21 Mar The Critical Pillars to M&A Success
Listen to Shoot the Moon on Apple Podcasts or Spotify.
The 4 core components to M&A success:
- Origination: research, outreach & marketing – we’ve got a team of dedicated researchers finding your list, dedicated outreach team contacted buyers & sellers and supporting it with marketing
- Deal Flow & Negotiation: Moving a deal forward, creating an LOI and negotiating a purchase agreement – all the things that happen to move a deal through the pipeline).
- Financial Analysis: Valuations, Cash flow analysis, deal support
- Due Diligence: where we verify that the information provided is correct – contract analysis look at top 10 to see if they are worth continuation, invoices reconcile to the cash you actually receive, quality of earnings (QOE)
Episode Transcript:
Mike Harvath 00:04
Hello and welcome to this week Shoot the Moon podcast, broadcasting live and direct from revenue rocket world headquarters. I’m Mike Harvath, President and CEO of revenue rocket. Revenue rocket is the world’s premier growth strategy and m&a advisor to tech enabled services companies. With me today. This week’s podcast is my partner Ryan Barton. Brian, welcome.
Ryan Barnett 00:28
Hey, Mike. Thanks for having me here today. And thanks for hosting this podcast. Thanks to all our listeners who are tuning in and who are part of this journey. As we’ve done this podcast, we’ve learned a few things about what our audience is. And oftentimes our audience is someone who’s looking at mergers and acquisitions in the IT services space for the first time. And some of them I’ve looked at it in understanding of, Can I do this alone? Or what should I look for an advisor when it comes to an m&a deal, and today, what we wanted to break down were, what we view are the core components in a team when considering the m&a function within an IT services company. So , we’re just gonna kind of walk through what we see some of the things to look for, and areas of how to evaluate an advisor or take a look at how you may want to have some of those options yourself. When we start to look at this. The four areas or five areas that we’re covering are really origination, deal flow, financial analysis, due diligence, and then at negotiation. So let’s start with origination, and might just fill us in what’s a an origination and or what’s that term mean? And and what does that mean for in the function within mergers and acquisitions?
Mike Harvath 01:52
Yeah, thanks, Ryan. Well, I’ll tell you, you know, origination is interesting, it’s essentially in short, originating or finding a target that fills your needs as a buyer or as a sell. So if you’re a seller, you want to find a qualified buyer. Likewise, if you’re, you know, someone looking to acquire friends, you want to find a seller in that origination function consists of a research function to help find the firms that fit your profile. And then an outreach function which consists of both in a perfect world, both folks are on phones calling, you know, potential targets, as well as a whole marketing team that focuses on finding those particular targets, through a variety of digital outreach campaigns and in sort of media initiatives. And I would tell you that, you know, this stuff is hard, right to get origination done right? It requires a very significant investment of money and time, in order to build an infrastructure that works. I would say it also takes a very skilled talent, a very narrow talent set throughout that team on origination with this experience, and preferably years of experience that makes it work. And so it’s very difficult if you’re going to try to roll your own or do something on your own to find a team either do it on your own, or find a team that can do it, that does not have the experience of m&a origination. We’ve certainly seen a lot of clients try to hire a telemarketing firm, for example, to do this, or someone who does a portion of the outreach without the deep m&a experience. And it just doesn’t work. Because the skills required once you find a potential target on the phone, or you get to them through a marketing vehicle are very, very specific. And it really has to happen from a quality m&a adviser, in our opinion in order to work.
