Shoot the Moon with Revenue Rocket

IT services M&A is in one of its most active stretches in years. We explain how private equity defines the market, the platform and tuck-in roll-up strategy behind most deals, and how AI is separating premium platforms from commoditized providers. You will also hear which segments are hot, which are cooling, and the exact questions to ask when an investor calls.

0:00 – Why private equity keeps calling

1:13 – How we define the IT services market

4:11 – The long tail: ~50,000 firms and three channels

7:03 – Why PE targets IT services: growth and recurring revenue

12:31 – Predictability drives investment

13:48 – Platform and tuck-in roll-up strategy (the math)

16:32 – AI and the services-as-software shift

18:27 – Raising the bar: AI-enabled service delivery

24:06 – Go AI-first or fall behind

26:28 – Hot vs cooling segments (specialize, verticalize, productize)

29:13 – What to do when private equity calls

33:18 – Closing thoughts

Predictable Cash Flows: Private equity favors IT services because recurring and repeat revenue make future cash flows highly predictable.

The Roll-Up Strategy: The dominant model relies on buying a platform company around 5–7x EBITDA, scaling via tuck-ins, and exiting near 8–12x.

The New Minimum: Recurring revenue above 50% used to impress investors—today, it is the bare minimum expectation.

Market Temperature:

Hot: Cybersecurity, AI & Machine Learning, regulated cloud, OT/industrial, and vertically focused MSPs.

Cooling: Pure staffing and generalist break-fix providers.

When PE Calls: Prepare beforehand: know your numbers inside out and engage a specialist M&A advisor.

Blog Post: Read the full article

Valuation Tool: Free Valuation Calculator

Schedule a Consultation: Book a confidential conversation

Podcast: Listen on your favorite podcast platform

Official Website: Revenue Rocket

Revenue Rocket is a sell-side and buy-side M&A advisory firm focused exclusively on IT services companies, including MSPs, cybersecurity, cloud, custom application development, and VARs.

#MergersAndAcquisitions #ITServices #MSP #ShootTheMoon #RevenueRocket #ExitStrategy #PrivateEquity#AIinITService

Getting calls from private equity? Do not wing it. Schedule a confidential conversation with Revenue Rocket to understand your options and your value.

Listen to Shoot the Moon on Apple Podcasts or Spotify.

Buy, sell, or grow your tech-enabled services firm with Revenue Rocket.

Revenue Rocket’s Mike Harvath, Ryan Barnett, and Matt Lockhart break down the real reasons

founders delay an exit, and why the safest-feeling choice is often the most expensive. This episode

of Shoot the Moon covers the “one more year” trap, founder dependency, succession planning, derisking customer concentration and contracts, and why knowing your valuation is the first move in IT

services M&A. If you run an MSP, MSSP, cloud, dev, or VAR business, this is the timing

conversation to have before the market decides for you.

CHAPTERS

0:00 Cold open and welcome

1:56 Why founders delay a sale (the “one more year” trap)

5:46 Run it forever, but stay ready to sell

6:26 Owner dependency and building a machine

12:27 What succession planning really looks like

16:07 Enjoy what you have built vs. the window to sell

21:30 De-risking: customer concentration and contracts

22:23 Know your number: the case for annual valuations

24:40 One move to make this week

28:45 Closing thoughts: have a plan

KEY TAKEAWAYS

● Waiting one more year can lower value, not just raise it. You carry 100% of the downside.

● Buyers pay for a business that runs without you. Build the bench and reduce founder

dependency.

● Real succession planning is documented and executable, not a someday idea.

● De-risk before you go to market: diversify clients, fix contract assignability, deepen the team.

● Know your number. An annual valuation is good corporate hygiene and a stage gate for

timing.

LINKS

● Blog post: [BLOG LINK]

● Valuation calculator: revenuerocket.com/valuation-calculator

● Schedule a confidential conversation: [SCHEDULING LINK]

● Website: revenuerocket.com

ABOUT REVENUE ROCKET

Revenue Rocket is a sell-side and buy-side M&A advisory firm focused exclusively on IT services

companies, including MSPs, cybersecurity, cloud, custom application development, and VARs.

Thinking about your own timing? Schedule a confidential conversation with Revenue Rocket at

revenuerocket.com/contact-us.

Listen to Shoot the Moon on Apple Podcasts or Spotify.

Buy, sell, or grow your tech-enabled services firm with Revenue Rocket.

Inbound interest is at an all-time high for IT services founders. In this episode, Mike Harvath and Ryan Barnett unpack what happens when a founder gets an unsolicited offer: why the first offer is rarely the best offer, what a no-shop clause actually locks up, and how “deal facilitation” differs from running a full sell-side process. You’ll also learn the mistakes founders make trying to roll their own deal, when to bring an advisor in, and why an advisor adds leverage without taking control.

Your phone is ringing off the hook with buyers. One of them just made an offer. Now what?

Most IT services founders field calls every week from strategics, private equity corporate development teams, proxies, telemarketers, and M&A advisors. Eventually one of those conversations turns into a real number. In this episode, we talk about the moment a founder says “I already have a buyer” and what has to happen next to protect value.

We cover why first offers are typically un-optimized, what’s actually binding in an LOI (hint: mostly just the no-shop), and how the absence of competitive tension changes your leverage. We get into the specific levers buyers pull, including structure, earnout design, working capital, and reps and warranties, plus Mike’s rule of thumb that there are roughly 150 things to negotiate between LOI and close.

We also break down the two paths an advisor can take with you:

Finally, we address the control question head-on. Advisors don’t take control of your process. You make every final decision. What you get is leverage you can’t manufacture on your own.

Key takeaway: don’t engage emotionally, validate the buyer’s credibility and certainty to close, get clear on whether you’re selling in or selling out, and make a phone call before you respond to that offer.

Part 1. Knowing When It’s Time to Sell: Listen now >>

Listen to Shoot the Moon on Apple Podcasts or Spotify.

Buy, sell, or grow your tech-enabled services firm with Revenue Rocket.

Mike: Hello, and welcome to this week’s Shoot the Moon Podcast, broadcasting live and direct from Revenue Rocket world headquarters in Bloomington, Minnesota. As you know, if you tune in regularly or maybe if you don’t, Revenue Rocket is the world’s premier M&A advisor to tech-enabled services companies. With me today is Ryan Barnett. Welcome, Ryan.

Ryan: Hey, Mike. Thanks for having me. We’re missing Matt today.

I’m looking forward to talking about a topic that I think is core to what we’ve seen the last few weeks and the last few months. On this podcast, we always talk about issues impacting leaders of IT services firms. And one of the things we’re seeing is a huge uptick in people reaching out to them for the purpose of acquiring them.

It’s not uncommon for us to talk to a managed service provider who says, “Hey, you’re the eighth person to talk to us this month. My phone is ringing off the hook and I’ve just had to turn everyone away.” And sometimes there’s an offer that comes through that’s probably worth taking a look at.

So what I want to talk about today is the concept of what it means to engage in a “deal facilitation,” where you’re talking one-on-one with a potential suitor, and what that might mean for your business versus going across the whole market.

Mike, let me start with a general question. We’re seeing more founders come to us saying, “Hey, I already have a buyer.” What changed in the market that started bringing this in?

Mike: Well, there are certainly a lot of buyers. Some would argue it’s a seller’s market and continues to be a seller’s market.

