M&A Insights Q4 2023

M&A Insights Q4 2023

Shoot The Moon
Shoot The Moon
M&A Insights Q4 2023

In this episode of Shoot the Moon, we’re talking about what we are seeing in the market for Q4 2023 M&A for tech-enabled services firms.



Mike Harvath  00:05

Hello, welcome to this week’s Shoot the Moon podcast broadcasting live in direct from Revenue Rocket world headquarters in Bloomington, Minnesota. As you know, revenue rocket is the world’s premier growth strategy and M&A Advisor for IT services companies I guess we got to remember what the heck it is we do some days I just get a little tongue tied with me today or Ryan and Matt, my partner’s here at Revenue Rocket. Welcome, guys.


Matt Lockhart  00:33

You know, sometimes it’s hard to see the forest through the trees, Mike. Right. And, you know, we just live in, we live amongst the trees and sometimes, you know, forget how to characterize what what in the heck it is we do. Right. But man, happy to be here excited, excited for the future. We just talked recently about our participation in the Inc 5000 Gala. And on that list, and and had the opportunity to meet a bunch of great people and great firms that are also optimistic for the future. And, and the future is bright. Right, right.


Ryan Barnett  01:18

Absolutely, it was such a great conference and great spending time with both you and and something that really the fast companies are on that list for a reason. And they are going to keep on that list for a reason. And one of the ways to keep on that list is to help is to actually buy a few companies. And today would love to talk a little bit about what we’re seeing for market dynamics. And today’s m&a transactions especially focused on the tech enabled services, businesses. So we say that that’s usually custom application developers, application integrators and cybersecurity firms MSPs and the like. So, Matt, you were just talking about what you’re seeing in the market and kind of this mix of our resellers seller’s market or a buyers market? And I’d love to get your thoughts.


Matt Lockhart  02:12

Yeah, you know, we’ve, I think we’ve we’ve been open, we’ve talked about the fact that 2023 has been a bit of a slower year, in in the M&A marketplace, and I don’t think just in, in tech services, it’s really been somewhat across the board, largely driven by the increase of of interest rate, which is made the availability of capital a little bit more difficult. In addition, you know, there’s been some economic wobbliness. Right, a little bit of headwinds. And so firms have, you know, been been maybe not growing at the rate that they’d been used to historically. And so it’s been time to sort of hunker down. And in particular, and I know, Mike, you’ve got perspective on this, I think, in particular, in the sort of first half of 2023. Now, if you were to listen to a podcast about a year ago, or maybe, you know, 15 months ago, we would have been talking about the fact that it was it was pretty squarely seen as a seller’s market, and specifically in tech enabled services. And And while the pendulum hasn’t really swung fast, right, to the point that it’s a complete buyers market today, I think that what’s happened in the economy has brought up a bit of equilibrium. Right? And so that maybe it’s sort of in between being a buyer’s market and, and a seller’s market, which is actually a great place to be because it really puts a little bit more impetus on finding the right fits, culturally and strategically as well as financially. And those are the opportunities that really pay off in the long run. And so while there may have been deals that were done without some of the without having all of the boxes checked or the right boxes checked previously, I don’t think that we’ll see that in the in the near term future and what we’ll see is is really great partners coming together.


Mike Harvath  04:45

There or they could call them at no question about that. I think it’s going to be you know, an active period. You see, rapidly accelerating and consolidating market after are a sort of slow start to 23. And so we’re we’re bullish moving forward. And I think certainly if you’re a buyer, now’s the time.


Ryan Barnett  05:15

Simply look at this and that you’ve got a bit of an equilibrium. Meaning that some unpack that a bit. If we think about there’s some headwinds and pressure. One of the things that I’ve heard more in the last, let’s say, three to six months, is, it’s really hard running a business. And it’s hard to be the boss of a business. Is there been a shift in perhaps people’s attitude? If you’ve been grinding this out for 20 years? Is it time to perhaps think about what that next step is? Is there? Is there good alignment for buyers and sellers when that attitude is present?


Matt Lockhart  06:00

Well, I’ll take a swing, you know, yes. The, I think what you’re saying is, is that there are, you know, could be founder led businesses or, you know, second generation or somebody who, who bought a small business and has grown it to an extent, you know, when, when things are a little out of balance, right from the the overall supply and demand perspective. And it’s, and maybe it’s a little bit easier to grow your business and manage that business. That near, you know, what, no reason to think about anything differently. And then all of a sudden, you come into a bit of headwinds, and you recognize that, you know, what it’s going to take to go to the next level, and where you are at individually as a business owner. And maybe those two things don’t match up. Right. And so, it’s a good recognition of saying, Well, you know, what, now is the time. And, and, you know, when it’s time it’s time, and that’s a we always ask our clients, it’s the number one, you know, factor, it’s, are you ready? Have you made that emotional and mental leap of being ready? And, and I think you make a great point, Ryan, that, you know, having some challenges sometimes creates an opportunity, a window of saying, you know, what, now is the time. And quite honestly, Ryan, we’ve seen that, in the in literally the last three months, as is we’ve counseled with some, some clients about that topic. You know, right there.


