Instead of Buy-Side M&A, Consider Selling-In

Instead of Buy-Side M&A, Consider Selling-In

Shoot The Moon
Shoot The Moon
Instead of Buy-Side M&A, Consider Selling-In

Mike Harvath and Matt Lockhart from the Revenue Rocket team recently attended a large MSP Conference in Chicago where Mike had the opportunity to speak on “10 Questions to Consider before Selling your Tech-Services Firm.” In this episode, Mike, Matt, and Ryan are unpacking one of these questions, Selling-In vs Selling-Out and some takeaways from this recent conference.

A few areas we touch on in this episode:

  • Unpacking and advice for those owners saying “I’m not willing to sell but I’m willing to buy”
  • Understanding your options for Selling-In
  • Working with a capital partner
  • Pick Selling-in OR Selling-Out, not both
  • Diving into no deal is the same and deal structures are unique
  • Quick Takeaways from the Channel Partner MSP Growth Show in May 2024

Listen to Shoot the Moon on Apple Podcasts or Spotify.

Buysell, or grow your tech-enabled services firm with Revenue Rocket.



Mike Harvath  00:06

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’re a regular listener, and maybe even if you’re not, revenue rocket is the world’s premier growth strategy and M&A advisor for tech enabled services company. With me today are my partners,Ryan Barnett and Matt Lockhart. Welcome, gentlemen.


Matt Lockhart  00:32

Great to be here. As always, it’s playoff season. If you listened last week, you heard just how fired up we were with our local team, the Minnesota Timberwolves. Since then, we’ve gone on an Owen three run and fight and then glom on to stay alive in the NBA Playoffs. So there’s our playoff update. Next week, I’m looking forward, I’m visioning, giving the update as to how we came back. And we beat the nuggets in the last two games to move on in the NBA Playoffs. More importantly, we got some pretty cool topics, Ryan, what’s going on?


Ryan Barnett  01:18

Hey, Matt, I love your enthusiasm. But I think you’re a Minnesota guy. But maybe you haven’t been here long enough to be disappointed for all your life, and loving our our teams in the playoffs. But nevertheless, we will someday it will be ours. I’ve


Matt Lockhart  01:35

lived here my whole life. And I’m just trying to live in another world, Ryan.


Ryan Barnett  01:42

I love I do love it. Well, a you know, in addition to watching some playoffs, Mike and Matt, you were at a show this week on the channel programs. M&A roadshow. And and you got to meet with who’s a good crowd. And the topic was the MSPs and how you tackle M&A. So today wanted to get a little bit of a debrief on what you see there in the during that events and one topic that came out from Mike a speech that you did. You talked about 10 questions to ask before selling your MSP. And one of the first questions is about selling in are selling out. And that prompted a lot of good discussions. So I want to do that as well. So, Mike, Matt, I’m really happy to have you here today. And looking forward to to kicking off. So, Mike, what was the show about? Tell me a little bit more about the audience? What what were people excited to hear? And what were a few conclusions that you might have had?


Mike Harvath  02:44

No. Yeah, this was the channel program grow show in Chicago and Matt and I went down there from Minneapolis here to, to not only meet all fine people there and and enjoy the content, which was quite good. As well, as you know, talk a little bit about, you know, this topic of, you know, 10 things you should consider before exiting the business. And one that got quite a bit of dialogue was, you know, selling in or selling out. And we’ve talked some about that in my podcast. But let me just recap what that is, again, selling in when you sort of move forward with your business has to do a lot with joining forces with maybe a capital partner, or another organization, where you’ll play a material role, it may still play the role of CEO, or founder or president. But with much more capital to deploy in a lot of ways. It’s about getting to a new level of scale, both organically and through acquisition. And so it’s not in some ways, it’s not really about selling at all, in some ways, much more about buying and growth. And it’s a growth story. And it’s the thesis behind a lot of private equity investments, a lot of family office investments, and other investors for a thesis around the space. Selling out, on the other hand is much more about doing a transaction to have an off ramp or a way to exit the business. And that may be a fairly slow exit over a period of years, or a fairly quick, let’s say, is maybe as short as six months and he can facilitate it in orderly transition. But either way, it’s a it’s an enabler for you as an owner, to transition away from the business versus get more involved with the business. So hopefully that provides a little context, right?


