Rolling Up Mystery Shopping: Market Force CEO Karl Maier (Part 4)

Sramana: How did you actually accomplish a roll-up in mystery shopping to start a company? What was your next step?

Karl Maier: The first step was to conduct research to answer the basic questions such as market size, value proposition, and market competition. Paul Berberian, Rushton McGarr, and I then spent three months bootstrapping the company. We spent our time looking for a platform acquisition. We canvassed the market that had good processes, good customers, reasonable scale, and decent financial characteristics.

We looked at 25 target acquisitions in the first year. We did due diligence on six companies. We knew we were on to something by this point, so we hired a corporate development field officer and we raised some money. We put in some of our own money and then we raised seed financing from Centennial Ventures.

Sramana: How much money did you have to raise to do a roll-up?

Karl Maier: We had to raise $750,000 to start, which we did in May 2005. That was basically used to search for the platform acquisition. Once we found a company we liked in 2006 called ShoppingPoint, we did an $11 million Series A round. Centennial Ventures led that round, but we also brought in two smaller firms in Boulder.

Sramana: How did that acquisition work out for you?

Karl Maier: It was incredibly successful. They were doing $15 million in revenue and $2 million of EBITA. After one year of running that business, we were doing $16 million in revenue and $4 million EBITA. Due to that success, we decided to focus on our next acquisition.

In February 2007, we raised $32 million. We brought in a new investor, Monitor Clipper Partners out of Cambridge. That round was a war chest to buy new companies and invest in products and services. In March 2007, we bought SpeedMark, and in March 2008 we bought Certified Marketing Services.

Sramana: Roll-ups of private companies are notoriously difficult to do. It seems like you figured it out. Can you share some wisdom on the deal structures?

Karl Maier: In each of the cases, we bought 100% of the company. We paid approximately 70% cash to close, and the remaining 30% came in the form of earn-outs. We wanted to make sure we aligned our interest with the management teams of the sellers so that they received a portion of the proceeds over two years. We gave them first-year milestones on how the business should look.

That was usually a relatively modest growth rate. We essentially told them we would give them the first earn-out if they kept the business flat and kept profitability where it is. The second year, we put in place aggressive growth and revenue targets in order for them to earn the second payments. That strategy has worked well for us as well as for the sellers of the businesses.

Sramana: From an objective point of view, did you try to keep the sellers’ management team around for the long term?

Karl Maier: It depended. We wanted to live and work with them for a period to determine if they fit into the Market Force culture. The folks who have meshed well with our culture have stuck around. There are a number of those. Others who did not fit left anywhere from six months to two years later.

Sramana: Did you provide incentives later on to keep key players around?

Karl Maier: Yes. Normally, we did put employment agreements in place with two to four people. If we made a mistake, then we would bite the bullet and pay them severance. Otherwise, we had agreements in place with people for two years. Once that agreement was up, we would offer them options and ensure that they were fully part of Market Force.

This segment is part 4 in the series : Rolling Up Mystery Shopping: Market Force CEO Karl Maier
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