Most of you out there running an IT services company know that you get lots of calls every week, and sometimes every day, from suitors looking to acquire your business. And not just suitors: you’ve got proxies, M&A advisors, telemarketing firms, corporate development departments of private equity firms and strategics. All of these people are fighting for your attention to say, “Hey, we’d love to buy your firm.” They do a little research on you and say, “This is right in our sweet spot.” And sometimes it’s not. Sometimes it’s just a cold call and they don’t really know.

So there’s certainly an increase in inbound interest. There are also more educated founders. Founders have access to more tools now to become enlightened about how this process works, and they can move the process farther down the track themselves.

I’d also say buyers are reaching out earlier in some cases, developing a relationship over a period of years, so when a seller is ready to move forward, they think of them.

And there’s this tendency where founders think they’re done before they’ve started. They’ve got all this inbound interest. Maybe they engage with someone who’s mentioned, “We’re looking to pay X multiple.” They provide information, they get to a non-binding LOI at their number, and they think, “This is pretty much done. Now we can engage.” Maybe they think they can manage it through themselves. Or they think, “Now we need an advisor because most of the work is done,” and that it comes at a savings compared to running what we call a full process.

Ryan: So in the scenario you just described, people receive interest, go down a path, send over an unfiltered P&L or balance sheet, do a little preliminary work, and a buyer comes back with a potential offer. Or, to your point, they’ve already issued an LOI with a no-shop clause that gets you out of even thinking about going to market.

When someone says, “I already have an offer,” what’s your immediate reaction?

Mike: My immediate reaction is: from whom? How qualified are they? What’s the likelihood to close? Have you already committed to a no-shop?

It’s really important to know that most first offers are not optimized. They’re simply a number, and in some cases they’re not even real. Because in an LOI, not an indication of interest but an actual LOI, you can say just about anything for an offer. The only binding provisions typically in an LOI are things like the no-shop clause, which means you can’t continue to look for buyers during that period of exclusivity.

The value in that LOI is certainly not fortified. It could be anything. I’m being a little facetious, because generally, unless a buyer is a bad actor, and we’ve worked with some of those representing sellers, they’ll honor what was in the LOI for the most part. They try to, anyway. But it’s not outside the realm of possibility that you have someone telling you what you want to hear, and their plan is to come back and retrade, add structure, or push some risk onto you.

And you certainly miss the competitive tension of running a process, which generally means better buyers, better prices, and better terms. So your desire to make it easy and low-cost may be hurting you when you accept that offer as written. There’s a lot that’s not stated in an LOI that will come out in due diligence and can change that offer wildly from what’s on the paper.

Ryan: So if you’re getting that offer and it’s the first offer you’ve seen, why is that oftentimes not the best offer you could have gotten?

Mike: The lack of a competitive process creates the issue. When you have a lot of competition being managed by an M&A advisor like Revenue Rocket, you get to choose between a variety of buyers, a variety of price points, and a variety of structures.

And it’s not just about price and terms. When you’re working through a single conversation, you tend to focus more on price and terms than on the other components of what makes a buyer effective, which is strategic fit and culture.

That matters especially with private equity-oriented firms or people with professional corporate development teams. These are not ultimately the people you’re going to work with. You may work alongside them, but you should know their job is to find companies to acquire and manage that process from origination to close. They’re professionals at that. You’re not. So you lose leverage there. You give the buyer the advantage. And you set yourself up for an anchoring effect.

Founders also mistake interest for value. When you’re getting a lot of calls, in some ways you have happy ears. You get an offer, maybe you’ve negotiated it up a little, but you haven’t fully optimized your financials, and you haven’t taken advantage of what a third-party negotiator brings to the table.

There are a bunch of reasons why the first offer is often not the best offer, and you need to keep that in mind.

Ryan: And I think we might talk out of both sides of our mouth here. We do quite a bit of buy-side work at the firm. So sometimes when we’re the ones calling, it might be the best offer. There is a chance your first offer is the best offer. In M&A, it only takes one.

But it also means that if you’re evaluating that offer yourself, you don’t have context for what the market is.

So thinking about it that way, Mike, what mistakes do founders make when they take an offer that came to them and try to handle the deal themselves?

Mike: There’s a fair number of them, frankly, Ryan.

Certainly overvaluing their business is one. Thinking their business, because it’s their business, is worth more than it generally is in the market. And sometimes you have buyers who know that going in and offer you that number knowing they’re going to retrade it. They come back with competitive sets and say, “Here’s what the last 10 deals we know about traded at, and you’re asking for a multiple that’s much higher,” once they’ve locked you up in a no-shop.

Then there’s underestimating structure. Typically a buyer can offer more if there’s more risk put on the seller from a structure perspective. There are a lot of ways to do that. Earnouts, for example: if they’re structured tilted toward the buyer rather than fair and down the middle of the plate, that can set you up for failure to hit those numbers. There are certain common levers a lot of buyers pull to get the advantage in the negotiation, and you need to know what those are.

Working capital is a huge one. Negotiating working capital happens in every deal, and there are standards set in the market. You need a representative working for you who can do that effectively, one who’s knowledgeable and has done it many times, to get your working capital harvest out of the business. There’s really only one time you can effectively harvest your excess working capital, and that’s when you sell.

If you don’t have that help, it’s common practice for buyers to land-grab extra working capital, or convince you that extra working capital needs to stay in the business. Because you’ve likely been overcapitalized over time, you’re the most likely to concede on this point. It’s not a fair ask. It’s just a way for them to reduce purchase price by keeping more working capital.

Then the details around reps and warranties. You’ll have a lawyer helping you there, but how you approach reps and warranties, how they’re fortified, how the buyer protects their interest, whether there’s reps and warranty insurance, a holdback, an escrow, or some other mechanism like an earnout or seller note used to fortify those reps, those are all negotiable. And frankly, it’s a mistake founders typically make when they try to negotiate it themselves.

And then there’s emotional decision-making. This process is detailed. I typically say there are about 150 things to negotiate between LOI and close. Part of the challenge becomes: how do you run the business while negotiating and leading the negotiation on those 150 things? It can be very disruptive.

And if it is disruptive, if your business performance goes down while you’re away from it, the buyer will take advantage and retrade the deal toward the end of the negotiation, when you’re worn down. They’ll argue the price isn’t warranted anymore because your business is shrinking.

I’ll say one more thing: the statistics say there’s a pretty low probability the deal actually gets done if you manage it yourself. There are a lot of reasons for that, and we’ve touched on some of them here.

Ryan: Right. And you’ve mentioned working through everything from structure and its nuances, to terms, to working capital, to reps and warranties. There’s a lot for someone to deal with, and it sounds like help is needed from a variety of places.

So when should a founder bring an advisor in if they already have a deal in motion?

Mike: Earlier than you think. If you’re contemplating offers from outsiders and you’ve narrowed it down to a short list, that’s a great time to bring in an advisor.

Some founders just don’t want to run a process because they don’t want the distraction, and it is a distraction. I don’t want to sugarcoat that. So if they’re looking at a couple of offers, what they really need to do is bring someone in before the LOI, ideally.

Now, even if they’ve negotiated an LOI on their own and they’re post-LOI and going to accept it, even if they say, “Yeah, I think we’ve covered everything,” you need someone to help you facilitate getting that deal done. It’s about protecting value and terms, not just price.

The whole effort of diligence defense is a practice area inside our firm. You have to have someone who can understand your numbers well and defend them to a potential buyer without that becoming a distraction for you. You want someone looking at your numbers and doing what I’ll call pre-diligence to see if there are any issues in your financials a buyer is going to dig into and challenge.

