Buy-Side M&A 101

Buy-Side M&A 101

Shoot The Moon
Shoot The Moon
Buy-Side M&A 101


Welcome to Buy-Side 101! We’re doing an overview of buy-side M&A in this episode because it’s come up a lot lately with our clients, prospects, partners and more. Here’s what we’re talking about:

  • Buy Side programs are the fastest path to growth
  • Have the right team and processes in place
  • Criteria for Buying a Business (Why are Cultural, Strategic, and Financial fit important)
  • Why a Buy-Side M&A Advisor is important
  • What other advisors do you need to bring to the table to get a deal done (Legal Advisor, Accounting Advisor…)
  • Timelines & Expectations (Origination, Due Diligence…)


Listen to Shoot the Moon on Apple Podcasts or Spotify.



Mike Harvath  00:04

Hello and welcome to this week’s Shoot the Moon podcast broadcasting live and direct from revenue rocket world headquarters in Bloomington, Minnesota. Revenue Rocket is the world’s premier growth strategy and m&a advisor to IT services companies. We are here today with my partners Matt Lockhart and Ryan Barnett. Welcome guys.


Matt Lockhart  00:30

Hey there, Mike and hey, Ryan, it’s you know, I don’t know about you guys, but we’re up here in the great white north in Minnesota and, and temperature starting to cool down a little bit. And the trees are kind of gonna start to turn here, it’s football season or our home team, you know, it’s, you know, we’ll just keep the promise alive that the Vikings are gonna do what they’ve never done before and win a Super Bowl. And so bright skies and let’s go.


Ryan Barnett  01:08

Indeed, it is a it is great to get nearfall and,  happy to everyone’s end. We’re talking Matt said, you said something to me this morning. And it resonated well, and it we made it the topic of today, which is really we wanted to an overview of what a week called by side m&a would be. And if you think about the market, there’s buy side m&a, which is where companies where you’re looking to acquire another company, and there’s oftentimes in the industry, what we would call sell side work, in which a company takes themselves to market and is on the on the sell side. So today we wanted to talk about biocide a bit why it matters and, and to walk through some things that you need to consider when embarking upon or even looking at a buyer-side program. But, Matt, just remind me what was what did you say when we talked about biocide? What’s something you learned since since you’ve been here?


Matt Lockhart  02:09

So, you know, and I knew this before? Because for those that I’m sure don’t know, but I’ve been working with revenue rocket right, I was a customer of revenue rockets for the past 15 years before joining and I saw the sort of the expertise that that you all had way back when and we did some buyside work, shoot trying to buy a small firm and a smaller firm in, in New York. So the net net of it is by side is hard. It’s you know, it’s not for the faint of heart. Right. But so buyer-side work is hard. But you know, Mike, I know that you’ve been doing it longer than I top performers, right growth firms do in organic growth, right in organic growth means you’re gonna go and make acquisitions. And so why don’t you kind of touch on that, Mike, that, you know how, why inorganic and organic growth really needs to happen on a continual basis?


Mike Harvath  03:27

Yeah, for sure, Matt, you know, you leave about 50% of your growth potential on the table if you’re not doing inorganic growth. And so you may be executing exceptionally well are organic, organically with your growth. But there is a theoretical growth limit, right to grow a profitable tech services company. You know, we’ve talked a lot about the rule of 45. And you can do some research on that. You are somewhat pinned down by that it’s not unlimited, top line growth. profitable growth isn’t available to you. It’s not it’s not how it works. So in order to maximize your growth potential, you have to have an ongoing inorganic strategy as well. And, you know, certainly marrying those two things together will optimize your potential in the marketplace and certainly help you you know, get to your goals much faster than organic law.


Ryan Barnett  04:26

You nailed it, Mike. There’s a growth in which you achieve and oftentimes companies get to plateaus, and that plateau may be 10 million or 15 million. It’s very hard for a $25 million company to become a $50 million company if you don’t consider growing with someone. But when companies start to embark upon the process of buying another company, there’s a lot of things to consider and a lot of things that go into the process. What’s a typical biocide process look like what are some major steps and milestones a company looks through when they start to go through and perhaps even consider an acquisition?


