28 Feb How to Become a Platform Investment
In our latest episode of the Shoot the Moon podcast, we’re giving advice to sellers interested in becoming a platform company. This can be a win win situation where an investor can provide opportunities for quick, sustainable growth for the platform company. This is an interesting and attractive option for IT services business owners looking to sell-in and grow the business with a funding partner.
De-risk your biggest investment (your company) by becoming a platform company. Essentially a platform company (like an App integrator or Managed Service Provider or Digital Transformation Firm) is a top quartile, well-run company that takes capital from a private equity firm or other investor. When a private equity firm is investing, a platform company might be the first to receive investment which in turn will help them accelerate their organic growth and take advantage of acquisitions for even further growth.
Some questions we’re diving into in this podcast episode:
- What is a platform company
- What does an equity partner look for in a seller?
- What are some things a seller should have to be a good platform candidate?
- What are the next steps for growth after becoming a platform company?
- Why does the platform company need to have excellent leadership?
- What is a thesis?
- What should a seller look for in a funding partner / platform investor?
EPISODE TRANSCRIPT
SUMMARY KEYWORDS
platform, investment, investors, acquisitions, partner, firm, private equity firms, opportunities, add, company, mike, growth, acquire, good, part, thesis, equity, alignment, seller, business
SPEAKERS
Mike Harvath, Ryan Barnett, Matt Lockhart
Mike Harvath 00:05
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 know if you tune in to this podcast regularly and maybe even if you don’t, Revenue Rocket is the world’s premier growth strategy and m&a advisor for tech enabled services companies with me today and our podcast are made partner of Reimer net and Matt Lockhart. Welcome, gentlemen.
Matt Lockhart 00:34
And good to be here, Mike, excited about today’s topic. You know, we deal with this a lot. I don’t want to steal your thunder here, Ryan, but it’s a good one. And here we are almost through kind of getting through the the first quarter. Happy to report we’ve we’ve already gotten some some really successful deals done this year, and activity is up. So we’re rolling! What’s going on? Ryan? What are we talking about?
Ryan Barnett 01:06
Well, great topic today. And I think it’s something that both buyers and sellers should be interested in, in the concept is, what is a platform, a platform provider in this space? And what I mean this space, the IT services market, so think application developers or application integrators or managed service providers. And we want to break into what is a platform in the context of M&A why it matters and, and why it’s something that should be on both buyers and sellers radars here today. So, Mike, why don’t you just help us out? First, just define what is the what is a platform and can start just start us off?
Mike Harvath 01:53
Sure, thank, you know, a platform company is typically a firm that, you know, is getting, you know, has proven sort of methodologies and approaches to the market, they’re specialized or operating well, they tend to be in the top quartile of profit realization amongst their peers, they’re growing. And as such, they become a very attractive platform, if you will, for investment by either private equity firms or groups of investors that have pooled their resources to build the fund, and become the capital partner to help that company go places with that capital that they can go on their own. And there’s many, many, I mean, this thesis is pretty proven in the world of private equity, it’s kind of been around for a long time, it’s been deployed, you know, broadly, probably in the last three to five years and tech enabled services space has become very prolific, there’s lots of new investors popping up and private equity firms popping up coming into the space. And there’s a lot of, quote, unquote, investor optimism in our space right now, which is really, really interesting.
Ryan Barnett 03:09
So if I, if I put this in a little different context, the, when a private equity firm is investing, that platform company may often be the first company that receives investment for a thesis. And typically, that might be a larger scale investment, we often times hear a platform investments may be three to 5 million, EBITDA or more, it could be even much greater than it could be 25 million. But essentially, it’s someone large enough and with enough sophistication and scale to go acquire other companies. And the other contexts will put this in is will often hear private equity firms or platform investment firms that have have received investment as making add on acquisitions. An add on acquisition would be a another acquisition following that platform. And I think that’s kind of the basic foundations of that. Matt, anything to add there?
