Success in M&A! We're digging into five crucial things to have ready in your business before diving into a merger or acquisition.
We spent the last 12 months in an accelerated market, executed dozens of combinations, advised dozens more on getting ready for a combination and here is what we have boiled it down to, if you're looking to get a deal done in the next year.
1. Be market ready
The truth about market readiness is knowing where you fit. Whether selling or buying, understanding what you are looking for within the market and understanding your value to the party is the true sense of being market ready
2. Solid financial performance:
We always encourage our clients to undergo audited financial statements, maintain solid, timely tax reporting and payments as both buyers and sellers are always going to look for third party validation and understanding on prepared financial statements.
3. Look ready:
Fit and finish carries a lot of weight when it comes to market perception. After all, you want the right people at the table when you are selling (or buying).
4. Be realistic when determining valuations:
The hardest part of mergers and acquisitions is determining what each party is worth.
Working with an advisor like Revenue Rocket will help you understand those levers and value streams to ensure that both sides have a robust understanding of the value that will come from the combination and the price to pay for it.
5. Be open to creative deal structures:
The reality behind deal structures is that in order to obtain the best fit or highest valuation, or most attractive exit, or most attractive retention program you will need to be open to all types of currency, terms and timelines.
Mike Harvath 00:04
Hello, this is Mike Harvath, President & CEO of Revenue Rocket, and your host for this week's Shoot the Moon podcast revenue rocket is a premier M&A and growth strategy advisory firm, to IT services firms worldwide. Today, I have with me my partners Ryan Barnett and Matt Lockhart. We're going to talk about the five milestones to achieving a combination in 2022. Gentlemen, welcome.
Matt Lockhart 00:35
Happy New Year, Mike, we're off and running.
Ryan Barnett 00:39
That's a great start to the quarter. And at least for us, so as 2021 wrapped up, we're looking forward to an interesting structure of 2022. We have a macroeconomic that is really positive for deal making. So we still have people that are looking to get deals done by companies and also looking to sell. And we see that throughout the year. So Matt, Mike, today, I'd love to talk to you a little bit about some of the most important milestones that we see in actually getting the deal done in the next 12 months. And part of it is coming back to fundamentals, so love to just start and get your opinions on on what it means to get a deal done and what milestones are out there. And I think the big one that we're going to just start with is you got to be ready to start a process, whether buying or selling your company, you simply have to be ready, Mike, what's it mean to be ready?
Mike Harvath 01:40
Wow, that's a great question. You know, I think what's interesting to be ready is ready is important on a variety of fronts, obviously, you need to be, you know, financially ready. And this really holds for whether you're buying or selling, right? I mean, you need to have your financial house in order you guys have heard this from us before, understand what a top quartile firm is in your space as it relates to growth and profit, and be in those ranges. And there's all kinds of great sources of data to determine what a top quartile firm is. Certainly, if you have questions about that, you can contact us but you know, doing a little bit of research online based on the specific profile of your IT services business will show you sort of where those numbers typically are. And I think, you know, you want to be in a situation where, you know, you understand the current level of market readiness, you want to understand the current level of, you know, kind of where in general your value is. And I think in the end, you know, there's a variety of other aspects of being ready, but including luck ready, and sort of, you know, beyond financial and operations and, and realistic expectations for value whether you're buying or selling. You know, there's also other intangibles, and I would like to spend, you know, we spent a lot of time talking about financial readiness, a lot of our podcasts be great to talk about, to on this podcast, little bit about the intangibles. What you guys think they're about readiness relates to intangibles, but certainly we know and looking at a lot of firms that that does have an impact on value.
Ryan Barnett 03:36
Absolutely does Mike and I think part of this is just determining and running with market fit. So we look at product market fit and company's going to market, I think this is an opportunity that, you can also be just ready for what we're doing. So if you look at it services overall, we have a trending market that's going upwards and we have the adoption of new technologies, that continues to be hot. Think about the things cloud, for example, think of macroeconomic terms in IT, cloud, big data, the movement towards labor markets that are global, the remote work possibilities and the companies that need that work. So part of this has just being right place right time. And IT services are right now. Really in it, the market fit is there. So it's it's just simply the time where valuations and IT services are being understood. You're seeing the multiples that are increasing and it's just a good time to for people to start executing on a deal.
Mike Harvath 04:49
Yeah, I would agree with that. Matt. What's your opinion about some of the you know other intangibles or readiness as a relates to M&A?