Because when they start doing that, they’re eroding value in the price. Remember: the number and the terms in an LOI are non-binding. They can’t get you to a binding price and terms until they’ve done their due diligence and are drafting the legally binding agreement. So protecting value and terms becomes super important.

There’s also a lot of ideation that happens between LOI and close around how to deal with issues that come up: a contract terminating on your side, a large client concentration issue, terms in a specific contract as it relates to transferability. There are things that come up that are very in-the-weeds details, and you need someone with experience to help you navigate them.

Ryan: Right. You’ve outlined a ton of what a buyer brings to the table. And if there is one buyer that intrigues you and makes sense, you’ve established cultural fit and strategic fit, and you’ve aligned somewhat on general terms, it’s often great to engage an advisor. And to your point, ideally before an LOI is written.

When we work with someone on that one-to-one basis, we call it deal facilitation. It’s different from a “full process.”

Mike, can you explain the difference between deal facilitation and a full sell-side process?

Mike: Sure thing, Ryan. In short, it takes less time and less scope to do deal facilitation. It still includes some of the most valuable work an advisor does.

If you think about a full sell-side process, you’re meeting the client at a point where they’re thinking, “I’m considering selling my business and I might want to run a process.” At that point you’ve got to get inside the client’s head, understand what they’re thinking and what’s important to them, get a valuation done, help them understand what that means, develop marketing materials, begin marketing, and bring buyers to the table to qualify, ultimately getting to a short list of buyers. That’s very valuable because it creates competition and helps move toward an optimized value, as we talked about.

When you’re doing deal facilitation, you’re meeting the client where their head already is. You’ve already talked to buyers. You already have some sense of value, likely from competing offers, because the market is speaking to your value. Maybe you’ve signed an LOI, so you’ve already made a commitment to a particular buyer, and you’re saying, “Okay, now what?”

That means we’re not running a full process, and the scope and time involved from us is reduced to helping you get to close. It’s much more about helping you evaluate, negotiate, and structure an existing opportunity. And it comes with a lower price tag, frankly, because the scope is lower.

Do you benefit as a seller? You might. You’re going to save a few bucks. Is it the best path for you? Everybody has a different point in time where they need help and advice, and we want to meet you where you are at any point in the journey.

We’ve had clients in the middle of deal facilitation where we determined the buyer wasn’t correct. They either went back to another buyer they’d talked to and that deal got done, or they decided to run a full process.

So we’re not putting our thumb on the scale on whether it’s better to run a full process or do deal facilitation. If you want the maximum number of options, the highest number, and probably the best fit, running a full process is better. But if you’ve already done all that work yourself, we want to meet you where you are and help get the LOI-to-close process done effectively, efficiently, and with value optimized.

Ryan: Absolutely. That’s where a third-party advisor really adds value: understanding whether this is the right deal, and if it’s not, what the options are. Sometimes facilitation turns into a full sell-side process. Sometimes facilitation leads to business improvement.

If a suitor is reaching out to you and you have this one good one-on-one interaction, having a third person at the table to protect your interests and help understand the full value of your business is critical.

Mike, some founders might feel like they’re losing control if they hand the process over to an M&A advisor. How should founders think about “control” in this process, and where should their mindset be when they’ve already had interactions with a strategic suitor?

Mike: It’s an important question. Advisors don’t take control. We never control that process.

We add leverage, a lot of leverage, to your discussion. And what’s important about adding leverage is that it takes a village to get a deal done. It takes your lawyer. It takes a CPA or accountant or tax advisor. And it takes someone experienced to manage the negotiation with the buyer.

So it’s about partnership. It’s about adding members to your team. It’s not a replacement for you. You’ll make all the final decisions on how this process works, what decisions get made, and how to best navigate with that buyer.

The key is that you get leverage by using an experienced third party that you don’t get on your own. I think that’s the most important point.

Ryan: Last question, Mike, then I’ll let you wrap it up. If a CEO is listening today and they just got an inbound offer, what’s the first thing they should do before responding?

Mike: First, don’t engage emotionally. Don’t start thinking about what you’re going to do once you sell your business. Not yet.

You need to validate the buyer: their credibility, their certainty to close, and their story. Most sellers we talk to and work with want to make sure their employees and their customers are well taken care of in a transaction, and you have to make sure that aligns when you’re talking to a buyer about their level of interest.

Then ask yourself what you want. Do you want to sell in? Do you want to sell out? Do you want to be around for a while or not? Those are important considerations. Understanding the offer, the buyer, and the structure is important, and bringing in the perspective of a third party or an M&A advisor helps you do that. It protects your optionality.

So what we’d encourage you to do is call an M&A advisor and talk to them about what you’re contemplating, whether that’s us at Revenue Rocket or one of our peers in the market. Say, “I’ve got these offers. I’ve got people talking about this kind of offer and it’s interesting to me. What do you know about these guys? What do you know about buyers like this? What do you know about how you can help me? Is this the right time for me or not?”

A phone call can help you formulate your thinking, and we welcome those conversations all the time. We’d love to have you give us a call. We can share some perspective on whether this offer is in the range of what makes sense for you, and if you’ve already signed that LOI and you’re looking for a partner to help you, we welcome those calls as well.

Ryan: Well, thank you so much for a great discussion today, Mike. Really appreciate it. Some great advice. I’ll leave it to you to wrap it up.

Mike: With that, we’ll tie a ribbon on it for this week’s Shoot the Moon Podcast. Look forward to you tuning in next time, when we’ll bring additional perspectives to your M&A thinking if you’re an IT services company. And with that, make it a great week.

Vertical specialization is one of the most reliable ways to raise both growth and valuation in IT

services M&A. In Episode 254 of Shoot the Moon, we break down how focusing on one or two

industry verticals, and building the sales team to match, makes an IT services firm worth more

to buyers.

Most IT services firms start as generalists because it is the fastest path to revenue. But in a

market where AI is commoditizing technical skill, domain expertise is what buyers and clients

pay for. We cover why vertical focus shortens sales cycles and lifts valuation, how the hunter

and farmer sales roles work, and how to compensate and hire for a vertical model. We close

with three practical steps you can take this week to find and commit to the right vertical.

CHAPTERS

Timestamps are approximate and must be verified against the final edit.

0:00 Cold open and intro

4:05 Specialize, verticalize, productize: the framework

7:00 Why vertical expertise matters more in the age of AI

9:30 Why most IT services firms default to generalist

12:30 What verticalizing takes, and the payoff

16:50 The sales team: hunters, farmers, and support roles

Revenue Rocket Consulting Group | Shoot the Moon Episode 254

20:40 Hiring for a vertical: fish where the fish are

24:10 Compensating hunters vs farmers

28:00 What buyers see: vertical focus and valuation

32:40 Where to start this week

35:30 Wrap-up

KEY TAKEAWAYS

 AI is commoditizing technical skill, so domain expertise is the differentiator buyers pay for.

 A vertical focus shortens sales cycles, sharpens marketing, and tends to lift valuation.

 Selling is a team sport: hunters win new logos, farmers grow accounts, with a handoff inside

the first 12 months.

 Concentrating in a vertical is a strength; depending on a few clients is a risk buyers

discount.

 Start by analyzing where your revenue already concentrates, then commit to a market you

are passionate about.

LINKS

Blog: [BLOG LINK]

Valuation calculator: revenuerocket.com/valuation-calculator

Schedule a confidential conversation: [SCHEDULING LINK]

Listen on your favorite platform: [LINK]

Website: revenuerocket.com

ABOUT REVENUE ROCKET

Revenue Rocket is a sell-side and buy-side M&A advisory firm focused exclusively on IT

services companies, including MSPs, cybersecurity, cloud, custom application development,

and VARs.

