“M&A negotiations are asymmetrical and to the advantage of the acquirers if the seller of the business lacks expert advice,” said John Holland.
Acquirers are drawn to the recurring revenue and “lasting” customer relationships that MSPs and agents have built.
This idea comes from John Holland, managing director of Corporate Finance Associates, who urges partners to seek advice if they want to sell their business. MSPs and agents are seeing a high level of outward investment and consolidation in their industries.
Holland will speak at the Channel Partners Conference & Expo, April 11-14, in Las Vegas. His conference session, “Maximizing Value in Channel M&A Transactions,” will take place on April 12.
Holland spoke to Channel Futures about mergers and acquisitions ahead of his speech at the event.
Channel Futures: What’s the one thing most entrepreneurs don’t understand about how the M&A process works?
John Holland: Business owners are often flattered when acquirers engage in conversations and offer deals. Many acquirers have business development teams that initiate such conversations in order to capture “exclusive deals”. An exclusive deal is a transaction without any competing bidders. As with any asset such as a house, the optimum value of a business is achieved when multiple bidders compete for the asset. Therefore, business owners must resist the temptation to sell their business without a bidding process.
|John Holland is one of over 100 keynote speakers at the Channel Partners Conference & Expo/MSP Summit. Register now to join 6,500 other participants from April 11-14. You can also interact with over 300 key technology service providers and distributors.|
Selling a business is a very, very difficult and time-consuming process. For most business owners, the sale of the business is the most important financial transaction of their life. Mistakes can be very costly. There is a risk of post-transaction litigation. Just as any business owner would consult a cardiologist for advice on heart problems, it is important for business owners to speak to experts such as investment bankers, merger lawyers and acquisitions and CPAs with M&A experience when owners are considering selling their business. Many acquirers have teams of financial analysts, accountants and lawyers. Therefore, M&A negotiations are asymmetrical and to the advantage of the acquirers if the seller of the company lacks expert advice.
Since every business is unique, there is no universally accepted “rule of thumb” that applies to business valuations. The true value of any technology services business is determined in the tussle of free market forces when the business (or an interest in the business) is sold in a confidential auction-like process. . Investment bankers orchestrate a confidential auction-like process that synchronizes bids and pits potential acquirers against each other to help business owners maximize the value of their businesses and optimize ownership structures. transaction.
CF: What are some of the things the potential buyer is looking for in a transaction?
JH: Investors are looking for upside potential while mitigating downside risk. Growing companies attract many buyers, while declining companies often fail to find a buyer. Acquirers are highly attracted to companies with recurring revenue and long-term “sticky” customer relationships, as these companies are considered low risk. This is why Managed Service Providers (MSPs) and Agents are in such demand. Regardless of the type of business, the business owner can create value through recurring revenue and lasting customer relationships. Let me draw a parallel with another industry that everyone can relate to. Buyers are not at all interested in companies that build new pools or renovate old pools on a project-by-project basis, but buyers are very interested in companies that charge monthly for the upkeep, cleaning and upkeep of these swimming pools.
Acquirers are very interested in the scale. Since the transaction cost of acquiring a business can be as high as $500,000, including attorney and CPA fees, it is not cost-effective for acquirers to acquire low-income businesses. Business owners with EBITDA (earnings before interest, taxes, depreciation and amortization) of less than $1 million should consider merging with competitors to achieve this scale. As companies achieve higher levels of EBITDA, the pool of interested acquirers grows. Therefore, valuations tend to rise in terms of multiples of EBITDA as earnings increase. Typically, there is an “army” of interested acquirers in any technology services company with an EBITDA above $3 million, especially if those companies have recurring revenue.
CF: What is one way for agents to maximize the value of their transaction?
JH: Agents are very attractive to acquirers because of recurring revenue and long-lasting client relationships. Agents can maximize the eventual value of the deal by achieving steady revenue and profit growth and growing the business organically or through a merger with competitors.
CF: Is there anything else you would like to add?
JH: When selling a business, the structure of the transaction is just as important as the price. The deal structure refers to the methods and timing of payment upon acquisition. Every business owner dreams of an all-cash transaction. Acquirers understand that once a business owner has received a lump sum of millions of dollars, the business owner is unlikely to be as “hungry” for the continued success of that business. Thus, acquirers ensure that the owner/seller of the business continues to have “the skin in the game” by including payments over two or three years which depend on certain objectives of turnover, gross profit or EBITDA (i.e. an “offset”). In addition, some buyers ask the owner/seller to retain part of the company’s capital.