Merits of Running a Process

Merits of Running a Process

Shoot The Moon
Shoot The Moon
Merits of Running a Process

Running a structured process can help maximize the value of the business and get the most out of the selling experience. In this episode, Mike, Ryan, and Matt discussed the importance of understanding the selling process, being educated about options, and managing a sale effectively to maximize value.


Introduction to selling your business with a process.

What is a process and what is a deal facilitation?

What types of processes are there?

  • Structured process – soliciting a limited but significant, number of buyers to evaluate the business and put forth an offer
  • Becoming a platform by selling in, typically with a PE firm
  • Minority investment: selling a portion of equity while retaining full ownership
  • Management buy-out or an employee stock ownership plan
  • Recapitalization: restructuring capital but owners retain ownership and continue to manage the business
  • Spin-off/Divestiture – carving out part of the business
  • Deal facilitation – you’ve identified a potential buyer and need want to get a deal done

If we compare having a structured process where you are put in front of a number of buyers to deal facilitation, where one buyer is already identified, what are the merits of running the process?

Let’s start with the enterprise value of a deal – how does that change between a process and a facilitation?

What about timing for a transaction? Which one will run faster? Are there parts of the process that will run the same (e.g. DD, legal drafting)

How does competition between buyers impact the process?

If you’re doing just deal facilitation, will a buyer really know the maximum potential of their firm?

How easy is it to convert from a deal facilitation to a full process?

Why would someone not want to run a full process?



Mike Harvath  00:03 

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’s premier growth strategy and M&A advisor for tech enabled services companies. With me this week are my partners, Ryan Barnett and Matt Lockhart. Welcome gentlemen.  


Matt Lockhart  00:22 

Good to be back after missing a week, although I know it was a great conversation. Had a had a cool guest on. You know, last time I was on, we were we were still rooting on the home team, Minnesota Timberwolves, but we won’t go there anymore as they’re not as they’re not in but summer is on and we are fired up, and we got a great topic today. Ryan, thank you. 


Ryan Barnett  00:53 

Yeah, absolutely. And thanks Matt and Mike for setting this up again. If you have any questions you want to talk about, please email us at info@revenuerocket.com, we’re happy to talk about anything and everything, M&A within tech services companies today, and growth strategy consulting, something we deal with as operators every, every day of the week. Today, we are going to talk about a concept of as a seller in a technology business, and you’re considering selling your business, what are the merits of running a process and and what does a process look like? Oftentimes, as we talk to sellers, it’s a bit of a mystery on what, what should they expect? And it’s doesn’t need to be a mystery. And what today, what we want to do is unpack what a process looks like, compare a few different processes that are out there, and look at how this can really help you as a potential seller, to maximize your life’s work and get the most out of a process and to understand what’s in it. So Mike, just I’d love for you to get this discussion going. And really, why’d you pick the topic here today? 


Mike Harvath  02:05 

Well, I know we throw this term around as M&A advisors and investment makers and such as it relates to, you know, running a process, or running a structured process, or, you know, a casual process. But what the heck is a process. So a process is essentially could be labeled a selling process, probably to add more clarity, and it refers to taking your company to market, either through a for a recapitalization, like you would do in a sell-in context around sticking around and kind of recapitalizing the business or sell out where you’re looking to exit the business in an orderly way. And it has to do with engaging an advisory firm like Revenue Rocket to help you value the business, package it from a marketing perspective and get multiple buyers to the table that have interest and fit for your business. It really you win sort of when buyers compete for your business, and you’re going to want to run that process in order to get those multiple buyers, have your advisor help you vet those buyers and ultimately get to the best fit structurally, culturally and financially for your firm moving forward, 


Ryan Barnett  03:39 

One of the things, 


Matt Lockhart  03:41 

Sorry, sorry, Ryan. I was just going to jump in, you know, I think Mike sort of started it off great. I also think that, you know, as we put ourselves in the shoes of sellers, one of the number one things in in, you know, as a reminder, we, we, we do work with a fair amount of founder led businesses and largely privately held businesses and and one of the things that that we know that our sellers are interested in is understanding the choices that they have right? And so when Mike talks about the desire to to have multiple parties at the table. You know, absolutely the case. It helps to maximize, you know, the value as well as the appropriate deal structure. But you know also it’s it’s just great for the sellers to be able to see all the options that they have, between strategic buyers, financial buyers, in betweeners, etc, etc. So I just thought it was one of the key points early on in the quote, unquote selling processes, just being able to be educated about what’s out there. So. 


