07 Feb The Role of an M&A Advisor for both Buyers and Sellers
When you’re talking about M&A for your life’s work, it’s a an emotionally charged affair and having an advisor by your side can be the difference between getting a deal done, and it falling through.. In this episode we are mainly discussing the role of what an m&a adviser is in selling and buying IT services companies.
Mike Harvath 00:14
Hello, and welcome to this week Shoot the Moon podcast, broadcasting live and direct from Revenue Rocket world headquarters in Bloomington, Minnesota. As you know, Revenue Rocket is the world’s premier growth strategy and enemy advisor for tech enabled services companies. With me today are my partners, Ryan Barnett and Matt Lockhart. Welcome, gentlemen.
Matt Lockhart 00:34
Good to be with you, Mike. Good to be with you. We got a fun topic today around negotiation and negotiations and sometimes get a little heated, which is pretty good for us here in Minnesota is we’re in the depths of winter, and it’s rather chilly.
Ryan Barnett 00:56
Perhaps Matt, it’s not the weather, but the clothes you’re wearing, it is chilly. Today, you know, we’re looking at something we also got some banging around the office revenue rocket has been expanding. And we’re in the final throes of Office expansion. So if you hear a few hammers, we thank you for your for your business and continued support. But today really what we’re talking about is the role of what an m&a adviser is in in selling and buying it services companies, when you’re talking about a transaction that’s really important to your life, either on site you’re buying or you’re selling, it’s a an emotionally charged affair. And it’s something that is very easy to to get sideways on almost. Or you want to get involved and calpheon and do your best to help sell your company or help buy another company. And today we want to reframe that a bit in put some in really talk about what role of the advisor has and what role of the seller has in actually talking with someone on the opposite side of the table. So I’m gonna go with the assumption in this case that your advisor has already done the good work of pairing together, a buyer and a seller. So in the case, we we’ve found a good strategic fit company, we found a good cultural fit. And we’re at a pre loi stage. So letter of intent is, is perhaps ready to be crafted by a buyer. And in this case, we’re probably we’re really talking about the seller. So, Mike, why don’t you get us kicked off, you know, what is the role of a seller at a stage kind of pre LOI? Not the adviser, the actual complete person who’s selling their company?
Mike Harvath 02:42
Well, thanks for Ryan that’s a good question. I think what’s important is, you know, first, and you’ve heard this from us before not to get distracted with the process and allow performance of the business to lag, be critical that you need to continue to grow the business continue to grow profitability, continue to be up until the right without distractions. To that end, you know, most sellers will be tempted to insert themselves into a direct conversation with your seller or a buyer or vice versa, because they feel that they’re the best person to be negotiating a transaction on their own behalf. And you know, that’s a natural thing. That’s a natural feeling. It’s just unfortunately, not accurate. And I think part of the reason you hire an advisor is to have a person who is professionally trained and equipped to negotiate the best deal on your behalf. And there’s always a bit of a good cop, bad cop in a negotiation with another party or around m&a. And you want to make sure that your advisor is in a position to play the bad cop as needed, and bring a material amount of expertise about how the negotiation process will continue, and what options or solutions that they may have brought to the table and other deals that can be applied to your deal. And I think, you know, oftentimes we get asked about, well, you know, that sounds great, but tell me you know, more, more quantitatively why that is. And I think if you look at the success rates of people that try to what we call, roll their own deal or bring their own deal the market, only about 1% of those deals statistically get that. Okay, very low number, you’d have a 99% chance that that deals gonna fail if you’re trying to do this on your own or insert yourself in the process. You put the deal at risk, where if you’re using an advisor market-wide, you have about a 50% chance of getting the deal done. So big, big uplift and likelihood to get it done. And if you use you know, our stats are last year, we had 86% of our deals got done. So certainly, I think, you know, if you just look at the likelihood of getting a favorable outcome, certainly there’s a good business case, to be using your advisor and in following your advisors lead in the negotiation.
