanks for having me. I appreciate it.
- [109:03]
Interviewer
Hope you enjoyed that interview.
- [109:05]
Will Smith
Don't forget to subscribe to the Acquiring Minds newsletter. We send an email for every episode with an introduction to the interview, a link to the video version on YouTube, and soon, key takeaways, numbers and more essentials from the interview. For those of you who don't have time to listen or watch it, subscribe
- [109:26]
Interviewer
at Acquiring Minds Co. You'll also find all our webinars there on the website,
- [109:32]
Will Smith
both those we have coming up and recordings of past webinars. At this point, There are over 30 webinar recordings, a wealth of information on all the technical nitty gritty of buying
- [109:44]
Interviewer
a business, acquiring minds co.