Navigating Exit Strategies: What are your Options?

Mike Harvath  00:05

Hello and welcome to this week’s Shoot the Moon podcast, broadcasting live and direct from Revenue Rocket world headquarters in Bloomington, Minnesota. This is Mike Harvath with my partners Ryan Barnett and Matt Lockhart. I’m pleased to be back for you regular listeners, you know that I’ve been out on holiday for the last few podcasts. And it’s awesome to be back in the saddle, get back to work, so I get a little rest and join my esteemed partners with today’s topic. So, welcome.

Matt Lockhart  00:38

It’s awesome to have you back. Mike. It’s been Ryan and I hopefully we didn’t play too much when you were gone. But you know, the the mice will play when the cat’s away, we had a couple of great discussions, including a real highlight and in having the opportunity to chat with one of our valued clients saw that that podcast just went out recently and excited about today’s topic. It’s not one that that everybody thinks about a whole bunch, but it’s it is super important, especially in those in the context of partnerships. And speaking to partners. Hey, Ryan, what’s going on?

Ryan Barnett  01:21

Hey, guys. Great to have you back Mike. I think Matt was getting used to playing lead singer compared to color color guitar, here so.

Matt Lockhart  01:32

Yeah, yeah right.

Ryan Barnett  01:36

Yeah, great, great to have us back here and great to have us digging in here on a topic. Today, we’re really talking about, you know, a lot of our clients that we work with, come from founding their business in the 90s or early 2000s. And they’ve been in that for a very long time. And you’ve been building a business or, and working in it, sometimes wearing multiple hats all the time. And it comes to a point where you’ve got to consider options for for the future. And whether that might be retirement or moving on to something else. It’s a big topic. So today, we want to dig in and understand why are there some options to do with your business? And how do you protect some of that legacy? and such? So, Mike, what once you get started?

Mike Harvath  02:26

Yeah, you know, we’ve been having a lot of conversations lately around, you know, people that are either approaching retirement or making a decision to retire. Or maybe they’re looking to exit the business to do something else. Or take a sabbatical. And, you know, there’s a common theme in those conversations, which is, when you know, the time is, right. Like when you think about, you know, the inflection point of, you know, seeing your own mortality, if you’re sort of in the, you know, I guess sun, sunset years or the later in your career or when you know, when it’s time to move on, and how best to do that. And, you know, there’s just a lot of different motivations for people to think about, when they think it’s time to exit the business when they, you know, maybe that’s a, it’s a very personal decision. It’s something that, you know, people think about for a long time, and I guess, in our industry of, you know, tech enabled services companies, I guess, I haven’t ever talked to an owner. And maybe that’s a little bit of a stretch, but there’s very few owners that I’ve talked to that didn’t start their business with a thought that some day they may want to exit and sell it, or retire. It’s certainly on their mind from the day they started. And, and I think, you know, this, this discussion today is really about, you know, when do you know the time is, right? And how do you best client the best vehicle because there’s so many ways and approaches and vehicles for you to either exit or retire, that may or may not include selling the business and its entirety and how you gather the Intel and information to help you make a decision. So, with that, man, I’ll turn it over for some perspective.

Matt Lockhart  04:28

Yeah, you know, we’ve reflected on on this topic, maybe not solely focused on it, but oftentimes in the podcast and, and, you know, we talked about this recently that that three step decision, right, you know, start, start by making it easy is, are you emotionally ready? Is there another chapter in front of you, whatever that chapter may be that you know, and and you’re ready to see your So turning that page and getting into that chapter two, there’s the financial component. Are you are you realizing the appropriate enterprise value for your expected enterprise value? How much of that is today? How much of that is into the future? Does it matter, right, et cetera, et cetera. And then, and then three, you know, is not as much of a deal, though, you know, we move to that third piece of are you selling in are selling out. And if you’re selling in, then who you’re selling into makes a whole bunch of difference. But for the context of this discussion, we’re really talking about selling out. And so you know, that I think that the the next thing to sort of think about to further the discussion is, what are the other aspects that are the, you know, in, in consideration? IE, are you a partner? Are you a sole owner in? Right? If you’re a partner in the business, then all of a sudden, you know, there’s some additional complexity that is brought into this scenario of when are you ready, versus when is the winner all the partners ready within the business? So So I think that kind of putting all that into the mix of the discussion, and also introducing the fact that, you know, there’s the there’s the facts, right, and then there’s the emotion and the personal aspect of this, and, and those, you know, sometimes those things aren’t easy to bring together and to justify. And so working with people who’ve, who’ve done that before, and know how to guide and work through both the emotions, as well as the facts, right, I think is super important.

