Buying a Business is not like Buying a Car

21 Aug Buying a Business is not like Buying a Car

Shoot The Moon

Buying a Business is not like Buying a Car

Play Episode Pause Episode

Mute/Unmute Episode Rewind 10 Seconds 1x Fast Forward 30 seconds

00:00 /

RSS Feed

Share

Link

Embed

EPISODE TRANSCRIPT

Mike Harvath  00:06

Hello and welcome to this week’s Shoot the Moon podcast, broadcasting live and direct from Revenue Rocket world headquarters in Bloomington, Minnesota. As you hopefully know, Revenue Rocket is the world premiere growth strategy and M&A advisor for tech enabled services. Companies with me today are my partners Ryan Barnett & Matt Lockhart, welcome guys,

Matt Lockhart  00:34

And great to be here. Mike. We are coming on the tail end of the Minnesota summer continue to be very enthusiastic with our level of activity right now. It’s keeping us away from, you know, the lake and the golf course. I’ll tell you that much, but that’s a good problem to have. And excited about our topic today, Ryan, what’s going on?

Ryan Barnett  01:04

Yeah. Hey guys, really excited. And thanks to all the listeners out there. If you have a topic that you would like to talk about, best to hit us up at info@revenuerocket.com, we talk about all things that related to IT services and M&A and how you can use mergers and acquisitions as a tool to accelerate your growth, as well as strategy in IT services firms. You know, Matt mentioned, you know, we got a few few pro projects. If you look at our website, you’ll see in our current deals, we’ve got project and terrorists and project neutron, Project Neptune. These are all companies that we’re representing to the market. And in some levels, when you look at this, we’ve got a lot of action. And if you look as a buyer, that’s out there, there’s some great opportunities. But one of the things that we’ve noticed in this process, and as we’ve talked with more companies and more and more firms, when you have a lot of options, you start to treat things a little bit differently, and it almost feels like sometimes guys that that, it feels like we’re almost selling cars instead of selling companies. And today, we’ll want to kind of back off, back and dig into, you know, sellers don’t really agree with that. And we kind of want to get into that topic, that when you buy a business, it’s not like buying a car, and that it’s there’s much more to a process, and sellers are a huge portion of that. So Mike, why don’t you get us started and just, you know what? What’s the attitude here and what, where, where do we get going? I mean, when you think about all these listings, how can a firm start to look at this in a strategic way?

Mike Harvath  02:47

Well I think it’s important to note that you know, when you’re contemplating an M&A transaction as a buyer, it is about a partnership, and it is about likely a long term partnership, one that will be a material investment for your business or group of businesses, and one where you hope that you can get to a place together that you can’t get apart. What that means, by definition, is that it’s a complex transaction. It’s one that has to align to your business strategy, to your culture, and it has to align for all parties financially. What it what it means that it’s not is? It’s not a transaction, transactional deal. It’s not a commodity that you’re buying. You can’t, and shouldn’t put forth an offer in a haphazard manner, or ask for materials off the cuff that would allow you to put forth a number. And the reason why that is is, I think you know, for all the reasons I just talked about, I mean, it is a, usually, a big decision, and one that has material implications for the business that’s acquiring and selling. But more importantly, you know, you’re entering a partnership with someone, even if they’re selling out and taking over their employees and customers, and that should be done with a lot of thought and purpose and investigation, not like you’re buying a car or buying a commodity. And I would hope that our listeners that are out there think of it the same way, because if you don’t, you’re very unlikely to be successful in acquiring any company, because the time taken to thoroughly investigate that firm and its intentions and determine whether there’s alignment around all. These three key pillars that we just talked about is critically important.

Ryan Barnett  05:07

Yeah, thanks for getting this going here. Mike, I like the concept that it’s much more complex than a transactional even though it is a transaction, that it’s truly the unique and the most unique I’d like to dig in and perhaps start on the other side of the fence, which is when a company decides to go and go through a process. Matt, what’s the mindset of that seller when and then choose to go to market? And perhaps can use the scenario of they’re going to market with a company like us who is an M&A advisor. What are they thinking about when it comes to relating to buyers who are looking at them, what concerns they have about buyers and what, you know, what it seems like we can’t just show up with a bag of money and just buy you anything we want. What’s the mindset of that seller?

