Intentional Growth

We speak to a man who has been there and done it… from the business buyer to the eventual seller of his own company.  Jamison West overhaul his business model from the traditional IT, time and material (trading dollars for hours), to the new Managed IT Services monthly recurring model.  His new business gave him a 15%  jump in EBITDA, from the original 4%, so he was averaging to a healthy 17%!

Jamison gained great insight into the whole sale/valuation process during his acquisitions of multiple Managed IT firms and then used this experience to consciously prepare everything in his business before he finally sold to a strategic buyer.

This episode is a perfect example on how to maximize the value of your business while simultaneously achieving the day-to-day efficiency of your business and TRULY moving from the hub to the spoke.

There are certain benchmarks in the Managed Service Industry for recurring revenue and overall company size that are benchmarked by a Managed IT Service peer group called HTG.  This lead Jamison on a quest to grow organically, AND acquisition, in order to hit the numbers he thought he needed to achieve for a future buyer to pay top dollar.

The first two acquisitions helped add staff and mass to his firm and allowed Jamison in make strides in the direction he wanted to go.  The third merger / acquisition proved to be a much bigger challenge due to culture and management, but the right intentions were there!

Jamison was charging more than a fair price for his time but quickly realized he was needed by multiple clients at once. Obviously he couldn’t be in more than one place at a time and his clients had a top stop on how much they were willing to pay.  Therefore, there was a problem that was ready to be solved!

Not only was his time a limitation but the current situation came with serious highs and lows. In order to change the company’s emphasis from the revenue ups and downs of project work, Jamison flipped his business model and expanded so he could provide fixed-fee services and thus improve his own potential scalability.

Ultimately he realized that the clients were not just paying for the time he’s working, they’re also paying for peace of mind and immediate availability to any question that needed to be answered for the business’s technology. To do this he needed a lot of staff. Thanks to advice from his peer group of similar businesses, he decided to increase his price by 20%. He figured that if 20% of his clients left he’d only have 80% of the work to do with 100% of the revenue he had before.

Like we said soon he had a business that was 17% EBIDTA rather than 4%! In terms of take home dollars, and the formula that his buyer used to acquire his company, it was worth a TON more.  Jamison knew if he had locked in contracts that a buyer who collected money the first of each month would pay WAY more than if he had to resell new agreements / time and material each month.

Therefore, it was less risk for a buyer (especially a strategic competitor) to take Jamison’s company and their clients and bring them into their platform.  They had more time, energy and resources that they could apply to keep those customers.  With a contract in place it allowed them to prove their service, trustworthiness and ability to exceed the client’s expectations before the agreement came due.

He used a specific industry broker that created a slightly different structure than the standart multiple of EBIDTA. It was actually a comp

We’ve got a seriously wise man on the show this week. Not only did he sell his business for way more than the original offer, he then strategically mapped out the framework for his second half and he is having a blast doing it!

Rob’s goal for his life after business was to go into another venture, but despite feeling restless while working for the company he sold to, he only took the plunge once he had identified an opportunity that met the five strict criteria he’d devised. He is a great example of how good planning can set you up to succeed in a life after business, which of course is exactly why we’re here!

His investor used a multiple on the company’s net income and arrived at a figure. It was then agreed that whatever percentage of the figure Rob was able to pay would ultimately equal the share of the business he would receive. Rob eventually ended up hitting 100% and took full control of the business.

The business was strictly grown out of profits. After the initial investor was out of the equation, there was no external financing.

They hired a management consultant that forced them to really get a hold of their metrics. In his words: “that was the most transformational thing as CEO – it had the greatest impact”. The increased accountability for all staff made results improve immediately.

One of my favorite things that Rob said was that the metrics and data got him and his employees all working in the same direction. The data became the measuring tool instead of Rob.  He was able to move to the same side of the table as his employees instead of being the bad guy “telling” his employees what they needed to do. The data became the “hero” or “enemy”.

They had real time information that measured how they were doing and allowed them to work as a team to march in the direction that was universally visible to everyone.

A larger competitor reached out to Rob and asked him if he was willing to sell.  In Rob’s mind it wasn’t for sale, but he did provide the bidder with some rudimentary information to help with the process. He turned down two offers but remained in communication and set a price that would work, as well as some conditions.

Rob stipulated that it must be a cash purchase and that the deal had to be concluded in the two months before year end. Miraculously the buyer agreed to the higher price and to all of the conditions.

A deal of that nature was only made possible because of the data dashboards and excellent book keeping Rob had put in place.  Rob was able to provide all the information that the buyer wanted, and much more, almost immediately.  The confidence that they buyer had in Rob and his operations eliminated any hidden surprises that may have popped up to derail the deal.

In Rob’s experience a strategic buyer is easier to deal with. Due diligence is less rigorous and the price they pay is likely to be higher because they have the know how in the marketplace to make a return on the dollar they pay. He’d been receiving enquiries from private equity firms long before the sale but didn’t give them the time of day. Although he wasn’t particularly interested when the strategic buyer first came to the table, he was at least interested enough to volunteer information.

