We’ve talked a bit about what to expect for fees when evaluating M&A vendors – you can check out previous podcasts and blogs on the topic on our website at RevenueRocket.com.

Today we want to dig into a provision you’ll find in nearly all M&A related contracts – a tail for a transaction after an agreement comes to an end.

But Before we jump into the specifics of tail related provisions, there are a few things you should know about how the M&A business operates

Types of M&A contracts

• Exclusive
• Non-exclusive

How M&A advisors are compensated

• Deal preparation/retainer
• Success fee

What is a tail?

A tail is a provision in an M&A contract that requires the seller to pay a former advisor, typically an investment banker, for a specified period of time after the closing of the transaction. The purpose of the tail is to incentivize the advisor to continue to work on the deal and ensure its successful completion.

How long does a tail typically last?

Tails typically last for one to two years after the closing of the transaction.

Who is typically eligible for a tail?

Investment bankers who have worked on the deal are typically eligible for a tail. In some cases, other advisors, such as lawyers or accountants, may also be eligible.

What are the benefits of a tail?

Tails provide an incentive for advisors to continue working on a deal after it has been completed, which can help to ensure its success. Tails also allow advisors to share in the upside of a successful transaction.

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What happens during an economic downturn:

• Buying cycles elongate
• Customers cut discretionary spend
• Multiple levels of approvals happen at targets, slowing down the process
• More competitors start searching for the same deals

What you can do:

1. Specialize in what you’re best at – talk about what it means to specialize
2. Pick an industry and work on addressing critical pains where they
3. Make things easy to buy

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The time between getting a financial request and sending the information can be critical.

1.  It shows that you're organized and prepared.

When a company is considering acquiring another business, one of the first things they're going to want to see is that business's financials. Having your financials in order shows that you're organized and that you know what's going on with your money. This can give the acquirer confidence that they're not buying a lemon.

2.  It makes due diligence easier.

Another reason why it's important to have your financials in order when you're being acquired is that it makes due diligence easier. Due diligence is the process of investigating a potential acquisition target to make sure that it's a good fit for the buyer. If the acquirer can't get a clear picture of your financials, it could scuttle the deal.

3.  It can help you get a better price.

If you're able to show potential acquirers that your business is in good financial health, you may be able to negotiate a higher price for your business. This is because buyers are often willing to pay more for a business that they perceive as being low-risk.

4.  It can make the acquisition process smoother.

Having your financials in order can also make the actual acquisition process smoother. This is because there will be less paperwork and red tape to deal with if everything is already in order. This can save everyone involved a lot of time and headaches.

5.  It gives you peace of mind.

Finally, one of the best reasons to have your financials in order before being acquired is that it can give you peace of mind. Knowing that everything is in its proper place can help you relax and enjoy the ride, secure in the knowledge that you're prepared for whatever comes next

6. It shows you’re running a good business that doesn’t require a lot of financial clean up or manufactured earnings

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Considering a sale is a very personal decision for a business owner. You've spent your life and energy building a business and now you've decided to consider a merger or acquisition. We get it - we've helped hundreds of firms sell and we're sharing what we've learned and what it takes to start a process.

1. What is the current market value of your firm?

You'll need to know how much your firm is worth before you can start shopping it around. There are several ways to value a tech-enabled services firm, so you'll want to speak with a financial advisor or business appraiser to get an accurate estimate.

2. What are the potential buyers interested in?

When you're selling a tech-enabled services firm, it's important to understand what potential buyers are looking for. Are they interested in the technology itself, the customer base, or the team? Knowing what buyers are interested in will help you package and sell your firm in the most appealing way possible.

3. How much debt does your firm have?

If your firm has a lot of debt, it may be difficult to find a buyer who is willing to take on that liability. You may need to restructure your debt or negotiate with creditors in order to make your firm more attractive to potential buyers.

4. What are the terms of your current contracts?

If you have any long-term contracts in place, potential buyers will want to know about them. They'll want to know how much revenue the contracts generate and whether there are any early termination clauses that could allow the buyer to get out of the contract if they're not happy with it.

5. What is the expected growth trajectory of your firm?

Buyers will want to know whether your firm is growing quickly or slowly, and whether that growth is sustainable. They'll also want to see evidence that your team has a plan in place to continue growing the business.

6. What are the margins like for your products and services?

Your potential buyers will want to know how profitable your products and services are. They'll also want to know whether there's room to increase prices or cut costs in order to improve margins.

7. What is your customer churn rate?

Your potential buyers will want to know how often customers cancel their subscriptions or stop using your products and services. A high customer churn rate could indicate that there's something wrong with your product or that customers are unhappy with your service levels.

8. Do you have any patents or other intellectual property?

If you have any patents or other forms of intellectual property, potential buyers will want to know about them. They'll want to know what rights they would have to use that IP if they were to purchase your firm.

9. What do you want to do post transaction?

Sell-in vs Sell out. We have a podcast on this topic, listen here: https://www.revenuerocket.com/podcast/selling-in-vs-selling-out/

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Will I hit my revenue and profit goals with organic growth alone?

M&A is the fastest path to growth

What is my strategy in acquiring another firm?

Will this expand revenue, add new services, bring new people, or add a geography?  How will this impact channel relationships?   What are the potential benefits of an acquisition for my company’s growth and success?

Do I have the right team in place and is it’s culture defined?

Will my leadership team be able to lead a new group? What type of firm do we need to find so our cultures can blend?

Do I have the financial capability of doing a deal? How can I ensure that I have sufficient capital (cash, debt, equity) available to finance the acquisition without putting my company in a vulnerable position

How can I mitigate the risk of a deal?

What type of due diligence will we have which decreases risk while still moving forward in a deal?

What outside team do I need to ensure a deal is done that’s win-win for all.

M&A advisor for sourcing, deal making, negotiation, due-diligence and being the bad guy on tough conversations. Lawyer for contracts.  

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Origination: research, outreach & marketing – we’ve got a team of dedicated researchers finding your list, dedicated outreach team contacted buyers & sellers and supporting it with marketing

Deal Flow & Negotiation: Moving a deal forward, creating an LOI and negotiating a purchase agreement – all the things that happen to move a deal through the pipeline).

 Financial Analysis: Valuations, Cash flow analysis, deal support  

Due Diligence: where we verify that the information provided is correct – contract analysis look at top 10 to see if they are worth continuation, invoices reconcile to the cash you actually receive, quality of earnings (QOE) 

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IT Services customers today are expecting experts in their market. IT Service providers should pick one vertical market and be the dominate player in that market, aligning with your technology specialty. 

When you pick a vertical market you: 

• Narrow your marketing focus to companies that need your services allowing for better leads
• Build referrals and references of like-minded businesses that will recommend your business
• Concentrate sales efforts on deals you know you can win
• Set yourself and your business up for a premium valuation and successful M&A

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"Birds of a feather fly together."

Why should you use an industry specific advisor when entering into an M&A process:

1. Industry Specific Knowledge

An industry specific M&A advisor will have a deep understanding of the trends, challenges, and opportunities that are unique to your industry. This knowledge can be invaluable in helping you to identify potential acquisition targets and negotiating the best possible deal.

2. Access to Key Players

An industry specific M&A advisor will also have a network of key contacts within your industry. This network can be extremely helpful in identifying potential acquisition targets and getting access to the information you need to make an informed decision.

3. Deal Structure Expertise

An industry specific M&A advisor will also be an expert in deal structure. This means that they will be able to advise you on the most tax-efficient way to structure your deal, which can save you a significant amount of money.

4. Negotiation Skills

An industry specific M&A advisor will also have a wealth of experience in negotiation. This experience can be invaluable in helping you to negotiate the best possible price for your acquisition target.

5. Exit Strategy Planning

An industry specific M&A advisor will also be able to help you with exit strategy planning. This is important because it will ensure that you are able to maximize the value of your company when you eventually sell it.

6. post-Acquisition Integration

Finally, an industry specific M&A advisor will also be able to help you with post-acquisition integration. This is important because it will ensure that the acquisition is successfully integrated into your business and that all of the synergies are realized

Listen to Shoot the Moon on Apple Podcasts or Spotify.

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In this episode of talking about enterprising values, the team will be discussing: 

• Size of companies
• Revenue and ebitda thresholds
• How deals are shaped up in the IT services world

Listen to Shoot the Moon on Apple Podcasts or Spotify.

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