25 Oct Selling your Business to a Friendly: Good or Bad Idea?
Listen to Shoot the Moon on Apple Podcasts or Spotify.
EPISODE TRANSCRIPT:
Mike Harvath 00:04
Hello and welcome to this week’s Shoot the M oon podcast broadcasting live and direct from revenue rocket world headquarters in Bloomington, Minnesota. As you all know, revenue rocket is the world’s premier growth strategy and m&a advisor IT services companies. With me today are my partners, Matt Lockhart and Ryan Barnett. Welcome, gentlemen.
Matt Lockhart 00:26
Hey, Mike, great to be here.
Ryan Barnett 00:28
Good morning, Mike. Thanks for having us on here today. It’s been an interesting and good week and fall year at revenue rocket, and one of the topics that we’re taping today is really the topic of mergers and acquisition with what we would call a friendly in the market. Mike, what’s a friendly what’s a friendly to you?
Mike Harvath 00:48
Well, could be a friend of the firm could be, you know, a management buyout could be someone you know, the industry, who is a peer, could be someone from maybe a peer group, that’s where a lot of these conversations tend to originate. Could be from someone you meet at a conference who you know, and like, certainly could be a variety of people. But there are people that are known to you, as a business owner, that are running similar businesses are in your business, and may have an interest in buying your business.
Matt Lockhart 01:22
Could be a family member, I guess. Family members might be friendly.
Mike Harvath 01:27
Yeah, I guess it depends on your family right Matt. But yeah, certainly there could be a multi generational component. We’ve certainly seen plenty of those over the years. But it’s certainly someone that is known to you as a business owner. And I think selling to a friendly, you know, comes with some unique advantages and some unique perils. We’re talking about some of those today.
Ryan Barnett 01:50
Well, Mike, I think we could probably dig right in. If we understand that someone that’s near to us, and we understand them, perhaps or understand their business, or know them, it can help engage those discussions faster. So oftentimes, I think, to me, I picture this is a meeting over a cup of coffee, and you’re asking, Hey, how’s business going? And then the picture takes up. But let’s just start with that. If you’re thinking about the origination of a firm, and let’s say you’re on the buy side, and you’re trying to help buy a company, what what’s how would you approach a friendly compared to how do you approach a typical origination type process?
Mike Harvath 02:31
Yeah, that’s a good question, Ryan. I mean, I think what’s important is typically in a friendly, you know, you have some relationship, right? You’re known to each other, you have some level of trust. Yeah, I’d like to think you know, you at least like each other, right? So that you can have a conversation like this. And you may broach the subject with them directly. Hey, have you ever thought about selling your business or merging? You know, we’re looking at doing some acquisitions, so businesses like yours are merging with companies like yours in order to get to a place together that we can’t get apart? And just want to gauge your interest. Certainly, if that seller says, Well, yeah, you know, something we’d look at. I think, you know, at least you’ve opened the first door began the conversation.
Matt Lockhart 03:18
I think you use the word, trust. And I think that trust piece is a is super important. Right? And because it can certainly facilitate the what are the natural starts of doing a merger or an acquisition, right is as people are feeling each other out: how do you think, are you for real, can I trust you, is what you’re telling me real, and if it’s a friendly. Yeah, obviously, that whole piece can go that much easier, that much quicker and, you know, that’s a that’s a real potential benefit.
Mike Harvath 03:57
Yeah, I think it’s interesting about that comment, Matt, is that what’s important, though, too, is certainly you’re opening the first door more quickly, I think. But you have to know that, you know, does that other party have a similar customer care and employee care philosophy, as you know, that’s an important component that gets vetted typically in a normal outreach process, or one that’s managed by an advisor to make sure that there is alignment. And I think there could be a tendency to move too quickly with a friendly and maybe overlook some of those things as it relates to reciprocal diligence. You know, we have to remember that all these deals need the lineup strategically, culturally and financially in order to get done. And so while you’re talking to a friendly may have a leg up on sort of the trust angle, but you need to make sure that there’s alignment on all three pillars in order to further the discussion.
Ryan Barnett 03:59
Yeah, so simply knowing each other does not necessarily mean that your businesses are aligned or they’re the strategic they can accomplish something together that you wouldn’t be able to do alone. I think that that’s something where I think if you know someone well, you may not know them as well as you think. Just knowing from asside, and you start at the, I think, ask the same questions that you would, if you were having an external view of it. So get into an LOI, for example, that might be a little bit easier because you understand the common goals together. But when you start to get to the fine points of what might be in an LOI, it may be harder to separate and step back and say, Hey, why am I doing this? Or what I’m expecting? Or what’s the deal that’s going to be win win for everyone.