Ryan Barnett 03:55
To add on the research function specifically, there are so many term terminologies and technologies in the marketplace today. That understanding that the nuance that it takes when finding the ideal targets is really difficult. And this is why if you listen back to our industry specific advisor, podcast, we go into this in depth, but if you’re using a generalist, or you’re looking at an area where of building the right list of targets, there’s a big difference between managed service provider and a cloud service provider and an internet hosting provider. Those things that all made feel very similar at some levels are, are quite different when it comes to either buying or selling your firm. So finding a team that’s able to utilize the tools that they have the research databases and the outcomes that are there and being able to really understand what a target is or isn’t. It takes a skill that is I would say that In almost every company we have ever worked with underestimates, but really, really look for firms that understand and have a comprehensive research function that are able to build target lists that are for you, in your market industry, and size, and being able to continually refresh that list to make sure that the right targets are in place. On the outreach side, I think it’s Mike hit it a bit. But in m&a process, you’re really dealing with the highest levels of company. And it takes a lot of effort, it takes hundreds upon hundreds of phone calls to sometimes get simply one, one of our top clients that we had worked with, we called them 48 times before they picked up the phone and had a meaningful conversation with us. That’s something that’s very hard to replicate internally. And most firms really struggle staffing in that function of having that very upper first vacation with professional staff. So we oftentimes think this is a entry level, high performer type job. Instead, this is someone having a discussion that could impact the rest of their life. And it’s very important to staff that correctly. And the third area Mike you touched on was was marketing. There’s a lot of material that goes in on both the buyer side or sell side, but especially the sell side, and packaging up a firm for sale. So in developing everything from nothing as simple as a teaser to as complicated as a confidential information memorandum. And then being able to push that in channels, that is exponentially broadens the reach of an outreach team starts to become critical as to so if you’re looking for an advisor, it’s important to understand can they find companies that they don’t know about today? And can they get your deal in front of those that are not on the target list, when instead are going to be caught in them in a web of marketing. And I can follow up with those marketing leads in a creative way. Mike, anything else on the on the origination team that you think is important to look at or things to watch out for?
Mike Harvath 07:17
Well, you know, I think it’s important to, you know, be cognizant of the fact that, you know, when you use origination as a vehicle for, you know, finding your next opportunity for m&a that those interactions need to be handled very carefully. Because you can imagine, if you were to receive a call yourself about selling or, you know, buying another company or whatever, you know, you probably disregard most of those. You know, we’re told all the time that, hey, we don’t really don’t take these calls, but we’re taking one from you. Or we don’t generally respond to these types of inquiries via email or social media, or, or, you know, other ways. But we’re taking we responded to this from you. Because it was different. And I think what’s different about it, at least in the approach that we take, and it’s important is that, you know, back to the industry specific experience, and, and I’d say in general experience in the space for almost 25 years now comes through in that communication, and it should, and that outreach, which resonates with people who want to hear from other operators, and not just bankers. You know, as much as we are, you know, an m&a advisor, we all have, at least at revenue rocket grown up on the side of an operator. And because we’re operators, we come to the conversation with a different focus and different level of experience. I think, sometimes that comes through, and it’s very nuanced. And it’s very art like versus a science. And I think when you’re evaluating advisors, you really have to, you know, look for that secret sauce or look for that artful approach, so that you can get the biggest bang for your buck.
Ryan Barnett 09:12
Yeah origination is kind of is the start of things. And in the way that we work it, we have a marketing team that’s going to help drive demand, we have that research function that helps find the targets that ultimately fuel the our outreach team. So the tip of the spear, but once contact is made, we transition that into what we would call a deal flow team, or a program team that’s really responsible for managing the workflow of opportunities in a campaign from start to finish, Mike, what happens in that deal flow stage and what things should a person be looking for either in their own functions or when to evaluate an advisor to help out?
Mike Harvath 09:58
Yeah, Ryan, thanks for the question, it’s important to establish a cadence with the other side, as we’re talking about deal flow and deal kind of movement. And that happens, it starts to happen when you’re managing a pipeline of potential targets, in the communications that you have with each of those. And then as you get narrowed down to a particular target, whether you’re a buyer looking to find a firm to acquire, or you’re a seller talking to various buyers, you know, to be able to manage the information requests and to be responsive, it’s not go dark with a potential target. I think it’s easy even for, you know, the best teams to phone in on a particular target. For example, before you would get a letter of intent, and eliminate or drop the ball on communications with all the other targets. And you know, that that is a that is a problem, you have to be able to close out those communications and be able to move towards a particular spot with a particular target so that you can, you know, move the deal or keep the deal moving through sort of the valuation phases in the LOI phase and into diligence and then through ultimately to negotiating the definitive agreement and to close, and that cadence has to be proactive and timely. Otherwise, the other party will lose interest, or have lack of confidence that you can actually get the deal done. And it may not be the case, but the perception becomes reality in that situation, if you’re not moving things along in a timely manner, and it’s easy to get stalled, particularly if you don’t have the various functions of the deal staffed properly, and you’re able to keep a good cadence moving forward. We’ve seen that happen many, many times.
