12 Apr Questions to Ask before you Consider Selling your Firm
Considering a sale is a very personal decision for a business owner. You’ve spent your life and energy building a business and now you’ve decided to consider a merger or acquisition. We get it – we’ve helped hundreds of firms sell and we’re sharing what we’ve learned and what it takes to start a process.
1. What is the current market value of your firm?
You’ll need to know how much your firm is worth before you can start shopping it around. There are several ways to value a tech-enabled services firm, so you’ll want to speak with a financial advisor or business appraiser to get an accurate estimate.
2. What are the potential buyers interested in?
When you’re selling a tech-enabled services firm, it’s important to understand what potential buyers are looking for. Are they interested in the technology itself, the customer base, or the team? Knowing what buyers are interested in will help you package and sell your firm in the most appealing way possible.
3. How much debt does your firm have?
If your firm has a lot of debt, it may be difficult to find a buyer who is willing to take on that liability. You may need to restructure your debt or negotiate with creditors in order to make your firm more attractive to potential buyers.
4. What are the terms of your current contracts?
If you have any long-term contracts in place, potential buyers will want to know about them. They’ll want to know how much revenue the contracts generate and whether there are any early termination clauses that could allow the buyer to get out of the contract if they’re not happy with it.
5. What is the expected growth trajectory of your firm?
Buyers will want to know whether your firm is growing quickly or slowly, and whether that growth is sustainable. They’ll also want to see evidence that your team has a plan in place to continue growing the business.
6. What are the margins like for your products and services?
Your potential buyers will want to know how profitable your products and services are. They’ll also want to know whether there’s room to increase prices or cut costs in order to improve margins.
7. What is your customer churn rate?
Your potential buyers will want to know how often customers cancel their subscriptions or stop using your products and services. A high customer churn rate could indicate that there’s something wrong with your product or that customers are unhappy with your service levels.
8. Do you have any patents or other intellectual property?
If you have any patents or other forms of intellectual property, potential buyers will want to know about them. They’ll want to know what rights they would have to use that IP if they were to purchase your firm.
9. What do you want to do post-transaction?
Sell-in vs Sell out. We have a podcast on this topic, listen here: https://www.revenuerocket.com/podcast/selling-in-vs-selling-out/
Mike Harvath 00:04
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 world’s premier growth strategy and M&A advisor to tech enabled services businesses. And with me today, and this week’s podcast are my partners Ryan Barnett and Matt lockhart. Welcome, gentlemen.
Matt Lockhart 00:30
Hey, Mike, great to be here. Great to be here. Spring has sprung. Let’s roll.
Mike Harvath 00:37
Oh, awesome. So today, Ryan, I think we’re talking about questions to ask before considering selling your firm. So things you need to ask yourself?
Ryan Barnett 00:52
Yeah, so if this goes a bit of our series of preparing for acquisitions, so many companies that we speak to today, they understand that acquisitions can be a big growth lever for the firm, but don’t necessarily know exactly where to start in the process. That same question can go if you’re looking to sell your firm. And when we talk to IT services leaders, it’s very, very common that they have a goal in mind that an exit is in the future, I think, Mike, you’ve said that every owner that you’ve talked to is got exit plans on their mind. It may not be today, but in the future, they they, they built a company with a vision for some kind of exit, or their very least a successful transition to new business owners. So what we’re looking at today is, before you even start that process, and you look at, hey, I’m going to sell that my firm, want to take one step back in and go through a series of questions you may want to ask yourself about consider before even considering our process, the questions you should really ask yourself. So Mike, and Matt, I’m just gonna, I’ll set up some of the questions here. But feel free to add any of your own questions here. And I will summarize them at the end. But we’ll start with kind of the big one if you’re looking to sell. And I’m Mike, I’m going to go start almost at that with the end in mind here is why would you consider a process in the first place? What’s the biggest driver for someone to take a look and consider selling the firm?
