Consistency in an M&A Process

Consistency in an M&A Process

Shoot The Moon
Shoot The Moon
Consistency in an M&A Process

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Mike Harvath  00:04

Hello, and welcome to this week’s Shoot the Moon podcast. broadcasting live in direct from Revenue Rocket world headquarters in Bloomington, Minnesota. As you know, you’re a regular listener of revenue rockets podcast. We are the world’s premier real strategy and m&a advisory firm for IT services companies. I’m happy and fortunate enough today to have my partner’s Ryan Barnett and Matt Lockhart, with me for this podcast. Welcome, guys.

Matt Lockhart  00:33

Hey, thanks, Mike. interesting topic here insightful, around measuring your m&a efforts with consistency over time, usually is the right strategy to find the right opportunities and make them pay off. And, and I was sort of thinking as we’re, as we’re rolling into the holiday season here, sometimes that’s difficult because of the fits and starts that are natural in the holidays. But it’s about getting her done. So good topic.

Ryan Barnett  01:08

Thanks for having us. And thanks for being here, Matt and, Mike, that consistency is important. And it’s a a bit of a blend between the person who’s helping to get near him and m&a deals done. That may be you or it may be an advisor, and that it could be the targets that you’re working with. And it could be just the process overall. So Mike, just turn it over you on general thoughts on just get us rolling on the topics.

Mike Harvath  01:36

Yeah, for sure. You know, I think in this is probably, you know, certainly this advice applies to both people that are buyers and sellers, of IT services firms, tech enabled services firms, but in some cases, more buyers. You know, it’s interesting when you know, someone engages with an advisor, to do outreach and to run a process for them. Certainly, they naturally want to move quickly, right? Because that time you’ve made the decision that, hey, we want to go buy a company, and we want to work with someone that can help us kind of throughout the entire journey, you want to identify targets as fast as possible. And you want to move them through to close as quick as possible. And I think it’s very challenging, in some cases for you to be patient, as a client who’s looking to buy a company, entrepreneurs in general, and particularly those in our industry, tend to be guys and gals who are action oriented and generally want to get stuff done right now. But m&a is one of those things, particularly in sourcing potential targets, were taking the time to get that right and let that process play out, particularly in the sourcing phase or finding targets to acquire is critically important. You know, I would say that really on both buy side and sell side, but particularly on buy side. And there’s a natural momentum happens as that work stream starts, that you have to allow to kind of get moving in order to have choices, because it’s most important that as a as whether you’re selling or buying that you have choices and choices come with time, the more time you give it sort of in the sourcing phase of finding targets, the more choices you have, and typically the better choices are sort of the cream that rises to the top.

Matt Lockhart  03:38

You know, it’s interesting, Mike, you mentioned that patience on the sourcing on the buy side. Well, you know, it’s, it can be true on the sell side as well. I know, we’ll get into, you know, sort of structured process versus longer term processes. If sellers are looking at strategic opportunities. You know, sometimes it takes time to find the right strategic opportunity that is going to be the best fit that will allow a seller to sell in and, and grow with a firm. And so yes, totally applies on the buy side sourcing but oftentimes can apply on the other side on the sell side as well.

Mike Harvath  04:24

Yeah, I would I would agree with that. I just to add a comment, I think better the more time you provide, the better, more fortified the choices become. And I think from a budgeting perspective, you know, I would sort of recommend that people think about this whole journey taken about a year. You know, it can take longer, it can be certainly shorter, but you should have your head around that. And the reason why I say that is because you know, it’s gonna take 90 days in some cases 120 days from the time you get to a letter of intent to close anyway. And so that sourcing fees and your ability to find high quality targets, and companies that you’re going to potentially combine with is pretty critical. And I think it’s gonna line up, like we’ve often said, you know, strategically, culturally and financially, and the more choices you have, the better. And so the more time you get, the more patient you are, the more choices you have. And I think that’s just, I’ll keep beating that drum because I think if you’re a buyer or seller, I think anyone would say, hey, if I give it you know, an extra three months or six months, you know, to have more quality choices, that’s probably time well spent.

