Transcript
Will is the CEO of IT Voice, and Will, you've been with that company for a long, long time. I mean, you have listed here on LinkedIn as 33 years, so you don't look a day over, you know, you don't look old enough to have started a company at 33 years old. So, I'm going to assume that maybe this has been in the family, or you bought this, maybe this was your first company, you're in Birmingham, Alabama, and maybe fill in blanks for me here. And for the folks watching, tell us who Will Slappy is. Yeah, yeah. Well, Mike, thanks for having me on, and I always love to get to spend time, you know, talking about M&A and everything that we've done in our journey. So, long story short, you know, my father founded the company back in the 80s, and I started, you know, he could tell you a long, funny story he told a group of people the other day, but really, even at the age of five is when I kind of started in the company. So, going to meetings, sweeping the warehouse floor, later, you know, cleaning old parts and equipment, and, you know, going out on customer sites, and, you know, back in the early days, like, pulling cable, right? And then later, you know, my first operating system was Windows 3.1, and pretty much got to serve in every single role, working part-time, full-time summers and stuff growing up. And then, you know, after getting out of college, I came on board with the company full-time, and then took over running the day-to-day operations around 2014 of the company, and then my father officially exited the company in 2019. We also brought in some outside investment at that time, and that's when we really started our acquisition journey, and so we've done 18 acquisitions since 2019, and we about 7 1⁄2, 8X the company in that period. So, now, as a company, you know, we have four main sort of lines of business, as we call them. So, you have the classic MSP that, you know, that you referred to earlier in what we do, but we also have a private cloud, as well as public cloud line of business, and then we have, like, our voice and internet division, and then, of course, we have our cybersecurity. So, we have the four main sort of lines in terms of what we do as a business. And, you know, we got big growth plans, so we want to grow to 500 million. We're about 50 million. You started about 5 million when I took over, about 50 million now, and then growth plans to grow to about 500 million. Wow. Amazing. What's changed? I mean, 2019 wasn't that long ago, but, you know, in our industry, things change in the blink of an eye. So, here, tell me, talk to me about, like, what it was like, that first deal, you know, where we are today. It's, is it different, or is it the same? You know, that's a great question. Our first deal was not, we didn't do well, right? You know, I mean, my playbook was about one page long on our first deal. You know, we had a general idea of what we wanted to do, and we learned a lot from that, right? And so, a lot of the playbook that we have today was generated from, honestly, some mistakes that we made, right? I mean, we did what we thought was the best way to do it, but anybody who's ever been in business for any period of time knows that you set a good plan. And it never goes as planned, and you learn along the way. And then, you know, after, it was probably about the third, fourth one, we're really starting to hit our stride, and then just continue to perfect that model, you know, thereafter. So, I don't think I was well-educated enough. You know, actually, I spoke, I was one of the MSP titans at, I guess it was DattoCon this past fall. And it was kind of a little bit surreal, because I can remember roughly about, you know, five, six years before that, sitting in the audience at events like that, learning about, you know, M&A from the guys that were on the stage at that time. And then, now, I was, you know, one of the guys on the stage answering those questions for, you know, the next group of people coming behind. So, I don't think I knew enough, Mike, in 2019 about really what the lay of the land was to even, you know, know how much has changed since then. Of course, multiples have gone up and come back down, and then gone up and come back down, you know, in that process. Really, the fundamentals of what we look for in a company, and those levers are really, those have never changed in terms of what really drives value. Of course, in any economic condition, you know, valuations are going to go up and down, just like they would in, you know, if you're selling a house, right, it's going to go up and down, right? Overall, over time, it continues to go up, but, you know, there's some fluctuations up and down. So, you've obviously got that that changes. I think probably the biggest thing that, you know, is kind of affecting things now is that you've got a lot more, like, private equity type of money that's entered our space more than was five years ago. So, that's helping to give some positive pressure upwards in terms of what the multiples that you can get. And there's a lot more companies like us that, you know, are those platform companies that are doing roll-up strategies and buying a larger group, you know, to make into a bigger whole. You've seen private equity do this in other, you know, industries, like, you know, dentistry, you know, for example, or even vet clinics or, you know, those kinds of things where, you know, even like, you know, pest