Matt Lockhart 02:34
Well, certainly, it’s personal for most business owners as to when the right time is to consider selling. I think it’s important to understand what are your drivers, and what is your timeline. So you know, generally you don’t want to select from under duress, that does happen from time to time, and either people are tired or burned out, or they want to change because they just can’t they feel they can’t get the firm to the next level based on their own experience or motivation or, or, or inputs. Another common one we’ve had a lot of, in the last few years have been retirement, certainly people that want to retire and they want to, you know, transition the firm or get home. And they essentially essentially want to sell out. There’s other folks that want to sell in, they feel that they can go faster with a partner, they really are looking for a one plus one equals three, four or five and, you know, they want to be part of something bigger, I feel, you know, as we all know, you know, entrepreneur, nourish ship can be a lonely, lonely road, right. And a lot of the trials and tribulations you experience as an entrepreneur, you have to sort of experience in many ways, especially in the early days on your own. And so, you know, they, a lot of folks just want more fellowship and more alignment with like minded tech executives, and that oftentimes can be a big driver for selling. And I think to sum up this point, I would just encourage everyone to who’s contemplating a sale, they’re really think about why you’re doing it, and what your desired outcome is, before you enter a process. Obviously, a structured process will help you ensure that it actually gets done, versus you just, you know, feeling it out. And I think using outside advisors helps that happen for sure. So, you know, if you’re going to engage someone to help you and you’re in a good place, a good mindset, the likelihood of getting that deal done is pretty high. So I think being able to think on purpose about what those desired outcomes are. Why You’re going to mark it, and kind of what happens after you’re after it’s done are all important things that should go into your, you know, Decision Matrix before kind of thinking about going to market.
Ryan Barnett 05:15
Yeah, I think that’s probably the most critical one is a win win, do you think it’s going to happen? And why are you doing it? I think that’s extremely critical. Magic probably talked this a little bit more, but it’s, and we’ve talked about this on other podcasts, but this concept of are you selling in or selling out? I think that’s one of the most critical to consider.
Matt Lockhart 05:39
Yeah, no doubt Ryan, I was just going to build upon what you know, Miko say that the emotionality aspect of really entering a new chapter, closing an existing chapter and, and entering in into a new chapter it’d be It can’t be taken lightly. And, you know, I was just going to also say that, you know, once you start, it’s, it’s, it’s hard to pull back, right. So, we often advise people against sort of dipping your toe in the water and seeing what’s seeing what’s possible, because, you know, once you crossed that, that chasm of of looking at an acquisition, you know, things are gonna just naturally change individually, you know, emotionally, but also within the business. And so, you know, it’s not to be taken lightly. And then to your point, you know, Ryan, I think that it is absolutely critical to think about the the context of selling in versus selling out. And for those common listeners, you know, that we did a, an entire podcast on this topic. But selling in is basically your, you’re going to continue forward with the acquiring firm in the new company, and continue to do to help drive value, grow the firm, grow the new company, and you’ve got a second run. And, and oftentimes, you hear about that second bite at the apple, and you’re working towards that. So the terms that you’ll hear is, is the opportunity to de risk or take chips off the table, if you will, and then work towards that. A second, a second opportunity monetarily, but then also to find people that you that you really trust that you that you want to work with on a day to day basis. And quite honestly, that you can answer to, because you as a salary are, you’re not going to be in control, and you’re not going to have that controlling interest. And so, you know, finding those people that you want to work with, and that you trust is absolutely critical in that selling aspect. versus selling out, which is, you know, after an applicable transition period, you’re gonna walk away and and truly start a different chapter. Not just a new chapter, but a but a different chapter. And so, you know, I think that yes, you still have to answer that first question of Are You Ready? Right, individually, personally? Or is your team ready? Right? If it’s a if it’s a group, if it’s a partnership, and be on the same page? And then I think that second question of, What are you looking for, in selling in and selling out? Is is critical? Yeah,
Ryan Barnett 08:44
that’s well said that. I think part of this too, to jump into that question. Business owners often ask themselves, will a transaction get me to the point where I need to be financially. And I think that’s one of those questions is, what is your number? And the corresponding thing that comes with that is? What is my firm worth? So, Mike, I’d love to hear your thoughts on and I’m understanding how do you come to that number? Or is that a valid question and be? What’s the value of affirm?
