In this episode we're talking about the keys to successful deals + learnings, bringing in our own findings from recent transactions. We'll walk through a few of recent deals: what worked well, what didn't, and ultimately how the deal got closed.
Mike Harvath 00:04
Hello and welcome to this week Shoot the Moon podcast broadcasting live and direct from revenue rocket raw headquarters here in Bloomington, Minnesota. I'm fortunate enough to be here with my partners today. Ryan Barnett and Matt Lockhart. Welcome, guys. Hey, Mike, good to be
Matt Lockhart 00:22
here. The sun is shining, finally, here in Minnesota. And you know, it looks like we may get at least a touch of a spring after all.
Mike Harvath 00:34
Absolutely. Hopefully we break 60 degrees today, which for us is going to be a big celebration, because it's been a long, cold winter. Ryan, what are we talking about today?
Ryan Barnett 00:47
Hey, guys, and thanks for having us on here. Today, we've been we're lucky enough to talk about a few successful deals that we've navigated, and really wanted to help our audience understand some of the key factors to what happened in the news deals. So why don't you introduce the deals, talked about how they fit either strategically, culturally or financially. And then what advice we can give to buyers and sellers as they consider transaction and learning from some of these deals that consummated. So with that, I'm just going to lead you through three of our our deals, and I'm going to start with a revenue rocket, we use code names for our clients, and everything is named after a rockets or a missile or something, you know that that is a fast growth into the sky. So I'm gonna start with a project Starburst. And, Mike, if you, you know, actually party met, I'd love for you just to describe kind of who's the project Starburst? What did they do? And tell us a little bit about the seller and the buyer?
Matt Lockhart 01:52
Yeah, absolutely, this was a think, a very successful transaction. As we've talked about before, you know, we're always assessing the cultural fit, the strategic fit and my financial fit. And I think that this method did a really good job of hitting the mark and all three of those projects start betters is a leading, you know, Microsoft CRM, and Salesforce consultancy. You know, I think they these guys, the firm had been around for about 15 years, founder led and founder driven, but had really built a great best in class, you know, model that started with their ability to advise the CRM customers in terms of the best practices related to their CRM initiative. So they sort of did the advisory work first aligned the the sort of the very best value as well as business practices and processes, then they would guide in terms of a product selection, either between the Microsoft ecosystem or the Salesforce, the ecosystem, and then they obviously did the implementation, and then had post sort of post implementation support capabilities. In addition, one of their target markets and verticals was the oil and gas industry, and they built some intellectual property related to serving that marketplace. So, really a very best in class solution capability and, and there was a great deal of interest in the market. The the buyer in this case was a large accounting firm, national based accounting firm, that as an add on cross sell capability is building up their suite of technology consulting capabilities, and, and this was a great fit and mark for that firm. So, it strategically, you know, very much met the mark, one of the things that the seller in this case was very, very sensitive to was ensuring that it was going to be a good cultural fit for all of the people within the firm. And so, when looking at the various interested parties, the buyer in this case, you know, really met the mark of being able to ensure that there was a great opportunity for the people and that it was going to be a good cultural fit as well. So, Project Starburst was a very successful transaction and process and you know, had the natural pushing and shoving that will occur in any deal but you know, one of the things that on note is that both the buyer and seller were very motivated to move the process along as quickly as possible. And I think that that's one of the key things that when we think about the case study, is ensuring that there's a good deal of momentum throughout the deal.
Ryan Barnett 05:20
I think is a great overview. Matt, one thing that was really interesting about this project is, I believe we started talking to them at first from actually our buy side. And it wasn't a complete strategic fit. And they caused them to at least pause and say, Okay, let's not take this deal. But is there something else out there? And when we started to take a different look at the marketplace, we found that there, there were some really great fits strategically, culturally, and ultimately, financially. That made a bit more sense. Was there any other reasons why these guys decided to, to sell the company?
Matt Lockhart 06:02
Well, Mike, I know that you had some early discussions with them. I think that you know, and this is, I think the case for a lot of these organizations they had meet, they had met a level of maturity, and market reach that was, you know, very attractive to the market. But also, you know, they knew, and were smart that to take their business to the next level of scale was going to be, you know, a, probably a three to five year plan. And, you know, they they think, quite, you know, we're right, in saying, you know, do we exit now? Or do we take that, you know, three to five year plan forward. And, you know, for these leaders and founders, the decision, I think was, was made to, you know, now's the time. Mike, any other thoughts? I know that you, obviously, were very key early on in in Project Starburst.