Mike Harvath 04:15
No, I would just add that and then we can certainly get Matt’s perspective on this. But it is a fascinating time, because, you know, there’s a huge number of new investors flowing in and this thesis has been proven in other industries, much larger platforms, typically the platforms and other industries, you know, start at maybe 20 million and even then go up from there. But in the world of IT services and tech enabled services, those platforms tend to be a little bit smaller and to your point, they can be larger like you know, more traditional sort of thoughts but you know, they have, have definitely started private equity firms have come down and market because there’s so many well Ron, you know, kind of what I would say, firms that are positioned for hyper scaling with the right capital partner, and typically got, you know, firm that has has it figured out and is in a position to hyperscale is a firm that, you know, maybe has three, four or five, 6 million bucks on EBITDA. And they just need that capital shot in the arm to go then begin to execute on a fairly aggressive buyside initiative to tuck in acquisitions. And that’s where advisors like Revenue Rocket come into play.
Ryan Barnett 05:40
So first, I started thinking about this as a as a seller, perhaps let’s say I do have a company that’s size, and I’ve got some scale here. What’s the benefit of being a platform company? And what opportunities does that give me to take some of this take an investment and be part of something different?
Matt Lockhart 06:07
I think, you know, Ryan, I think that there’s a couple of different opportunities that would be open to that platform candidate, right. One is just going faster, and scaling. And, you know, it takes money to grow, right. So it takes that capital partner that that Mike talked about to be able to, to go faster. And, and maybe there’s a recognition that by a platform firm, that their particular capabilities are their specialty, has a limited time horizon now, and when I say limited time horizon, we’re not talking about months, we’re talking about years. But maybe there’s a recognition that there’s a five year run, that that platform’s capabilities are going to be specialized in a marketplace. And so you really do need to go faster, to just take a bigger piece of the overall market. And there’s a recognition that, you know, you can only go so fast with the capital and the money that’s in place. And so you need to go, you know, you need to go outside and partner, the potential financial gain, you know, it’s quite honestly, it’s kind of simple math, right, where you go, Well, if we’re able to scale at 10x, what our size is right now, even though I am going to relinquish part of, you know, part of the equity that I owed 10x, the equity that I’m, you know, able to get in that time period is, as, you know, a distinct financial gain. There’s also the aspect and we, you know, you hear this term in this context of being coming in a platform, which is de risking, so, you see the opportunity to have a 10x gain, for example, yet you’re able to de risk by, by having a payout for the value that you’ve created today. So those are some of the reasons why don’t you know, another reason would be that, you recognize that by being the platform, and being able to make subsequent acquisitions, add ons, if you will, you’ve got the opportunity to bring a higher level of talent on board by acquiring some additional leadership that is going to be interested in, in being a partner and and sort of being along for the ride. So you know, those are some of the things that we advise and, and see from those platform partners that you know, that we’ve worked with.
Ryan Barnett 09:20
I think that’s a great a great start and into both of that, Mike advance and just getting us going. If I’m a seller and I let’s say I do have a substantial firm. What are what are some things that I should start to look at to be kind of that platform candidate? I mean, what are what is a, an equity partner going to look for in my firm when it comes to maturity, and excellence? Mike, why don’t you just get us started there and And there’s all sorts of things I’m assuming, we can look at from leadership to sales and marketing and or the specialization and where the target markets are going after. What can I bring to the table as a seller to these companies?
Mike Harvath 10:18
Well, I think they’re looking for a safe, it’s kind of kind of implied in the name of the platform, they’re looking for a safe platform for investment. And what do they want there, they want excellent operators that are growing a solid business that’s repeatable, that have, you know, that our staff properly, that have strong sales and marketing initiatives that are in the top quartile of their peers as it relates to revenue, growth and profit. Now, specific investors have specific requirements they may be looking for, for example, a digital transformation or custom software type firm that fits that profile, they may be looking for an app implementer that fits that profile of a certain ilk, or a managed service provider, all of their specific mandates for investment are different. And usually, that has to do with their level of comfort, or where they’ve made investments before or maybe where they have board members or operating executive at the investment level that have experience. But in short, they want to look at firms that are running really well, that have a strong plan for growth, that with some additional funding and support could accelerate the organic growth. But more importantly, could also integrate and take advantage of acquisitions for growth. Because to get to the, you know, 3x or more return on investment and equity that they want pursuant to kind of investing in platform businesses, they need to be able to be a solid enough operator to tuck in those add on investments or add on acquisitions to augment. What is our already a really good growth story.
