Entering a process to buy or sell a business is not to be taken lightly and something that should be properly planned; both strategically and operationally. In this episode we will discuss the strategic and operational pitfalls and priorities that companies looking to enter into a process should always account for.
Strategic readiness:
Knowing when to enter into a process to buy or sell is likely the most important part. Allocation of resources, financial planning and operational distractions need to be taken into account. At Revenue Rocket we evaluate a client's strategic readiness based on several attributes:
Operational readiness:
When a company is in a process it is important to plan for distractions but also ensure that the performance of the company maintains a positive momentum regardless of additional workload associated with the process. Financials need to be in order, tax returns up to date, audits complete (in some cases), product and market positioning is well known and that the intended outcome is well documented and realistic.
Work with an advisor to help you get ready!
Mike Harvath 00:05
Hello, this is Mike Harvath with this week's Revenue Rocket Shoot the Moon podcast, broadcasting live and direct from Bloomington, Minnesota. As a reminder, for all of our listeners, Revenue Rocket is a premier M&A and growth strategy advisor to IT services companies worldwide. Today, we're talking about M&A process readiness going to be a little bit in the weeds about how do you get ready to be able to either run an M&A process and sell your firm, or to kind of take an inquiry from someone who may be looking to acquire your business. I'll turn it over to Ryan, I'm here today with Ryan Barnett and Matt Lockhart, my partners in the business for their insights as well, Ryan?
Ryan Barnett 00:48
I think, Matt and, Mike, thanks for putting this together. When you enter process to either buy a company or sell one, it's it's difficult, it really shouldn't be taken lightly. You really have to plan what's coming up, and how that acquisition is going to play in your future. If you're buying a company, you have to see strategically, why are you doing that? And if you're selling your company have to understand, am I really ready to do so. So today, I guess I have some questions for both Mike and Matt, who are experts in this field, and you've helped companies become ready to ask you why readiness matters in general. So if we think about this, we're kind of break it down into strategic readiness, operational readiness. And I would say there's there's just straight up financial readiness. And just starting at the strategic readiness part, companies need to understand why they, why to do this process. Mike, I'd love to know, what are some starting thoughts as people should have when considering they try an M&A transaction?
Mike Harvath 01:59
Wow. You know, from a strategic perspective, I think, you know, we've talked a lot about over the years as a seller, mentally, you need to be in the right spot to sell, right? You have to decide that it's time for you to either sell in or sell out, as I call it, right? There is no right answer there. But being transparent about what your intentions are, is super important. So and that's whether you're an individual or a partner group. You know, we work in situations where we have fairly large partner groups might be an ESOP, or it might be a group of partners, that's, you know, three, four or 5, 10 people, or might be an individual. But in any case, the perfect group of the individual has to be in alignment with what each of the individuals is going to do post transaction probably critical to getting it figured out. Likewise, if you're, you know, a buyer, you have to understand, you know, are we in a position to take some risk? Are we in a position to grow through acquisition and take on some of those challenges? Do we have realistic expectations, and I'd say that's certainly the case for both buyers and sellers. You know, we recently did a podcast around, you know, expectations of, you know, hearing about sort of crazy multiples in the market, these would be maybe a deal you're already working on, and how a lot of that is hyperbole and just not factual. And, you know, so but having realistic expectations about what your number is, if you're a seller that's based in, you know, market research and reality by going through a valuation exercise, likewise, if you're a buyer, understanding what the market is, and what you have to pay to get a deal done, those are super important attributes, because of a buyer and you're expecting to buy below market, that's just not going to work. If you're a seller and expected to sell above market, it's also very unlikely that that's going to occur, as I've said many, many times, you know, no unfair deals get done. They just don't there's too many advisors and you know, accountants and lawyers and M&A advisors in the mix to expect the deal that all those folks that are putting their name on the deal are going to allow a transaction occur that's quote unquote, unfair or biased to one party or the other in a way that's, you know, materially tilted. So I think understanding that and, you know, being strategically ready, certainly is really, really important as you begin to think about entering into a process.
Matt Lockhart 04:42
Yeah, that's awesome. Mike, you know, I, if you break M&A down in a sort of very simplistically, at least from my experience, right? The two biggest strategic means or strategic goals that you will find is that on one side, it's about market expansion, right? We're, we're looking to expand our marketplace that could be geographically that could be internationally. It could be, you know, we just need to gain revenue, we need to gain EBIT, there are strategic goals around any of those areas. Some sort of market expansion. The other side, you are filling capability gaps, right, you are expanding capability for a buyer. And and I think both buyers and sellers first need to answer that question, what is the priority in doing an acquisition? And so if you think about that, from a seller's view, you know, it's like, well, how do we answer that question for potential buyers? You know, so many times that we see somebody coming to us, and they're, they're interested in selling. And they say, I had a great year, right, I had a great year. So now's the time to sell. And they think that they're going to be able to get the, you know, just the craziest valuation ever, because they had a great year. And they haven't really thought about strategically, what are the values that they're going to be able to provide to a potential buyer? And, I think you really need to answer those questions. Now, the best is you can sort of check both of those boxes, that you demonstrate a market expansion opportunity, and because what you are providing to your customers is so much better or is better, is competitive, that you're going to be able to check some boxes on on capability expansion as well.