Matt Lockhart 04:59
You know, I think that alignment is super important. Oftentimes, you know, we're dealing with firms where they're there's obviously multiple partners in play. Right, and just being aligned with the partners is obviously super critical. And so an example of alignment is, what if you're selling your firm? What type of firm would be, you know, best to acquire your firm? Is it? Is it a financial buyer? You know, I, e, there's, there's members of the partnership that are interested in continuing moving forward. You know, so what are the motivations and, you know, for each of the, each of the partners and, and making sure that you're aligned towards that, I think that reinforcing what the, you know, you both said, and and Ryan, in particular is aligning your greatest value, to, you know, the greatest value that you provide, to what is most important in in terms of the market overall, you know, Ryan talked about some of the sort of the hotter solution areas or capabilities, and just ensuring that you're going to be able to align to that. So, yeah, I think those are, those are some of the I mean, structurally, we can, we'll get into some of the other pieces that need to be in place, the financials, you know, the marketability, etc, etc. But, you know, the M&A process can, you know, create confusion internally within an organization, and so ensuring that everyone is aligned and understands what they're getting into, is critically important. And that, you know, that's, that's for both buyers and sellers.
Mike Harvath 07:03
Yeah, go ahead, Ryan,
Ryan Barnett 07:05
was just gonna say just a transition a little bit. And this is part of that, simply, the financial piece, as you just mentioned, that it's your end, if we just finished up a year end, take this is a great time to look back, close the books, but also just having accurate accounting records. So if you're thinking about selling your company, this is the time where it's critical to perhaps get that close in and getting it done. And starting to look at how 2021 wrapped up. Mike, is there anything special if you see at the start of the year, and in the start of a deal making process that has special financial considerations?
Mike Harvath 07:57
Well, certainly, you know, we like companies that are up and to the right. But you know, if you need that's an ideal situation for optimizing value, right consistent growth over time, and a consistent path to growth in the future where your story holds together. I think as you're beginning a process for looking to sell, and when we say a process, we talk about an official process with an advisor, such as revenue rocket, bring your market to bring your business to market, you need to know that it is a journey, right? And we spend a lot of time helping you determine your, what we call realistic value. We think that any advisor and there's many good advisors, we're you know, not the only game in town, but there's many good advisors out there that do M&A advisory, you know, good advisors should provide clear value around doing your valuation and talking to you about a clearing price that they expect based on their experience and comps. They should not allow you to set the price that you feel your business's worth. Without the context of outside review and valuation diligence being done on your business. We think that's a mistake. We see advisors do that from time to time. And they say, well, the market will allow and figure out the pricing for the businesses that we represent. We think that's not doing a sell side client or someone you're bringing to market any favors, because it means that there may be a big disconnect between what you might feel your value is and what the market's willing to pay. So establishing that evaluation is important. I think also understanding and surviving, you know, due diligence due diligence is a extremely rigorous process where a buyer don't want to look at everything you've got, right and so making sure that you're well organized, buttoned up, not only financially but from a records perspective that you have copies of all your contracts that they're signed that they're assignable, that you have systems in place to make sure your records are in order that they're digitized. Sounds like a simple thing. But if you've been in business a long time, you might have a lot of your records that are on paper. And being able to digitize those records, to make them easily accessible by a variety of parties that have to look at them as part of a diligence process is really important. And I think the time to providing diligence information that time to providing information, once you're in a process is also an interesting measure, you know, buyers when they look at doing an acquisition, gauge their level of suspicion, if you will, in the information provided based on how quickly it's provided. If it takes you nine weeks to provide information, basic financial information to a buyer, believe me, they're going to scrutinize, scrutinize it at a level that is amazing. Now not that they won't look at it and scrutinize it if you provided in nine minutes. But it will be with less scrutiny from our experience, if it's put together because the assumption is you can't provide information around contracts and financials and everything else if it's not quickly if it's not put together. So again, back to what a good advisor will help you do, they will help you organize your information in preparation, whether that be you know, audited financial statements, which we think are generally a good idea, if you're going to go to market or at least to a minimum, a compilation or comment from your accountant about its being put together tightly tax reporting and payments are really important, both based on both buyers and sellers. Nothing like a tax lien to throw a big wrench and a deal on either side of a transaction. We've seen it, you've seen it happen, we've seen transactions get pretty far down the process. And in the diligence process, a tax lien is found and that blows up the deal. So you know, make sure that you have your house in order your records in order. And then you're prepared to be fully transparent with everything in the business. I think many of those things are critical to being ready.
Ryan Barnett 12:34
Great, great. And Mike, can we transition a little bit and Matt, I'm curious on your impressions on this is just like a January brings some new year's resolutions when it comes to health and fitness goals. Companies have to look great too. And there's a lot that it comes to just making yourself look like you're ready for for the market. And some fit and finish can carry a lot of weight when it comes to that perception. So curious if there's things that you think a sort of your tuneup could do to help a company just look ready for, for the process? I get this includes buyers and sellers to buyers have to it takes more than just a pile of cash to get a deal done. So, Matt, what do you think? What's it take for a company to look ready for a deal this year?
Matt Lockhart 13:27
Yeah, so I mean, if you think about it in as sort of an overall process, like Mike talked about, or a program, if you will, that's got a timeline. Now, you know, nobody can predict the future in terms of how long it will take to either acquire a firm or sell your firm. However, you know, the more that you can sort of try to map us and so get your schedule together, first and foremost, and, and if looking ready, if you're not looking ready. And so, you know, within that, obviously the website, right, and does the website bring forward the most valuable assets, right, or solutions? Again, tying to that market need. Understanding who's going to be the face of, of sort of the firm or faces of the firm. And are those individuals appropriately represented on the website, right? The historical, you know, any historical customer information that validates right, all of those things, which is you know, just good marketing capability overall, that certainly needs to be in alignment because, you know, the first thing that any, you know, potential suitor is going to look at how they're going to go to the website, right? And then whatever supporting materials, that once you get into the process need to map to that they all need to stitch together and tie together, you know very well. And then the, you know, and then the communication plan, you know, once you get into communications with customers that needs to map to that as well. So, you know, those are some of just the the real basics that you got, well, yeah, da, right. But, you know, we just see, time and time again, where people are like, Well, I'm ready to be I'm ready to sell or I want to go buy a firm, and they haven't really thought through how, how they appear, right, and how they appear consistently, right, can enhance value. You know, one of the one of our financial, you know, experts in our financial team talks about the role that volatility plays in valuation. And, you know, there's volatility from the financials. But there's also just volatility from, you know, the message and the appearance of a firm. And so that consistency is just absolutely critical.
Mike Harvath 16:24
And then I would add, let me make a note on that, Ryan, I would also have third party validation of your it's also good for optics, right? Whether that be, you know, you're recognized as a fast growth firm or best places to work or, you know, some of those outside third party validation awards are meaningful in the optics of your business. And so not only do you need to look and operate from an outside perspective, well, but But you know, consider that if this is on your long term trajectory, whether you're a buyer, frankly, or a seller, people are looking for third, you know, what I like to call the Good Housekeeping Seal of Approval, I might date myself a little bit. But if you see that, whether you're looking at someone acquiring your business, or vice versa, reciprocal diligence, those things are, do add to your credibility, and frankly, do add to the optics that your, your firm worth partnering with.
Ryan Barnett 17:37
And I think, Mike, that's a great point. And which leads us if you look ready in a pad, which was our point three, and you have the solid financial performance, point two, and the market is ready with 2.1 kind of brings us to point four, which is simply if you do all those things, right, your valuation is probably going to go up. And you also be aware that the market is a certain spot for getting deals done. And this is an interesting part in which buyers in this reality are starting to realize that buying a company on the cheap is probably not going to happen. So I'd love to get Mike your idea on what should buyers and sellers do to help set realistic valuation expectations in 2022?
Mike Harvath 18:29
Well, I think understanding the current market, you know, a lot of people want to rely on market multiples as the only gauge of valuation metric. And unfortunately, multiples aren't valuations. Valuations aren't multiples. And so do they give us a general guidepost? Yes. But I think what's challenging about valuation multiples is your perspective on the current market may be dated or stale. And if it is, you run the risk, whether you're a buyer, thinking that valuations are lower than they are, or whether you're a seller, you could be the same situation. Or you may have an unrealistic expectation, because you heard about someone at the coffee shop, who happened to sell their, you know, business similar to yours at, you know, crazy multiple, that you should expect that as well. And so I think it's very, very valuable to get outside advice from an advisor or evaluation firm to determine what is the real value of my business? What are real valuation parameters, where are the ditches today? When you go to look at doing a transaction, and does that make sense. I alluded to earlier that credible advisory firms, if you're selling your business, do that work as some of the most early work they would do with you, to give you context around what you could expect in selling your business in the current market. That is absolutely critical, I would strongly recommend that you stear away from a firm that doesn't do that, if you're going to run a process, and you're going to go to market, certainly we have a lot of clients that just do evaluation every year just to know, because they have stakeholders or their business it should know. And they want to know internally from a planning purposes, are they doing the right thing to add value to the business over time, and it's a great metric to understand that. But we think being real about valuations is important. We see every day scenarios where buyers think they can buy firms for less than they can and then they walk by or do not get deals done that others do get them. And so the ultimate test of valuation is when you have a willing buyer and a willing seller come together on price. And what's very, you know, challenging is to be someone who's trying to acquire a business in this case, if you're a buyer, not getting traction with a seller, because you have an unrealistic expectation of value. And someone else comes in and does the deal. Right? That that's frustrating. But you have to really look in the mirror in that situation and say, Why didn't we get that deal done? Did we don't get the deal done because the seller had unrealistic expectations of value, or because I had unrealistic expectations as a buyer as to what current market value really is. So I think, you know, being able to understand the current market is always critical and being realistic, you know, value. Valuing a business, if you're a seller is not like a Turkish Bazaar, I say this a lot. We are not selling commodities here, okay, so it is not give you to have this for this or bundle deals to get to a certain value exchange. Based on a commodity. This is a business that you have to clearly understand where the market based pricing is. And it's not just a number that you have in your head, that will get paid. Most people do have a number in their head, if they're a seller, they want to get to a certain size or a certain value. But they need to have realism about you know, realistic expectations and, you know, be real about what their business really is worth. And if it's not worth what you want it to be worth spend time doing the right thing and growing it and investing in how do you scale and profit and get more profit so that you can achieve your number? That's the best way to actually transact the deal.
