07 Mar Value of an Industry Specific M&A Advisor
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“Birds of a feather fly together.”
Why should you use an industry specific advisor when entering into an M&A process:
1. Industry Specific Knowledge
An industry specific M&A advisor will have a deep understanding of the trends, challenges, and opportunities that are unique to your industry. This knowledge can be invaluable in helping you to identify potential acquisition targets and negotiating the best possible deal.
2. Access to Key Players
An industry specific M&A advisor will also have a network of key contacts within your industry. This network can be extremely helpful in identifying potential acquisition targets and getting access to the information you need to make an informed decision.
3. Deal Structure Expertise
An industry specific M&A advisor will also be an expert in deal structure. This means that they will be able to advise you on the most tax-efficient way to structure your deal, which can save you a significant amount of money.
4. Negotiation Skills
An industry specific M&A advisor will also have a wealth of experience in negotiation. This experience can be invaluable in helping you to negotiate the best possible price for your acquisition target.
5. Exit Strategy Planning
An industry specific M&A advisor will also be able to help you with exit strategy planning. This is important because it will ensure that you are able to maximize the value of your company when you eventually sell it.
6. post-Acquisition Integration
Finally, an industry specific M&A advisor will also be able to help you with post-acquisition integration. This is important because it will ensure that the acquisition is successfully integrated into your business and that all of the synergies are realized
Transcript:
Mike Harvath 00:02
Hello and welcome to this week Shoot the Moon podcast, broadcasting live and direct from Revenue Rocket world headquarters in Bloomington, Minnesota. Revenue Rocket is the world’s premier growth strategy and m&a advisor to tech enabled services companies. With me today are my partner’s Matt Lockhart, Ryan Barnett. Welcome, guys.
Matt Lockhart 00:23
Good to be with you, Mike. Hey, Ryan, what’s going on?
Ryan Barnett 00:27
Hey, good morning, guys. Thanks for hosting another good podcast. We’ve got an interesting topic here today in looking at advisors in m&a who are specific to a an industry and the value that industry specific advisor might be able to bring. And some some benefits there and some opportunities for companies if you’re considering bringing your company on market or to do some biocide work. So I love to hear Matt and Mike, why do you think that it’s important to have that industry specific advisor at for us, it’s tech enabled businesses, and more even specifically, we’re looking at companies like managed service providers, cybersecurity providers, application integrators, customers, and developers and the likes of technology related businesses. Let’s back up a little bit. And Mike, I’d love to hear you know, why did revenue rocket pick tech enabled services as a vertical market? Tell me a little bit more about the story and why it matters?
Mike Harvath 01:28
Yeah, thanks, Ryan. You know, the reason, little bit of history is I had started and grew and sold three tech enabled services companies prior to starting revenue rocket, I used a lot of m&a advisors along the way, as manufacturing, the last company I own, we bought seven companies prior to my exit. And what I learned in hiring those advisors was that there really needed to be an advisor that was aligned to kind of Ikki services, tech enabled services to really get the nuance of how to advise us in the transaction. And this impacted things like valuation, integration, planning, just how to further monetize a deal, look at their strategic fit and provide critique in a meaningful way. And then also, you know, just know, the lay of the land, because in tech services, it can get pretty complex. So the nuance of a specific companies we bought was very complex to in my case, you know, ERP implementations and, you know, strategic advisory for financial services firms and a variety of things. And, and most of the advisers who use just didn’t have that expertise. So I, after I sold the firm, I said, you know, this is an opportunity, this is sort of a real opportunity to create an advisory firm, around m&a and growth strategy, that it gets it from an operator’s perspective, not simply from a bankers perspective, but from an operator’s perspective. So that we could bring that, you know, strategic, sort of thinking around kind of what does one plus one and Gliffy really look like and, you know, understand the myriad of three letter acronyms that are thrown around our industry, and to be able to, you know, provide a kind of a step up and level of advisory counsel to my clients that that would really make a difference.
Ryan Barnett 03:28
I think it’s a great foundation for the business to you were in it, you were able to operate in a very specific market, you saw the needs of that specific market and can execute in it. I think there’s a lot of value in understanding, even simply the jargon that’s used to your point, we’re filled with three letter acronyms. And it’s oftentimes difficult to to jump in and learn the difference between an MSP or a CSP and or just the nuances that come with some of these markets. Matt, maybe I’d love to get your opinion here on Is there something specific or industry like an industry specific advisor? What are they doing to help kind of find better strategic fit? Is there? Is there something specific about a a person or firm that’s dealing with with our industry that a generalist may not find or may not understand or may not connect the dots?