control or whatnot. You know, there's all these industries that, like, private equity have come into with these large organizations and take all these smaller, you know, one to 20 people sort of, you know, shops and now combine them under a bigger umbrella. So, we're starting to see the same thing happen, you know, in the IT industry as well. From the buyer side, you know, it sounds like these days it's probably more challenging or maybe more competitive because you talk about private equity coming in. So, that's probably a challenge, which may not be a bad challenge, but, you know, sometimes those things can be just as great as they can be bad, if that makes sense. Like, is it, I guess, is that a challenge? Is that a bad challenge, good challenge? And then what are some other challenges that you're seeing today that you recommend or how do you recommend other people combat them? Yeah, so for us, it ends up kind of equalizing because, obviously, I'm raising capital on the other side. So, the more interest in our industry, the more, the easier it becomes to raise that capital, right? So, yeah, with it more competitive, it drives up some of the numbers, but it also drives up the enterprise value of our company as a whole. So, you know, it's not to beat the real estate, you know, horse to death, but, you know, if you think about if you're upgrading a house in real estate or something along those lines, like, you might, you're going to pay a higher price. You're also going to sell your house at a higher rate, too. So, you kind of, you win, you know, you win or lose kind of equally, if you will. And so, it doesn't necessarily have that net sort of negative impact when you're seeing it on both sides. So, you know, that would be what I would say there. You know, so if somebody's on the buy side, I think I would look at it kind of in a couple of different angles. It kind of depends on the nature of what kind of buyer are they. So, you know, you've got probably you've got kind of two primary buyers that I would look for. Right. So there's like a buyer like us, which is what I would consider to be like a platform company. Right. You know, we want to scale at a pretty large degree. You know, we want to 10x the size of who we are. You know, and that's what most platforms, you know, are wanting to do. Most platforms start at somebody that's north of $10 million in EBITDA. And then now they're wanting to grow to, you know, $30, $50, $100 million in EBITDA. But then you've got a lot of other buyers. And this is where I mean, I spend a decent time helping people in the industry that, you know, they might be a smaller size company. I mean, I'm thinking of some guys that I help from time to time. I mean, they're like $20 million in revenue and I think maybe like $3, $3.5 million in EBITDA. And they're just trying to grow to the next level. And they're looking at an acquisition that, you know, is a quarter of their size to add on. So they're trying to do one acquisition. And, you know, maybe to do another, you know, two or three, you know, along the lines to grow their business that way. That that's different from somebody that's kind of looking to enter into serial acquisition mode like we are. Now, you may have somebody that maybe has grown their business to a good point. And they want to move it to the next level. And they want to become that platform. So then you can look at, OK, do you bring in private equity to help you do that? Or do you bring in other types of private money? Do you leverage debt to help you do that? How are you going to go about becoming that platform and getting access to the capital that you need to be able to grow, you know, the company, you know, exponentially like we've done where you've, you know, basically, you know, 7, 8x the size of the company, you know, through 18 acquisitions become a pretty big lift in terms of what you're doing there. So there's a lot of different strategies that people can take that just depends on, you know, again, what is that core thesis that you have that you're trying to accomplish? And I could spend a lot of time talking any of those different core thesis routes that somebody might be, you know, going down. And, you know, what's the best route to do that? One of the things I don't know if this is the question you'll ask, but one of the things I always love to talk about is kind of, you know, what to look for in an acquisition from like a valuation perspective, right? And I think that this is the same across all of those different options that I talked about. So the first one I always have on the list is culture fit, right? So, you know, if you've got a company that you're acquiring that doesn't fit the culture of your company, and I say this very humbly too, in the sense of, you know, it doesn't mean that they're a bad company or a better company or anything along those lines. It's got to be, it's just got to be a good fit. You got to approach the customer from the same angle, you know, in terms of how you operate and what's your thoughts on, you know, employees and kind of what are your core values? What is your, you know, your core model of how you go to market? And those don't have to perfectly align if you're a platform company. Hopefully you're bringing in a higher level of operational maturity that you're pushing down to the companies you acquire. And that's part of how you're creating that, you know, one plus one equals three sort