Fielding an Inbound Call from a Suitor

07 May Fielding an Inbound Call from a Suitor

Shoot The Moon

Fielding an Inbound Call from a Suitor

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EPISODE TRANSCRIPT:

Mike Harvath  00:06

Hello and welcome to this week’s Shoot the Moon podcast, broadcasting live and direct Revenue Rocket world headquarters for our regular listeners on you, even if you’re new to the show, Revenue Rocket is world’s premier growth strategy and M&A advisor to tech enabled services companies. With me today on this fine sunny day in the Midwest are my partners Ryan Barnett. And Matt Lockhart. Welcome, gentlemen.

Matt Lockhart  00:34

Thank you, thank you. Yes, it is fine days, matter of fact, not a cloud in the sky. I think it’s representative of what we’re seeing in the market these days, guys that the clouds are dissipating. And people are getting out. And they’re they kind of got you know, it’s that up here in Minnesota wanted hips, hips, 60 degrees, people got to jump in their step. And, and we’re we’re seeing that in the market overall. So it’s a good time, a really good time. And now I hope everyone did well on their on their March Madness, brackets and time to get down to business. Right, Ryan?

Ryan Barnett  01:20

Absolutely. And thanks for setting us up here in Matt, and thanks for joining on podcast here today. As always, we love talking about topics that interest you, and out there in the audience. And you’d love to have something covered, please let us know at info at revenue rocket.com. We appreciate it. One of the things we talk about is Mike mentioned, we’re a m&a advisor for IT services firms. And we were both on helping companies acquire other companies, as well as helping companies sell when when the time is right. When we’re on that helping companies acquire, we oftentimes call that buy side work and we’re, we’re buying and on behalf of the buyer working with them. And when we’re in that biocide, motion, if you may, we we tend to call companies that are unrepresented by a broker and are usually not for sale, or at least they think they’re not for sale, when we first talked to him for the first time. And we want to talk today about how should you if you’re, you take a call like from a buyer like ours, like us, or if a another strategic company? What kind of things should you do? You know, why should you take the call and? And why does it matter to take that call? And eventually, what kind of help do you need along the way to make it a great process for you? So, Mike, I’d love to get to, you know, maybe get us started? And just get us going and why this is important topic. important topic today. Should you should you work for someone and work with someone and know, how do you feel an inbound call from a suitor?

Mike Harvath  03:11

Yeah, you know, it’s interesting. We have certainly talked to literally 1000s 10s of 1000s of companies over the last 24 years since we started the firm about selling their business, right, we’re calling in on behalf of a client who’s hired us and we hear some very interesting responses. And so, you know, we wanted to spin off this topic, so we could help coach you guys a little bit. Typically, you know, when you pick up your phone, and there’s someone like us, or maybe even a competitor, you know, a strategic buyer or maybe it’s a financial buyer, and we’ve talked to those differences and other podcasts encourage you to look those up and take a listen. You need to first sort of understand a couple things one, based on their introduction, is this something you want to learn more about, right? Is this something that piques your curiosity? Hey, could I be a seller now? You know, maybe maybe it’s the day that a rough one and you decide to sell and you’re thinking about selling out or maybe it’s hey, I need more capital to expand my operation. And that’s I want to be part of something bigger. But either way, you can give clear direction to whoever that is calling in and based on their profile based on their ask. It’s sort of based on where your head’s at. And I think early on, you want to try to vet are these guys serious? Do they represent a buyer or are they The buyer themselves. So it’s a question you want to certainly get answered. And if they’re a buyer by side and representative, you know, how credible Are they really in the market? Are they representing a real client? Or is this what’s called the infamous bait and switch to try to get you to be a sell side client of their firm? I think you can ask very pointed questions about the type of firm the size, a firm that’s looking to buy, the type of acquisition they’re looking for, to acquire, the size of that the intent of the owner, all those things are probably reasonable questions to ask, a buyer or a buy side representative? Obviously, the flavor of those questions is a little different if it’s the actual suitor, or if it’s a representative. But you know, understanding that there’s serious understanding they are either representing a quality buyer or our quality buyer themselves, is the first step to sort of engaging in a conversation. I think, almost always, it’s appropriate to not disclose too much information, other than maybe your general size, and what you do and who you do it for stuff that’s publicly available in that first call. And if there’s interest, and you deem them to be qualified, or at least qualified enough to continue the conversation, then you should ask to put in place a nondisclosure agreement. That is sort of standard practice, you know, managed by most buyers and sellers, put in a nondisclosure agreement so that you can schedule a follow on conversation to further that discussion. And I’ll stop there and turn it back over to you, Ryan.

