M&A Lessons from AllPaws 🐾

Welcome back to another edition of The Wise Exit!

In today’s newsletter: 

• 3 lessons from Darrell Lerner about his exit from AllPaws. 🐾

• A brand new episode of the Cashing Out podcast 🎧

• Our round-up of interesting M&A transactions from the past week 💰

Let’s dive in!

Darrell Lerner is passionate about building companies: “I love startups and creating something from nothing.” He and his brother grew their social media dating app company, SNAP Interactive, to 100 million users and $100 million in revenue. SNAP’s revenue grew 4,400% over 5 years and was ranked on Deloitte’s 2012 Technology Fast 500 list as the 36th fastest-growing company in North America.

Using his online dating technology as the foundation, Lerner then launched AllPaws in 2013. AllPaws matches adoptable shelter pets with prospective pet owners who swipe left or right on an app. After registering 1.5+ million users and reaching almost 1 million website visits per month, he sold AllPaws to PetSmart, the largest pet specialty retailer in North America. 

Lerner is now a Co-Founder of Saturday, another social app that advises startups and businesses on how to optimize their digital and product growth strategy.    

M&A Lesson 1: Changing the commission structure

When Lerner first started thinking about selling AllPaws, he spoke to a banker who told him, “Give me a number that you will absolutely sell this business for. I need to know you’re serious.” 

So Lerner calculated the lowest sale price that would cover his costs, plus give his investors and himself “something back.” His absolute lowest number was $3 million. The risk of giving his banker his lowest number was that the firm might not work to sell for any higher.   

To mitigate this risk, Lerner structured an unconventional deal where the firm’s commission went up at an increased rate as the sale price went up (instead of the conventional commission that goes down as the price increases). This motivated the firm to get the highest price possible. 

M&A Lesson 2: Amp up the competitive tension 

As a part of his M&A strategy, Lerner had befriended a writer with Forbes who said she’d write a story on him if he had a good business angle. He told her about how the ads and sponsorships on AllPaws were performing much better than industry average: not only were they his main income source, but they did more than simply drive traffic to his advertisers’ websites. 

The ads connected brands with new pet parents, offering them information that matched their search queries, along with a coupon for helpful products. Each new pet parent was also emailed a welcome kit from the sponsor. The Forbes article talked about the high performance of these ads and sponsorships and how they were a unique opportunity for brands. 

Within a week of publication, Lerner got his wish and a call from a PetSmart competitor inquiring into the possibility of a purchase. PetSmart had a right of first refusal in their LOI, and immediately increased the terms of their offer and interest level in closing the transaction of AllPaws. Knowing that Lerner wanted to sell the company, PetSmart also jump-started the process of acquiring AllPaws.

M&A Lesson 3: If you've gone through the work to find a great banker, trust them when it counts

Once the acquisition process had started, the banker was able to get Lerner 2 non-binding Indications of Interest that each offered a sale price range. They sent company materials to be reviewed over a couple of weeks and then PetSmart and the other potential buyer were asked for a specific price. 

After negotiations, Lerner’s banker gave him what he believed were the highest numbers from both companies. He said, “It’s time. If you start squeezing them any more, you’re going to run the risk of losing the deal.” And Lerner trusted that, with the many years of experience the firm had, they’d know when to advise him to accept the deal.

And it worked: Lerner ended up selling for an undisclosed amount to PetSmart, but one that was much higher than the $3 million he would have initially settled for. 

Cashing Out: How Much Is My Business Worth? 

Sarah Greifenberger is a Certified Exit Planning Advisor (CEPA) and has been a Certified Valuation Analyst (CVA) for over 10 years. 

Prior to becoming a CVA, Sarah was Director of Financial Planning at United Technologies Corporation, performing valuations to support M&A activity, as well as for purposes of international tax planning. She also prepared financial information for the divestiture of UT Automotive to Lear Corporation for $2.3B.

In this episode, Sarah talks about:

• The various reasons that a business owner considers a business valuation

• The difference between fair market value and valuing a business for sale

• Becoming an Exitwise Ambassador and referring Fathead.com for sale in October 2023

M&A News 📰

• Education: A leading education technology company, Instructure, has acquired Parchment, a digital education records provider, for approximately $795M. 

• Real Estate: Zillow Group is set to acquire Follow Up Boss, a popular customer relationship management system for agents and brokers, in its pursuit of creating a “housing super app.” The deal includes $400M in upfront cash and an additional $100M cash earnout. 

• Cybersecurity: Palo Alto Networks has confirmed the acquisition of Dig Security, an Israeli company specializing in data security posture management. The financial terms of the deal were not disclosed, but sources suggest it’s in the vicinity of $400M.

• E-Commerce: With aims to expand its presence in the growing e-commerce and retail media sectors, Omnicom Group Inc. acquires Flywheel Digital for a net cash purchase price of approximately $835M. 

• Logistics: UPS is set to acquire Happy Returns from PayPal, aiming to enhance its label-free returns service. The acquisition will incorporate Happy Returns’ software and operations to offer customers frictionless returns at over 12,000 locations in the United States. 

That’s all for now. 

Tune in next Wednesday for another set of M&A lessons, and have a great rest of the week. 👋