As far as channel stories go, the birth of Sydney reseller Applaud was quite dramatic. The tale begins five years ago with Ricci Danieletto, later to be Applaud's managing director, running the Australian operations of a multinational systems integrator called Cybernet Engineering.
Danieletto was the first employee hired to drive Cybernet's managed services expansion in the Asia Pacific and by 2004 the subsidiary had grown to 60 staff.
Danieletto says the Australian unit was performing strongly when in late 2004 the Cybernet CEO Barton Watson was busted for a US$100 million fraud. Later featured on a TV series called "Greedy CEOs", Watson committed suicide in his luxury home during a stand-off with police.
Danieletto and two employees approached the liquidators to buy out the tangible Australian operation, which had not been involved in the financial irregularities of the US parent.
The liquidators initially showed interest but then abruptly decided to terminate all staff in November 2004. Danieletto and his two business partners approached Cybernet's two largest Australian customers and proposed continuing the managed services contracts under a new company.
The customers - human resources company Chandler Cloud and pokies manufacturer Aristocrat - gave Danieletto six weeks to prove the freshly-minted Applaud could pull it off. Luckily for all involved, they did.
Applaud took a core team of 10 people from Cybernet and began life as a managed services provider running a 24x5 network operations centre.
By 2006 it had added professional services to the portfolio and had become a gold Microsoft and silver Citrix partner. Growth was organic - the marketing plan was written on the back of a napkin during that first six-week sprint and not touched since, Danieletto says.
"Just as the GFC was hitting I decided we needed to rebuild our brand and messaging," says Danieletto. He hired a marketing assistant in December 2008 who spent six months developing a marketing and communications plan.
By September 2009 the company was "just about to do the launch" of the new marketing campaign when a letter from the tax office arrived.
The letter demanded that Applaud pay a half-a-million dollar debt in full or go into liquidation. The bad news came while Danieletto was himself in the middle of a divorce.
"In the first few years we made some poor decisions as to how we spent our funds," Danieletto says. "We were relatively undercapitalised in the beginning. Because we needed to keep the core team employed, we had to incur a debt with the ATO. We told them and they put us on a payment plan."
He admits there may have been some missed payments "along the way". Applaud tried to make a change to the "hefty" payment structure earlier in the year because customers, feeling the effects of the global financial crisis, were putting the squeeze on contracts and margins.
The managed services reseller was also operating in three separate silos, one under each director. "When the GFC hit us it exposed all the problems with running a business that way," Danieletto says.
The tripartite structure made it difficult to manage finances. None of the departments was accountable for adding resources nor explained to the other parts what it was doing.
Danieletto had realised they had to change the way they ran the business and took over as managing director in July 2009. The two other partners continued as shareholders; one is now the CIO and the other is doing personal study.
Although the business was heading in the right direction, the missed payments had forced the tax office's hand.
Danieletto received financial and legal advice from administrators who said the business wasn't insolvent but for the debt. That year the company made $8 million in revenue. They advised him to go through a voluntary administration, make a lower offer on the debt to the ATO and trade out within six weeks.
The administrators suggested that Applaud enter administration under a creditors' trust, which binds the company to making trust payments on its debts and in return gives the company independence to trade freely.
Importantly, a creditor's trust arrangement would avoid any stigma with the Australian Securities and Investments Commission; without the trust Applaud would receive a black mark on the ASIC website.
"If the business was going to trade out of this it needed to be under a creditors' trust," Danieletto says. Otherwise, voluntary administration "would have been too much of a handicap".
The administrators were so confident in Applaud's underlying financial health and ability to
trade out of the ATO debt that they recommended keeping the process confidential.
"I lost a lot of sleep when I put the business in voluntary administration. I consulted with the administrator and said I think I have a responsibility to tell the customers," Danieletto says.
"[The administrator] was non-committal because he thought we would be in and out of voluntary administration without customers noticing. That wasn't the way I wanted to handle it."
Danieletto visited his top 10 customers with the administrator at his side. The administrator told each customer that in his view the company was not insolvent if not for the tax debt and that he expected the company to trade out of its position.
Danieletto was surprised and overwhelmed by his customers' reaction. "They were unbelievably supportive. They were calling me every second day offering their help," he says. "The support was humbling."
Next he had to tell his employees. Danieletto assembled the staff in the boardroom at the suggestion of the administrator, who explained what would happen next.
"The intent was that we would trade out a stronger entity than we were going into the voluntary administration. We asked [staff] to have faith in me and in the management team. Some of the really good ones came up and said, ‘How can we help? We're here to the end.' For that respect I kept our promise."
Applaud made an offer of 30 cents in the dollar and the ATO accepted. "We traded out in six weeks and we're on track to have a pearler in the next six months," Danieletto says. By February 28 this year all creditors had been paid.
Danieletto says he learnt important lessons from the experience about running his business. "Because it was such a baptism of fire it made my commitment to internal reporting and assessment almost a religion. I needed to be extremely diligent about that. It taught me a lot about commercial law and the Corporations Act.
"It taught me that we've always endeavoured to be very open and ethical with customers and staff. I got some satisfaction that because of our ethical conduct we were repaid by customers and staff and suppliers."
The business is now more stable and solid than it was before the voluntary administration. The rebranding consolidated its four different services to two - managed and professional services.
Applaud is investing in a cloud services platform (see breakout) to carry it into the next phase.
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