Matt Lockhart 12:15
You know, I’ll add to that, Mike, that I think that this is the starting point, oftentimes is the leadership of the platform team. Right. So and specifically, it all starts at the top, you know, the CEO, the the investors need to have confidence that they are partnering with that individual who is going to be the quarterback, if you will, for operating that platform investment, Annie and integrating the additional, you know, acquisitions and and add ons. And it’s not a, you know, the success rate in that is not 100% like it is? Yes, that’s true of anything. But those savvy investors really understand who, you know, what are the components of good leadership that they are going to be teaming up with? And I think that that, I think that that is really key. We’ve we’ve had, you know, experiences ourselves, most of them positive, right, where we’re representing people who are, you know, interested in becoming that platform? And, you know, and a couple of times where we’ve had had the counsel and coach that, you know, maybe maybe the leadership needs to be addressed before becoming a platform, so that leadership is is certainly a key piece. i The only thing that I’d also add on is is while a platform and that investment strategy is a key part to that strategy is going to be additional acquisitions and add ons, having the foundations in place for organic growth as well. Right. Yeah, I think that that’s one of those key pieces because you certainly get a leverage up in addition to growing EBIT to through acquisitions by being able to demonstrate a good strong organic growth plan. And then obviously, cash is king and and the ability on a historical basis to produce a strong profit returns, as you know, is obviously another critical factor.
Ryan Barnett 15:01
I think that’s a critical point, the these in a platform company you’re going to be, you’re going to essentially be part of a thesis. And that thesis is oftentimes very, very tight. So it may be, if you look at private equity firm, for example, they might be investing in companies that are focused in healthcare IT and from there, they may want to focus on application hosting providers in healthcare IT. So an understanding that market and your ability to to grow within that specialization and vertical market becomes a key component to to the strategy. And this is where a little bit where add ons and platforms go together. I think it’s important to say that it’s it’s, it can be a very good to be a add on to a platform. And we’ve there’s a successful funding platform, a our funding provider, and a platform that’s in place that is setting direction and setting that thesis, the add on components. And if you’re considering selling your firm, I think being an add on can be extremely effective for you is sometimes you get the same benefits of that platform company. Sometimes there’s an equity role. Sometimes there’s a scale that you can’t get alone, and a a group and the focus that is tighter into into areas that you can do really well. And so I think that that add on is the next step to think about and into that platform. Play, that can be very helpful. Man, you you’ve you’ve talked about the kind of the ability to acquire. And I think that’s also important to think if you are that platform company, the investors are looking for that next stage of growth. And the next stage is through making additional acquisition. And I’d say that one part that seems important is that if you’re you are the platform provider, provider or player, it’s really important to know the other players in your industry as well as they could quickly become acquisition targets. But it’s also affected, you need to have a really strong m&a strategy to go into into the sum of those into these platforms and oriented these investments. And, Mike, maybe you are Matt, either one can can help me understand or, you know, what advice would you give to a seller if they are in that position of becoming that platform on kind of where that next deal should come from?
