The $14M Secret to Building a Business That Can Run Without You with Richard Stroupe

Speaker A: Before we get into the Exit today, I want to talk about the certified M and A advisors that are on Flippa. Uh, if you are an operator right now running a business and you're thinking about exiting, you are going to want to get a free online business valuation on the Exit landing page. Without a doubt, it is the smartest thing you can do to start a process and get yourself organized. So you're going to go to the URL flippa.com exit to check out more. And let's jump into the interview. Hello and welcome to the Exit presented by Flippa, the number one platform to buy and sell online businesses. Flippa manages over a billion in deal value annually and combines expert buy and sell side advisory with its market leading valuation tool Deal Room off market offering market insights and an AI based deal by deal matching engine. Now for the Exit. The exit is a 30 minute podcast featuring awesome entrepreneurs who have been there and they have done it. The Exit talks to operators who have bought and sold businesses of all different sizes. You'll learn how they did it, why they did it, and get exposure to the world of exits. It's a world occupied by a small few, but accessible to many. On, um, this episode of the Exit, I sit down with Richard Stroup. He's a fantastic entrepreneur, started as a software developer and went to scale multiple successful exits. And this is a fantastic conversation because we talk about coherence, we talk about separating yourself from your company and really just how to prepare and know your business. And I think that knowing your numbers equals knowing your business. And coherence is a really cool kind of theme that I liked about this episode because we talked about how that builds trust. And trust in M and A is basically everything. Like you need to be able to trust each other. You need to be able to trust that everything that you're looking at and going through in due diligence is accurate. And everybody's coming from a place of, uh, you know, they have a goodwill in the transaction. So I like the coherence theme and basically going through this with Richard, we talk a lot about the ups and downs of his ventures and going through multiple exits. He has a lot of wisdom when it comes to preparation and also post acquisition, what that means when you're getting integrated into the acquiring company and just sort of looking out for the business, looking out for everybody involved. And I like that we really dig into uh, the kind of confidence and the trust of a deal during diligence. So without further ado, let's sit down here on the Exit with Richard. All right. I am here with Richard Stroup, and he is the founder and managing partner at Cape Fear Ventures. How's it going, Richard?

Speaker B: Great. Thank you, Steve, for having me on. Really appreciate it.

Speaker A: Yeah, yeah. I'm excited to get into your multiple successes here. But before we do, let's talk about your background. How did you get started?

Speaker B: Sure, absolutely. So I am the founder and managing partner of, uh, Cape Fear Ventures. Uh, before I started Cape Fear, um, my background actually is a software developer and business operator, uh, primarily building and scaling technology companies that served the national security sector for the last 20 years. So after spending years, uh, on building, scaling and operating side, um, and eventually two M&A deals, uh, I transitioned more into the investor mentor role where, uh, I currently work with early stage founders who are trying to, uh, turn promising technologies into scalable companies. So a lot of the work I do with founders is centered around building the systems, the financial discipline, and the go to market structure that allows a company to scale responsibly.

Speaker A: Got it, got it. Okay. Well, I think once we kind of start, uh, unpacking habits and stuff like that, it is always fun. But I like to sort of talk about how you really built your business because I think there's theory and all of that and then there's the reality of it. And that's one of the fun things about the podcast. We always like to talk about the nitty gritty and, uh, what goes into it. So I guess with the first venture, let's talk about that. As far as I understand, it was a strategic. And can we unpack that a little bit what that business was?

Speaker B: Absolutely. So I originally started that company, um, as a 1099 consultant. So I worked for, um, an integrator who worked in the intelligence community. And I was offered a role, uh, to work on this other contract. And they gave me an option to be a 1099 consultant versus a W2 employee. Um, so I was able to start my own LLC and I was 24 years old and decided to say, you know what, I'll give this, uh, entrepreneurship, uh, uh, side a shot. So, um, the one contract turned into three. Um, I was working 2,400 hours a year. I was making a ton of money working on some really cool projects. And a few of my friends where I worked at prior was asking me, how did you do this? What's going on? So I explained to him, you should really consider becoming a 1099. Um, it opens up the door for some really challenging work. You can set your own Hours, uh, and of course we get to work overtime on multiple projects because a lot of us did at that time wanted to work as much as possible. So. So after about hiring 15 of those as 1099s, I eventually converted them into a W2, um, company, W2 employee, uh, based company and uh, scaled that company to $14 million over the next five years. So that was in 2005 through 2009. And I eventually um, received an offer to be acquired by a strategic company. It was a DoD focused company that wanted to kind of break into the intelligence community where we worked at. Um, so ended uh, up selling to those guys. But eventually I didn't really know I wanted to sell um, at the time. You kind of get into working at your business and it becomes pretty much uh, your soul. And every single day you just get up and go to work and it becomes more of a routine. Um, but there's signals there that will tell you maybe it's time to sell. Um, so I was fortunate enough to kind of pick up on the signals, um, hired uh, some good strategic advisors and kind of looked through various peers in my community to kind of see if it was a good time to exit. Uh, and which I did. So we sold that business in 2009.

