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The Sell Side Masterclass for Tech Services Founders: It Takes a Village
EPISODE 241. In the 5th episode of the Seller Master Class, Ryan, Mike, and Matt break down the “village” of experts you need to successfully sell an IT services / tech-enabled services firm. They cover when to start engaging advisors (ideally 6–12 months ahead), the three core roles (M&A advisor, M&A attorney, tax specialist), and what can go wrong when you choose the wrong team—like inflated valuation promises, inexperienced counsel stalling negotiations, and messy financial readiness that invites retrades.
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 >>
EPISODE 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. If you guys tune in to this podcast on a regular basis, you know, that we are a firm that’s focused on M&A for tech enabled services companies. With me today, are my partners, Ryan Barnett and Matt Lockhart, welcome guys.
Matt
Great to be here. Mike, excited to continue our master class series. Ryan. I love your topic of the day. You know, I like to sometimes give a weather report and, you know, by goodness guys, there was this bright orange orb in the sky today that we haven’t seen in something like 30 days here in Minnesota. So we’re fired up and ready to go. Ryan, what’s up that?
Ryan
Helped explain some of the productivity gains I had today. You’re absolutely right sun is shining and if you’re thinking about selling your business, the sun might be shining on you as well. And today, as part of our continuation in our master class, this is episode five in which we’re really talking about who you need to surround yourself in a transaction. The first few episodes were on getting ready, and what you need last episode is what your take home pay would be after a transaction and the next moves into really what does it take, to start to go to market? And so today, I really want to talk to you matt and Mike about what kind of advisors aid IT services for needs to have by their side. I’ll preface this. We are an emanating advisor ourselves so well, this is not totally self serving. It, it is really a guide to helping you decide what kind of partners do I need to do if I want to have an exit this year or next year? So, I love Mike, matt, both of you. I think there’s a just a general question but we’ve seen some deals just go wrong and there’s a, an advisory team that maybe isn’t the right fit or even they run solo. You know, Mike, why does that happen? Why, what happens, when you don’t have the right team in place? Well?
Mike
You know, I think it’s important to note that it takes a village to get a deal done. It takes a village of advisors who are, who have deep expertise in legal tax and M a matters in order for you to be successful. And I think for those that have tried to do this on their own, sometimes they’re looking for cost optimization. Hey, I don’t want to hire advisors to tell me something I should be able to do myself or I should know myself. They get sideways when around some of the details or things that should be known that are not known. And so I’ll just tell you that understanding the specifics of our market, understanding the nuance… of these specific disciplines and then also being able to be objective with a buyer throughout a very lengthy. What I would say is negotiation of terms pursuant to agreements, and economics around a deal are all there’s all a benefit of having the right advisors on your team to do that. Any one of those advisors, if they’re a wrong advisor or there’s not someone in that seat and you’re trying to roll your own, can have a turn, it turn into a deal breaker frankly. And if you’ve gotten far enough to say, hey, I want to do a deal or maybe you’re to the point where you’re negotiated the Loi, or it’s already underway, you certainly need a team of advisors to help you get that deal finished. And you need the right ones.
Ryan
Matt, anything you want to add on to that?
Mike
Well, yeah.
Matt
I mean, I think first and foremost, there’s in all areas and all industries, there’s well, quite honestly, there’s bad actors, right? There are people who, you know, see an opportunity to quote unquote make a buck and they… maybe are not forthright, not completely honest. They, you know, may inflate, you know, opportunities and shoot. One thing that we see all the time is we have somebody who approaches us and they say, well, they talked to, you know, some other Guy and that Guy says my firm is worth X, right? And that’s what we’re going to be able to go get… when it doesn’t bear out in the market, there’s very little reality to it. You know, they’re so inflating a price that it’s you know, ridiculous, right? But, you know, people can buy into it and that’s just one example. And so, you know, the credibility of an advisor is based upon their experience, how long they’ve been around their focus. And, you know, what other people are saying about them. So, you know, I think that’s the only that’s a place to start is let’s you know, just recognize that there are bad actors out there. There are bad actors in the M a environment, investment bankers, M&A advisors. So we can sort of just set that aside but know that it is the case.
Ryan
Absolutely that the experience and your specialty and your just being in this market and understanding what is truth from fiction is something that is critical here and having the right team that works with you through that is important. Matt, I know we hear that all the time my friend sold his company for 14 times. Well, your friend was probably in a different situation than what you’re at today, but it leads to challenges when trying to go to market with realistic expectations. And that’s what those advisors can help with. Mike. If I think about these teams and someone’s looking to sell, when should you start engaging experts? How far ahead do you need to be planning to be working with the teams that you suggest?
Mike
Well, I think, you know, it’s reasonable to be thinking six to 12 months ahead of time. You know, you need to know who’s going to be on your team when the time comes and you need to develop those relationships. If you wait until you get an Loi, the clock is already ticking right? There’ll, be a, you know, the Loi will only be good for a limited time. If you accept the LOI, or negotiate an LOI, you know, you typically have 90 days to close and, you know, early preparation will help you particularly in defending your diligence. So you don’t get what’s called a retrade or a move down in enterprise value because you either didn’t have your records in order or your house in order in general or you hadn’t assembled a team of experts to help you time. We have a saying around here that says time kills all deals.