#MergersAndAcquisitions #ITServices #MSP #ShootTheMoon #RevenueRocket #ExitStrategy

#VerticalSpecialization #HunterFarmer

Thinking about your own growth or exit? Schedule a confidential conversation.

Listen to Shoot the Moon on Apple Podcasts or Spotify.

Buy, sell, or grow your tech-enabled services firm with Revenue Rocket. 

In IT services M&A, depending on a single platform or channel partner is a valuation risk, not a strength. This episode breaks down what happens to your firm’s value when a vendor changes its pricing, partner tiers, or lead flow, and what the most acquirable IT services firms do instead.

Platform partnerships built much of the IT services industry, but the balance of power has been shifting for two decades. In this episode of Shoot the Moon, Mike Harvath, Ryan Barnett, and Matt Lockhart unpack channel and vendor-partner dependency: why buyers treat it like customer concentration, how verticalization lowers the risk, and why the partner’s future is the final-mile implementation and service layer. As the model shifts from software as a service toward “services as software,” they argue the next era may be the biggest opportunity channel partners have ever had.

Chapters

In this episode

Links

About Revenue Rocket — Revenue Rocket is a sell-side and buy-side M&A advisory firm focused exclusively on IT services companies, including MSPs, cybersecurity, cloud, custom application development, and VARs. For 25+ years we have helped founders grow, position, and sell their firms.

#MergersAndAcquisitions #ITServices #MSP #ShootTheMoon #RevenueRocket #ExitStrategy #ChannelPartners #ManagedServices

Thinking about your next move? Schedule a confidential conversation: https://www.revenuerocket.com/contact-us/

Most first acquisition offers are not the best offers. If a buyer has approached your MSP or IT services company out of the blue, this episode walks through how to evaluate that offer, what a letter of intent actually binds you to, and why bringing in an advisor before you sign protects both your price and your optionality.

In this episode of Shoot the Moon, Revenue Rocket’s Mike Harvath and Ryan Barnett unpack what to do when you already have a buyer at the table. They explain why a competitive process typically delivers better price, terms, and strategic fit, and they introduce “deal facilitation,” a lower-scope IT services M&A engagement that helps founders evaluate, negotiate, and structure an existing offer from LOI to close. The reality they keep coming back to: in a letter of intent, the no-shop clause is often the only truly binding provision, and there are roughly 150 things still left to negotiate between LOI and close.

CHAPTERS

KEY TAKEAWAYS

LINKS

ABOUT REVENUE ROCKET

Received an offer and not sure what it is really worth? Talk to an advisor before you respond: https://www.revenuerocket.com/contact-us/

Your friend sold for a great multiple. PE pays more than strategics. Earnouts are a trap. Wait for the right market. You’re too small to sell. Here’s what’s actually true.

Mike Harvath, Ryan Barnett, and Matt Lockhart break down the five M&A myths they encounter most often with IT services founders, and what believing them actually costs. From misreading a peer’s deal as your benchmark, to misjudging how earnouts work, to holding off on a sale waiting for perfect market conditions, these are the misconceptions that consistently lead founders to make worse decisions at the worst possible time.

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TIMESTAMPS

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LISTEN AND SUBSCRIBE

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Revenue Rocket is the premier M&A advisor to IT services companies, helping owners in the lower middle market navigate sell-side and buy-side transactions with specialized expertise and hands-on deal management.

Shoot the Moon is their weekly podcast covering M&A strategy, valuation, and growth for IT services leaders including MSPs, cybersecurity firms, cloud providers, VARs, and digital transformation companies.

EPISODE 249. If you decide to go through a sell-side process, what are the big things you can really screw up? In the final part of our Master Class series, we are talking what not to do during an M&A sale process. In the final installment of the Sell Side Master Class, the team breaks down the biggest mistakes founders make when preparing to sell their IT services business. From waiting too long to prepare and mismanaging diligence, to misunderstanding deal structure and scaring off buyers, this episode covers the pitfalls that can reduce value or kill a deal altogether.

OTHER EPISODES IN THIS SERIES:

Part 1. Knowing When It’s Time to Sell: Listen now >>

Part 2. Get Your House in Order: Listen now >>

Part 3. Valuation Drivers: Listen now >>

Part 4. What is my Take Home? Listen now >>

Part 5. It Takes a Village. Listen now >>

Part 6. The First 30 Days of a Process. Listen now >>

Part 7. Finding the Right Buyer. Listen now >>

Part 8. Deal Structures 101. Listen now >>

Part 9. Due Diligence. Listen now >>

Part 10. Definitive Agreements and the Final Stretch. Listen now >>

Part 11. What Happens After the Deal Closes. Listen now >>

Listen to Shoot the Moon on Apple Podcasts or Spotify.

Buy, sell, or grow your tech-enabled services firm with Revenue Rocket.

TRANSCRIPT

Mike: Hello, and welcome to this week’s. Shoot the Moon podcast broadcasting live and direct from Revenue Rocket, world headquarters in Bloomington, Minnesota. Tuned into this podcast series, this master class series. You already know that Revenue Rocket is the world’s premier. M&A advisor to tech enabled services companies with me today are my partners, Ryan Barnett and matt Lockhart. Welcome guys. 

Matt: Hey, hey, I think I jumped the gun last time and said we were wrapping up the master class, but I think I’m right this time, we are wrapping up the master class Ryan that you created and we’ve been getting just a ton of positive feedback on. So it’s been a good series looking forward to the next master class that we do someday, but let’s go, Ryan. 

Ryan: Thank you guys for the insight and guidance here. We work with founders every day of IT services firms that are looking to understand what’s next as part of this journey. And it really does feel like a journey. Sometimes people run into just potholes and mistakes and deals don’t get done. Our job as advisors is to help make sure that doesn’t happen. But what we want to do in this episode is if we look at the process from deciding when to sell all the way through closing in that first 100 days, we want to make sure that we’re doing this in the right way and really avoiding some things that could torpedo a deal or torpedo success in the long run. This hits all throughout the process of things we’ve already talked about. But Mike, why don’t you get us started? If I’m thinking about issues or common mistakes that founders make, what are the most common mistakes that they have when it’s time to sell the company? 

Mike: Well, there’s quite a few Ryan, one would be deciding to sell when you’re already burned out. It’s really hard to build momentum around your excitement in the business and being able to get buyers to see your vision when you’re already struggling just to get checked into the office every day. That’s certainly one obviously waiting too long to prepare your business for sale. Is another pretty important one. It takes a fair amount of preparation. And depending on the condition of your P&L and balance, that may be years of time to be prepared to transact a deal with an optimum valuation. So critically important that you actually begin that preparation early and often and start to talk to an advisor early that can help you and sort of position your business and give you input on what might need to change to optimize it. Obviously thinking about an M&A deal as a one time event instead of a process. Certainly is another mistake. It is a process. The right way to think about it is kind of one step in front of the other understanding the full sort of scope of what you’re about to sign up for is important and know that it’s going to take a period of months. Likely… from the time you kick off that process. We hope with an advisor and we recommend with an advisor until you close, you know, it can be a, you know, six nine month journey up to a year journey to get your deal transacted. If you’re a seller. And you know, I think in general having an open mind, not having an open mind about, you know, twists and turns and the work that’s involved. It is called the utmost unnatural act in business. I don’t want to talk you out of it or scare you by saying that, but it is one that requires, you know, a village of people to help you and you just have to be open about that and changes that may be required in your business to optimize for value. 