Ryan Barnett 05:24
I think it’s a great way to, to kick off this discussion, you’re excited to sell your company, I think it sounds like the seller at this stage really has to find and see, kind of see the fit, does. It’s a cultural fit or strategic fit. And really, you’re also selling yourself, I think you’re coming to the table, you’re selling what you have. But you’re not necessarily talking about the deal at this point, that maybe you can tell us, you know, pre loi again, what’s the role of an advisor at this stage? So not the buyer or seller, but instead, what’s our role in this case?
Matt Lockhart 05:58
Ryan, I think you’ve sort of led the way in talking about the cultural and the strategic fit, right, so and just in review, three major things need to come together cultural fit, strategic, fit, and financial fifth, importantly, and I think that this is, quite honestly, where we have a bit of a leg up, given our focus in the tech enabled services space. First and foremost, really understanding our sellers, understanding them culturally, understanding what they do best. Understanding what they could do better than Why talk about that first is, is in finding the right fit for a seller, regardless of whether or not that seller is selling him, or selling out, is really going to create the best future for a new cow. And if you’re able to find those right fits, when strategically, it’s aligned. And everybody’s really, really excited. Well, you know, what, that’s gonna have a distinct impact on the negotiation of a deal, and creating the greatest upside for the seller, because the buyer also sees the greatest upside. So it’s really about understanding, and then obviously, identifying those right FIPS I think that’s probably the most important now, there’s a whole bunch of other readiness that needs to occur, kind of more technical readiness, if you will, in terms of positioning things appropriately, obviously, all the financials. And, you know, Mike, maybe you could add on in terms of some of the most important things from, from a financial picture that we’ve got to make sure are readied, that demonstrates the stability of a firm that demonstrates the upside of a firm, but I really think that first and foremost is understanding our sellers well, and to enable finding those those best fits.
Mike Harvath 08:10
Yeah, for sure. It’s interesting, as we’ve said, before, it’s all about strategy, culture, and financial, when you think about financial, you know, if you, you have what we’ll call a top quartile business, from a profit perspective, you’re certainly gonna command I think, a very nice offer. And, you know, the advisor can be in a better position as you related to negotiate an optimum deal for you, you know, if you’re in that, what we’ll call top quartile, both for revenue growth and profit realization at the middle level. And I think, you know, that advisor can certainly explore what’s possible, and optimize that negotiation in a way that you probably can’t, as a seller, just because of the level of experience, it’s very likely as a seller that this may be your first time or maybe you’ve sold another business, but it’s not like you’ve done this hundreds of times, you may have done it once or twice on your own behalf with another advisor, or maybe a roll your own and you got it done. You were lucky enough, maybe you’re in that one perfect category, but you just don’t have the same level of experience. And I think experience matters here. Because probably deals get put together and how they get structured. And how they get optimized, is as much art as it is science. And it’s something is like it’s like a muscle that needs to be exercised, right. It’s a skill that advisors gain, because they’re doing it every day. And so I think you know, the parts that need to be negotiated certainly are around the total amount of the purchase price, if you will, and advisor can do that. As well as terms because very seldom is a deal. 100% cash it does exist but you know, it doesn’t always come that way, sometimes it may be in your best interest as a seller to, you know, have a component of the DLB in earnout. So you can optimize value, typically or an earn out paid out at 86% of the time, or, you know, and, you know, that means that there’s a high probability that turn outs are gonna get paid out at or above their index value. And so if there’s a fast growth firm, you probably want to align interests. And that’s certainly one way to do it to optimize value and get more value from your future performance. You know, likewise, there’s just, you know, tons of nuance around, you know, how does the seller note might work? And how, what, what, what things index earnout? And, you know, how’s the cash paid? And is it staged? And, you know, there’s probably, you know, I don’t know, 10 or 15, different levers to pull on sort of deal terms. And I think it’s important to be able to leverage your advisors experience there, especially as we focus on, you know, what’s in and out of the loi, there’s times when, you know, buyers right, ello eyes that are, are somewhat seller hostile, so that they can try to leverage that later. And then negotiations around the definitive agreement, where, you know, we’re not necessarily talking about that here. But, you know, there’s several 100 things to negotiate the definitive agreement. And so again, I encourage you as a seller to take the advice of your advisor, about what should be in the hole. And what shouldn’t be in the loi, it’s, it’s important to know that you’re not going to have everything to do with the deal negotiated and documented in the LOI. It’s one of those deals that the LOI in many ways is like a handshake. It’s a non binding agreement that defines the purchase price on the deal terms, which could change when diligence occurs. So just a few more thoughts about sort of pre loi negotiations and how to leverage your advisor.