of, you know, math. And we can spend a lot more talking about that. But fundamentally, you got to understand how they're going to fit into the culture. Because if it doesn't fit into the culture, then, you know, you could end up with an acquisition that could fail and, you know, lose a lot of money for a lot of people. So that's the first thing I always look at. Of course, recurring revenue is king. So what's the percentage of recurring revenue that you're looking for? What's your target? Hopefully that's a part of your core thesis in terms of what you're trying to do. And there's no one right strategy that's there. That's just something to think about. So, you know, I know people who actually look for IT type businesses that have lower recurring revenue because they have a model to convert the non-recurring into recurring and they know they can buy at lower multiples and then be able to convert it. And that's part of their core thesis in terms of how they want to operate. Other people are like, hey, we're at 80 plus recurring revenue and I only want to buy people that are also at that. So whatever your target is, that's one to be very specific about in terms of the target. Generally speaking, not even generally speaking, I mean, I would say this is pretty much always the case across the board. More recurring revenue is going to be valued higher than less recurring revenue. Significantly so. You know, at least double if not triple in terms of the valuation that you're going to get from a, you know, 80, 90% recurring revenue business versus only a 10 to 20% recurring revenue business. But from a buyer's thesis perspective, again, you might focus on one that's less because you can get it at a different multiple that is less costly. And then if you can successfully convert it, you've really done some value add in that case. You know, percentage of that recurring revenue that's under contract becomes a key point. If there's one thing that I were to tell sellers out there is this point, a lot of times sellers have a philosophy of, hey, you know, my customers can leave at any point in time. It's a month to month sort of scenario. They maybe haven't renewed contracts with customers in a long time. Their contracts aren't assignable. You know, they have, it requires the customer consent and then you go to sell your business. And then now you're like, well, I don't want to tell my customers I'm selling my business to have to get their consent. And the buyer's like, well, I don't want to buy your business. And then your largest customers say they don't consent. And then what have I bought? Because they're buying that revenue stream from those clients. You know, so it's worth the money on the front side, especially if you're thinking of selling in two, three, you know, years, somewhere down the road. You get a good contract in place and make sure that you're getting your customers under that contract because that's going to make it a lot easier and make your business more valuable when you go to exit than if you don't have your contracts in good order. So again, from the buyer's side, you're looking for that. What are the contracts that they have? What is my risk profile on the seller side? How do I make sure I have all good contracts in place that reduces the buyer's risk and therefore increases my valuation, right? Low churn rate, you know, is going to be something that's going to, we're going to value and a buyer's going to value is, hey, if you've got a lot of churn, well, then that becomes a question, concern, a red flag. You know, why is that? What's broken inside the business? You know, the lower that churn, the better it says that, you know, your operation is performing. You know, what is the growth rate of the company? Are you growing? Are you flat? Are you declining? Obviously, the more you're growing, the more it shows that you've got a good market awareness, your sales process, your marketing, you know, those things are working and you're seeing the growth rate associated with that, which is more, usually more appealing than, you know, a flat company, especially of a declining company. I wouldn't tell people to worry about too much. I mean, I know a lot of the MSPs are fairly flat. They don't really have any sales or marketing and, you know, they get word of mouth and that's how they grow their business. Those are still great businesses and they still have a lot of value that's out there, but it's different. A company like that usually wouldn't work as like a platform company and platform companies are usually ones that get the higher multiples. So it's just a factor to consider as a part of it. What the EBITDA margin, I mean, that's another sort of health marker. You know, you want to really be north of 15% in terms of EBITDA margin. You know, best in class is going to be in that 20 to 25, you know, level in terms of EBITDA margin. A lot of people, you know, if we're talking in, you know, and I don't know who all is listening to these, you know, podcasts and how much that they know. So some of this, they may be like, well, duh. But I do find, especially with the smaller MSPs, they don't always recognize properly the costs in the business, right? So they've got family members that are being paid in the business that really don't work in the business. They got personal vehicles or other personal expenses that they're running for the business. You know, so a lot of times people should