Ryan Barnett  06:56

I think, I think you put options out here. So if we’re thinking about, let’s just consider the next chapter. And we are going to, to move on. I mean, some of the options could be as simple as you could just, you could simply fold up the business. And I would say that, with most of the companies that we’re dealing with today, in the built very healthy revenue and profit streams, I would say that there are a lot of alternatives outside of just folding up the business.

Matt Lockhart  07:38

Well, that that is an option, Ryan. Probably a worst case scenario. But an option nonetheless.

Ryan Barnett  07:48

Yeah. So I would think that even even if you have a company that is perhaps been under distress, or it’s maybe not seeing the growth potential that you fully think it is, it’s a moment in which to your point that that could be the last course of course of options for you. You could look for further investment. I think this gets to your point Matt, were selling man are selling out becomes a major goal. And if retirements on the on the board, I think, you know, if you’re selling in deals, structures are oftentimes tied to the success of the future state of the company, there could be an option for a partner buyout. And there there could be that’s an option of of your partner, perhaps even over time buy in the business from you. There could be seller notes involved, and there can be other alternative financial instruments that allow that you could even look at transitioning that whole company to to an ESOP. And there’s options, there’s so many there are many options here. So if you are considering this phase, don’t think it’s a just one path that you have to go down there, there are a lot of different ways that you can take it. Mike, maybe I’ll just ask you this, if you starting to think of this, what are what are some first things that you should start thinking of or start doing?

Mike Harvath  09:17

Well, I think, you know, certainly, there’s plenty of owners that have a lot of you know, they’re very concerned about their team, right, their staff that they’ve built, and they don’t want to be perceived as they’re selling out, or that they’re leaving the team kind of high and dry. Their reputation is so important to them that they don’t want to they just they just don’t want to don’t want that. Right. And I think you know, as an owner, you got to be thinking about that emotion and feelings and, and in in many ways that you know, Reality, because I think, how you approach a deal, how you think about what a deal would be to get to the next phase of your life, whether that’s, you know, going on to do some other business or for, you know, doing things that maybe are more lifestyle oriented, we’ve certainly worked with people in the last year that wanted to exit to, you know, go hike the world’s peak, for example, or do other things. And so, you know, coming to that conclusion, but also getting your head around, placing the business in good hands. And or structuring a deal. So that there is, you know, very favorable continuity for the, you know, clients and staff is of paramount concern. And I think, understanding the full suite of your options, and getting perspective from not only your peers and friends, and maybe people you know, but on through sort of a transition or an exit, but also from folks that are doing deals every day is is a critical step in at least getting your head around, you know, what might be the best vehicle because there is a huge number of options, in order to transition out of the business as a founder or leader that probably should be on the, on the table to consider. And we don’t always see all of them as a lead owner or leader in a business, clearly, without some outside perspective. So I certainly think gleaning that outside perspective from people that structure these deals, you know, is is pretty critical. And helping you kind of come to a conclusion of, you know, Is now the right time, and if so how so?

Ryan Barnett  12:09

I’d love to key in on on one areas mentioned on just people and getting the right people in line. I think it’s critical that owners understand that buyers really are going to look for continuity that and that’s leadership, and looking for how you’ve been able to remove yourself from the business. Matt, have you seen any good best practices around proving that continuity? And how owners can show you’ve got a continuing asset?