Ryan Barnett  05:46

I guess if we, if we break this down a little bit into a few phases that are important with m&a, and where buyers or sellers are really being consistent in some key phases are your origination. And that includes a, I’d say, research and outreach. You’ve got your negotiation or loi phases, and then you’ve got your due diligence phase, can you be give some advice on when you’re starting to look at an ideal prospect profile, how that may evolve after your first few attempts, and what’s important for in this case, a buyer to perhaps look at the targets in a different ways, and once once a few things are discovered?

Mike Harvath  06:31

Yeah, I’ll take a run at that. Matt, I’d love to hear your opinion. You know, I think oftentimes, when you come into the market, as a buyer, you have or even a seller for that matter, you have a preconceived notion as to who is the ideal target, who would be a great company to buy. The problem with that is depending on how specific that IPP is in narrow, you might not find a whole lot of companies that fit that profile, particularly if you’re upmarket. And what I mean by that is, the larger the firm gets, actually the fewer the targets that are going to be presented. So it becomes challenging sometimes to say, hey, we want a large company with exactly these attributes, the list can be pretty short, it was oftentimes better in our market, in our industry, for you to focus on firms where there may be more potential targets and be able to see how you can put several of those deals together to get to the same end game. And you may not discover that until you’re into the process. And so, you know, certainly you may find that you get into the process, you find your ideal prospect profile right away. And there’s, you know, choices there. There’s multiple choices, it depends certainly on the nuance of the specific micro market within tech enabled services as to whether there’s lots of targets or not many targets, you certainly see that to be quite variable, depending on your focus area. But being in sort of taking a learning approach to that outreach, certainly will help you be successful and being flexible about how your target and to the IPP will be super helpful, I think in the long run.

Matt Lockhart  08:24

You know, Mike to add on, I think that the process of understanding and courting, but you know, beyond sourcing can take some time as well, to ensure that there’s really that good fit and balancing that against a party who is is interested and and demonstrating progresses is a combination kind of art and science. But you know, there’s there can be time to ensure that it’s the correct thing to move forward towards that letter of intent after that after that courting period. And so giving that the adequate time is super important, right? Oftentimes, it’s that that courting period where you’re really lining up that there’s a good cultural fit, right, which is so important, obviously, in this IT services space to ensure that one plus one can equal, you know, four or five, six. Right? And so it’s it’s I think being measured, I think that the other thing kind of going back to that that sourcing phase is we’ve we’ve seen firms that that sort of stop and start in that process. And that’s a you know, that can be a real challenge, right? Is, is sort of that stopping and starting because, well, sourcing is the grind. I mean, it’s a real grind, and we know that Ryan often uses that analogy of the duck paddling underwater and yet seeming so calm on top well, that paddling underwater is a lot of work and, you know, getting people interested and, you know, probably a good reminder that the best firms to buy are the firm’s that are not for sale today. And so staying consistent with those prospects, and over time is, is, is really part and parcel to, you know, finding success of getting people interested.

Ryan Barnett  10:27

I’d like to chime in on on the origination aspect specifically, it’s, I think, oftentimes one, if you present a firm with a list of prospects, there’s a lot of excitement that comes with that list, hey, I’m gonna go after and target and, and you’ve come to consensus on what could be possible, it’s really fun to to get to a place where there’s excitement building towards what could be. And then it takes a lot of work in order to find a seller that’s willing to have a conversation. And it really in the same same goes with the sell side, it takes a lot of work to find buyers that strategically get your initiative. And some of that’s very, very tactical, in that you know, one of our stats that’s fascinating is, if you look at our call rates, and you look at the what we call a successful sign up in which someone looks at a, and willing to have a conversation with one of our principals to move forward, it takes over 11 attempts just to say kind of get them on the phone to agree to talk to someone. And that’s if things go well. So it’s fairly common for us to have have left 10 to 15 voicemails, and left two to three email messages and LinkedIn and sometimes a carrier pigeon, to get a hold of someone. And oftentimes, is something that we internally struggle not struggle with. But it’s part of the the approach here. I certainly know if I called my sister, I don’t think she’s going to call me back. If I think about that, as a stranger calling another stranger and trying to move forward and make big decisions. It can take a lot of effort in human human connection to move things forward. But that’s actually after you’ve got an ideal prospect list. And if you think about building a list, each firm has carefully curated each firm, to look for strategic fit for geographic fit for size, fit for management, intention fit for cultural fit, all these things before it’s ever put onto a list to even to move forward. So to your point, Matt, that the legs are definitely pedaling along in a lot of things that are somewhat probably underappreciated into the actions that go into building a long, long, long term relationship with whatever target that we’re on the phone with. That grind is worth it when we start to move forward, but in the meantime, can if it can often feel painful.