Ryan Barnett 12:04
Sure, thanks, Mike. I would add here that if you think about the roles here, just in the financial books, the seller, it really helps if you have a clean set of books, but the advisor really needs to understand those books and create a seller’s EBITA that’s defensible. So including the Add backs, including the financial performance included in your forecast. If the seller didn’t come to the table, understanding where the story is going to go, your advisors going to be telling that story to buyers, that will get to a point where we actually have to put numbers on the table and start to look in getting that deal on negotiated. I’d love to get your perspective met here. Again, this is kind of the mix. So Ying and Yang are advisor and seller. There’s points in which we’re getting to things like an introductory meeting, in which let’s say an NDA has been signed, and a confidential information memorandum has been said. And there’s an introduction in which the two parties are really kind of getting together and starting to know each other. What role is the seller? Right before that LOI? Should they be contacting the buyer directly? Should they be compared to working with the advisor?
Matt Lockhart 13:28
I don’t think you can go 100% on this. To some extent, there’s an art of reading the room. That being said, most often, it is not in the best interest of a seller who has an advisor in place to be doing ad hoc direct communications with a potential buyer. And let’s frame it as a potential buyer. Because, you know, there’s other potential buyers that are also in play, you just want to make sure that that seller is able to manage appropriately to that set of potential buyers. Now, that being said, if and we see this where there is such an obvious upside and obvious fit, call it the proverbial love fest, where you’re like, look, ya know, let them go. Let them continue to build that bridge, or in other circumstances, and sometimes we sort of promote this, where say in an introduction meeting, there was a conversation about pipeline or a conversation about upside with customers, or an upside with our particular customer, or et cetera, et cetera. And then the seller goes, Look, we I have an update, right? And they’ll provide that direct update directly to the buyer. And sometimes that’s a, you know, a really good thing to do. But, you know, sort of not working with your advisor on that communication strategy, and going, sort of going rogue, not a real good idea.
Ryan Barnett 15:23
You are right, Matt, this is definitely not a yes or no question. I would say that, if you, if you look at our materials, when you send out a confidential information memorandum, you’re gonna see a direct all communication to the brokers and advisors always want to be engaged and understand the step. Some of it is purely functional is that we, we want to make sure that we’re advancing the deal appropriately in a in a timeframe that works for everyone. So having someone and just keeping your advisor in the loop, I think, is critical. So if you have a discussion with a buyer and your seller, make sure your your broker is there, it’s helpful for them to be in that conversation. If I flip to the other side, what are some conversations that a seller may not want to be a part of? Mike, Mike, maybe you can start here, where it can get interesting in when you’re negotiating a deal. And there’s a bit of sausage making, that comes into buyers and sellers coming together, you know, where where should the adviser be alone with the with the buyer.
