Part of Bob’s continued ramblings.
I sometimes write these blogs to save myself time, like in this case. We have been getting some inbound requests about our interest in acquiring companies in the registration or ticket spaces. While we may have looked at companies in the past, the answer now is no thanks. Let me explain why.
Risk of Financial Obligations
Payment processing and being a ticket or registration vendor puts us in the path of managing money properly, plus complying with federal and state laws. Many registration and ticket vendors ignore these laws or implement poor solutions to compliance and are potentially building up large financial obligations. Here are the main ones:
Sales Tax – There are still registration and ticket vendors to claim that marketplace laws do not apply to them and they do not have to collect and remit sales tax. They say it is the customer’s obligation. Our lawyers and accountants say differently. And the problem is that these taxes and rules are managed by all of the states individually. All it takes is one or two states to demand back taxes since their laws went into effect years ago to win a judgement. Even entering into arguments about whether the registration/ticket vendor is obligated to pay a state or local sales tax is a lot of overhead and expense even if judges and juries decide the vendor is right. Oh, and in those situations, you wind up with unhappy customers who might not have paid sales tax or thought the vendor was supposed to worry about that.
RunSignup has a comprehensive Sales Tax system that makes sure our customers and we are complying. We invest about $200,000 a year in vendor fees to compute and remit the sales tax for 9,000 jurisdictions across the US. We do not have faith that other vendors have been so cautious, and if they also do business overseas then that is a whole other can of worms and financial obligations.
Fee Transparency – Many states and now the federal government have passed a wave of fee transparency laws. Like sales tax, RunSignup has been working hard to comply. Many of the competitors we see are lagging in compliance. The financial obligations that may arise from non-compliance are an unknown we are not willing to risk.
Unaudited Financial Records – The registration and ticket vendors are all very small. The books we have taken a look at over the years are very disorganized and do not represent what is reality. Race Partner was a good example of that, where they had been using customer funds and then suddenly went out of business leaving customers with hundreds of thousands of dollars owed to them. We have people at RunSignup who worked at other companies who could not reconcile their books and match payment processing vendor reports to reports of what they owed to race customers. We have heard from some customers that other current vendors are not making reliable or accurate payments. We heard of a roll-up acquisition of one of the old registration vendors who after the acquisition was closed, other parties emerged who were owed money because they had been “friends and family” investors.
In short, if we were to acquire a registration or ticket vendor, there is just too much unknown financial risk with no way of indemnifying the risk.
Non-Growth Market
Pretty much all event customers have a registration or ticket vendor already. And there is not massive growth of events – it is a large and stable market. So that means the only way for a vendor to grow is by having customers move from one platform to another. It turns out that event customers are busy and in most cases it is easier to stick with what they are doing today.
We think there are two ways to grow. Slow and steady, which is what we have done for 15 years and will continue to do for decades into the future as an employee owned company. The other way is to do a roll up. We will choose the slow and steady approach where customers make up their own minds and not forced by a private equity company to move from one thing to another.
Waste of Energy
For RunSignup, we have the premier product and are objectively years ahead of our competitors in endurance and calendar based timed entry ticketing technology. So that means if we acquired someone, we would have to force those users over to our platform since it would be a waste to keep the other platform running. That would mean unnatural forced migration of customers, which would require extra work for customers and for RunSignup. Let customers move when they are ready.
We Get 50%+ of Customers in the Long Term
We have been around a long time, and have seen as each company goes out of business – Enmotive, RaceIt, Race Partner, IMAthlete, etc. that we wind up getting about half of the customers or more without paying the previous owners. THe samew ill wind up happening in the timed entry ticket market over time as small, niche vendors fail.
Not Fun
There is a LOT of NOT FUN stuff that happens with acquisitions. All the financial due diligence and negotiation. Laying off employees. Mass migration of customers from one platform to another. We would much prefer to spend our time and efforts working with customers who want to use our platform and improving our platform.
Summary
I am happy to spend a small amount of time with investors who are looking to understand the market, but know that it will be a depressing conversation for those looking at roll ups or offloading their poor investments.