08 May How to Keep a Level Head During an M&A Process
EPISODE 217.
Mike Harvath and Ryan Barnett discuss the emotional component of mergers and acquisitions in the IT services industry. They highlight the emotional challenges founders face when selling their businesses, including attachment to relationships and inflated business valuations. They emphasize the importance of maintaining objectivity and using advisors to navigate negotiations. Common signs of emotional clouding include inflated business valuations and overzealous buyer behavior. Preparation, alignment with advisors, and patience are crucial for a successful transaction. Emotions should be managed to enhance enthusiasm but not cloud judgment. Advisors act as mediators to ensure rational decision-making and improve transaction success rates.
Selling your business is more than a financial transaction—it’s an emotional journey. Our latest podcast explores the critical balance between emotion and logic in mergers and acquisitions, offering insights for IT services business owners. Key Takeaways:
- Understand the deep emotional attachment founders have to their businesses
- Recognize how emotions can impact deal negotiations and valuation
- Learn strategies to stay level-headed during the M&A process
- Discover the importance of professional advisors in managing emotional challenges
Whether you’re considering selling or acquiring a company, emotional intelligence is your greatest asset. Our experts provide practical guidance to help you navigate the complex world of business transactions with confidence and clarity. Want to transform your M&A experience? Listen to our full podcast and gain expert insights into successful business transitions or reach out to schedule a no obligation introduction call: info@revenuerocket.com
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. Revenue rocket is the world premiere growth strategy and M&A advisor for tech enabled services companies with me today is my partner, Ryan Barnett. Ryan, welcome.
Ryan Barnett 00:26
Hey, Mike, yeah, thanks for having me on this podcast. We love to talk about things that we see every week and things that our customers, clients, friends and partners want us to talk about. So if you have something you would like to talk about, please let us know at info@revenuerocket.com, and we’ll tackle your subject. Mike, one of the things that we’ve seen a lot this week, and maybe it’s just where the season LOIs and deal closing is the emotional component to mergers and acquisitions, and IT service leaders when they are forced and to come to either sell their their life’s work, or sell their baby, or to really dive in and understand and work and buy with the company, oftentimes, their emotions can get in the way of, sometimes the the logic and the deal. And I just love let’s, let’s tackle that today. Let’s talk through some of the ideas that we see here, provide some examples of what we’ve seen, and provide a path for both buyers and sellers to bring the right level of enthusiasm and emotional giving to this project. So Mike, let’s we’ll start with an easy one, but why is M&A such an emotional process for founders, especially in the IT services world?
Mike Harvath 01:49
Well, Ryan, I think what’s important to note is that you know, if you start a business and put a lot of blood, sweat and tears into it, you know you you are committed and have built this business, or maybe if you want, and then when you have someone come and say, Hey, that looks like a really interesting business, and I’d like to buy it. You know, there’s a period of of first, wow, I’m flattered that you’re interested. But often times there’s this, Hey, you know, I built it. I don’t know if I’m ready to sell it. I hadn’t really thought about it. Or I’m, you know, so committed to doing what I do on a daily basis, I couldn’t see ever leaving. There’s just this whole range of emotions that you go through and you start to transition to well, but whoever would acquire this would need to have the same sort of customer care and employee care philosophy as I do, and do they really have that, especially in services businesses where you have deep relationships with customers and Clients, you know you’re in a situation where you can’t really quickly and unplug emotionally, really, from the business, because it is based on a relationship. That’s, I guess all businesses, to some extent, are built on relationships. But for sure, in a professional services environment, they’re built on relationships. So all kinds of, you know, emotions roll around in your head. You know, when you initially get approached, and even if you bring a business to market proactively and run a process, you do have a little bit of time to get your head around, hey, I’m going to be, you know, either selling this business or doing a recap in this business. So you have a little more time to, you know, have it soak in and think about it. But a lot of the you’ll go through the same emotional sort of phases, if you will, about it. And you know, you have to understand that kind of going in, because oftentimes those emotions around contemplating a sale or acquiring a business can either cloud your cloud your judgment, or impact the deal and the deal pricing in in a negative way, or it can, you know, ultimately derail the deal if you’re not careful.
Ryan Barnett 04:18
Mike, I’d like to, yeah, re emphasize the point you are building these long term relationships with customers and employees and and these personal relationships in which you’re working daily with them. Do you realize that there’s going to be change, and that change is going to be hard for everyone? And so I can absolutely see on a seller’s point, it can be emotional, even on the buyer’s point, you can be emotional, but just the excitement of a deal and excitement of what could be next, and excitement of working together, and those that excitement can be lead to overzealous or irrational behavior on the buy side too. So Michael, I was curious, what are Common Signs That You. Seen where a motion to start to cloud the a CEO’s judgment, what, what starts to happen, and what are some red flags that you can watch out for?