Mike Harvath 16:39
You know, oftentimes sellers think that when their advisor is involved, the they’re trying to keep them in the dark. And this isn’t about a span of control thing, I think it’s just about utilizing the appropriate level of skill for the task and optimizing outcome. So to respond to your point, any discussion about price and terms or any discussion, you know, about, for example, working capital harvest or employment contracts, or go down a long list, but, you know, we’re focusing predominantly here on pre loi, a should be held by your advisor alone, you know, valuation on asking price has already been established. And that negotiation has a lot of nuance, because of who the buyer is, and all, you know, what kind of return rate that buyer is gonna get, we certainly do a lot of work for buyers and and we understand sort of what buyers are thinking about and the lovers they want to fall on a deal and, and in representing a seller, we can leverage that expertise in the negotiation, probably in a way that you know, an individual can, an individual seller cannot. If your goal is to optimize the outcome of that negotiation, then certainly, you want to have a separate conversation. And there’s a couple other reasons I alluded to this earlier about good cop, bad cop, there may be things that are asked by that buyer, where we want to have some time are we want to bring to you to reflect that in order to not immediately respond, and allows us to do that in a way and facilitate the negotiation in a way that we can’t, if you’re on the call, or if you’ve been a party to the call. And so, you know, there’s a cadence in the negotiation, that’s better managed, you know, with with the adviser law, but but to sum it up, Brian, I think anytime we’re talking about price and terms or dollars, and how that’s going to that consideration is going to get positioned and paid, whether that be for you know, working capital or employment agreements, or overall a price paid for the firm, it’s certainly better than buying an advisor long.
Matt Lockhart 19:06
You know, Mike just brought up a really good point. And I really want to accentuate this. So we find great opportunities or we enable we help, we’re part of the process. That is creating great upside opportunities in the marketplace, through the combination of two firms. The best way to enable getting after these great opportunities is to make that sure that both parties are feeling really positive, about working together, about coming together and going and getting it and there are things that happen through the course of a negotiation that can sometimes you know, make people feel a little emotional, to the extent of making them question whether or not cash are these good are these good people on the other side of the table, right. And it’s just human nature, right. And so part of our job is to keep playing our role. And if we’re the ones who are getting yelled at great, right, because we want to make sure that both parties are fired up and ready to go get after that great upside opportunity. And that’s a nuance that it, it really doesn’t come through. Now, quite honestly, I communicate that I know, we communicate that with our clients. So it helps them understand. And they’re like, it’s so common sense, but sometimes they forget it. And it’s just a really important role, so that our clients can stay steady on the tiller and be positive, and then that that deal gets done. And the cork and the champagne is popped, and they’re fired up to go get after it.
Ryan Barnett 21:05
I think you nailed it, that there are certain things that a buyer is going to try to negotiate at a price that’s better for them, no deal gets done without a willing buyer and a willing seller. So you all have to get to that point. But you do have to think there are there’s pushing and shoving on the table. And there’s some times that buyers going to disclose the thing about what they don’t like it the business that could impact that long term relationship. And so kind of hearing every, every bit of a deal is may not be appropriate for the long term, because ultimately you’re gonna have to work together. So if we can keep everyone on the same page, this is not to that an advisor hides information from either party. But it is at least the closed source conversations are held in a way that are positive towards getting the deal done. It’s kind of critical to know, at the end of it, we emerge, and we talk about what was learned, we look at where there points to negotiate in a deal and be kind of better and stronger together. If I flip this a little bit, let’s say we do come to terms on agreements, and we’ve got the enterprise value calculated and got the deal terms, everyone’s kind of moving forward. And we’ve got a signed loi that’s exclusive. And you’re turning into due diligence, the role of the seller here probably that what I would call almost a gag order gets lifted as we start to look into two teams that may be working closer together. Mike, you can help me understand the role of advisor when it starts to get into due diligence and the role of that seller. More people are likely to get involved more parties. From a legal perspective and a from a financial perspective. Mike just helped me understand kind of the role of the two two parties at this stage after an LOI is signed.