Matt Lockhart  07:00

Well, you know, I’m gonna jump in real quick, I’m sure that 90 something percent of our audience today is getting, oh, five of these calls a week. It could be three, right? It could be 10. But you all are getting these calls. And that’s, you know, it’s part and parcel of the business you guys are, you know, everyone, this is a great space to be in. I think maybe even before going into what was just great advice by Mike, if it’s not a possibility at all, right? Then tell people and it’s go, look, it’s just not the right time, for whatever reason, you know, the business isn’t in great shape, you know, and and it’s just, it’s not the right, or personally, it’s not the right time. Don’t Don’t waste your time. If it’s 100%, not even in the in the scope, right? Because it can be a distraction to your business, quite honestly. And, and this is what we do, right? So we want to talk to you. So we’re calling on you, right? And then just give John, our outreach experts. It’s like, hey, it could be viable in a year from now. And we’ll call you back in a year from now. That’s all that’s cool. But I just I think it’s important to point out anytime you engage in these discussions, it becomes a, you know, something that you’re spending time on.

Ryan Barnett  08:35

I think that’s such an excellent point, Matt, it’s there’s rarely a call that we started to doesn’t say you’re the I’ve talked to a number of you this week, or a number of people have reached out. And and part of it is it is our job to find the right fit. And sometimes it’s just that we’re where you mentioned that if we can just get some understanding of where you’re at. It’s not intention, I think, for anyone to bug someone to death or convince you to sell your firm. I think that’s a decision that you have to come to yourself if you want to entertain these processes. I think both of you, Mike and Matt you both in previous podcasts and just in conversation have really noted that you’ve got to have a strategy in your mind. And at all times. Like you should always be ready to engage in a discussion almost very similar to someone who is employed and the firm should likely have a resume ready as you never know when that resume being needed. In some levels a consideration of taking a call like this it you should be have something a little bit ready and sometimes that might simply be I’m not ready to have the discussion today. And and I’m but I thought about it. So I’d say step one even before he any of these goals, I think it’s helpful to understand what you want to do, and have some planning and exit planning and financial planning in mind to help make these calls worth or take field some of these calls that come to our job. Yeah, okay, fine. But Mike, Matt, I think that’s really a great introduction to both of these. Maybe Mike maybe can tell us about what happens in a process. Like, if a seller says, Yeah, I am interested, what does that look like for them? And what you know, for even from perhaps a tiny timeline to expect, and I’ll highlight this, like, if we’re on the representing a buyer, we typically have someone that is at a very introductory call that’s asking, Are you are you willing to have a chat? And then the second step for us is having that actual chat. The third step might actually be through an NDA in an introduction meeting with our client, but maybe walk us through a few other steps that is seller might experience if they do consider talking to a potential suitor?

11:14

Yeah, you know, I think what’s important to note is, you know, most credible advisors or, or suitors are going to want to have a conversation with you pretty early on about, you know, a system that were post MBA, at some place, they’re gonna want an overview of your business, they’re gonna want to understand your intent for the business, what’s been going well, what’s maybe a challenge where you could use some help in growing the business. And I think all transactions are potential transactions, I should say, in this case, need to line up and we’ve said this before, it needs to line up strategically, it’s likely your corner, quick serve restaurant owner, who’s calling you to talk about buying your business, you know, unless they have a material interest in experience, and IT services are already own one business. Strategic alignment might not be there. Right? So you kind of got to determine is there a pretty quickly? Is there a potential place you can go together that you couldn’t go apart? And that probably will, you know, further, you’re thinking about, well, this might work? Then certainly there’s the cultural aspect of that call? Is this a firm that shares our values for customer care and employee care? Is this a company that has built its business in a way that we respect? Do we know them? Do we not know them? You know, all of those things are important to sort of think about, and share your side of that story, both strategically and culturally, with that potential suitor, and then there’s high level financial data, which is pretty important to present. I think anyone that would contemplate a combination with another company wants to see, you know, are you running a healthy business? Have you had any challenges in growing that business? What’s the revenue and profit trajectory look like? You don’t have to get down and dirty and every number on your, you know, on p&l or balance sheet, we could do need to show some fairly high level directional numbers, to see that that’s a deal or opportunity that still potentially fits from that suitor. Interesting enough, a lot of potential suitors, particularly if they’re doing corporate development or outreach on their own, don’t do a very good job of qualifying a potential seller until it’s too late, meaning they don’t qualify them appropriately to be a fit strategically, culturally, and financially. They don’t talk about their intent around sort of multiples and what they wish to pay and, and so it’s contingent upon you as a potential seller, to try to kind of get to that conversation early. And make sure that it lines up, you know, not only with sort of market averages, but also that it lines up with your expectations, because you don’t want to waste a bunch of time here. And I think having, you know, some of those conversations about fit and finish and size, and expectations of value early on, is super valuable.

