So much attention is paid to the valuation in M&A for IT services businesses but sometimes the importance of other factors isn’t fully appreciated. Buyers should realize that sellers also judge offers by the deal terms, payment structure, timeliness of the sale, and whether the sale is an asset or share sale. Additionally, having a level of trust between buyer and seller, having a cultural fit between both companies, and addressing the seller’s role post-close are crucial factors for putting forward an attractive offer. The combination of these factors, which we’ll discuss in today’s blog, may influence a lower valuation offer to be seen as the better offer from the seller’s perspective.
The deal terms refer to the specific conditions of the sale and have a significant impact on the perceived strength of an offer. Deal terms can include structures such as bonuses or earnouts, which are performance-based payments. Earnouts are often preferred by buyers when there is risk associated with the acquisition. For instance, if the business has a key client that makes up the bulk of revenue, an earnout can help mitigate the risk of that client leaving; or maybe the business has customers in countries where there’s a tumultuous business climate, and an earnout mitigates the of regulatory risk. On the flipside, because earnout payments are based on the future performance of the business, they may also be an attractive option for sellers who believe their business will continue to grow post-sale.
Payment terms refer to how the buyer plans to pay for the business, whether it’s a lump sum payment on close or installment payments over time as well as the frequency of these payments. Sellers likely prefer a lump sum payment on close, but installment payments can allow a buyer to get to a higher valuation, aid with cash flow, in addition to providing some security by maintaining a degree of leverage.
Another important factor is whether the sale is an asset sale or a share sale. In an asset sale, the buyer only purchases specific assets of the business — most importantly the customer list and annuity stream (goodwill) — but also potentially equipment, inventory, or even real estate. In a share sale, the buyer purchases the entire company, including all assets and liabilities. Asset sales are typically less complicated and less risky for buyers, while share sales can make taking over operations much simpler but may come with lower valuations. There are also tax implications, with sellers usually benefiting from a share sale and a buyer usually benefiting from an asset sale. Most transactions we broker are asset sales due to the simplicity and generally lower costs.
From the onset, sellers want to feel confident that the buyer is trustworthy, reliable, and committed to completing the sale. This trust and confidence can be established through sincere communication, transparency, and trying to build a rapport with the seller. While negotiations typically start with an online meeting, eventually taking the time for an in-person meeting (if feasible), can go a long way. Buyers who make the effort to get to know the seller, understand their goals and motivations, and demonstrate a genuine interest in their business may put themselves ahead of a competing offer at a higher valuation.
Read our blog about why ‘First Impressions Do Matter’.
Culture fit refers to the compatibility of the buyer’s organizational culture with that of the business being sold. A lack of cultural fit can complicate the sale and post-sale transition, resulting in a drop in employee morale, productivity, and retention which has the knock-on effect of creating customer churn. Buyers are well advised to assess the existing culture of the business, identifying areas of compatibility and incompatibility, and present a plan to bridge any gaps.
Cultural integration is a two-way street, and the seller also has a responsibility to be open to the buyer’s culture and values and to work collaboratively to achieve a successful integration. By working together, the buyer and seller can ensure that the sale of the IT services business is a positive and productive experience for all involved, and that the cultural fit is aligned for long-term success.
Sellers are often emotionally attached to their business and want to be involved for a period post-sale to ensure that it continues to be successful after they leave. In other cases, they might be motivated to retire, or to focus on other business endeavors, in which case they would view a lesser role appealing. In either case, sellers are interested in knowing what their involvement and compensation will be post-sale.
Discussions should be had about the transition period, the seller’s involvement in the business, and any potential consulting or advisory roles. Buyers can also communicate their plan for integrating the seller’s knowledge and expertise into the business. By addressing these concerns upfront, buyers can build trust with sellers and establish a positive relationship that can lead to a stronger offer.
A timely sale is important to most sellers. In addition to being prepared and organized, buyers can also ensure a timely offer by having funding secured in advance. This helps to streamline the process and ensures that the buyer can move quickly once an agreement has been reached. If a buyer is unable to secure funding or is otherwise delayed in the process, it can cause frustration and uncertainty for the seller and may cause them to prioritize other offers.
While there’s no doubt the valuation is very important, these other factors we discussed in today’s blog are also key considerations for sellers when evaluating offers for their IT services business. Favorable deal terms, rapport and trust with the buyer, culture fit, employee retention, the seller’s role post-close, and the timeliness of the offer all play a role. Buyers who take these factors into account when making offers are more likely to successfully close deals. The more favorable elements a buyer can integrate into their offer, the more likely their offer will be compelling, and there is the real potential to be a successful bidder despite a lower valuation.
Mergers and acquisitions (M&A) are complex transactions that require a great deal of preparation, negotiation, and collaboration between the parties involved. One of the most critical aspects of any M&A deal is making a good first impression. Unfortunately, many buyers overlook the importance of a first impression, assuming that the valuation and payment terms are all that matter to a seller. However often the seller’s perspective is that they want a good home for their clients, their employees, and themselves if they’re staying on post-acquisition.
In this blog post, we’ll explore the importance of a good first impression in M&A transactions and provide tips for making a positive impression on the seller. Although these may seem obvious and trivial in some cases, we continue to see areas for improvement and deals lost due to the subtle yet critical nature of the first impression.
The first impression sets the tone for the entire transaction. If the buyer comes across as disrespectful, unprepared, or uninterested, the seller may feel hesitant to move forward with a transaction. So it is important for the buyer to make a positive impression on the seller and demonstrate their professionalism, respectfulness, and interest in the seller’s business. By following these tips, buyers can establish a positive relationship with the seller and increase the chances of a successful deal.
Whether it’s in person or virtual, being punctual shows that you respect the other person’s time and are serious about the transaction. It also demonstrates your reliability and professionalism. If there are unexpected delays or issues, communicate them promptly and clearly to the other party. Being on time is a simple but important way to set the tone for a successful M&A transaction.
Dressing professionally for video calls is an important aspect of making a good first impression in an M&A transaction. It demonstrates that you take the transaction seriously and respect the seller’s time and effort. To dress professionally, choose clothing that is appropriate for a business setting, avoid distracting patterns or colors, and consider your background and surroundings. Also, ensure that the lighting and audio quality of the video call are suitable. Although these may seem obvious, the following are all based on experiences we’ve had. Taking calls in moving cars or coffee shops with background noise is annoying and frustrating for others on the call. Constantly dealing with your dog barking or kids yelling is equally annoying. Wearing hoodies, exposing armfuls of tattoos, smoking or drinking alcohol while on the call, should also be avoided.
Avoiding politics or controversial issues is important during an M&A transaction and discussion process, as these topics can be divisive and create tension between the buyer and seller and these days are very polarizing. It is crucial to keep the conversation focused on the business and transaction, rather than personal or political beliefs. By avoiding controversial topics, the buyer can create a comfortable and productive environment for the discussion of the transaction. The conversation should focus on the business and its strengths, areas for growth or improvement, the buyer’s company and culture, and how they plan to integrate the acquired business into their operations.
Complimenting the seller on their business indicates that the buyer values the seller’s efforts and accomplishments and has conducted thorough research on their business. Specific and genuine compliments can help to establish a shared understanding of the business’s potential and facilitate productive discussions about the transaction. The buyer can also ask the seller about their goals for the business and their vision for its future to ensure that both parties are aligned in their goals for the transaction.
The buyer should highlight their own company’s strengths and what sets them apart from other companies, emphasizing their values and approach to business. The buyer should emphasize their approach to treating employees to demonstrate their commitment to maintaining a positive work environment and employee well-being after the transaction. This can be achieved by discussing specific employee benefits, programs, and company culture, while also showing interest in the seller’s current approach to employee well-being. By highlighting these aspects and outlining how the acquired business will be integrated, the buyer can build a positive relationship with the seller and set the stage for a successful and smooth transition.
Positive body language demonstrates confidence and friendliness, which can help to put the seller at ease and establish a positive rapport. It’s important to maintain good eye contact and a friendly smile throughout the meeting or video call, as this shows that you are engaged and interested in what the seller has to say.
During any business meeting or negotiation, it’s crucial to be attentive and respectful towards the other person. This means actively listening to what they have to say and asking relevant questions to show that you are interested in their perspective. By being attentive, you can better understand their needs and concerns and address those concerns proactively. Additionally, showing respect towards the other person can help build trust and establish a positive working relationship.
After an initial meeting with a seller, it’s important to follow up with a thank-you note or email to show appreciation for their time and interest. This helps establish a positive relationship with the seller, to clarify your interest level, and to ask questions. Then if there are follow up questions asked by the seller, it’s important to answer promptly to demonstrate the buyer’s seriousness and how easy it will be to work with them. Following up effectively can help build trust and establish a strong foundation for a successful M&A transaction.
Making a good first impression is crucial for any M&A transaction. A positive first impression sets the tone for the rest of the deal, and it can make all the difference in establishing a productive working relationship between the buyer and seller. It’s important to be punctual, dress professionally, avoid controversial topics, compliment the seller, speak to your corporate culture, use positive body language, be attentive and respectful, and follow up promptly after the initial meeting. By following these tips, buyers can create a positive environment for the transaction and increase the chances of a successful deal. A good first impression demonstrates the buyer’s professionalism, respectfulness, and interest in the seller’s business, and sets the stage for trust which is key for a smooth and successful transaction.
Are you an MSP thinking about doing your first acquisition?
Are you privately funding the transaction?
Are you a seller wondering where to start in getting ready for acquisition?
If you answered yes to any of the questions listed above then you have to catch this week’s episode of MSP Business School, where Hartland Ross talks about the world of M&A, and what to do if you are a growing MSP looking to make moves without private equity.
Valuations for managed service providers and IT firms are increasing, and we’re seeing higher prices across locations and sectors. We’ve seen a number of factors driving higher valuations, leading to a market that is hotter than it has been in years. What this means for business owners is significant. On one hand, this may represent the right time to exit the business through a sale. On the other hand, there are compelling reasons to seek an acquisition to drive meaningful growth for your business.
In our view, these prices are not artificially high, because there are identifiable reasons that IT and managed service organizations are growing in value. From improved appetite in the broader market for IT services, to an increase in acquirer interest all around the globe, this post will examine why prices for IT and managed services organizations continue to rise. Further, we will explore how both buyers and sellers can make the most of the current market conditions.
One of the primary drivers of increased valuations for managed service providers and IT firms is the overall growth of the tech sector. In recent years, there has been a surge in demand for tech products and services across industries, as businesses of all sizes look to improve their digital capabilities. This has led to strong growth for many companies in the sector, and investors are eager to get a piece of the action. As a result, they are willing to pay premium prices for quality companies in the space.
This trend is likely to continue in the years ahead, as the demand for technology continues to grow, and as our digital transformation settles in. Businesses are increasingly reliant on digital tools, and that reliance is only going to increase over time. As a result, the tech sector is likely to continue its rapid growth, leading to even higher valuations for companies in the space.
In recent years, there has been a surge in M&A activity as big firms have looked to acquire smaller ones to gain market share. This has put pressure on buyers to act quickly and to offer top dollar when they find a company they’re interested in acquiring.
Another factor that is driving consolidation is the shortage of qualified workers in the IT sector. With the rapid growth of the industry, there are not enough workers to meet demand. This has led to a situation where companies are willing to pay a premium to acquire talent. In some cases known as acqui-hires, the primary motivation for the acquisition isn’t to add new customers or lines of business, it’s to bring aboard the target company’s employees.
While this consolidation trend has been happening for a while, it’s likely to continue in the coming years. Ultimately, ongoing industry consolidation suggests sellers can expect high valuations for their businesses.
The COVID-19 pandemic has had a major impact on the IT sector, accelerating demand for many products and services. For example, the shift to remote work has led to an increase in demand for cloud computing and other virtualization technologies. And as businesses look to improve their digital capabilities, they are increasingly turning to managed service providers for help.
These changing work norms for businesses around the world have also changed the services required from MSPs. Employees working remotely means that security and operations extend outside of the traditional workplace in ways they never have before. Businesses are more reliant on their tech partners than ever before.
Another factor brought on by the pandemic pertains to owners of IT firms nearing retirement age. For many of these owners, there were difficult challenges with customers, partners, and vendors in 2020, 2021, and even into 2022. And for some, these headaches accelerated their retirement plans, becoming the onus for entering the market as a seller.
We are seeing new types of buyers enter the market for IT and managed service providers. In particular, we are seeing more foreign buyers and those in cross-functional industries showing interest. This is adding even more competition to the market and driving up prices.
It isn’t just buyers in other American locations coming to the table. Buyers from other countries and continents are coming to the table with aggressive offers as well. These acquisitions are being made for strategic reasons, the expansion of the provider’s service area, or for wholly financial reasons that have nothing to do with technology, staff, or capability at all.
In addition to foreign buyers, in recent years, there has been a growing trend of private equity firms going downmarket (evaluating smaller firms than they would have in the past) in the managed services space. This trend is being driven by a number of factors, including the desire to add new capabilities to existing portfolios and the increasing importance of digital transformations.
Finally, it would be a mistake to not consider the role of inflation in rising prices. Inflation is impacting the economy across the board. While six or eight months ago inflation was primarily affecting automobiles and gasoline, the devaluation of a currency relative to goods and services is now touching everything from food to aluminum. This broad wave pushing the economy to and fro certainly impacts the value of IT businesses looking to sell.