Mike Harvath 09:28
Yeah, I think it’s important to know that, buyers need to be aware here in the sense that if you’re someone looking to sell your firm and you’re looking to hire an advisor, you know, there’s lots of what I would consider to be less than scrupulous advisors, I will promise to the world about getting to your number. But in reality, they don’t have a good handle on what that really is. And so, a good first logical step is to make sure that when you engage 10 advisor or an outside third party, that you get a real objective valuation on your business, you know, based on sort of market comps as well as, you know, analyzing the financials and more traditional valuation models, I think the best people that do that, frankly, are people who actually conduct transactions because the ultimate value of a firm is determined when you have a willing buyer and a willing seller. Certainly, there’s plenty of folks that do valuations, accountants do valuations or certified valuation consultants that do valuations, there’s broker and advisory firms that do valuations. But I think it’s important to note that, ultimately, you want someone who has competent financial staff, and an objective model to do that valuation. And typically, some of that helps negotiate deals, because they need to have that experience of where are the transactions actually occurring today. And, frankly, not just take the advice of someone who doesn’t really do valuations, and just does a piece or a part of that overall equation. Because there is a lot of snake oil salesmen out there that are positioning themselves as m&a advisors who really are just looking to get your retainer money, and you know, their success rates are not all that high. And they’ll tell you just about anything to get that deal signed up. Likewise, or to lock you up in a long term exclusive agreement, which ultimately they get paid down the road, whether you do a deal with him or not, which we think again, is somewhat unscrupulous in their approach. So the first step is to get a current value valuation done for your firm, with an experienced firm, that works in the space, and can help you objectively consider what it’s worth. And then more importantly, if it’s not worth what you think it is, or if it’s not your number, that you have a path of what changes need to be made, to help you grow into your number. And, you know, having a firm that can provide advice and counsel around that, as well as help you with your growth strategy is super important. Because oftentimes, you know, making these kinds of changes in the business are not immediately intuitive or evident, or you would have already made them right, in order to grow your firm or optimize it for for profit and growth. And so I think entering into an objective conversation about what is the value in understanding? And currently, what is your number? And if there’s any gap, in those numbers, understanding what your next step is to get your number is super important.
Ryan Barnett 13:03
Yeah, and that’s exactly why some of the M&A readiness conversations we have really look to what it takes to shore up the business to get to the revenue and profit needed for buyers to be attractive to your business. attracted to your business partner. And that kind of goes to one of the next questions that I think that that sellers need to consider in and Matt, I’d love to have you expand a little bit about this is what do you need to do strategically. So potential buyers are really understanding of what they might be interested in. So maybe it’s technology or services or process, but you can talk a little bit about how you might what questions you might ask on positioning your, what you do and how you do it.
Matt Lockhart 13:54
Yeah, I think a variety of of areas to unpack there a little bit, but what what is the greatest value in your firm, you know, not just the monetary value, but your strategic value in the marketplace? So let’s think about and, and, and then how do you position that for the right, buyers? Right? So you could say, you know, you’re pitting let’s, let’s think about a couple of scenarios. One, you’ve just got up real strength geographic geographically, right? So maybe you’re a real market leader in in a certain geography, you know, maybe the southwest, right for example, or northeast or right and, and you’ve just got a command on that geographic marketplace, right and and that could be a real strengthened selling point. For for the right buyer. So, or potentially your, your, your strength and capability in, in technology sector, ya know, we’ve seen this and actually I’ve represented this numerous times. So you’ve got a real strength in the Microsoft ecosystem. And, and that lines up with a potential buyer who, you know, has a strength in a different ecosystem, you know, could be AWS, for example. And so you’re really positioning that strength in, in that ecosystem, not just you know, because of the technology strength, but your ability to just maneuver the, the behemoth that is Microsoft, or the behemoth that is AWS, ya know, potentially, you’ve got a, you’ve been able to drive a higher level of recurring revenue. And, and you’re really wanting to the ability to position and, and show that as a real strength, maybe you’ve you’ve, you’ve added a service line. That is, you know, kind of on the cutting edge, or it’s your you’ve been able to innovate, that demonstrates that, that you, you’re ahead of the marketplace. So thinking about kind of all of these potential real strategic values. And then, does that show, right? Does that show in your marketing materials, does that show in your customer contracts, does that show in, you’ve created the breadth and the depth of that capability. And that and that strength, I think that that, and we’ve we’ve done a fair amount of work with, you know, our customers on on doing just this is, is helping them realize, where they’ve got strategic differentiation, and making sure that that’s, you know, brought to light. In other cases, we’ve, you know, we’ve been able to identify where, you know, where they could go, that increases value in the marketplace, and, you know, guided them and yeah, and then they spent 12, 18, 24 months, and in working towards that, but it was it was worthwhile, because it added so much of their bit added to their, their, basically, their, their valuation, because of the strategic nature of what they’ve what they built. So, you know, variety of different means, each and every one of these is its own story, if you will. And, and I just it’s something to think about, you know, you brought up the context of m&a readiness, which is one of our, you know, one of the things that we do m&a readiness, once you’ve answered that question of I think I’m getting close to being ready, emotionally. Boy, it’s time to talk to, you know, peer groups, talk to advisors, you know, we’d love to talk to you to say, okay, you know, are you are you really ready, right now, yeah,
Ryan Barnett 18:38
I think you really covered that well on that. What strategic value to say, does a do you bring to the market? No deal? Doesn’t it doesn’t get done. If it doesn’t make sense financially, which we talked about a little bit earlier, doesn’t get done if it does not, doesn’t fit strategically, as well. I think he did a great job covering that. Mike, that kind of leaves the in least in our stool of things to think about the other part of that three legged stool, the culture fit, and can expand a little bit of what questions should a owner look at when considering their legacy of the employees that they’re with and the culture that they’re trying to merge into and, and what to look for in a potential buyer?
Mike Harvath 19:28
Yeah, for sure. So, you know, what’s really important is to evaluate in a potential buyer, you know, you know, how do they think about employee care and Customer Care philosophies, right. These are critical elements. Those are indicators of some of the culture aspects of the business. And, you know, and they’re fairly mechanical. I think the the and tangible intangible is spending time with those individuals. Put that on and run those businesses that may be acquiring you, you really have to ask your question, can I work with these people? Right? Could I work with these people, even though I’m selling out? would these be somewhat? Would this be a group of people that I would be excited to work with? Because I think as you build your firm, the firm culture often mirrors your own culture, or your own thinking about customer care, client care, and just in general life, philosophy. And when it does that, you need to realize that, you know, the team will think similarly, Otherwise, they wouldn’t work with you, your own team would, will think in many of the same ways, so there is an alignment there. And so when you evaluate a buyer, you need to really be asking yourself, Could you as an individual see working with them? And for them for an extended period of time? If the answer is no, I think you have to be honest with yourself that even if the strategy and financial aspects of the deal come together, it’s really not a deal that will be successful post transaction. Because your team is going to evaporate, close transaction, they’re not going to be in alignment with that business, the way that those business owners and leaders think about life in general, and, and their work life balance, and their customer care, and client care philosophies, and everything that’s important to them. And so, you know, evaluating it is, you know, some some part, sort of gut and in an art, if you will, to sort of think about, you know, are these people I can, you know, like and work with and have a long term relationship with or not. And then beyond that, you know, probably more mechanical around the customer care and client care philosophies. And, and what they do? And do they really walk the talk? Or do they just is it a veneer, you got to get through that too, because it may sound great. But until you actually go see their business and go into their office, you know, if they have an office and also them well, and spend time with them, you probably really won’t know the answers to those questions. But I think, you know, you got to be nodding, and it’s got to feel right, or I’d recommend not doing the deal.
Ryan Barnett 22:34
Yeah, I think you’re absolutely right, it is go back again, to that legacy of protecting your customers, protecting your employees, and protecting really your brand and reputation of what you built. It’s important to have the suit or in line that’s going to align with that. And I think in general, when you consider selling your firm, there are a lot of more tactical questions. I mean, for example, if you have a large debt service, you have to understand that a transaction typically is going to have you extinguish that debt. What does that mean for you personally, it also means you might have a cash harvest. So there’s things to think about cash planning and that are important. I think it’s important to think about things like understanding your churn rates, and what type of customers that you have brewing some of those things before you can go to market or understanding, you know, the margins that you have today that allow you to market the firm better. When you look at potential suitors. Those are all things to, if I’m in two years out, I might be thinking, How do I strategically make margins better? How do I improve the technology set and product offerings that we have? How do I make sure that I’m targeting a market that’s appealing to a buyer and my customers are aligned with either contracts or long term agreements or recurring revenue, those are things that are, I think, in the background in your mind. But first, you’ve got to get through some of these strategics that the cultural fit and ultimately that financials data on what it means to have a big, big events happen in your life. With that, guys, I think we’ve covered a lot here today. Matt, I’ll turn it over to you for any closing thoughts and then hand it back over to Mike.
Matt Lockhart 24:29
I mean, it’s a big deal. I mean, this is this for for especially like founder led businesses. This is a combination of blood sweat and tears, right. And it’s one of the most important at the business, personal financial events have burned for many people in their lives right now. For others. They you know, they they’ve done it one Two or three times, so but it’s still super important. And, you know, I think that it engaging early with people who’ve been there before, I guess is the is probably the most important piece of advice that I that I’d offer again and again, obviously, engaging with an advisor is going to make it a whole bunch less stressful. It’s going to create greater outcomes. And but not just advisors, understanding who within your peer groups are going to be people that you can talk to, and whatnot. But start early, when you’re getting close to that point of being ready, where you’re where you’re, you know, you’re, you’re getting there. Don’t wait, don’t delay and start early and in talking to the professionals.
Mike Harvath 26:02
Sure, Matt, thanks. Thanks to both of you for all your insights and this great podcast. That will tie ribbon for this week as we’re approaching spring, here in the Midwest and at revenue rocket and encourage you all to tune in next week. For more unpack more exciting topics around growing your tech enabled services business and ultimately doing m&a transactions that make it a great day and a great week. Take care