Mike
The time that takes for you to assemble your advisory team, find the right fit, have them be prepared and up to speed and to get your house in order. It’s too late. If you’re trying to do all that, after the Loi is signed, it’s very unlikely that your transaction will get done. If you wait. So, you know, being prepared ahead of time, at least six to 12 months ahead of time. Some people are, you know, laying the seeds of this prep work years in advance, we think it’s not a bad idea and certainly will benefit you when the time comes to go to market or to accept an offer.
Ryan
Yes, that’s great. So, at least six to 12 months out. And if you’re not quite ready for a transaction, it may make a lot of sense to incorporate some of those advisors well beforehand or even if the phone is ringing off the hook and you need to just tell people to be at bay having the right advisors there well before that transaction. It can be pretty critical to success in maximizing your value of your business and the structure of the deal. Makes sense. So if you think if you’re in that shoes and you’re out, let’s say a year out, can you just walk me through at the highest level? What kind of advisors that someone should be looking for? What are those core advisors? And which, what does each one do?
Matt
Yeah, sort of three key categories, right? First and foremost is us, right? Your, M, a advisor or an investment bank that has a focus on mergers. And acquisitions. And these guys are going to be your quarterback. They’re going to be your counselor. They’re going to be your guide. They’re going to be the ultimate deal maker in the process in finding the very best strategic deal for your firm and ensuring that there’s applicable competition in place that is going to ultimately drive the highest price for your firm. Second to that is a credible, M&A attorney, and they are there to protect your risk to… complete the definitive terms in a purchase agreement. And really that negotiating point around the legalese, if you will, in the definitive agreements, the purchase agreement, if an employment agreement is appropriate, etc, these legal documents and that’s critical. And then, you know, third is, you know, your personal sort of tax specialist, you know, because when you’re selling your firm, obviously, it’s a significant liquidity event and want to ensure that the agreements and the terms of the deal are as favorable as can be as it pertains to your tax burden. So, those are, you know, really the three key buckets, you know, one item and it really enhances, you know, as you look at a credible M a advisor is, do they have the capability to ensure that your financials are set up in a way that is clean, that is understandable and doesn’t create any confusion in the process? And, you know, we at revenue rocket do have that team and many do. Sometimes there are M a advisors that, you know, don’t have that capability and you may, you know, want to work with that individual but you will need to know that you’re going to need to have the appropriate accounting and finance support in place as you go into the process. And then one thing sort of on the timing of it, you know, many people, obviously, all of you firms have a lawyer in place, but does that lawyer and, or that firm have, you know, merger and acquisition experience, right? You know, and that’s something to understand. And if they don’t you know, tag that now, do you need a lawyer 12 months before you sell your company? No, you don’t so you have some time there. Do you need to think about the tax aspect as you go into the process? Yeah, very much. So, you know, depending upon how your firm is organized, the corporate structure of your firm, that’s critical to understand. And just so you have an idea in mind and we talked about this last week in terms of the take home number that you have in place. Now, your M a advisor. And you guys touched on, this is something that you’ll want to have in place early especially if there is an opportunity to optimize the firm in a call it a readiness period of six to 18 months and that M&A advisor can certainly help in that process. To ensure that again you’re going to get the greatest return at the end of the day. So that M a advisor in our opinion is one that, you know, comes early and can have a distinct benefit on the return that you’re going to get.
Ryan
Absolutely. And that’s really kind of where I want to go next is exactly to the point if we start to look and break down these roles, I really understand when someone’s trying to evaluate what to look for, what should they look for? Mike, why don’t you get us started here on just, you know, what’s the value of an M a advisor and flow right into kind of, you know, what are a few things to look for and also a few things to watch for as potential risks in an advisor red flags there?
Mike
Yeah. I mean the value of an M&A advisor certainly is, you know, I’m a little biased here but it’s immeasurable we’ve heard that from our clients over the years that with a quote unquote, you know, without your involvement, this deal wouldn’t have gotten done. I think any M, a advisor who has deep domain expertise and experience with firms like yours… if they’re credible and they’ve been around awhile, should be able to provide that value or you shouldn’t be using them, right? And I think that’s evidenced by the references it’s probably evidenced by their deals, completed deals that’s evidenced by their… experience and the value that those folks bring. And I’d like to say ourselves included is to position your story in the best light with a buyer list that is most likely to transact, has a high likelihood of transacting for a premium value. They have to be able to sort of manage the multiple work streams, to control a timeline with an interested and qualified buying community. They have to be able to negotiate and manage the buyer psychology. They’ve got to keep you as a founder focused on running your business and manage all of the other things that are needed to be in play. Otherwise, a distraction of either you managing it or a thinly staffed advisor asking you to manage some of these components will mean that distraction puts downward pressure on the growth and health and wellness of your business while you’re running this process. And it gives the opportunity for a buyer to retrade your deal. So in short, you want to outsource as much of this as you can. So you can continue to run your business. So you don’t have value leakage and retrades creeping in because either you’re trying to do it on your own or you’re trying to do parts of it that, you know, frankly, your advisor, if they’re well put together should be doing for you or staffing for you. When you add up all of those things into pure value. If your advisor is charging kind of normal what we would call market rates which the marketplace has a good way of shaking that out frankly by comparing proposals and thinking about how you would work with an advisor. You’re going to, they’re going to more than pay for themselves just in the value of maintaining your enterprise value, being able to keep you focused on running your business and being able to negotiate around the situation, inevitably will come up throughout the process.