Ryan: Yeah. Thanks for getting us going here to your point that the route to a successful deal can be fraught with peril if you don’t think about these things first. So having the, you know, in the mindset to sell, I think we talked about in our first episode is important to understand picking the timing and executing when things are going right is something we talked about in this series. Really thinking about this process and getting through that. So making sure we have the best buyers aligned and the right thesis in place for someone to buy is starting to critical. And so really understanding what those buyers are looking for and how to position your company throughout there is critical. So, yeah. So, thanks for getting us going there, matt, if I turn the gears a little bit and we think about some of the issues that are found in the process, can you tell me what financial or operational surprises show up in? Diligence? What are some common ones that you’ve seen that can perhaps kill a deal? Yeah, I. 

Matt: Think, you know, let’s kind of start in theory, right? Which is you’ve presented your organization and you’ve told a story right through the dating process prior to a LOI… and you’ve sort of, you know, let the buyer in the door, right? And showed them around the house. But, you know, maybe not showed them all the house if you will in that first date or two. And then, you know, post LOI, all of a sudden, the buyer is asking to see everything in every corner of the house, right? Let’s see it all. And if what they see doesn’t really match the story that they’ve been told. And the first things that they’ve looked at, well, then it raises alarm bells, right? And, you know, to your point, a lot of that is just data, right? And so maybe a wild example but one that we’ve seen, right? And before getting ready and before preparing is that, you know, the chart of accounts and the, you know, lines of revenue in the chart of accounts really don’t line up to the overall P&L. So it’s just an example and one that, you know, maybe you don’t see all the time. But using that as an example to say, well, geez if things don’t tie out, right? If the financial statements aren’t clear, if that revenue recognition isn’t understood and easy to point out. If, when they start to see data doesn’t line up with a story. So, for example, you know, maybe you said look, we don’t have any customer concentration issues. And then you get into the data and maybe on a top line account or a top line view of the data and the revenue. You have one customer that is segmented out amongst a bunch of subsidiaries, right? And so, there’s multiple lines of revenue in these subsidiary customers that all are all seen as an individual account. But what you find out, is that it all rolls up to one parent company and one decision maker. And all of a sudden there’s concentration that’s in place. So again, another example where the story isn’t or the data isn’t lining up to the story, you know, without advisors. Oftentimes you know, there’s just not a knowledge of what all of the requests are going to be related to the data. And, you know, in a scenario, maybe an organization really hasn’t had to create an organizational chart, you know, founders is thought well, that’s really not that important. I know who everybody is, and they just don’t have an org chart which then says, they probably don’t have a succession plan, right? And, and so that speaks to sort of operational risk, and risk related to the going concern of the business. And so I think it all sort of it all is in this bucket of it’s. Got to be really well understood. It’s got to be clean when we’re talking about the data and all of those things needs to line up with the story that you’ve told about the business itself. 

Ryan: Yeah, you got to show up with the receipts, right? And I think in order to do that, there’s a lot of process and thoughts that get there. So, yeah, you’re absolutely right? Your customer concentration example I think is really poignant. It’s very common for a company in the IT services space to have a fairly large customer concentration issue. We see a 15 to 20 percent often, we see that quite higher. But if you don’t have the corresponding story with, it can make selling so much harder. So sometimes identifying those risks that you see up front can help make this process a lot smoother as you go through. And by the way, learning along the way, if one buyer tells you they understand and look at something one way, it’s a good sign that other buyers are going to ask the same kind of question. So as you go through the whole process and you have some of these perhaps missteps or mistakes, it’s good to learn from them and put that into a positive in the next turn around. Mike, if I again switch gears a little bit since we’re talking about all the things that could go wrong here, I want to focus in about kind of if we’ve found the right buyer and a LOI has been sold or signed. And we’re close there. And throughout this whole series, we talked a ton about valuation methodologies and how value and how to increase your value. But what do some founders mistake when they focus too much on that enterprise value number compared to what else comes with that enterprise value? Yeah? 

Mike: That’s a really important question Ryan, I mean, sometimes everyone gets caught up around what is the total purchase price as pitched in an LOI, when they don’t fully unpack what that is. And I think the biggest mistake is ignoring the deal structure. It’s one thing if the deal is all cash, certainly then there is no deal structure. So maybe I need to define structure for a structure is really the terms associated with that offer. There’s price. And then there’s terms. So enterprise value is price and structure would have to do with the terms. So there’s common mistakes made with not understanding the levers in an earn out and how an earn out might work and whether it’s one sided or whether it’s you know, we often say earn out should be mutually beneficial or gain share oriented. And they really need to be structured that way. And there are certain ways to structure them properly and ways to structure them where we almost always not make the earn out. As a seller, there’s a lot of noise in the marketplace about, you know, earn outs never, you know, sellers never make earn outs, blah blah blah, well, not true. If they’re structured properly and a competent advisor can help you structure them properly, you’ll be able to, you know, do pretty well in an earn out as a matter of fact, most earn outs get paid out as a matter of fact, but that, you know, that big part of making sure that happens has to do with correct structure of that earn out itself. You know, not fully understanding what’s involved with a seller note or a rollover equity risk is another couple other areas where sometimes, you know, you may be blinded a little bit. You know, seller notes can have a collar which means there is a performance component to them that often makes them look kind of like an earn out. And so, you need to understand, is it just a seller financing or it’s a collared? Likewise, if there’s rollover equity risk, you’re rolling over into a firm that you know, either isn’t established or isn’t a proven operator. There certainly could be some equity risk with your role that you need to fully understand. Another area might be, you know, how working capital is managed. A lot of buyers take advantage of sellers by overstating the amount of working capital and their analysis that’s needed to run the business. Really really important that you understand how working capital is calculated, what’s required to be to stay in your business to have it be defined as a going concern. Most buyers want your business to be a going concern and have enough working capital. To operate. And then also, you know, how adjustments are made to that working capital as again, we’re working with a quality advisor and partner can help you immensely. 

Matt: And. 

Mike: then, you know, probably not understanding how headline valuation doesn’t equal cash or close, right? I think fully understanding the terms of the oi and unpacking that before you sign is pretty important. Yeah. 

Ryan: Absolutely setting that. It’s, the cover that great. I think, you know, we dealt with valuation quite a bit and we dealt, and also, I really encourage the audience to check out the, in this master class, the deal structures, what to expect. I think it outlines a lot of the issues, and potholes that you can fall into if you’re not careful… matt, if I think about the process a little bit more as well. And again, we’re looking at mistakes and potholes to void here. If I look at the process in which founders are starting to talk with buyers, is there any behavior or what kind of behaviors or mistakes can a founder make in that phase? That just scares buyers away? Yeah. Well. 

