We've seen it many times, you began the M&A process, you got to the 11th hour (or maybe not that far), and your deal fell apart. In this episode of Shoot the Moon, we're talking about common mistakes to avoid & tips to success when it comes to selling your business.
Here's what we cover in this episode of Shoot the Moon:
Mike Harvath 00:03
Hello, and welcome to this week Shoot the Moon podcast broadcasting live and direct from Revenue Rocket world headquarters in Bloomington, Minnesota. As you know, revenue rocket is the world's premier growth strategy and m&a advisor for tech enabled services companies. And I'm honored to be here with my partners, Matt Lockhart and Ryan Barnett today. Welcome guys.
Matt Lockhart 00:26
It's good to be here, Mike. Good to be here. Now, you know, bands been back together a few times. So let's keep it going. What's going on Ryan?
Ryan Barnett 00:37
Yeah, that's it's great having us all here. And, you know, as we talked about every day, it's every time we have a podcast, it's something that we see within our, our client base. And today, we're set we're talking about somewhat of a tough topic, because it's something that we don't want to happen. But it can happen. And we've seen it from other brokers, and we hear from other companies that have had they've tried a successful sale, or tried to market their company. Oftentimes, it's by themselves, or it's, they've tried to process in the past, it didn't quite come to fruition. And it's hard to it's a hard topic. So what we want to walk into know, why is it hard to sell a company? And what are some things that we should take a look at, we'd love to talk through some of those common mistakes to avoid. And then we'd love to give you a few tips on on what you can do in that business, in your IT services business to have a successful outcome when it comes to this. So, Mike, I'd love for you to just get us kicked off on what can why selling business? Why is it difficult to get is gone.
Mike Harvath 01:49
Thanks, Ryan, the whole topic of M&A in general, you know, it's often times called the most unnatural act in business for a reason. These are difficult transactions to get done. But when you make a decision to bring your company to market, much like if you decide to sell a used car, or a piece of real estate or whatever, you need to prepare that asset for sale to optimize it, and to encourage or to enhance the likelihood you will get it done. And I think part of that comes from you know, operating the business in a efficient manner, sort of having some up and right up into the right trajectory in the business, meaning you're growing top line and requisite Lee growing bottom line in the top quartile of profit compared to your peers, to be, you know, quite attractive to buyers. I certainly think there are many other things that need to be done. But you know, those are some, some basics, you know, policy defenders and, you know, in the case of real estate, you know, make sure that everything looks good and your your houses that stage properly before you take it to market. I think the same generally applies to the business and, you know, many of our clients that we've worked with begin that preparation years in advance, they may work their way out of a job as an owner or leader and put additional leadership in place if they're choosing to sell out, and to retire, for example, or move on. Or if they're deciding to sell in, they may decide to you know, focus on a very discreet role in the business so that they can continue to do that once the transaction has occurred. So at the very base foundation, you know, you need to prep the business, so it's attractive to a buyer. I think there's many things that make it unattractive to buyers, and we can certainly unpack those but just start you want to make sure that you know you've you've thought about it and you're in a good spot to make the business attractive.
Ryan Barnett 04:10
Yeah, I think that's a good a good start spot to start. It's, it's you have to have the business in the shape where people can work with it, and it has to be marketable. But also you got to get your self in the mindset of taking your firm and having a look attractive and and part of that starts to become your own thoughts about the business. Now what Matt, what are some things that people should start thinking about even well before a sales process and in getting their their mindset, right?
Matt Lockhart 04:46
Well, we'll go back to those three, three simple steps, right? You You've you know that you're emotionally ready for the next chapter. Right? And that's, and you've started to think about what that next chapter looks like that selling in selling out, right? And you've and you've clarified that in, right? Because when we're talking in the context of, hey, something went wrong? Well, sometimes we see where people pull back, they get into the process, they start talking to people, that becomes real. And then all of a sudden, they're like, oh, wait a second, I'm not ready. You know. And so that's, you know, that is very critical. The, the, the, the understanding of your own expectations related to what is the value of your business? And or do you have a number in mind? Right? That is absolutely critical in identifying that and being able to then work with an advisor, who, you know, who allows you to, to say that your expectations are realistic, right. And, and that, and that's achievable? And then I think that that starting to think about, if you're selling out, have you prepared the business to, you know, to succeed without you, right? I mean, that's a, that's a first step is the business ready to go on without you, as a, as a leader, as a founder or leader within the business. And so kind of what has been that succession plan? That's a key, you know, real key first step. And I know, we'll talk about, you know, some of the other breakdowns as it relates to financials and, you know, position in the marketplace growth into the right, but you know, that succession plan that sort of a real key first one.