Ryan Barnett  04:48

It certainly does. I think it’s one of those. It’s the primary question. I think we ask everyone, you know, where do you want to go? And you have to pick one or the other. And if you’re, if you’re selling out that’s There’s going to make sure if people understand there’s not a value judgment to selling out. I think some people may say that to us, it’s in moving on to the next stage of life. And if there’s any advice, we given that it’s some, make sure that you understand that that next stage of life is without your business is actually complicated. And you have to have a plan. And having that plan can be grand, it can be simple, but having a plan and making sure you execute on that plan. Maybe it’s doing nothing, but making sure you’re doing nothing this is important. So but in the context of selling in, I think, something Matt, you were just mentioning, there’s a lot more to selling than than just getting a capital partner. It could be opportunities for girls. Maybe you could dig into that a little bit.


Matt Lockhart  05:53

Yeah I mean, you know, one of the things that we often advise our clients is that, you know, sometimes a timeframe matters, right, in the, in the continued evolution of a business. You know, sometimes there’s a shorter window of time related to your firm’s unique capabilities, ya know, an example of that right now would be artificial intelligence capabilities, enabling the data related to artificial intelligence, and overall sort of automation and, and the like, and there are leaders right now who have a leg up, because they, you know, they invested earlier, they, they are able to create a more unique and valued go to market and in a space that clearly has a lot of promise. But in order to stay in of leading position, and you need to drive scale as well, because others are going to be working hard to catch up. And so, being able to drive that scale, just through organic growth is obviously hard, it is slower, it will just take more time. And, and there therein lies sort of a risk that, that without growing scale based upon superior capability or offering limit to your ability to sort of maximize the value that your firm can, can drive over time. And so timeframe matters and, and scaling and enabling the scale that enables continued progression for your overall go to market goals and, and growth needs to be considered. And so the idea of partnering with somebody that has the wherewithal has the financial wherewithal to be able to sort of fuel the business with capital for an inorganic growth strategy, as well, as continued, you know, fuel for your organic growth strategy is oftentimes a really great strategy. And, and, you know, sometimes when we’re talking to our clients, or people who are interested in starting to think about organic growth, they maybe just think about it in the context of, you know, one purchase or two purchases, and, and they’re saying, Well, I, I think that I’ve got enough, you know, enough security in my business and, and there’s enough cash flow in my business, and I can also, you know, look to an SBA loan or, you know, a bank and and get it done that way. And it’s it’s certainly possible. But again, thinking in the context of timeframe, is that the right approach versus, you know, finding that capital partner with deeper pockets that can allow you to go faster.


Ryan Barnett  09:25

I think you nailed a key point here. And oftentimes when we do outreach, and we are contacting companies to be part of something bigger, let’s say be part of a platform or be part of an investment. One of the first reactions we’ll hear is I’m not ready to sell, but I’m ready to buy. And it oftentimes is this actually comes from sometimes really small companies. So you might have a smaller company that’s just really going to jump in and they don’t necessarily know the option. into that are even there. So they kind of think in that SBA loan, or they think in that cash at hand. And they there’s believe there’s some risk. In that approach. I think what we’re introducing here is that there’s there’s people here and processes here that allow you to, perhaps take some chips off the table, and be able to continue continue that growth and be part of something where you can buy, you can still do a bit and, and, and to go buy other firms. Mike, when you think about that, that concept, a it feels like people can take a bit of risk and take some chips off the table. And a and how does that? How does that sit with a business owners when it when you when you mentioned that? And how does that? What are some options when you do? allow someone to work with that equity partner?