Ryan Barnett  07:49

One of the things we start to see that is, in our origination efforts, people are literally more apt to pick up the phone, or return an email. And then to have that conversation. If I had a wish, or desire, I would love for business owners to always have a thought of what an exit might look like, or the planning might look like. And something that it seems that we’re also having a lot of discussions lately on, I’d like to, to have an exit plan for that next two or three years. So getting yourself emotionally ready and thinking about what you’d like to do if you’re selling in or selling out or getting to the firm or you’re to a point of profitability that makes the sale more important, I think helps are important to hitting your number is is good for just planning into the future. Mike, I’d love to get your perspective, if we see a bit of softening here. And there’s perhaps that pendulum moving over. What happens to valuations in our market. When you look at is this favorable for buyers? Or does does it still stand up for sellers?


Mike Harvath  09:05

Well, it’s fascinating that there’s been a lot of speculation this year that valuations are coming down or have come down. But we haven’t necessarily seen that. And I think because of continues to be a situation where there’s a shortage of talent in our in our world in sort of tech enabled services companies in general. I don’t know that we’re going to see that. I think valuations have been holding up pretty well. We’re certainly getting deals done at you know, valuations that are supported and have been supported over a period of years. Could there be some micro fluctuations in certain segments? Yes, we’ve certainly seen that. But I will tell you, it’s not a material change. I mean, we’re talking about you know, if anything, 10 to 30 basis points, moving around, both down loop back up this year at certain sub segments of, of a multiple of EBIT up. And so it’s an every deal, you know, depending on the merits of its, of its specific deal can can move around and be optimized. I think more than that. So, you know, on the macro view, I would say we’re not really seeing that we’re not seeing valuations, certainly moving materially in any one direction, whether they’d be down or up. And we do have to remember that valuations for many, many years, we’re moving in one direction, and that was up. So, you know, micro correction here or there based on Sub Sub Sub segments, I don’t think warrants any concern. And if anything, I think with the additional volume, that’s expected, as we move forward and move into 24, which has an election year, likely will be generally favorable for the economy, we’re certainly gonna see valuations hold steady through 24.


Matt Lockhart  11:10

And, Mike, I think that you just I mean, just to highlight, you know, finding the the strong strategic and strategic fit first, but then, you know, cultural fit is, is going to enable the appropriate and, and strong valuation for selling firm. Now, I think that buyers are going to have the opportunity to introduce a bit more structure into deals and when designed correctly, that’s great for both parties. provides some alignment between both parties. And, and so I do think that there may be a bit more structure. I agree, valuations are not plummeting, any financial buyer is going to want to, you know, start with that line, but it’s just not, you know, true or appropriate. But at the same time, you know, we’re not going to see, you know, Forex, you know, forex revenue multiples, that, you know, some craziness happened a couple of years ago.


Ryan Barnett  12:22

Man, I’d love to dig into the structure you mentioned, so the structure is going to be used on what do you think will happen is term of structure? And typically, when we talk structure, that’s that deal structure on how somebody could come together? Yeah.


Matt Lockhart  12:38

Yes, sorry, right. I mean, I was just gonna, you know, jump out a so structure, there’s cash at close, right there. Oftentimes component of an urn out, that’s part of structure within a deal, there’s oftentimes the opportunity to roll equity, and or participate, you know, participating as a shareholder. And then in the new company. There’s the use of seller financing. And I think we had a whole podcast on seller financing, Mike’s an expert in that. And then there’s, you know, duration of employment, and, and, you know, being compensated in in that way as well. That and the reason that I think that buyers will have an opportunity and may look to introducing more structure is somewhat related to the cost of capital that we talked about earlier. It’s just, it’s more expensive to use outside capital. And so, you know, firms are not going to want to, you know, seek that as an avenue as much as they did in the past. And so they will be looking to, you know, reduce that cash at close portion. I think that it’s also appropriate, because we our growth has slowed a bit using structure to ensure that everybody’s on the same page with, you know, managing growth and, and net income through a transitionary period is, is an appropriate means for structure. And I think that that, you know, can be and will be used to the benefit of both parties, again, when designed correctly, by quality advisors. It’s a win win for both parties. And so I just think that, you know, because we’ve sort of moved from being the kind of hyper seller’s market into a little bit more balanced market, you know, we’ll we’ll see that as as sort of one of the factors in 2024. And I do want to also, you know, highlight what Mike said is, we’ve already seen a, quite a significant uptick in the fourth quarter here of interest, both from buyers and sellers. And and, and so I think that we see 2024 as being sort of, you know, we’re tipping the nose up, and, and we’re going to see quite a bit more activity


Ryan Barnett  15:29

I think if you’re on that equation that the sellers keep in mind that if you look at where your valuation and the opportunities you have, even with a flat year, you’re still going to have a discounted cash flow view of the future. So thinking keep in mind, those forecasts can be huge and to contribute to the value of your company and buyers. I think what I heard for from your magnet, I think I at least extrapolated to this, right? It’s not necessarily that there may be more opportunities, but the expectation of getting a deal done that’s, that’s good for everyone could be more in that the seller may have a more realistic set of expectations. And the buyer, I don’t think buyers are going to, it’s not going to be a fire sale or something that a seller is just going to give up on price because of the current market conditions. I don’t see that really happening either. So instead, you get this equal equilibrium that’s really helping each other. Yeah,


Matt Lockhart  16:35

I agree. I mean, I’m balanced equilibrium and, ya know, enables for more proper and, and aligned expectations. You know, it’s all about expectation management.