Ryan Barnett  05:01 

You nailed it, Matt, one of the things that we we see in our I think I’m, I’m surprised every time, is that the a buyer may not come from where you think it comes from, and one of the options that you have is by talking to a lot of buyers and opening up the mandate to to more than just a small pool, is that you bring in companies that are really looking to make strategic changes or really invest in their strategic future. So sell side mandate, we may not know on the start or day one in which your buyer may come from, we have an idea, but ultimately, getting in front of a lot of people helps, helps open everyone’s eyes up. This is the potential buyer that’s out there, and to get in front of, in front of that buyer. So great, great point and a great start here. It may help to understand, when we say a process, what does that process look like? Mike, could you just give us, maybe the, the top, top level categories of what a seller should expect in a process. 


Mike Harvath  06:06 

Yeah. I mean, I think oftentimes when sellers are looking at evaluating a M&A advisor partner to run a process for them or to take them to market, they don’t necessarily ask the right questions of that advisor in the proposal process. They really need to better understand things around the capability to market, because when push comes to shove, the best advisor, in many ways, will be one that has the best marketing talent, but to answer the question more directly, Ryan, you know it comes down to helping you, as the seller, understand your fair value in the market. And you’re going to want to engage an advisor that does lots of valuations. I think it’s an important thing. And then, you know, understand all the steps in the process as they see it, and understand and vet them to see how excellent they are in marketing and packaging and outreach. And you know how many relationships does that firm really have with potential buyers for a firm like yours? And you know how many they think they can get to the table to for you to help that and evaluate and then ultimately get fair offers from them that are aligned at or above the valuation that we had done earlier, and then beyond that, much more importantly is once a loi is selected and signed, people have the chops to guide you through the due diligence process and the negotiation motions around the definitive agreement. There are very few firms in our space that can do all those things. I’m thankful and and happy to say that revenue rocket provides, of course, all those services. And I’d like to think we do them a little biased, of course, but I think we do them better than anybody, but, but there’s others that are out there that can do that. But I think when you’re thinking about running a full service process, getting you from sort of value expectations, management, selecting the right ideal prospect buyer, doing the outreach, and getting those buyers to the table with offers that make sense, and then having the skill to negotiate an optimized offer and then ultimately getting through loi and definitive agreement to close. You need a partner that can do all that in a world class way. Not all the advisors that are out there can do that, and the ones that can do you know the early phase work at a level of excellence are sort of few and far between, and that’s evidenced by the number of buyers they ultimately can deliver. It’s certainly a question you should ask a potential M&A advisor is, how many interested parties do you think you can get to put in an IOI indication of interest, or ultimately an LOI for our business, that should be a qualifying question, so that you can kind of bet the merits of their outreach, because each firm that’s out here does it just a little different, and making sure that you can achieve your objectives with that partner, M&A advisor, pretty critical. 


Ryan Barnett  09:28 

I think one of the areas that you’re you’re smearing in here, Mike, is that their advisors are going to tackle things differently. And if I look at just a very base case scenario, there are different arrangements in which you may work with an advisor. For example, there are contingent representatives. Mike, what is it just? What is a contingent rep and what? How do they work? Compared to how you might have that a different. Model like how we work here? 