Critically, this impact is felt in different ways by buyers and sellers. For buyers, the raw number of an offer must be higher on account of inflation. For sellers, they are also likely considering the downstream or longer term effects of inflation by wondering to themselves: “if this continues, I’ll need even more money to comfortably retire or start a new venture. I’m not just thinking about now, I’m also thinking about five or ten years from now.”
While predicting the future of the IT and MSP market is as much supposition as science, market trends and conditions do indicate continued growth. Because no single factor is driving prices up then it stands to reason that the combination of factors at play will continue. For example, if there were a scarcity of IT companies, then that might drive prices higher until more companies came to market. However, a wide range of things is pushing valuations higher in different locations and segments of the IT space.
That, combined with the entrance of a larger buyer pool into the market indicates that IT and managed service providers will continue to be valued highly.
However, there is one caveat worth considering: commoditized services. Some services like basic network monitoring and help desk continue to head towards the realm of commoditization. In this scenario, customers have a hard time differentiating the quality of service between providers. These companies will struggle to keep up with the valuation growth that other, more specialized companies are experiencing. IT providers that offer a very deep and specific service – think modernizing legacy IBM workloads to work in a hybrid cloud or pen testing for public utilities or of course MSSPs – will continue to see increases in value.
There are a few things that both buyers and sellers can do to make the most of the current market conditions. It’s important to have a clear understanding of what you’re looking for and what your goals are. This will help you to narrow your search and focus on the right opportunities. Make sure to do your due diligence. With prices as high as they are and with the risk of overpaying, it’s even more important to make sure that you’re getting what you’re paying for if you are an acquirer. If you are a seller, it is important to find an acquirer that meets not only your financial goals but also to ensure there is a cultural fit and that your timeline for a complete exit is met.
Be prepared to act quickly and pay a premium price.
Look for companies that are in high-demand sectors such as cloud computing and virtualization.
Consider acquiring talent through an “acqui-hire.”
Now is a great time to sell your company. Valuations are at all-time highs.
Be prepared to negotiate hard and get the best price for your business.
Focus on buyers who are willing to pay a premium price and close quickly.
With the market for IT and managed service providers heating up, prices are increasing across locations and sectors. There are a number of factors driving this increase, including broader growth in the tech sector, consolidation as seen previously, COVID and work from home, hiring and resource needs – “acqui-hire”, and new segments of buyers including foreign buyers and those in cross-functional industries. With all of these factors at play, it’s no wonder that prices are on the rise, and will likely continue to be.
Here at The Host Broker, we have helped hundreds of managed service providers and IT organizations through the acquisition process. We match buyers to sellers and serve as a trusted advisor throughout the process. Our team has the dedication, care, and expertise necessary to make the purchase or sale of an IT company a success. Contact us here to learn more about how The Host Broker can help when it’s time to buy or sell a hosting company, IT organization, or managed service provider.
While a successful acquisition can be a major achievement for both buyer and seller, for employees the acquisition process is seen much differently. It is abrupt and the source of concern. Join us for an expert panel about the perspectives of employees going through an acquisition, and learn how you can address their concerns to ensure a smooth transition for all parties.
Devin: All righty. Well, thanks to everyone for joining us today. I’m really excited to be bringing us this webinar panel today. And I tell you what, you know, I say this for a lot of our webinars that we have some great guests, but today I really mean it. We have three exceptional guests. We have James Kernan, Tom Parker, and Troy Thibert. And the topic of today’s presentation is The Company I Work For Has Been Acquired What Now?
And this was a topic that we came up with and we were inspired by an actual post from the MSP subreddit. And I won’t read the entire thing here. You can pause the video and read it if you’d like, but just to quickly paraphrase, the topic was same as ours.
The company I work for has been acquired what now? And, the poster says I’ve worked for a mid-size MSP for 11 years. We had a bomb dropped on us that we’re gonna be sold to another company. Can anyone speak about good or bad experiences they’ve had during a merger situation like this? I’m really trying my best, and to keep an open mind and stay positive, but given how long I’ve worked here, and this was my first real job, I’m very conflicted not feeling so great right now. Any input about what I could expect in the coming months would be great.
So this struck me as, quite an interesting post, just because of the candor of the poster. And it comes across quite clearly that there’s some concerns and really deep-rooted concerns, that this employee is feeling about this acquisition process. So we want to put together a presentation to kind of address some of these concerns, not only from the perspective of an employee but also from the perspective of a buyer or seller of a company, who has to essentially help deal with the concerns of the employees to make sure that the transition goes smoothly.
Devin: So, before we really get into the presentation today, I want to say a little bit about The Host Broker. if you’re watching this video, you’re probably already familiar with The Host Broker, but we are a brokerage and M&A firm for IT service providers, including MSPs, web hosting companies, data centers, IT service firms. And also we sell IP blocks, and we also offer marketing services through our other brand, which is eBridgemarketingsolutions.com. The Host Broker was actually founded in 2005 as spin-off from eBridge due to client demand. We had enough companies asking us for marketing growth opportunities, and we started to offer M&A growth opportunities as well. And if you’re interested in more information, you can check out our website, thehostbroker.com, where we have a free evaluation available for you.
It’s now for a little bit more information about our panelists, and, I’ll ask each panelist to introduce themselves briefly here. And just tell us a little bit about your experiences with M&A, so James, do you maybe wanna start us off and tell us a little bit about yourself?
James: Yeah, you bet. thanks Devin. And I’m, happy to be here. I’m James Kernan with Kerning Consulting. We’re headquartered here in Omaha, Nebraska. So, we’re based in the States. I’ve been in the industry now for close to 30 years, but the first half of my career, I owned my own MSP and Southern California. you know, bought sold owner, ran seven different companies, had a successful exit in around 2006. And then since then just really stumbled into, consulting and coaching. Since then I have been involved in over two dozen M&A transactions, either helping people grow by acquisition or grow their business and, and sell and exit. I also run the millionaire mastermind peer groups and do one-on-one coaching and then special projects like M&A consulting, and so forth, but happy to be here.
Devin: Great. Thanks James. And Tom, do you mind telling us a little bit about yourself and your experience?
Tom: Yeah, thanks very much for having me today. Glad to be here. So, I am working with HostPapa. I’ve been in the tech industry for around 20 odd years. The first half of my career was predominantly on corporate sales and biz dev, in the last 10 years or so I’ve been with HostPapa, and, we’ve been very, very active in the M&A space. So, HostPapa for those of you that aren’t familiar with us, is Canadian owned and operated based in Ontario. We are the largest web host in Canada in terms of Canadian ownership. Since about 2019, we’ve been extremely busy, as I mentioned, with M&A, we’ve probably done an excess of 15 deals for predominantly web hosting companies, but also a variety of technologies and other activities. So, that’s really the connection with The Host Broker. They, as those of you that are familiar with them, we’ll know, great service and, a great relationship there. So, that’s our background.
Devin: Great. Thanks, Tom. And Troy, do you wanna tell us a little bit about yourself as well?
Troy: Yeah, absolutely. First off, thank you, Hartland and Devin for the invite, greatly appreciate it. Yy name’s Troy Thibert, and I’m the owner of an IT firm called IT Partners who originated in grand Prairie Alberta with, well, I guess with a city, population of just under 50,000 at that time, we’ve since grown it to operate, with offices in Calgary, Alberta, Vancouver, Victoria, and operations in west, and you know, in Edmonton as well. So, we started this in 2010, and every year of our existence, we’ve grown in revenue. From our model, right up until 2022. During that 12 years we’ve been successful in three types of growth, through acquisition and mergers. Two are asset purchase agreements. There is a difference. And then of course, last year, with Hartland’s group, I finally pulled the trigger on a share purchase agreements, which is a different leave, path forward as well.
But it also has very good potential exit strategies that come with it. So yeah, So I’m gonna be speaking where I can assist on, you know, from the buyer side and, and what I look for. And maybe one of the things that I’m missing other than the three successes is probably the 16 to 18 conversations, that I, we walked away from for whatever reasons, but they’re just as equally as important for potential buyers to, to watch out for pitfalls to take the knowledge that I believe James is gonna bring as well, and to why you’re going to set up certain, processes and structures within your corporation, so that when it comes to your exit, you’re gonna get the most value for that exit. And so I look forward to contributing and hopefully provide some value to, you know, to some potential buyers out there.
Devin: Great, thanks to that Troy. And last but not least, Hartland.
Hartland: Yeah. Thanks, everyone for participating. And I really wanna thank, James, Troy and Tom for, joining us today and I’ll have a somewhat unique perspective, from them, as well, both, looking at this from a hosting perspective, as well as MSPs, as well as buyers, as well as, sell side. So, being I’m looking forward to today, I think it’ll be a very interesting discussion. I founded eBridge just over 20 years ago, as, Devin said, focused on really, IT firms and growing them organically. And then, we just ended up with a lot of those groups that for one reason or another wanted to kind of grow more quickly, than they could organically or in some cases, less expensively. And so, we ended up, building out, frankly just with, with clients, asking, building out a kind of informal marketplace, if you like. And, that turned into, The Host Broker and so, you know, today we worked with, literally like over a thousand, IT firms, collectively, whether it be hosting or data centers or MSPs or whatnot. So, look forward to today and, let’s get started. So, Devin over to you.
Devin: Great, thanks Harland. You know, and as it was illustrated in the Reddit post we shared earlier, going this through, an acquisition from an employee’s perspective can be very chaotic and there’s a lot of different variables. So, for the purposes of today’s presentation, we wanted to kind of simplify the issue by providing a little bit of a framework. And so, we’ve categorized the types of concerns that employees have into four different categories. We have day to day, financial, cultural, and technological, and recognizing that there’s gonna be some overlap between these, hopefully by keeping to this sort framework. We’ll make this a little bit more digestible today.
Devin: So, let’s start off with the day to day concerns. So, when we’re talking about these, we’re thinking about things like, what change can I expect as a result of this transaction? Who will I be reporting to? Where will work actually be conducted? Will I, or any of my coworkers lose our jobs? So when it comes to those sorts of day to day concerns, maybe James, maybe I can start off with you. Is there anything that comes to mind, but how you would coach the MSPs that you work with to guide their employees, and to help them help to help ease the employee concerns?
James: Yeah, so the first three questions, I would kind of peel off on one side and then, you know, will I, or any coworkers lose our job to me, that’s something separate that needs to be addressed immediately. And, you know, there’s a lot of training. Normally the leadership team will come together and select, you know, I break it down into three categories, people, process, and tools or technology. Normally it’s the acquiring company. You’ve got your tools and processes already, so there’s gonna be a lot of training of the new employees, but, I just wanted to tell a quick story if I could, Devin, and to put things in perspective that the post that you read from Reddit reminded me of the human element of things. And I’m a numbers person. I was a young executive with a big VA on the west coast. And, the first acquisition that I was a part of to hop on an airplane. And we, it was a company called technology integration group, but we bought the microwave of Honolulu. It was, they were based in Honolulu. They’d been around for 20 years. Unfortunately, it kind of looked like a VCR repair shop when you first walked into the shop, but the whole plane right over there, I was looking at all the numbers, all the contracts, the resumes of the staff, compensation. I was kind of going through all the numbers element of it and that’s important. But when I walked in through the front lobby and all of a sudden in the tech support area, there were about 25 human beings, all looking at me. And I walked in with the President and I was Vice President of Sales and Marketing.
And immediately, everybody kind of pointed the finger at me to start the conversation. And before I could say anything, it just, I remember vividly, like it was yesterday. I remember looking at everybody’s eyes and the number one concern, I felt them communicating, or I could see in their eyes was, you know, am I gonna have a job? Am I gonna, is me or any of my coworkers gonna lose their job? And I didn’t have this all prepared. It just kind of came to me. But the very first thing I said was, hey, welcome to the team, welcome aboard. We’re excited to be here. We’re to give you guys an update. The first thing I want to say to everybody is everybody in the room right now is gonna stay here. And there were, there were a couple people I knew we peeled out and had already left the company, know the original owner, was gonna leave the company and then like the accounting person and the purchasing person because central operations were gonna be handled through the corporate office, but everybody else, you know, sales administration and technical support, we needed everybody else.
But to me, that’s, I wanna, you can get caught up in the numbers really quick and, and see if it’s a culture fit and all that. But it’s the people side that, is really important. So, I would carve that out first. So I hope I kind of answered your question, but I remember saying that to everybody and I could just feel the energy in the room, like, you know, everybody kind of relaxed, and then we could talk about some of the other things, we had a training schedule over the next couple days of getting people trained on ours systems, setting goals and expectations. But one of the other things I said, I don’t know if it makes a whole lot of sense today. It’s kind of funny, but I just said, Hey, the first thing I’m going to do here is nothing.
And what I meant by that was I wanna listen. I wanna have one-on-ones with everybody in the team. And I wanted to understand the culture there. But I wasn’t gonna rapidly just start changing everything in the world because, they had their own culture and it was unique. And I wanted to embrace that and understand that before we blended another culture on top of that. So that was, you know, I probably should have said the first thing I’m going to do is do one on ones and, and listen, that’s what I meant. I wanted to listen to all their feedback before we implemented any changes.
Devin: Very interesting. Troy, Tom, and Hartland. Any thoughts on that?