Matt: I think that there are some… let’s think about it in the context of personality and then practicality from a personality perspective. If you’re over the top. If you make… it all about yourself as it pertains to customers or as it pertains to employees, right? You know, then somebody’s sort of looking at you and saying, well, do I like this Guy because he’s gonna have to be around because it’s all about him or girl? I think that that’s you know, from a personality perspective, it’s all about the team. It’s all about what the team has done, and that the team, is in a great position to continue forward. You know, that sort of personality can then also get into how you’re communicating and, are you overselling or are you exaggerating at any point, right? And saying, wow, yeah, you know, this customer’s gonna double, they’re gonna double their business. And oftentimes in due diligence, a buyer may ask to talk to customers and they say, well, geez no, as a matter of fact, we’re you know, we’re thinking about putting this contract out for bid. And so you can see again, truth isn’t lining up with a story. And at times founders can think that they’re hey, this is going to be great. They want my company and they’re just going to take everything that I tell them. If there’s an inconsistency, right? Any other inconsistencies between? Yeah, we talked about this before, the data and reality. So you got to be really tight, right on your messaging and knock on wood work with a good advisor who’s helping you with the messaging. And, you know, some of the messaging may not be the most positive but it’s reality, and there oftentimes is a story buyers understand that everything isn’t perfect. And so, you know, yeah, make sure that story and the message, is aligning, you know, oftentimes sometimes, you know, once you move into that due diligence phase, there can be sort of this heightened emotion, right? Because a buyer is doing what they should be doing and they are getting under the covers and they’re asking tough questions. And if as a seller, you and, or your team is getting defensive in that process, well, that’s only going to raise, you know, red flags, why are they getting defensive? And also it’s changing sort of the overall momentum and emotion, right? When buyers and sellers, once they get to the end of the business, once they pass that, finish line cross that finish line. You want them to be holding hands and feeling great about it. And so if there’s emotion and defensiveness that occurs. And all of a sudden that creates problems, well, it’s harder to hold hands and get on with the getting on which is, you know, making one plus one equal, you know, four or five or six. And then finally, you know, sometimes we see this is, you know, buyers start to, you know, want to communicate on their own, you know, or excuse me, buyers do and sellers will try to communicate on their own outside of the process. And, you know, that usually is a real negative. And you know, if you’re a seller and buyers are trying to communicate with you directly outside of the process, that’s a red flag that a buyer’s you know, not playing within the rules and you should be working with your advisor accordingly. But then as a seller boy, you really want to hesitate before, you know, getting outside of the process. So those are just some of the things I mean, be yourself. And we often say this look be yourself. It’s you who brought your firm to this point, right? And have confidence that, that’s you know, that’s enough. And then lean on your advisor to ensure the messaging is correct. And then, you know, super importantly is just let’s make sure that messaging lines up with the data and reality. 

Ryan: Yeah, that’s a great point, matt. And just to reference that, if you’re doing this alone, it’s really hard to maintain that relationship with your buyer. A lot of it is that especially if you’re selling in and continuing with the firm, you’re going to be with that buyer for quite some time. So having that third party person to really manage that relationship. So after the deal’s closed, it’s really smooth. I think it’s good to bifurcate that relationship between the deal and the execution going forward. So, yeah, great points. Mike, if you were to think about this process again, we’re thinking big mistakes through the process, right? What are a few things that make things slow down or perhaps create friction once the buyer’s in diligence? 

Mike: Yeah, great question, Ryan, this can be, these things can be deal killers by the way. So I think they’re critically important to be able to understand. One is a slow response to diligence requests. A buyer gauges your level of, you know, for lack of a better term, how put together you are and how put together the business is by how quickly you respond to diligence requests. And so being having a fulsome set of diligence prepared ahead of time that’s been reviewed by an advisor that is ready to, at the ready to respond to said requests will help move things along much more quickly and with a lot more confidence. The next one is sort of disorganized and incomplete data rooms. Data rooms have to be organized in a logical fashion and they have to be complete and more importantly, they have to be able to respond to kind of out of the blue. Diligence requests things that, or push back right? And again, that’s a role of the advisor. If a buyer asked for some, you know, relatively obtuse cut at the data, if it’s easy to get. Okay, fine, you can provide it or maybe something that based on where you are in the process, it’s either already been provided and they don’t know where it is or it is not appropriate. And I think having someone who works with you as your advisor that can manage and do that. What we call due diligence defense role is really important. I think not having good strong internal resources to support diligence is a fatal flaw. Diligence is hard. It can be a very big distraction in the business. And so, having a team of people that are working just on that, so you can continue to run the business and put up the numbers that you’ve committed to is critical. Oftentimes buyers, I wouldn’t say all buyers, but certainly some buyers will take advantage of a seller who’s trying to move forward without someone on their team doing diligence defense and distract them. It becomes a distraction to running the business. And what happens inevitably is your business will perform not as well as it does when you’re not distracted. And we’ve seen that in businesses that are sizable and ones that are small, it doesn’t matter if you have the executive team distracted by diligence running around trying to deal with diligence requests. They’re not doing their day job and that’s a really important consideration. And often, if that’s the case, it will lead to a retrade or a lower offer when you’re just not delivering on. Your forecast because you’ve been distracted for a period of months with diligence requests… and we think running the business and the deal process without thorough preparation and partnership is a mistake. Certainly you have to be prepared to keep the train on the tracks with the core business while this is going on. And that can be difficult. You might be thinking about life after the deal. You may be contemplating what integration looks like and other distractions. And certainly there’s a lot of legal distractions that occur in the negotiation of a definitive agreement. And that alone is going to take up quite a bit of the leadership team’s time and our owner’s time and so being prepared for all that and understanding that and making sure you’ve surrounded yourself with a competent team will certainly make that go much better. 

Ryan: Yeah… wow. Great job. Mike. I think you covered just a ton of sense throughout this process. And matt, Mike, you’ve both been extremely valuable in this whole podcast series. And I’m glad that we’re able to produce it for founders of the IT services firms. And if I go back to perhaps if someone’s to listen to this and you’re trying to give a seller just one piece of advice about what they should start doing now to avoid being their own deal killer matt, what are the things that you might tell someone to do if they’re selling in a few years? 

Matt: Yeah. We’ve talked about this before Ryan. I think it’s start early with the preparation. Obviously, you don’t need to worry about final packaging of materials two years before you’re. 

Mike: thinking. 

Matt: About running… a process and selling your business, but you may need to think about your succession plan and how you’re preparing the organization for you to not be around. And so to Mike’s point earlier, this is not a single one time transaction that’s like selling a house, right? It is more complicated than that. And so, I think if there’s one piece of advice, it is start preparing early with your peer groups asking people who’ve been through it before. And then building a relationship early with an advisor or a banker who can guide you accordingly depending upon your timeline to make the process smoother to… ensure that what you’ve built lands in the right place and to maximize your return. And so if there’s one piece of advice, I think that one piece of advice that I’d give is understand your timeline and give yourself enough preparation time. 

Ryan: Thanks, Matt, Mike. How about you? It’s the last question I have in this whole series. So feel free to pontificate there and wrap this one up. 

Mike: Yeah. You know, I don’t know if I’d add a lot more other than, you know, there are some pretty key components about, you know, lessening the dependency on you. If you’re considering selling out or moving on, you know, things like, you know, making sure you’ve built rigor around your financials, you know, I’m just echoing some of the comments as me, but, you know, be thinking more about how do we really optimize profitability to optimize value? These are all things we’ve talked about along the way here and in today and in the past… and, you know, just thinking about your purpose and being ready, right? Really really important to understand that we’ve talked. We’ve had a, you know, one of the sessions this master class talked about kind of what’s next and how to prepare and whether you’re selling in or selling out. Those are really important things to be considering. So with that, we’ll tie a ribbon on it for this week’s. Shoot the Moon podcast. We hope you tune in next week when we all unpack further kind of new and interesting ideas around M&A and the world of IT services, make it a great week. 

Closing the deal is not the finish line. It is the beginning of the next chapter.

In this episode of the Seller Master Class Series, Mike, Matt, and Ryan walk through what sellers should expect after a transaction closes. They cover how to protect customer confidence, reassure employees, establish communication cadence, and prioritize the right operational changes without disrupting service delivery or cash flow.

