Why we acquired UpCounsel

Starting my first business…

When I finished college, I didn’t know anything about business and came from a family of non-business people, but fortunately for me, a college professor inspired me to start my first venture in 2012.

I think it’s easy to underestimate the vastness of the unknowns when starting a business for the first time. I knew nothing.

Family friends of mine told me that if I structured my business incorrectly it could kill my business in the future. 

So I fell into the age-old trap that most young founders fall into. I hired an expensive brand name law firm. 

I did this for two reasons:

  1. I thought if I paid extra today, it would avoid issues in the future (this later was proven wrong)
  2. They offered to defer up to $15,000 of fees until we raised capital (this was the trap)

In the first 3 months, the law firm sent me a bill showing that we had surpassed our $15,000 in deferral and now owed them $15,000. 

This BIG bill scared me. I thought I was going to have to close my business if I continued any further.

So I Googled around and found a lawyer for a fraction of the cost on UpCounsel who had 100+ 5 star reviews. Helen became part-time General Counsel of my company and saved me $80,000+ in fees over the years.

The Shutdown Announcement

In February, I received an email from UpCounsel announcing their imminent shutdown. 

I was shocked.

I knew tons of my friends had hired lawyers from UpCounsel, so I assumed they had a good revenue stream. So why were they now planning to down?

Cracks in the Armor

Through the first 8 years of the business, UpCounsel had raised $20 Million in Venture Capital funding from prominent investors. They had built a fantastic reputation, software, and community of high-quality lawyers.

By late 2017 growth had slowed a bit, and they were locked in a prolonged lawsuit with shareholders. These two combining factors made fundraising challenging for the company which led to a series of layoffs in 2018, and ultimately the founders and remaining employees joined Linkedin.

An Idea

When we saw the announcement, Xavier decided to reach-out to the founders. 

We quickly learned that we had an opportunity to continue holding and growing this business while helping the founders get a favorable outcome.

The founders Matt and Mason had poured their hearts into the business for 8-years, and we wanted to help make sure their company lived on, while helping them earn a healthy payout in the process (read The Founder Code soon).

The Acquisition

Things moved quickly from there — we were able to structure a deal with investors and founders for a positive outcome to what otherwise would have been a sad ending to a great business — 1 month later we are the proud owners of UpCounsel.com, which is used by over 1 Million customers a month for legal help. 

If you need affordable, high quality legal help for your business give it a try.

If you’re the founder of one of the following, give us a call:

  • A business that makes over $1 Million in Cashflow per year and is stable or growing
  • A business that has over $10M+ in revenue but is burning too much cash

We always seek to buy the majority of a company, but we are open flexible arrangements. In our ideal situation, we buy a profitable business with a great team and help the owner get a financial windfall for their life’s work.

How to sell a business with customer concentration “issues”.

Many outstanding, profitable businesses have an issue with customer concentration. This doesn’t only affect small businesses – even large public companies struggle to give investors comfort if they have an especially large customer or supplier. In a way, customer concentration is one of the greatest indications that a company has created real, lasting value. Why else would a customer choose to spend millions of dollars with them year after year?

Yet customer concentration does present a huge risk to a buyer of a business, whether professional or individual. Buyers will typically a finance a business purchase with a loan based on the company’s cash flows. If the biggest customer disappears the day after the sale closes, the buyer may be stuck with payments they can no longer afford and a business that is worth far less than the one they bought. A loss of a large customer that would have been painful but manageable before the acquisition becomes fatal after it.

Further, there is an inherent problem of information asymmetry. The seller knows far more about the prospects of continued business from its largest customer than the buyer ever will, no matter how many good questions they ask. The perfect time to sell is right before orders dry up from your biggest customer. Even though a seller may be honest and have no reason to deceive the buyer, they will obviously try to sell right after orders have been especially strong. That risk is often sends otherwise suitable buyers running away.

The solution to this, like so many problems, can only come from shared risk and partnership. The buyer and the seller need to openly acknowledge the risks of the customer concentration and work together to address it. A model that can work well is essentially splitting the P&L into two parts: the “business” of serving the large customer, and the “business” of serving everyone else. Costs need to be assigned to both to ensure that the business is sustainable if its largest customer were to disappear.

Assuming the business is healthy, though smaller, without its largest customer, the size of the traditional small business loan should be based on that remaining business. The profits from the largest customer should be dedicated to a larger than usual seller financed note and/or earn-out. If business from the largest customer remains stable or grows, the seller should benefit from this. If the business from the largest customer shrinks or disappears, the seller needs to bear the risk of that. Part or all of their seller note needs to be dependent on the largest customer purchasing as projected.

Nothing is without risk, and this approach certainly does not eliminate it. The seller must accept the risk that the new buyer may “screw up” the delivery to the large customer. The buyer must accept that their returns will be more variable than from a fully diversified business. But compared with the alternative of a failure to sell or a sale at a distressed price, this approach is far more likely to meet the financial goals of the seller and reward the buyer appropriately for their risk.