Matt Lockhart 04:31
Yeah. Great question Ryan and sort of building upon, you know, Mike’s foundation for starting revenue rocket, because I think that in the context of an industry specific in is is also at least in our experience, built from living in the shoes, operating these businesses. And, and we live in Right, we’ve lived it. And and, you know, before it kind of getting back to your question in terms of how to how does this enable finding these fits, I think it’s important to also say that, at least in our case, and I know in other industry specific advisors, we do we really like these businesses, we, we, we enjoy this space, we live this space, because we, we love it. And, and so having the opportunity to continue to apply all of our experience is something that, you know, we get up and we’re fired up to do every single day and, and provide that guidance to our clients. And, and because we’ve lived it for oh, it’s hard to say, you know, like decades and decades, you just sort of get it, right, yeah, understand the personality of the businesses, that the value adds of the businesses, understanding how a particular business can can fill gaps for a strategic buyer. And it really, you know, we talk about it all the time, but I don’t want to make light of it, the opportunity where one plus one can equal four, five or six, in a combined entity is really about finding the very best strategic, you know, fit and the strategic value. And, and if, if an advisor doesn’t, quote, unquote, get it, they don’t understand some of the nuances, some of the growth opportunity that can be applied by matching the right firms and strategic value, well, then, you know, they’re gonna miss opportunities, you know, and it’s also, I mean, think of put, let’s put ourselves in the shoes of a seller, and Mike sort of talked about this experience, where the seller needs to be constantly educating and advisor and in language in differentiated value in opportunities to, to go faster than competition, opportunities to be a leader in a space. Well, you know, I mean, shoot, you know, that’s, that’s really hard for a seller, and it quite honestly, it takes years, if not decades, to really get it and to really understand it. Now, I’m not saying that an advisor has to be an operator in the past, or having that experience. You know, there’s many investment bankers and or advisors who’ve spent their life in this space, and they, you know, they’re credible, and they and they get it or in, in other industry, you know, specific cases, you know, we do tend to believe and we get this feedback from our clients on a regular basis that our past operating background does make a difference, right? And then, you know, maybe, you know, that sort of also build upon it and, you know, listeners of the podcast, no, we can’t we talk about cultural fit, we talk about strategic fit, we talked about financial fit, having lived in this space, and in Mike’s case, having been advising in this space for decades. You also sort of understand the cultural fits naturally. And, and I think that the industry specific lens gives us a leg up on the cultural fit as well.
Ryan Barnett 08:59
Yeah, covered a great, great swath there. You’re, you’re absolutely right, the Fit has to be in line with the nuances of the market. And without, to your point, could be decades of experience. It’s hard for someone new to come in and, and really understand that. If I flip this around a little bit, is there no? Why would someone use a generalist? Is there is there something that a generalist could bring to the table that helps maybe increase reach or increase? Maybe it’s price efficiency, either Matt or Mike is or what can a generalist bring? That that perhaps changes our view of the industry specific visor? Are where does that where does the generalist work? Work really? Well?
Mike Harvath 09:54
Yeah, I can lean on that. You know, I think that there’s a great number of As generalists out there that do very credible job for their clients. And where that’s the best fit, certainly is with high asset based businesses. So when you think about the number of transactions that occurred in sort of quick serve restaurants or convenience stores, or you know, even some manufacturing businesses that have high asset counts, that are very similar to one another, and there’s just lots of them, and a generalist can do a very credible job, because the sea of comps for like firms is readily available. It generally doesn’t require as rigorous a process in order to facilitate a deal, whether they’re being represented on the buy side or the sell side. And, you know, the path is pretty proven, right? So I think that there’s some very, that’s a great situation where a generalist can do a credible job, I think there’s some pricing efficiency, if you look at how, you know, generalist firms price, oftentimes, their, their, their structures are a little more aggressive than, you know, vertically aligned specialists. It’s no different I oftentimes use the analogy, right. It’s, it’s no different than other areas of professional services, if you go to an accountant or a lawyer or our, you know, pickup, you know, in the medical business, if you’re a generalist, say, you know, you’re a single single lawyer guy in a small town in America, or you’re an accountant who works with, you know, the local small businesses, your your rates are certainly gonna be lower than someone that’s highly specialized tax expert in, you know, international tax matters for, you know, hedge funds, or some such thing, right? Or, likewise, you’re gonna have a similar scenario with medical specialties, right? If you’re a neurosurgeon who works on a very specific type of neurological challenge, it’s going to be a different sort of expectation or unveiling them, maybe a general practitioner, and you service different audiences. So I think as you think about all of that, you know, the specialization required to be vertically aligned, and the value that’s brought to the conversation is one that certainly typically comes at a bit of a price premium. But that’s not always what’s required. And if I can use an analogy, again, if you have to have a laceration stitched on your head, it’s probably overkill to have a neurosurgeon doing that work. Likewise, you know, same thing with tax, right, if you’re on a small business in a small town in America, you don’t need a, you know, international tax expert for hedge funds to do your tax return. And so I think it is, it would be good to make sure you align sort of your needs with the particular advisor, I, you know, maybe we’re biased a little bit, but certainly in tech enabled services, the complexity and nuance exists. Enough that, you know, when you begin to look at close rates of firms that are highly specialized, and well put together, those rates tend to be much higher than generalists in the same sector. And I think that’s just a, again, another indication of the value that specific vertically aligned advisors bring to their respective industries versus those that don’t. And it is a mistake to try to use someone who I think is a generalist versus specialist in these complex industries. If what you’re looking for is the optimal outcome, just like it would be in a medical scenario, right? You wouldn’t want to use it for a general practitioner for your complex neurological problem as an example, they may be able to try to do it, but I don’t know the outcomes will be optimal.