Mike Harvath 07:07
Yeah, you know, I would say that also a driving factor. And we see this, certainly, amongst many of the owners of our sell side mandates, you know, they have a decision to make, as they approach retirement, or at least begin to plan for retirement, maybe they're within five years, or seven years, or retirement, some cases 10 years of retirement. And they they come to that conversation internally that says, you know, yes, we could, you know, invest pretty heavily in the business to grow into get to the next level and next three to five years. But if we're thinking about retirement being on the horizon, do we want to do that, right. And I think there's quite a bit of thought and introspection that has to go on, for someone to come to the conclusion that, you know, now may be the time for us to go to market, see what we'll see what will work and see what the opportunities are. And ultimately take an exit. Now, because, as is the case with Project Starburst, and is the case and many opportunities, even with a stated goal to exit the business and retire in the coming year or years, there is some work that has to be done in order to integrate the business and operationalize the business with the new buyer. Right. And I think some sellers think that, you know, maybe they can just sell the business and you know, in a short period of time walk away, that's not really always the case. So I think a smart seller who's approaching retirement, say in the coming years, or even though next 557 10 years, we'll want to be thinking about, you know, how long do they want to continue to work, and then ultimately, where you know, where that plan lies as it relates to bring in their farm to market. And that certainly was the case for Project Starburst.
Ryan Barnett 09:22
Yeah, the one other thing I'd like to add here is just, they were ready, ready to sell from just a readiness perspective. So their financial books were in order, and they could defend numbers. Well, they had put people in place to help run the company with their absence. And they had really built a great sales and marketing engine that was that's frankly rare in the Microsoft Dynamics, C ecosystem. So they I think when they came to market and they were ready, they could put things together in a really nice way. Is that allowed, allow the process to go really as smooth as we've seen in a transaction?
Matt Lockhart 10:09
Yeah, that's a great point, Brian, one of the themes that I think that we'll see, as we talk about some of these other opportunities is, it's just this consistent theme of, of keeping the momentum in the process. And that is, you know, that it's really important for, from the buyers perspective, you know, because time kills all deals, but then also for the sellers, because, you know, whenever somebody is selling the business, you know, it can be a big distraction. And the more time that goes along, you know, the, it just increases the risk that something can happen, you know, within the business. And that's not to say that, you know, there's, you know, people are, are putting a facade up, it's just the, you know, businesses go in, in peaks and valleys. So, you know, keeping that that momentum, you know, from the sellers perspective is super important to your point of being ready, and having all of that information ready. And so you can, you know, kick things off successfully, and keep that momentum rolling.
Ryan Barnett 11:23
Yeah, absolutely. Thanks, Matt. i You did a great job on this. And congrats to the seller, then buyers. When we look at this, it really fit all legs of ours of our stool, and they they were such a pleasure to work with, and, and congrats to them on hitting the goals that they wanted in a structure that mattered to them. Love to transition a little bit, we've got another project. Internally, we call it project Elotes. This was these guys were very interesting blend of a cybersecurity company, one of the light leading cybersecurity companies in Canada and a very interesting consolidator. Mike, could you tell us a little bit more about the seller and the buyer? And I wouldn't know what role did Reverend rocket play?
Mike Harvath 12:12
Yeah, for sure. You know, this is a very interesting company. You know, as a matter of history, we had approached them on behalf of a buyer, another buyer, probably three years ago, and got introduced to them at that time. And it wasn't a fit, necessarily for that buyer at that time. But we did stay in touch with them. And ultimately, they became a strategy client and an m&a client of revenue rocket, we help them optimize and get ready for a future transaction, as well as help them do an acquisition, or they expanded their footprint. In Canada, they're a very material player, about 70 million in revenue, very well respected work with the best brands in Canada, on cybersecurity. And through that work, we had another client who we knew, or a friend of the firm and a client, that where it was going to be a good fit, essentially a consolidator. That has been very successful at pulling companies together in North America, both Canada and US and bringing them to the public markets on the Toronto Venture Exchange. And that ultimately leads to cross listing an up listing on NASDAQ and, you know, creates an environment for the firm to grow and add additional capability capabilities. This particular strategy involves both it and OT type companies. And they're executing well certainly cybersecurity as a pillar in the IT side of the of that business thesis consolidation thesis. And the role in all the it checked all the boxes from a strategy, sort of culture and financial fit perspective, as well. Ultimately, the seller you know, the transaction consideration was made up of three components. One was, of course, upfront cash. The next was what we'll call an urn out, essentially to align mutual interest in the third was a rollover of equity pursuant to that public company that that equity ultimately becoming public in the near term that aligns into As for all parties to, you know, have one plus one equals three, four or five. And certainly those guys are on a tear here plus transaction, and working through integration and aligning interests to go some do some great work together.