Ryan Barnett  14:50

I think leads me to a great question that Matt you might be able to help me with is if you’re having these conversations, and Mike you just mentioned that expectation Shouldn’t have value? Should a seller know what the firm’s worth or? Or you may? Do you need a little bit of help along the way? Or what should a seller think about when determining what the firm could be worth and, and go with that?

Mike Harvath  15:20

Yeah, well,

Matt Lockhart  15:21

it’s funny as, as Mike was talking, and you know, both Mike and I like to take the air out of the room. So, you know, I’m, I couldn’t wait to jump in, because I was like, Well, now’s the time that you need to talk to somebody who’s been there before. If you haven’t been there before yourself. And going back to sort of what I talked about earlier, it’s, it takes time. And so, you know, is that the right time to engage with a potential advisor like us? It very well could be? If you are, you are saying to yourself, you know, what, I didn’t, I took the call. I know I’m not on the market today. But it really spurred in me that, hey, it’s time for me to explore. And or, it’s time for me to get smart, and explore, you know, opportunities in in either of those cases. And even if you’ve been there before, but you haven’t done it recently, and or you still have a business to run it very well, maybe time to get help, even if that could be calling up. Well, revenue rocket and saying, Hey, guys, I am just starting to explore, or I am I’ve, you know, I’ve listened to your podcast. And I know, you guys know, and I’m, and I, you know, I’m starting to take these calls, I’ve, you know, pushed them off for years. And I would love to run a thing or two via and it’s like, well, of course, right? We, you know, we’d be happy to have that discussion. But when you think about you are starting to portray your company in a in a different fashion for a different purpose, right? How do you best portray that company strategically? Right? How do you best portray your culture? You know what it is? Right, but how do you communicate that? And what is the right level of information? Well, I mean, these are key considerations that, you know, are super important. And in you know, that very well may be time that you need to start working with somebody who’s been there before, that could be working in in, you know, sort of pre fi land. Right, and but just having that discussion. Now, it also sort of gives reason to have an ongoing relationship with the, with an investment bank and m&a advisor, right? There’s a reason to have that ongoing relationship. But certainly, the when you’re starting to share information, right? And you haven’t really, you know, lined up somebody lined up and advisor or at least have the discussions, right? Well, then you may be getting out over your skis.

Ryan Barnett  18:38

But and I think this, this happens quite a bit. So when we’re on the buyer side, and we talk to buyers, or sellers, and it’s there, maybe it’s their first time going through, or maybe they’ve even done a deal in the past. I think it’s a surprise to most of what the process what it takes to go through the process. And there especially, there’s, there’s learning along the way on, on how to convey the value of the business and the ongoing relationships and, and the continuity of the firm and the new buyer and, and you’re introduced with all these new, sometimes oftentimes new terminology, and everything from cap and baskets and illegal definitive agreement or working capital calculations, or even in owner ad back. And if you haven’t considered selling your firm before, you may not know what is known or bad back. Yes. And so when a prospective buyer asks for what are some of your add backs, it may be a learning education just even start on what is an add back. By the way, there’s plenty of podcasts that we have here that talks about how to backs and cap and baskets and all those things we just mentioned we’ve, there’s a lot of materials that you can learn from in this podcast alone. And I encourage you to To listen back, but it’s I think, oftentimes sellers are somewhat surprised that you get a cut of a number in your mind. And that number may not be based based in reality. Mike, what do you think about that?

