If you’re a tech services CEO going through a process of selling your business and get to a point where multiple firms are looking to acquire you, you need to evaluate your options. What should someone be looking for?
Questions
First off: how does someone get multiple offers?
What’s an exclusivity clause in an LOI?
How should a seller approach negotiations when they have multiple interested buyers?
We talk about deals getting done when there’s a strategic, cultural, and financial fit. How do you evaluate the strategic fit?
Can you discuss the importance of cultural fit between the buying and selling companies? How should this influence the evaluation of offers?
What are the key financial metrics that sellers should focus on when comparing different offers? How do these metrics impact the decision-making process?
Beyond enterprise value price, what other terms in an M&A offer should sellers pay close attention to?
How do you evaluate transition terms for owners?
Should the due diligence process be a factor in deciding which buyer to move with?
What are common pitfalls or mistakes that sellers make during the M&A evaluation process and how can they be avoided?
Could you share insights on the role of legal, accounting, financial advisors, and MYA advisors in the M&A process? How critical is their expertise in evaluating offers?
Mike Harvath 00:07
Hello and welcome to this week Shoot the Moon podcast broadcasting live direct from Revenue Rocket world headquarters in Bloomington, Minnesota. As you know, if you're a regular listener, and maybe even if you're not a regular listener Revenue Rocket is the world's premier growth strategy, and M&A advisor to IT services companies. With me today are my partners, Ryan Barnett and Matt Lockhart. Welcome, gentlemen.
Matt Lockhart 00:33
Thank you, Mike, it's good to be with you. I'm working very hard to contain myself from doing a howl in celebration of our hometown, Minnesota Timberwolves, who at this point are sort of have become maybe the favorite. To win an NBA championship there first and wait a second, we may want to strike that, because I feel like I may be given some bad juju to the team. But boy, we're pretty excited up here in Minnesota at this point. So as we do our next podcast, we'll report on the continued success of the Timberwolves. More importantly, we have a heck of a topic today, Ryan?
Ryan Barnett 01:19
Yes. I will join you in these exciting times in Minnesota. And even those non basketball fans can quickly become basketball fans a lot with this team. Keep up keep it going. Yeah, you know, we do have a great topic here today. And it's something that's a realistic scenario. And it's something that we hope is if you're looking to sell your tech enabled services firm, a situation that you would be in as well. And the topic is, is how do you evaluate multiple offers for your tech services business. And so if you're going to market and you're looking to, perhaps optimize that purchase, and or optimize the sale of your firm, there's a lot of factors that go into that. But if you get to be the lucky case, where you're talking to multiple suitors, they're really interesting scenario and want to dig into a few things. And have you start to think about what's important to when you sell your business, you know, what's important in a buyer? And what are some things to think about? So, Mike, maybe you can get us kicked off. I mean, how does someone get multiple offers in the first place?
Mike Harvath 02:28
Will do, I will tell you that whole concept of multiple offers is where it's at, if you're looking to optimize the enterprise value or sale price of your business. And it's critical to understand that the best way to do that is to run a process with an advisor, I think, you know, a competent advisor knows how to take your business, package it, do the proper outreach, take it to market and ultimately get, hopefully, for you, if you're a seller, a tsunami of offers for you to consider multiple offers where buyers compete for your business usually is a good thing, because each offer isn't just about purchase price. It's about you know, combining with an organization where you have to further event, culture and sort of their capacity to do a transaction financially. And, you know, not only the number but the structure of the deal. And you know, what life looks like post transaction and, you know, we've talked a lot in previous podcasts about selling in or selling out. And, you know, doesn't involve either one of those things, does it align to your objectives, you know, there's probably 20 or 30 things to consider when you're looking at, quote unquote, offers. And you want to make sure that that's done in an orderly and proven way, so that you can begin to further vet those and I think, you know, beyond that, you want to be able to do it in a within a time box that allows you to look at the offers a similar stage of maturity. Because, you know, just because you had someone offer you X for your business two years ago, now someone is offering Y that you can't action, that old offer, right? It's not coming to you at the same time. So there is a very proven process for doing that. I think firms that are committed to doing this for a living and have a strong methodology, and quite frankly, database of people to do outreach to our The best ones to help you get there, not to mention the fact that if you align with an advisor who can properly value your business versus what's going on in the market, you can determine are these are these offers coming in at market or above market, which they should, and then how to best select them. You know, is, is certainly something that's tough to do, all on your own. And I think you know, that experience, at this juncture, if you're looking for multiple offerings will be invaluable.