Ryan Barnett 15:20
Hey, Mike, I'd like to dig into that a little bit more. So this is a structure in oftentimes from from sellers, we hear them start with, I'm not I'm not, I'm a little wary of, of earnouts. And sometimes the even the equity portion of this, Why were those two parts so critical on a deal like this? What what made the seller go, Whoa, this is much better than just cash to close.
Mike Harvath 15:51
Now, what's important to know is that, you know, earnouts, statistically, get paid out at or above, you know, 86%. So, if at or above index values we call it, which is where they're, where they're targeted to be 86% of the time. So, you know, it's not 100% of the time, as you can imagine, because things happen in the market, you know, there could be a recession, there could be a loss of a client post calls or whatever. But the likelihood that you're going to achieve your earn out if it's structured properly, and I'll emphasize structured properly, with aligned interest is exceptionally high. And so the way to optimize value in your business as a seller is certainly to focus on being able to take some risks, right? If you take an all cash deal, you've eliminated really all the risks in the consideration. But you've certainly also given up any potential upside, where you could participate in that once the businesses came together. And you need to remember that, you know, an acquirer will not be acquiring your business, if they don't see material upside in the in the transaction, right. I mean, it's a fundamental tenet of what occurs in m&a. You know, people need to be able to model a return rate, and certainly, they're not going to have interest in doing a deal if they think they're gonna fail at it. So moving into a transaction with the mentality that turnouts are bad, and you're never gonna get the money, and everybody I've talked to has been screwed out of them, is really not factual. I mean, it may be factual and everybody I've talked to, but it's just that it's because they weren't structured properly. So having an advisor in the in the transaction that knows how to structure earnouts, to make sure that the chief sort of mutual interest is critically important. And because there are specific levers to pull and to do that. But when you think about aligned interest and what someone's trying to do, as a seller, it has more to do with being able to fully optimize a deal for a premium. And you do that by participating in equity. By looking at an urn out and having a gain share, we often call those gain share type components of consideration. And as long as you're executing well, on the strategy and the combined vision, that's, you know, very likely you'll meet or exceed your goals and ultimately get to your gain share, fail.
Ryan Barnett 18:33
Yeah, I think it's very interesting to see that fair to it. It also aligns, I think, in this case, to entrepreneurial cultures, trying to really work together to build something that's really much bigger, bigger than everything. Mike, I know, I'm asking a lot of questions here directly here. But was there any sticking points in this deal, especially kind of later in the process, or any any advice that you'd give to a seller that the that they may want to avoid, like working with certain people or certain documents that you could give better advice to?
Mike Harvath 19:10
Well, certainly, you know, the challenge in getting a transaction done is, you know, these, these deals are very, and this isn't unique to this transaction, I'd say this is the case for every transaction. You know, this is called the most unnatural act in business for a reason, they're very, very difficult to get that people get what we call deal fatigue. So there was some deal fatigue in this deal. And there was some legal challenges in this deal, as both parties use very large law firms that put, you know, teams of people on the transactions and ultimately those teams internal to each side of the legal advice. Were not in in sync, and so it created a lot of rework A lot of challenges, frankly, and, you know, impacted both the buyers and the sellers from a legal perspective, I wouldn't I'm not being overly critical of the lawyers work other than the team communications could have improved. I think the work ultimately got done. And ultimately, though transaction got close, which I guess is the ultimate test, but certainly, there could have been more efficient utilization of the staff on both sides. And you know, beyond that, that exacerbates the deal fatigue that occurs in these deals, because there's just a tremendous amount of information and a tremendous amount of small nuance that has to be negotiated. And I think the best way to move into this phase of any transaction is to come into it with an open mind, and a flexible mind about finding a solution that I say most entrepreneurs are pretty good at that right, you're going to be an entrepreneur, build a business, you got to be nimble, be flexible, you got to be smart. But when you're making your you know, decision alongside your advisor, the 200 or 300 decision, pursuant to trying to get the transaction done, you can get you can get tired. And certainly that occurred here. You know, as it does in most deals, and I don't want to sugarcoat it, it's certainly a reason why you need coaches and mentors and advisors along the way.
