15 Nov Identifying the Ideal Suitor
Listen to Shoot the Moon on Apple Podcasts or Spotify.
We often use the term ideal prospect profile (IPP), which is something as a buyer or seller matters a great deal. Before outreach to a potential seller, decide what attributes are the most important to you when looking at an ideal company to buy. If you are in a position to sell your business, think about the ideal buyer and what the ideal attributes are. Having your idea prospect profile ahead of time and then managing outreach is critically important.
Here’s what we’re covering in this episode of Shoot the Moon:
- M&A Readiness in the context of an ideal prospect profile
- The big 3 for Fit: Cultural, Financial, and Strategic
- What is an Ideal Prospect Profile (IPP) and what to consider
- How important is geography?
- Looking at size and where it fits
- Financial Conditions
- Management intention
- What we consider “Bonus Fits”
- Making sure you’re in the right category
- Defining this without guidance – who is going to help you reach out to these prospects?
EPISODE TRANSCRIPT:
Mike Harvath 00:04
Hello, this is Mike Harvath with another Shoot the Moon Podcast broadcasting live and direct here from Revenue Rocket world headquarters. As you know, Revenue Rocket is the world’s premier growth strategy and m&a advisory for IT services companies. I am fortunate enough to have my partner Ryan Barnett here today to chat about the ideal prospect profile. Ryan, welcome.
Ryan Barnett 00:30
Hey, good morning, Mike. Thanks for having us on today, and thanks to all the listeners out there that we’ve been taking this podcast, whether you’re on the treadmill, or whether you’re having a workout or driving in the car or listening intently. We appreciate it. You’re here today. But if you’re working out, please Do you know another 10 crunches. Mike, the topic today is that I will we call an IPP, the ideal prospect profile. And it’s critical when you’re thinking about an m&a transaction that the company you’re looking to buy is someone that fits strategically and culturally and financially. And in order to do that, we you have to take a step back and understand the strategic strategically why a company should be acquired and when your strategy in in building your own business. So when we look at this in our own practice, that we typically put this through our m&a readiness portion. So, Mike help me understand just what m&a readiness is in the context of an ideal prospect profile.
Mike Harvath 01:37
Yeah, for sure, you know, I think what’s important to understand is that just because you have the desire to do m&a, and kind of move into an m&a motion, doesn’t necessarily mean that you’ve thought through everything as it relates to IPP, right. There are a lot of things that fall broadly into three categories on m&a readiness. And we’ve talked about this and former podcast, but we’re gonna go a little deeper today. You know, they generally fall into strategy, culture, and financial fit. And all those things as there’s probably a half a dozen or more attributes in each one of those areas that contribute to the IPP. And the IPP should line up really, really well with your business if you’re a buyer. And likewise, if the shoes on the other foot and you’re a seller, you need to make sure that these things kind of line up for your buyer. So that you can have a much higher probability of success post transaction. And so if we drill into strategy, I think, you know, we can start by picking that one apart a little bit. And strategy alignment has a lot to do with either an adjacency type model, which means, hey, you guys are kind of selling to the same market, but maybe offering different services where there’s complimentary, you know, a complementary relationship, aka you can bring deals to the other business that you’re acquiring, and vice versa. Or it’s consistent and an extension of your existing focus area in your business. And I think by thinking of it that way, you can very kind of quickly decide, you know, does this work? Or does it not, it may even flavor the IPP, in that you’re only looking for like an extension, or you’re only looking for what I’ll call kind of more of the same type attributes and extending your business maybe to a new geography that are very similar, or even in your own, you know, market or vertical market, you know, couldn’t be more customers, some of those deals can be smaller, you know, people use the term Accu hire all the time. That’s, that’s not really, I think, real effective, as a way to think about it. Because whether it’s a small business or a larger business, you certainly are going to be bringing on people. And I think as you know, more appropriate to think of it as a way to get additional opportunity in the business, whether it’s small or large, frankly, but it’s either a line extension type deal on the strategy, or it’s more of a well considered more of the same customer base sort of expansion, at least on the strategy side, and hopefully that makes sense.
