Gusto Acquires Guideline for $600M, Plans Divestiture of Rival Customers

Gusto Acquires Retirement Plan Provider Guideline

Gusto, a leading provider of payroll and human resources software, recently announced its agreement to acquire Guideline, a startup specializing in retirement solutions for small and medium-sized businesses.

The financial details of the acquisition were not publicly revealed. However, a source with knowledge of the transaction indicated an approximate value of $600 million. Confirmation regarding the proportion of cash versus stock utilized in the deal remains pending.

Guideline's Valuation and Funding

Guideline’s most recent valuation stood at $1.15 billion, achieved during a $200 million Series D funding round in 2021. Since its inception in 2015, the company has successfully secured a total of $340 million in funding.

Despite the acquisition price falling below its prior private valuation, early investors – including firms like Felicis, Tiger Global, and NEA – are anticipated to see a return on their investments. General Atlantic, who spearheaded the Series D round, is also projected to realize a modest profit.

Guideline's Business Model and Growth

Founded by Kevin Busque, previously a co-founder of Taskrabbit, Guideline simplifies the process of establishing and administering 401(k) plans for smaller businesses. The company distinguishes itself by employing a flat, per-employee fee structure, diverging from the conventional percentage-of-assets-under-management model.

As of January of this year, Guideline reported an annualized recurring revenue (ARR) of $140 million, a key metric for measuring consistent, subscription-based income.

Gusto's Existing Relationship and Strategic Intent

Gusto, established in 2011 and currently valued at $9.3 billion, has offered 401(k) plans to its clientele through a partnership with Guideline since 2015. However, this partnership was not exclusive.

Guideline also facilitated retirement plan setups through other payroll providers, including ADP, Intuit, Paylocity, TriNet, and Rippling.

Sources indicate that Gusto intends to divest Guideline’s client accounts associated with competing payroll companies. The revenue generated from these sales will be distributed between Gusto and Guideline shareholders, potentially enhancing investor returns.

Conflicting Reports and Future Plans

Gusto has refrained from commenting on the deal’s price and its plans for divestment. A Guideline spokesperson disputed the $600 million price tag without providing alternative figures and stated the company has no intention of losing customers due to the acquisition.

Competitive Landscape and Rationale for Sale

While the acquisition appears beneficial for Guideline’s shareholders, the underlying reasons for the sale remain somewhat unclear. The company has reportedly been profitable for over a year, according to its spokesperson.

However, Guideline operates within a competitive market, facing significant challenges from companies like Human Interest, a major rival backed by SoftBank and Baillie Gifford. Human Interest experienced 70% growth last year and anticipates achieving profitability by year-end, as stated by its co-founder and CEO, Jeff Schneble.

Reports suggest Human Interest is currently exploring a $200 million fundraising round at a $3 billion valuation, effectively doubling its valuation from the previous year. Schneble declined to confirm these fundraising discussions.