Webinar: Top 10 most common challenges buyers of IT firms experience and how to avoid them

Top 10 most common challenges buyers of IT firms experience and how to avoid them

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.

Webinar Transcription

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.

The Host 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.

Getting to a signed LOI & Getting through Due Diligence

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.

1.      Secure financing

  • Ensure you understand where your financing is coming from and the terms
  • Be transparent with the seller on timelines and subjects if any
  • SBA process takes much longer than the bank will tell you
  • If using SBA, find out if your bank makes the decisions or if they need to seek approval
  • Challenges with vendor and bank financing

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.

2.      Have an established process

  • Create a DD list
  • Divide process into financial, operational, technical, legal, HR, marketing etc
  • Have timelines associated with each
  • Have a team lead for each part
  • Focus on “deal killer” issues first (customer concentration, verification of revenue, customer churn, customer profile, reviewing of contract, verify % of recurring revenue etc.
  • Generally start with financial elements first

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.

3.      Know what you are looking for

  • Be clear how an opportunity fits into your strategic plan and be prepared to support why it’s a fit (even better if you provide this in the LOI)
  • Know that you can afford it
  • Understand what your deal killer issue(s) are
  • How are you going to service the customers? All remotely or will some need to be in person?
  • Would you entertain buying real estate if relevant? Office, data center etc.
  • Are you only interested in buying 100% of the business?
  • Are there any types of customers you don’t want? Adult, certain industries, etc

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.

4.      Know what you are prepared to pay for (understand your targeted ROI)

  • Recognize that most transactions will have 30% to 50% on close
  • Understand how you would structure an earn out & what constitutes an adjustment to an earn out
  • Are you looking to hire the seller and if so, under what terms?

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.

5.      Understand and discuss key deal terms early

  • Purchase price and payment terms
  • Indemnification caps
  • Goodwill vs asset allocation
  • Asset vs stock deal
  • Make sure the seller understands the tax consequences of a transaction
  • Legal jurisdiction
  • Liabilities associated with employment obligations

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.

6.      Discuss transition support

  • What are your expectations of the seller? Timelines, compensation etc
  • If staff are being included, is it all? How to vet individuals?

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.

7.      Move quickly and keep up the momentum

  • Deal fatigue can set in
  • Sometimes preference is given to first come first served
  • Turn redlined purchase agreements around quickly (requires a discussion with your attorney in advance)
  • Be prepared to allocate the time
  • Keep in regular communication – esp for unforeseen delays
  • Don’t overpromise and underdeliver

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.

8.      Establish and maintain trust

  • Have references that you can provide
  • Focus on building rapport throughout the process (in person meetings can help)
  • Rapport is an investment
  • Understand the motivations of the seller (money, speed, supporting employees, supporting customers etc)

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.

9.      Overzealous attorneys

  • Will slow the process down
  • Focus is on protecting their client – not getting deals done
  • If too overreaching, seller may walk away, lose trust or become frustrated

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.

10.  Customer and staff churn

  • Rock the boat as little as possible (pricing, processes, SLAs, response time etc)
  • Is there alignment of company culture
  • Typically customer churn follows staff churn

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.

Bonus slide # 1 – Miscellaneous items worth noting

  • Build your team with your own set of coaches (CPA, broker, attorneys etc)
  • Allocate sufficient time to focus on the process and keep up the momentum
  • Start small and move to larger files

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.

Bonus slide #2 – Sourcing Opportunities

  • Doing direct outreach to a targeted group. Note that like you, they a re receiving a lot of calls and emails these days
  • Monitoring lists and sites such as ours
  • Become a member of a peer group
  • Attend conferences

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.

Thank you!

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.

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