Mike Harvath 05:12
Well, I think you know it will approach you both from the seller side and the buyer side. You know, on the seller side, certainly, you know there may be a, in general, an inflated version of what you feel the business is worth. It’s not based in sort of objective market data. It’s more in based on what you feel the business is worth, are worth to you. And oftentimes there’s incongruence on that. And you know when, when you buy a business, it’s it’s got a commodity type sale. So you think, well, if I think it’s worth X, and whoever wants to buy me should think it’s worth X, and that makes sense. So it’s easy to take offense if someone offers a lower price that’s more market based, for example, assuming you as a seller might have an inflated view of your value, vis a vis sort of standard valuation review or models or multiples, and that can set up sort of a bad exchange around, hey, I feel my business is worth X, and you’ve offered me Y, and now I’m offended, right? And it’s hard for us to get past that to a point where there’s a deal, not always, but it certainly can create a emotional barrier for, you know, productive negotiation. I think on the buy side, what’s interesting is buyers, oftentimes, when they find a deal they like and they make an offer, and that seller rejects the offer, or negotiates the offer without a competent advisor in the middle of or helping them get that deal done, they can get what I call deal fever. And deal fever is where they’re just conceding on almost every point a seller wants in an effort to get to a deal, even if it makes no sense whatsoever in the context of a fair valuation or a fair structure based on what they’re buying and what happens. It’s a dangerous place, because ultimately it can impact return rates for the buyer negatively. It can create a set up sort of unhealthy exchange in the post loi negotiation, where there’s going to be lots and lots of stuff to negotiate and and it can create, you know, essentially, an environment where a buyer might overpay. Now, you might think, well, that’s great for the seller and bad for the buyer. And you know, as a result, I’m a seller, I want to find a emotionally invested buyer who might overpay, but there’s actually a lot of fallout that comes from that later in the substantive negotiation that I think oftentimes people miss. If that happens up front,
Ryan Barnett 07:57
Absolutely, and if you’re doing a bunch of turns on a document, or we’ve often seen kind of think rationality thrown out the window when it comes to talking about points that could be just more data driven, or could be more fact based than kind of emotional based. So oftentimes, when we look at things like an earn out which has a future payment emotion get in the way, because, of course, I’m going to keep that Enterprise Client. I’ve had a client for 30 years. How dare you think that I we’re going to lose that client. Seller can oftentimes take that and a buyer is going to look at that and say, This is a tremendous amount of risk, and so you kind of have this cold, calculated view of the specific risk that I’m going to account for, versus that emotional view of look at all of the value that I’ve done to employees that are in this deal and how we can work together. So it’s fairly common for us to see that emotion creep up. Mike, especially if you think about like definitive agreements, where are some parts from where you’ve just seen the face go red, or people just get like, this is almost a personal affront or or something that you should really watch more emotionally in the in the process, I’m thinking of things Like being surprised, maybe working capital calculation or a Retrade, which could, of course, cause appropriate emotional reaction, for sure.
Mike Harvath 09:27
Yeah. I mean, there’s many things you know that I think you have to be aware of that you know. First of all, we’ve said many times, if you’re a frequent listener of this podcast, that you know you’re going to have 150 or more things to negotiate in a definitive agreement. There is a lot of moving parts there. Unfortunately, you know, there’s a lot of great lawyers, M&A lawyers out there that can assist with fortifying the agreements. From a legal perspective, it’s important to have a good M&A advisor, investment bank, and you’re. Corner that can help you, you know, negotiate to what we’ll call market deal terms, ones that are seen in the market today, ones that aren’t out of alignment with what’s considered normative. That’s what an M&A advisor does. That’s what we do in our role as an M and A advisor. And I think, to defer to your M&A advisor and your lawyer when you’re feeling emotionally charged in a particular data point or or negotiation is wise. It provides a degree of separation for you from that buyer if you’re a seller or vice versa. It allows you to be more objective, because it takes you out of the moment, and it may also allow you to, you know, not show offense. If there’s something that comes up in that negotiation, sometimes there’s a fence around, you know, what would be considered an employment agreement negotiation or a contractor arrangement, post close based on what a buyer might be willing to pay. There may be things where people get emotionally charged around to your point, working capital peg and why that’s needed, and you know how much is in there, and I thought all of the cash in the business was mine. Well, answer that is a definite, maybe, depending on the shape of your balance sheet, and you know what ultimately occurs as working capital peg. So there’s a lot of things that can come up that people could, you know, I guess, as a seller and or a buyer, find a fence to but what you have to remember is that there’s you have to sort of take the long view on the fact that if we can kind of stay in our lane and work through these issues one at a time to a successful conclusion, that’s kind of the goal, right? And to not get too upset about an ask or something that occurs along the way without having taken the time to get fully informed about what is actually in the ask. I think a lot of people make assumptions about where the negotiation is or where it’s going. That caused them a lot of emotional strife, you know. And you know the old adage about assuming anything you know, it’s obviously not wise to do that. So I would seek to understand the facts and the reasons for an Ask by someone on the other side of an M&A transaction, it may not be what you think it is, and there may be alternative ways to resolve that concern or that ask, and so that’s why it takes a lot of as I often say, the more smart people you can put in the room that can help you get your deal done, the better.