They also discuss the founder’s transition after closing, common post-merger integration missteps, and what success looks like in the first 100 days.

What you’ll learn in this episode:

OTHER EPISODES IN THIS SERIES:

Part 1. Knowing When It’s Time to Sell: Listen now >>

Part 2. Get Your House in Order: Listen now >>

Part 3. Valuation Drivers: Listen now >>

Part 4. What is my Take Home? Listen now >>

Part 5. It Takes a Village. Listen now >>

Part 6. The First 30 Days of a Process. Listen now >>

Part 7. Finding the Right Buyer. Listen now >>

Part 8. Deal Structures 101. Listen now >>

Part 9. Due Diligence. Listen now >>

Part 10. Definitive Agreements and the Final Stretch. Listen now >>

EPISODE 246.

Key takeaways

Listen to Shoot the Moon on Apple Podcasts or Spotify.

Buy, sell, or grow your tech-enabled services firm with Revenue Rocket.

OTHER EPISODES IN THIS SERIES:

Part 1. Knowing When It’s Time to Sell: Listen now >>

Part 2. Get Your House in Order: Listen now >>

Part 3. Valuation Drivers: Listen now >>

Part 4. What is my Take Home? Listen now >>

Part 5. It Takes a Village. Listen now >>

Part 6. The First 30 Days of a Process. Listen now >>

Part 7. Finding the Right Buyer. Listen now >>

Part 8. Deal Structures 101. Listen now >>

Part 9. Due Diligence. Listen now >>

EPISODE TRANSCRIPT

Mike:

Matt:

Ryan:

We’ve been working through a master class, and Mike and Matt, you’ve been really helpful in this process. The point has been to help educate leaders and owners of IT services firms who are looking at a potential transaction either now or in the future.

What we’ve looked at so far has helped listeners understand what it takes to get ready. That means starting with the discussion and decision of whether they should be selling, walking through valuation, finding buyers, the process of getting into an LOI, and signing that LOI. Last week was really focused on due diligence.

Today, we’re going to go past that phase and picture yourself in the situation where you’ve had an LOI signed, diligence has been going really well, and you’ve been able to show a buyer your business. They get to a point where they say this looks great and they’re going to start crafting definitive agreements.

The focus today is this: if we survive the due diligence process, what does it look like to get from three quarters of the way there to all the way there? Mike, help me understand this. If a seller thinks the deal is done with an LOI, what really changes as you start to move to definitive agreements in this process?

Mike:

First of all, you’ve got to understand that the LOI is like a handshake agreement. It is not binding. It’s not legally binding and generally aligns around price and terms, and that’s it. You have to craft all of the legally binding agreements in the definitive agreements. It really should be called definitive agreements because there are a lot of them, and we’ll talk more about that later in the master class.

The focus shifts from just economics around deal terms, price, and terms to risk allocation and how the buyer evaluates the risk of your deal, and how you may share in fortifying that risk for them. It’s frankly where deals get reshaped.

It’s critically important during this phase of moving toward definitive agreements to have a strong cadence around momentum because you can get bogged down. You can definitely get bogged down in the legal language in the definitive agreements, but also in what you’re representing and warranting in the business. We’ll get into that in a minute.

Ryan:

The parties at the table change as well. Matt, maybe you could dig into that a little bit for me. If you think about that definitive agreement phase, and as Mike mentioned, a ton of documents, what documents are included in that phase and what should owners be aware of?

Matt:

But there are others that matter a whole bunch to sellers. Employment agreement, for example. Regardless of whether you’re selling in or selling out, likely there’s going to be a certain period that you’re involved. If you’re selling in, then certainly an employment agreement is going to be appropriate. If you’re selling out, then oftentimes there’s a transition services agreement. Think about it as a contract for a period of time. Both of those are obviously extremely important.

The employment agreement is especially important because you’re setting the stage for your future employment and what the conditions there are. The purchase agreement, and most likely the employment agreement, will also have non-compete and non-solicitation aspects to those agreements. Those things are obviously super important as well.

Then there are the tie-alongs to the purchase agreement that are critical, including the disclosure schedules. Mike will talk more about those. There’s also the escrow agreement, if that’s going to be included in the purchase agreement. If there’s escrow being set aside, that matters too. Then there can be others. There can be lender agreements and so on.

So there’s a lot of paper and there are going to be multiple signatures. The most critical pieces are the final purchase agreement, the employment agreements, and any associated non-competes and non-solicitations.

Ryan:

Mike, when you think about all these documents, who should really be driving at this point? If you think about the people involved such as an M&A advisor, an attorney, and a CEO, who’s driving the bus? What’s the best way to get through this from an advisor capacity?

Mike:

Certainly, clear lanes of responsibility are important. The M&A advisor protects the economics and the deal momentum. Remember, we just talked about how momentum is important, moving forward at a reasonably quick cadence so you don’t get bogged down. Working around roadblocks or stoppers that come into play is the advisor’s role. The advisor keeps everybody moving toward a close date. Otherwise, it’s too easy to reschedule the close date.

We say around here that time kills all deals, and that’s true. Things come up, distractions happen, the economy changes, the Fed changes interest rates. There are a million things that can impact a deal if you spend too much time getting bogged down.

The attorney’s role is more around protecting legal exposure, and they should stay in that lane. The CEO really protects the relationships that have been developed in a positive way with the buyer and keeps the business running.

Without the appropriate village assembled, this can become a real problem. We know many stories of people being approached by buyers, larger companies, private equity firms, and sponsored companies where they underestimated the amount of time diligence would take. It was like death by a thousand cuts. While they were in the diligence process, their business suffered because they weren’t paying attention to it and they weren’t running it.

When that happens, buyers can use that as an excuse to retrade the business. If there’s softness in the deal, they’ll use a reason to change price and terms. They’ll say that over the last several months during diligence, your sales are down or utilization is down or the business is not performing the way it was when we started talking. And they have a point.

So it’s important that you let the advisor ride herd on all of this. A good advisor has a strong diligence defense team so they can answer a lot of the questions, gather information from you in an orderly manner, and manage that defense. There are still going to be a lot of questions in diligence, and there are areas where you’re going to have to weigh in, but you want to minimize those distractions.

The cardinal rule of what not to do is to not allow just your attorney to try to run the deal, defend economics, and manage all of this. The reason is they already have their hands full managing legal exposure. Most lawyers want to do this role if they can because it means additional billable hours, even though they are ill-equipped to do so. Attorneys are a critical component to getting a deal done, but like all things, you need to have the tools and the talent to do your role effectively.

We think it’s best to keep your attorney in the legal defense lane, have your M&A advisor manage the project and keep the wheels on, and have the CEO running relationships and keeping the business running, while bringing in other spot advisors around tax and related issues.

Ryan:

Matt:

Ryan:

Matt:

From a purely legal perspective, there are some real critical aspects in the purchase agreement. Indemnification, warranties, indemnification caps, baskets, and so forth. Oftentimes that’s the number one area with a spotlight around risk mitigation that your M&A attorney is going to be all over, and appropriately so in protecting you as a seller.

When I talk about the business aspects, something that often surprises founder-led businesses and first-time sellers is the working capital agreement. That will be included in the purchase agreement, but there is generally a well-understood market view that there will be a certain amount of working capital to operate the business for a period of time that will be left behind or provided by the seller. Sometimes that’s a surprise.