Ryan Barnett 05:36
If I were to hear that right and summarize a bit, if you, if you are in this position to sell your company, it's best to talk to multiple people. And so that's kind of step one. Now, one of the interesting parts of this process, it's a little bit actually, it's easier to say, than to do. And one of that is fairly technical. But when you think about a letter of intent, and someone puts an offer in for a business and think of what a letter of intent is, and we've got podcasts on this as well, that letter of intent is someone who is signaling intent to acquire your business, a big portion of why someone issues a letter of intent is to actually remove the competition from the process. And essentially, the letter of intent will include an exclusivity clause. So part of this in the discussion is you have to have the right timing, to consider multiple offers. And typically, that's actually going to be before the letter of intent. Because once the letter of intent is signed, your options are likely going to narrow down to one person, as you start to go through to do the due diligence process. So something to think about, try to bring multiple people in the table. Bringing multiple people per table is not necessarily easy. In fact, it's it's it's a timing challenge. It's it's a logistical challenge. It's a it's a packaging challenge, that I think you need the right team at your side to help to help bring that in. So keep in mind that exclusivity costs. Matt, you know, we talk a lot about three things that have to happen in order for a deal to come to fruition. And that's a really finding the strategic fit of a company, the cultural fit of a company. And finally, if those two come together, the financials of the company, but can you can you help me understand? And how do you start to evaluate the strategic fit of multiple buyers? When it comes to to your, to your seller? I know, it's a huge question, but maybe break it down a little bit for us.
Matt Lockhart 07:50
Yeah, sure. And I, you know, Mike sort of started this, but first, thinking about the context of selling in versus selling out. And we did a whole podcast on this, but selling in means you're partnering up in financial terms, you may be recapitalizing your business, but you're joining with a partner, and you are going to continue working to grow and expand the business and continue to be adding value versus selling out is you've got a short transitionary period. And then you're you're off to your next chapter. When thinking about strategic fit, I mean, it applies in both cases. But it certainly applies more and you need to provide more diligence towards it if you are selling in. Yeah, I think that first is is making sure that you've got a good grasp on your own strategy today. And where you see the the opportunities to grow the business and expand the business and expand offerings. And to you know, expand expand the income, right, expand the poll through into net income. And so you know, you've got your plan and then aligning that plan with external parties and and their thoughts right around growing the business say, you know, for example, you know, you've had success in an inorganic growth strategy, right, you've done a number of successful acquisitions. Well, it's it's pretty important that you know, when you're assessing the potential buyers for your business that A: they want to continue with that in organic growth strategy. B: they've got the wherewithal, all right, they've got the, the ability to do that just financially. And then, you know, they've got a track record, they've got experience in doing so. And then you get into some of the finer points of, of, you know, what, what type of firms? And so how does that acquisition and ongoing in organic growth strategy come together? Right. And so and that's just one example of, of, you know, a likely number of strategic factors that, you know, you need to assess. And, and, you know, you likely are never going to check all of the boxes, right. But it's certainly important to check enough of the boxes, and to have enough discussion with the respective parties to align and make sure that that you're thinking the same way, naturally. So through those strategic discussions, you're also going to start to get an assessment of, you know, leadership and cultural mentality as well. So they're not mutually exclusive. But certainly a great place to start is, is thinking about that strategic fit.