Ryan Barnett 12:01
I think it’s important to note here to this is again, another tools, technology and process into Pizer here has to have the proper virtual deal room software to allow for confidential access to documentation. If you’re if you’re rolling your own acquisition, to be able to have some of those is is definitely a niche. And then just the understanding of the process. Oftentimes, it’s as a buyer or seller, you may want to jump into the deal flow and push things along by yourself. And your advisors really there for a purpose of helping that deal flow, seeing things from a third party perspective and view that could be a little farther out than your short term vision, and evaluating multiple options, for example. So keeping that dealflow amongst multiple firms, in both buy side and sell side is critical. And keeping the communication going. Ultimately, you’re selling your firm, the most important thing you need to do is run the business that could stop for sale. And that’s very hard to do if you’re in the weeds. Talking through the terms of a deal in terms of an LOI and negotiating through an APA, it’s unnecessarily impossible to do impossible to do by yourself. The other section and so if you can think about through the normal process, the teams that you could origination to the second for the deal, the the deal flow or program management team that is consistently keeping that deal in play. There’s another function that’s really around financial analysis. In Mike what in how would you define kind of that financial analysis team? And and what do you look for in and near your own team or an advisor?
Mike Harvath 13:59
Well, you know, super important to have folks that know their way around, you know, valuation and valuation in the space. You know, we’ve been fortunate enough to do you know, 1000s, if not 10s of 1000s of valuations in the space since we started the firm, you know, 22 years ago. And throughout that experience, we’ve learned, you know, we’ve developed a proprietary methodology that I think works pretty well as well as is bedded in and proven through our comps analysis, but most importantly, through successful transaction. So, you know, the ultimate valuation of a deal happens when you have a willing buyer and a willing seller come together. And ultimately, you know, come do a deal and, you know, our our valuation approach because this is, you know, the only space we work in as technical services companies. You know, it’s typically our mark to base prices, because typically within a few percentage points over the deal happens. And we think that’s, you know, pretty good. So it’s important to have an industry expert, someone that knows the valuation modeling for your industry, and can help you get to a fair deal. We often say that, you know, no unfair deal gets done in our industry, they just don’t they, you don’t see people taking advantage of someone else, as much as you might fear that there’s enough outside advisors in the case of accounting, and legal and tax and other advisors that are touching these deals that, you know, if something looks like it’s out of bounds, and you’re outside the ditches, they’re going to raise a red flag for either the buyer or the seller. And so, you know, we just don’t see unfair deals getting done. So, you know, someone who has deep experience in doing valuations, understands what information they need, how to do it quickly, is critically important. And I think that will help facilitate a negotiation that is based, in fact, in one that is, you know, where transactions typically occur, and certainly provide some lubricant to be willing to get the deal negotiated. I think some of those, you know, just to continue on that for a little bit. You know, the financial analysis associated with the diligence phase is also equally important, if not more so. And having very experienced diligence analysts on a team on your advisory team is really important, and ones that have experience in your industry. So that they’re doing, proving out the cash flaws, are accurate, and that you know, what you’re buying. Those are all sort of financial review and financial diligence functions. Yeah, they’re somewhat interrelated between valuation and
Ryan Barnett 17:07
They’re interrelated, but they’re also integral that they’re working together. So if your finance team is is providing the models and the expectation on ROI of a deal, the due diligence team is there to back it up. And revenue rocket, we treat these in the same team with different different functions. And that’s typically the personality type is a little different in those as well. I will note, the deal economics to understanding the impact of an acquisition is something that’s is niche compared to a traditional FPN, a financial planning and analysis type person at a company. So I there’s some modeling in that industry specific expertise, not only within IT services, and technical services, but also within the the merchant acquisition world, it’s important to specialize there. And the same with due diligence, there’s there’s a lot of work in that, that goes into determining what is real within the company that you’re buying, and what needs to be worked upon, and even proving invoice to cash. And, and everything in between. Firms oftentimes will outsource some of this work to another term to and to a due diligence specialist, or they may have something called a quality of earnings approach. Oftentimes, quality earnings skip cue will leave, you’ll hear it called oftentimes the the overkill for a deal. And instead of focusing on the adequate risk, and compared to the adequate control and spend for understanding that risk is is overblown, in some cases. So keep in mind that there’s different functions that may do this, and maybe an accounting firm, we find that we it’s important to work alongside vendors like accountants and lawyers, to make sure that the deal is done right. And using an advisor that they will be able to be experts in those lanes is will help get the deal done. The last session and Mike this is really as your specialty is, I would say that it’s all no category is really negotiation. And there are so so many things that happen when a purchase agreement is getting done. So, Mike, what, tell me, tell me kind of what goes into that and what’s the difference or what were some things to look for if you do this yourself? Or if you’re evaluating a an advisor Report?