Matt Lockhart  06:04

Yeah, I mean, it’s hard to generalize into one bucket, but, you know, I think that you know first, and this is very common in tech enabled services that you are dealing with A lot of founder led sellers and or, you know, situations where there’s partnerships in play, where they built a business together. And, you know, they’ve gone through the the blood, sweat and tears of building a business. And for all the listeners out there, and I’m sure many have been in that position before, where they they’ve really gone through the both the ups and the downs of building their business. They’ve built a team that they feel very strongly about. Oftentimes, you’ll hear sellers talk about their teams as an extension of almost their families, right? And they positioned a great service or product plus service, and have really, really valued customers and valued relationships. And so at that point in time when it when they’re ready to look at a next chapter, I think it’s important for buyers to keep in mind some of those you know that situation where a founder is is both going through the steps of change right in in thinking about selling their business, but also thinking about what is going to be best for what they built. And oftentimes, you’ll hear us say almost every time shoot, probably the most common thing that we talk about on this podcast is our job is to help sellers and buyers find the very best cultural fit, strategic fit and financial fit and All of those things really need to come together in a way that that makes for a win, win win scenario for both the buyer and the seller. So certainly, the the financial aspect of a transaction is is absolutely critical. And however, there are the, you know, those other parts are, are absolutely critically important as well. And so a seller isn’t going into this thinking about, okay, hey, you know, what’s the, what’s, what’s the deal that I can make, and how quickly can I make the deal?

Ryan Barnett  09:09

I think something to add upon that, Matt is that when sellers are going through this to your point, it is, it’s, it is a creation. And what they’ve done is they’ve taken their creation and they put it, kind of make it in front of the world, at least under NDA, but at least in front of other people. And it’s, it’s really something that is hard. So oftentimes you’ll get just a comment from buyers, and oftentimes this is, I don’t want to generalize too much, but oftentimes financial buyers are, we’ll just see Hey NDA and CIM, and that’s kind of the response that we get. And I want to challenge buyers that are out there that when you when you ask for things, without understanding the value that you bring as a buyer, just. Digging into the next level without actually understanding the journey that that seller is going through at this time, and putting a company kind of on display and trying to make sure that they are finding the right fit to almost dismiss the go straight to the CIM. It can be a challenge, also, when you’re looking as a seller in that that happens. Mike, I love to get your opinion here. If you don’t have the conversation the right thing, and you’re just going straight to maybe the test drive of the car, you miss out on some nuances and understanding of why a company is brought to market. Mike, why is it important for someone to to talk to an advisor or talk and learn more about a firm before digging in and seeing and seeing a CIM?

Mike Harvath  10:54

Well, I think the backstory is always relevant, right? And I think a knowledgeable buyer who does this or has done deals before, understands that these are back to my point earlier, complex transactions that are not commoditized. There is no one size fits all M&A transaction. There is no one value that a company commands, even though there’s a lot of discussion that goes on in any circles about multiples of EBITDA and what a multiple should be, and once in and out of range for a particular company at a particular time, what actually comes down To there is that the actual value of a company is when a willing buyer and a willing seller come together to agree on price and terms. And that’s not necessarily based on any particular formula. It has a lot to do with the synergies of a particular company with another one. Does it align? Well, are there places you can go together you can’t go apart? Are there things that can create value in a business that maybe are not foreseen or even portended in the sim, that a buyer should contemplate when speaking to an advisor who’s representing a firm to market. And you know, as I often say, we have the luxury of perspective, right? We have a perspective because you don’t really have a horse in the race and a combination of companies. I mean, certainly we get paid our professional fees for the work we do, but we don’t. We’re not a party to the transaction between two companies. So we can talk about what makes a strong, strategic and cultural fit ahead of time with a potential suitor for that particular seller, and we can vet whether there’s a good alignment or not that may not be just communicated clearly or if at all, with the offering documents. And so taking the time to thoroughly understand whether a pursuit as a buyer of a company that’s represented by an advisor. As a seller really makes sense. Before digging into it, can save you a lot of time and money and energy. And frankly, if I’m a buyer, I want to be an efficient buyer. I only want to look at companies that line up where, you know, we can get a one plus one equals three or four one that is a good fit for my business. And frankly, I would want to be challenged by an advisor to articulate my benefit as a buyer in a particular deal that’s represented by a seller, to see if it’s actually going to be a good fit or not. And that happens through that qualification process, if you want to call it that, or conversation about a particular seller with a competent advisor,