In Rob’s words: “I never considered myself an entrepreneur until I stopped running the show”. He s

We’ve had some excellent discussions about the many benefits that an ESOP can bring, so we thought it was time to go in-depth with someone about their own ESOP exit journey.

Having built up her own highly successful SEO business, Nina Hale has now begun her second half and is in a life after business where she has some great balance and passion in her new ventures. Her story is a great example of how an ESOP can benefit a company every bit as much as it can benefit the seller.

Nina felt she could dictate the terms of her exit far better with an ESOP than with a sale to an investment banker or rival. Right from the beginning of the business she was very keen to provide an environment for people to have a sustainable career, so an ESOP was the best way of preserving this culture after exit. It also gave Nina a vehicle to be philanthropic towards the workforce that helped make her company so successful.

She hired a great managing director, Donna Robinson, who was keen to take on more responsibility. Nina then asked her if she one day wanted to run the company, which she did. She said “she was in for the long haul!” This was the beginning of the succession plan.

She hired a valuation firm who went through all the usual procedures. Then once Nina hit “her number”, she decided that anything above that should be used to reward the loyalty of her employees. Nina was comfortable with the fact that an ESOP can only ever offer a financial valuation, i.e. a valuation based strictly on her own company numbers. The strategic valuation, where a market competitor may pay a higher sum based on factors such as synergies, future growth and market share, is not part of an ESOP valuation.

Very cordial and stress-free for the most part, because Nina was able to hire the team for both the buying and selling side of the transaction. It felt like a project rather than a a negotiation.

A promissory note, where Nina wrote a loan to the company which the company is paying back to her at a specific interest rate. Because one of the loans was unsecured, a warrant was set up so she would be able to buy a certain amount of stock at a good price. The company has to buy that stock from her a year after the loans are paid off. This keeps her motivated to make sure the company is doing well.

Retention stock is part of stock appreciation rights. It encourages long-term loyalty, i.e. a 7-year agreement that doesn’t pay anything for the first two, but then 20% each year thereafter. She wishes she’d have done more of this with the employees.

“If you don’t have an exit strategy, you don’t have a strategy.”

“Really understand what your goal is and be true to yourself. Don’t hang on when you need to bring in somebody more professional than you. Sell too soon.”

Visit ninahale.com

Valuations, Gross Sale Price and Net Proceeds… What Really Matters? I had a great conversation with Scott Miller in this episode and we tackle some of the most important concerns every business owner have has when transitioning their company, how does gross dollar amount turn into net proceeds in the bank? AND how long does it take to get it and what do I have to do to get it?

Scott is a serial entrepreneur as well as a CPA. He knows what it’s like to be on every side of the fence. Just how can you protect those net proceeds from all the clever tricks a buyer and their attorney might pull? Keep listening for the answers, or if you’re pushed for time, read on below for the show summary….

The first question to ask, post-valuation and at the beginning of the negotiation after the buyer tries to wow you with the gross sale amount, is “what are the terms?” The figure given as a valuation and the offer that is in the Letter of Intent will be subject to many things, i.e. earn-outs, seller financing, management agreements.

The best way to approach this is to get the baseline figure agreed upon WHILE knowing the EXACT net proceeds dollar amount you are trying to get. Then know where you have leverage with the buyer and know as much information you can gather about why they would want to buy you so you have the upper hand any time there is a negotiation. THEN if you have to give and take KNOW what you are giving up as part of the process just in case whatever you agreed upon doesn’t follow through.

Typically the attorney for the buyer sits in the driver seat of the transaction and drafts up the purchase agreement and sends it to the seller’s attorney. So therefore, documents tend to be drafted with all kinds of intricate caveats to provide a cushion for the buyer.

For example: if it is in the buyer’s best interest to have an asset sale with the classifications of revenue a specific way to help them recapture the expenses and depreciate the purchase in a certain way, they will do that. REGARDLESS of what it means to you and your net proceeds. A few simple reclassification moves might make the buyer a ton more money but it could mean the difference between capital gains and ordinarily income for you (or 30% +/- in taxes!).

In Scott’s words: “Professionals who are well-versed in the world of transactions are really worth their weight in gold. They’re able to distance themselves from the emotion that business owners have typically invested in their company. If things are said during the negotiations to the owner. it’s like calling your kid ugly”

A stock sale is typically favored by the seller because the stock will all be taxed as capital gain, so the buyer is assuming any liabilities going forwards.

In most cases a buyer will prefer an asset sale because they get to allocate the purchase price to assets that typically promise the highest return on capital. For the seller, many of the items they’re selling are ultimately taxable as ordinary income. 

They should attach the earnout to something that’s easily verified, i.e. sales. It’s very easy for the buyer to take it down the road of profitability, but there is a so much more that can be massaged when it comes to profit numbers. A proper exit planner rather than just a standard company attorney will be able to iron these things out.