Ryan Barnett 06:43
It's, you really get alignment on what you want to do. I think that's critical. That's it things like secession planning, you may want to start years ahead. So oftentimes, when we seal, I guess, I'll ask this a little bit differently, what, Mike, what are common reasons that people do have for not successfully having a getting a deal done?
Mike Harvath 07:12
Well, a big area is sort of a disconnect between expected price as a seller and your performance to warrant that price. And so, you know, I've seen lots of situations where, you know, maybe the only thing you know, if you've operated the business at three, four, or 5% profit, or maybe had some unprofitable years in there, which are generally a low single digit profit business. Yeah, you've heard of peers of yours that have sold their business for, you know, approaching one times revenue or more. And, you know, at the end of the day, that that is a direct function to how profitable those businesses were at the time of the transaction. So it's pretty important to get real feedback about your business performance and valuation. From, you know, experts that do evaluations, you know, not to toot our own horn, but we certainly do a lot of those and have very good perspective on what the market is and what your valuation would be in the market, before you really make a full decision to say, hey, we're gonna go to market, you need to be in alignment with the value of that. If you're not, you're gonna be disappointed. Because it is certainly something that, you know, is a thing that we see often, right, and sometimes, you know, there's unscrupulous brokers that will tell you what you want to hear to get the listing to see if they can find a buyer. But you know, there's a big disconnect between reality and I come back to the cars or the, or the real estate scenario, right? If you're have a very similar house, to all your neighbors in your neighborhood, and, you know, I priced it at 40 or 50% premium, it's not really warranted based on the condition or the property, you're just not going to get that, right, it's going to be a situation where you will not have a buyer. So making sure that you have alignment around what the real value is, is certainly a great, great place to start. I think, you know, when we see that we typically are able to, you know, find buyers through sort of an extensive outreach process to make things happen. I think, you know, a secondary where people get sometimes, you know, sideways is they might just decide, hey, we're gonna, we're going to sell and I'm going to wait for the phone to ring and the wait for someone to call me because I'm getting lots of phone calls from people who want to buy so I don't need to read the process. I don't need to go to market with a with a broker Park. And the challenge with that is oftentimes those calls, you know, maybe from people who are either not qualified to buy, don't understand the market, or there isn't good synergies and they're just trying to, you know, take a scorched earth policy to see if a small business owner might be willing to sell their business, they're not too fussy about, you know, is it IT services business or convenience store or, you know, used car lot, they're just looking for someone that may want to sell their business at a discount. And so you may go down a process where, you know, there's buyers that either aren't qualified or don't align properly, with you around strategic alignment, and value and cultural fit. And at the end of the day, you know, you really need to make sure all of those things line up. So, you know, those are a couple of the sort of major reasons we see kind of deals not get done. Either you're not professionally marketed, or you have a pretty big disconnect between fair value your business and what, what it really is.
Ryan Barnett 11:22
Yeah, those are those are all great. I think there's a, there's so there's there could be so many things that could go wrong. And there's a lot of common mistakes that are there. Matt, I'd love to hear your perspective. Let's say we do find a suitor that fits strategically, culturally. And then perhaps even financially, what are some things that perhaps later in the process that could cause a deal to fall through? Maybe this has been a post loi, perhaps in due diligence, all the way to close things like working capital, or a clean balance sheet or some of that pushing and shoving around the deal? So past loi, what are some things that can help get that deal done? Or? Or what are some mistakes to avoid? Um,
Matt Lockhart 12:19