be tracking like an adjusted EBITDA inside of the business. You may want to run those various different expenses to your business. That's, you know, between you and your CPA and what you should do there. But at least from an exit perspective, make sure you're really adequately measuring your adjusted EBITDA that's saying, hey, look, if I sold the business and walked away, like what are the ongoing expenses? And then things like salary for yourself, you know, what, like, maybe you're overpaying yourself for what the market really should bear for that. And you should have an ad back. Maybe you're underpaying yourself and a buyer is going to come in and say, hey, you know what, if you leave, I got to replace you with a general manager and they're going to cost X. And you were paying yourself half of that. So that actually becomes a negative adjustment, you know, for you on that side as well. So all that kind of put under the guise of, you know, the EBITDA margin that's there and then making sure you're looking at that correct adjusted EBITDA margin. And I would say on that note, like if you think that you're going to be selling at some point in the next couple of years, it's worth having a conversation with some M&A attorneys. And by the way, don't use your family attorney, use an M&A attorney that actually does this every day and knows what they're doing. Conversations with accountants, it'd be great to even talk to accountants that again, know the M&A world and even go ahead and start talking to like business brokers and stuff that are out there or coming to conferences. You know, ping me, talk to people like myself, get educated on some different things about how to do things. Because even though you might not be selling tomorrow, you should always be, a well-run business is always run in such a way that's looking for exit value. Even if it's five or 10 years down the road, it helps you run the business better. I actually run the business better in all the M&A sort of activity now, just because you're like, well, hang on, this is the right way to value it. The reason it makes it more valuable is because it means the business is actually running better. Some of the things I've talked about, like low churn and percentage of recurring revenue, those are all things that just make it easier running a business, even if you're not selling. Even getting educated on that will have value of things you can work on now that when you do get ready to sell two or three years from now, you really can get a lot of that accretive value because you've spent some time. Another one would be largest customer percentage. If your largest customer makes up north of 50% of your total revenue, then that's gonna be a ding, because if that one customer leaves, then you've lost half your business. That's a threat to you right now in running your business, regardless of exit. So that's something to keep in mind and making sure you're growing other parts of your business. Again, back from a health perspective, you really never want a customer that's over like 10% of your revenue anyway. Because it'll make you make bad decisions from running the business. You end up with a tail kind of wagging the dog, right? Because now you do whatever that customer wants, even if it's not in the best interest of the company. But when they provide that much revenue to you, you don't wanna shoot yourself in the foot. But sometimes it becomes a perpetuating problem because you keep making bad decisions, and then that prevents you from getting other clients and kind of takes you down a bad road. So that's something to just keep in mind and watch for as you're growing and find ways to reduce that. And then the last thing is that, and this one I kind of put two things, integration level and or operational maturity. So if you've done acquisitions, how integrated are all the acquisitions that you have? And if you have or have not, then there's also the operational maturity of, and this kind of ties into some of the things I've talked about, like your contracts and how good those are. Do you have rate increases in those contracts that you're routinely doing for those customers or all your customers on the same offerings? Or do you have a ton of one-offs that you're doing, customers set up on autopay? There's a whole long list of things. Gary Pica in True Methods does a really great job of talking about all of those ways to improve the operational effectiveness and I call operational maturity of a business. So that's worth its weight in gold right there. I mean, joining like one of those, understanding what they talk about there in True Methods and a big proponent of like the true peer groups and all of that, that really can help people level up their game that not only helps it from a running a day-to-day, but it really can help ultimately on what that exit value of a business is. And then on the buy side, when you're buying a more operationally mature business, it usually goes a lot better. You have less customer churn and there's less risk involved because that business has been run well versus one that's kind of just all been run kind of shotgun by the owner and all of a sudden the owner wants to exit and then there's a lot of risk involved. So that was a really long answer to a fairly simple question you asked. What's your advice for a new buyer? They're coming in the market and I talked to folks who want to get to the position