Mike Harvath 23:05
Yeah, I mean, I think if you’re working with a competent advisor, they’ll have pre screened or diligence items ahead at this point, right in preparing it for sale. And you know, that data may need to be updated depending on how long it’s taken to get from sort of deal origination and finding the right buyer to now. But we have a pretty good idea of what a buyer is going to be looking for, for representing you as a seller. And we do pre screen all our diligence, and advisors should do that as well. Beyond that, I think what’s important is, there’s a certain cadence to which that information needs to get delivered to the buyer, in order for them to have confidence in you having your act together as a business owner and a leader. And when that cadence is interrupted, or when there’s delays, in getting that information to a buyer, it can put the entire deal at risk. So I think the pre work that goes on before an LOI assigned is critical, and it needs to be complete. And then beyond that the data has to be updated and timely response needs to occur. Now, buyers may request information that’s not been in the pre work, all right, that did not occur. Oftentimes this happens. So you want to look at, for example, customer concentration data in a particular way or want to look at things on the diligence that may not have been we may not have thought about or is somewhat irregular, but they need it based on formulating their thesis around the combination. And they’re doing that as part of diligence. Your ability to respond to that information in a complete accurate and timely way is paramount to moving the deal along. And so, since I would say the same thing if there’s a request by the buyer about having a conversation, oftentimes, there’s conversations that say, Hey, let’s tell us about, you know, how your client contracts are assembled and, you know, each of your major customers and how long they’ve worked with you and, you know, etc, etc. And that’s a lie, it could be a lot of conversations, sort of like a interview, you know, tell us about the top five or top 10 customers and their history with you, the work you’ve done and what opportunities exist. I think being able to be flexible and available for what’s required, with guidance and leadership from your advisor is certainly super paramount that having a successful due diligence effort. So I think accuracy and timeliness, probably are the big takeaways there. And being flexible and available are also super important as you work through due diligence.
Matt Lockhart 25:53
Yeah, I think those are great points, it’s kind of going back it you know, we’re sort of framing this, especially from the lens of a seller, you gotta keep running your business. Now you know, where you’re going, you know, through the course of this process, but But most important, is keep, keep driving that business forward, up. And right, as, as Mike says, we as advisors are going to do our darndest to make it easy for you to play the role that you need to play through the process, be framed up and prepared to show your firm and yourself in the very best light, and then be doing some of the hard stuff. Right. And, and the negotiating aspect that we’ve sort of talked about today is doing some of the hard stuff, what what I think we also want to make sure you understand is that a, we’ve got your best interest in mind, B, we are going to be working with you strategically in terms of and making sure you’re aware of what we are doing right throughout the process. And, and so it’s, you know, we feel a indebtedness to all of our clients in the trust that they are giving us by being their advisor by being their teammate, and by being their partner. And so, you know, I think we’ve covered a lot of ground here, Ryan, what do you think?
Ryan Barnett 27:24
I think just to summarize a bit here, there’s use your advisor what their role is, and that role is truly for that negotiation, setting up the stage keeping both the buyers and sellers really just fired up. Again, that deal negotiated with the LOI. Now as the deal start to get signed, and you’re willing to do diligence, you’re going to have a more of a freer interaction between buyer and seller, but your advisor is going to still put, he’s going to be the person or they’re going to be the person who’s pushing and shoving. And if there’s going to be any kind of stink with headhunting advisor, if there’s something there because you’re again, going to have to work together for quite some time. So if we can keep keep that deal moving, keep everyone excited, look for the positive parts of the deal, get the best deal for seller get the right deal for the buyer, everyone’s going to have a win win situation here. With that. I’ll turn it over to Mike, any parting thoughts? And I’ll let you do what you do.
Mike Harvath 28:28
Thanks, Ryan. Appreciate it. Yeah, you know, I think this is an interesting topic, I think, you know, when you hire a professional, it’d be a lawyer, m&a advisor, or consultant or wherever it is, you know, they’re credible part of what you’re doing is, is not only getting that valuable expertise to guide you through a complex transaction on the case of an m&a deal. But you’re also, you know, in many ways, outsourcing the task associated with it. And, you know, we see business owners make the mistake of trying to do too much an m&a process, not being on their advisors or trying to roll their own. And then they see, you know, bad bad outcomes in their business, right, they they end up having a lagging business during that time. Because these things are hard. They’re hard to get done. And there’s a lot of moving parts. So I leave you with is to be smart about that. Stick to your knitting and, and focus on running the business and growing the business and leave the rest to your advisor. So with that, we’ll tie ribbon on it for this week. So Shoot the Moon podcast. Thanks for tuning in. I look forward to having you tune in next week when we unpack and explore more new and exciting ideas about how to grow your tech enabled services business as well as you know how to navigate the highways and byways of mergers and acquisitions. Thank you and make it a great week.