Mike Harvath  11:03

Yeah, that’s a good question. Ryan, I would say that, when you think about most of business owners, you know, want to accelerate their growth. Many of them I shouldn’t say most, but many through acquisition, right? They’re like, Okay, how do I go fund that? So they’re thinking about it, like, Hey, maybe I can do some sort of financing, many of them will go to a debt financing vehicle or think about how do we, you know, get to the right path, the fun, my inquisitive strategy. Not many of them, think about it through the lens of sort of selling in and a recap or recapitalisation structure, where they can join with a capital partner, take some chips off the table now, or what they’ve built, meaning sell part of their equity now and get paid for that. And then, oh, what we call roll equity, or move equity into a new entity, one that is, is capitalized differently, that can support a much more aggressive growth strategy. Not only acquisitive growth strategy, bought organic growth strategy, and really fuel the scale of the business in a new way, but likely was not available to someone without that level of capitalization. So it’s a way different way of thinking about how you monetize your investment and get to scale. And it may be the only way to scale a business. In the world of IT services past, you know, certain thresholds in those thresholds maybe come to mind like 50 or 75, or 100 million dollars. If it’s a, you know, a services company, a lot of times people run into these glass ceilings, it’s difficult to get there without the collaboration with a capital partner, because a capital partner, the right one brings not only capital or but they bring smart, smart money, as we often call it. And they’d bring in some leverage connections and experience and kind of augment your journey with not only great financial engineering, but also great business acumen that can help you think differently about how you scale your business and how you grow it. And, you know, what, what the quote unquote thesis is for your expansion. And that sort of new thinking often leads to a place that you can get you together with a capital partner, that you couldn’t get to a part.


Ryan Barnett  14:02

Matt even even working on a deal here that has a nice potential for for our platform. And it’s, you’ve got an owner that could be selling in the Navy, their horizons, not for forever, but it’s for enough to continue the growth path that they they’re on. And we’ve seen a lot of deals like this. So it’s not necessarily just one deal, but What risks do you see or perhaps, what questions are sellers thinking when they take this approach of taking on capital for growth? Is that how is that different than their approach if they were selling out?


Matt Lockhart  14:45

Well, I mean, I think it goes back to that first principle, Ryan, that you know, clearly understanding you know, your drivers for selling in versus selling out and, you know, taking on a capital partner and On and looking to accelerate growth is, is one aspect of selling, it’s not the only aspect of selling and you can, you could sell to a strategic buyer, where you are still interested in participating. But it’s it’s not, you know, that platform roll up strategy. Yeah, type of an approach. So there’s a variety of different means upon selling it. But again, understand your personal goals, your professional goals, related to your desire to sell in, versus if it’s time to, for a completely new chapter you’re selling out. Now, in, in sort of the, the idea that you are selling in as a means of scaling your business with a partner, and doing so faster, and, you know, receiving the, the, the eventual benefits of, of a much larger scale business. Yeah, now you go back to the, the the three most important principles that we talked about all the time, cultural fit, strategic fit, right, and then obviously, financial fit, you’ve got to, you’ve got to trust the partners that you’re working with, you trust them, based upon their experience, based upon their knowledge of your business based upon their competency of being a great partner and helping others scale their businesses. But then also just trusting them personally as well. And relationally. Because, and this is one of the things that, you know, was talked about yesterday, at the great, you know, summit that we were able to attend is, is in some ways, it is like a marriage, it’s like a business marriage with a partner, and, and you are tied at the hip financially. And relationally. And life is too short to be working with people that you don’t trust and enjoy spending time with. Equally important is being in line with the strategic goals. What is, you know, sort of an acquisition strategy isn’t an acquisition strategy around, you know, serviceable market area? capability development, you know, both people, you know, all sorts of things, and, you know, being in line with that being in line with how big and how fast and sort of what are the goals related to that understanding, you know, each partner sort of areas of responsibility, you know, you talked about, you know, this current scenario that’s going on, and, and, you know, our clients are, in, in discussions now, related to all of these things, and, you know, knowing full well that, that they’re going to, you know, they’re gonna have the starting quarterback role for a good period of time, and, but then building that real, you know, that trust based relationship so that they can make they that all the partners can collectively make the the appropriate decisions moving forward, that are going to enable the continued scale of the business. So it really does just go back to a number of the principles that that we, that we talked about in every scenario here. But it’s, it’s, it obviously is is worth the diligence and worth the time in the in the context of partnering up and scaling the business.