they're just starting today. They own their MSP, they're running their MSP and they have a plan to buy. Of course, I'm not giving you much specifics. So think about it as they could be a terrible candidate to start buying. They could be running an MSP that's broken so they could be on the other end of the spectrum ready to rock and roll. So what's your general advice? Yeah, so I always give people the same advice. I get asked this question all the time and usually I'll be at a conference and somebody like after I speak or something they'll be like, hey, Will, I'm thinking about buying. Tell me, I've not done it before. Give me the lowdown. So what I always tell them every single time is that here's a common thing that I see as a problem. When people have not been able to grow organically, successfully, and so they think that the solution is to do acquisitions instead. That is a disaster waiting to happen. Because when you do an acquisition, one, if you don't have a good sales motion, then you probably don't have a lot of accretive value to bring to an acquisition that you're acquiring. And I guess maybe they have a great sales motion and that's why you're acquiring them, but that's kind of a dangerous endeavor to go about doing as well. And so if you don't have that good sales motion, then it's very risky to be now trying to acquire somebody. Because when you do an acquisition, some people think, oh, you just acquired all the customers and now you've got that and you're all hunky-dory, right? Well, unless you're going to go a route of not doing any sort of integration between the companies, you're just going to acquire it and just keep its own name, keep it completely segregated and over there to the side, which is a strategy that some people do. You don't really get a ton of accretive value because when you really get the value, like I talked about as one of those factors earlier is that integration level and you're getting those economies of scale of working together, that's where you start to get one plus one equals three in the acquisition game. And so if you're going down that route, which is what I would usually recommend to people from an integration perspective, you now are going to have to essentially resell the vast majority of those customers on who you are because that becomes a change. And so you need to have a clear value proposition, clear message to those customers of here is why my company now has value to you. And then hopefully there's upsell opportunity on top of that because you're going to inevitably lose some customers. Somebody liked the former owner and if the former owner is leaving or they just don't like the change or whatever, I mean, I've never heard of anybody doing like an acquisition that like 100% of the customers stay, right? Inevitably speaking, you should be budgeting, proforming for customers to leave, you know, and so you've got to have something weighing on the other side that is now adding that value. Okay, I'm going to lose a certain, you know, number of customers, but now I'm going to increase and grow those customers that I've got with more revenue that's going to far outweigh, you know, the customers that you may leave or that may leave as a part of that. And then all of a sudden you take your good sales processes that you've got in place, you put it on top of that acquisition and then now you help it grow at a faster speed. And so now you've actually brought some additional value that then allows you to gain more value, you know, from the acquisition that you've done. So that's sort of like the first, like, bit of advice that I always tell people is, you know, don't try to cheat good business practices of you've got to have a great go-to-market strategy and sales motion with thinking, oh, well, I'll just, you know, acquire. I know of a couple of, like, big companies that basically did that and they all went bankrupt doing that because they just kept trying to acquire their way to growth, you know, to drive the stock price and those kinds of things. But their business practices weren't sound. And so eventually, you know, that all caught up with them, you know, and they went belly up. So that would be my number one advice if somebody is looking at you in the buyer's game is, hey, make sure that that platform that you've got is a good platform. And I'm focusing on the sales side, but it really goes to all things, like having good, you know, processes and pieces in place, having, you know, so I guess, you know, like go join a peer group first, right? Like go and, and like join, like, you know, something like a, you know, true methods or whatever to improve your business. Because there's a lot, you know, a lot of things that you can do first to improve your business and then making sure that you're mature enough to now then be able to go and acquire companies. Now, you don't need to wait until you're like at, you know, you know, the top level, ultimately mature as an MSP to go and do that, right? But hopefully you're at least above average before you start going down, you know, that journey. And so that way you've got something to offer. Now, in our strategy, as we've gone through it, every single company we've acquired have had some value that they brought, some maturity that they've had as an organization that was better than what we had. And then that helps bring our maturity up because we take their best practice and incorporate it into who