well, I think we, you know, we do counsel this all the time, I'm not sure we've raised it up the the most important thing that you need to do as a seller is to continue to operate your business very well throughout the process. If there is a significant and or material change and expectations, downturn, right, against forecast against, you know, current year forecast, and, and or the trend that enables expected forecast, right, I think that's a real important one. The other thing is, is you know, there's gonna, you gotta, you got to have a level of flexibility. Now, that doesn't mean that you're, you know, like Gumby. But, you know, oftentimes, new information and or, you know, situation with regards to financing, could could change some terms, not materially, but some terms and or expectation term structure, and the like, and it really doesn't materially change the enterprise value, but there is some movement, and and if sellers are completely unflexible, with regards to finding common ground and a, in a good middle ground, and ongoing negotiations, then, you know, they it's just not gonna work. Not spending enough time and Bill continuing to build that trust between leaders of organizations, so you can see some, some disconnect. Right, that that can cause things to turn south. And then again, you know, I think this oftentimes goes back to, you know, Mike's point of not having the appropriate representation, but, you know, for example, you bring up working capital, right, and, and, you know, we've just got to personally get a real strong track record of being able to have a non emotional, logical path to determining an appropriate working capital. And, you know, if you don't have that type of representation, that enables that to be done in a fair and equitable way, you know, then there can be real pushing and shoving around that, you know, people can make land grabs, right, that are out of bounds and, and quote unquote, not market, right. In terms of being able to, to manage things to an agreed upon closed I
Mike Harvath 15:04
think I would add, let me just make a comment. You know, to emphasize that point. You know, we often say there's about 150 material things, negotiate on a deal, that you need some experience on your side, it's often I would suspect that most of our listeners, use a professional to help them with their investment portfolio, or their retirement plan or their you know, whenever they're using to sort of invest their money. And those guys come to the dialog with a material amount of experience about, you know, the optimal way to, you know, look for a return and balance risk. You know, I would say the same thing occurs in an m&a advisor. There's certainly risk and, and the input your m&a advisors, working on your behalf are going to help you balance risk with optimum return. And be able to suggest things that, you know, maybe a buyer, or maybe you have not thought about. And as much as that seems, in some ways counterintuitive to an entrepreneurs mindset, about, you know, hey, we can figure out most things and get through these obstacles ourself. Having an objective third party with experience always brings a great perspective and, and potentially a path to get things done that you couldn't find, certainly on your own. So I think you want to lean on your advisor, wherever that is. And certainly, if you're in this space, and IT services, we'd like to think it's, we welcome the opportunity for that to be us. But you know, you need to pick your advisor carefully. Because they'll be able to help you level set and think about what's needed. And, you know, and even a credible adviser may tell you that now's not the time to go to market, because your likelihood of success based on your expectations or where the business is, or where the market is, is not aligned. And I think you know, that's a message you'll also need to hear if you're contemplating this move, and if that should be the case.
Ryan Barnett 17:19
Yeah, great, I totally agree. Yeah, open this up to you to maybe pull it with you. And, and maybe kick us off here. But what do you do if you can't sell the business? Now? Let's say you go through a process, and it's been some time, it does come somewhat goes into how long? What should you do? How patient are you, but perhaps a deal didn't get done in your timeframe? What should you do?
Matt Lockhart 17:51
Well, I think it's always a good thing to to, you know, have enough time. Right? It's, you know, maybe you went through a process, you had somebody, you're under a letter of intent, and it didn't work out. I think that having enough time to step back and say, Okay, what happened, right? What were the reasons? What did you learn through the process? Going back to, you know, that simple three step? Are you ready? Are you is, or, or maybe you say, hey, I need a little bit of a break, right? Because if you know, it, it's work. It can be emotional. You know, what is the outlook for the business in the next, you know, six to 12 to 18 months? Right? Are there would there be some games, you know, in terms of the continued development of the business in that timeframe, so but just being able to sort of take a step back, again, working with your advisor, analyzing the facts, right, and understanding that. So, I don't think that we would advise Hey, rush back in or correspondingly, you know, throw your hands up and say, Well, I can, I can never do this. And so I'm just gonna, I'm just gonna go back and run my business for another 10 years, right. So having enough time to be able to sort of clear the emotion out of it, and then make the appropriate strategic plan so that you can again, you know, get the reward of of your life's work.
Ryan Barnett 19:42
Is there a case here, Mike, and he were? Yeah, oftentimes, do deals in our IT services companies are run are run by partners. Are there opportunities to look at perhaps a partner by out and then move into a different sales process or looking at just taking some time off or cleaning up the books. Any other options that that might be available than dish? That's alright.