Ryan Barnett 04:29
Absolutely, like, I think you nailed the two categories, you’re either expanding to something you don’t know and do today, or you’re you’re bringing in or you’re looking to expand your market share of where you’re at. So when we think about in terms of that Prospect Profile, the biggest area you should consider is that that category, whether that be an expansion, and typically you start to think about that in terms of the technology, maybe dealing with. For example, if you’re working with your Microsoft Azure partner, perhaps you want to further your Azure capabilities by buying someone that has a tier one CSP license, that would be a good example of somewhere where you can further your capabilities. But then within that target market, the other way to adjacency, if you’re in Azure, maybe you’re looking for an add on AWS customer, we typically consult with companies, most companies want to stick within their lane, and where you’re doing, where you’re working, and where you have specialties is where you can continue to build upon those specialties. But overall, spend a ton of time thinking about where this fits, the category of company that you acquire will have a radical difference on the valuation expectations of that buyer. So keep that in mind when if you’re something similar, and you’re in a high paced environment, understand that the cost may go up with that, but the revenue and profit, the creative value of that acquisition will also be most powerful.
Matt Lockhart 06:06
Well, you know, I think you guys are spot on, I will point that point out that in this supply-side challenged environment, you know, sometimes this strategy can just be we need, we need people with similar skills that match to our existing capabilities today. And that’s of all of the strategic opportunities that that we look at. It’s kind of the lower end of the strategy scale. But it is something that that exists today, simply because there’s just challenged with talent overall.
Mike Harvath 06:49
Yeah, for sure, you know, another thought on strategy sort of fit as it relates to IPP, you know, and we could argue whether this is financial fit or strategy fit. But I think of it more like strategy is whether you’re looking for a fixer upper, as we like to call it, where it maybe it’s low profit, maybe it’s growing or not. But you can apply some best practices that maybe you’ve implemented in your own business to optimize growth and profit to that business, and get some left or not, you know, maybe it’s a healthy growing business. Now, there’s trade offs, right for buying a fixer upper, certainly, you can, you know, probably pay less, because there just isn’t, as it’s not a, it’s not worth as much because profits may be suppressed, or maybe even it’s not making money. And you’re in a position to turn it around, where you can get some value. But I would say in general, for most businesses that we’ve seen over the last 22 years or so, it’s better to buy a healthy growing concern, or going concern, as we’ll call it, versus one that’s a fixer upper. And the reason for that, at least in my own experience has been, there’s always a lot of skeletons in the closet, on a fixer upper. And you may not have full visibility to that, as you do your due diligence. And because of that, oftentimes, there’s hidden costs associated with kind of optimizing that business if you acquire it, and or try to turn it around, that maybe you didn’t anticipate. And so oftentimes, when I talked to, or we worked on projects, where we help clients buy fixer uppers, or, you know, we know kind of friends of the firm, or, you know, maybe we even represented a fixer upper to the market, the folks that buy those sometimes end up really questioning whether their return rates that they expected to get were as high as they thought they would get, because some of these sort of hidden issues that sometimes pop their head up, you know, it could have to do with sort of employee satisfaction, or it could have to do with, you know, customer sad, it could have to do with a million things that may not have been readily determined in diligence, and you didn’t really learn about it until, you know, after the deal. So that becomes a strategy decision as well. Do you buy healthy going concern and pay a little more money and certainly have less risk and broken glass on the backside in that situation? Probably? Or are you equipped and ready to take on the risk of a fixer upper knowing that you’re going to pay less, but you may have some hidden costs associated with sort of optimizing that business right sizing and close to you.
Ryan Barnett 09:36
Yeah, Mike, I jumped straight ahead to one of those critical things to look for in an ideal prospect profile is that financial condition? If and when you’re defining your ideal prospect profile, it’s important to understand your risk tolerance for what Mike just talked about the if you’re willing to take something that is not accreted to profits, but you’re able to transform that company to be accretive to profit, that can be a powerful acquisition. So consider that financial condition and the health of that company is is paramount, I will say it’s difficult to understand the financial condition of a company, when you’re starting to build a list for the, for your ideal prospect profile, this is something you’re gonna find out deeper in the cycle. And when you start to have meaningful discussions, that that will come out more.
Matt Lockhart 10:31
I think you brought up a really good point around building the IPP is, when it comes to the financial fit, it’s really just a range, right, or pricing, you know, buying range that you’re looking at, as a first, you know, sort of brushed, and, and then, you know, playing into how you would like to structure a deal is obviously super important when it comes to the financial fed. And, and to some extent, that plays into whether or not you’re looking for an organization with a management team that is, you know, looking to sell in, versus selling out. And so I just kind of wanted to raise that up that this whole context of, you know, selling in versus selling out. And as that pertains to an ideal Prospect Profile, really, you know, kind of covers all three of those fit categories.