Troy: Yeah, I can go. I think I’d like to maybe offer, you know, I think is some key advice and maybe just taking it, a step, precursor to the questions that are gonna compost announcement. And, that is really, doing the due diligence process is when you’re identifying key resources, the length and term they’ve been with the current company, and being begin to identify and set up a merger committee, the roles and responsibilities, those individuals are gonna corral all these questions that are well scripted. And, as we see in the day to day concerns and the financials, the technology concerns, they’re all gonna be listed thereby having a, a merger group team set up when you’re lucky enough to go through the process of finding the right fit, the right conversations.
And then you get to the close, before you go in and announce the potential merger acquisition, is to give the first line of conversation to that merger committee. Two things are gonna happen there. One is most importantly, you’re going to answer all these questions. You’re gonna build internal advocates with the new group. You’re gonna table all the possible questions that the staff and the groups below you are gonna run into, what is it what’s gonna happen after what happens next? And that’ll be key. And then when the announcement does come, then you’re structured and prepared to ease those questions, because at the end of the day, if you are lucky enough to get across that line, the first and most important thing is to protect that investment.
And yes, you know, the IT model and structure is very key, but to me, the resources also just as key as what it’s gonna look like in your portfolio, after you successfully smash the two companies together. So that’s the piece of advice to that. I would highly recommend for anybody about to go through the process and if you are successful is to take that, cautionary step, take that extra breath and, put that team together. And you’ll find that these key people, they’re internal advocates and, they’ll do a lot of the answering quite for you and really buy you some time to move forward. And in the, well, I guess the extremely hard work you’re gonna have for the next three to six months to intertwine two companies.
Tom: Yeah, I would add to that, if I may. That circumstances of the sailor, the transaction will obviously dictate to some extent the communication strategy, but fundamentally people want to know they’re secure. So, you come back to James’ original point. So, there may be depending again, on the transaction timing, there may be, different people find that a different, different points of, of the process. But you have a transaction purpose. There’s a reason why you’re transacting and why you’re putting a couple of companies together. But it’s important to remember that people in individual areas need to understand exactly how it applies to them. So, people want to know, are they secure, but also what role will they have going forward? And so I think that touches Devin on some of the other, other bullets on the slide here, who will I be reporting to, where will I be working, what are the practical things that will change for me? And I think, again, that depends very much on the circumstances. Is there, is the transaction happening because there’s a missing piece in a larger organization and you’re looking to, really keep the acquired entity intact, is it a similar business? And you’re looking to get, synergies together and cost savings and you’re sort of amalgamating. So, a lot of those things they need to be thought through, but again, just to reinforce my original point there, we’re trying to make sure that people understand how it matters to them. How will it affect them individually? And then they can participate in making sure it’s a success from there.
Hartland: Yeah. And I, I think, the interesting thing about this topic is that we have, three stakeholders, right? We have, we have sellers and we have the employees himself. And although this conversation was triggered by the request that came through from an employee on the receiving end, we’ve got these three stakeholders, all of whom, have a vested interest in a successful outcome. So, you’ve got, you know, from a buyer’s perspective, if as a buyer, you might be focused more and you probably would be by default focused more on, well, is this the right fit for us? In terms of the customer base in terms of the services provided, is in terms of the location, revenues, is this, is this, kind of the right target for us, et cetera. And then, and everything else becomes a sort of ancillary secondary, thought, or afterthought, but, you know, the staff are really important. And a lot of buyers these days are looking at acquisitions, not only for the customer base revenue, revenue stream associated with it, but really looking at it as an Aquahire, right? So, they need the people, they need their resources, they need the expertise. and particularly if it’s a niche market or a technology or, and just even the intimate knowledge of the, customer base. And, as a buyer to have, employees who are motivated to stay and feel like they, their world wasn’t just turned upside down. There’s an incentive because the boat won’t be rocked, the customers will be happy and customers who are happy stay, so you don’t have to put the churn.
And then from the seller’s perspective, often to time, certainly, with MSPs, less so on the hosting front, but within an MSP environment, most of the time the buyer wants the seller to stick around for some period of time. Now it may be three months. It may be a year or more, but, and it’ll vary, but, they’re gonna want them to stick around. And, and so, the buyer sticking around will help with the employees sticking around because they’re gonna feel some continuity there, at least for some period of time that the person that they’ve been working for a long time is still gonna be a part of this process. And they’re going to, you know, the seller, also is, is got their own, issues and questions, right? Because, well, who will I be reporting to? I mean, I’ve never reported to anybody before now. I need to report to somebody who is that person going to be, and where will that be? And what are my, the expectations before I could come and go and do what I want when I wanted now, maybe I can’t do that. So, there’s these questions on these different levels. And, I think it’s why it’s such an interesting topic because, there’s sort of so many stakeholders, but, you know, I really, I like choice point, of having a committee, because I think a lot of this, it doesn’t get thought through well enough in advance. And so taking an inventory, with the seller of, of kind of, well, what is the culture at your company, right? Do we, I’ve heard stories where there’s, Friday afternoon, we, we do our, our, you know, our drinks, right? Whatever you call it, happy hour, or, a, we take Friday afternoons off at our company. Well, the buyer company doesn’t take Friday afternoons off. In fact, they work right till six o’clock every day. So now what do you do? you need to make sure that, that, there’s gonna be some way to address, you know, very different, environment there.
Devin: Yeah. Great points there. and so just one, one thing I wanted to ask and kind of trying to think about this from the employee’s perspective a bit too, is I can imagine that every company who makes an acquisition probably tells the employees that no one’s gonna lose their jobs. Right. And then inevitably it happens, at some frequency. See, so I guess the question is really, how do you come across credible when you’re making that sort of a statement, so that it’s actually felt, genuinely by the, by employees
James: I’ll chime in and, and just say, normally, you know, that upfront, you know, it’s part of the due diligence on the front end when you analyze the staff and most of the transactions that I was involved in most of the time, back to Hartland’s point, you want to maintain that culture and maintain that, all the employees, you know, you may need to pull one or two out of the equation cuz you don’t need those, but you wanna address that right away way. And back to the story that I had, you know, you wanna put their minds at ease so you can communicate, you know, everybody here has a job here’s who you report to. And pretty much across the board, all the transactions I was involved with, the expectation was, Hey, we’re gonna take this existing core team. We’re gonna plug you into the headquarters office with all these other resources behind it. And we wanna grow, we wanna grow the local marketplace. So we’ll be adding additional staff of superstars, just like you are, to the mix. So, but normally, you know, that, I would want to identify that in the due diligence on the front end. So coming into any conversation, you’ve already, removed people that you aren’t gonna have. And, cuz that’s a, that’s a really important point, Devin, that that’s a culture buster right there. If you say one thing and you do something else, that’s not how you wanna start an engagement.
Hartland: And, I think that you know, from the, I’m not involved in the due diligence, so I don’t have full visibility into, some of these, you know, the analysis that goes into it, but from a high-level perspective, I do know that, oftentimes, the recommendations will also come from the seller. Look, you know, I have these 20 people, these are my, a players, these are my B players. And then, these are some that, that there’s, there’s some problems that I have concerned with and you might wanna kind of, take a look at these ones a little bit more closely. And then of course, there’s some people who may be great. It’s just the reality is, is that they’re, they’re redundant. And they just not needed. And they’ll, you know, oftentimes they’ll know, they’ll if they’re, if they’re aware of the process for it in the beginning, and sometimes they’re, they’re the ownership level too, right? So someone might be the CFO, well, now we don’t need a two CFOs, so, that person is gonna go and, and if they’re part of the ownership team, they’re already, kinda tuned into that fact, but if they’re not, then, you know, these are conversations that have to be had and, and probably should be had, you know, con right away concurrently with, with everybody else. So, there’s no rumors, being spread.
Tom: Yeah. The other consideration is that with a, with a larger company, making an acquisition, sometimes there’s new opportunities as well. So it’s not simply a case of will my job stay the same, will I lose my job, but actually there may be an opportunity to learn new skills to move into new roles. So I think there’s, there’s a positive spin here as well. And I think during the due diligence process, you want to identify some people that have a high potential, and maybe you’re looking to bring them into, into the group level, and you’re looking to give them new opportunities and, and enforce the overall value of, of the group management as well at that point.
Troy: Yeah. That’s a great point there to, just to add to that maybe on, of the reverse kind of psychology of, you know, we definitely want employees to stay, reality is, you know, when you do put two companies together, the daily pace of their environment, may increase, to something that they’re not normally, you know, accustomed to. So meaning, maybe have a great it firm smaller, you know, maybe 10, you know, 10 employees and under, and their daily routine has been pretty calm, nd all of a sudden they’re gonna be into new new processes and procedures, and a faster-paced environment. And, you know, they’re excited from maybe day, you know, 10 or 12 on, but the reality is after three to six months, maybe they don’t have a skillset for that fast paced environment, you know, where you can take advantage of those extra opportunities because that is definitely more, more salary, more income, but then there’s more responsibilities, more fast-paced. You know, those are please go aside inside, but you will, you will have some type of churn, you know, with staff that decide, you know, what, I’m gonna go realign myself with, you know, my, my, my current workflow mentality. So that’s just something to keep a, you know, keep in the back of your mindset as well.
Devin: Great. Well, I think, we can probably move on from day-to-day concerns. That was some great insights there. And, we can also talk about some financial concerns from employees. So these are things like, what will I be paid? Will I be better or worse off, how will performance be evaluated? What will my role goals and object objectives be? Will I be signing a new contract, who will pay my vacation pay? So some of this, picks up from what Troy was just talking about. but, what comes to mind for you guys, when you think about the financial concerns for employees going through this transaction?
Hartland: I mean, I, I think what I’ve seen, oftentimes is that the buyer will try to, assuming that they want to keep the team. And, and generally that is actually the case that they will be providing some incentives to, to the employees. So, salaries will be, increased, benefits will be improved, you know, kind of perks associated with the role, would, would improve and, and so forth. So that’s oftentimes what I’ve seen, as, you know, part of the, the kind of incentive, process and, and taking inventory course of, of what the existing, structure is, how much the existing employees are paid, how many hours they’re working, what their, expectations are. I mean, I know, Troy, for instance, you’ve got, some pretty cool things that, that you’re doing with, con pension, contribution. Right? So there’s providing, a bit of a lift overall. I think the, you’ll circle back, if someone else doesn’t cover the vacation pay and, and the new contract. Cause I think that’s, those are two important points, but I’ll, I’ll pause there.
Troy: Yeah, I can, I can add a little bit it, you know, to that. And, I think with, having those little, like you say, incentives, and, so that helps speak to being in a large organization, you know, what’s in it for you, right? So usually that does come with some bit of a salary or income compensation bump, because you are already identifying that their workload’s gonna increase to some, to some level, you know, but it’s also important to note that, there’s time for there’s two types of sales and asset purchase agreement is a smaller in nature and we’re in reality, you’re just buying the book of business in, in the client base that comes over and you just start to implement and, and earn those new contracts under your brand. the next, you know, with a sale purchase, you know, the purchase share agreement, you know, that’s different, you, you have time, you know, there’s gonna be a lot of considerable time to one, one down, if that is the end goal.
So when it comes to vacation pay, the books are gonna be managed, by one quarterback, but in the interest of the direction of where the integration is taking place. So, for our group, obviously signing into a new contract comes in, with our IT P partners logo, that’s where our better health plan is. That’s where our compensation plan is. That is the legal document that puts us on the hook to say, we’re gonna pay all these wonderful things. We’re gonna get you access to our pension plan. We wanna improve your lives and, and kind of, you know, nail a lot of those questions about roles and responsibilities, vacation pay that becomes administrative in, in my books, whether, you know, whether our bookkeeper pays it from the other account while it’s winding down, you know, but the end goal is to move it all under, you know, for us, our QuickBooks, data files.
James: So, Yeah, I think, I think all of these six questions are critical. And the first thing I’d say is they all need to be crystal clear in writing back to the employee that you would want to retain. I was always a big fan of either retention bonuses, but more specifically, increased performance commissions or bonuses, you know, you’d either want to equal or increase a little bit are their salaries, but you would wanna be able to demonstrate that here’s an opportunity for you to make a lot more money based on your performance and achievement of goals. the, the one on the very bottom Hartland will probably talk a little bit more about this, but, you know, who will pay my vacation pay. There was, I think it was that very first transaction that I was involved with. I was, there was a staggering number on, on the bottom of the spreadsheet of the outstanding vacation or accrued vacation pay. And, in that transaction, it was recommended that the seller, pays that out before we would sign them on a new contract, you know, they had to, we go on, on our contracts, and would recommend that. But, I don’t know, in most cases I would say that the liability of the outstanding vacation pay, should fall back on the, on the seller. and in some cases, you know, that can be easily overlooked and that number can be pretty substantial. so, that’s something you wanna look at.
Troy: Yeah, that’s a good point, James, I think, for those that are embarking on this, depending on the time of the year and your fiscal year, yeah. You’ll be admins, what’s called, I guess basically a, a stump here end. And that will start to get that, that pivotal point on, you know, what part of the networking capital you’ll be adjusting that is owed by the, you know, the firm that got acquired pre April one date versus post April one date. And again, I think if you leave with the employment contract and getting them signed up, the vacation pay comes under their group, and then the payout will come from the networking capital.