Ryan Barnett 22:54
It's a really great points, Mike, I think the valuation is critically important to finding a deal. But once we find that enterprise value in mind, it seems like 2022 might have difference is in how the deals get done. And Matt, I don't have some follow up points on Mike are going to transition to what we see as point five, which is this could be a year where you're open to creative deal structures. And I'd love for you to get both your opinions on on how enterprise value could be higher, or perhaps lower if you have a deal structure in mind.
Matt Lockhart 23:38
Yeah, I think it's it's great, right? I just if you if you go back to sort of aligning right, in terms of expectations, and if they're if it's if you're a selling party, and there's multiple partners, then that alignment is critical in the form in the context of valuation. And what you can expect to but also alignment in terms of, of deal structure. And when we talk about deal structure, you know, it can be anything from all cash, right? Cash plus an earn out cash plus an earn out plus, you know, rolling equity, right, all sorts of flavors. And but you really need to understand, you know, sort of what is this spectrum that you would be willing to participate in? Ryan, I think you mentioned a really good point, which is deal structure can have an opportunity to maximize value, you know, within within your firm. And so, you know, what do we mean by that? Well, if you're open to selling the majority of the stake in your firm, yet the buyer is open to you rolling some of the value of your firm into the equity of the, you know, the new co. Well, then, you know, you've got the opportunity to win twice. And you know, and you know, participate in continuing to grow the overall organic value of the new firm. And that's a, you know, it's a really wonderful opportunity. And that takes place, whether or not the buyer is a pure financial buyer, like a private equity firm, or can be a strategic buyer. And it may look a little bit more like a traditional merger than pure play acquisition. So I think that it really all goes back to that alignment, the understanding of, you know, what you're willing to look at. And, and then being, you know, sort of open and transparent and flexible, to, you know, what may provide an increased overall market valuation.
Ryan Barnett 26:08
I agree, and a part of this is just making sure you know, what's available to you, we'll take a second for commercial, but you really do have to work with an advisor to understand what your profile is, what it takes, and, and what it will take to get a successful deal done. And, look what options are available to to move some of those levers to give you the deal that you want. There's so many interesting structures out here right now, and looking at rolling a company forward, if you're successful, and looking at second bites at the apple is really, really exciting time right now.
Matt Lockhart 26:46
You know, I'll highlight, you know, Ryan, a really good best practice that Mike, you know, brought up and I think needs to, you know, sort of be highlight, which is, you know, do a valuation, do a evaluation on a consistent basis, right, to truly understand how the market would view your firm. And that has more to do than just financials that has to do with the strategic nature of your capabilities, how those capabilities are viewed. And, and, and, you know, the other things that we've talked about in terms of being ready. And I think that doing that on a consistent basis, and you know, and I am and having a relationship with an advisor that you trust, to be able to give you that feedback. So that, you know, potentially, you aren't ready today. But you want to be ready, right? Ya know, pretty wise guy that I've had the opportunity to work with in the past that, look, you want to be ready at any given time, right? And to to sell your firm, run your business as though you're going to be running it forever. But be ready, right? At any given time. And you go, well, these aren't those competing, right? It's like, no, not really, right, the very best well run firms have all of these considerations that we've talked about today. And so they are ready. And if you haven't thought about that, or you haven't gotten some of that outside perspective, then you know, it's, it's worth its weight in gold to do so.
Ryan Barnett 28:34
I agree and supposed to wrap this up, and I just look at those five things for something that's going to make a great 2022. You know, know when your market is ready, and we believe IT service hot and ready to go. Make sure there's solid financial performance and then you're executing to the numbers that you're planning to. You got to take a step you got to look ready. So make sure that you get your fit and finish look that you got your everything in place to either buy a company or sell a company. You have to know what valuation works for you and what's acceptable for for that enterprise valuation say yes, let's get a deal done. And number five, you can be open to creative deal structures. With that, I think that's all the questions I got for this podcast. Michael turn over you do.
Mike Harvath 29:25
Thanks, Ryan. So with that, we will tie ribbon on it. Make a great week. Take care!