Ryan Barnett 11:39
Absolutely. And moving, you segwayed perfectly Matt, into the other thing a buyer needs to consider is, what do you expect the management team to do? And by management, oftentimes, this might be the owner and the shareholder? Do you expect them to stay on and continue with the firm in perhaps bolster your leadership capabilities? Or do you expect them to move on and do other things? Like any insight, additional insight on how firms buyers should think about that management intention?
Mike Harvath 12:14
Yeah, I mean, as a pursuit, as a, as it impacts your IPP or a deal Prospect Profile, I think you have to give that some thought and some clarity around what it is you want. As a buyer, I would give the same advice to a seller, right, it’s probably more important that the seller has clarity, as to whether they’re selling in or selling out, we often use those sort of terms, if you’re selling in, you’re saying, Look, I want to lean in be part of the new, bigger enterprise, maybe you’re open to rolling some equity, which means you’re gonna have some ownership and, and a combined enterprise moving forward, you’re interested in sort of monetizing some of your work, but you’re okay with staying in the ownership circle. Or, you know, maybe you don’t want that maybe you want to sell out, you’re looking to retire or move on to new opportunities. And we’ve certainly had plenty of clients that have done that successfully. One of my favorites was a guy that was very passionate about Taekwondo and ultimately opened, I don’t know, four or five very successful taekwondo studios after selling his IT services business. And, you know, he wanted to sell out, his focus was to kind of pursue something new. So it’s not just retirement, it may just be that a seller wants to pursue something different. But having clear intent on that, as a seller will help you find the right buyer, but more importantly, as a buyer, as we’re advising IPP, having clarity in your own right, are you wanting to put in a management team? You know, are you are you a search funder who’s looking to lead that business or you’re wanting to acquire it and run it as CEO, and thus you want to, you know, learn and partner with the former leadership until they move out over a period of months or years? Or are you a strategic buyer that says, hey, you know, we don’t necessarily want or need additional leadership, if the second tier of leadership is strong. We can manage it from from, from whatever, you know, from your chair, as a leader or group of leaders at the acquiring company. And so I think, you know, having clarity about in the IPP, are you looking for leadership to stay on, are you looking for leadership to move on, will help you to further refine your IPP.
Ryan Barnett 14:37
Great stuff. I would say switching gears here a little bit when you’re considering the companies you’re going after. One of the just simple, more basic things to consider is geography. And we’ve seen the world of being a bit flatter these days. Matt, I’d love to get your opinions on how someone should start to think about geography into consideration of their ideal prospect profile?
Matt Lockhart 15:07
Well, I mean, a few different, you know, things to sort of consider is, are you looking at geography as a similar destination in a, you know, say it’s the same capabilities that you’re buying, but you just need to expand into a new marketplace. And you know, you need those customers, you need the selling capability within that marketplace. And, you know, you just need that, that presence and history within that marketplace. And so in, in in that context, obviously, the geography matters just a ton. And as we I think we’ve talked about a number of times before where, you know, we’re representing firms from outside of North America, and they’ve got a strategic imperative to enter the North American marketplace. Well, then, you know, obviously, that geography discussion is, is super critical. But then it also plays into what we just talked about probably wanting some continuity from from management, and then you’re looking at their go to market capabilities within that geography has been super critical. On the flip side, where you know that the geography of the personnel isn’t as important, because you’ve got a disparate distributed organization, distributed delivery capability, you know, obviously, today, people are working more virtually than ever, the world is flatter. And so the geography of the BI is much less important, because, you know, you’re really about adding the capabilities could be line extension could be adding of additional, you know, numbers of people within your same capabilities today. And that geography, you know, really isn’t going to be as important. But obviously, key consideration as you’re building, sort of the strategic element of your IPP.
Ryan Barnett 17:22
We’ve seen a lot of customers and clients take a really narrow focus with starting with geography. And I think that is something that is has expanded a bit, we often see this with managed service providers, looking to acquire someone that’s very close to them. There’s benefits to expansion, geography, and the more remote tools that are available. And the ability to work with clients remotely, does broaden the expansion, I would encourage anyone who is looking at acquisitions to be much broader than their initial take on geography. And there’s a lot of room to expand and physical location matters much less than that did even two years ago.