Mike Harvath  13:05

I’d also like to do a little myth busting here. You know, I think a lot of folks when they think about doing outreach come to a firm like ours and others that are focused on the vertical in the space. And believe me, we just have this huge list of firms that are dying to sell or dying to buy companies just like what is in your ideal prospect profile, or your profile if you’re a seller. And that’s really not the case. And the reason I say that is because certainly we have friends of the firm where that is the case. And we put those guys into the process on every campaign that we do early on. But the nuance of the connection, and the timing, and the intent of all parties. All has to be vetted all the time. So it’s not a static scenario. It’s not like because we talked to someone two years ago, and they were interested in being a buyer of a firm like yours if you’re a seller or was interested in selling at that time and hasn’t sold is interested in selling now that’s not the case. It’s a it’s a vibrant and ever changing market, companies get bought companies get sold. Sometimes owners of those businesses change their mind about what they want. Sometimes they’re in a very different place, right? From where they were, they may have grown materially or shrunk or had a death of a leader or I mean just a lot of dynamics in the marketplace that play into the vibrancy of the target list. And so they all have to be really requalified and sourced pursuant to your campaign when you initiate it. And all of that time and energy does take time. Now, that’s not to say that being focused on a market that way we are, that we don’t have a head start compared to firms that don’t verbalize or don’t focus on our market. I think we absolutely do. And I think we do outreach and marketing and pipeline building better than anybody. But it does mean that, you know, as you’re thinking about engaging with a party, whether it’s us or anyone else, that they’re telling you that this is going to be easy and a quick process, and that they got a long list of potential targets and all that stuff, you really need to be challenging some of those statements of assumptions because you do have to sort of till the field every time and certainly all wish it was easier, but it generally isn’t.

Ryan Barnett  15:51

I would note here that one thing to be cognizant of is, right turns are difficult compared to veering off the path. So if you’re long, and this is especially true on the buy side, but seen on the sell side, too, if you are have a target in mind and change your mind, it is effectively starting over. It’s not the worst thing in the world, it’s you. The problem is the momentum that is done and that that chain of voicemails outreach, all those things, if it’s a brand new set of targets, can derail. So there’s part of this, if you are going to look at a target market, be careful in the approach as you adapt, and you learn more about the next target that you’re going after. And that you have added, say a willingness to consider even firms in the past that may have been a part of an older strategy that you’ve evolved, those conversations still have legs, at the end of the day, you’re going to find out who’s selling and who’s willing to sell. And understanding the propensity for them to do a deal could be great in a evolve strategy or an original strategy. Guys, if we take it to the next step, and you think about perhaps consistency and an offer, or their IT pieces of advice, we can think about were working through an LOI or even working all the way through the definitive agreement. And what’s the importance of showing up and what’s important of being consistent in communication and kind of negotiation with firms.

Matt Lockhart  17:30

Super important, even sort of consistency of your emotion and or composure throughout the process, knowing that there’s always going to be disagreements or things to get figured out. And the idea of of a letter of intent, I think the most important word in there is intent that both parties truly have an intent to come together. And I think that that that’s oftentimes overlooked. Now, we don’t, you know, we advise accordingly. And as part of the qualification process, and we’re dealing with serious people, we’re not dealing with tire kickers, right, but you’ve got a consistency of intent, you’ve got a desire to come together. And so you’re measured, I think that having a consistent schedule is super important sort of post letter of intent, and, and everybody’s got transparency to that. And that, you know, your intent is to keep the deal as close to the terms that have been agreed upon as possible. Now, obviously, there’s always variables that come up in due diligence, but I think that just the intention of being consistent, consistent to schedule consistent to the intent consistent in your desire to come together is just a it makes things a heck of a lot easier and a lot less painful. And B it’s going to increase your chances of success. Mike, you’ve seen it a lot more than me.