Ryan Barnett 14:30
Thanks, Mike. It’s with a general system play. It’s a it can be very difficult to understand a market that’s outside of what you’re really familiar with. And everyone’s got their own niche of what they come in with anything in the years and understanding within that niche. And it takes time to get educated on the specifics of any deal, even in our market and To understand some of the nuances between let’s say, Microsoft partner, or a ServiceNow partner are miles apart. And understanding the ecosystem there is is difficult. So to for someone to come up for a completely agnostic standpoint to come in, it takes time, not saying they can’t get there. But understanding. Understanding it can be can be hard. One of the things that we’ve seen is a misalignment in understanding financial statements and valuation trends when it comes to specific industry. So if we’re talking to a agnostic broker, they may not understand what’s important to look for in a p&l. When it comes to like, its, let’s say, a managed service provider. Matt, I’d love to get perhaps a little bit of your insight on maybe what’s the value of a finance team that is specific to tech enabled services? And how that may impact a deal overall?
Matt Lockhart 16:07
Yeah, well, I mean, I think not not just the finance team. I mean, I think the entire team Ryan, right. I mean, from the marketing team, to the outreach team, to the finance team, to the legal team, right. I mean, it’s, it’s, it’s everybody, but you know, as it pertains to the finance team, specifically, I think that, you know, you started to raise the point around, you know,, how do you portray, for example, the forecasted growth of the business, right. And, and being able to demonstrate through past financials, how the forecast is put together, and is arguable, it’s not just arguable, it’s plant, right. And in and especially within, oh, say, pure services, business, how the ability to demonstrate the appropriate spend, for growth, but also not just, you know, growth on the revenue side, but growth within the business, and were in that growing business, there is a an accelerated projection for net income. And so, you know, our teams and industry specific advisor team within their finance department really understands that because they’re looking at it day in and day out, in addition to that, they’re able to identify, you know, let’s talk about it from a buyside, you know, advisor perspective, and being able to very quickly identify outliers in the financial statements that, you know, need to be explained that that are, quite honestly, just plain wrong, and can also have an impact on you know, on valuation. So, I mean, I think that it it is it, it is a different business, you need to be able to eighth, understand it to get it right, but then understand it to be able to paint the picture as to what the future is going to is going to hold.
Ryan Barnett 18:35
Good points, like to think about the valuation part of that question. And negotiating deals specific, what are some things that you’re seeing within the IT services world that that the general world may not see, especially when it comes to the some of those kind of pegging the right number that works to get a deal done? And why why does it matter to have all these years of experience?
Mike Harvath 19:02
Well, I think not only the trends around the valuation, but the structure and things like tax efficiency, which is something actually we’re dealing with today on a specific transaction. You know, we oftentimes see a generalist advisors that maybe focused on tax as an example, advising a client on tax efficiency, and you can tell by their advice or their questions that they don’t fully understand the business, right. You know, things like what portion of purchase price allocation goes to asset versus good? Well, you know, tech enabled services businesses, the lion’s share of all deals are always goodwill, because our asset light businesses, right. And they’re always asset like businesses, I guess I haven’t even seen in our cloud service provider clients, asset heavy businesses, I mean, they typically these have either overall revenue and what they do tend to be asset light, which, by definition means that they’re going to have the lion’s share of any purchase price allocation Go to Goodwill. Now, you wouldn’t know that if you didn’t specifically work in this industry every day, right? You might not know that. So you would give more generic advice about, you know, how to negotiate that allocation. These are the businesses that tend to be more asset heavy, for example. And so I just bring up, and then there’s many, many, many points like that, as it relates to, you know, bringing industry experience to bear as it relates to things like working capital negotiations, and tax allocation, and, you know, tax efficiency. You know, goodwill, rollover on equity, and how that works versus purchase. I mean, all those things are relevant examples that have literally presented themselves today, were being, you know, industry specialists helps you sort of not only be knowledgeable about these things, but be knowledgeable in the context of experience on transactions that have occurred in a recent timeline. And I think that that brings huge value to the client, in huge value to you know, everyone in the ecosystem was working on the transaction, to actually optimize value for the client, but also optimize their their price or their harvest, if you will, from the transaction, because without that relevant experience, you’re just going to miss some of those nuances.