Mike Harvath 18:10
Yeah, I would add that, you know, you also have ForeX or foreign exchange leverage, you should consider while US Dollars relatively high. And certainly it’s come back in line a little bit here in recent weeks. But with the US dollar being a historic highs, if you’re in the US, and you’re looking to do acquisitions, you do get some left if you’re looking at international potential targets, that’s attractive to international sellers, because typically, focus would be that, you know, there could be a good opportunity of synergies there to leverage some labor arbitrage from other countries against us client base. So there’s some interesting strategic decisions. And I think, you know, more broadly, as you’re building it, services, businesses, certainly the most successful ones, we see, you know, think of their practice globally. They think about not only supply side dynamics around Labor internationally, but they also think of customer acquisition and working with clients on a on a global basis. And I think if you think of your business that way, and begin to operate even as a small business, as a global business, you certainly will be in a position to grow and scale and and learn frankly, as the world continues to shrink and be certainly serviced on much more remote way.
Ryan Barnett 19:34
Great stuff Mike and Matt, both good thoughts, love to switch gears here again, on that ideal prospect profile. You need to define size, and typically we looked at revenue and employees are two critical metrics. Let’s put some guardrails up. Do we have any rules of thumb that we typically look at for a buyer on on what they could be capable of?
Mike Harvath 19:59
Yeah, I mean, you know, generally we recommend you can sort of afford to buy not only in Dollars Sense, but in sort of risk tolerance, a firm about half your size. But that’s just a guideline. Certainly, we’ve had in our history, individuals buy businesses that were seven 810 $12 billion in revenue, it has much to do with your story, as a buyer, as it does your size. And I think what you have to know is that, you know, sellers are savvy, and they’re gonna, that you as a buyer, as much as you’re gonna bet them as a seller. And you have to have a compelling story, if you’re looking to buy someone your size or larger, you know, the question immediately comes up, and it’s always mind as to why would we do that, right, we want to sell if there’s a one plus one, equal three or four, by learning from a buyer who’s done it, they’ve kind of been there and done it, being able to exploit an installed base, and maybe that Boyer buyer has the seller can have access to. And certainly there’s the attribute of, you know, you basic premise of the deal is really further amplified when you can get to a place together that you can’t get apart. That’s a good way to think about a deal or a test. But the answer the question more directly and broadly, right, and it’s typically a firm, about half your size, is you’re able to absorb as the buyer.
Ryan Barnett 21:34
Makes sense. Those are those are the big, when we think about building that ideal prospect profile, the big categories we think about is that that business category and strategic that we look at size, where where it fits with your organization, we look at geography, we look at the financial condition, and we look at the management intention. And we’ve we’ve talked about all of those, I would say that there’s also a general category of bonus fits. And this somewhat comes into a topic that Matt, you’re familiar with an abundant a bit with, which is kind of a an ideal prospect profile versus an acceptable Prospect Profile. And I’d love to get your thoughts and just definition about kind of what that APP might be, and how bonus type criteria might help influence that acceptable profile into an ideal fit.
Matt Lockhart 22:33
Well, I think that to some extent, as you’re building your inorganic growth strategy, important to recognize that if the box that you create with your IPP is so small, right, that, you know, you have to hit the center of the bullseye. Without hitting the center of the bullseye, you’re never going to proceed with an acquisition? Well, you may not be very successful in your in organic growth strategy. So being able to have an IPP that has some flexibility that can blend in with an acceptable, you know, Prospect Profile, that there’s a, you know, there’s a real range there. And so, oftentimes, so Okay, say for example, right, an organization is attempting to do an extension of their capabilities and maturation of their capabilities. In your, in your example, Ryan, they’re an Azure shop, who really needs to, you know, build their AWS capabilities. And they’re looking to extend their marketplace geographically, with the the addition of a Salesforce that has capabilities within a geography as well as the capabilities, you know, within extending that line capability. And you’re looking for a management team to stick around for at least five years. And and so I’m using that as a as a difficult example. Well, it’s going to be really, really difficult. So prioritizing, and maybe that way of talking about the bonus criteria, prioritizing what is most important in that IPP can allow you to have enough flexibility to adapt your own strategy to be successful in your inorganic growth efforts.
Ryan Barnett 24:57
Yeah, well said. Mike, any follow up on that?