Ryan Barnett 11:36
Yeah, I think it's a great framework, Matt, I think a few questions that sellers should have in their mind. And ones that I think we hear the most often are, how are my employees going to be treated? And how are they going to survive a transaction? Think there's a lot of fit strategically there? And where do my employees find themselves in a future organization that is going to be different, and most likely, larger than their what they're doing today? And I think the same philosophy comes with the care of your customers, how strategically will a an acquisition help my customers, and how will we retain them, those are relationships are core to most sellers that we talked to, and answering those in at first to make sure that your employees are taken care of your your, the what you build continues on and the legacy that you have, I think those that should carry weight, if you're selling in or selling out, I think even the legacy, if you're selling out becomes critical that you want some what you believe to be something that is lasting beyond what you have today. A great start and great start. Mike to say the second part is that cultural fit when you're evaluating multiple suitors, part of this is how, what is that fit? Here? Reverend rocker, we've done a bit of work had headed up with Chelsea Nord, who is a industrial organizational psychologist by education and trade, who's dug into this quite a bit, knew what should firms start to look for, in alignment of culture, that may prioritize one buyer over another?
Mike Harvath 13:28
Well, certainly, you know, the cornerstones of that, and the beginning of that discussion have everything to do with sort of that organization's Customer Care, and employee care philosophies. At a minimum, those have to be aligned, and they have to be very closely aligned. Otherwise, you know, the run the potential at Pulse calls, you could have, you know, alienation of either one of those communities within the confines of the new owner. I think if you're you're selling in, there's certainly more there there. As it relates to, you know, can I work with these folks? Can my team work for these folks? Is this a good home? I think for my customers and my employees, whether you're considering it, selling it or selling out, you know, those are all important questions to answer. And I think having a formal methodology for vetting that is pretty important. You know, I think, you know, we've worked pretty hard over particularly over the last several years to formalize that, that validation approach, and to be able to grade it and degrade alignment. And, and I think being able to think through that and understanding how to do that, and being thoughtful About It is important. And the primary reason it's important is because the biggest risk to any transaction, kind of, you know, blowing up or melting down post close, this is sort of after you're closed is a malalignment of culture. That is what is one of the biggest risks and creating a long term kind of bad outcome post close. And a lot of firms a lot of advisors, like our firm and revenue rocket and and other sellers kind of glossed over that they focus a lot of time on the financial considerations and deal terms and, and, you know, mechanics of getting a deal done, but don't spend enough time before close sort of betting and aligning and thinking about cultural alignment. It what's always been strange to me is that, you know, that is the biggest risk for failure, and what would be considered failure in an m&a deal post transaction? Yeah, almost no one looks at it deeply enough, or thoroughly enough, you know, I would certainly encourage you to do that. Because it will make, it will make everyone's lives much easier. Post deal. So when you're thinking about a vetting, a multiple offer sort of scenario, you'll want to spend a lot of time thinking about and aligning and testing and, you know, looking at what does culture mean? And what does life post transaction look like? And, you know, each suitor or buyer brings a different set of pros and cons to the deal. And you have to look at all these things holistically, particularly culture if you want to have long term success with any deal.
Ryan Barnett 17:04
Yeah, that's something that's a great framework, critical to make sure that there's alignment, their customer care, philosophy, employee philosophy, how you do things where you do things where you work, ensuring some continuity to make sure that buyers when they're looking at your company, is going to it's gonna work for the long term. That's critical.
Matt Lockhart 17:28
Yeah, thanks. Sorry, Ryan, sorry to interrupt. One of the things I was thinking about, as Mike was talking about that is, is, you know, there's a lot of scenarios where it's a financial buyer. And, and, you know, we've had sellers who are like, Well, I mean, they're just in it for the money. Right. And that's not really the case. You know, these financial buyers oftentimes have have been in operating and leadership roles previously, even though their financial buyers, they are there running firms themselves. So you really can sort of get an insight into both customer care and employee care. One of the things that we've seen and oftentimes advocate towards is that the end of the financial buyers have a set aside to ensure that employees can can participate in a profit sharing plan, or it can be an equity incentive plan. And that, you know, oftentimes is seen, obviously very welcome for the salary just as a means to continue to build upon the culture to build upon the team. So I was just thinking about it in the context of those financial versus, versus strategic buyers.