Mike Harvath 20:17
Well, I think absolutely, yes, I think what's important is that, you know, partnerships are hard. We've talked a lot about that. And oftentimes, and we see this is a pretty common occurrence, you may have a partner that they have a pretty wide each difference. And one partner due to that wants to sell and retire and the other partner does not want to stay in the business, they want to continue to work in the business, I think a lot of it has to do with the appetite and the partner they may want to stay in versus the one that might want to retire. And, you know, the flexibility, frankly, of the one that might want to retire as it relates to financing a buy out. Oftentimes, that's the way it's done. And certainly, in like medical practices and legal practices, that's a pretty common occurrence. And if you think about, you know, IT services, businesses, in many cases, professional services, businesses, they're similarly aligned, particularly if it's a multi partner, own sort of business. And so I think you have to be in alignment with your partnership, about what you know, needs to be done in the business. And certainly, if there's people that want to be sticking around and growing the business for some time, and there's a partner that wants to exit, there's all kinds of options to explore, on how to do that, which include, you know, partial sale, sort of with the businesses is of a certain size, you know, private equity sort of recap, to get that first partner out, just a purchase a direct purchase by the remaining partners, based upon agreed upon valuation, and that would include sort of a price and terms negotiation, as well as bringing in, you know, maybe another outside operating partner operating partner that wants to buy into a business. So there's certainly lots of options that are available, as it relates to, you know, a partner exiting and sort of a partnership. I think many of those things, again, get can get complex quickly. And you need to be able to have some advice and counsel on, you know, what's the right way to do that, and what's the right way to structure it, and ultimately, how to best documented for everyone's benefit. So that, you know, it's a win win deal, I think, you know, to bring, you know, not too fine a point on it. The best deals need to be Win Win, whether it's an outside buyer and internal buyer, you know, partial equity transferred, whatever. And as a practical matter, you know, our experience has been that almost all everyone feels like they gave a little too much, right. And so, you know, oftentimes when the negotiation gets tenuous, people feel like they're giving too much walk away from the table. And I think that's another area where a lot of deals fail where they shouldn't. And I think being able to have an arbitrator, a strong arbitrator, advocating for your position in a m&a representative is certainly go in that situation worth its weight in gold. Because what might seem like a dire deal killer moment, in a transaction to you as an individual, particularly if you're trying to negotiate your own deal where there's a high degree of emotion, maybe a path that you haven't thought about or haven't considered or may even become one that is better for you as a seller, with the input and advice and counsel of others. So I think, you know, that amalgamation of advisers around legal and accounting and m&a can all provide valuable counsel as well.
Ryan Barnett 24:25
Again, great advice, Mike. Great advice. Just to wrap up a bit of what I heard here today, you know, m&a, it is really hard. And it's, as you mentioned, Mike, the most unnatural act in business. So, you know, expect some challenges and expect some loneliness in the process. It's hard to get through, and it is challenging. So I think mentally prepare yourself, hopefully for a successful outcome. But ultimately, consider it's something that it's hard to go through. Is math mentioned, it's absolutely critical to have your your readiness for sale. So that includes your personal motivation, your financial readiness, proving a nice history of success, and really looking for some of the succession of your team and getting the right things in place. Before you ever consider that sale at all, make sure that you're ready for it. There's a lot of common mistakes in the sale in in an m&a process. So you might overvalue the business or ruling out a suitor or being unwilling to negotiate or not having the right succession plans in place, or even waiting for suitors to knock on your door. So before you engage in the process, understand that there's a lot of things you can do, right and and guard yourself against some of those common mistakes. It's also critical that you meet your forecast and your profit expectations through a process, you really have to run the business like it's not for sale, that's gonna be one of the hardest impacts on getting through through a deal. And the last point is, you know, there's definitely gonna be changes between an LOI and a purchase agreement. And through that due diligence and to close, there's gonna be hundreds of back and forth. So be prepared to have some changes from the original documents into actually what you all come to is an agreed upon document. The last two things, it there's options, if you don't sell the company in the first round, or maybe another round, it may be a partner buy out there may be some short term financing another way, it may be just a time where you go back and reflect and look, can I raise revenue, profit EBITA target markets to go to a point where we can better execute. And then lastly, and be patient, it's the more niche your businesses, the more the harder might be to find the right buyer. So we talked about finding strategic, cultural and financial fit, but timing is a fourth lady must consider all throughout that process. So with that mantle turning over you for anything else you'd like to add.
Matt Lockhart 27:17
Ah, well, yeah, that was an awesome summary Ryan for sure. Which gets wrapped up into a blog post, I think. No, I think great topic. You know, a lot of people thought that this would be the changes in market that you know, it had last year, everyone was saying, Wow, real seller's market, and people are saying, Wow, geez, now's not the time just because of the market conditions. I'll tell you, we don't see it that way. The the strategic value that the that our clients hold in the marketplace, because of their specialization in in what is a continued supply versus demand, you know, imbalance in IT services. It's still a great time to sell. So hopefully this was helpful for people who are considering it and thinking about it. A plan plan plan. Well begun is half done. So we'd love to talk to you and and great topic. Thanks for leaving Ryan.
Ryan Barnett 28:34
Your welcome Mike. Well, I guess the last thing I'd asked if you have any future topics, let us know info at revenue rocket.com We're happy to send you a bottle of water bottle problem where we help give people 10 years of clean drinking water sponsor to with Domian and revenue rocket and but we'd love to hear your questions. Like with that, we'll turn it over to you.
Mike Harvath 28:59
Thanks, Ryan. With that we'll tie ribbon on it for this week's podcast. We encourage you to tune in next week when we unpack additional topics of relevance for you as owners and investors and IT services companies. And we certainly look forward to hearing from you as Ryan mentioned, info@revenuerocket.com. Feel free to keep those cards and letters coming as they say and we'd be happy to send you a water bottle as part of our giveback campaign. Take care and make it a great day.