Matt Lockhart  12:42

Yeah, well, I mean, it’s obviously, you know, formally all about succession planning. I think that one of the key areas that founders and owners need to recognize that is that if they, if if they are tied too closely, to that customer acquisition, as well as customer management, that makes it difficult to remove yourself quickly from the business. And so that’s one of the key areas to look at, then then looking at sort of an end, the customer acquisition and customer management also really does speak to the ongoing health of the delivery and quality of the delivery of services within the business. So, you know, those two things kind of go together, then, you know, looking at kind of the operational internal operate ops aspect of what does founder group of founders do, and ensuring that it is, it’s not just lip service, but that others have stepped in to lead the day to day internal ops, right aspect. And then there’s the financials, which, quite honestly, are sort of the least important of the things that, you know, owners and or partners need to give up, because it’s the easy is most easily transferable aspect of the business. So, you know, that’s kind of the way that that we see things, you know, on an ongoing basis that and oftentimes we’re guiding firms years in advance of you know, their intended sort of timeframe to ensure that those pieces are established. And there’s a track record behind the sort of the relinquishment of responsibility and should, you know, two of our two of our existing you know, sellside programs that is exactly, you know, what are our clients did the owners did within the business and and quite honestly, it was a multi year period that enabled them to get there

Ryan Barnett  15:19

I’ll say, yeah, it’s a, it does take a bit and it takes planning, and it takes execution throughout throughout this, to make sure that you’ve got everything in line. And I think it’s something that you may if you’re considering and selling, it’s not something you wake up and do overnight. And it’s something that will take a bit of time. Part of that can be looking at, at your numbers and how they’re how you’re putting them together, and perhaps moving a few dials around to to help increase profit, perhaps compared to revenue growth, or perhaps increasing your vertical market expertise. So you’re more attractive to a buyer, there are some things that you can do, I would say that are two, three years out, that you may want to consider that can can help help bring on the profitability of the firm composition of your revenue off, get your financials in order here to our core organic plan just really doing well. And then it’s really helped you look more attractive in that process as well. On the financial side, and Mike, you know, one of the big questions you mentioned earlier is getting to a financial number, what should what should an owner do to to understand what their value the business is worth?

Mike Harvath  16:42

Well, I think it’s important, you know, just to just to make a comment on the last sort of thought, you know, you do want to work your way out of the job is what we often say. And, you know, part of that goes hand in hand with, you know, understanding your understanding your firm’s worth or value, pursuant to not having to be involved in the day to day or even, you know, ongoing operation. And that transition typically happens slowly. But to answer the question more directly, or comment on and more directly, when you certainly need an outside evaluator to look at the business. And I think be objective about the recommendations that are needed to optimize value. Oftentimes, you know, owners will, you know, and we’ve talked a lot about this on our podcast series over the years, but they’ll run things through the business or operate the business in a way that’s convenient for them as owners, or maybe tax efficient, but not may not make it as easy to transition the business to new ownership. And so being able to be smart about, you know, what are those kind of how you’re running the business, Visa, your own ownership, how the financials and the chart of accounts are organized, and then more importantly, understanding the true value of the business and making sure that’s in alignment with expectations. You know, your expectations as as pursuant to an exit, or some sort of ownership transition, whether that be a partner buyout, or whether that be, you know, some other structured deal, or maybe an ESOP transition or, you know, whatever that might be, is pretty important. So I think there’s some, you know, outside advice and counsel that’s probably required to think about, you know, are we organized from a financial perspective, the right way? And are we optimize for, you know, the business transition, beyond the value consideration, because certainly, those things can be very different. And, you know, it needs attention and time in order to get those things lined up. One to make your business more attractive to or open more options for you, if you will, for that transition, but also to optimize value as you begin to think about, you know, making this move.