Ryan Barnett 19:00
And I think one one of that quit, is going to ask the same thing, a search funder fits in that same kind of world. So sometimes that person who's going to come in, they want thing they want to live to be relatively the same and what it was, but you as a CEO, they leaving and a search funder will be coming in to take that place. So it is interesting, what you built as essentially the continuation, and it's critical for that alignment. Strategically, it's the same question, I think, the bring it's such a great question, do you have to have a strategic buyer for a company to fit strategically and that we've seen such a change in how private equity runs and that PE funds are a lot smarter than just dumb money? And I think that's something that it does make evaluating offers difficult because that financial buyer is not just someone with an endless pocket book, they're someone who can add value to to your firm, perhaps over a very long term. If asked to look at the third wheel, that we talked about it, we've covered our strategic fit cultural fit, it is really the financial fit. And here, if you're, if you're looking at multiple offers, typically, you're going to see that the first thing you might get in let's call it an indication of interest process is going to be some top line value of the company are what a buyer might be willing to pay. And that top line numbers is, I think, one part of the equation. And there's a lot more that goes into that. Matt, I'd love for you to get started on what are some of the key metrics that a seller should focus on when comparing different offers? And how did those metrics impact decision making process?
Matt Lockhart 21:04
Sure. You know, obviously, first, you know, it's enterprise value. Right. And, and I think, super important, and that sort of also speaks to Mike's recommendation that you aligned to an advisor, that understands the space. And by understanding the space, they're understanding what fair market value is, for your particular firm, and making sure that there is a realistic understanding of fair market value. And, and, you know, obviously, one of the goals and having multiple offers is, you're getting the opportunity to optimize your fair market value, but making sure that that expectations are realistic, is super important. And then from there, you know, what is the overall enterprise value? Does it meet that fair market value? And does it meet expectations? And and does it exceed it in, in many cases, and then understanding the the, sort of the different levels of structure? Right. So, you know, we've talked a lot about the opportunity for earn outs and or gain share opportunities. And, you know, and these are targeted towards some specific metric, revenue growth, for example. So, say, a firm says, Look, I'm I'm willing to pay more, but to pay more, I need to see x in the form of revenue growth. Okay. Well, that's, that's great. Now, how do you make sure that that, you know, the measures that are set fairly, that the expectations for that growth is, is fair, and, and, and likely, and Mike will tell you that, you know, when we are in, in, in the place, you know, our our sellers win almost all the time, in terms of achieving their their earn outs and or gain share metrics. So assessing the reality of that, and, and being very open to having that type of an arrangement, when you know, there's an opportunity for a win win. Obviously, there is, we've talked about the context of seller financing and seller financing is can be very appropriate. But what is the value to you financing part of the deal yourself, and ensuring that, that that is fair, obviously ensuring that the appropriate controls are in place, so that it should be, you know, that seller financing should be seen as close to a guarantee, as possible. And then, you know, the third, you know, major is is the opportunity to roll equity. And I think that this is one of those areas that is is super important, again, aligned to strategy alliance to culture. Because when you know, there's an opportunity to roll equity. Oftentimes, that can be just an extremely important part of optimizing the overall value of a deal, but it has to come together it has to it has to happen, right? And when you're rolling that equity, you're betting that the firm is going to increase its value and increase its value. at a at a higher and faster rate than then previously. And by doing so, you know that second bite at the apple in many cases can be equal, if not greater than that first bite at the apple. And but in order for that to be a reality, boy, that strategic and cultural fit certainly needs to be in place, the the partner that you're signing up for needs to have a very good track record of working with their portfolio companies and their partners to assist where possible. And, and, and then that can be a super great opportunity when you know, when looking at the opportunity to optimize
Ryan Barnett 25:53
the structure I think is critical. And I'm glad you dug into that it's, if you're to use examples out there, there's typically going to be a bit of a scale on the amount of guaranteed versus the amount of at risk, if you may. So if you're, let's say, getting an offer for your firm that might be $20 million in cash, that same $20 million in cash, and you're stepping away from the business might have the same equivalency of a $25 million offer that has contingencies to it aren't earnout Elara a equity role? And those are those are all considerations. So part of this, I think you nailed it earlier, Matt is if you're selling in and your goals, versus selling out and your goals that might change that structure. And you as as you're looking to sell your company may want to put weighting factors in there on what is most important? Is it going to be that cash now? Is it cash later? Is the bigger amount? Is it a more guaranteed amount? The thing is when you bring more multiple offers to the table, the variety of the structure of the deal that you're going to see is going to be larger, I think something really critical to to think about is I guess I'll pass this over to Mike, just kind of curious on this. Should the buyers due diligence process be considered in in this in evaluating multiple offers?