Mike Harvath  10:03 

Yeah, contingent representatives. They tend to be firms that are only paid on the success of a transaction completing or getting done. Call it a success fee only, or contingent fee on success. And as much as that may look interesting and quite compelling for you as a seller. The challenge is the economics of that relationship make it very difficult for M and A advisor to be full service. Because to be full service, you need to have, you know, a whole host of pros on your side, right? You need to have a research team and outreach team members and financial auditors and staff and valuation guys and and legal. And even if they’re not your lawyer, per se, you know they need to be able to vet and review things like NDAs, and having all that staff inside of a firm typically means that they operate in a in both a retained and success fee model. Their fee models are a combination of retainer and success fee. It’s about the only way economically that an advisor can be full service. Not to say there’s not you know, contingent you know, M&A advisors that you know try to be full service. It just comes down to the level and quality of the team and the results that come from that you know, oftentimes are put under pressure. It’s part of why we do what we do the way we do it. We’ve learned over the last 24 years being the first firm, you know, in North America to focus exclusively on IT services in the space that as an M&A advisor, that that you need that, right? You know, you very challenging to build a full service firm. Otherwise. 


Ryan Barnett  12:02 

Yeah what I’m hearing and picking up, in order to tackle this and do this right, you have to have a team that is executing on origination, you know, finding people that are interested in the deal. You have to have find people that are great at packaging and understanding your business, talking in the way that you talk, using the language that you use, and finding the value that’s in a tech services business. So it’s sometimes hard for a generalist M&A person to understand that you have to have a finance team that’s that’s digging into the numbers, building the valuations and supporting a seller throughout due diligence, and that that’s financial analyst, financial or valuation experts, that’s that’s critical, then ultimately, people that are also just doing a deal. So in that value spectrum, it’s, it’s nearly impossible to find someone to do all of that unless they’re only working one deal. In that, even that case, you’re still going to have a real, really hard time pulling in the All, all parts of that to have a well rounded financial offering, well rounded marketing, well rounded outreach and well well rounded deal facilitation and due diligence, all those things are, I would say, an absolute basic necessity. Is there a reason why a company and Annette Mike feel free to interview that, why they can’t, why company can’t just list their business on biz, buy, sell or or any other or just kind of roll it themselves, or do it themselves. 


Matt Lockhart  13:45 

Well anybody can do that, but they should know that they’re doing that and and very, very likely leaving money on the table. So you know all that you just ran through Brian, it takes a level of expertise. And then I’ll also add in a level of specialization to do that in the very best way, and then to continue forward and and and continue positioning effectively guiding the client in terms of of, you know, the very best things to highlight about their Business for prospective buyers and and, you know, expectations on a go forward basis, and how to manage all of those things. It it really takes a level of expertise and and a level of specialization that, if you just go list on any you know, deal site, especially a generalist deal. Site, you’re not going to get that and, and if you try to roll it your own, you’re likely not going to, not going to get that. Now, there’s always exceptions to the rule. You know, we’ve seen situations in which that’s it’s been done successfully, but the odds are definitely, you know, against you. 


Ryan Barnett  15:20 

Yeah, and if I take the opposite and look at perhaps almost a big four type or a big investment bank, what does that process differ? If they have the people for financial analysis, they have some of the tools to to really represent a company. Mike, I know you’ve, you’ve seen some challenges there too, on on how they get that deal done. You know, what are some things someone should consider if they’re looking at a, let’s say, a generalist, or a large investment bank or or even a large firm like a KPMG, 