Mike Harvath  19:06

I think it’s easy to, you know, it’s called the most unnatural act in business for a reason, right? There’s a ton of moving parts here. Why the business case for an advisor to help guide you is critical, because it’s not some of these things will seem unnatural. And I think it your ability to follow your advisors lead on kind of getting things put together and negotiating them because there’s hundreds of things negotiated to get through the definitive agreement. And being consistent with your approach and to your point man with your emotions is important, critically important. Remember, you’re trying to build confidence as you build the relationship and do the due diligence activities that are required to vet that either you’re buying is who they say they are. And then they fit along our three pillars of, you know, strategy, culture and and in finance, or, you know, if you’re a seller, your buyers trying hard to get to know you determine your sort of working style and bet all three of those things as well. And there’s a ton of time and energy that’s put into each one of those areas. But most notably, the finance fit to make sure that there’s comfort on both sides of the table, that the deal will be successful post transaction. And so being able to be responsive and consistent, and being able to deliver what you say you’re going to deliver, when you’re going to deliver it, whether that’s a commitment, for items and due diligence, or whether that’s a set of performance metrics, if you’re a seller, it’s very easy for sellers to get distracted by a process that’s going on and allow the business to wane a little bit to not perform as well as, as it has consistently. We see that occur often. And I would just encourage you, if you’re contemplating a sale, and you’re going to be involved with one of these processes that you do not let that happen, the priority needs to be to consistently deliver at or above your committed targets while you work through diligence. And be consistent with your actions with a buyer and delivery and timing and and in managing expectations. You know, certainly if you’re a buyer you want to be you want to be consistent as well, in your asked in your analysis. And and follow a process that is proven, because we’re deals get sideways is when suddenly one side or the other begins to become inconsistent, or they start to get emotional. And so the advice would be steady hand on the tiller and be consistent and deliver and show up. And you certainly can then move towards I think a successful close.

Ryan Barnett  22:12

Yeah, the other element that comes with that. And consistency is you’re building a culture and cultural alignment throughout the process. So as you meet with the leaders of a an acquiring firm or firm you’re acquiring, or you’re building that relationship with the firm that’s acquired and yours, how you do business and the beliefs and norms that you put together for your team, those start to meld together. And that moves into, I think a more formal post integration in which may take a look at how combined firms truly meld together from culture and what aspects are critical to keep from each firm to maintain the success of each firm. And being consistent in showing up and understanding and learning what the future holds for both of you in a combined entities is important throughout the entire process. Today, I think we’ve kind of hammer this home, you want to show up consistent through the process. And that could be tactical, could be emotional, it could be just in general, I think it’s important to to keep things moving and ensure that there’s understand the gaps in time, lead to lost momentum and lost momentum can can further expand a project can learn that there’s value in the transparency that your advisor may have in in how they’re reaching out to to help you show kind of the paddle underneath the water compared to the smooth dock. And there’s ways that you can bring a deal together in a consistent manner that will help everyone girl, Matt, Mike, any parting thoughts?

Matt Lockhart  23:57

Good topic, Ryan. I think embrace the grind, embrace the grind. And just a reminder that top quartile firms have an ongoing m&a strategy. I mean, it just it is what it is. Right. And it’s not something that stops and starts. So keep that in mind as you as you’re driving your firm into that top quartile. Mike over to you.

Mike Harvath  24:24

Yeah, I would add also that, you know, picking your partner is an important component of getting that right. You know, the best partners are very transparent with their entire process, their approach their tools, so that you can have confidence that they’re in the market doing it in a meaningful way. We think companies that provide a black box that aren’t that transparent, certainly are proven to be less successful than those that are and create a lot of challenges for you. I think as a customer, in looking at how do you work with them, I just tried to walk a mile in the shoes of all of our clients and and for me, I certainly would want to know, you know, who our partner was targeting and where we were in the process and, and kind of regular status meetings on all of the activity that had occurred since the last time we had had a conversation. I think it’s your advisor should be held to that standard. And I would encourage you guys to find advisors that do that would be the only thing I would add. Think as a takeaway, you know, it’s really all about patience and consistency, you know, the m&a process. To Matt’s point, you know, the best firms consistently do this are certainly in the market, from a buyer side perspective, all the time. And sellers when they move forward with exiting, do so in a way that is consistent with optimizing your firm’s value and working with partners that have a proven track record of actually getting deals done. Super important stuff. So that will tie a ribbon on it for this week’s podcast. We hope that you’ll tune in next week, when we’ll talk about more kind of relevant and exciting topics around the world of m&a and growth strategy for tech enabled services companies. Thanks and make it a great day and a great week.