Mike Harvath 27:40
Well, I think understanding the approach is going to be very important. You know, most what I'll say sophisticated buyers, or people that have done transactions for shouldn't have a pretty solid diligence process and request that they can provide you fairly early in the game while you ormally You may not get full visit to that till after you signed up in an LOI. If you have questions about their level of maturity from a buying perspective, you should probably ask for that. What what you could expect in due diligence, or a diligence request list early and understand what their processes going to be a typical fair sponsored company. And when we say sponsored, we mean by private equity or a family office or some other financial sponsor, they will require a quality of earnings analysis, which, you know, is akin to certifying the cash flows of the business or an audit, and that'll be paid for by the buyer. But it will require that you respond with a lot of information. Usually, it's best to have a firm that represents you. Whether that be an m&a advisor like us, that's a full service firm that has these people on staff, or your CPA or some other financial organization that can feel these diligence requests help provide context around your financials. And also, you know, push back on some of the requests if they're not necessarily either relevant or appropriate, based on where you are in the diligence process. And so giving them a long winded answer, I think that understanding the the level of maturity and buying organization is important, just as it is to understand their capacity To finance, you know, financially, honor their obligations on the transaction. And both of those things should weigh in on who you may select, or what offer you may select. And I think, you know, certainly if you're weighing these offers on your own, you can do the best job you can based on your own experience and reach to you know, that their capability. Or you can lean on your advisor to do that. That's certainly something that credible advisors do every day.
Ryan Barnett 30:37
Michael, mad at either of you, I'm not sure is the best answer this, I'll throw it out to either of you. But I think oftentimes sellers, when they think about a process that involves multiple buyers, they think of it in terms of perhaps a bidding war, or an auction. I guess I'd like to get your take on on that. Is this process? Does it feel like a bidding war? Do? Do people raise their offers, or there's a field that this goes to the highest bidder making? I know, you've talked about this in the past, I'd love to see if love to hear your opinion, and it's still the same?
Mike Harvath 31:17
Well, I think, you know, a competitive process is less like an auction and more like, a negotiation around all the, all of the factors we've talked about. And I think the deals do have to line up. And all things equal, which they never are completely well, but all things equal around, you know, strategic fair and capacity and diligence, maturity and, and offer price and structure and culture fit on stuff, you know, assuming that you ended up having a number of those firms that lineup equally across the board. And I'll emphasize again, that it generally doesn't work that way, then yeah, it can be a bit of an option, like you could go and say, well, I'll take, you know, either offer one, two, or three, best, depending on who optimizes that, for the things that are most important to me. And those things could be things like how quickly you transition out, if you're selling out, or you know, how long you have to be around, or the amount of cash that's in the offer or opportunity for game here. There's many, many, many variables. So I think that, you know, having a good understanding of your own desire in a transaction, and what is, you know, great win for you will certainly impact which offer you will accept. And obviously, the more of the checkmarks, on your side of the ledger and a particular offer, the more likely higher the likelihood that you will accept that one. But because this isn't a commodity, and because not all buyers are created equal, it doesn't really look like a true auction. There is negotiating leverage that comes from having other offers, and multiple offers, as you work to hone in on the offer that you want to select. That certainly is a fact. But because it's not commoditized there isn't it's not really an auction in the true sense. I agree completely. Mike,
Matt Lockhart 33:35
if you think about it, like an auction, you're thinking about your firm, as just a well, maybe a piece of machinery. And we know that there's so many more important factors that go into the decision, even if you know and, and doesn't matter if you're selling in or selling out, you you really gotta care about you know, that future in the future for your employees in the future for your, for your clients. And and, you know, that's a great place to start. So, no, it's not just an auction. It shouldn't be just a bidding war. But it's an opportunity to look at the market and have choices and choices that line up to all of the decision criteria.