Ryan Barnett 12:54
Makes a ton of sense. And my first transition a little bit here, when you’re talking to a seller and you’re getting them ready to go to market. I mean, how should sellers really prepare themselves, kind of mentally and emotionally before going to market? I love to hear about sometimes we get into the weeds and specifics about seeing a due diligence list for the first time, and then and sellers going, Whoa, this is a lot of work, or seeing a definitive agreement for the first time, and went from a two page term sheet to a 200 page definitive agreement can be kind of just shocking. So if I was to summarize that question, how should sellers prepare themselves just before going to market?
Mike Harvath 13:50
Well, I think you have to understand this is going to be hard, and it’s going to be time consuming, and it’s going to be taxing, you know, I don’t want to talk you out of it, but it just is reality. It is called the most unnatural act in business, for a reason. You don’t do it all the time. You’re not probably well versed at doing it. And even if you’re, you know, done acquisitions in the past as a buyer, they’re still, you know, challenging, right? There’s all kinds of things that occur along the way that are challenging. You do have to get a cast of people together in a line, everyone from you know accountants to lawyers to advisers to your partners in your business, to spouses to bankers, you have to get alignment with a lot of people, and that takes some time and some strategy and some patience, right? And I think you have to enter a project like this with those things in mind. Right that there is no easy button here and there is no fast forward button. Just to get all this done, you have to sort of, you know, move along. And I would say that, in some ways, deals have a life of their own right, from a timing perspective as well. And I think if you artificially try to push, certainly you want to see a cadence of progress, but if you try to artificially push a deal, or you’re going to walk away, or you’re going to threaten that this is going to happen, or that’s going to happen, it won’t have the desired outcome that you want. And I think particularly because there’s so many folks that have to be lined up around the approach, and you know legal documentation of it, and financing, and you know fortification and and diligence around your financials, and all that that you Know coming to this process with the level of patience and level headedness and focus on the end game, as well as being able to, you know, corral the troops on your side of the table will certainly help you be Successful.
Ryan Barnett 16:20
Yeah, and I think you think you addressed the question I was going to ask, which is, you know, timing is huge here, and so as processes go on, and if there’s delays in the process that can feel like, like it’s kind of picking apart your business, or picking apart your process, and and it’s, it’s tough to keep keep steady here, and so when you think about that emotional roller poster that you go on from deciding to sell your company to getting people interested and having introduction meetings and and getting an LOI and signing on The LOI, and then getting that due diligence list. It can take a bit to get through all of those things, especially if you’re not well prepared. Coming into this thing that’s Mike, that’s one of the reasons I think we spend a lot of time and readiness is to by the time we hit the launch button, we’re already answering some of the questions that are going to be asked, which helps defray the concerns and emotional ties to the timing here. I mean, how? How else do people stay focused over these time periods, especially when things can change, or, or, yeah, especially when things can change.
Mike Harvath 17:39
Well, that’s a good question, Ryan, I think you know, to your point around readiness, I think for people we really haven’t met. I mean, I know it happens, but I’d say we have very few situations where someone says that they’re going to pass this business, their business, on to a next generation and their family, typically not really done in the world of IT services very often it does occur, but I’d say it’s pretty rare. And so, you know, almost everyone’s building their business for an eventual exit. It may be, you know, before they, you know, leave this earth or after, but it is eventually going to likely occur that the business will be sold in some way if they’ve built fundamental value in it. So your point around readiness, readiness, preparation, thinking about aligning strategy and team members and financials and you know, level setting, valuation and all that ahead of time is super valuable, even if you’re planning to not go to market in a proactive process, and the purpose for that is, if someone approaches your business and you would like to entertain that offer, having gone through that exercise of readiness, will one build more value in your business for that eventual buyer, but it will also ultimately make it easier for you to kind of get to the table and and provide the information needed, and ultimately make it a whole lot less stressful when the time comes. And so, you know, I think at least, at a bare minimum, you’re going to want to think about aligning who your advisors would be, should you be approached, if you’re not actively running a process, be thinking ahead of time of who you might retain as a advisor, or m a lawyer and or accountant or tax advisor to help you be prepared. Should you want to entertain an approach? And you know, also think through when the time might be right for you to run the full process. I think that will help provide a lot less stress and angst as you’re contemplating a move towards an exit.