Matt
You know, one thing I’d add there, Mike is, you… know, that process can be sort of full of peaks and valleys emotionally. And, you know, one of the things that we get on a consistent basis is, you know, sort of a thank, you know, for keeping us sane right throughout the process because it can be emotional, and I think that a good advisor is obviously focused on getting that deal done and getting the right deal done and maximizing the price, but also ensuring that it’s not something that, you know, that you’re not able to sleep throughout the process. And so, I just think that that’s a really important piece that we hear consistently and, you know, worth noting.
Ryan
For sure. Yeah, yeah. And also just playing that role of, the person that the M&A advisor is not going to be there the whole time and there’s going to be conversation and you maybe you might be working with this company for or with a buyer, for quite some time. And so having that person in the middle that’s actually had those really hard conversations so you can continue to have a great relationship with the buyer is critical as well. Yeah. All great points. There’s a lot of Roi that comes with an M&A advisor. And a lot of it is more than just the enterprise value that’s going to go up with using an advisor. And it’s critical to have one to help you that sure process. Mike, if you go back to that other question, just part of it, it’s when you think about that, M&A advisor, what’s really important for leaders of it services firms to consider? How would you have them evaluate a firm that can be an advisor in this?
Mike
Well, I think, you know, as I mentioned before, you… know, look for specialization in it services, right? Look for someone that has a process, a repeatable internal operating process, right? That has good communications, a great track record. They have the ability to lead the leadership of that advisor with a buyer and a seller is critical. I think anytime you hear an advisor… or an investment banker start to guarantee a particular valuation, they can certainly give you guidance based on their experience in doing valuations. But to guarantee a number, particularly if it sounds above market, that should be a huge red flag. There are certainly unscrupulous actors in our market who tell you they can get a particular number, usually a multiple of EBITDA, that sounds too good to be true. I would caution you that those guys are doing that on purpose in order to get your mandate. When they do get your mandate, they lock you up typically in what’s called an exclusive contract where no matter who you sell to in the coming years, they get paid whether it happens now or later, and they can’t deliver that number. And so we think that’s unethical and bad actors. That’s why frankly we don’t have in our business exclusive if you want to go sell to someone else. And while you’re running a process with us and we say go for it because we think that we add enough value along the way, that you’re going to stay the course with the work that we do together. I think anybody who gives you vague deliverables promises billions of deals that don’t seem to make sense that they have been involved with. A lot of these guys actually count all the deals as individuals they’ve ever been involved with. We know of one relatively prominent advisory firm that hasn’t done the number of deals that they tout on their website. They did them with another firm and brings that to their existing firm. And alluding to the fact that they’ve done those deals with their existing firm, which just isn’t factual. They oftentimes have no relevant references. They do a lot of spray and pray, you know, it’s just a lot of unethical buyer targeting. I can go down a long list, right? So hiring an M a advisor who has been there for the long term who is credible has credible references, has what we’ll call integrity in how they market. I think will all be indications that you’re probably signing up with the right guys.
Ryan
Yeah, thanks, Mike. It’s good to spend a little bit of time there just to understand the value in those red flags. And your point, we’ve got previous podcasts on selecting an M&A advisor and I think they’re definitely worth listening to as well. Matt, you’ve worked with a lot of attorneys in this process and I just would love to. And you mentioned earlier, the industry specialization matters now. I’d love to hear understand what is important in selecting an attorney and why does that specialization matter?
Matt
Yeah. And you know, the industry aspect particularly in it services because there’s a, you know, a fair amount of nuance, right? In the it services industry where specialization can, you know, can certainly be helpful in that space, right? Liability around contracts, right? For example, liability around it services, contracts, and understanding what that means and how that is going to have any impact on, you know, reps and warranties, and then overall liability, right? Just an example, you know, I think that even more important than that is having an experienced M&A attorney and not just a generalist attorney. And, you know, we’ve seen this, right? Our, you know, clients have sort of mandated that they use their old pal attorney that they’ve been using for, you know, just corporate contract matters and, you know, employee matters and the like. And, you know, what sometimes can happen in that space is they don’t understand the give and take around, you know, negotiating a final agreement that there is always a sense of give and take and they want to, you know, sort of take the hill on every particular matter and win, you know, on every item. And then, you know, they pretend to their clients, well, I’m reducing your risk and reducing your liability. I’m protecting, you know, when the, you know, some of the matters that they’re you know, wanting to fight on really are of very little risk to the client. They just, you know, when you put it on the risk continuum, it’s really quite low and that can basically shuttle a deal. The terms are understood, they’re agreed upon, you know, the strategic value is in place. There’s really good alignment. Both parties are willing and wanting to get the deal done yet simply because the lawyer does not have experience, they get in the way and they shuttle the deal and you know, that it’s not only costly. There’s reputational cost in the marketplace. When that happens. It’s costly because you’ve spent a fair amount of money and the deal didn’t get done and the like, and so in other cases, it, you know, the deals can get done however they’re awfully painful and it kind of goes back to that emotionality aspect. And, you know, the lawyer is presenting just conflict upon conflict and it can, you know, taint the seller’s view of the buyer and that’s never a good thing, right? And so, you know, for a lot of reasons, find that credible experienced, M&A attorney. And plus is finding that M&A attorney that has relevant experience in the market that you’re in.
Ryan
Yeah, absolutely. Well said. And it’s critical for the speed of the transaction and the completeness of the transaction to get that done. You absolutely nailed that. And then if you do think about the tax planning, matt, you had mentioned just the tax planning earlier, there’s some advice to just to start earlier here. So if there’s some big decisions that need to be made whether that’s a family plan, tax planning or wealth strategies that are big impacts to what your take home payment is. Your standard CPA can help allocate some deal structures. And, but you’ve got to take some time to understand what stock and asset deals look like or the allocation of the assets that you have and roll over equity when it comes to getting the deal done. And tax planning and financial accounting here is critical to make sure that you get nailed down. I think sometimes we skip over this section a little bit. But really making sure that you have your long term planning is going to really help put a little bit more money in your back pocket here. I think… Mike, I think of this. Just a quick question for you is that, can you help me understand the role of a CPA in an accountant? And also kind of understanding what role they’re going to play within this process? As well as just addressing, you know, do you really need a quality of earnings report to go to market?
Mike
Yeah, it’s a great, it’s a great question. Ryan. I think, you know, there’s a lot of debate in the world of, you know, finance and M&A, as to whether you come to a transaction with a qv done independently or if you kind of wait to see if a buyer needs a qv to be done and have them do it. I think, you know, certainly… being able to be deal ready is critical, right? And financial readiness is critical. So your accountant plays a role in doing that. You want to be cleaned up and ready to go. Now if you choose to invest in a quality of earnings. And some M&A advisors require you to get a quality of earnings done before they’ll even undertake taking you to market. And I want to make sure that your financials are clean and that you’re marketable… frankly and that you can get to a number that you expect. So they require you to take on that effort. I don’t personally believe that’s necessary if you have good financial hygiene and that hygiene has been reviewed by an outside third party such as an M&A advisor with a competent financial function. I’ll put a little plug in with revenue. Rocket. We have that, or your cpa who has some experience in making sure that your records are in order and will stand the test, due diligence test. And if not, if your cpa you’ve worked with for many years, you feel doesn’t have that level of skill. Maybe they’re just working with you on tax. They don’t really provide strategic advisory. You need to find someone who can provide that strategic advisor, whether it be a rent to CFO or someone that can take a more deal oriented view of your finance. But financial readiness is critical. Tax advisory is critical. How you’re going to manage a transaction. From a tax perspective. Your personal tax situation is likely not the same as the next Guy. And you’re going to want to make sure that you have, very good advice. So, you know, I would leave it with great and easy to understand financials and good financial hygiene as well as you know, strong and understanding of the tax ramifications of a transaction. And your preferred transaction from that perspective will be important. And if those things are in order, then it would be my bet that you don’t need an outside qv done independently before going to market. You should be able to be able to get to market without that.
Ryan
Yeah, this has been a very helpful discussion. Matt and Mike, I really thank you for it. I would love matt. Feel free to answer this and pass this over to Mike. But if a founder remembers one thing from this episode, what would you want them to walk away with?
Matt
Yeah, I think that it’s you know, build your team and you know, even more than building your team is building those relationships. You know, this is such a critical life… event and, you know, obviously critical financial event and you want to have some time and, you know, build the bridges and, you know, build trust, you know, with your advisor team. And so, you know, build a relationship, build a relationship with a few different advisors. And, you know, over time, you know, one is going to really rise to the top as the people that, you know, both have the credibility and the experience and the expertise as well as, you know, that sort of that gut feel of the people that, you know, that you’re going to enjoy working with. And so, you know, start early, certainly start early with, you know, at your, M&A advisor, I think we’ve talked, you know, if you don’t already have, you know, a tax specialist in your wings, you know, important for you to do, so, not very costly, right? But can certainly help in terms of your take home. And then, you know, understanding who are credible, M&A attorneys in your purview as well. So start early and build those relationships. Mike. Well, with that, I’d say.
Mike
It’s time to tie a ribbon on it. Thanks guys for this episode as part of our masterclass and moving towards step by step, how to get to market, how to think about getting to market and how to get to a successful transaction. Feel free to tune in next week for our next installment of this masterclass and make it a great week.
View all episodes
By EPISODE 241. In the 5th episode of the Seller Master Class, Ryan, Mike, and Matt break down the “village” of experts you need to successfully sell an IT services / tech-enabled services firm. They cover when to start engaging advisors (ideally 6–12 months ahead), the three core roles (M&A advisor, M&A attorney, tax specialist), and what can go wrong when you choose the wrong team—like inflated valuation promises, inexperienced counsel stalling negotiations, and messy financial readiness that invites retrades.
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 >>
EPISODE 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. If you guys tune in to this podcast on a regular basis, you know, that we are a firm that’s focused on M&A for tech enabled services companies. With me today, are my partners, Ryan Barnett and Matt Lockhart, welcome guys.
Matt
Great to be here. Mike, excited to continue our master class series. Ryan. I love your topic of the day. You know, I like to sometimes give a weather report and, you know, by goodness guys, there was this bright orange orb in the sky today that we haven’t seen in something like 30 days here in Minnesota. So we’re fired up and ready to go. Ryan, what’s up that?
Ryan
Helped explain some of the productivity gains I had today. You’re absolutely right sun is shining and if you’re thinking about selling your business, the sun might be shining on you as well. And today, as part of our continuation in our master class, this is episode five in which we’re really talking about who you need to surround yourself in a transaction. The first few episodes were on getting ready, and what you need last episode is what your take home pay would be after a transaction and the next moves into really what does it take, to start to go to market? And so today, I really want to talk to you matt and Mike about what kind of advisors aid IT services for needs to have by their side. I’ll preface this. We are an emanating advisor ourselves so well, this is not totally self serving. It, it is really a guide to helping you decide what kind of partners do I need to do if I want to have an exit this year or next year? So, I love Mike, matt, both of you. I think there’s a just a general question but we’ve seen some deals just go wrong and there’s a, an advisory team that maybe isn’t the right fit or even they run solo. You know, Mike, why does that happen? Why, what happens, when you don’t have the right team in place? Well?
Mike
You know, I think it’s important to note that it takes a village to get a deal done. It takes a village of advisors who are, who have deep expertise in legal tax and M a matters in order for you to be successful. And I think for those that have tried to do this on their own, sometimes they’re looking for cost optimization. Hey, I don’t want to hire advisors to tell me something I should be able to do myself or I should know myself. They get sideways when around some of the details or things that should be known that are not known. And so I’ll just tell you that understanding the specifics of our market, understanding the nuance… of these specific disciplines and then also being able to be objective with a buyer throughout a very lengthy. What I would say is negotiation of terms pursuant to agreements, and economics around a deal are all there’s all a benefit of having the right advisors on your team to do that. Any one of those advisors, if they’re a wrong advisor or there’s not someone in that seat and you’re trying to roll your own, can have a turn, it turn into a deal breaker frankly. And if you’ve gotten far enough to say, hey, I want to do a deal or maybe you’re to the point where you’re negotiated the Loi, or it’s already underway, you certainly need a team of advisors to help you get that deal finished. And you need the right ones.
Ryan
Matt, anything you want to add on to that?
Mike
Well, yeah.
Matt
I mean, I think first and foremost, there’s in all areas and all industries, there’s well, quite honestly, there’s bad actors, right? There are people who, you know, see an opportunity to quote unquote make a buck and they… maybe are not forthright, not completely honest. They, you know, may inflate, you know, opportunities and shoot. One thing that we see all the time is we have somebody who approaches us and they say, well, they talked to, you know, some other Guy and that Guy says my firm is worth X, right? And that’s what we’re going to be able to go get… when it doesn’t bear out in the market, there’s very little reality to it. You know, they’re so inflating a price that it’s you know, ridiculous, right? But, you know, people can buy into it and that’s just one example. And so, you know, the credibility of an advisor is based upon their experience, how long they’ve been around their focus. And, you know, what other people are saying about them. So, you know, I think that’s the only that’s a place to start is let’s you know, just recognize that there are bad actors out there. There are bad actors in the M a environment, investment bankers, M&A advisors. So we can sort of just set that aside but know that it is the case.
Ryan
Absolutely that the experience and your specialty and your just being in this market and understanding what is truth from fiction is something that is critical here and having the right team that works with you through that is important. Matt, I know we hear that all the time my friend sold his company for 14 times. Well, your friend was probably in a different situation than what you’re at today, but it leads to challenges when trying to go to market with realistic expectations. And that’s what those advisors can help with. Mike. If I think about these teams and someone’s looking to sell, when should you start engaging experts? How far ahead do you need to be planning to be working with the teams that you suggest?
Mike
Well, I think, you know, it’s reasonable to be thinking six to 12 months ahead of time. You know, you need to know who’s going to be on your team when the time comes and you need to develop those relationships. If you wait until you get an Loi, the clock is already ticking right? There’ll, be a, you know, the Loi will only be good for a limited time. If you accept the LOI, or negotiate an LOI, you know, you typically have 90 days to close and, you know, early preparation will help you particularly in defending your diligence. So you don’t get what’s called a retrade or a move down in enterprise value because you either didn’t have your records in order or your house in order in general or you hadn’t assembled a team of experts to help you time. We have a saying around here that says time kills all deals.
Mike
The time that takes for you to assemble your advisory team, find the right fit, have them be prepared and up to speed and to get your house in order. It’s too late. If you’re trying to do all that, after the Loi is signed, it’s very unlikely that your transaction will get done. If you wait. So, you know, being prepared ahead of time, at least six to 12 months ahead of time. Some people are, you know, laying the seeds of this prep work years in advance, we think it’s not a bad idea and certainly will benefit you when the time comes to go to market or to accept an offer.
Ryan
Yes, that’s great. So, at least six to 12 months out. And if you’re not quite ready for a transaction, it may make a lot of sense to incorporate some of those advisors well beforehand or even if the phone is ringing off the hook and you need to just tell people to be at bay having the right advisors there well before that transaction. It can be pretty critical to success in maximizing your value of your business and the structure of the deal. Makes sense. So if you think if you’re in that shoes and you’re out, let’s say a year out, can you just walk me through at the highest level? What kind of advisors that someone should be looking for? What are those core advisors? And which, what does each one do?
Matt
Yeah, sort of three key categories, right? First and foremost is us, right? Your, M, a advisor or an investment bank that has a focus on mergers. And acquisitions. And these guys are going to be your quarterback. They’re going to be your counselor. They’re going to be your guide. They’re going to be the ultimate deal maker in the process in finding the very best strategic deal for your firm and ensuring that there’s applicable competition in place that is going to ultimately drive the highest price for your firm. Second to that is a credible, M&A attorney, and they are there to protect your risk to… complete the definitive terms in a purchase agreement. And really that negotiating point around the legalese, if you will, in the definitive agreements, the purchase agreement, if an employment agreement is appropriate, etc, these legal documents and that’s critical. And then, you know, third is, you know, your personal sort of tax specialist, you know, because when you’re selling your firm, obviously, it’s a significant liquidity event and want to ensure that the agreements and the terms of the deal are as favorable as can be as it pertains to your tax burden. So, those are, you know, really the three key buckets, you know, one item and it really enhances, you know, as you look at a credible M a advisor is, do they have the capability to ensure that your financials are set up in a way that is clean, that is understandable and doesn’t create any confusion in the process? And, you know, we at revenue rocket do have that team and many do. Sometimes there are M a advisors that, you know, don’t have that capability and you may, you know, want to work with that individual but you will need to know that you’re going to need to have the appropriate accounting and finance support in place as you go into the process. And then one thing sort of on the timing of it, you know, many people, obviously, all of you firms have a lawyer in place, but does that lawyer and, or that firm have, you know, merger and acquisition experience, right? You know, and that’s something to understand. And if they don’t you know, tag that now, do you need a lawyer 12 months before you sell your company? No, you don’t so you have some time there. Do you need to think about the tax aspect as you go into the process? Yeah, very much. So, you know, depending upon how your firm is organized, the corporate structure of your firm, that’s critical to understand. And just so you have an idea in mind and we talked about this last week in terms of the take home number that you have in place. Now, your M a advisor. And you guys touched on, this is something that you’ll want to have in place early especially if there is an opportunity to optimize the firm in a call it a readiness period of six to 18 months and that M&A advisor can certainly help in that process. To ensure that again you’re going to get the greatest return at the end of the day. So that M a advisor in our opinion is one that, you know, comes early and can have a distinct benefit on the return that you’re going to get.
Ryan
Absolutely. And that’s really kind of where I want to go next is exactly to the point if we start to look and break down these roles, I really understand when someone’s trying to evaluate what to look for, what should they look for? Mike, why don’t you get us started here on just, you know, what’s the value of an M a advisor and flow right into kind of, you know, what are a few things to look for and also a few things to watch for as potential risks in an advisor red flags there?
Mike
Yeah. I mean the value of an M&A advisor certainly is, you know, I’m a little biased here but it’s immeasurable we’ve heard that from our clients over the years that with a quote unquote, you know, without your involvement, this deal wouldn’t have gotten done. I think any M, a advisor who has deep domain expertise and experience with firms like yours… if they’re credible and they’ve been around awhile, should be able to provide that value or you shouldn’t be using them, right? And I think that’s evidenced by the references it’s probably evidenced by their deals, completed deals that’s evidenced by their… experience and the value that those folks bring. And I’d like to say ourselves included is to position your story in the best light with a buyer list that is most likely to transact, has a high likelihood of transacting for a premium value. They have to be able to sort of manage the multiple work streams, to control a timeline with an interested and qualified buying community. They have to be able to negotiate and manage the buyer psychology. They’ve got to keep you as a founder focused on running your business and manage all of the other things that are needed to be in play. Otherwise, a distraction of either you managing it or a thinly staffed advisor asking you to manage some of these components will mean that distraction puts downward pressure on the growth and health and wellness of your business while you’re running this process. And it gives the opportunity for a buyer to retrade your deal. So in short, you want to outsource as much of this as you can. So you can continue to run your business. So you don’t have value leakage and retrades creeping in because either you’re trying to do it on your own or you’re trying to do parts of it that, you know, frankly, your advisor, if they’re well put together should be doing for you or staffing for you. When you add up all of those things into pure value. If your advisor is charging kind of normal what we would call market rates which the marketplace has a good way of shaking that out frankly by comparing proposals and thinking about how you would work with an advisor. You’re going to, they’re going to more than pay for themselves just in the value of maintaining your enterprise value, being able to keep you focused on running your business and being able to negotiate around the situation, inevitably will come up throughout the process.
Matt
You know, one thing I’d add there, Mike is, you… know, that process can be sort of full of peaks and valleys emotionally. And, you know, one of the things that we get on a consistent basis is, you know, sort of a thank, you know, for keeping us sane right throughout the process because it can be emotional, and I think that a good advisor is obviously focused on getting that deal done and getting the right deal done and maximizing the price, but also ensuring that it’s not something that, you know, that you’re not able to sleep throughout the process. And so, I just think that that’s a really important piece that we hear consistently and, you know, worth noting.
Ryan
For sure. Yeah, yeah. And also just playing that role of, the person that the M&A advisor is not going to be there the whole time and there’s going to be conversation and you maybe you might be working with this company for or with a buyer, for quite some time. And so having that person in the middle that’s actually had those really hard conversations so you can continue to have a great relationship with the buyer is critical as well. Yeah. All great points. There’s a lot of Roi that comes with an M&A advisor. And a lot of it is more than just the enterprise value that’s going to go up with using an advisor. And it’s critical to have one to help you that sure process. Mike, if you go back to that other question, just part of it, it’s when you think about that, M&A advisor, what’s really important for leaders of it services firms to consider? How would you have them evaluate a firm that can be an advisor in this?
Mike
Well, I think, you know, as I mentioned before, you… know, look for specialization in it services, right? Look for someone that has a process, a repeatable internal operating process, right? That has good communications, a great track record. They have the ability to lead the leadership of that advisor with a buyer and a seller is critical. I think anytime you hear an advisor… or an investment banker start to guarantee a particular valuation, they can certainly give you guidance based on their experience in doing valuations. But to guarantee a number, particularly if it sounds above market, that should be a huge red flag. There are certainly unscrupulous actors in our market who tell you they can get a particular number, usually a multiple of EBITDA, that sounds too good to be true. I would caution you that those guys are doing that on purpose in order to get your mandate. When they do get your mandate, they lock you up typically in what’s called an exclusive contract where no matter who you sell to in the coming years, they get paid whether it happens now or later, and they can’t deliver that number. And so we think that’s unethical and bad actors. That’s why frankly we don’t have in our business exclusive if you want to go sell to someone else. And while you’re running a process with us and we say go for it because we think that we add enough value along the way, that you’re going to stay the course with the work that we do together. I think anybody who gives you vague deliverables promises billions of deals that don’t seem to make sense that they have been involved with. A lot of these guys actually count all the deals as individuals they’ve ever been involved with. We know of one relatively prominent advisory firm that hasn’t done the number of deals that they tout on their website. They did them with another firm and brings that to their existing firm. And alluding to the fact that they’ve done those deals with their existing firm, which just isn’t factual. They oftentimes have no relevant references. They do a lot of spray and pray, you know, it’s just a lot of unethical buyer targeting. I can go down a long list, right? So hiring an M a advisor who has been there for the long term who is credible has credible references, has what we’ll call integrity in how they market. I think will all be indications that you’re probably signing up with the right guys.
Ryan
Yeah, thanks, Mike. It’s good to spend a little bit of time there just to understand the value in those red flags. And your point, we’ve got previous podcasts on selecting an M&A advisor and I think they’re definitely worth listening to as well. Matt, you’ve worked with a lot of attorneys in this process and I just would love to. And you mentioned earlier, the industry specialization matters now. I’d love to hear understand what is important in selecting an attorney and why does that specialization matter?
Matt
Yeah. And you know, the industry aspect particularly in it services because there’s a, you know, a fair amount of nuance, right? In the it services industry where specialization can, you know, can certainly be helpful in that space, right? Liability around contracts, right? For example, liability around it services, contracts, and understanding what that means and how that is going to have any impact on, you know, reps and warranties, and then overall liability, right? Just an example, you know, I think that even more important than that is having an experienced M&A attorney and not just a generalist attorney. And, you know, we’ve seen this, right? Our, you know, clients have sort of mandated that they use their old pal attorney that they’ve been using for, you know, just corporate contract matters and, you know, employee matters and the like. And, you know, what sometimes can happen in that space is they don’t understand the give and take around, you know, negotiating a final agreement that there is always a sense of give and take and they want to, you know, sort of take the hill on every particular matter and win, you know, on every item. And then, you know, they pretend to their clients, well, I’m reducing your risk and reducing your liability. I’m protecting, you know, when the, you know, some of the matters that they’re you know, wanting to fight on really are of very little risk to the client. They just, you know, when you put it on the risk continuum, it’s really quite low and that can basically shuttle a deal. The terms are understood, they’re agreed upon, you know, the strategic value is in place. There’s really good alignment. Both parties are willing and wanting to get the deal done yet simply because the lawyer does not have experience, they get in the way and they shuttle the deal and you know, that it’s not only costly. There’s reputational cost in the marketplace. When that happens. It’s costly because you’ve spent a fair amount of money and the deal didn’t get done and the like, and so in other cases, it, you know, the deals can get done however they’re awfully painful and it kind of goes back to that emotionality aspect. And, you know, the lawyer is presenting just conflict upon conflict and it can, you know, taint the seller’s view of the buyer and that’s never a good thing, right? And so, you know, for a lot of reasons, find that credible experienced, M&A attorney. And plus is finding that M&A attorney that has relevant experience in the market that you’re in.
Ryan
Yeah, absolutely. Well said. And it’s critical for the speed of the transaction and the completeness of the transaction to get that done. You absolutely nailed that. And then if you do think about the tax planning, matt, you had mentioned just the tax planning earlier, there’s some advice to just to start earlier here. So if there’s some big decisions that need to be made whether that’s a family plan, tax planning or wealth strategies that are big impacts to what your take home payment is. Your standard CPA can help allocate some deal structures. And, but you’ve got to take some time to understand what stock and asset deals look like or the allocation of the assets that you have and roll over equity when it comes to getting the deal done. And tax planning and financial accounting here is critical to make sure that you get nailed down. I think sometimes we skip over this section a little bit. But really making sure that you have your long term planning is going to really help put a little bit more money in your back pocket here. I think… Mike, I think of this. Just a quick question for you is that, can you help me understand the role of a CPA in an accountant? And also kind of understanding what role they’re going to play within this process? As well as just addressing, you know, do you really need a quality of earnings report to go to market?
Mike
Yeah, it’s a great, it’s a great question. Ryan. I think, you know, there’s a lot of debate in the world of, you know, finance and M&A, as to whether you come to a transaction with a qv done independently or if you kind of wait to see if a buyer needs a qv to be done and have them do it. I think, you know, certainly… being able to be deal ready is critical, right? And financial readiness is critical. So your accountant plays a role in doing that. You want to be cleaned up and ready to go. Now if you choose to invest in a quality of earnings. And some M&A advisors require you to get a quality of earnings done before they’ll even undertake taking you to market. And I want to make sure that your financials are clean and that you’re marketable… frankly and that you can get to a number that you expect. So they require you to take on that effort. I don’t personally believe that’s necessary if you have good financial hygiene and that hygiene has been reviewed by an outside third party such as an M&A advisor with a competent financial function. I’ll put a little plug in with revenue. Rocket. We have that, or your cpa who has some experience in making sure that your records are in order and will stand the test, due diligence test. And if not, if your cpa you’ve worked with for many years, you feel doesn’t have that level of skill. Maybe they’re just working with you on tax. They don’t really provide strategic advisory. You need to find someone who can provide that strategic advisor, whether it be a rent to CFO or someone that can take a more deal oriented view of your finance. But financial readiness is critical. Tax advisory is critical. How you’re going to manage a transaction. From a tax perspective. Your personal tax situation is likely not the same as the next Guy. And you’re going to want to make sure that you have, very good advice. So, you know, I would leave it with great and easy to understand financials and good financial hygiene as well as you know, strong and understanding of the tax ramifications of a transaction. And your preferred transaction from that perspective will be important. And if those things are in order, then it would be my bet that you don’t need an outside qv done independently before going to market. You should be able to be able to get to market without that.
Ryan
Yeah, this has been a very helpful discussion. Matt and Mike, I really thank you for it. I would love matt. Feel free to answer this and pass this over to Mike. But if a founder remembers one thing from this episode, what would you want them to walk away with?
Matt
Yeah, I think that it’s you know, build your team and you know, even more than building your team is building those relationships. You know, this is such a critical life… event and, you know, obviously critical financial event and you want to have some time and, you know, build the bridges and, you know, build trust, you know, with your advisor team. And so, you know, build a relationship, build a relationship with a few different advisors. And, you know, over time, you know, one is going to really rise to the top as the people that, you know, both have the credibility and the experience and the expertise as well as, you know, that sort of that gut feel of the people that, you know, that you’re going to enjoy working with. And so, you know, start early, certainly start early with, you know, at your, M&A advisor, I think we’ve talked, you know, if you don’t already have, you know, a tax specialist in your wings, you know, important for you to do, so, not very costly, right? But can certainly help in terms of your take home. And then, you know, understanding who are credible, M&A attorneys in your purview as well. So start early and build those relationships. Mike. Well, with that, I’d say.
Mike
It’s time to tie a ribbon on it. Thanks guys for this episode as part of our masterclass and moving towards step by step, how to get to market, how to think about getting to market and how to get to a successful transaction. Feel free to tune in next week for our next installment of this masterclass and make it a great week.