Ryan Barnett  19:08

That’s a great, great point, Matt. Mike, how does someone start to consider this? And if if this is a new concept, and you’re wondering how you’re going to be impacted, I would imagine just understanding what maybe your firm is worth today, and what it could look like in the future could be a good start, but what are a few things that firms could consider doing when when investigating this concept of selling in?


Mike Harvath  19:42

Well, certainly, I think you bring up a good point, right, which is, you know, being able to understand what you’re worth today and being pragmatic about that. I think sometimes there’s gaps between what business owners think their business is worth and what it’s actually worth, you know, vetted through comprehensive valuation. process. You know, we we do that as a firm launch evaluations every month in the space, we’re pretty unique in that we have a pretty material comps database of private to private transactions based on our own work, but also based on the work of some of our trading partners that do what we do in the space and and in the end that benefit you to have clarity about, you know, what is your firm work today, I think being able to forecast and understand what the options are, and how you can build value into that firm. Through both organic and acquisitive strategies, we’ll help you get your head around this and all roads there lead to having a competent m&a adviser that can advise you on you know how to position your business best for this type of selling in recapitalization effort. Ultimately, and culminating likely with the process to go find that capital partner for you. And then being able to facilitate and help you execute against your buyside strategy. Once you’ve sort of recapitalize the business. I you know, it’s important to note that ideally, you need some time to prepare for any potential conversations with a partner around recapitalisation, you want to optimize your business value. You know, in many ways, I don’t like real estate analogies with m&a, but I’ll make one it’s often like, you know, did you paint the house and fix it up and make sure everything was ready and staged it before you put it on the market? Or didn’t you. And if you do those things, ahead of listing a house for sale, it’s likely it’ll command a higher price. Likewise, in your business, if you kind of tune it up and make sure things are working, and you’re firing on all cylinders. Prior to moving into a process to recapitalize the business, it’s likely that you’ll come in at a higher premium, and frankly, attract more interesting and better recapitalization partners, ones that can be a great fit for you to achieve your goals. And a lot of that has to do with your ability to be level set and what the real value of your businesses be able to have, quote unquote, tuned it up or staged it or prepared it and be in a position to run a process. All those things are pretty critical. If you’re thinking about doing this.


Ryan Barnett  22:37

How does deal structure change? And all this Mike or Matt Would What should a someone who is engaging in this and then into selling and what should they expect their deal to look like? But it’s 100 of understanding that all deals are different. But what’s a general guidance that you’re going to see compared to a deal where you might sell out?


Matt Lockhart  23:05

Well, I’ll take a run. But yeah, I was sort of laughing. Ryan, when you said what is the deal straight? And it’s like, whoa, wow, how are we going to answer this because it’s it, there’s no one path there. But if you’re selling in with a capital partner, it’s I guess the the most important principle to think about is that you are going to receive cash, right for equity of your business. Now, that could be you could be selling a majority, over 50% equity in the business or less than 50%. I think that’s an important piece in and of itself. Now, there can be other term structures applied. But oftentimes, what we see when there’s opportunities to to partner with a capital partner, is there’s there’s an acknowledgment that there is a real buy in from the existing ownership team. And so it oftentimes can make it easier to not have other aspects of structure in a deal. And so what we sort of advise towards on both sides of the table is is the cleaner the alignment is the more that you’re together on those cultural and strategic goals can make a cleaner alignment on structure and sort of simply having a cash and equity based discussion.