Mike Harvath 17:45
Yeah, I mean, I’ll weigh in on this. I mean, I think, you know, we’ve certainly seen some interesting combinations between, you know, funding source call private equity, or investor or sponsors, those terms are used pretty interchangeably amongst the financial community, that build on platforms. And, and, and generally, you know, they’ll they’re pretty successful at finding those platforms. Sometimes we help them find them, we’ve certainly had plenty of clients that we’ve supported and finding platforms or facilitate, you know, what we’ll call deal deal facilitation for a platform and an investor. We’ve done lots of that over the years, but, but I think a component that they have to be able to execute it exceptionally well on is finding, attracting and integrating acquisitions quickly. After the platform is acquired. We’ve seen some firms make some mistakes, frankly, and either trying to underfund their outreach, and their alignment around doing add on acquisitions, or they haven’t, you know, partnered early enough with someone who can do by side support, such as revenue rocket or other very capable peers in the market that do that work, in order to quickly get those add ons built, or acquired and put on because you have to remember that a an investor and a platform is typically you know, looking to buy, build, and then exit themselves in, you know, five years, maybe seven years on the outside and so, time is not your friend there and if you squander a year, trying to roll your own and find targets as an example, that is opportunity lost and your ability to get to an accretive multiple of even a scale to a point where you know the you become attractive to very qualified, much larger acquires. And the formula for success and I alluded to this earlier really includes the finance partner the business that is the platform anonymity advisor to be able to provide a steady stream of tokens that support the mission.
Ryan Barnett 20:09
Yeah, it’s always it’s, I think it’s critical to have someone by your side, and I think that the pressure is really high, when you are part of the if you are the platform. And so getting all the help you can at the table is something that is, is critical. That what should i What should a seller look for in a funding partner? Or what’s, what should they bring to the table as far as getting a platform launched?
Matt Lockhart 20:39
Well, that’s a great question, Ryan. I think that it’s it’s sort of like, you’re interviewing for alignment around a number of areas. You know, one is just quite honestly, symmetry around the strategy, right. So in in, and what I mean by that, it’s sort of at the highest level of looking at the market. And, you know, looking ahead five years, and saying, This is what, you know, this is what we believe our firm is, in five years, what the values are, what the capabilities that are, where we are going to play, where we are going to specialize, what are some of the potential force multiplied opportunities that we’re going to create and take advantage of, and being in alignment, or around that strategy, I think that that is, is absolutely critical, I think that maybe even more important, but at least as important, is just the good old trust factor, that you’re going to be able to trust each other work together, that you’re going to be able to work through, you know, water invariably going to be difficult times and situations and decisions, that you’re going to be able to have each other’s back that you’re going to be able to pick each other up. Because it’s it’s not always easy. And you can’t predict the future. But I can just tell you, after 25 years of of being a partner in a, in an IT tech enabled services business that, you know, there’s good times, there’s bad times, and so just having that high degree of trust in each other is, is going to be key, then, you know, some of those little things like actually having strong investment background, and having the money, if you will, I mean, it’s probably pretty important. Having a track record, being a platform investor and and then successfully making those add on acquisitions, and investing appropriately towards being able to make those add on acquisitions. I think that Mike talked about a number of those key criteria, speed is King being able to be effective in, in continuing that add on consolidation strategy, and doing it doing it quickly is is is absolutely critical. And we’ve seen the other good and the bad, then that those that that have difficulty making decisions and or, quite honestly, they’re too cheap, and they’re always looking for deals are not not not necessarily the best, the best investment partners. So, you know, I think those are some of the key things. But it’s, it’s sort of like think about going into business with somebody, you know, and and lining that individual up with yourself. That actually brings up another good point that I they hadn’t really thought of having somebody who’s going to cover your gaps. Right. As the leader, you know, that you’re really good in some areas, you know, oftentimes, but you need somebody that can cover some gaps. I mean, shoot that gap could be leadership development, that gap could be marketing that gap could right and and finding that investment partner who has some of that expertise in in their firm, I think is another key key attribute that you might want to look for.
Ryan Barnett 24:49
I think that’s great. I don’t have a lot more questions here. In what I heard today was that you know, platform is a really exciting opportunity with investors. And I think that’s something to get into. Thankfully, I do have one more question. I’ll back up a little bit. If you are a platform, should you expect your an exit yourself? Now, what’s a typical timeframe and and is that a big portion of the lower of this is that there’s going to be perhaps that second bite at the apple.