Speaker A: Nice. And just from that business, I love that story of how started as 1099, kind of brought, brought like minded people together, got everybody onto W2 and scaled it up. I think that's a really kind of um, just great entrepreneurial story of starting and learning as you go. Um, I think that's great. So when it comes to preparing for that exit, how much preparing did you do and what advice could you share with people listening about preparation?

Speaker B: So yeah, the approach was pretty unique. Um, at the time I was working as an engineer by day and working on the business at night. So I was burning myself out, which was one of the signals that I needed a change. Either I needed to hire some more people to help me run the business because I was spending too much time in the business. Um, so after attending Harvard Business School's OPM program, one of the modules there was talking about M and A and strategic, uh, acquisitions and legacy, trying to build value creation for your shareholders. Um, so I took that back and said maybe, maybe this is a time that we should explore uh, selling our company. Because it was a pivotal time in 2009. And so the first thing I did was I interviewed three different founders who recently had sold and I took them out to lunch and I said, tell me the Reasons why did you sell? Number one, what prompted you to sell? Are there indicators in the market or the economy? Um, are there anything happening internally with your organization? What was the driving force that made you decide to sell? Um, they were very gracious on giving me some of this feedback. Then I asked them, who did you use to sell? How was that process? Who did you talk to? And, you know, did you do an auction or did you do more strategic? And who was your top three? You know, who. Who did you end up selling to? Why? What was it about them that really made you choose them versus the other two? You know, kind of like the, um, losers of the deal. Um, and so I did that with three different companies, and I, you know, got a lot of information. And so basically I kind of went back and said, okay, I now know that it is a good time to sell. The valuations are great. As far as, uh, getting a good deal for selling your company. I know who's looking, because more importantly, I found out who did those acquisitions, but more importantly, who didn't win those acquisitions. So I had kind of a target list of people that were hungry, looking to buy in, but didn't win those specific bids. Um, I learned who the brokers were, um, and who had the relationships. So based on this information, um, I went out with the strategy and talked to several investment bankers, and I ended up hiring Raymond James, um, to kind of to work with us on the sales side. And I knew Raymond James had some relationships with a few of those companies that, you know, came in second, uh, to those deals. So I basically said, look, let's just go back to these people. If this is the kind of company they're looking for, we're very similar to the ones that they lost. Um, let's start there and having some conversations and kind of peel back the onion. And then, of course, I knew what they sold for, so it gave me a floor to kind of like, plus up a little bit on the price, uh, which eventually we did get to the target we were looking for.

Speaker A: Nice. Uh, that's a good segue into systems. I think when it comes to maximizing an outcome, there's a lot of things that you can do to really drive the valuation there. But I'm curious to get your take on systems, like, people that are listening to this. What type of things can they implement to really increase the value to a buyer?

Speaker B: Yeah, I think the thing that actually builds confidence in the diligence process isn't any one system. It's coherence. Um, most founders Prepare for diligence by cleaning up your financials and your books. Um, fewer prepared for customer calls. I think that was really one that kind of threw us a curve ball. Um, the buyer will reach out to your top accounts and, unprompted, to, uh, strangers, and then ask them to describe what does your product or service actually do for them. It's not what the deck says. Um, it's what they experience. And of course, that's a narrative that you can't control. And that information is not in the data room that you light up. So, um, the management presentation, the financial model, the customer interviews, all must align. Um, when all three tell the same story, the buyer kind of relaxes and they understand and it builds trust. Um, but when they contradict, when you start seeing some red flags, then that trust can break. And of course, once the trust is broken in the process, um, it does show up in the price because they can always come back and try to narrow you the price or throw in more terms and conditions like earnouts or some other, uh, interesting legal terms to kind of like, lower that initial purchase price or the overall risk into the deal. Um, but at King Fear Ventures, from an investment point of view, we look for what we call the four T's, which is team, technology, traction, and tam. And all four of those must align with financial reporting to show strength and coherence. Diligence reveals what the pitch conceals. Um, every gap between your narrative and your operating data will be found. Um, uh, the question is whether you find it first.