Mike Harvath  24:43

Might. Yeah, I would totally agree with that. I think what’s quite interesting is, you know, the, again, no two deals are the same, but you have to align objectives and You have to be committed to this new structure. And committed can mean different things for different people with different Capital Partners. You know, some capital partners will do what we call minority equity deals, or less than 50%. Buy in more of a capital infusion, if you will, them majority, the vast majority of them, though, do require majority equity. And they will, you know, typically do a deal where you’re going to require a 20 to 30% equity role, and you’re going to take the chips off the table one way or another, for the rest of your equity. And, and I think, you know, provided you’re prepared to structure a deal like that. And to align interests, I think you’re gonna do pretty well. I mean, there’s all kinds of nuance about, you know, are you a platform? Are you a tucked in? Are you, you know, are you? What is your time horizon? In the business? Do you want to be there for the long haul? I think most Capital Partners would like you to be around for at least five to seven years. So are you okay, with less time but, you know, again, another topic that came up in yesterday’s conference was, you have to have clarity about what you want, when you go into a conversation with a capital partner suitor, any other, you know, business related partnership, and having being being not clear, oh, I could stay on or not staying on or this or that, you know, appears to be wishy washy on the on the perception of a capital partner, they want somebody who knows what they want. And I think you have to come to a point where you have that clarity as well, because it will help fuel the selection of the right capital partner in this situation. If you’re selling in to align interests, I think if you’re holding back information or reticent to say, you know, I really want to retire, but I’ll play the game in order to get the deal done. You know, and, and then kind of spring it on them afterwards, or whatever. If that’s your thinking, it’s flawed, you can’t do that effectively have a good outcome, need to be fully transparent with where your head is at at the time now, can that change later? Yeah, sure, of course, it could. But it should be, you should be fully prepared to be fully transparent about what you want, and where you want to go with the business and how capital partner can help with that. As well as and this is against something that came up yesterday, all businesses have warts, you need to be transparent about them in order to have a partner come into your business eyes wide open. I think discovering those things later can cause problems. So, you know, if I wanted to, you know, bang the drum on a theme and would be, you know, full transparency will certainly help win the day when it comes to finding and selecting the right capital partner, and certainly enhance your ability to achieve your broader goals in the


Ryan Barnett  28:19

That’s a great, great point, guys. And then both of you have some really interesting insights. And and thank you so much for participating in that. And that show yesterday with the topic that Mike again talked about was 10 questions to ask before selling your MSP. It’s a podcast that we’ve done. It’s it’s also white paper available on our website, and we’re happy to talk to you live about what that means to your business. If I was to summarize what I heard today, one of the things that we hear a lot again and say, I’m not willing to sell, but I’m willing to buy. And I want that notion to flip itself a bit on its side on, you can do both, you can take some risk off the table, take some chips off the table, and get capital and actually have both good roles. And risk. That’s the diversify. And that’s important. If you are going to sell in there are options for who you’re going to sell in with. And there are opportunities for girls could be organic or inorganic. But having that capital partner can help either one of those be true. I heard that if you’re going to pick one, stick with it and be clear on your intention somewhat that matter of what happens in the future. So keep doing pick a path, but continue with it and stay true to your to your mark. And I heard that I know deals the same and structure is going to be wildly different, but expect some cash and expect some kind of equity roll. There’s often a third component, whether it’s an earn out or seller note or some other portion that could be used utilized as well. So I find that it doesn’t make as much sense But today keep in mind there’s other other deal terms besides just cash and inequity role that can be an option mantle turning over your name today for any other points want to summarize on or reflect on and then back over over to Mike


Matt Lockhart  30:16

Thanks Ryan just a huge kudos to the channel partners crew. I think they did a great job. I know that there’s more upcoming I think that the interest level related to you know, mergers and acquisitions in this space was was extremely high. The panelist from some of the largest platforms in this space where they are the guidance was was really excellent. You know, the future is bright in the managed service provider space as it is in in the overall tech enabled services space. So, so it was great. I appreciate it, Mike.


Mike Harvath  31:02

Now that will tie a ribbon on it for this week’s Shoot the Moon podcast, encourage all of you guys tune in next week. We will impact from other relevant discussions around M&A in the space and and growth strategy. So that make it a great week. Thanks a lot for your time. Have a good one.