Mike Harvath  15:59 

yeah, we’ve certainly done work with firms that had failed process, and when we say failed process, they weren’t able to successfully consummate a transaction using one of what we like to effectively call the bigs, or the bigger investment banks. And it could be enough spin off of an accounting firm like KPMG, or it could be, you know, any number of different firms that are larger. The challenge there, what we typically see when we do post mortems on those deals and why they didn’t work, was that most of the time, and I don’t want to say all the time, because there, of course, are exceptions to everything, but most of the time we see in the failed transactions that the large banks are referring it to their network of buyers, or people that they know. And Now, granted, they’ll know a lot of people, but oftentimes they’re not the right people or the right buyer. They’re just not the right ideal prospect, profile buyer, and they’re not doing as robust or meaningful outreach function as they probably should, to represent you to market. And I think that’s evidenced by the number and type of offers they get, and we have the luxury oftentimes, of kind of coming in after a failed process with one of these bigger representatives, M&A advisors, and seeing where they kind of went wrong, and learning from that. And in many ways, they just don’t put enough diligence into identifying the right profile of that suitor that meets the objectives of the seller, and then doing an aggressive level of outreach and marketing to find those people, they just kind of do a more, what I call casual, sort of referral approach. And we think that just doesn’t net the best results. It might, you know, net some good financial buyers, certainly, but it doesn’t generally net many strategics, and it generally doesn’t net the preferred buyer volume that’s needed to really effectively optimize the choice of a seller to find the right suitor. We love choices. We love giving our clients choices. And we know from practical experience that the only way to do that is by really rolling up your sleeves and doing outreach in a meaningful way. And a lot of the larger firms, I think, you know, rest on their laurels. On they’ve certainly been very successful in doing it the way they’ve done it for many, many years. But it’s not as complete a job, I think, particularly for smaller tech enabled services companies. And in the context here, I would define smaller as you know, probably below 5 million in EBITDA to get a deal done. I think many of these larger investment banks are wired, and have been wired over the years to do deals in certain ways for much larger firms and those referral networks of firms that even have the capacity to do deals of that size are much smaller, as you can imagine, if you’re going to spend hundreds of millions of dollars, let’s say, in acquiring a business, those networks of folks that would fit probably are smaller than if you have a smaller tech and human services company, for example. So I think in many ways, they lean on the same processes that have worked for them over the years with bigger deals. And now that there’s a lot more kind of medium sized deals and smaller deals, those old processes at the big banks don’t really work anymore. You need a scrappier, probably more of a focused mid market, a. Approach that has more outreach chops in order to find the right suitor. 


Matt Lockhart  20:04 

Yeah, I was going to double down on that. Mike. I, you know, I do think that let’s not, not kid ourselves. The the big banks of the world do really big and important things and but when you’re when you’re talking about middle market, right? And for us that it’s really anything, probably under the high end, $20 million of EBITDA. But so even at like, call it a midpoint, 10 million the dollar EBITDA business using that big bank method of, hey, here’s the 10 best buyers for you, right? And we’re going to, you know, we’re going to quickly round up these 10 best buyers and fly through the process, and, you know, we’ll have this all wrapped up in in two to three to four weeks at the most, right? That that’s, it’s really not applicable in the middle market, you know, which is, clearly, that’s our our expertise and our specialty, you know, is, is that middle market opportunity and maximizing value and, and guiding appropriately, and, and it’s just, It’s kind of a different ballgame altogether, I think. 


Ryan Barnett  21:21 

Yeah, I think that’s a great point. So we looked at extreme from kind of do it yourself, or that maybe a single shingle representative. We do see a lot of that, all the way to to that the bigs in which there’s a perhaps more process, but let’s say more network driven. You know, in our in a sweet spot, I think you have to bed the bit of both. You need to know people be knowledgeable in the industry of who might be a buyer, and be able to work that at the same time, be able to aggressively market and be open to someone who’s new to the business, and be able to be flexible. There’s a lot of differences in what we see, in how targets are treated within a process. So and then target, I mean a potential suit or a potential buyer, and some of that has to do with transparency within the process, and involvement of the seller within the process. At Revenue Rocket, we get you in front of a lot of buyers, and we’re transparent about the list of people that we contact with. That’s not always the case. Is that, is that right? Mike? 


Mike Harvath  22:32 

Absolutely, absolutely, that’s the case, Ryan. You know, I think you again, I’ll just beat my drum that, you know, all deals need to fit, you know, strategically, culturally and financially, I think you have to be very dutiful about how making those selections work. And, you know, partnering with the right team of advisors that are proven will help you have the best outcomes and and, you know, I just encourage everyone who’s listening to this to be mindful about that and sort of making sure that they’re they’re aligned accordingly. 