Mike Harvath  05:13

Well, that’s a great question. I think what’s important to note is that, you know, buying companies is really hard, right? It’s very difficult to effectively transacted deal. And you’ve probably heard us talk about the fact that if you want to roll your own and attempt to go do an acquisition, then only about 1% of those transactions actually occur. And if you’ve tried, and I know, there’s been listeners of this podcast that have tried to do that, and many of them have come back to us and said, Wow, you know, we took a run at a variety of companies, we just couldn’t get deals done for variety reasons. And then they hired us to help them go get transactions done, and then we’re able then to successfully help them. It’s because a lot of that work is not only very challenging, but it’s also time and resource heavy, right? You need to be able to dedicate the time and the resources, knowledgeable resources to that project. And they include, you know, variety of steps. One is to kind of determine, are you ready as a company, kind of both strategically and financially? Do you have a clear idea of what it is you actually want to acquire? And will that be a creative to your strategy? Beyond that, can you identify the companies that would be a fit that aren’t for sale? Because, you know, if you’re going to come to your inorganic strategy, and you know, just respond to those teasers or come across your desk, that may not be the most effective approach to acquiring a company that’s an exact fit for your inorganic strategy around, you know, m&a, and one that aligns to your overall business strategy. And then can you manage outreach? And then can you you know, evaluate those companies in a meaningful way? Can you do, you know, can you do a valuation to determine what they’re worth? Can you negotiate a letter of intent, include all the information that should be binding and non binding, and then much more importantly, and where a lot of deals come apart is? You know, can you work through a meaningful diligence process to know that those cash flows that are presented in their financials are actually real, and that their contracts are fortified and that you’ve mitigated the risk to ultimately get to the right of negotiating a definitive agreement with competent legal counsel, I mean, all those things need to be done in a world class way. Otherwise, your deals not going to get done.


Ryan Barnett  07:57

The state of the market talk about that the it’s really tough for buyers to buy it because sellers are selective of who they’re going to sell to. And the best companies you mentioned earlier, the best companies are really not for sale. So it’s a matter of finding those companies that fit your strategic mandate, whether that’s to increase revenue, whether it’s to expand your service capabilities. Those are those are hard to find, it’s hard to define. And it is hard to define that as well. I think part of why biocide can be difficult is that you’re trying to find a Goldilocks in meeting all all of your criteria. And it’s that’s paired with sellers that just aren’t are oftentimes not willing to sell, or they even haven’t thought about it. And approaching someone without a pretty guided approach can be difficult for a seller to get into the fold of even considering should they take your phone call and should they talk about a deal and what does it mean to sellers we spend a lot of time educating sellers on what it means to be in a business combination and walking them through what it would take and getting the deal done. And it’s an it’s much it takes so much more than just a blank check to get a deal done. Matt, I know you’ve been working on some biocide deals lately. Is there been something that has helped that has been key to success in in working through the deal from origination through close any secrets that you’ve can share?


Matt Lockhart  09:44

Yeah, I mean, you know every deal is its is its own little life. But you know, there’s some common pieces as we as we constantly talk about right and I think it’s it’s warranted cultural fit. So strategic fit, financial fit. And as deals progress, sometimes both buyers and sellers kind of lose sight of the the real upside value to both parties, culturally and strategically. And people get really focused on the financial fit, right, especially as deals progressed towards the end. So I think that one of the things that we do really well because we, you know, no are no our job, right? We’re, we’re, you know, we’re, we’re, we’re helping bring people to the middle and bring people on. But it’s, it’s to be constantly re enforcing the upside value to both parties, culturally and strategically, right, and then, you know, as, as you move past letter of intent, right, you know, that, that people sort of agreed that they’re going to get married, that you, you try to make it as common sense and practical as possible. Here are the steps, here’s the timeline, here’s the, you know, here’s the project plan, if you will, that everyone’s going to work through on both, and both parties to, you know, to get to the finish line. And so, you know, it’s this, it’s this combination of, of sort of diligence and practicality and, and management, while at the same time, continuing to, you know, really further the trust, you know, which furthers that cultural alignment. And then continuing to, you know, fire people up and, you know, be a cheerleader. And, and, and, you know, continue those discussions strategically. So, it’s just, I think it’s just continually talking about those three fifths Ryan and, and, you know, good things happen.


Ryan Barnett  12:15

Yeah, you’re absolutely right, the it’s very easy to lose sight of the deal, especially if you’re the one doing the day to day battle. So it helps to have an advisor in the mix to move through this. Mike, you can you help me understand if you’re doing biocide work and you’re trying to buy another company? What kinds of advisors do you need to bring, bring to the table to help get a deal done?


Mike Harvath  12:50

Well, I think it’s important to note that most m&a advisors are sulphide advisors, there’s very few that are wired to be by side. And that’s because buying companies is actually harder than selling companies. So little known fact. You know, m&a advisors will go to the path of least resistance generally. And they are generally started or cultivated, as, you know, sell side advisors, and maybe that’s all they do. Or maybe they’re, you know, really built as a sell side advisor. And now they’re going to try to wade into by side. So I think it’s important to that buyside advisors. First, as ones that do by side for real. And oftentimes, that’s, that’s an that’s the indication there has to do with how they structure their feeds. And so we can talk more about that. But, you know, most m&a advisors structure their fees around the enterprise value ultimately achieved for the seller. That’s in direct competition to what would be practical or even logical for a biocide advisor. And so, you know, that buyside advisors should index their fees some other ways, so they’re not in conflict. And that’s certainly a good way to test whether a by side advisors thought through thoroughly how they build their fee structure and how they support a buy side initiative. But the the advisor, which I think is important and betting them as someone who really does buyside for real, you need to also have a very competent, legal adviser, one that can help you, you know, navigate the perils of negotiating a legal agreement. If your advisor your m&a advisors doing their job, they should be able to help you negotiate the business terms of the agreement. But the legal advisors be able to be smart about how they help you navigate the legal aspects of the agreement and how to evaluate and mitigate those risks. And not, you know, turn it into a science project. So you need an m&a lawyer who’s represented buyers in the past, and has experience ultimately in, you know, tech services, right. That’s how I would certainly begin to evaluate a competent legal adviser. And your m&a adviser usually can refer you to a competent legal adviser who has experience in the domain, if you don’t know one, so that’s a good source for that. You also need to have some competent accounting advisor who can help you determine the ramifications of structure on your tax, how taxes would be applied. This is critically important depending on sort of what countries you operate in, as well as sort of how you plan to do and structure the transaction, whether it be as a stock transaction or as an asset transaction, in understanding the nuances of those pursuant to your own corporate entity, and also based on the sellers corporate entity. So those are things that you know, a competent tax advisor can weigh in on. And certainly you’ll need that level of advice as well.


Ryan Barnett  16:36

And when it comes to a as an m&a advisor, specifically, I think it is important to understand the capabilities of the advisor when it comes to the offerings that you have. So if you think about trying to get a deal done, a you have to you have to have the strategic fit and build your ideal prospect profile. And we’ve got other podcasts on that. And we’ll have upcoming future ones on that as well. But understanding who you’re going to buy is, is critically important to really starting to build a list. And from there, you have to have a a the ability to understand the market you’re going after and know who are potential candidates that are out that could be good additions to the firm. So researching and understanding companies that are in the market for for outreach is critical. And then you have to have a function that does the pure origination of bringing conversations to the table, and ensuring that does happen. From there once a you need a very competent deal team that’s going to help negotiate in LOI. But even before that, you need a whole financial team that’s going to analyze the company that you’re you’re going after to make sure that you have enough information for for an LOI. Once you get someone locked up into that loi process, it takes a whole nother team to get through the 60 to 90 days of due diligence. And in perhaps even a quality of earnings report or quality of earnings light report as well. So when you think about trying to tackle that as a your own entity, it’s hard to find a specialty on that, especially if it’s there’s a, let’s say, a one man shop who’s who trying to get a deal done. It’s hard for them to have the resources that are available to go build a list and to execute on outreach to that list. And if they can do that really well, it’s really hard for them to be financial experts and following the due diligence trail and keep the deal done. And even then it’s hard to keep the financial team aligned with the I’d say the deal team to make sure that everyone in the deal feels good and at the key points are being negotiated. So it can kind of it can become complex when you start to piece it all together.


Mike Harvath  19:04

I would just, comment on that, Matt, you can chime in here in a second. Many buyers look at m&a advisors on the buy side simply as people that can source a deal, right? If you’re someone that can just source a deal, or find a deal. That’s problematic, right. And I would say that, to Ryan’s point, you need to be able to have a very material level of experience throughout the full lifecycle. Oftentimes a financial buyer may think that all you need is someone who can source deals and that’s really not it it’s not really the case. I think someone with deep domain expertise you know, such as ourselves in IT Services provides a A vehicle to be able to provide a lot of value along the full lifecycle to not only finding that opportunity, but being able to negotiate it and understand comps because of the level of number of valuations that the firm does, and then really meaningfully do due diligence. So that you can get through that with confidence and know that the company you’re buying is what they say they are, and ultimately get, you know, things as nuanced as working capital negotiated, are critical. Matt, you got a comment?


Matt Lockhart  20:40

Oh, no, I was just gonna, you know, commend Ryan for it. So, yeah, let’s frame it. If you’re a, if you’re a Microsoft of the world, then build your own corporate development organization, of course, right? I mean, common sense, right? Because you, you’ve got the means you’ve got the wherewithal, you’re gonna do 510 deals a year, right? I mean, that doesn’t mean that you’re not going to work with an outside party. Right? You really should, right? Because that, that independent DNL entity is going to, you know, provide a lot of value in plugging in and helping blah, blah, blah, right. But if you are not a Microsoft of the world, then, you know, it’s just like, you know, you’re better off in working with an expert that does this every day, you know, I hear you guys know, I mean, I came from that software development world, and, and, you know, we would go into Oh, shoot the global med device companies, and, and we, and we chat with the CIO. And the CIO would be like, hey, you know, my guys think that they’re like, a software development company, or they want to be a software development company. But, you know, really, we’re not, we’re a med device company. And so we need your expertise as a software development company. And so you know, it in the same way, it’s like, this stuff is hard, right, and you need to just get that expertise. And then it’s an it’s not easy to have all those components. So I think we’re all saying the same thing. So, you know, Ryan, you’ve been doing it for a while, and I mean, how long does it take? I mean, how long does it take to get a deal done? Is it you know, isn’t? Isn’t it pretty easy? You know, you throw a line in the water? And, you know, shoot, you know, two months later, you got a deal done, isn’t it? Yeah,


Ryan Barnett  23:07

all you have to do is write a big check, right? I would love for it to say that. In reality, there’s the we certainly can’t create a baby in in in one month with nine people, it just it’s difficult to get deals done. So a very, very practical matter is that outreach takes quite a bit of time. So understanding the prospect and getting ready just getting ready to go call in to get after that, you’re gonna expect at least a month to make sure that you’re aligned on the people that you’re going after the list is done, your financial aid checked off, you have those those things done, when you start getting out there, it can take months, we have seen deals done quickly. It can take years, that based on how specific you want to be. So there are some companies that are looking for the Goldilocks of the world, and it’s appropriate to do so every every penny, you invest in this, you want to have a good return. And sometimes if the smaller the target market or the niche that you’re going after the harder that can be. But realistically, it takes a lot of touches. We’ve got you’ve heard this story before but one of our clients that we’ve had a lot of work with and success, we had to call 48 times before we had the appropriate call with the decision maker that took almost six months. So it’s it’s common for someone to when to take a while to come into the process. Sell it less sellers are out there, and they’re ready and they’re raising their hands and say, hey, you know I’m ready to be sold. I’ll tell you that comes with almost more risks, and sometimes more tire kicking and more inability to get a deal done. And because they sell, when you’re packaged for sale, there’s a kind of a different mentality of the company. And when you’re trying to truly find that company that’s not for sale, that that fits your strategic fit your cultural fit and financially works. I’ll put it this way, don’t expect something in the first 60 days, it’s maybe a few introduction meetings. Unless a company has a bunch for sale, and even then I’d be cautious on or the track is the deal trying to get done compared to are they trying to find something that works for you. So I think Mike, his often use some phrases on things often will take three times as long as you think and three times more expensive. I don’t think it’s not quite that much. But it will take longer than you than you think.


Mike Harvath  25:54

Well, the thing I think is very challenging is predicting the future, right? You know, anyone who’s in the business of predicting the future, definitively, there’s only one thing they really know, is that they’re likely to be wrong. And so I think it’s hard to predict time, it’s hard to predict, you know, you may get lots of interest right away, you might, it might take, you know, six months or a year. I think the key, and I found this to be the case with many of our very successful engagements with buyside clients is the most successful clients where we’ve done many, many transactions are very patient, they’re very patient in the outreach phase, they’re very patient, when it comes to negotiations. And as a result, they’re very, very successful. And, and so I would just leave you with anything, I’d say it’s, it takes specialists with various skills, and it takes time. And if you’re willing to commit the time and the resources, and be open to the advice from the various advisors, you’ll be really successful by side.


Matt Lockhart  27:08

Well, yeah, and I think just to really, you know, accentuate that in the wrap is, is to be that market leader is, is inorganic strategy is an ongoing strategy that is always open, and it’s part of the strategic practice of, of the firm. And so it’s not something that you turn on and off, it’s not a one time type of a deal. It’s an ongoing practice and strategic value of the firm. And as such, you know, you’re constantly you know, looking for those right opportunities to extend your market to capture market share, to fill capability gaps. And, and you just keep going at it, you just keep grinding. So it’s all good. Love it.


Ryan Barnett  28:14

Yeah, that’s a great, great way to wrap it up man. I took summarize it by side programs are the fastest way to grow, and to two acquiring companies is critical to to achieving growth objectives that are much beyond your organic control. It helps to have the right team and processes in place, aided with the advisor that can help fuel deals. And then from there, expect the process to to have some origination, some due diligence and negotiation along the way, and an advisor can really help. With that. I’ll turn it back over to Mike and wrap it up.


Mike Harvath  28:58

Sounds great, Ryan. Well, as we say every podcast, it’s time to tie a ribbon on it. So we will do that now, thank you for tuning into this week’s podcast from Revenue Rocket, and we look forward to you tuning in next week when we’ll be addressing more interesting topics as it relates to growing your IT services company and or doing an m&a transaction. Thanks and make it a great week.