Mike Harvath 25:02
Not really. I mean, I think you have to be somewhat flexible to Matt’s point. And I think, you know, understanding kind of what’s complimentary to your business and taking an honest assessment, as a buyer, is really important, because I think, you know, you can certainly complement your business with acquisitions as well, that are, you know, material from a staffing perspective and sort of leadership perspective, you can’t have too many great theories around any business if you really want to scale and grow meaningfully. So, you know, taking an honest assessment of that, I think, also the sort of the culture test, we haven’t talked much about that in the IPP on this podcast, yeah. But, you know, culturally, you have to be able to make sure that those components have your IPPR also lined up. So that, you know, you’re thinking in an acquirer or in your IPP is about, you know, companies that have employee care and Customer Care philosophies that are aligned to your own. If they’re not, you’re setting yourself up for a pretty rough ride. And so thinking about that, in your own taking an honest assessment and inventory of your own customer care, and employee care philosophies, and how that applies when you’re looking at a particular acquisition is important. Because if those are aligned in an acceptable criteria, versus an ideal criteria, oftentimes that can trump and help you be really successful together, where if in an acceptable criteria that’s not in alignment, or even an ideal criteria, it’s not alignment, it could be a recipe for a pretty rough ride.
Matt Lockhart 26:44
I’m glad you brought that up, Mike. Oftentimes, when we’re talking about an IPP, with customers that are, you know, they’re obviously most focused upon, you know, the strategic fit and sort of management intention, or, you know, or, or their, how big, right, but often overlooking the cultural aspect of it. And let’s face it, if it’s a tech enabled services, business, it’s a people business. And if you don’t align on that culture, or even if the culture isn’t in perfect alignment, you understand the culture that you’re buying, and are and have a plan to sort of address gaps or, you know, so on and so forth, then, quite honestly, the biggest risk is, is that, you know, you’re going to lose people, and you’re probably going to lose top people. And if you lose top people, well, then they’re your your ability to sort of meet your strategic goals to meet your return rate to meet, you know, everything is really compromised. So I think that that off that cultural aspect is oftentimes overlooked. And thinking about the IPP, and how many times have we looked at scenarios where our clients or our clients on the buy side, you know, are really recognizing that they’ve got a pretty strong cultural, you know, method culture in place that needs to be aligned too.
Ryan Barnett 28:27
So even if something is finding the right size is is there, there’s a bit of art and science behind that, or understanding the complexities or subtleties of a website of dissecting what a company actually does compared to what they say they do. And one thing that is difficult to ascertain from a list building perspective, for that ideal prospect profile is culture. We can look at cultures and our core beliefs, or we can look at it how employees act. And those are good starting points. But it really takes those conversations to understand how things are culturally aligned in how they treat customers, employees in the the norms, values and beliefs that are there that allow everyone to work together. So I encourage you to work with a firm that they can start to build the right list of companies that fit your ideal prospect profile, and then frankly, the concert to reach out to them. So you can execute on a a campaign that starts to bring that ideal prospect profile from some imaginary piece of criteria on a piece of paper into someone that you can actually go acquire.
Mike Harvath 29:41
Yeah, for sure, Ryan. You know, and, and oftentimes we get asked, well, how do you vet a firm that really gets it? Right, I think, you know, we’re a little biased here. But you know, we think a firm like ours that’s focused on the market vertical is critically important because of the deep understanding of how all these IoT services, businesses, tech enabled services, businesses, broad operate, ownership thinks about them, how ultimately, we get to a spot where we can transact a deal. And I think another measure that should be, you know, looked at is, you know, what is your success rate and getting deals done? I think many, many brokers are happy to put forth that they only are able to get to about a 50% success rate. We don’t think getting half your deals done is very laudable. We think the numbers should be you know, north of 90% 50%. So, certainly, that’s a test and it’s something that we pay close attention to here a revenue racket so so just my two cents, you know, on evaluating a firm personal into, you know, helping you execute against your IPP, and back to you Ryan.
Ryan Barnett 30:55
That’s all the questions we’ve got here today on this topic, Matt, Mike I’ll leave it to you for any last closing thoughts?
Matt Lockhart 31:05
Well, I think that it’s, well, great discussion, guys, first and foremost. And I think that one of the things that we’ve seen is that going through this process of defining the ideal to acceptable Prospect Profile is oftentimes super enlightening for organizations as they’re starting their an organic growth journey. And so I speak for all of us, we really enjoy this process of defining it with our customers and oftentimes seeing their perspective adapt they under their eyes open in some ways. So great discussion, guys. Over to you, Mike.
31:51
Thanks, Matt, Ryan that will tie the proverbial ribbon on it for this week here at Revenue Rocket. We look forward to you tuning in next week for more thoughts and insights on growth strategies, m&a, and the IT services market. Thanks for tuning in and have a great week.