Ryan Barnett 21:32
Yeah, I agree. I agree. I'd love for it to talk about project. I lost my notes here. Project Patriot next. And by the way, I should say, Great transaction. Really, all of that was an amazing transaction all around, it's amazing to see them all work together, that we saw some really great cultural fit, and I think it's gonna be powerful. Just the love to switch to it. Sorry, one second, been attacked by a robot project patriot. This was a platform in which we have a company that's making a its first few selected transactions within the managed service provider space. And we were able to help the buyer source a deal and was able to help them get through it. And I'd love to kind of walk through a little bit about kind of microbead either one you can drop on this can tell us a little bit more about the situation here of the the buyer and seller. Mike,
Matt Lockhart 22:55
you know, I'll talk about why or a little bit on patriot, and, you know, because this is somewhat of a, I think, a common theme. But but you know, where there's a very strong team that is sort of building that a private equity organization, but different than a traditional private equity, because these guys, you know, have a very strong operating background, very good experience in the technology marketplace overall, but are looking to build an organization that serves the, I think the upper small to medium size marketplace, with advanced, you know, managed services, cyber security, and the like, now, this, they're looking to, to do, you know, somewhat traditional roll up of many managed services and cyber security services organizations. And so, you know, but this was one of their earlier and first transactions, and so important, you know, obviously, to look at the platform capabilities of the, of the selling firm, as well as the leadership team, you know, within the selling firm, because it's a situation where, you know, both parties are going to need to grow together and, and be aligned on vision and, and in success. So, you know, again, culturally, is really important because they're going to be working together for a period of time and growing the business and then strategically, obviously, if needed to check enough of the right boxes for for the acquiring firm. So, a little bit of background, Mike, you know, I know that you had a long relationship with the seller In this case, and tell us tell us a little bit about the seller.
Mike Harvath 25:05
Yeah, you know, the seller was a very well run MSP, we have known for a while they had, they had come to us for a valuation, just to sort of determined the value of the business with the original mandate that some of their partners were going to be buying into the business. They wanted to determine fair equity value prior to conducting that transaction. As it turns out, we approached them on behalf of this buyer, and they were interested in, you know, potentially looking at combining and being part of something bigger, they ultimately did roll equity, and did focus on what we call the second bite of the apple being able to have a broader exit at a later time. So we often use the term selling or sell out these, these owners, these stockholders and future stockholders that were critical to the business, all are kind of selling in, meaning they're going to participate in the bigger firm and the broader firm and, and participate in, you know, a broader equity value funded,
26:25
you know, by private equity. So,
Mike Harvath 26:28
it in many ways, you know, because we only focus on the IT services space, you know, this opportunity came to us probably not vastly differently, based on Project LLF. Because we had known sort of all the parties, right, all the parties at the table. And we knew that in our work with our buyside client, we're representing in this deal, that this former valuation client would be a great fit, because of what we knew about their, what they were trying to do and some of the opportunities that were in front of them. And it ultimately worked out to be a very good transaction for all parties.
Ryan Barnett 27:16
Yeah, I think I agree. I think that the last thing I'll ask on this one, as we wrap up our podcast here, we were able to help out the buyer with what I would call a mini quality of earnings. And, Mike, I'd love to get your perspective on why that matters. And and what firm or why it mattered in this case, have the proper level of due diligence to get a deal to get the deal done.
Mike Harvath 27:47
Yeah, that's a great question, Ryan. So you know, we have a very capable finance team here and finance function at revenue rocket that does great work on behalf of our clients all the time and helping to manage and actually complete due diligence. And then part of what happens in due diligence is to, you know, validate and confirm that the cash flows as presented in the financial side are accurate. Now, most private equity firms when they bought that are funded, or that do funding want to do a quality of earnings analysis, and the quality of earnings and analysis is typically done by an accounting firm and outside auditing firm is the best way to think about that. And they do a deep dive and audit those books of that seller pursuant to a transaction, they want to not only confirm probably the most important component of the QE to confirm the quality and accuracy of the cash flows, but also, you know, audit for any potential risk and sort of doing a risk assessment of the overall business of visa vie
28:57
their accounting practices, for example.
Mike Harvath 29:01
You know, we conducted what we call a mini cube here at qv light, which focus mostly on the quality, the accuracy of the financials and the quality of the cash flows. Because in the end, when you think about what's important when you do buyside diligence, is you want to make sure that the numbers as presented in the forecast as presented are accurate, right, because you need to be able to get to your return rates. And, you know, some of these other ancillary things that full qv might discover are far less important. Right. In in evaluating potential risks in your deal. You certainly want to make sure that those cash flows as presented the financials as percentage are accurate. And, and that's a, you know, p one priority and that's certainly what we did here. We didn't do a All audit, turn over every rock, look for every potential point of risk, because, frankly, the risk associated with this deal for those other items just was not material. Yeah, very interesting.
Ryan Barnett 30:15
Well, we've had, these are just a few of the deals that we did recently are recently completed. Can't wait to talk to you a little about a few more that we've done. But congratulations to all the buyers and sellers on getting this across the finish line. It's a hard task and Congratulations, everyone. But that Michael, I'll turn it back to you to wrap it up.
Mike Harvath 30:39
Sounds good, Ryan. Thanks a lot. So with that, we'll tie a ribbon on it. Revenue rocket is a premier provider of m&a, advisory and and strategy services to the IC IT services markets worldwide, and we look forward to having you tune in next week. Take care