Speaker A: Got it. And when it comes to behaviors, I think this is a common question around, like, behaviors that founders can kind of sporadically have, let's call it, um, at the time of an exit. So what are some risky behaviors that you've seen? And we'll call it mistakes, because that's my favorite topic of the whole M and A, uh, process, is mistakes people make. So what are some behaviors you've seen that have kind of risked a deal and then mistakes that you've seen people make?

Speaker B: I would say the mistake technical founders make that nobody prepares them for again, you know, the buyer will call your customers part of diligence. And whatever the customer says, unprompted, really, um, does matter more than anything in your deck. Um, most, um, technical founders never have really thought about what that conversation sounds like. So they must. They know their product deeply, but they haven't built the customer story. That's easy, uh, for someone to tell. Um, I think the other mistake, uh, that founders make is underestimating the Integration process or question, um, the buyer is already thinking about what happens after the close. So, um, um, you know, think about how the product or service fits in the stack and which members they need to retain if something breaks or it's challenging. Um, you know, it's really, it's a whole different set of questions that you're not prepared for. Um, I also think, uh, that technical founders, um, make specific uh, mistakes in acquisition conversation when they lead with technology or they go deep in architecture or the differentiation or the engineering choices. You know, the acquirer sits across the table thinking about revenue, customer contracts and whether the team stays after the close. Um, so the business is the asset, the technology is what's enabled it. So founders who spend the first half of the meeting explaining how the product works, um, demonstrating that the business is clean, scalable, it doesn't depend on them personally. Um, knowing the numbers is also non negotiable. Um, unit economics, gross margin, net revenue retention. Those aren't finance department questions, uh, they're founder questions. So even though you've built the business, you should be able to answer some of those questions. Um, if they seem dodgy or if they're not willing to have deep conversations about finances or if their projections aren't aligning, uh, with what the data is telling you, those are all red flags and major mistakes that they should make. So obviously before they go into any type of, uh, deep due diligence with the buyer, they need to make sure they're prepared in those areas for sure.

Speaker A: Yeah, knowing your numbers comes up pretty frequently. Uh, a lot of people surprisingly don't know the basics of the business. They're excellent operators on all the other senses. But uh, when it comes to the financials and everything, people, uh, and sometimes the type of people that it takes to build big businesses have to learn the hard way and they have to kind of get, get course corrected, um, as they go.

Speaker B: So yeah, yeah, the behavior that does work in those rooms, um, are the same one that builds great companies. Transparency, uh, ownership and clarity. Uh, know your numbers, know what's working and what isn't, and speak about the risk before they ask, yeah, what is up.

Speaker A: Builders, a quick break from the show. I want to talk about valuations. Now if you want a quick estimate on how much your business is worth today, at this very moment, there is a free tool out there. So with Flippa's, uh, free valuation calculator, you just answer a few easy questions about your business and you'll literally get an immediate estimate of the value of your Investment, entire business. That's right. Just a couple clicks. You put in some data and some information privately on Flippa and you get an immediate estimate that is a huge free gift from Flippa. And if you're listening to this show, you are probably operating a business or you're looking to buy one. So it is a very helpful tool to learn valuations. You might be surprised how much you can get for your business today. So check it out@flippa.com valuation that is flippa.com valuation. So let's talk about timing. When is the right time to sell? Everybody's different. Every industry is different of course. But uh, I really like this question because it's just so, so broad and it, it is just a great one. So whenever anybody listening, when is the right time for them to exit?

Speaker B: I think it depends on the founder and the management team because it really depends. Um, in my example I had health problems because I was working 80 hours a week and I wasn't taking care of myself. Um, I had family, uh, issues because I wasn't, um, spending much time with my family and doing what I needed to do there. Um, you know, you'll know. Um, so it's either internal when you look at the team, if you need to scale up the team, um, how the team operates together, whether you're having issues at home, in your personal life, um, or even environmental. We look at today how AI is disrupting every business model. Um, it's a legitimate question where some companies maybe, maybe their business model will evolve and to be less profitable five years from now. So, um, looking back to my first company, uh, we were, it was a change of administration and working in the intelligence community. From 2003 to 2008 there was a big run up in technology because of 9, 11, um, but once those areas peaked we knew that we were kind of going into more of a plateau, plateau area. Um, so we needed to kind of differentiate ourselves or create another uh, business market in other areas than the intelligence community. Um, so it was kind of either, it was like a crossroads decision. Either we double down and build in these new areas or we take an exit. So I think the story, that question really depends on the situation that every founder is in, whether or not they need more capital to double down and expand and scale the business, uh, or if their industry is being disrupted by competition or other external factors out of their control for sure.