Mike Harvath  20:18

Well, I, you know, I think everybody sort of has a number, right? You know, I think most entrepreneurs that start tech businesses say, you know, if someone would give me fill in the blank with a number, then I would contemplate an exit, I think, or oftentimes there’s a dissonance is that number may not be supported by the size, level of maturity or, you know, quality of your business, and you just have to be very understanding of that, in order to make an informed discussion or decision about, you know, what a what a fair offer would be, because I would hypothesize that unfair deals don’t generally get done on either side. Okay. So there’s, you know, unscrupulous buyers that try to take advantage of, you know, unknowing sellers, and they want to lowball and they want to try to, you know, do an unfair deal. But generally, there’s checks and balances in the system, like with your lawyer and accountant and others that might say, hey, wait a minute, this doesn’t really look to be fair or market. Now, they generally and broadly have opinions about that, I think, if you’re really going to look at a deal, however, you want to engage a professional who can help you with a valuation that exclusively in our space, and does lots of them in order to get a feel for what your business is actually worth. And then take that to heart. Because it may not be your number. And if there’s a gap, then you really should be thinking about, well, what do I need to do to get my business to my number to be able to support the number that’s in your head? Because unlike, you know, a lot of people think that if a seller just puts out a number, if a buyer isn’t interested enough, or, you know, his approach them approach you as the seller, well, then we’ll figure out a way to pay it. That’s just not how it goes. It’s not about capacity, or budget of the buyer is about arriving at a number that is supported. That’s based on fair value, and market compensation. And fair value, ultimately, is one that, you know, is fairly programmatic. It’s not just a number pulled out of the air, it’s done through quite a bit of quite a bit of science and review and calculations. And, you know, yes, the market sets the price for a particular firm and profile of a firm. But, you know, there’s a lot of inputs to that, you know, like your forecast and how much profit you’re generating, how fast the business is growing, and you know, what other firms like yours have so far recently. And so, you know, understanding of that, as a potential seller puts you in a really good position to vet how serious a buyer is. And if they’re willing to pay market to determine whether you should engage in a conversation. And I just want to, you know, highlight the point that the best way to do that is probably to do an annual valuation of your business to just know what the equity in your business is worth. There’s lots and lots of clients where to do that, so that they know if there’s, someone approaches them, you know, if about if an offer is fair, but also, if there’s a triggering event, right, if you continue to build value into your business, you know, it’s likely that it’s a single largest asset in your portfolio. And, you know, you want to be able to protect that asset. And there may be triggering events like, you know, heaven forbid, something happens to you or you’re disabled or whatever, you can put some put some things in motion around insurance and ensuring the value of that business so that if you’re incapacitated, you can still harvest the value or your estate can harvest the value out of the business. Those things are important. So it’s all part as you grow a business to you know, material size, and we define a material size to be one that’s contributing, you know, more than a million bucks. You annual profit that you you know, all these things are in place so that when someone calls you, you will have a concept as to whether, you know, their range of of value is in alignment with what your firm is likely worth. And that to determine, at least at first blush, that they’re in the ballpark to warrant any continued discussions.

Ryan Barnett  25:27

That’s extremely helpful. We’ve covered it covered a ton here. So far, I think, when sellers are considering this is complex, it is complicated. I wish I could say, this is simple, but ultimately, ideal is one of the most unnatural acts in business. And if you try to do it, to do it alone, there’s a lot to consider. Matt, I guess I’d love to give you maybe some last thoughts on perhaps, what are some things someone should think about when going through this process? And what should they look for? If they are going to look for help? What should they seek out in in an advisor or an m&a advisor or broker?

Matt Lockhart  26:11

Yeah, yeah, I think we’ve talked about this before, you want to be smart about this as a, as a business leader, this is this is obviously a critical event, at some point, you’re likely going to exit a business, get smarter about it ahead of time, build those relationships. And, and do that on a consistent, you know, sort of basis. Having representation is absolutely critical at the right point, if you are taking opportunistic advantages. There’s a, you know, what we talked about is having deal representation. And, and, you know, I think that you need to think about that, versus you think about the representation when you are bringing a firm to market. And, and that’s a, you know, it’s a critical decision that you shouldn’t be working with advisors and your trusted circle. On that discussion. I just had a, I had a call this week with a very successful multi 100 million dollar firm that we’re working with, and in the middle of discussions, you know, sort of related to this point. And he said, everybody should have representation. Nobody should go it alone. Right. And, and so when you do that, that’s kind of what this discussion is all about. But, yeah, build those bridges, you know, the deal, relationship matters. And it and it’s an important consideration.

Ryan Barnett  28:04

That’s great point. Micah, I’ll turn it over to you for any closing thoughts. And let’s wrap it up.

Mike Harvath 28:13

Well, Ryan thanks. Hopefully, you guys found this sort of interesting topic of how to field calls from suitors how to shoot straight when someone calls in about, are you ready to potentially sell your business? I think in general, the answer is yes, no, or depends. And for those of you that are in the know category, you know, you should be able to make short work at these calls. For those of you that are the yes independence category, which hopefully this podcast has shed a little bit of light of how you can think about it, what free work you might need to do to move into the yes or it depends category, and to be able to be ready for those discussions when opportunity knocks. With that will tie ribbon on it for this week’s Shoot the Moon podcast. Make it a great week, and we look forward to having you tune in next time.