we are. And then now we spread that across, you know, the whole, the whole company and all of the locations that we've brought together. So, you know, certainly not advocating that you have to, you know, be at a level of perfection before you get started, but just make sure that, you know, you're strong enough that obviously you don't do an act, because depending on the size of the acquisition, if your culture and your way of doing things is not strong enough, then that acquisition could actually kind of overtake even the culture of your company and potentially take it in a direction that you aren't necessarily really looking, you know, to do. So you just got to make sure, you know, that you're ready before, you know, before you jump into it. Now, once you're, you know, let's just say, hey, you've checked that box. All right, well, I understand. Yep, I'm in a peer group already. I'm following, you know, best practices. And now I'm trying to, you know, go off and do, you know, go off and do my first acquisition. So if you kind of check that box, you know, then the thing that I would probably, some other advice I would say is it's ideal to start small on an acquisition, you know, and even to your point, like, hey, I may not want to do like one of those million dollar MSPs. Most people, the first acquisition they do, and I mentioned this early on in our conversation, Mike, that, you know, we made a lot of mistakes in our first one. And I'm glad that our first one was of a small enough size that we could absorb those mistakes and learn from it. And it not, you know, turn the apple cart, you know, over. So, you know, make sure that, you know, don't go out and, you know, the first one is like too big. And then now you don't really know what you're doing. And then now you're, you know, you're kind of a little bit playing with fire. So, you know, I would advocate, hey, do one that's more manageable that, hey, you know, if it, if there are some, you know, lessons learned that those lessons are a little bit less expensive than if you go, you know, too big, you know, on the get go. The next thing I talked about before, just, hey, who your team of people, you know, attorneys and accountants, make sure you get people who actually know what they're doing in M&A. There's a lot of great attorneys out there that don't know M&A and it's a different sort of practice. So make sure you get people that specialize and that can help you in doing that. The same as with due diligence, make sure you're getting like a, you know, accounting firm that actually knows what, you know, actually does like M&A type of due diligence, you know, all the time. So, you know, having a good supporting cast of people that can help you. It'd be great to have some sort of mentor, you know, I've had multiple people who, you know, and that's really ultimately why we've been so successful. I've had multiple people that will take my call like, hey, you know, what do you do with this sort of situation, right? I have some lifelines that are out there that can be able to help you. Those are other kind of professionals, you're probably not paying them, but professionals that, you know, can help you down that route. Then you start thinking of the structure of the transaction, right? So there's a couple of different routes, just I'm gonna talk real high level of structure of transactions. So of course you've got the cash component. That's what most people think of immediately. Once you get beyond the cash component, then the next thing is to consider like from a debt perspective. So one, you know, that goes on both the debt from the seller and the buyer side, right? So when you're the buyer, you know, most people will leverage some sort of debt. The same as in real estate, right? Like you could buy, you know, a piece of property, all cash, but you can also get some decent terms in the market to be able to have a certain portion of that purchase price that now, you know, is financed based upon the cash flow of the deal. So you got debt that you can bring in to help limit the amount of equity and cash. You gotta come out of pocket to be able to make one. You can also get the seller to finance that as well. So, you know, you can have a seller that could have a note that you could pay over, you know, a one, two, three, five, 10 year, you know, whatever, you know, sort of option in terms of how, you know, you negotiate that. Another good one is retained stake. So you can let, you know, say 10% or something like that of the value of the business now becomes a retained stake that that seller gets into the broader organization that, you know, owns all of it. Now, of course, like if that 10%, then it has to, if you're 10 times the size of them and that 10% actually ends up being about 1%, I'm using, you know, kind of, you know, easy numbers here. A good attorney and accountant can help you figure out how to actually match that up. But now you're paying, you know, if you're going to pay a million dollars for it, you know, now you're, you know, say you had a business that you valued a million dollars, again, keeping easy numbers here. It might be something that, hey, you're going to have like, you know, 700,000 that maybe you're paying up front, 200,000 that they're having as a note, and then $100,000 like retained stake that gets rolled into the business that now they get as an equity piece. The retained stake is nice for a couple of reasons. One, it