We educate sellers very early and make sure they understand that when they’re doing their spreadsheet in terms of what’s going to be left behind, there’s got to be a stub in there for working capital.

If there is an escrow requirement as part of the deal, then what does that escrow agreement look like? When is it released? How much is it? What is it for? What are the stipulations around it being released?

Then the last one, and this can be a sticky one, is an earnout. If an earnout is applicable as part of the deal structure, then that’s a negotiation and an agreement that will continue forward, and obviously it is very critical to the seller as well as to the buyer.

We often say an earnout or a gain share means there’s a target that needs to be met, and the buyer and seller should be on the same team trying to go get that target. We always communicate to buyers that if they want to include an earnout and it’s appropriate, then the seller is accepting some risk. Because of that, there should be additional gain for a seller through accepting an earnout.

It’s in the best interest of everybody for the seller to achieve the earnout because that means the business is performing and growing and continuing to hit the agreed goals.

Those are some of the things that are ongoing negotiations. If you keep legal focused on legal risk, they will be after all those legal risk terms like indemnifications and warranties. The business negotiations that also get incorporated into the purchase agreement should really be the responsibility of the M&A advisor or the investment banker because they are alongside you the whole way and are best positioned to drive the best agreement.

Ryan:

Matt:

Ryan:

Mike:

That can be a big lift. Not to mention the fact that you’re going to warrant that the disclosure schedules are everything tied to your warranties. There’s a lot of discussion about representations and warranties. The representations you make and the warranties you make are supported by the paperwork in the disclosure schedules, and you’re going to warrant that they are fulsome in their disclosure.

You may sign disclosure letters that say you don’t have any pending litigation or you don’t have anyone who’s given notice of termination or that you have whatever the case may be. That’s going to be part of the definitive agreement.

Now, if someone has said they’re going to terminate or sue you or do something that you have represented as not being the case, then you have to disclose it in the disclosure schedules. Otherwise, you’re in breach of the agreement.

So it’s super important that it’s done in a very fulsome way and that it’s fully transparent. I would never encourage someone to hold anything back. You need to be fully transparent in the disclosure schedules so that you can make exceptions where needed.

For example, maybe you said no one has given notice of termination, and then a week before close someone says they’re going to terminate. You have to disclose that termination in the disclosure schedules so that the buyer doesn’t come back and say you didn’t disclose that, it impacted the economics of the deal, and now they have liability claims against you.

If it’s in the disclosure schedules, they reviewed it as part of diligence and signed off on it, then it won’t impact the deal post-close. Think of it like an insurance policy. You need to be fully transparent and factual about the state of the business.

A lot of people think maybe they don’t need to disclose something because it seems minor. But if the buyer doesn’t think it’s minor or it turns into a major thing, then you’re going to be on the hook for it if you didn’t disclose it.

The issue is that in disclosure schedules there is a lot of paper. Even if you have your records in great order, all the parties want the most recent version of those records. Oftentimes, you have to pull them together right toward the end of the transaction. Almost everyone underestimates the time involved. It can take hundreds of hours to pull together all of the disclosure schedules.

For the disclosure schedules that are not time sensitive, and I would say most of them are not, you can pull them ahead of time. If you need a copy of your lease for example, or certain things that are not time sensitive, get them ready.

One thing a lot of people overlook is consents. This isn’t technically a disclosure schedule, but it’s often related. Your bank may need to have a consent or a release of a filing pursuant to your line of credit. Your landlord may have to agree that the buyer is creditworthy enough to take over your lease if that’s what’s going to happen. They may need to provide consent for the transaction.

Those are often related to the disclosure schedules and come out of them. When a lawyer reviews your lease, it may have very specific terms for how it can be transferred. These are the kinds of things that crawl out of the rocks when you begin putting together your disclosure schedules.

I would always encourage people to start early, start often, and disclose as much as possible as quickly as possible in order to close. We’ve had deals get delayed because people cannot assemble the disclosure schedules in a fulsome way based on the time they allocated to do it. It’s critically important that you assemble a team, focus on it, and get to work so that if there are encumbrances, issues, or things that need to be resolved, you still have time to complete them.

Ryan:

Mike:

If it’s not, it’s not considered to be pursuant to the transaction. If someone mentioned it in passing but it’s not documented accurately in the definitive agreements, it doesn’t exist in the eyes and minds of the law.

So it’s critically important that everything has been communicated, clearly defined, and captured in all of the definitive agreements in a fulsome way. That’s how you avoid future liability. You might think, well, I told them that a particular client was rolling off, but if it didn’t make it into a disclosure schedule, too bad. You didn’t disclose it. It wasn’t in the four corners of the document, and you would have liability in that case.

Ryan:

Matt:

You should already have put signatures on the documents. Those signatures and documents haven’t necessarily been released to the other parties yet, but they’re in place. So all of the agreements are done on closing day. We like to have a ceremonial call where everybody confirms the deal is done and the money is starting to be released.

All the signature packets are delivered, the final schedules are in place, and the various wires are released. If there are lenders that need to be paid off, those wires are going out. If there’s an escrow agreement, those wires are going out. Often the payment flow is also paying your providers, your lawyer, your advisors, and so on.

Those things are kind of out of your hands. You have a closing call, thank everybody, and move forward. Again, when it is well managed, everything just transpires from there.

That’s where we often hear, wow, okay. And then really, most importantly on closing day, have you figured out how you’re going to celebrate? Whether that’s a big dinner, getting together with your team, or going to a quiet place and having one of your favorite libations, plan something to celebrate because you’ve reached the finish line.

So again, when it’s well managed, all those things are in place. If it’s not well managed, you are still tying out final pieces. And if it’s managed horribly, you’re still negotiating something on the last day. We don’t let that happen, and sellers shouldn’t let that happen either. Ideally, closing feels a little anticlimactic because everything important has already been handled.

Mike:

Everything else should have been done and considered ahead of time, either signed ahead of time so those signatures are with your lawyer in escrow, or executed in a way that your lawyer can release all those documents. There shouldn’t be a lot of drama on that day.

Sometimes there are documents that get digitally signed that day, but more often than not these days it’s done ahead of time and held by your lawyer because there can be a lot of documents to sign. If people are online with connectivity issues or digital authentication problems, those technical wrinkles can slow things down.

To get around that, we’ve had most of our clients circulate digital signatures ahead of time to be held by their lawyer. That means when they release signatures, it’s really more about wiring logistics.

Depending on where wires come from and originating banks, that can take some time. International wires especially can take a day or two to clear, and that’s not uncommon. The advantage of having your lawyer hold the signatures is that they hold them until the funds are received. Technically, the transaction is not closed until the funds are received.

That can be received by your attorney in their trust account or sent directly to you. There are some logistics that need to be managed that day, but to Matt’s point, it’s mostly anticlimactic and ultimately more about getting people paid and beginning the journey of integration.

I think the best firms begin an integration plan ahead of close, but most of them start celebrating and thinking much more about integration once all these documents are finalized and they’re effectively at the closing table.

Ryan:

When we look at this master class, we’ve gone through the process of starting to think about what a transaction can be and we’ve gotten all the way to the end of what it is. The next topic we have is what the next 100 days look like after an acquisition, so we’ll cover that in our next podcast.

Mike, Matt, thank you both so much for sharing a lot of wisdom here. I’m glad that we’ve actually had the opportunity to get to that final stage many times, and you’re speaking straight from experience when it comes to this podcast. Thanks for your great work there.

With that, I’ll turn it over to you, Mike, for any closing thoughts.

Mike: