Reselling today is not the same as reselling was yesterday. Reselling today is not the same as reselling was yesterday. Mike Harvath and Ryan Barnett dive into reselling in the tech-enabled services industry. They note the impact of cloud-based services on reselling margins and the importance of building a robust services business to complement reselling. They also discuss the challenges and opportunities for private equity firms in valuing reselling businesses, emphasizing the need for advisory firms like Revenue Rocket to navigate the complex landscape.

Episode Outline:

• Reselling's Evolution and Its Impact on M&A
• The Renaissance of Value-Added Reselling
• Challenges and Opportunities in Specialty Reselling
• The Role of Private Equity in Reselling
• The Future of Reselling and Its Impact on Customers

Related Episodes:

Episode 178: The Pros and Cons of IT Reselling in M&A Transactions. Listen now >>

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This episode of Shoot the Moon covers Buyer & Seller perspectives in the last week(s) leading up to close.

RELATED EPISODES:

Episode 83: The 11th Hour. Listen now >>

Episode 154: What Will be Your Take Home Portion of the Deal? Listen now >>

Episode 158: Between the LOI & Deal Close, What should you Expect? Listen now >>

Listen to Shoot the Moon on Apple Podcasts or Spotify.

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Utilizing Marketplaces for M&A Deals. Third party marketplaces have really emerged in the past few years. These are services that a buyer or seller subscribes to to find deal related information and oftentimes try to match your company as best as possible through AI or manual matching. 

Matt Lockhart and Ryan Barnett discuss the evolving landscape of third-party marketplaces for M&A transactions in the tech-enabled services sector. They highlight the increasing interest in these marketplaces, driven by the growing recognition of the value in tech services firms. They note that while marketplaces like Axial, PE Marketplace, and GRV Source can broaden the pool of potential buyers and sellers, they also present challenges such as the generalized nature of listings and the need for specialized understanding and marketplaces are a useful tool but should be part of a broader outreach strategy.

1. The use of third-party marketplaces like BizBuySell, DealStream, Axial, and PE Marketplace for finding and selling businesses.
2. Marketplaces can be a useful tool to increase the top of the sales funnel, but require careful curation and alignment between buyers and sellers.
3. Buyers using marketplaces may not always have deep industry expertise, leading to potential misalignment.
4. Sellers should proceed with caution when using marketplaces alone, as significant work is still required to properly prepare a business for sale.
5. Advisors can play a critical role in helping both buyers and sellers navigate the complexities of the M&A process.
6. Competition for deals can increase when using marketplaces, as the goal is to get in front of as many potential buyers as possible.
7. Buyers should view marketplaces as one tool in their inorganic growth strategy, not the sole source for finding acquisition targets.
8. Proper cultural, strategic, and financial fit are essential for successful transactions, regardless of the sourcing method.
9. The group discussed the recent podcast episode on "Buying a Company is Not Like Buying a Car" and the importance of this mindset.

Listen to Shoot the Moon on Apple Podcasts or Spotify.

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Mike, Ryan, and Matt from Revenue Rocket discussed  the importance of understanding the strategic, cultural and financial fit when evaluating potential buyers in tech-services M&A transactions, emphasizing the need for a comprehensive approach beyond just financial capability. They highlighted the complexities of M&A transactions, the emotional aspects for founders, and the role of a competent advisor in navigating the process and ensuring a win-win scenario for both buyers and sellers.

Key points

    1. Buyers often approach acquiring a company like buying a car, but sellers see it as a complex partnership that requires strategic, cultural, and financial alignment.

    2. Sellers, often founders, have built their business with blood, sweat, and tears, and are protective of their team and customers when considering a sale.

    3. Buyers need to approach the process with an open mind, seek to understand the seller's perspective, and demonstrate how they can create value together, not just offer a price.

    4. Advisors play a critical role in facilitating the right buyer-seller fit, rather than just facilitating a transaction.

    5. Sellers are looking for buyers who are a good cultural and strategic fit, not just the highest bidder.

    6. Buyers making offers without proper diligence or understanding the seller's motivations can be a turnoff for sellers.

    7. The introduction and early interactions between buyers and sellers set the tone for the entire process.

    8. Buying a company is a complex, relationship-building process, not a simple transaction like buying a car.

    9. Sellers have leverage in the current market and can be selective in choosing the right buyer.

    10. Advisors can help both buyers and sellers navigate the process and find the best fit.

Immediate turn offs for sellers from buyers:

• Coming off too strong of how to run a business vs trying to understand the seller's business model - sellers need to know that the buyer is low risk for their employees, customers, and have an open mind about how to do things as a combined entity. This challenges the success of post-merger integration
• A buyer's attitude about their successful past
• Be careful what documents you put in front of a seller too early
• Blowing the introduction call - this meeting sets the tone for the entire process between both parties! Take it seriously

Our job is to help buyers & sellers find the best cultural fit, strategic fit, and financial fit to make a win-win-win scenario for all parties. This has been our speciality for IT Services firms for 25 years. Reach out to schedule a no obligation introduction call.

Listen to Shoot the Moon on Apple Podcasts or Spotify.

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EPISODE OUTLINE:

• Partnerships in business and their importance in growth.
• Valuation and buyout considerations for businesses with multiple partners
• The importance of documentation, shareholder agreements, operating agreements and more
• Valuing a business for partner buyout or sale, importance of credible outside counsel, and potential impact of a departing partner on continuity
• Managing partnerships, exit strategies, and value creation in business

RELATED EPISODES:

• Episode 168: Adjustments to EBITDA and Valuation based on Owner Comp. Listen now >>
• Episode 162: Aligning Leadership in M&A for a Better Deal Outcome. Listen now >>
• Episode 144: Navigating Exit Strategies: What are your Options? Listen now >>
• Episode 136: CEO and Leadership Transitions When Selling your IT services Firm. Listen now >>

Listen to Shoot the Moon on Apple Podcasts or Spotify.

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We talk alot about Multiples of Revenue & EBITDA when it comes to an M&A deal. In this episode we are unpacking how we use them, why they are important, and how buyers & sellers can align when it comes to deal multiples.

1. What is a multiple?
2. Why are multiples used in M&A deals?
3. How is a multiple calculated? Does it include items like cash harvest or employee agreements?
4. Based on different categories, different sub-industries in tech-enabled services will warrant different multiple ranges. What are some of those categories and ranges?   For example: Staffing companies, resellers, custom app dev, CSPs, MSPs, cybersecurity, generative AI
5. How do other items, like size, geography, vertical market concentration in clients, impact a multiple? How do non-financial factors like culture impact a multiple?
6. How do Revenue and EBITDA multiples interact? We’ve seen firms with high profit margins result in deals that are 2-3X revenue.
7. If someone hears a multiple, it feels like they hear either the highest number if they are trying to sell or the lowest if they are trying to buy. How do you explain the nuances to a buyer or seller?
8. If multiples are more of a gut check on the proper ranges of a deal, how often are M&A enterprise values tied directly to a multiple of EBITDA?
9. How important is it to get the proper deal comparisons if multiples become a method of comparing two firms?
10. If a deal is based on a multiple of EBITDA, how do buyers and sellers agree what is in or out of adjusted EBTIDA?
11. What are examples of firms that traded well outside of an industry norm for a multiple?

EPISODE SUMMARY:

• Multiples, such as a multiple of EBITDA, are commonly used in M&A deals as a simple way to gauge the value of a company. However, they are not the sole determinant of a company's valuation.
• Adjustments to EBITDA, known as "add backs", can be made to account for one-time expenses or other factors that will not continue post-transaction. The agreed-upon adjusted EBITDA is a critical factor in determining the multiple.
• Many factors beyond just the EBITDA multiple impact the final enterprise value in a deal, including strategic fit, cultural fit, and buyer synergies. The multiple is more of a planning tool than a definitive valuation.
• Higher profitability tends to correlate with higher multiples, while lower profitability may not support a revenue multiple above 1x. Finding truly comparable companies can be challenging.
• Deals sometimes trade outside of typical multiple ranges due to strong strategic fit or other unique factors, highlighting that multiples are not the only consideration in valuation.