Ryan Barnett 19:54
Sure, and perhaps a motion might be the trigger we. Have had plenty of people pick up the phone on a Friday afternoon and saying, I am tired of running this business, or I’m tired of having all of the hats, and I’m ready to do something about it. And that that emotional trigger might be, might, could be a great thing to get you moving and looking at a process. It sounds like Mike, what you’re suggesting here is there’s great decision frameworks, or just even data in your business on, perhaps where you’re at, or the even, even the multiples that you want to get to, or the number that your head, or even the the trusted advisors that you have in your network can take that emotional trigger and turn it into a more rational way to to approach this process.
Mike Harvath 20:47
Yeah, I would say absolutely right. And you know, this is kind of where some pre planning in your business is important, as you think about, you know, what you might want the future. I mean, we’re obviously pro sort of strategy planning firm anyway. I mean, we offer, you know, all these sort of m and a readiness and growth strategy planning services we have since our inception, 25 years ago, because we think it makes sense for people to sort of plan the work and work the plan. And if you’ve done that effectively, we know that you can outperform the firms that haven’t done that, and it puts you in a better position to conduct an M&A transaction which inevitably will likely come in your business, whether you like it or not, or whether you know you’re going to be around or not. I mean, we’ve certainly seen plenty of situations where someone you know, unexpectedly and tragically leaves this world and you know, their spouse or their partner is left to, you know, have to transact a deal, and where the firms have had solid planning in place and thinking about that transaction and that environment, it makes it easier on their loved one, certainly. But you know, having the planning done ahead of time, being able to have thought through a lot of the emotions and reconciled in your head, you know, what would make it great fit and be able to be a fantastic one plus one equals three goes a long way towards understanding kind of what’s to come and when it’s to come, and frankly, for who it’s to come, because it may be for you as a business owner or team of people that own the business, or it may be for you know, somebody managing a trust or your loved ones. It could be for a whole variety of different people. And I think, you know, just like doing any sort of planning in your business or your life, you know, an ounce of prevention is worth a pound of cure.
Ryan Barnett 22:51
Very, very true. Yeah, absolutely. Mike, we’ve talked a lot about in this podcast, about keeping emotions in check, letting data and advisor guide you to where you should be being just simply level headed. I’m curious, is there a flip side to this? When should emotions be brought to the table? I can think of specific examples. But for example, if you’re delivering a letter of intent, I think you’d want to show enthusiasm, or the same thing with your talking about your story, having touching moments that can help preserve legacy start to become critical, so without Being too calm and collected and cold. I mean, how, what are good ways that buyers and sellers should use their emotion and should share some of that enthusiasm?
Mike Harvath 23:52
Great question, Ryan. I mean, I think it’s critically important, if you’re a buyer, to show excitement about a potential transaction, right when you present the offer, when you talk to a potential seller about the synergies, how you envision those firms coming together. As you know, if you’re listening to this podcast, you probably heard it say many times that buying and selling just about anything has a lot to do with the emotional state of the buyer, or emotion around want or need or desire to exit, etc. So emotions play a critical role in your buying and selling strategy of just about anything, whether it be a house or a car or your company or another company. And I think being passionate about what a combination might look like as a buyer goes a long way to having the seller have a high degree of confidence that you actually want to do this deal beyond the numbers, right? Because all deals have to line up strategically. Culturally and financially. It is not simply a financial transaction, and a deal might work strategically and it might work financially, but if there’s a gap in perceived interest, culturally by a buyer and a seller by a seller with a buyer, they’re not going to do that deal. And if presented differently, they might, you know, they, they very well might do that deal. So I think as a buyer, you have to be cognizant of showing interest and excitement about that deal and sort of selling the merits of that deal, and likewise, as a seller, I think you need to be looking for synergies and opportunity in the future and being excited about that as well, whether you’re leaving the business after the sale, whether you’re staying on and be more invested than just getting the check that ultimately is super important in charting a path to a successful transaction.