Mike Harvath 05:50
An important point I’ll just make is that, you know, this just really emphasizes how you always have to be ready for these types of conversations, even if you’re actively not looking to sell your business, because you never know when someone might come knocking and the opportunity is right. And you know, what is ready mean? Well ready means that, you know, you’ve built a healthy business that continues to grow, you know, at or above the industry growth rate, and one that is a top quartile from a profitability perspective. I think since most all IT services deals are valued on a multiple a cash flow, or EBITA, if you will, or profit, being, you know, in a top quartile profit situation means that you could be ready to have those conversations doesn’t mean that you will and doesn’t mean that you’re ready or that are ready for the sort of ready to sell from an emotional perspective or from a distant generally where your headspace is, but it does mean that at least you’re financially ready to optimize the value of your business. And, and that just brings back the business case that you should always run your optimize your business for growth and profit with an emphasis on profit in order to be prepared to have that kind of conversation.
Ryan Barnett 07:07
If a willing seller is there and a willing buyers there, it sounds a bit as it could be a situation which would be ideal for doing the transaction yourself and negotiating yourself and coming to terms, do you think that’s fair to the case or say a little more complexity to it?
Matt Lockhart 07:24
I think that, you know, we’ve talked about the fact that and Mike really brought up you know, where I say that, you know, it can facilitate those early motions within the deal of getting to, you know, having a basis of trust. But Mike said, well you still need to do the appropriate analysis, and know that an opportunity is right for the buyer and is going to be right for the buyer in the long term. Likewise, getting a deal done is a business transaction. And having somebody help having an advisor help and play an objective role on all of the things that need to be looked at, you know, pre loi, post loi, within getting an agreement in place, all of those things need to be done thoroughly, professionally, objectively. And having an advisor in place is always going to facilitate that process and enable what is a friendly relationship to continue being a friendly relationship for a long time into the future. But it’s that’s the way I look at it, Mike.
Mike Harvath 08:40
Yeah, I think it’s important because, you know, m&a is hard guys. Oh, you know, it’s tough to get these deals done. I often say there’s hundreds of things to negotiate. And most of them you’ll be blind to as you work through these deals and/or, maybe your first time that you’ve negotiated some of these things. So the benefit of experience with a guide is really important. It will help maintain the relationship with that friendly as you guys come together to work together. And just the sheer math of it, you know, dramatically improves the likelihood of closing the deal. You know, you only have about a 1% chance of closing the deal if you roll your own. Most of those deals fall apart for a myriad of reasons, things that could have been prevented if there was more experience at the table. And so you certainly have a much higher probability of being successful as you go down this journey or, you know, stopping the efforts sooner before you put a bunch of time and energy into it if there isn’t a fifth by using an outside adviser than that.
Ryan Barnett 09:47
I think it’s clear if there’s going to be someone that gets any pressure or or even stink on them, as you may say, it’s it helps for an advisor to get that you ultimately have to work together and And then work to get through the transaction and also post transaction. In the case where there’s friendlies, do you see any difference between what we would term selling in or selling out?
Mike Harvath 10:12
You know, we use those terms pretty loosely selling in as those to re, you know, redefine it is when you’re a business owner who wants to continue to work together or work in the business moving forward, selling out as more hey, we’re going to sell and transition out, there’s no right or wrong answer there. When selling to a friendly, you may find it incredibly empowering and a great opportunity to sell in and be part of a bigger team. We’ve seen that certainly in some areas of our wheelhouse, where we’ve had friendlies bring three, four or five companies together, and they all continue on in different roles, emphasizing where they’re, you know, have their superpower, if you will, or where they’re super effective. As individual leaders and the combined business. We’ve certainly seen families do deals where they sell out, but to a trusted partner, someone that they’ve known for a long time. So they feel good about leaving their customers and employees with someone they feel that will take good care of them and be able to be good shepherds of what they’ve built. So there’s no right or wrong answer there. I think it’s a very personal decision. And it’s one that you would have to examine and make sure it lines up with the goals and objectives of of that acquirer or you if you’re the acquirer that the seller is, you know, lined up with where you want to take a potential deal.