Speaker A: So let's talk about your next exit. What happened after that? Did you build that one to sell? How did that start?

Speaker B: Sure. So with My first exit I had a non compete. So I worked for the acquirer for two years after we did the deal in 2009. So I left in 2011 and I had a one year non compete which is why I branched into the venture capital side. I had to have something to do for a year, um, so I became more of an investor and more of a mentor helping other small businesses and startups in the area. Uh, but when my non compete ended I started my other business in the same area doing similar things uh, for different customers. But yeah, this time I took all the lessons learned from the first business. And since I was in my 30s I said I'm going to go down and do this thing again. Now that I have uh, all the systems and all the contacts and the relationships, it would be easier for me to scale. And it was uh, the first couple years we were able to scale much faster uh, because of those relationships and systems that we had um, than the prior company. But obviously the market was changing and the contract acquisition strategy also changed from the government that we were working, the customer we were working for. And um, eventually in 2019 we decided that we were going to sell the company. Actually it was in 2018, um, I was, I was getting burned out at the time where I was kind of doing dual hat investing and also operating at the same time. And there were a lot of challenges in 2018 as we headed in 2020, where we worked at and what we had to do. And I just felt like it was a good time for an exit because we had built some really good strategy and some systems and products that we were building. Um, but this time around before we hired a broker we were approached by private equity buyer because this time uh, private equity was entering the market. And um, so we had a few conversations uh, with uh, private equity buyers and one of them talked us into a good deal. They gave us a term sheet. It was more than what we were asking for. Um, so we decided to go direct with them without a broker to save the broker fee. And the due diligence took about six months with the private equity group just to kind of make sure everything's in order to um. And before the deal was closed, um, the only difference is that we didn't have an earn out with the private equity. So most of the money that we had was up front with a little bit of um, uh a 10% that was kept back for like 60 days for taxes, uh, to make sure our tax return was appropriate. Um, but that was refreshing. Whereas the first deal uh, we had 75% was up front and 25% was in an earn out. Uh, whereas the second deal with private equity, um, 95% of it basically was day one. And then the other 5% or such was just a retainer for taxes. But eventually we got that too. So on that aspect, it was a much better deal. Um, and private equity buyer let us keep the culture, let us keep the same team. It created some synergies for us that allowed us to grow because they brought some relationships in. Whereas the strategic folded our company into their business, which the culture eroded. So, um, very, very different outcomes, uh, even though the structure was very similar, but we had two different outcomes because the buyers were different areas.

Speaker A: Yeah, yeah, for sure. And I think around that time that was really like an era of grow at all costs. Like that was sort of that 2018-2021 ish, was just burn, burn, baby, burn. Just get that top line as fast as you can. And, uh, it quickly changed after that. I, uh, think everybody sort of felt that profitability and you switch up. So what were some like, scaling decisions that you saw that kind of hurt

Speaker B: the value scaling decisions? Well, we didn't have the relationships, but that's one of the reasons we chose to do private equity is because they actually had the relationships in the DoD areas that we didn't have. Um, about that time between 2016 and 2020, the federal government was going through this major transformation, um, of going to the cloud. So our company was one of the first ones to help create this air gap cloud for the classified networks. So they were moving from a distributed architecture to more of a centralized architecture. Even though we did a really good job for this one specific intelligence customer, um, we wanted to break into the DoD area. And it was the same problem we had with the first company where we worked really well in one area, but kind of branching into the main DoD areas to kind of compete for contracts for, you know, the Army, Air Force and Navy made it very impossible unless you had those relationships. Um, and this is where this private equity buyer came in and said, yes, we have those relationships. We sit on boards, we know the people and acquisitions. So our limitation to scale was, was something that they were able to help kind of leverage their experience and network to help us kind of scale and meet some of those objectives, which we did over the last five years that we've been with them. Um, they've opened up many doors that we couldn't. Um, and we've been able to do a couple acquisitions ourselves on the buy Side, um, which scaled our company over. We doubled their company basically in the last five years through, through uh, acquisition. So, so that's been very helpful having a partner like that.

Speaker A: Cool. And when it comes to simplifying, this is one of my favorites as well. Like what, what could a listener listening to this do today to simplify their business and just make it more valuable?