Ryan Barnett  14:11

I think that the confident advisor part is huge, if you it puts the nuance of the firms you’re working at. So listeners out there, if you’re working in an IT services world, they want to make sure that you’re the company that you’re working with, put together things like offering materials are going to be resonating with buyers that are in that space as well. In general, we’ve seen generalists really fail at this point where they just don’t understand the key metrics that might be needed, for example, in a managed services deal compared to a general deal. So if you are on the buy side, and you see a company that you’re interested in and they have expertise in that market, it exponentially helps the buying process. Is if the the sell side representation is knowledgeable about the space. So work, always work with someone that knows the world that you’re at. Matt, I’d love to understand that you worked a lot with sellers and and I’d love to understand what are sellers looking for when evaluating buyers, and when they have some of that first introduction, and what are the what are some of the things that a buyer needs to establish to be into serious, considerate when a process starts?

Matt Lockhart  15:39

Yeah, well, let’s go back to that cultural and strategic fit. I think that sellers are oftentimes most interested in understanding that even before understanding the financials, right, the as a competent advisor we’ve guided, you know, our clients into realistic expectations in terms of value. And it’s always a range, right? Because, you know, the the ultimate value is determined, you know, via that, that strategic and cultural fit, and again, going back to the concept that they’ve you know, the seller knows that what is going to be best for their organization and their people, and equally important, their customers is the right buyer. And so it it takes time to learn about that, about that buyer, their management philosophies, their practices, the alignment of of offering that you know plays into that strategic fit, the opportunity for growing together, you know, just a whole host of things. And then, and then, you know, building a bridge and building some relationship. And because, you know, ultimately, at the end of the day, at some point, there’s likely going to the seller is at some point, likely going to be walking away, even if they’re even if they’re selling in right, at some point they recognize that they are, you know, going to be letting go and and They want to know that the people that they’re dealing with are, well, simply said, good people and and are going to be good. And, you know, because the the worst thing in the world is, is, you know, for a seller would be to, well, I sold my business and, and all of a sudden, you know, my, I had great relationships with customers and great relationships with employees and and, and, you know, the relationships have been hampered because of who I sold my business to. You know, that’s kind of the worst case scenario, right? So, you know, it’s relational. It’s, it’s a bit of trust building, and then it’s, you know, understanding the picture of the future, or the potential future based upon, you know, the scenario of the buyer and and again, those cultural and strategic fits, really,

Ryan Barnett  18:41

that’s a great, great point, Matt, either I’ll open up to either of this. Have either you seen some stories here of of kind of immediate turn offs for sellers that have come from buyers?

Mike Harvath  18:57

Yes, I think oftentimes people that come forth with too much hubris about how to run a business or how to and are not seeking to fully understand the business model. That’s a big turn off for sellers, right? Sellers need to know that a buyer is Low risk, low risk for their employees, low risk for their customers, that they can bring forth an open mind versus a closed mind about how to do things, because it all pertains to the likely success of post merger integration. So you know, we’ve certainly seen buyers that come in with too much attitude about their success pre in the past. And whether that’s, you know, factual or perceived, and what is the right way to do it. And that can be reflected in some of the questions they have for the seller, and how they determine their response to those answers of those questions can certainly be a turn off. I think, as a buyer, the advice I would give you is, you know, keep an open mind and understand. Try to seek to understand and be a stable force for that understanding, and see if there’s good synergies there or not, right? It’s okay to come away from a meeting and say, yeah, probably not a fit, probably better all the way around, versus, you know, wasting a lot of time or thinking that you’re going to add such a risk premium to your offer because you feel it’s not a fit, that it’s just not competitive. And so I think the approach of the buyer in looking at any company that they’re contemplating acquiring has to be, you know, one of acquiring minds and trying to see how a one plus one could equal three early through the answers of that seller and what they built, and know that that seller is being just as critical of you as a buyer. Remember that If they’re running a process with a company like revenue rocket, they may have hundreds of interested buyer, so you’re competing with and in that situation, they have choices, right? And you know, if you’re really interested in that particular company, you have to be looking for where those unique points of light are synergies. Otherwise you you you could be a great suitor, but you may not be successful because there was someone that you know wasn’t, quote, unquote, a better fit in the end.

Matt Lockhart  22:12

So I’ve had just recently, yeah, scenario where, no, you know, we we shared our teaser. And I think everyone knows that teaser is the highest level of information about a potential opportunity. Call it the sort of the landing page, if you will. And you know, I had a subsequent conversation with this, with this potential buyer, it was a financial buyer and and then all of a sudden, there was a term sheet that would didn’t ask for a term sheet, right? They didn’t have any more detailed information. They didn’t have they hadn’t gotten into a work site, right? And, and then all of a sudden, you know, comes across a term sheet. And the the seller was like, Well, who are, what, right? How could they? How could they make a term sheet off of a teaser and, and one conversation, right? And so, you know, that’s probably not the, not the approach to take. And, you know, I think that that another sort of common turn off, if, if you, if you sort of go down the steps, right, and, and if you have a buyer has seen the confidential information memorandum and and then you’re, you’re setting up an initial introductory meeting or a fireside chat. I will, I’ll guide buyers that that is not the time to try to make a deal. We oftentimes we see buyers who, you know, within 15-20 minutes of an introductory meeting, they’re they’re they’re wanting to try to negotiate a deal and and that that that usually doesn’t come off so well either. So in general, and certainly not to toot our own horn, because, you know, you work with a lot of credible advisors. But, you know, ask the advisor in terms of what is the best way that that a buyer may be able to put themselves in the best light of a particular seller, and you know, that’s what we’re here to help both sides come together.

Ryan Barnett  24:48

It’s such a great point, Matt, this is, it is just to reinforce and to summarize a bit here. It is a two way process, and there is a equal. Eight, if not more weight to the seller in a process. Right now is that the you sellers, you you have a lot of control in this process. Yeah, I’ll just, just put that out there, and you’ll get, you’re gonna want to talk to a lot of people, but finding that fit is important. For example, buyers that you take that introduction call is something that is critically important and that could set the tone for everything moving forward. Don’t take the call from your car. I mean, we’ve seen it happen, but buyers, you have to be in the in the selling seat the second that you start to have introductions with the firms, and that goes all the way to an introduction with the broker, like revenue rocket to the your first meeting, and even evaluating the materials. I heard guys that this is, you know, every firm is unique, and it’s a something that you have to take time to establish the best or to understand the strategic bit. What are you going to do with the company? The understand how the they’ll fit culturally, and then ultimately, if those two work out financial fit, should be part of that. I heard that sellers should, you know, ask good questions of buyers and understand the fits of where everything’s comes together and how they can best work together for a deal. You know, buying a company is not like buying a car, not at all. Matt Mike, I’ll let you kind of close out any thoughts or any additions that the who’ve gotten this topic.

Matt Lockhart  26:43

Well, you know, Mike, I’ll steal one of your lines. It’s, it’s not a Turkish bizarre, is it? You know, I think that putting all sort of jokes aside, it’s a, it’s a very, very important and serious business decision on the part of of sellers, as well as it is on the part of buyers. And so, you know, go into it with that mindset, build some rapport. And I think that chances of success will certainly be increased, Mike?

Mike Harvath  27:32

Yeah, I would agree with that. Matt, I think it’s really important to recognize that, you know, this is a, I’ll use a term that you use a lot, building a bridge, right? You want to have a clear path to the synergies, and that takes time and energy, and you’re contemplating a relationship that can be very successful and fruitful or very costly if you don’t take the right amount of time and energy and diligence, if you will, to come together to find common ground. So with that, we’ll tie ribbon on it for this week’s Shoot the Moon podcast. Certainly encourage you to tune in next week when we bring you more hopeful, thoughtful topics around M&A and growth strategy in the world of tech enabled services make it a great week. We look forward to you tuning in next time you