Matt Lockhart  19:29

Well, Mike, also, I mean, you know,we’ve talked a whole bunch that do an ongoing valuation of the business, it’s just a good practice, right? It’s a good benchmark of where you’re at. But, you know, we, you’ve had some discussions here recently where, you know, there’s a partnership in place, you know, one partner is see, you know, sees a path, you know, multi year path. I think it was somewhere between three and five years, the other partners younger, you know, doesn’t see a three to five year path, right. And so the need for, you know, setting a baseline of evaluation and then having a consistent, you know, plan in place to do that valuation in the same way. Right? Is, is super important in that particular scenario. Right. And that allows for a basis of fact, if you will, to then make it easier to sort of manage the process and manage the the emotions of, of one partner getting out before another.

Mike Harvath  20:44

Yeah, and I guess, you know, some would argue, oftentimes, you know, it’s a best practice to as it relates to continuity planning, you know, to even get evaluation annually, just understand what you know, that value is usually, for most of our owners, you know, clients that are owners, you know, that their business is their single largest asset. And so, you know, valuing it and understanding of fluctuations of value, not only marketplace dynamics, but also in how they’re operating the business and what impacts those have over time, is super valuable. And if you’re looking at a partner buyout, in particular, that’s pretty critical. Because you want to be able to understand, you know, is the value, is there value accretion there? How is that reflected in the buyout? You know, how does that impact existing partners? You know, there’s just a lot of variables there. Again, I think that’s where, you know, a good m&a adviser can provide you food for thought on. Now, fair way to structure that. That’s when when and can certainly, you know, facilitate a smooth transition. And, you know, begin to think about, you know, how do we have transparency into our value versus just worrying about at a, at a triggering event or, at a time now in, you know, hey, you’re contemplating a transaction, so you don’t get a value. You know, I think some of the best run firms that we work with, and have over the years do annual evaluations as just a standard operating procedure. And that’s certainly a place to start to think about what your options are, and when.

Ryan Barnett  22:33

And I have to plug revenue rocket to my chair, but we do have a number of resources to help think about this. One of them is, if you go to revenue rocket.com/valuation-calculator, you’ll be able to get a pretty decent range of what your firm is worth. Again, always assuming that you’re in the IP services market. That’s everything we do is really focused on that market. So but it gives you a good idea of where to start. Another resource that we have is, we’ve got a white paper really focused on the 10 questions you should ask yourself, if you’re selling your this is really the focus for MSPs. But I think a lot of technology companies follow the same as a managed service provider. So a couple of resources are available over at revenue rocket.com. And in anytime, if you want to hop on the phone, we’re happy to individually talk to you as well, and hear your story and walk you through some of those options that you may have, as you consider part of your part of your sale. But that Matt will turn it over to you for any closing thoughts and kick it back over to Mike.

Matt Lockhart  23:47

You know, I guess the closing thought that I’d have is, is a, this is one of the more important things that many of our clients do in their, in their lifetimes, at least financially. It can also be one of the biggest changes of a chapter, right. So, you know, two things is, you know, planning time is appropriate, right? being real, being reactive, or, you know, kind of waking up one day and saying, okay, now’s the time, and let’s get it done, usually doesn’t lead to the best results. And the second thing is, you know, you have a good team behind you, right, because a just makes it a lot easier. And be you have a much greater chance of getting what you want, both financially as well as personally. So, I think those are, those are sort of the some of the key themes. And, you know, to Ryan’s point, we love having these discussions, because there’s there’s no nothing greater than The that we get to do than you know, help our clients and who many of which have become friends have great outcomes. So, great discussion, guys. Mike. What do we do?

Mike Harvath  25:14

Well, it’s time to tie the proverbial ribbon on it for this week’s podcast. Thanks, guys for interesting and relevant discussion that I know many of our listeners are thinking about. And I encourage you all to tune in next week, and we’ll unpack and discuss other topics of relevance for tech enabled services companies around growth strategy and M&A. Thanks, guys, make it a great week.