Hartland: Yeah. So, I agree with James your point about this being a potentially big issue. T these are the types of things in a transaction that, nobody really worries too much about until the end. And I find out, geez, there’s this huge liability, and who’s gonna pay this and you gotta come to terms with, with it, particularly with COVID because a lot of, vacations didn’t happen. And so you ended up with this, this, accrued, you know, pay that, that needed to be, dealt with and, or time, I mean, the other thing is time, right? They’d accrued, six weeks of vacation that they hadn’t used. but generally speaking, it, it is the buyer, sorry, sorry. Excuse me. Is the seller, excuse me, who would pay, the vacation pay as well as any other liabilities up until, the point of close. And so this kind of brings me to another issue which can freak, employees out certainly is that they, do end up, in an asset purchase agreement. They do end up, being terminated. However they get simultaneously rehired, you know, at the same time, the same day. So, the liability associated with the, prior the periods prior to close become, or remain rather with the, with the seller and then the buyer kind of has a clean slate, going forward. So that’s typically what we’ve seen is a simultaneous termination and, and rehiring process. And of course, as, as we said, under a new contract with new, and hopefully better terms, if it’s, a share deal, and, and Troy is, you know, recently done one of those, then a little bit of a different story. And so, yeah, it’s an adjustment to, to working capital, at that point. But of course a new contract can also be, signed.
Tom: One thing, Hartland that I would, regards to an asset sale. And, and what you described in terms of the simultaneous sort of, termination and new account. I would highly recommend that people look into employment law in their jurisdiction and where the transaction is taking place. And you may need in, certainly in one instance, we’ve certainly had to, put protection into the actual asset purchase agreement with regards to the liabilities. Because I know in Canada as an example, they, the courts do not necessarily see, the liability and, and I’ll, I’ll take severance as an example, as an acquirer, you’d like to think that when the seller has terminated, they’ve taken on that responsibility, they’ve paid out severance, the Canadian courts may you that differently because they essentially have had a continuous employment with the, with the business they were involved in, even though the ownership has changed. And so, I think what you’ve described is certainly our experience for the most part, but I would, I would highly recommend getting some legal advice on that point.
Hartland: Yeah, that’s a good, a really good point. and we’ve encountered that issue as well. So, yeah. Thanks, Tom.
Devin: Great. Well, maybe we can move on to the, the cultural is, concern slide here too. So, for this category of concerns, we’re talking about things like which name slash brand will the company take. What’s the direction of the new company? What are the goals, what will the companies cultures be like, and will they synergize? And how will I adapt? How will I adapt to new company culture and what steps will be taken to get there? Does anyone wanna start off, on this topic?
Troy: Yeah, I’ll just, I’ll take a quick lead on this, culture is, is key. If you wanna retain your employees along with the financial and making sure you’re protecting your investment, what they’re used to and they do well and what you do well, all goes back to that, initial, merger committee, and setting that up to what that’s gonna look like. And that should be a major, task item to review, and implement. I wouldn’t stress enough that that is, that is, that is key. when it comes to culture, that’s the integration that you look for, as, as part of one of your tick boxes when you’re looking at making a final purchase. but that is a key concept and, these are great. These are great questions. And I think if you stay ahead of it, you’ll have, you’ll have more, more opportunity to protect your investment when, when the news is, when is brought to everybody and dropped on everyone.
James: Yeah. Yeah. Good, good point, Troy, the, when, you know, culture is key, and one thing I would look at very closely is the company who’s getting acquired. Are you going to of retain any of the leadership in that organization, or not, and, in many cases you do, and something that I’ve seen work really well to embrace those cultures and get everybody on the same sheet of music as, I’m an EOS implementer as well, and work with both leadership teams together and take them through there’s 12 exercises that I would walk through to build out their vision traction organizer, which is a, a two-page document. And then at the end of us completing those exercises, we build a presentation deck and present it back to the entire company. So both leadership teams, you know, had their fingerprints on the updated core values and the goals and the direction and the 10 year roadmap of where the business is going. And then you need to communicate that to the entire team, to really embrace that culture and get everybody on the same sheet of music.
Hartland: I think the, I was gonna take the first point here about the name and the brand, that the company will take. So now this is often a question that the seller will ask, of a buyer is what, what do you gonna do with this brand? And in some cases, the seller doesn’t care. they’re just, it’s kind of more of a curious question than anything else. in other cases, they do, because this is their baby. They’ve built this, this for quite some time. And, and now the buyer is simply just gonna kind of fold it in into their, their brand. And so, it’s a little bit of an affront to the seller to now, kind of have this, this thing that they created, disappear, right, because it’ll be, it’ll be moved into the fold.
And so the employees, to some degree, especially ones that have been around for a while may also, you know, have this kind of feeling that that’s something that they’ve built and, and what they’ve built is ends up being, disappearing. So I think it’s an issue that, should certainly be talked about, in some cases it may just not be practical to keep it, there may be steps to, to take, and, and Tom, you know, your perfect example of this, because you’ve done many acquisitions with many different brands. but, you know, I’ve seen situations where the brand is maintain for some period of time. And then it’s, it’s a brand ABC part of X, Y or Z company. and then, and then it’s a, you know, an X, Y, Z company, formally ABC, right. And then the ABC eventually just disappears. But, it is an important, consideration and you know, as far as the other points go talked about, cultural already. So I, I think looking at these kind of cultural artifacts and norms, and taking an inventory, taking stock of, of what exists in, in the company right now. So as they say, do people, not work on Fridays, do they, do they have a, once a month, kind of, thing that’s, that’s done once a month, we, we go and we bowl together, or we have a company kind of, you know, softball team or whatever it is, what what’s gonna happen to, to these things. And, and in some cases, you know, maybe that the buyer likes the idea and, and, and kind of rolls it out. In other cases, there might be a better, something that’s better than, than what is even being done. But I, I think it needs to be, you know, addressed and communicated and, and, and, and mitigated. And of course you’re not gonna, appease everybody. But, reality is, there is gonna be change, but, not to overlook the importance of some of these things.
Tom: Well, I, I think it’s vital to recognize that these are relationships. So, you have to invest time and energy in, in making them work. And sometimes an acquisition happens quickly. And in terms of the goals, it may be difficult to determine, very, very clearly a long-term plan, but, you know, there’s a short-term need and a fit. And so as a buyer, you need to, you need to really evaluate where the value is gonna come from in a transaction. But then you need to be able to within a comfort level, you have to be prepared to invest the time and energy in, in working with the people that are coming on board, making sure they understand what you’re about and what you’re trying to achieve. And even if you’re not able to set out a 10 year plan at that point in time, helping them to understand the approach that you’re taking and how you want them to be involved in that again, will make a big difference, to their comfort level as to, you know, what’s going to happen. And when, and it will engender, I think a sense of, patience, which in the absence of communication, which I think is a big failing in M&A transactions. A lot of times, on the communication side, people get nervous. And so if, if you’re not clear about the fact that something will happen or something is being worked on, and this is what the role of, of the individuals are, is going to be, people will assume the worst, they get nervous. They wonder whether or not they, the, you know, we, we were promised that we’re gonna keep our jobs, but actually in six months time, I’m gonna lose it. And, and it’s that, it’s that I sense of integrity and, and trust that gets lost. So I think you have to be clear with people. And I think being honest and upfront about something like the name of the brand is important as well. And even to the point where, you know, you don’t wanna do a deal and then have a disgruntled seller, because as part of the negotiation, you said, yeah, we’ll keep the brand. but then subsequently you, you immediately retire it. So I think all of this comes down to having honest trend transactions and, and trying to make sure it’s a win-win for both parties.
Hartland: Tom, because you’ve rolled quite a few brands into, host Papa, what, if any challenges have you seen around groups wanting their brand held onto, or the team kind of feeling like they’re, they’re associated with that brand end? I, I know this can be a particularly big issue, and I don’t know if it’s happened with you where, where, this happened for a number of other hosting brands years ago, where, the companies were acquiring, they viewed each other as competitors. And, and so what was happening was is that the, the, as the buyer continued to buy up other brands, and, and these were competitive brands there became this, still this competitive culture within the company, where it’s kind of us and them, even though it was, everybody was now an us, they’re still maintained that us and them mentality because for years they had been rivals, essentially. So I’m just curious how, how have you?
Tom: Yeah, I think in, in our experience, we haven’t found employees, to be, you know, desperately attached to the brand a lot of time. I think they want to be gainfully employed. They to have purpose in their work. They want to be part of a team and a culture that they, they like, and that matches, you know, their own beliefs. I think it tends to be the seller who perhaps, created it has run that brand for 20 years. It’s, it’s their baby. It tends to be the sellers. I think that are a little bit more attached to the brand name. But in terms of competitiveness, you know, I think there’s an element of that, but I think the way that we’ve, we’ve always tried to overcome it is to, is to really focus on integration. So bringing people on board and rather than leaving individual business units, in our scenarios, we tend to integrate them into their functions.
So you don’t have, five or six different development groups in under different brands or, or different lines of business. Typically, you have it more centralized and that allows, individuals, to stretch beyond what they’ve been doing traditionally, and to work across other projects with other, other developers. And certainly, when you’re acquiring a small group of people who have worked in isolation to a large extent, one of the big benefits of a, of an M&A transaction tends to be that they get to work with other people that have, you know, similar interests, similar skills and, and other people that they can learn from. And we often find with some of the smaller shops, you might only have a couple of people doing a particular job development as an example, and some of those people like to, to have peers. And so that’s part of the integration and getting them to be bought into what we’re trying to achieve as an organization
Hartland: Yeah good points.
Devin: Well, thanks, Tom. And so our last set of concerns here are technology concerns. So these are things like, do I need new training, will the tools and systems I’m familiar with beach, how well documented our new procedures? Well, the skills and expertise I’ve gained be seen as valuable. so, you know, a lot of these are really at the kind of the core of, how technical employees see their value and, and self-worth and things like that. So, you know, these are very significant, concerns. I’m, I’m curious what you guys think about these.
Tom: I think to some extent, it depends on the nature of the transaction again with this one, Devin. So, certainly, and I think it was mentioned earlier in, in the call, if we’re making an acquisition for a technology, then the individuals coming on board are, are managing something unique. It’s something that we don’t necessarily have expertise in. We don’t necessarily have people that are able to, to run that. So you may keep them and, and have them focused on that. And, and the training could actually be reversed. So it could actually be leveraging the skills and knowledge coming into our organization, and spreading that knowledge, to help the broader group, in terms of tools and systems. Again, I, I think it was also mentioned earlier that generally speaking as an acquirer, you have systems and you have tools that you try to want to have standardized across group as much as possible from an efficiency standpoint. So yeah, that’s, that’s an area where someone may need to, to change, but, you know, again, from a hosting perspective, we often find, the companies we’re acquiring are working with the same sorts of technologies that we are anyway. And so there’s not necessarily a major, major shift there. And then in terms of the skills and expertise for, you know, to close for, for myself on this, I would say that it, it points back to, is it a, like for like acquisition, are we acquiring somebody who, or a business that’s doing the same thing that we are today, or are we acquiring them because they offer us something entirely new and somewhere on that spectrum, you’re gonna find that you, you may have very unique skills that you’re bringing in and, and you can actually help us to grow as an organization. Or you may find that, you have peers that have similar types of skills and you can, you can join a large group of people with those skills and, and find new ways to apply them.
Troy: That was a great point, Tom, I’d just like to add just a small item and, and, and when you are doing your due diligence, for an it MSP and being an acquire, you do look for a certain tool sets and what that’s gonna look on the integration side of things, because those are, those are hitting costs. so you wanna make sure that you identify what type of integration challenges you may or may not have. but I would guarantee you’re gonna see some type of, out of scope, you know, pop your head if you’re not aware of, you know, a strategy when it comes to, you know, connecting processes.
James: Yeah. I wanted to mention a couple things here. The one, one key, super valuable asset that isn’t normally on the balance sheet is the people and, you know, their skills and expertise, and especially in today’s workforce shortage, acquisitions and acquiring talent is very important. So, you should be looking for those skills in and expertise with the people that you’re acquiring and, and embellish them, and training. Absolutely. There should be due systems training just on the new company, the processes, the tools, in some cases you’re acquiring some of their tools if they’re better than yours. and, and there’ll be some reverse training, like was mentioned, and hopefully, the procedures and the processes are well documented. and, and most of the time that’s the case, but not all the time. So, but I just wanted to address the people part of it, because that’s, to me, one of the key reasons why the acquisition would be a, a win-win is if you’re looking for talent.
Hartland: And, and, you know, just, from my perspective, I don’t get to info in, in this, really, these types of questions, they’re, they’re really end up falling on the, the shoulders of primarily the buyer, but, certainly, you know, James, you would back up and you know, Tom, you said it is, is just the well, and Troy of course, there needs to be, a commonality amongst the tools, and platforms and systems that are being used. Otherwise the, the costs, just become a prohibitive, to try to keep up with all of the new, you know, updates and different customers using different tools. In some cases they may be somewhat redundant in others. They’re both, security tools doing the same thing, but, just different, competitive solutions.
So, do a lot of times that’s a screen in the beginning, as well as part of the transaction, but, you know, it’s hard to line them up a hundred percent. And so at that point, decisions need to be made. And so some of the tools that someone’s familiar with may not, end up, remaining, as, as, you know, kind of going forward. but, you know, as Tom said, I’ve also seen a lot of times where there’s discussions and, a little bit of a kind of humor comes into it when the, the buyer says, well, we were on this platform and the seller says, huh, we used to be on that platform. We changed our platform six months ago, but their team, I at least knows the platform of the buyer. So they’re not, they’re not having to go to something they don’t know. Now they’ve moved out of that system and it might be six months or a year ago that they last used it. but, there’s still some familiarity, with it. And, and so, you know, that’s, that, that often kind of mitigates, some of these things, but, you know, you are gonna have employees who will not be happy with certain tools. They’ve moved away, they’ve made a decision to move away and now they have to move back and you know, that that’s gonna have to be, navigated as well.
Devin: Great. Thanks Hartland. So that’s, that’s all the slides for today’s presentation. And, I wanna thank everyone for their time. James, Troy, and Tom, those were excellent insights. you know, I, I hope that, you know, our poster on Reddit, if they get to see this, they’ll have a little bit more of, insight into what they can expect for the coming months post transaction. And I hope if you’re, an owner or in the, a leader in a Nike service firm and, you’re on the buy side or the sell side, you got some good tidbits and, and wisdom about how to make sure that the transaction goes smoothly as well. So, thanks so much everyone for joining today. You know, if you’re watching on YouTube, please be sure to subscribe. you can reach out through our website, The Host Broker.com, [email protected]. If you have any questions and, we hope to see you next time. Thanks so much.
Hartland Ross leads a discussion about the Top 10 most common challenges buyers experience during the acquisition of IT services firms. 15 years of transactions has identified common themes as the basis for deals not getting done and buyers losing interest.
Hartland: Good morning and welcome to today’s session. We’re going to be talking today about some of the most common challenges that buyers experienced during the acquisition process of IT service companies and my name’s Hartland Ross. I’m the president of e-commerce marketing solutions and a founder of eBridge and The Host Broker and MSP broker.
Hartland: If you’re familiar with us, you’ll know that we started as a marketing firm about 20 years ago and evolved into the M&A space as a result of client demand. And today we publish a list weekly of companies for sales, specifically in the IT services space. And that we focus on MSPs, web hosting companies, data center operators, and infrastructure providers, and also are very active in the buying and selling in the secondary market of the IP address blocks. If you’d like to find out any more about us, please go to our website thehostbroker.com. You can email me personally at [email protected] as well. And if you’re interested in having a complimentary sort of evaluation of your situation, whether it be a buyer or a seller, I’d be happy to set that up with you as well.
Hartland: So without further ado, I wanted to talk a little bit here about some of these challenges and essentially, we’re going to focus on the challenges that are associated with getting to a signed letter of intent or term sheet, if you prefer, as well as getting through the due diligence process. There are a number of other challenges of course, as well, and I’ll briefly touch on those at the end, but the primary driver we’ll be focused on these two stages.
So of course, first problem, financing. So where does the financing come from? And, one of the things that is key is to understand where your financing is going to coming from, and the terms. So, are you getting it from an investor? Are you getting it from a lender of some sort, is a cashflow from operations that you’ve managed to, save and allocate, for this type of purpose. So, understanding of that, and then relaying that through a buyer so that they have confidence in your ability to get the transaction done, from a financing perspective. And so if there are going to be implications associated with timelines, for instance, if there’s a lender involved and there needs to be an approval process and, or the various hoops that need to be jumped through there, and any subjects that, that information do you relate to the seller, in the interest of ensuring that everybody’s on the same page, nothing worse than for the transaction to be delayed and the seller not having full information, getting nervous about wondering what’s going on and coming up with a lot of reasons in their mind as to why a transaction might not be a big closing or closing as quickly as it otherwise could. SBA process, if you’re using that and the last, takes a much longer than any bank will tell you, they’ll tell you they need a few weeks of whatever it is, and they’ll need these 20 items. The reality is it will take far longer and they’ll need a hundred items. And every time you give them a little bit more information, they’re going to need a little bit more information. So, just recognize that estimate will need to be padded. And presumably, that most of the time, the seller will be aware that you’re getting the funding from the SBA. But, if they’re not, then may need to kind of share with them a little bit more information about that process. Another important aspect of the SBA process is that there are two types of banks, two types of lenders, ones who have the ability to make decisions out of their location. I don’t approve the loans and others that need to run it up the flag, full flagpole, so to speak and seek approval from either a head office or the SBA authority themselves. And if that’s the case, of course, there’s going to be delays. So, understanding what abilities and capabilities your particular bank and branch has in this specific instance. And then the reality is that there are challenges with vendor and bank financing in terms of getting and deal with that. So, if you’re going up against groups that have cash on hand, then you’re going to be at a disadvantage if you’re having to jump through the hoops and inevitably take longer with going through the process of getting the financing through from a bank, and similarly, but a little bit different if you’re going to be getting financing through the vendor, in other words, through the seller themselves. And then, there’s going to be a harder time kind of getting those deals done because, there needs to be some incentive for the vendor to be able to provide that financing either. They’ve had struggled with trying to find a buyer in first place, in which case they might be a little bit more flexible and lenient in terms of providing that sort of financing or the payment terms and, or the offer will need to just be that much better in order to beat out if you like, the other offers that presumably they would have available to them.
So, the second piece that where we see challenges is, is the groups that don’t necessarily have an established process. They’ve heard that M&A, and maybe you have the next best thing, and this is a strategy that others have recommended. And so, they’re sort of pursuing this for the first time. And in these instances, there’s a sort of disorganized sort of shotgun approach that we sometimes see. And, and so my recommendation is that first of all, you have a due diligence list that you’ve created in advance, and that process be divided into a number of components. So, you’ve got the questions related to financial and those that are related to operational and technical and, and so forth, and that you work through those systematically and that you have lead, a person who’s going to lead each one of those areas. Now, it doesn’t mean to say that one person can’t take on more than one area, but there’s clear sort of differentiators there in terms of who the leads are and that those people have the right connections on the seller side to be able to get that information. And in some cases, it may just be that the buyer, which is, that you perhaps, as an owner of the business and the seller who also is the owner of the business and, all information is being communicated with just the two parties. And that may well be or there may be a team of people on one or both sides of the transaction, but that it’s important that our process be followed. And, I specifically recommend focusing on what I call the deal killer issues first. And these are oftentimes anyway, not that there aren’t others, but that there’s a customer concentration, so, oh, geez, I didn’t realize that 80% of your revenue is coming from to customers. And if those were to leave the businesses, essentially, I’m going to be gone, understanding that the revenue actually exists and the type of revenue. So, what percentage of the revenue is recurring for instance, is there any prepaid revenue, so deferred revenue that’s been, for deferred revenue, customer churn, the customers leading for any particular reason, is it higher than normal? It’s been pretty is sort of standard and flat in terms of churn. What does that look like? And are there contracts in place with the customers? What do those look like? Can those customers, our contracts be assumable if they can’t be then, essentially the customers won’t have a reason for being able to break those contracts. So as a buyer, you’re going to want to check that as a seller, you’re going to want to ensure that you have, and some of our contracts. Well, generally speaking you’re going to start with the financial elements of doing these transactions first and then going to the operational and technical aspects. My experience has generally been that the operational and technical issues can be worked out and that it’s more a matter of how it’s gone about and how the deal is structured than it is about whether to go about moving forward with the deal or not. So, financials will potentially kill the deal and the others just sort of create, perhaps some friction in terms of how it gets done, but don’t necessarily derail the whole process. So, this is not a comprehensive list or other elements as well, that could be deal killers, but, these are some examples.
Know what you’re looking for. So, it’s one of those similar to that, of that old saying, which is, you don’t know which path to or what direction you want to go in, you know, any path will take you there. So, be clear on how the opportunity fits into your strategic plan and be prepared to support, why it’s a fit, and what I’ve seen some groups do. And I think this has been very effective is to be able to provide a bit of a narrative, a bit of a qualitative story on why you think that the opportunity might be a good fit and that this could be included in a letter format in a letter of intent or it could be included as a separate letter, accompany the letter of intent or perhaps a conversation. But, I think that ideally, something that’s written down goes a long way to instilling confidence. And essentially it would talk a little bit about your background, your company’s background, the opportunity that the seller has, why you think that there would be a good fit, whether it be, a customer fit, whether it be a technical fit, geographical, it plays into your strategic plan, cultural elements, et cetera, and to try to make a strong case that there is a good fit there, will go a long way to providing some reassurance to the seller and recognizing that in a lot of instances, it’s more than just a financial decision for the seller, that there’s also these qualitative aspects as well around, , how competent is the seller, how much experience do they have? Are they going to take care of the customers that are going to take care of the employees? And to the extent that you can reassure them of all of these things, and you’re a better fit will help support your offer, even if it’s not the top offer. Secondly, it makes sure that you know, that you can afford the opportunity. So, you’ve obviously had to have run the numbers looking at what your ROI needs to be to have it make sense and to know kind of when to stop. And we talked a few minutes ago about the deal killer issues. So, not only starting with those which I said in the beginning but actually understanding what those are and be clear on what you’re interested in and what you’re not interested in. So, some examples you’re essentially moving on to how you’re going to service these customers. I mean, you have, some of them need to be serviced in person and Johnny needs to go out and be on location once a week on Fridays with, you know, one customer in particular and somebody else needs to go somewhere else on another date. Are these customers that you’re going to want to continue to service? And if not, then, you know, its opportunity might not be for you if it’s a requirement from the customer’s perspective that someone would be onsite to support them. A lot of times it’s a preference, but it’s not a requirement. Would you entertain buying their real estate? So look, if there was an office, a lot of times there may be an office, sometimes a data center, that’s part of the transaction. It may be optional, may be required, usually, it’s optional, but, if it is required or even if it is, and he said something that you would entertain, are you interested in the real estate piece or is it just simply the business? Are you interested in buying a hundred percent of the business? What if it was a portion of their business that was being sold? For instance, there’s a couple of partners. One partner wants to exit the other one. Doesn’t one doesn’t want to buy the other one out or is not in a position to buy them out. Are you interested in taking over a portion of the business? Are there any types of customers that you aren’t wanting to work with and support? So particular industries, profiles size? Sometimes it comes up, but particularly in the hosting space around adult customers. So how are these going to be handled again, putting barriers and boundaries around, what is workable for you and what isn’t.
So understanding what you’re prepared to pay for and talk to her a minute ago about ROI. So, recognize that most transactions will have a 30 to 50% down on clothes, in terms of the initial payment. And this is for primarily for MSPs hosting and data center. Businesses can be quite a bit higher than that, but typically 30 to 50% on clothes for an MSP. And so, the balance of those payments are going to be paid out either as an earn-out or some kind of a note payable. And so understanding what you’re prepared to put down, what kind of an ROI you’re looking to realize, and how you would structure the earn-out. The biggest concern that a seller has of course, as well. Am I going to actually ever realize that the rest of the payment terms was payments over 12 months or 18 months, you know, are they actually going to get paid? And so being very clear about what’s going to constitute a kind of an adjustment to an earn is going to be very important and may seem easy, but, what happens in situations where there’s been a bad experience up until closed, and then there’s another bad experience by the new buyer and that’s the straw that broke the camel’s back, whose fault is it really does it make sense to share that burden or it may be worded in agreement one way, but that may or may not necessarily be the fair way to go. So, to talk through under what circumstances the buyer would be responsible and under what circumstances the seller would be in there for what circumstances, there’d be an adjustment to that for now. And are you looking to hire the seller? If so, is that a requirement for how long under what terms are they going to be paid? If they’re going to be paid, when does that kick in? Typically, there would be a period of time where the seller needs to provide transition support, regardless that would just be a standard process. But that they’re not working in the business. They’re simply answering questions related to running up the business so that the buyer can take that over. And if a situation presents itself where there’s an opportunity to hire the seller for more than that. So the seller can continue to support the, you know, the role that they’re in or you’re even a new role. How are they going to be compensated for that? And also, making sure that you talk through with them about their ability to shift from the decision maker and one who, sort the buck stops with them to now being in a position where they have to take some direction and that’s not to be underestimated the challenges. So, with that kind of a shift.
So understanding and discussing key deal terms early on, so price, purchase price, paying a terms as well. That one’s generally, one of the first things that’s discussed. But there are other aspects and, and sometimes these things don’t rear their ugly heads until the kind of 11th hour when the attorney has put forward modifications red lines to agreements, purchase agreements. And in some cases, it might not even come on the first go round, or it should. So, I’m thinking about indemnification caps. So in the event that there’s a breach or a representation or warranty, to what degree is the seller going to be responsible and, you know, standard would be, they would be responsible for a value up to the value of the transaction. So if there’s a $3 million transaction that would be their cap in terms of their liability, but sometimes a seller is not willing to do that. You don’t want to take any, providing any identifications or they’re going to cap it at some nominal number that’s drastically less than the value of the opportunity. And of course, this also is important to understand whether it’s a stock deal or an asset deal, because, there’s different exposure there for the buyer, depending on which, which routes, taken. Also, that there’s an agreement between a breakdown Goodwill versus assets in the purchase price. And, this has implications from a tax perspective and the both parties need to agree. So again, sometimes I’ve seen challenges where this has agreed to, with managed service providers. There’s generally speaking, not a lot in the way of assets, it’s primarily a Goodwill. And so, there’s not a lot of debate, but, in instances where there’s a lot of infrastructure, it can be more contentious of you’re like, make sure that the seller understands the tax consequences of a transaction. So, we’ve also seen it in cases where it offers mate and sort of verbally, almost accepted. Paperwork’s not yet signed a seller, goes to their attorney or a tax advisor and discusses the implications for them personally from a tax perspective, discovers that well, lo and behold, they’re only going to get a fraction of what they thought they were going to get, and it doesn’t make sense anymore. And so now not only does it kill the deal, but probably, if you’re at market, and the numbers are not workable, then it’s probably going to kill the opportunity for the seller entirely to find anybody that they’re gonna be able to get a deal done with. So, making sure that piece has covered off as well. Legal jurisdictions can be a challenge sometimes. I typically, if that’s put forward in the term sheet or letter of intent, that’s the time when it gets picked up and discussed, but, and oftentimes it’s going to be the same jurisdiction, but just to talk through that because if, and this is a more problematic with international transactions than it is for domestic, but still there, there may be some concerns around the state that’s chosen for jurisdiction. And then, liabilities associated with employment obligations, understanding that there those exist and that there, prior to close, they’re going to be for the seller to have to manage and then post-close that the buyer would, would take those employees over and essentially start new. So, they, employees are typically terminated and then rehired medially by the buyer. Assuming that it’s an asset transactions, if not, then there needs to be discussions around liabilities associated with unpaid holidays and sick days and so forth. Some more points related to this, number five. So, will you, as a buyer require some kind of or, sorry, excuse me, you as a seller require some sort of personal guarantee, or is there something else that could give the seller some reassurance that they’re going to get paid? That’s ultimately their biggest concern and, and so could a lean to use to lean on equipment. That’s often another option. So, the sellers may require this as a buyer. You may or may not be open to that. So again, by going back to your expectations and has been of what’s negotiable for you clearly articulate under what circumstances the seller will not receive the full payout. So, we talked about that, particularly in cases where there are no, but it’s not the only case. Maybe it’s not burnout. It may just be payment terms, but in some cases, they may not be fully paid up. And I went to those little claims. Again, this is just really a matter of expectations and making sure that all parties are on the same page and to the extent that these things can be alleviated in advance creates the trust and provides a bit of our greasing, the wheels for these transactions. Another area that we’ve seen challenges is putting forward a formula for the valuation to allow for changes. So, what happens if a customer we use during the due diligence, the price has been agreed to, and now all of a sudden, the revenue is less than where it was before. How is that going to be adjusted? And if the multiple is a multiple EBITDA, then now we’ve got a customer who’s left. We need to rework this and, and create a new valuation. We’ve had argents in the past from groups that have said, well, really there’s a lot of fixed costs here. The customer that’s left is essentially nothing but a profit. And so, we’re not going to deduct their contribution or their gross profit, but we’re going to adjust the full revenue contribution that this customer is bringing to the books and that’s not really a fair way of doing it. Just because the last customer is last doesn’t mean to say that they should be treated any differently than the first customer. So, looking at ways that those are the evaluation is going to be adjusted for any kind of changes. And frankly, the changes could be upwards as well. All of a sudden a new customer is signed on, and now the buyer wants to, or sorry, the seller, excuse me, wants to get value for that customer or that partner. And how’s that going to be handled? I mentioned adjustments for deferred revenue. So in cases where there’ve been prepayments for some period of time, for whatever reason, again, not often that common in MSPs, certainly a little bit more common in the hosting industry. And so how is that going to be handled? And then an assumption we’ll call expenses, and what if this changes? So again, prepaid expenses and who’s going to be handling expenses up to a point typically close, is that delineation line and those expenses that were for periods prior to close, or are to be taken and paid for by the, by the buyer, excuse me, regardless of whether the buyer has prepaid for them or not, then that would be an adjustment. But, nonetheless, if they’re responsible for the period up until close.
Discuss transition support together. So, what are the expectations of the seller in terms of support? Are they willing to provide support and hopefully they are, they should. But for a period of time, how many hours a week, how many months, what, if any compensation are they expecting as part of that process and what role do you require them and what role do they see themselves playing? Our staff being included. And, and if so, is it the entire team? Is it just a select individuals? How are you going to go about that? And this is important from the perspective that sellers oftentimes have some loyalty to their teams, how they want to make sure that their teams have been taken care of. And so if you’re only taking some of those customers, are there some of those employees, how is that going to be viewed, which ones and, you know, salaries and whatnot. It’s a bit tricky to vet these individuals prior to close, because in most cases, the staff are not aware of the transaction, but it is possible to attach a kind of anonymized ID or initials or something to the team and put titles and history and make information about the roles that they play. And then kind of a qualitative, summary of your thoughts as a, as a seller for, to be able to provide those to them, to the buyer for evaluation represents.
All right, moving on. So, number seven, and this is a really important one with respect to, you know, keeping the deal moving and this concept of deal fatigue is real. It can set in at kind of a point beyond where, timelines were originally set. So, if due diligence and the deal was supposed to complete within 60 days, and you’re now at 65 days, this is the start of frustration. If it hasn’t already set in by that point, and in some cases, it may be that the blame lies on both sides. In other cases, it may not. And, a lot of times the one side will feel that they’re the ones who are keeping the ball moving, and it’s the other side causing the delays. Of course, in some cases, those delays may be external, an external attorney who’s involved and who’s preoccupied with other projects and clients. And so, they sit on an agreement for two weeks before they get a chance to look at it. Meanwhile, time ticking away in a letter of intent, terms that were originally provided. So, another element to this is it’s not always, I think, fully appreciated is, sellers will give preference in some instances to a first come first serve type scenario. So, if they receive a number of different offers and hard to kind of evaluate them, because seemingly they’re all pretty similar or they they’re all have their pros and cons, but, are all relatively, even in their mind in terms of which one they go with. The group that came in, initially with our offer and who moved the fastest is oftentimes the one that will get it all else being equal. So just recognize that, showing your kind of eagerness is a value. There’s also an argent to be said, come in at the end with an offer and not have your offers sort of played against everybody else and sort of swoop in with a higher offer at the end. But, you know, that there’s a little bit more risk associated with that for a variety of reasons. One of which of course is that, you wouldn’t be the first to kind of demonstrate eagerness to, to getting the deal done. Turning the red line person agreements around quickly. This is a challenge that usually falls on the lap of the attorney. And as I mentioned, that they may have other projects that may be in court. They may be on holidays and all of these things were going to cause a delay.
It will reflect poorly on the party who’s hired that attorney. So, having a discussion with that group in advance and any other advisors, frankly in advance so that they can be privy to timelines and I can move the ball forward and to be prepared to allocate the time. Obviously, as a buyer, the buyers go to continue to run their businesses, that they have a business and the seller of course needs to continue to run their business. And so, this is going to take time from, from both sides and both sides need to be able to allocate that time. And that made me allocate some of their other responsibilities to other people in the team, or frankly, just working late and meetings or weekends to be able to get the deal done. Also staying in regular communication as came up earlier in the presentation here and discussion was talking to, on this goes both ways, but, particularly from a buyer’s perspective where there may be delays, whether they be with her attorney or it might be something personal, it may be something that came up in due diligence that they weren’t expecting, but to relay those challenges and to relay them early to the seller and the seller is going to be much more understanding if they know what’s going on, then they’re just kept in the dark and day after day, week after week. There’s kind of not really much happening, not much is going on. They’ve put files in a data room through be reviewed. They can, it’s clear if those files have been opened or not, and there’s been no interaction. It just creates a lot of frustration and it doesn’t set the right tone for getting a deal done. Also, I’m not over promising and under delivering as with anything in life. But, this has to do with timelines. It has to do with other commitments in the process to follow through with essentially the terms that were originally outlined in the letter of intent.
Eight, establish and maintain trust. So, one of the things that I’ve talked about so far relate to trust and know to that, and as a buyer, if you’ve done other transactions that you can provide references for that will go a long way in alleviating some of the concerns that buyers might have again, it shows competency, it shows that other sellers have been paid, where their payment terms and that alleviate concerns that that seller might have if they’re not going to receive those ongoing payments, focus on building rapport throughout the process. And this again, this speaks to kind of maintaining that, those lines of communication when there’s challenges to bring those challenges up and to have, can have candid conversations. And of course, with COVID right now, it’s difficult, but, in person meetings, certainly can help with that process and you know, establish more rapport than otherwise would happen on a phone call. So if it’s possible, if it makes sense to do something in person, I highly recommend it and think about the rapport as more of an investment in this process, rather than a kind of a waste of time. It really goes a long way towards, when there are challenges to getting out of those challenges. And it’s not until there are challenges that you’ll be happy that you have your report that you did.
So, investing in that, all the way along and kind of having a personal relationship in the process is important. And then this is another, this last one, understanding the motivations of the seller. I think all too often, this piece has, is not kind of kept in mind. So, remembering what the seller has told you as a pure buyer as to why they’re selling what their challenges are listening and talking to an advisor broker, if you’re working with someone, like us, there, where we can either relay some of that or pick up on some of these things ourselves, where there may be some challenges that maybe they talk about selling for personal reasons. Well, it turns out the personal reasons is that their partner has been diagnosed with some kind of terminal illness. And so, you know, or maybe they’ve got another project that they need financing for, and there’s a deadline coming up, so they need the transaction to close, and they need the funds for this to be able to support their, their other projects. They may be concerned about making sure that you, as a buyer are going to be hiring and supporting their employees, and you have a similar culture that they do, that you’re going to be supporting their customers and providing similar levels of service. A lot of times the seller has become friends with their customer base over the years, and they’re going to see them and have interactions with them in the future, not necessarily on a business or a business perspective, but for other reasons, and they want to go look them in the eye and know that whoever they sold the business to is going to be competent to be able to support them.
I put this one here, overzealous attorneys. I wouldn’t say it happens regularly, but it absolutely happens. And as you can probably imagine slows the process down considerably, you get an attorney who takes an agreement with a black font, and it comes back marked up because it’s got so much red and blue that it’s overwhelming and frustrating and really can change their path of the transaction from that point forward. So, the focus of attorneys is to protect their clients and both sides are hiring them to protect themselves. But they’re not there to get a deal done. And there are no vested interests. They don’t care whether the deal gets done or not. They get paid either way, but if they are too overreaching, the seller may just get too frustrated and walk away. And it goes the other way as well. Absolutely. But oftentimes it’s the buyer that ends up, or reaching more so than the seller and the, if that’s happens on Bailey’s trust, I become frustrated and the sentiment at that point and the ability to negotiate, enntirely changes.
And then the last one is just related to customer and staff churn. So, I always recommend what I call rocking the boat as little as possible. So, as a buyer, not the best idea to come in and on day one, start changing pricing, changing the processes for the employees and our customers, updating SLS that are more limited. Obviously, if you’re providing more service and reducing prices or providing better service or expanded services or expanded offerings or whatnot, these are all good things. But to the extent that you’re providing more of a limited experience, it’s going to cause challenges and frankly, lead to customers leaving, response times not as good as they used to be, et cetera. And, not to say that you can’t make changes, just not a great idea to make them all on day one and also to consult with the seller as to what changes are, are going to be kind of well-received. And so, if there’s an alignment of company culture, then the staff are going to be then taken over, are going to be happy. Happy staff typically will alleviate some or all of the customer churn. And then, it’s when the staff are unhappy that they provide poor service. And then the core service translates into customer churn, particularly when they’ve got the customers have got experience working with those, the staff for a period of time. And now that experience changes as a result of the staff, nothing happened.
So, I said, I was going to focus on the process of getting to the LOI and getting through due diligence. I just wanted to add in a couple of extra points here, which probably worthwhile noting. So, if some other challenges is building your team with your own set of coaches, not having the right people in your corner, so to speak, and to get those people in your corner before you start looking at transactions. So having conversations with your attorneys to say that this is your plan, similarly with your CPA or accountant and that you ideally are working with a broker of some sort, obviously that would be our role in this case. But someone who can ask the right questions and help get the information and how evaluate the information as it comes back and negotiate a deal, and that you’ve allocated sufficient time for the process and keep up the moment. So, in cases where you’re trying to get a deal done by the end of the year, and you’re starting this process, first week of December we’ve got Christmas holidays coming up at that point, and it’s just not realistic to get done. So, make sure you’ve got sufficient time and you keep the process moving as we discussed before. And, and if it is your first deal or even second deal, I always suggest starting with smaller opportunities and moving to larger deals. Sometimes we end up with groups that are looking to do a five or 10 or $15 million transaction, and they have never done a transaction before in their life. And they clearly don’t really know what they’re doing. They don’t have a process and they’re serving over their skis. And so, there’s always going to be learnings and things that you wish you’d done differently. And I think it makes sense to start on the small opportunities, frankly, if it’s gonna be a cost associated with these learnings, which usually there’s some level, some costs that you can attribute that, that happens at a smaller scale and there’ll be a little bit less painful.
And then the other challenge of course, is just finding opportunities in the first place. So, nevermind going through the negotiation process to get through an LLI and kind of close deal, but you know, what about just even findings opportunities and being successful, bitter. So, how can you find opportunities looking at doing direct outreach to targeted groups is one option. The challenge is if you’ve probably experienced yourself is, the law of noise going on right now in the market. There’s a lot of private equity groups and others who either themselves or hired somebody to do outreach and generate leads for them. And so, a lot of sellers are feeling a lot of calls and emails, and so it’s not easy to kind of cut through that noise. And, other options include monitoring lists, such as ours, obviously where, there’s opportunities being published. Ours gets published on a, on a weekly basis. Another source we’ve seen a reasonable amount of is members. They were part of peer groups and either a, their peer group shares an opportunity that they’re not interested in with the rest of their peers or some cases, one of the members of the peer group decides that they’re interested in kind of moving on and, and selling and, the natural place for them to, to discuss this and, and bring it up and see if there’s any interest is the groups that they’ve been a part of a member open sharing their experiences and challenges with over a period of time. So, becoming a member of these peer groups, and there’s lots of them, and I can certainly direct you to, to some if you’re looking. But, that’s another good source. And then of course, attending conferences, although, , that’s a little bit tricky in terms of how to go about doing it in a bit of a needle in the haystack, but negatively, there are going to be groups that conferences, it’s just a matter of how to find them and strike up those conversations.
So, with that, just like to thank you very much for listening here to today’s session, and you have any questions at all, please reach out. You can reach me and us at [email protected] and also our website, thehostbroker.com contact us form. If you’re wanting to subscribe to our list, please go to our site and do so. It’s free to subscribe and you will receive the mailings every week. It is a double opt-in. So just be sure you check your inbox to the confirmation. Thank you very much and appreciate your time. And, please continue to monitor this channel as we run webinars on our success. Thanks so much. I know.
Watch an in-depth discussion from Hartland Ross on the process of buying and selling IPs on the secondary market. We’ll discuss what is the secondary market, why does it exist, why are prices going sky high and what are your options?
Good morning or good afternoon, depending on where you are welcome to today’s session. Today I’m going to be talking all about this crazy secondary IP market. So what is it, how can you participate, why does it exist, and pricing, among other things. So welcome! My name is Hartland Ross. I’m the President of e-Bridge Marketing Solutions and The Host Broker. Just give you a quick background on us.
I started eBridge Marketing about 20 odd years ago and we were focused on working with IT service firms specifically servicing web hosting companies, IT companies, and generally including data center operators, infrastructure providers, and some of the vendors to the industry as well as managed service providers (MSPs). So we offer a full range of marketing services, digital marketing for organic growth to service, IT services space and then a few years later we ended up with groups that wanted to grow a little bit more quickly.
And so we ended up building out due to client demand, an M&A practice that was again focused on the same customer base. So MSPs hosting companies data centers and various IT service firms but also getting a lot of requests for IP address blocks and so as a result of groups that wanted to grow more quickly than they could do organically and in some cases perhaps even less expensively, they were interested in acquiring other companies or customer bases and in other instances of course we had groups that were interested in perhaps moving on and looking for opportunities in another industry and wanted to sell their business and so that was the genesis of The Host Broker. If we fast forward to today, we’re very active in the M&A space, within this community of IT service providers. We publish a list of companies for sale each week, which is free to subscribe to…typically we go out on Wednesdays.
So if you’re interested in acquiring a business I’d highly encourage you to take a look and subscribe and you’ll get access to new listings each week and if you are interested in selling, happy to have our conversation with you and give you an evaluation. You can reach me at [email protected] here or fill in the form on our website as well and of course, if you’re looking for IP blocks, which is a topic for today, then we have those listed as well but happy to have a conversation in terms of some of the nuances in your specific situation.
With that, I’ll jump right into it and just talk a little bit about the background and space.
So we have different regions and I recognize that some of those who are listening to this may be familiar with some of this information but probably not all of it. So bear with me as I cover some of the basics but there are different regions, five in particular here – ARIN, which is a kind of governing group for managing North America and they began in 1997. We have RIP which controls Europe. It started in 1992. LACNIC, 2002 covering Latin America, APNIC covering Australasia, New Zealand, and Asia starting in 1993, and AFRINIC covering the African continent in 2004. So today’s session is really focused on the IPv4 market. I’ll touch on a few things related to IPv6 as well.
It is now possible for all except AFRINIC for blocks to be transferred between regions and there’s a few hoops you have to jump through but they’re not particularly difficult. So blocks can be purchased from a Ripe seller and moved into ARIN as an example or vice versa. However, and this may seem obvious, but we do get a lot of requests from groups that want to acquire IPs but don’t yet have an account with anybody.
So if you’re in North America, you have to register with ARIN, create an account with them, pay your annual dues, and then you’ll have the ability to transfer IPs into that account. So nothing can be done until you have an account with a rear and these are all the different rears that you can transfer the blocks into.
So what’s the purpose of buying IPs in the first place? How did this come about? Weren’t IPs free or aren’t, shouldn’t they be free? And really there’s a history here but the reality is that we’ve got these kinds of two networks running in parallel. We’ve got IPv4 and we’ve got IPv6 and IPv6 is not widely adopted yet and the big discussion is when will that happen and when will it replace IPv4 but due to the difficulties it’s still at this point and so it’s a very small portion of the kind of network I guess, utilization, and so, as a result, we’re focused on on the IPV4 which has limitations and finite number of IPs.
So what’s the alternative to buying? Well, of course, you can lease. So this is your classic kind of own or rent discussion. So if you want to lease IPs, there are a number of different factors. So the term obviously, is the length you are looking for is three months? Are you looking for a year or longer? What are you planning on using it for or your customers planning on using them for? So is this going to be for hosting or mailing? If it’s mailing, it’s going to be a lot more difficult to find a group that’s going to lease to you and you’ll have to prove that and satisfy any kind of concerns that these aren’t going to be used for spam purposes. And then of course the block size or number of IPs that you’re looking for. So we’re typically seeing somewhere between the sort of 30 to 70 cents range. So that’s per IP per month.
Having said that, more commonly in the sort of the 40, 50, maybe 60 cent range would be typical at one point. They actually were about a dollar an IP a month but that was a number of years ago and so, this is where we’re at now with respect to pricing. So what’s the purpose of it? Why would you want to do this versus leasing if you’re kind of trying to evaluate the two? Really it gives you control over your assets. So if at some point you decide to sell your customer base and the IPs that the customers are using are owned, controlled by you, it makes it a lot easier for those customers to be moved to for instance a different facility, and if not, these customers need to be kind of uprooted, disrupted and moved on to different IPs and so this ends up creating a renumbering situation and certainly in terms of a sale process, there’s going to be churn as a result of that renumbering and the impact for you as a seller from a valuation perspective is not going to be great. You’re going to lose customers and there may be some kind of uh structure that’s been provided whereby you as a seller are ending up covering that risk. So ideally if you own the IPs, then you’d be able to have more control, and of course you’re also not reliant on your upstream stream provider which although it would be extremely unlikely that they wouldn’t continue to lease the IP blocks to you are still at their mercy.
So this is a chart and it may be a little bit difficult to read but we’ve got pricing on the y-axis on the left and we’ve got time along the bottom, starting in 2015 and going to earlier this year. As you can see, prices are going up and to the right and the dotted line is essentially a regression line here. So you can see that we’ve come from sort of just a little bit more than 5 dollars up to slightly less than 25 dollars earlier this year. Now, I will tell you a couple of things about this.
First off, there’s a down point in 2018, a downturn that is not a market downturn. I looked at some of the transactions that we’ve done and plotted a number of them but recognizing that different sellers have different motivations for selling their blocks, size of the block is a factor, and then also the region that the block is from, although that makes less of a difference now but at one time there’s a little bit more of a price difference between regions and so conceivably, I’d have to have checked this particular block but I wouldn’t read too much into that. So generally speaking, prices are going up and have been going up on a fairly gentle kind of slope until we see this sort of huge increase earlier this year and so, the interesting part here really is the part that’s not on this chart which is what’s happened since March, which is where this leaves off and so showing right now is about 24 odd dollars, something like that. However, we’re doing a transaction at this point for 40 dollars and we’ve got another one in play for about 42 dollars. So it’s gone up approximately 20 odd dollars here from 2015 to 2021 and we’ve gone up almost 20 dollars. Now just in the past 3 or 4 months, it was at the point where it was going up a couple of dollars a week, it was just unbelievable. So I don’t know where the end is here but I’ve been asked a number of times and certainly, I remember being asked a number of years ago whether I thought that we would hit 30 dollars and I felt that at that point, something else would change and here we’ve gone past that and are still climbing. So unfortunately it’s one of those things where acting sooner than later is going to be…if you’re looking for IPs they’re not going to get any cheaper.
So what’s going on? Why are these prices going up and why are they going up so quickly recently? And although there’s no firm answer for some reasons that I speculate…so with COVID 19 improving the economic outlook Improving, and economies returning and opening up and whatnot, some of the back burner projects are back online. So everybody put everything on ice for a while in 2020, some of those things are back now and so those projects are resulting in increased demand in IPs, and then the other flip side is the supply side and so, these IPs are going to come from somewhere in some cases someone may just have extra blocks that they’re not using but in a lot of cases these blocks need to be cleaned up, freed up, the customers need to be moved off them or whatever is tying them up needs to be removed from those blocks and that takes time, in a lot of cases, time that somebody needs to put in and the smaller kind of IT service firms may be willing to put in that time because especially now the returns are going to be very good for them if they can free those up and put those into the secondary market and so it might make sense for them to invest in doing that.
Some of these blocks get freed up but as a result of…for instance like hosting providers that might be moving their infrastructure into a public cloud or whatnot and so they no longer have their own data center space and don’t need the IPs but also recognize that a lot of the IPs are held by large telcos, by the public cloud providers. And frankly, selling IPs is not their business and so they’re not overly motivated to spend time to clean these blocks up even though they have large blocks and so even if they did want to sell them or felt that they didn’t need them, they don’t have the motivation to clean them up and the people who would have to actually do the work to clean them up aren’t being compensated. It’s not their business.
And so the fact the market’s gone up is kind of irrelevant to them and so they make a case why they don’t have the time or resources to invest in that process and the returns although it’s great for small business are not overly meaningful for large telcos and whatnot. So as a result, we’ve kind of got this double whammy of a lot of supply and effect, little supply, excuse me, and lots of demand and you know how long is this going to last for, well who knows? I don’t expect it to continue at the rate that it’s been at recently, that’s for sure but I do think it will continue to go up conceivably. Prices may change in the future and actually go the other way and we’ll talk about that here in a second.
So another couple of points that I often get is well prices, how are they impacted if I want to buy blacklisted blocks for instance, or I want to buy blocks from other regions. So, essentially IPs are fungible at this point, meaning that they really maintain the same value regardless of the region that they’re coming from, yes there’s a small hurdle to have them transferred but it’s really not overly significant adds a little bit of time not much and so it doesn’t really matter too much if you get IPs from another region. Now there are potentially some geo-blocking issues that can arise from that and there’s also as I say, there’s some transfer fees and a little bit of extra time but really it doesn’t impact just due to the general demand, it doesn’t impact the pricing that much.
Blacklisted blocks at one time did have a slightly lower value, a slightly lower valuation typically sort of one maybe two dollars or so, and we saw that for a number of years. However, the process is pretty straightforward now to have IPs cleaned up, Spamhaus and others look to see that the IPs have changed hands recognizing that if they changed hands or sort of starting fresh and so it becomes a bit more of a rubber-stamping exercise to get them cleaned so as a result, there really isn’t a much of a discount and we’re just not seeing those coming onto the market anyway at this stage certainly not like they were at one time.
However, as IPv4 adoption increases then we can see a double whammy the other way where prices conceivably could fall less demand for IPv4 space and secondly, as more groups move to IPv6 that there’ll be an increase in supply of these addresses as the block holders become sellers. So it’s as they say, double whammy the other way with less demand and more supply but what’s the time horizon for that frankly just really hard to speculate.
So what is the process how can you acquire and transfer IPs and at one time ARIN, it was giving out a free one, free 24 if you hadn’t had an allocation it was a bit like Santa Claus giving out Candy Canes at Christmas, they were basically saying “Look, welcome to ARIN. Thank you for setting up an account. We want to see you be successful here’s a kind of a small block out of the gates to get you started.” And they were giving those out. my understanding is that they’re not doing that at this point that they simply just don’t have the supply to be able to do that. So there is a waitlist which is a very long uh exercise so if you’re patient that might pay off but who knows when uh you’ll get your block and so as a result, it’s created this secondary market, and the shortage of IPs, in particular, has made this difficult and also has pushed the prices up.
So these are some dates when each of these regions ran out of IPs and officially said: “we’re out”. ARIN was 2015 right 2012 as you can see 2011 LACNIC 2014. AFRINIC still has blocks and they still have availability the problem is that you can’t be a member of ethnic unless you’re in Africa and uh you can’t transfer those blocks up to any of the other regions. So they’re effectively not useful. Now that may and probably will change, I expect them to adopt the transfer policy at some point.
LACNIC was the most recent ones to have done that in the fall of last year, it was a middle October or so, and certainly at that point there was a bit of a free-for-all to grab up LACNIC based IPs and prices were lower than they were for other regions. However, that also has stabilized and that bargain-basement prices that existed relatively speaking are no longer in existence either.
So I’m speaking of the ARIN transfer rules here primarily because most of you who are listening are going to be in the ARIN region.
Having said that, I can certainly talk to you about if that’s your interest but for today’s session, I’m just going to cover the ARIN options. So there’s essentially three main options. They call them section 8.2 8.3 and the next five will cover 8.4 and I copied this off the website verbatim.
So essentially 8.2 is the process that you would go through if you’ve done an acquisition, a customer base, you’ve purchased equipment, a customer base which is obviously going to associate a revenue stream and a website and brand and whatnot and their IPs that are coming along as part of that transaction. So if that’s the case, you don’t need to justify ARIN using a needs-based assessment as to why you should be able to get these IPs. This is a just a kind of formality, they need to make sure the documentation’s in place and they did in fact complete this transaction and they will then transfer the IPs under this 8.2 process.
The next one is 8.3, which is the scenario where you’re not doing an acquisition of any sort of other assets but simply you’re out of IP space or close to being out and you’re looking for additional resources. You find someone who’s interested in selling those IPs and in these cases, you do need to be pre-approved for ARIN or a specific block size. So if you’re pre-approved for instance a slash 22 then you can get up to a slash 22 or smaller but not larger. And so this is something that again we get requests for groups that are looking to have to purchase IPs and I mentioned earlier in some cases, they might not have an account in ARIN. So that’s step No. 1 but then the second piece is what are you pre-approved for? And if you don’t have a pre-approval authorization from ARIN, you need to get that and find out what that number is, what block size, and then for us, if you were speaking to us, we would be able to be in a position to see what we can do.
So the next one is 8.4 and this is very similar to 8.3. The only difference is that this is a transfer in or out of ARIN from another rear and you must again be pre-approved if you’re moving it from right to ARIN, you still have to…you can’t bypass that pre-approval process. You still need to make sure that you’re buying a block that is no greater than what you’re pre-approved for. And there’s also a transfer fee for any of these transactions. With ARIN charges, it’s relatively minimal frankly and also obviously becomes a smaller component if you’re doing a larger block. Just historically for interest sake, you might be interested to know that the number of blocks being transferred over the last few years has increased but the size of those blocks is decreasing. In other words, we’re no longer seeing 14s and 16s being 2415s being transferred, it’s far more kind of 24s, 22s, 20s, 21s, 23s. So we’re seeing more blocks but they’re smaller and of course, this is exacerbated for a couple of reasons.
One, there’s the pre-approval process. So those who may want a 16 can’t get it necessarily and secondly, even if you could get it, can you afford it? And so with the price increases, groups are kind of acquiring what they need more than what they speculate they might need down the road or using this as a sort of a speculation play.
So you can purchase blocks as they say from other regions except AFRINIC and there’s really pretty similar pricing across the board. As I mentioned LACNIC is is at a very slight discount but not much and I think it’s important though just to recognize this transfer process. If you’re working with RIPE or even APNIC the transfer process is not too long, typically you’re talking about a week or so, give or take, depending on time of year and holidays and whatnot. But we had a recent experience with LACNIC where we actually did the first-ever LACNIC to APNIC transfer and it took six months and certainly that the buyer was losing patience for that period of time and I can appreciate why it was a combination of them…I was just sort of going through this process and for the first time with this new transfer policies then layered on COVID and that most of their employees were working remotely and it just meant that this process took a long, long time. So we’re not that long at this point for these transfers. But having said that, you do need to be patient and recognize that if you are looking for IPs right away for customers or if you’re almost out, LACNIC may not be the reader to go.
So what are your options for acquiring IPs? You’ve got the secondary market, but specifically, where can you go?
So there are auction sites but the challenge with them is – commission fees can be as high as 10 and perhaps that I’m not sure in addition to the bidding process tend to make the IPs very expensive and there are other options out there that are less and not necessarily that their sellers are getting any less but there’s a you know fees being taken by these sites. So another option is to work with an intermediary or a broker such as ourselves and another option is for you to find IPs yourself directly. Maybe you’ve got a data center that you’re working with that doesn’t need all of their IPs or you’ve got a friend who runs a hosting business who also again doesn’t need their IPs and so you can do a transaction directly with them but you do need to go through the process and if you’re not familiar with it, then it’s helpful to have a little bit of help in terms of the purchase agreements and so forth.
So that segment segues me into the actual process itself and although a purchase agreement is not a requirement it’s generally our preference to doing one for disagreement will obviously outline who the buyer and seller are. It’ll outline the arrangement for various fees. There’s the errand transfer fee I mentioned earlier, so who’s paying for that typically – is it going to be the buyer or it’s split 50-50. Also, we’ve always used and I suppose not everyone does but the vast majority that I’ve seen will use some kind of an escrow service. escrow.com is commonly used and there are escrow fees as well. Since both parties benefit from an escrow, it’s typically agreed that the parties will split the escrow fees 50-50.
The org id numbers are going to be on the agreement. So your ARIN org id numbers are your right as well as of course says contact information and this purchase agreement may be asked for by escrow or your escrow agents as well. And then the next step would be to actually set up the escrow. If it’s set up through escrow.com, again, you need to understand how to set that up but that’s one of the things that we would do and once escrow, both groups have got an account with escrow.com if that’s the route that you end up going and then in the transactions set up, then both parties need to agree to the transaction, agree to the terms. Once that’s accepted, the buyer will upload their funds, wire transfer their funds and once those are showing in the account, the next step is to submit a ticket and submit that ticket to ARIN. For the transfer process, the buyer and seller will need to cross-reference their tickets with ARIN. So, ARIN can link those two tickets and realize that the buyer wants to buy and the seller wants to sell and they’re talking about the same block and there’s agreement, then ARIN will go through that approval process, which is pretty straightforward and generally only takes a few days. Once that approval has been done, the block will then show up as being announced and who is for the buyer and at that point, the buyer will need to release the escrow, and those funds then transfer and populate into the seller’s account again through a wire transfer typically although there’s a check option as well.
That’s the process and what I was going to cover…there’s more details certainly here and I’m happy to have any conversation with anybody who has any questions.
Contact Me (Hartland Ross) @The Host Broker
Dir: 1-604-987-5530 0r 1-888-436-5262
My contact information is here. Welcome to give me a call or reach out. I’m just going to check to see if we have covered all of the questions. Looks like I’ve got all the questions or at least I’ve addressed these points I think. So if there’s no further ado I will end. Oh! There’s a question that’s coming here – So what’s causing the demand? So, I was suggesting that the projects coming online with COVID kind of were the light at the end of the tunnel I suppose and that a lot of the projects that were mothballed or paused for a while are kind of active again. So that’s increasing demand but it’s a bit as I said earlier it’s a bit of a double whammy because there’s demand but then there’s also a lack of supply. So I’m not necessarily sure that there’s more demand than there..oh sorry a lot more demand than there was before or prior to COVID I should say. I mean certainly, there’s been an uptick as a result of sort of opening up a process but how that relates to prior to COVID is hard to say but there’s also a lack of supply. So it’s a bit of both.
And leasing opportunities. Yeah, I covered uh leasing opportunities as well. There are options I mentioned. Typically leasing prices are in the 30 to 70 cents per IP range. So those are possibilities depending on the term that you’re looking for, the region, the block size, and the use case is IT hosting, is IT mailing, etc. and being able to satisfy those requirements, one of the downsides is of course the leasing and again, I’m not sure when uh you joined here. But I mentioned that you don’t have control, right? You’re essentially renting versus owning and so, you can do it but you’re perpetually going to have to lease them and you’re at the mercy of the leasing prices and you now have a customer base that’s on somebody else’s IPs.
Hopefully, that helps answer your question. Excellent. Well, thanks very much, I appreciate everybody joining today, and as I say I’m very happy to have a conversation one-on-one and with that, I will stop today’s session and very much appreciate your time and have a great rest of your day.
Whether you’re buying or selling an IT services business, the M&A experience can be stressful and exhausting, especially if you try and go it alone. Not only can an experienced M&A advisor lift some of the burden off your shoulders by taking on individual tasks related to due diligence and negotiation, but they come with a great deal of strategic expertise including industry-specific knowledge and relationships with potential business partners.
Conduct your own due diligence to retain an advisor you can trust and has your best interest at heart throughout the entire process. This is critical to achieving a high valuation and a trouble-free close.
Here are 9 important criteria to assess when evaluating a potential M&A advisor.
1) Trust: While this is a business transaction with lots of financial data to pour over, at the end of the day the success of your transaction will be based on your personal relationship with your M&A advisor. As you get to know one another, you’ll probably share more private information with them than you ever anticipated. Conversations between business owners and advisors can include private chats about a contentious spouse, frustrations over the company’s limitations, previous business failures, health concerns, or other issues that you might not even tell a close friend. It’s critical that the M&A advisor you select is not a trusted advisor in name only, but that you genuinely trust them.
2) Availability and Responsiveness: Whether buying or selling a business, this process takes time and continuous communication. Phone calls and in-person meetings may be required during normal business hours, early in the morning, in the evening, or on weekends. Select an advisor who understands your business needs and is flexible enough to work around your schedule. In addition, are they responsive? How prompt are they at returning calls and emails? A successful deal requires you to respond quickly to an offer. Time is of the essence and slow responses can be the difference between securing a higher offer or losing it!
3) Organization: You may think that being organized is a trait which any successful business should have. But, consider how the potential advisors with whom you have interacted work with you. Does the advisor meet his/her commitments? Are they constantly late for calls? Have they done their homework before meetings so they can add value to your discussions? Being organized is not really something you think about but when someone is not organized you can spot it immediately. It not only reflects poorly on the advisor, but it will have a significant impact on the outcome of your business’ purchase or sale.
4) Executive Advisor vs Junior Staff: An advisory firm attempting to close a new client will often assign the company’s senior executive to meet with you to ensure you feel comfortable with the firm’s capabilities and their ability to provide you with a successful outcome. However, when the contract is signed, they often pass you off to a more junior M&A advisor with less experience and/or industry knowledge. Will the executive with whom you have initial conversations be the same person with whom you will work? Having consistent communication with the same person throughout the process enables you and the advisor to develop a trusted partnership based on a deep understanding of your business and goals.
5) What is Their Client Workload?: The M&A process takes time to complete. Does the advisor have the time to produce a successful outcome for you or are they spread so thinly that you’ll receive the bare minimum in terms of service and attention? While you may want to steer clear of a firm with a large number of clients because they may not be able to give you the attention you deserve, this may also mean that they’re very successful, with M&A candidates actively seeking them out. On the other hand, a firm with only a handful of clients may have the time to dedicate to you but they may have a small client base because they have a reputation for limited knowledge or expertise. It’s important for you to assess the firm based on all these considerations.
6) Industry knowledge: Just as you would evaluate the years of IT industry experience if you were hiring a new member of your executive management team, you should also evaluate your potential M&A advisor’s past performance and reputation in the IT industry. Have they acted as an advisor or broker for web hosters, MSPs or other IT service providers in the past? An advisor who is a specialist in IT services businesses can anticipate and help you steer clear of challenges which may come your way. They also have an in-depth knowledge of the market, competitors, and the nuances of your products, services and technology. This will enable them to more quickly spot opportunities and potential unlikely business partnerships which could end up being very lucrative.
7) Reputation: While an advisor’s reputation could be addressed in several of the items above, we believe it’s important enough to stand on its own. The IT services industry is small in the sense that everyone knows everyone. People regularly change jobs and recommend respected colleagues and industry insiders to one another. If a person has been in the IT services industry long enough to become a trusted advisor, they have built a well-respected reputation over time. If a potential advisor has continually burned bridges by not working in the best interest of their client, the word goes out around the business community and it’s not long before that advisor will be out of business. Ask to speak to business owners, industry consultants or other IT executives with whom the advisor has worked. Was the best interest of that business owner their top priority? Do they possess many of the traits that we are discussing here – industry knowledge, trustworthiness, responsiveness, honesty, organization, or availability?
8) Industry Contacts: While it’s important to be knowledgeable about the changes taking place in the IT industry, it’s also important for the M&A advisor to maintain a Rolodex of industry contacts (buyers and sellers). An advisor who is well established in your industry can not only help you endure impending business storms but introduce you to potential buyers, sellers, partners and other resources you should know. Speak to them about their connections and access their industry resources to see if they can add value to your transaction.
9) Mediation: Mediation is defined as “a dynamic and interactive process where a neutral third party assists disputing parties in resolving conflict through the use of communications and negotiation. Mediation is forward-looking with the goal being a resolution that each party can live with and trust.” Although you may not feel it’s necessary to hire a personal advisor to work with you throughout the entire M&A process, it may be helpful to hire an advisor who can act as a mediator during the valuation phase, contract negotiations, or even post close. An impartial mediator can help establish a level of trust and understanding which can lead to a successful outcome for both parties.
Whether you’re buying or selling a web hosting, MSP or other IT services business, this is an important life event. Anyone can call themselves a business broker, but a true M&A advisor will become a confidant, counsellor, and partner. Selecting the wrong person can significantly disrupt the process, reducing your business’ value and possibly ending the negotiations all together. Having the right person who is by your side throughout this journey will help align you and your business to deliver the most profitable and successful outcome.
Founded in 2005, The Host Broker has been the M&A advisor of choice for web hosters, MSPs, data centers, IaaS providers, IT security firms, SaaS providers, ISPs, and systems integrators for 14 years. We have successfully completed hundreds of transactions, working closely with both buyers and sellers. Our experience enables us to anticipate roadblocks and hazards while also uncovering unexpected opportunities.
Call us at 1-888-436-5262 to discuss how we can help you on your M&A journey. For a free evaluation of your business click here Free Evaluation.