Ryan Barnett 34:30
Yeah, I think last question I have around this is does does that multiple multiple offers allow you Matt to go back to multiple buyers and help set the market based on what others are willing to pay? I guess that some curious
Matt Lockhart 34:55
Yeah, it is. Yeah, certainly. You know, There's an expectation of fair value, people can look at that differently based upon, you know, their view of strategic fit and, and upside opportunity, and, and so on and so forth. It certainly does help to align these things, right, especially the that strategic and cultural fit, because those firms that tend to be in in sort of that leading category, for their enterprise value assessment, are looking at it, you know, through through those same lenses. Now, if, if there's firms that are indicating, you know, sit very similar goals, and similar strategic goals, and, and they're off from each other in terms of their, you know, their enterprise value and any associated structure, then, you know, with with good intent, you know, letting them know where things are at, and allowing them to assess, you know, reassess, their measure of enterprise value is super important and very appropriate. And again, it's not done in the context of, of an auction, it's done in the context of finding the very best fit, right between two parties. And as Mike has said, for, you know, close to close to 25 years here, ultimately, the ultimate value is what is agreed upon, you know, between the buyer and the seller.
Ryan Barnett 36:44
It took the words right out my mouth. Great job on, you know, what I heard today is, there's got to be a cultural fit, that is, firms, you can evaluate that in a fairly systematic way. And that cultural fit, will have importance to your clients and your employees. And that should be a huge consideration. When looking at multiple suitors, I heard there's got to be a strategic fit, and how your vision together is greater than just one on one and making sure that it's not just a financial decision, but something that will carry on through the future. And ultimately, I heard that just the price tag alone is just a one factor of of a financial consideration. You have to look very closely at deal terms, deal structure, timing of the deal and how that all comes together. Mike, maybe you can help me out if I missed anything, but also, you know, what is a advisor? What to perhaps maybe multiple advisors? How do they come into play when evaluating multiple offers and close it back over to you for any any closing thoughts?
Mike Harvath 38:01
Yeah, I, you know, certainly it takes a village to effectively do m&a transactions. You know that a village includes a great m&a lawyer that can advise you, it includes in accounting, accounting resources around how to impact the impact of tax on these payments, when they come out of your structure. Depending on the country you're in whether you have, you know, some tax relief, based on formulating a trust or other opportunities that exist. There's different certainly different accounting roles and, and tax authority rules all around the world that, you know, can impact structuring considerations. Obviously, financial advisors, you know, for most folks that sell a tech business, you know, this is their single largest asset, and how they manage the renumeration for that exit or taking off the table if they're recapitalizing, and what's expected in the future is important for them to be able to live the lifestyle for which they become accustomed and likely will need as they move through the rest of their lives. And I think, you know, m&a advisors, play an orchestration role in kind of running these processes and it certainly Shepherd when these other advisors need to come in and evaluate offers and when, not only at the time of accepting an offer and getting an LOI done, but in the diligence process and reciprocal diligence process, which is likely to occur as you move towards a clause. I think that that village of advisors will be able to optimize your deal not only for pricing terms, but for tax and and considering decisions as well as, you know, investment, post deal investment considerations and being able to have that team of people assembled together is super important.
Ryan Barnett 40:13
All right, well, thank you both on Matt and Mike. Matt, any closing thoughts?
Matt Lockhart 40:19
You know, the last piece is, and I think that this is super important is it sort of in the role of an advisor is, is to try to try to keep as much emotion out of the process as possible. It is a it's a naturally emotional process, especially for sellers, especially for founder led sellers. And trying to, you know, sort of keep that level had to go back to sort of the principles that the sellers have set forth in terms of their goals, and then being objective in the in the analysis. And, you know, not not taking anything personal, you know, with respect to offers that are coming forward, I think is another key role for the advisor to play. So, it's it's a good time. I'll tell you, we are certainly seeing more and more of these scenarios come to fruition here. Certainly better than 12 months ago, I think we all know. So let's, let's get on with the gap, man, Mike.
Mike Harvath 41:35
Well, with that we will tie a ribbon on it for this week, Shoot the Moon podcast, encourage you guys to tune in. Next week, we'll unpack further topics of discussion regarding m&a and growth strategy for tech enabled services companies throughout the world. We wish you a great day and a great week. Thanks for tuning in.