Ryan Barnett 21:38
Yeah that is such agreat point, it’s very easy to just cross wires just a tiny bit. And that can be difficult. Matter. I mean, in many businesses that we see out here, it’s perhaps not what you know, but who, you know, why does it matter to have what helped does it be industry specific, when it looks at your targets and contexts?
Matt Lockhart 22:03
Well, relationships are key, right. And when you’re just, when you’re, when you’re playing in the circle, on a constant basis, you have the opportunity to build those relationships. And, and it’s, it’s not, you know, it’s not just the ability to call somebody, and obviously, that helps, right. But it’s truly having that relationship where you’ve done business before, you’ve worked alongside, you know, or you’ve worked across the table with people, you’ve been able to build trust and credibility. And, and, you know, all of it, you know, makes a difference in. And so, you know, from, from the very start of building the, you know, the ideal prospects that are going to, you know, that have been, you know, the best chance for, for creating that force multiplying value between two firms, to, you know, working through what might cause the most unnatural act of business, right, in, in, in merging two firms and putting them together. And being able to credibly coach, because you’ve built, you know, a foundation of trust and relationship. So it’s, you know, it’s all part and parcel to facilitating, and making it easier. And, and, and then ultimately maximizing value, you know, as you bring that up as thinking about, you know, one of our clients who, you know, really gave us a nice note, which was, you know, yeah, they, we helped him get a great deal done. And it’s a great opportunity for both firms, and it is one of those strategic, you know, fits that was those was really great. And, and the, but the, the thing that was most meaningful to us was, you know, our client said, I was really worried I was really nervous about this entire process. And, you know, you made it about as easy as, as could be, you know, for, for our client and for his team. And part of that was, you know, simply because we were able to, you know, build that bridge, and we had relationships established with the other party. And so, you know, it’s not just about maximizing value, it’s about, you know, making life better and making life easier.
Mike Harvath 24:56
Yep, I would agree. I would also add, if I could just sprinkle in a little bit of thoughts. As you know, we had an interesting example this week very specifically, where, you know, the being aligned around being an industry advisor came back to help us, in our friends of the firm, and we had a conversation with a firm owner that I happen to meet by chance on an airplane 17 years ago, he remembered us and remembered that we did this work, when we did outreach to him, and that certainly helped us have a very meaningful conversation. I don’t know that if we were a generalist, or not aligned, in the same way around our industry, that that would have occurred. So, you know, I think I bring that only up because there’s a variety of very talented, vertically aligned m&a advisors in all kinds of industries in investment banking, and I suspect many of them, if not all of them, have similar levels of relationships with our industry. And when you do that, and when you attend countless conferences, and we’ve pretended over 50 conferences over the last 22 years, you know, you’re in spoken and many of them, that in your evangelizing your message, and you’re working with clients, and you know, we have many repeat clients that come back and call us years later and do work together. Again, it makes it much easier to, as Matt likes to say, build the bridge and develop a relationship with friends of the firm, and those friends. We can deploy in specific situations, and those relationships when they present. I think it’s much more challenging to do that if you’re, you know, a mile wide and an inch deep versus a mile deep and an inch wide.
Ryan Barnett 27:11
All great points, just kind of the last questions that I had here, but it has to take a summary on this, it’s having someone in your market and understanding the language and the jargon and the specific needs of the industry helps build a pathway to speed halfway a pathway to trust, and helps get a deal done much faster. I heard that generalist, just having an advisor is going to be a huge help. And sometimes if you’re in the in the right industry, that where the nuance of it and Technical Services is less, that could be a path that could work. I heard that it’s important to understand the valuation trends that are very specific to industries in sub industries. And having someone that can help negotiate deal and deal structure is critical to get the key to get an optimized deal on both the buy side and sell side. And then lastly, I heard that having the right contacts and targets and having a team that can put together the right list of targets and outreach candidates and the speed to get into those candidates of just knowing who may be in or out of market and to help accelerate the growth and bringing the right people to the table at the right time. Matt or Mike, anything you want to add to that list?
Matt Lockhart 28:41
Well you’re a good listener, Ryan. No, I think the only thing I’ll add is is maybe we title this podcast, birds of a feather fly together. Right. And that old axiom certainly applies in to our discussion today, I think great one great discussion, Mike?
Mike Harvath 29:03
Yep, for sure. We certainly are thankful for all those our clients and relationships and network over the years and look forward to many more years of being here to add value to the tech enabled services market. Well that will tie ribbon on it for this week’s Shoot the Moon podcast. Encourage you to tune in next week when we unpack and explore more relevant topics around m&a and growth strategy for technical services companies. Get out there and make it a great week. Thanks and take care.