Ryan Barnett  16:48

micromatic, do either review, think that the speed of a deal will increase, if you’re looking to, let’s say, put your company in a market in January of this year, or buy a company is starting now. Does the timeframe change?


Mike Harvath  17:08

Well, it might, you know, I think there are some just universal truths around the time it takes to get deals done, that’ll be hard to hard to be like, you know, that timeline, from loi to close is, for as long as I can remember been hovering around 90 days, and that’s with a lot of people pushing and pulling, they can get it done. Might be a little on this side of 90 or a little on the other side of 90, but generally it’s about 90 days. You know, origination and outreach and getting people interested in the table. You know, it’s a takes a life of its own as well. Now, do I think that we can get things negotiated quicker, kind of get from introduction to loi faster in a market that has more momentum? I think the answer is yes. I think if the Fed could help us out a little bit with holding interest rates steady and are reducing them preferably. And most pundits say that it’s likely that the Fed will begin cutting interest rates early in the second half of 24. Certainly valid goes a good shot in the arm and could you know, shorten times from introduction to to sort of through valuation review and negotiation to LOI. I think if there’s any time in the lifecycle that will be a little bit quicker, coming in to 24. And through 24, it certainly will be there. But in general, I think it takes it takes the time that it takes and what’s important to note is that with more activity, you know, it will portend that both buyers, in particular need to be decisive about the decisions they make about their potential targets. I don’t I think that what ends up happening in the cycles is that maybe there’s more sellers or more openness by sellers, but that just brings in more buyers. And so, you know, we’ve certainly seen our market expand from folks from outside of the space coming in. And there’s a much greater percentage of the GDP just in general market growth that happens every year. So you know, more capital flowing in more sellers means that there’s more what we’ll call sort of new capital flowing in which means there’s more competition which portends even a faster growth market. And, you know, as a buyer, you might think you can slow down and be more selective with your your deals. But, you know, our experience has been that that’s not necessarily the case and what people would consider at least a tilt more to a buyers market. makes sense.


Ryan Barnett  20:06

You know, I’ve heard today that you tried 23 has been a little bit slower across the board. But that ultimately means that if you’re looking for a deal that strategic fit and cultural fit could ultimately provocative be even more powerful. I heard valuations are that if you’re a buyer don’t miss don’t expect a fire sale. At the same time, there’s probably some more realism in the valuation of an of a seller. We heard that I think more sellers are receptive to hearing the pitch. And just being able to talk and have the conversation of Exit Planning. I would remind you, if you’re considering that, always use it as an advisor to help you walk through what that might mean. might mean for you. And then I heard a bit of an excitement for 2024, where there’s a potential for some really great deals to get done. And the opportunity for the true one plus one equals much more than two scenario to happen when when that strategic cultural and financial fit all come together to make something really special. Madam, Mike, any closing thoughts? Well,


Matt Lockhart  21:24

I just a reminder that, you know, top quartile companies have an acquisition strategy at all times, right? They, they, they may not be always buying based upon what’s happening in the in the market and or what’s happening within their business. But top quartile companies do have an ongoing acquisitions strategy. So it is important if you want to be fast growth, and, and a valued player in in your industry, and especially in the tech services space. So highly encourage people to put that on their overall strategic plan. And then the last thing that I’d say is, is that I think there is just some pent up, you know, there’s just pent up energy on on both sides of the fence, right for buyers, as well as for sellers, there’s pent up energy and, and 2024 is gonna be a great year. And I just encourage people who are thinking about what they’re going to be doing in 2024. to, to, to move from thinking into action, because you want to get him there earlier rather than later. So just some of my thoughts, Mike,


Mike Harvath  22:49

what do you think? Well, I couldn’t have said it better myself, I think it’s going to be a great year. For companies that have sort of a bolt on our game, organic and acquisitive strategy in mind. As our industry continues to grow and mature, certainly there’s great opportunities abound. And we’re a revenue rocket would love to help you out and help you achieve your goals on either side of that aisle, whether it be you know, optimizing organic growth and or helping you get deals done for a seller and love to take you to market as well. So with that, I think we’ll tie a ribbon on it for this week’s podcast. certainly encourage you to tune in next week, when we unpack more a ideas, concepts and tips and tricks for tech enabled services companies on how to better run their business, how to more effectively get them any deals done and in general be more prosperous. So with that, take care and make it a great week.