Ryan Barnett 11:39
Yeah, and any situation needs to be evaluated independently. I think there’s no right or wrong answer to that, to your point, you can certainly have cases in which you may know a friendly, who needs to retire and wants to retire. And that can be beneficial to both parties to have someone move on. Sometimes it’s just simply beneficial for someone to to stay and continue to grow. Is there a you know if you’d have a friendly here there’s a strong relationship? Is there any negative risk, you need to be cautious of? Or are in generals? What additional risks should someone consider if they are looking at working with a friendly transaction?
Matt Lockhart 12:25
Well, I mean, if you don’t separate the business from the relationship, then think that there’s there could be a natural risk to the relationship to the friendly relationship, say, for example, the buyer, you know, he’s taken over the business and who knows there’s some problems or you know, whatnot, and calling his buddy on a Saturday afternoon and the buddy’s like, hey, you know, hey, I’ll take this call, right? And then all of a sudden, he’s drilling him with 25 questions about business? You know, I think that it’s just important to, you know, be able to separate what is the relationship from what is the business appropriately? And, you know, have really clear and transparent discussions about that, because, you know, the relationship could businesses business, and, and you never, as Mike says, we wish we had a crystal ball to be able to predict the future, but we can’t, and who knows, right things can, things can happen. So, you know, that’s just kind of one that comes to mind for me.
Mike Harvath 13:36
Yeah, I think there’s some others that, you know, can present themselves, certainly, there’s this natural tendency we talked to a little bit earlier, to sort of short circuit the process a little bit, because you trust this person, you know, them, likely they’re considered someone who’s a trusted adviser. For example, all these transactions come together through people that know each other intimately know their businesses, and they’re, you know, they have a personal relationship through a peer group. They feel like they’ve, you know, they reviewed financials together, you know, very regularly, they get together, physically and sort of have some time together, as well as, as network and know each other, both personally and professionally. So there’s going to be a tendency as they head trust this person, we should certainly move, we could move quickly. And we don’t need to do all this stuff that maybe our advisor or lawyer or accountant is saying we need to do. And I would just say that, you know, that is a material risk to not only the transaction, but to making mistakes along the way that could create a fair amount of discontent post transaction, because either something material was overlooked, or something was kind of given short shrift, and it should have been looked at much more closely. So I guess I would encourage everyone who’s looking at this deal to not fall into that trap in an effort to maybe save dollars on professional services fees or think they need a little less time from their lawyer, their accountant or their m&a advisor, and to make sure they take the advice of those outside counsel to follow a rigorous process as they vet and put together the companies. Because if that ongoing relationship is built on a solid foundation of mutual diligence, and respect and planning, and you follow the best in class approach, and, you know, enhances the likelihood of a very successful post transaction deal and integration.
Ryan Barnett 15:45
Makes a lot of sense. That’s the questions I have today, Matt, any any closing thoughts before we wrap it up?
Matt Lockhart 15:52
As it pertains to this, you know, it’s certainly worthy to look at certainly worthy to talk about, I think that getting to an advisor, like Revenue Rocket, or anybody else, I mean, shoot, you know, people have been telling me that they’re listening to this podcast, and they’re not in the IT services business. So all of this warrants, you know, what happens outside of our sphere of expertise, but talk to an advisor early, get an objective view, and lastly, keep great relationships with people because it’ll open up, you know, more and more opportunities. That’s well put, but I heard today, guys was that there’s, as a seller, you should always be ready. So these conversations can happen, anyplace anytime. So the key to continue to run your business in the growth mode is and being profitable will help you attain the cash flows that are needed for a successful exit, you should really engage and advisor and make sure that even if you’re sitting across the table with someone very friendly, you’re all going to have interested or individualistic in nature. And sometimes getting to impasse is impossible without the help of an advisor. To get you through that. Make sure that you’re focusing on what we call our big three, strategic fit, cultural fit and financial fit, they all have to be there. And oftentimes, if you know someone, well, you made short shrift those, so make sure that those are really put together. Expect that there’s gonna be emotion within m&a, m&a, and with friendly people, those emotions can get high, again, turn back to your advisor, but it makes sure that you can get through that and work together while you’re selling and or selling out. And then there are risks to it’s annoying, someone kind of too well. So just be aware and understanding and make sure you have that objective view. At the end of the day, this is still a business transaction. And even though you may be very friendly, it’s still got a big price tag with it. So with that, Mike, any closing thoughts? I’ll let you close it out.
Mike Harvath 18:01
I think we covered it. Great job, guys and thanks, and with that we’ll tie ribbon on it for this week. Tune in next week to learn more about tips and tricks to grow your IT services business profitably and to facilitate m&a transactions. Thanks, make it a great week.