Matt Lockhart 25:28
I like to think my you correct me if I’m wrong, but I think that it’s safe to look in the five to seven year range. I think that’s a, that’s a safe guideline, with the understanding that it can go a little faster, and it can go a little longer. And but, you know, that’s a in in talking to those platform investors. That’s a great discussion that to have. Mike?
Mike Harvath 26:01
I would agree, Matt, I would say it’s a five to seven year on average. But understand that there are those investment groups that are kind of a buy and hold, you know, for example, many family offices or buy and hold, looking for platform investments to build on. And it brings up again, the need to have competent advice, because the devils in the details in your stockholders agreement, or as we like to affectionately call it the shag, as to how you can exit your investment and when you exit that investment and how it’s valued and, and what options you have as a stockholder, because you have to remember that if you’re going to align to be a platform investment with a financial sponsor, you are investing as well, you’re typically going to roll you know, upwards of 30% of your equity into this new platform. And it means that you have to have a high degree of alignment with those investors around, you know, what it means to be a stockholder? And are you seeing as the same? Do you have the same rights and privileges as an investor in that platform as the you know, money, guys, right, and how does that align? And is it really an attractive partnership? Or is it one sided, and oftentimes, in order to make sense of all that, you need some outside advice and counsel to really, you know, negotiate on your behalf to make sure that they’re lined up. But understanding I think your exit timelines and, and horizons and how that works, and what rights you have as a stockholder in that business, even up until and maybe a more broad exit, or recapitalisation, as we’d probably call it are super important. And making sure your your thoughts about alignment and return rates and all that and kind of what happens if things don’t go well, which I think is an important conversation to have, as well with your partner, your financial partner, are all things that are important to get on the table.
Ryan Barnett 28:10
I think they great topic today. It’s one of those where it’s very exciting to be part of this investment. So good to hear to replay a few of the things I heard they were important, you know, platforms a company where your proven success in investors combined. And investors can start to provide growth capital and opportunities for really quick, rapid growth. If you’re in part of a platform, or you are the platform itself, add an add on acquisitions are really core and central to the thesis. And having the appropriate people by your side to make sure that vision can turn into a reality is critical. And the speed in which you scale that is as part of this as you may have limited time for investment, and return based on your funding partners. It can be a financially, it can be huge. There’s opportunities to roll equity, there’s opportunities for continued growth, and there’s opportunities for everyone in the platform to grow. And if you’re trying to be part of a platform, having the leadership team in place, a focus service areas in line in even down to your target market that you’ve established starts to become critical and starts to drive those future acquisitions. Ideally, this would be a big, big platform for growth if for everyone involved. And it’s something again, really excited for the for everyone in the space. That’s what I heard today. Matt, Mike, I’ll turn it over to you for any closing thoughts.
Matt Lockhart 29:59
I think this is Great, Ryan, I, you know, sort of one final closing thought 10 years ago, private equity, because I had conversations with a number of private equity individuals, friends and associates, and they didn’t even really look in the tech enabled services space. For platforms, they didn’t they didn’t they didn’t understand it. Right. They, you know, and, boy, how that’s changed. And we still hear from a lot of founders, founder led businesses and or operators who, who are like, Oh, well, private equity just wants to, they want to cut everything to the bone and and it’s gonna be horrible, and so on and so forth. And quite honestly, most often, we see that that is absolutely not the case. That there are now because private equity is understood that this tech enabled IT services space is really a great place to be. There are great partners out there great investment partners out there. And so I just thought it’s important to note that because it really is and interesting and an attractive option for people to look at in achieving the sort of the that next opportunity for growth. So great topic. Good to be with you guys. Mike.
Mike Harvath 31:39
Well, great way to wrap up there, Matt, I would totally agree with you. I think if you’re contemplating a cell in looking to stay on and, and grow your business with a funding partner, we certainly welcome the opportunity to have a conversation about how we could help get you to market and get that recapitalization occurring so you can get to the next level. So with that, we’ll we’ll tie ribbon on it for this week, Shoot the Moon podcast, please tune in next week for other exciting topics around growth strategy and m&a for tech enabled services companies. With that, makes it a great week. Thanks a lot. Take care