Ryan Barnett 26:08
Yeah, absolutely, that’s it. That’s great point. Mike, lastly, I know you’ve touched on this, but I would love to hear your experience as an advisor. How you can help be that emotional shock absorber when you’re handling a lot of the tough conversations, you’re handling a lot of the things as a third party, and why is it important to have that third party in the room when it comes to some of these emotionally triggering type of activities?
Mike Harvath 26:47
Yeah, another good question, Ryan, I think what’s important is that it’s easy to go to sort of nefarious intent on behalf of the other party when you’re in a protracted negotiation, or one that has a lot of what would be considered personal data points, you can say the reason a buyer is asking for X, Y, Z is because of this that the next time, and you’re assuming those things, right? Like my same story, right? If you’re a buyer, you could feel the same way, or your salary could feel the same way, and you need someone to translate those emotions, or to tamp down those emotions, to understand the facts right, and not to try to govern the decision, either emotionally or through the negotiation based on assumptions and ones that may not be factual. So someone that can come to the conversation and be a mediator, to be able to understand the purpose for the ask, be able to translate that to the other side and help the ends come to the middle in a win win negotiation is what advisors do, right? And that is a critical role in supporting transaction success. And the statistics bear that out, right? You know, the likelihood of transaction gets done amongst parties is actually exceptionally low. Some statistics say as low as 1% I think it’s a little higher than that, you know, probably 10 or 12% but needless to say, it’s relatively low. Transactions with an intermediary, on average, say that there’s about a 50% chance that deals can get done, yeah, you know, depending on area specialist, most of the stats say they’re higher. The percentage of success are likely higher. So you want to optimize your ability to be successful, to get a deal negotiated, right? I don’t want to make it sound like, you know, these are all sort of fools here in because these numbers sound low to you. It’s just the deals are much more likely to get done when you can have someone sort of, you know, get the assumptions out of the conversation, sort of myth bust, focus on the driving force for the ask, and then try to find an appropriate Win, win middle ground, because the individuals that are advising you likely have had experience with this type of thing before, and so it certainly makes a lot of sense to, you know, bring in someone who can do that and can help you get past the emotion associated with thinking the other side is asking for something that maybe they’re not great,
Ryan Barnett 29:44
Mike, you’ve been a lot of really good advice here to all of our listeners. If I was to summarize some of the things that we heard, is that really keep that level head throughout this process, it’s critical for you to rely on Fauci. Facts and data and present the story is kind of emotionalist as you can, bringing in the right enthusiasm when appropriate. I heard that as some you can tank deals. I mean, you can really, if you have the wrong person say the wrong thing, the wrong time, deals can die, and so be careful in the words that you choose and how you deliver them from both buyers and sellers, to make sure that you are communicating in an effective way possible. I heard that if you prepare for this, you’re going to be much better at executing so make sure that you come ready for the process as a seller and as a buyer, to have the right teams in place, to have the right people informed, to make sure that you’re making the best level headed decision as possible. And then I heard that when it comes to timing, patience is great. Sometimes things take longer than expected, and there could be a multitude of reasons for that. So when timing is fine, flexibility is great, and find ways to work together to come towards a date of close that everyone can agree to. And then finally, I heard, you know, emotions can be powerful and helpful. So again, use that enthusiasm for getting a deal done is a way to to really utilize emotions in a positive way that allow you to to come together, together better again. Mike, thank you so much for this, for this podcast, and in this topic, this is one that you brought up, and I think it’s something that every buyer and seller and IT services space is going to go through, so I’ll leave it to you to for any closing thoughts.
Mike Harvath 31:46
Yeah, sounds good. Ryan, yeah. We had another real world example this week where we had a very experienced buyer come to our client that we were representing to market, and they actually heard misinformation from a trading partner that caused them to pull back on the deal, and it was fundamental to their thesis, and we were the folks that helped them determine that they actually heard the trading partners comments incorrectly and then moved to the wrong assumptions about the further opportunity that existed with this particular acquisition, and then they reset their thesis once they got clarity. So it’s just a real world example of where you know, you want to see clarity, you don’t want to assume anything and jump to conclusions about you know, what you thought you may have heard, or what you thought you may have perceived, and the use of the advisors around you will always be in a position to hopefully provide clarity and value to that end. So with that, we’ll tie ribbon on it for this week’s shoots Moon podcast. Encourage you to tune in next week, when we’ll unpack further ideas about how to further profitably grow your IT services business and conduct M&A transactions that are hopefully successful and don’t have a lot of emotion tied to them. Make it a great day and a great week.