Ryan Barnett 07:10
The strategic importance of finding that the type of target I think is critical, Matt, you and I were talking and Mike and I were all talking this week about the concept of IPP, in APP. And IPP, your ideal prospect profile, something in the center of the bull's eye, someone that's perfect for, for what you can go after, if you're going to go after something that's tight, and let's say fills a niche of both target market, and vertical markets, speciality and productization. To find that, just prepare yourself for a very long hunt. But Matt, maybe you can talk a little bit about that IPP and APP when it comes to to readiness, love to hear your thoughts there.
Matt Lockhart 08:01
Why I think that's great, Ryan, you know, oftentimes, what's first, often, by side, M&A is not trivial. It's not easy. You know, oftentimes, you know, we see customers who are like, look, I gotta check, right? I gotta check for this amount. And so this is gonna be easy to go out and find a firm to buy because I got a check for this amount. And, you kind of need to reset some expectations there right near you go, well, first off, you need to be attractive to a potential seller. And so identifying that ideal prospect and why you would be attractive to that potential seller is super important. Now, right? You need to sort of expand that purview. When we you know, it visually if you think about that, IPP, being the bullseye of a dart board, right, and and you go, okay, well, man, let's go. Let's go hit that bullseye. Well, you know, for anybody who's played darts, you know, it's not necessarily easy to hit that bullseye. However, if you hit that next ring, on the dartboard, you're going to be awfully successful, and you are going to meet your strategic goals. And that may be considered your APP your acceptable, you know, Prospect Profile. And the other thing that I might comment is that, that if your strategy is so hardend right, and there's very little flexibility in that strategy, well, it could be it may be a little bit harder, and now, I might give you some guidance that you're that you that you You need to increase your Agile and Lean thinking. But again, by side M&A is part and parcel to being competitively advantaged in the marketplaces. In tech, it's almost an absolute no brainer that you have an ongoing buyside M&A strategy, right? And you understand that it takes some time. And you really identify that APP versus that IPP, I think, great, great comment, Ryan.
Ryan Barnett 10:38
Thanks, I think sellers have the same message. So if you go to market as a seller, a an advisor will tell you that it's hard to predict where a buyer is gonna come from. And the reason why is we never know if someone is going to try to expand strategically into an area that they're not in today, or if they're trying to double down on the current market. So it's great to have that open mindset. And I think that open mindset is very important in readiness, can can you get a deal done? A lot of that comes down to understanding the the fluidity of the market, marketplace, and, and what you'd like to do. Other portion, Mike would love to get your idea. And this is, again, on the strategic side, is management intention, Mike maybe start off with on the buy side, why understanding the intention of what the management team does for the seller, how a buyer should think about that when getting ready.
Mike Harvath 11:42
Well, certainly understanding, you know, the IPP and APP about what you would like the management team to do in that prospect is critically important. So as a buyer, you need to understand are you looking to, I don't want to say set and forget, but at least acquire a business, support that management team to create value in that business over time with that company on your portfolio strategic investments, or are you looking to integrate the business immediately, make changes and headcount. So you can get synergies and be in a position to get, you know, a true one plus one equals three, due to synergies, right? Is it all about synergies and making changes and having clarity in your mind about what you want to do? As a buyer, once your targeting helps firms like us that do buy side deals to identify the right target? Likewise, if you're selling, you're gonna have real clear guidance on that, or at least in your own head, as to what you want, as a leader as well as the leaders in your business. And there is no right or wrong answer. A lot of people think, well, you know, in order to sell my business, I have to plan to stick with it for three to five years, and blah, blah, blah, it's not really the case, you just have to clarity about what you want, then be transparent about that. Because then it all aligned to the right, buyer strategically.
Ryan Barnett 13:24
The other thing I'll add in this discussion on strategic readiness is the importance of getting foundational, the foundations right. And this is just running a business correctly and getting just being present, I'll give you a great example. Your website has got to be up to par As to have a working website that's up to date, at least in that, hopefully, and then since 2016, we have to have a view of going after of a future trends and being able to execute upon sales and marketing activities. And this is not only on the sell side, but on the buy side just as much sellers want a strategic buyer. And you have to be able to have the foundations covered. Even just to start that so we have slowed down deals because we've had to have someone redo a website. And after that was done we found a remarketing improvement in the process. So it's critically important to do that. And just to end this on the strategic side, Matt, what should someone do if they're not strategically ready?