Mike Harvath 20:02
Well, you know, I think, Boy, I can read a book on this one. What’s challenging here is that, you know, they call the m&a transaction, the most unnatural act of business for a reason. You know, in the face of it, you would think, you know, you’re a business owner or leader in a business, and you shouldn’t be able to negotiate an m&a deal. No problem, right? Like a you’re negotiating contracts and agreements with clients all the time. So, you know, how hard can it be? It’s kind of what you tell yourself? And the answer is, it can be really, really hard. There’s hundreds of things that have to get negotiated in a definitive agreement. And it’s generally always better to have an advisor, who does this for a living, man, it’ll sense because many of them are interrelated. And how a deal is structured, how it’s treated from a tax perspective, you know, how working capital harvest is negotiated, how a Complan for key executives might be modeled in and might be considered part of the consideration. And its related tax, various, you know, approaches to, you know, things like the s reorg. And, you know, just, I mean, there’s just a ton of little nuance things, you know, IRS tax laws as it relates to structuring and efficiency, that you’re probably not going to know, unless you’ve been involved in negotiating these deals. And in some cases, we find the lawyers don’t even know about how some of these pieces come together effectively. And so, you know, assembling a quality advisory team that sort of covers the watershed, and has experience in your industry, is really important to being able to optimize the deal, and optimize the negotiation, because you need someone who’s experienced in negotiating the business terms and can get to the optimal transaction that everyone can do. Because no points for sort of win lose negotiating here. Because generally those deals don’t get done, you need to have someone mediating the deal that focuses on Win win, and can understand and hear not only around the more mundane deal terms of you know, price and terms on a transaction, but the nuance of all of the little things that impact sort of the real price, or the real cost of a transaction.
Ryan Barnett 22:52
Right, absolutely. And again, this is one of those where the, whether you’re a buyer or a seller, if you’re trying to negotiate a deal yourself, there’s bumps and bruises along the way. And if they’re, you have to work with that person for the rest of her deal. And that can oftentimes be difficult if you had a rough negotiation session. So having that advisor, by the way, who can take the brunt of the state, because we call it and just be the guy that it can struggle through the difficult parts of a negotiation that no one wants to be in, is absolutely critical for a deal. Mike, that’s, that’s really the kind of the big areas that we see here in kind of, if you’re thinking about functions, those are some big roles, any parting thoughts?
Mike Harvath 23:52
Um, you know, I guess the only thing I would say is that, you know, like many things, you know, it’s valuable to get experiences valuable. And I think, you know, seeking an advisor who has deep experience, and doing deals, just like the one you want to do, in the industry that you’re in, is super important in order to ensure your success or to dramatically improve your odds of success. And I think, trust them to do what they do. If they could go faster or slower or do it differently, or whatever they would. And I think in the on the whole, the advisors in our industry, do a pretty good job of sort of little biased about our work here at revenue rocket, but, you know, there’s other advisors that you know, are focused on our industry that I think do very good work. And you should look carefully at all of these discrete steps in the m&a process and unpack how the individual firm does it. Because there’s some firms that do one of these steps really well and may not do some of these other steps very well. Or, you know, they may do them all, you know, expertly or none of them expertly. So you need to sort of look at and unpack, you know, how these firms do each one of these discrete steps in the process and how they staff it and how, you know, some of the outputs of that work effort for you to credibly validate and evaluate them. It’s appropriate to not only do that, but also talk to their clients in check references and see how people’s experience on the other side of the deal occurred with that advisor.
Ryan Barnett 25:48
Make sense. All right. That’s all I got. Mike, I’ll turn it over for you.
Mike Harvath 25:53
Sounds great. So that will tie a ribbon on it for this week. Thanks for tuning in. And I look forward to having you join us next week. We’ll continue to focus on growth strategies and m&a tactics for IT services companies worldwide. That have a great week.