Speaker B: That's a great question. Most founders don't have a growth problem, they have a complexity problem. So if you want a more valuable business, simplify the things that create drag decision making operations, the founder dependency that causes everything to flow through you while installing the discipline, structure and process or what I call operational muscle that allows the business to operate consistently, uh, without the founder intervening. Um, one of the things that we teach at our CEO retreat called Elevate CEO. Um, we teach that complexity destroys enterprise value while simplicity creates leverage. Which is why the strongest companies build clear operating battle rhythms, um, defined accountability, uh, repeatable systems and disciplined execution that scales beyond the founder. Um, one of the simple questions we ask every founder and is one of the exercises we go through is if you disappeared for 30 days, what would immediately break? Uh, because whatever breaks is exactly the bottleneck that's limiting the growth and scaling of that business.

Speaker A: Yeah, I love that one. The what happens if you go away? What'll break? It's uh, a classic and tried and true for sure. It's almost like the testament to how you built the business is how long you can step away.

Speaker B: Yeah. Because if you, if you think about it, if you're a buyer, whether private equity or strategic, if they want to buy the company, they don't want the company to melt after the founder goes away. Because you know, most times when a founder does sell the company, they're not going to be there longer than six or 12 months either. They're going to get that payout and they're going to try to go do something different with their life because they've been doing the same thing for years and years and now it's like, okay, I'm going to go try something different. Um, or maybe the buyer will make changes that will cause operational pain for the founder because they've been used to doing things a certain way. And now for example, if they change culture or if they change the financial compensation of certain people, then you're going to have angry employees. Well, no founder wants to sit around and kind of take the beating like why did you sell your company when all they're going to do is change our, our compensation and make it harder to work. Um, so there are some pitfalls the founder should look towards. So I think if you create that, discipline those operational structures, uh, which creates leverage. That way when you do sell your company, then somebody can either take that company and plug it into another, uh, like a roll off model, or they can supply their own CEO, uh, that can run the business after that founder retired or chooses to do something different.

Speaker A: Nice. And that takes the finale. Knowing what you know now, what would you tell Richard 10 years ago?

Speaker B: That's a great question. I would say work more on the business rather than in the business. I spent too much time in the weeds because I enjoyed it. And a lot of the founders do the same thing because if they're technologists or whatever their background is, when they start their company, they become the company. Like it's their personality, it's their brand. Um, and sometimes when you insert yourself into every decision, you become the bottleneck. Um, but it's very hard to kind of break that cycle because this is your company and this is your blood, your life that you're trying to grow. It's almost like having another child. Um, so it becomes personal. I, um, would also tell anybody not to be personal. Think of it as two different entities you've got yourself and your company. So work on your company, but don't become your company. Make sure you have enough grit and perseverance to separate yourself from the two. Live a life, you know, separate yourself and protect your family. Make sure that you, you know, do the things that you need to do as a, as a, as a parent or spouse to what you're trying to do without sacrificing time to work on the company and hire a great team. And don't think that nobody else can do what you do. Um, that's another kind of a bias thing is you get into something and um, you think that you're the only one that has the capability or knowledge or experience to do something. You're not. You can train people, you can have those processes and those um, systems, uh, to become, ah, more disciplined operator of your business and let people have autonomy. Give them the authorization to go run the business so that you don't have to be there 24 7. I, um, would say that in a nutshell, would have helped me scale both of my businesses further than they did.

Speaker A: Well said, well said. Well, that takes us to Cape Fear Ventures. Tell us about it and where people can learn more.

Speaker B: Sure. Um, so Cape Fear Ventures, uh, we are a small venture capital firm based in North Carolina. Uh, we primarily invest in space exploration software as a service, uh, artificial intelligence, uh, and defense tech. Um, you can find us on Cape Fear VC. Uh, we also run an Elevate CEO workshop for CEOs. Um, it's an executive immersive retreat, uh, designed for founders and CEOs, um, who are serious about scaling their companies. Um, and they want to kind of go through and build the systems and confidence and discipline to kind of learn those strategies and the operating rhythms needed to transition from being a bottleneck, uh, to building a scalable business. And you can find more information about that at Cape Fear VC Elevate. Um, or they could reach out to me on LinkedIn.

Speaker A: Very cool. Well, wherever you guys are listening on itunes or Spotify, the links that Richard mentioned will be in the show Notes. Thank you so much for coming on and sharing all your wisdom.

Speaker B: Absolutely. Thank you again.