Matt Lockhart 14:40
Not start the process and identify and work with an advisor as to what as to what real readiness looks like and then create a plan and fill those gaps. You know I mean, shoot let's let's talk about some scenarios. Well, it Ryan, you just raised, which is, they don't look ready, right, and their website doesn't reflect their values then and or it's out of date or, you know, whatever that may be, you could go to, you know, they've had a great year, the underlying financials are actually quite solid. But how that is viewed on their balance sheet, you know, maybe they've got separate operations, and they don't have a consolidated balance sheet, or, you know, for a smaller firm, they may be cash based accounting, and you know, that it's gonna be super valuable for them to be able to demonstrate an accrual based accounting method. And, and, and have that seen, if they, you know, they, they need to select who is going to be involved in the process, and then ready those people with their corresponding messaging. There's just a whole bunch of things that, that create readiness and readiness is, especially for a seller, should equate to maximizing valuation. And then correspondingly, for a buyer, you know, we talked about that strategic discussion, but how do they look? What is the opportunity for sellers within their business? How, what is their management and leadership philosophies? And how can that be attractive to a potential seller, I mean, there's just a whole bunch of things. And if you're not ready, then you need to create the plan, as opposed to think that you can just start the process, and it's all it's all gonna come together. Now, that plan can be created and executed upon in, in a quarter. Right, and, and so it's not as though it's a mountain that's insurmountable to overcome. But, you know, first and foremost is, you know, work with a good advisor who's going to be able to guide you and work with you along those lines, who's done it before, and they're going to assist you and and allow you to progress your, your overall M&A plan more effectively.
Ryan Barnett 17:32
If we switch the table and look for financial readiness, Mike, I love to get your opinion on this. What does a company need to do? What's perhaps the guiding points of knowing Are you ready or not?
Mike Harvath 17:48
Yeah, a lot of thoughts on this. So certainly, being able to have a clear set of financials, particularly if you do business, in multi country or multi currency, you need to be able to have a very clear understanding of each country's business and then a consolidated set of financials. So we work with a lot of international buyers and sellers. And sometimes this is, uh, this is tricky, right? Particularly if you're in countries in, you know, Latin or Asia or others that have had some, you know, maybe some tumult as a relates to the political climate or inflationary pressures, which I guess, you know, is certainly the case in North America now, but in certain areas of the world, it's even more challenging. So being able to have your numbers tie out, make sure that they're meaningfully at a minimum reviewed by your accountant. And there's an opinion about that. Audits aren't necessarily necessary. Certainly, they don't hurt. If you're preparing to sell, you might want to consider it, but at least a compilation or review of your financials by a credible accounting firm ahead of time and, you know, making the investment to have those done is probably a good strategy. If there's gaps in your accounting, practice, your policy, your procedures, or your numbers from the last five years or so, in most importantly, your gaps in your accounting, sort of standard operating procedure today, meaning it's not standard or it's not generally aligned to GAAP. You need to get that figured out. We know that most small businesses don't absolutely coat it here 100% to GAAP, and there's some reasons for that. That's not a problem, but they should be in alignment with best practice. So Take the time to work with an outside adviser or an accounting firm, to make sure that someone who's evaluating your numbers can do so easily and efficiently, and credibly. Otherwise, you're in for some pain, because that'll have to be done as part of the transaction. And it can mean that it'll either negatively impact the deal in the sense that it won't get done, or it could negatively impact valuation. More importantly, and so I think to credibly get to evaluation, you're going to have to have those numbers in order and to credibly get through a due diligence process, they will have to be an order as well.
Ryan Barnett 20:43
Matt, any thoughts on the financial readiness?
Matt Lockhart 20:47
Well, I think Mike covered most of I think transparency, making it easy for somebody to understand, that's why at least if it's not in GAAP standards, easy to best practice standards, any, you know, credible M&A adviser is going to be able to help, you know, and but you got to be transparent, you can't be trying to hide things and you know, etc, etc. And then the only the other thing as it pertains to the financials, I believe, is thinking about the forecast, right forecasts adds, you know, really has an aspect, overall valuation and, you know, if if you think about your forecast, as well, throwing a dart at a dartboard to use the analogy twice, well, that's not going to be real credible. You need to talk about your forecasting methodology, how that corresponds to your your past history, in meeting forecasts, how that corresponds to your pipeline of business today. And, yeah, and breaking down repeat revenue versus new revenue. And all of those things. And so, you know, that's the only other aspect of the financial readiness that you know, I think a lot of people go in not thinking about because they think that that valuation is just, you know, is just going to be trailing 12 based, right.
Mike Harvath 22:32
Yeah, I'll add one more thing Matt, you know, taxes are important. You need to have paid your taxes, you need to have resolved any audits. And you need to make sure that there are obviously no tax liens in place. That is a fatal flaw. We've seen it creep up late in the process in some cases when their lawyers are doing background searches on a company that they're going to acquire. And that can that'll blow up a deal on its face. So don't expect that you're going to come to a conversation with a buyer. Where, yeah, you're, you have some skeletons in the closet that you haven't disclosed, or tax issues or issues with tax authorities, regardless of the country that might be in, that haven't been resolved. So, you know, be proactive about that. Make sure that your taxes are current that they're paid, that any, you know, liens of either if there had been liens if those have been resolved, and that any audits what the outputs of those audits are the documentation around that audit. That's pretty critical stuff as well.
Ryan Barnett 23:45
Great inputs from both of you. That's all the questions I got for today. Like I'll throw it over to you.
Mike Harvath 23:53
Sounds great, Ryan, thanks. So with that we will tie ribbon on it. Make it a great day in a week. Take care!