Ryan Barnett  23:13 

If I start to rephrase the question a little bit, we see this perhaps more on the buy side. It’s a seller may not see all the options they have in front of them is, is sometimes the case, or they may not know about every step in the process. So it for us, it’s critical that someone goes through a valuation. It’s absolutely critical that it goes for packaging. So there’s a creation of a one page summary and the marketing of that summary to a large base from that one page summary, making sure that you have a lot of people that are under an NDA. And I’ll give an example where processes you can really look at a process deeply on there may be firms that just automatically blink and will accept an NDA, and there are firms that will do a screening call before that NDA to make sure there’s qualified buyers. And so I think one of the things to dig in and when you’re looking at how you want to bring yourself to market, it’s important to keep confidentiality of your mandate high before perhaps getting into an NDA. I believe it’s important to understand the buyers that you’re working with before you even sign an NDA, for example. So there’s processes that are it may be subtle on the outside that may have a large impact on how you how you actually work through a process, and how you start to understand and bring buyers throughout, throughout. Yeah, and I think, 


Mike Harvath  24:49 

just to add more color to my comments around the big three pillars, you know, being mindful about how and when to disclose information and you’re. Getting to your point about alignment and betting, the alignment around the big three strategy, culture and financial fit will flavor if and how and when. You may even sign an NDA, what suitors are in the list, how they’re targeted. And I could go through 20 other qualification criteria to really, really mindfully, only bring the best, best opportunities to the table. The right advisor does that as easily as they breathe, and does that on your behalf in ways, in some ways, that you just don’t even see and and I think that’s important. It’s based on, you know, a set of experiences and reputation and and ultimately, results. And the results are in how many, you know, transactions actually get done by a firm that are engaged to do one that tell the story there. And so, you know, you bring up a great point, Ryan. I just wanted to add a little bit more color to my reference. 


Matt Lockhart  26:08 

And and also Ryan, I think that the the point related to transparency is is also absolutely key. And it sort of harkens back to what I what I mentioned earlier, in terms of educating, you know, sellers in terms of their options and the nuances of the options and and, you know, enabling them to have all of the available information so that they can make the best decision for themselves personally, as well as making the best decision for you know, their business and their employees and their customers.  


Ryan Barnett  26:56 

Yeah it’s a great point. If I look at this topic here, we’ve covered quite a bit here, it’s ideal to make sure whatever process you have, typically, that it has multiple buyers. Now granted, if you have a buyer in mind, there’s also deal facilitation. And I would say that that’s an option to think about as well. A deal facilitation is where you work with an advisor on a deal that is perhaps starting to come together, but the advisor would still help you with evaluation, perhaps hopefully help you with the loi, if it’s not already designed, help you get through due diligence and help you get to through the finish line. Even that takes a takes a lot of work, and it also takes a village. I heard that running a process allows you to really understand your real, fair market value, and it’s it’s critical to talk to multiple suitors, and have a firm that allows a process that has multiple suitors, and I’ll add, in a timely manner, to pick up this process you want to be able to talk to, it’s really difficult to bring a bunch of suitors at the right time and to get the right person to execute and do that well, is helpful. I heard that it’s critical to have advisors that have a full staff of people, and then the fee arrangement that you have supports that full staff of people. So from origination, research, origination, outreach, marketing, financial support to diligent support, deal structure support is all critical to making sure that you have people that understands what they’re doing. And I also heard there’s some big importance to industry expertise, that just a process off the shelf is not something that you should or just a something you need to work with, someone who actually knows they’re going to win in the industry that you work with not a generalist. Matt Mike, what other things I would like to leave our audience with? 


Matt Lockhart  29:02 

You know, we’ve talked about this before, but you know, one of the areas that that, you know, we think it really makes a whole bunch of sense, is to, is to build a bridge, you know, with an advisor well before you know the time in which it’s, well, your time to to look at either exiting the business or finding a partner and selling in the reasons it’s it’s an important relationship. You got to build trust, you got to build knowledge. You got to come together in terms of how you’re going to work together. Maybe there’s some opportunities to optimize the business. We call that sell side readiness. So there’s just a whole host of reasons to build a bridge and build a relationship so that when it is time, then you can, you can really, you can really jump start the process, the sell side process, we should say, Mike, what did a miss? 


Mike Harvath  30:10 

Yeah, I guess, Matt, I think you probably teamed it up for us to wrap it up with that. We’ll tie ribbon on it for this week’s Shoot the Moon podcast, and encourage you to tune in next time for more tips, tricks and opinions about both growth strategy and M&A in the tech enabled services world. Go out and make it a great day and a great week, and we look forward to tuning in next time. Take care.