RELATED EPISODES:

Episode 141: Add-Backs 101. Listen now >>

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Questions we dive into in this episode all about building relationships with a banking partner for M&A deals:

• What role do banking partners play in M&A deals within the IT services sector?
• What key criteria should companies consider when evaluating potential banking partners for M&A transactions?
• How do you assess the experience and expertise of a banking partner in the IT services industry?
• How important is the relationship between the buyer and the banking partner and what signs indicate a trustworthy and reliable banking partner?
• How can a company evaluate the financial strength and stability of a banking partner?
• How can buyers effectively evaluate the interest rates offered by different banking partners? What factors should be considered when comparing interest rates from various banks?
• What strategies can buyers employ to negotiate better interest rates with their banking partners? Are there specific terms or conditions that buyers should focus on to secure favorable rates?
• How do interest rates impact the overall cost of financing an M&A deal?
• How should companies assess the track record and success rate of a banking partner in previous M&A deals?
• How significant is a banking partner’s reputation in the IT services industry and what methods can be used to verify and evaluate a bank’s reputation?
• What role does the banking partner play in the due diligence process during an M&A deal?
• What will you need to provide to secure a loan?
• How do banking partners assist in identifying and mitigating risks associated with M&A transactions?
• How can buyers evaluate and compare the fee structures of different banking partners?
• Are there any hidden costs or fees that buyers should be aware of when working with a banking partner?

Listen to Shoot the Moon on Apple Podcasts or Spotify.

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Let's first understand customer concentration. Customer concentration is essentially where is revenue concentrated in your firm? Is it held by a few clients, a lot of clients? If you are in the bucket of having revenue very concentrated by a few good clients, or your acquiring a firm structured this way, this podcast episode is for you.

Why is customer concentration such a significant concern in M&A transactions?

What customer-related metrics are buyers looking for in an M&A transaction?

What red-flags will buyers be looking for concerning customer concentration?

What’s normal for large customers in the IT services world? How does this vary by category between MSPs, application developers, or software channel partners?

If you are a seller and have high levels of customer concentration, what should you expect in terms of purchase price adjustments?

Can you explain how earn-out provisions and contingent payments work with customer concentration?

What types of representations and warranties should will a buyer seek from the seller regarding customer relationships?

How can holdbacks or seller financing help mitigate risks?

What are the critical components of a successful customer transition plan post-acquisition?

How can representations and warranties insurance help in managing customer concentration risks?

Can you share any real-world examples where customer concentration was a significant issue in an M&A transaction and how it was successfully managed?

RELATED EPISODES:

Episode 152: Understanding Reps & Warranties for Buyers and Sellers. Listen now >>

Episode 90: Selling-In v Selling-Out. Listen now >>

Episode 73: Levers & Currency: M&A Deal Structures. Listen now >>

Listen to Shoot the Moon on Apple Podcasts or Spotify.

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How large of a company can you buy?

Let’s assume you’ve found a company that’s a great strategic and cultural fit.

• Can you speak to different acquisition types? For example, tuck-in, platform, or merger?
• What key metrics should you consider in the evaluation of the firm? (Revenue, EBITDA addition, growth rates, Return on investment)
• What’s the general guidance of how large a firm should be compared to revenue? (.5 to 2X revenue)
• What type of debt ratios should you consider?
• How do future earnings / cash flow considerations play in the size of a deal?
• If it’s a larger firm, how do you approach integration of the firm differently?
• Is there a quick formula that helps determine the rate of return for a firm or how many years are needed to receive a return
• Should you buy the biggest firm you can? (Discuss a small deal is as much work as a large deal)
• If you are buying a firm that’s bigger than you, how do you approach integration differently?
• How does working with a funding partner, like a strategic PE firm, change the size of deal you should consider?

Listen to Shoot the Moon on Apple Podcasts or Spotify.

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How does culture influence successful M&A deals? In this episode, we are talking about the importance of cultural fit when organizations come together in a merger or acquisition. We have special guest, Chelsey Nord, Revenue Rocket's Director of Strategy joining us on this podcast to share her expertise and experiences.

Questions Chelsey dives into:

• How do we define culture?
• How does organizational culture influence the success of M&A deals?
• What evidence do we have that culture impacts performance?
• How do most firms plan for culture fit as they look to buy or sell in today’s environment?
• What is RRCG’s perspective around culture fit in M&A? What’s the goal?
• What is RRCG's Approach to Culture Fit in M&A?
• What are greenlights or positive signs early in the M&A process that culture fit will be favorable?
• When in the M&A process should culture be addressed? Are there certain milestones?

RELATED EPISODES:

Episode 112: Why Culture Matters in Tech Focused M&A Feat. Chelsey Nord

Episode 111: Culture and IT Services Companies feat. Chelsey Nord

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