limits the amount of cash you have to put out on the front end. So that's helpful from just being able to get more deals done. Two, it aligns some long-term incentives where, hey, how your business operates afterwards directly affects their future, you know, valuation. A lot of people call this like the second bite of the apple. So if you're on the seller side, some people are like, oh, I want to get all my cash up front. And there's certain reasons for exit that that may make sense. There's also, if somebody's doing a platform bill that eventually they're going to exit, you know, sometimes that second bite of the apple, as they call it, that retained stake can end up being worth as much or more than the, what you got from the first sale. And so that can actually be a really good thing. And if you're selling to somebody that you really believe in the vision of what they're doing, then that can become, you know, very positive for you, you know, down the road. And if it's something like 10%, that's probably not going to break your bank today. And so now that becomes something that, but hey, down the road, there can be another big, you know, carrot that you're able to get. So that can be a very mutually beneficial. Of course, not everybody wants to do that or able to do that, understand that. But that's something that can be aligned. Another part of the structure to consider is with earnouts. I'm not necessarily a big fan of earnouts, and a lot of people are not a big fan of earnouts. The reason why that a lot of people are not a big fan is because of expectations. And so in an earnout, it's going to be based upon some sort of post-closing metric, right? So it could be, you know, the 12 months or 24 months or whatever, you know, EBITDA of the company or revenue of the company or those kinds of things. You know, if it all goes well, then it ends up becoming a non-issue. Most of the time, even then, sometimes it can become an issue. If it doesn't go well, then all of a sudden the seller is getting paid less. And the seller may feel like that the buyer didn't do what they were supposed to do, you know? So if you are going to do an earnout, revenue is usually the best one to do it on, because at least it's clear, like revenue is revenue. It's really hard to kind of tamper, you know, with revenue. And so that one's probably the best one to do. You know, if you start doing EBITDA, it's like, well, they added an extra cost or extra load or how they ran the financials, you know, people can, you know, kind of play with EBITDA a little bit that people may not all agree about, you know, those accounting decisions. So, you know, from a buyer's perspective, it's like, yeah, you want to track off of EBITDA because that's really where your value is. But then also, even from a buyer's perspective, the risk that you run is, well, now if the seller doesn't agree with your tracking of it and then now they end up suing you over it and then now you end up with a lawsuit from somebody. So maybe you save on the earn out piece, but then now you got to deal with a headache and another potential liability that are out there. You know, the revenue side can be better because at least it's clear, but then they may be like, well, you didn't do what you promised. You didn't go sell to customers. And you're like, well, your customers were crap and your contracts were bad or whatever it might be, right? So I'm generally not a huge fan of the earn out just because of the fact that you can get different expectations and then if things don't go well, then all of a sudden people are blaming each other and then that potentially creates risk and liability and headaches that may not be needed. Now, all of that to say that sometimes when there's a deal that two people want to do and there's a gap in between, you can mitigate risk from the buyer's side and create a more upside potential for a seller by creating an earn out. So that's why that they exist. So there is a time and a place for them. I would just be very cautious with those things. Sometimes a retained stake, I tend to like retained stakes better and the reason is that they're aligned, right? So if you have a retained stake, then it's not something that the buyer has to pay like at a certain point so it doesn't hurt them from a cashflow. And then if it's aligned with the buyer's equity as well on whatever that future value of the company is you win and lose together. So your incentives are more aligned in that case versus an earn out. The less I pay you, the more I get to keep. And the more I pay you, the less I get to keep. So we're at odds with each other in an earn out scenario just in terms of incentives versus from a retained stake. We're aligned with each other of both wanting to maximize the future value of the company as much as possible. So that's why I tend to lean that direction but there certainly are some cases for earn outs as well. So I kind of think of like, so that's something like if you're thinking about and I'm getting back to your question, Micah. If you're thinking about going and buying, those are some things to get educated. Go talk to an attorney that does M&A. Hey, what are these different structures? Let's talk about the pros and cons. Let me just kind of talk through, I think this could be helpful. Just kind of like the life cycle of how an acquisition, I'm gonna overly simplify it but if nobody's done one before, like the first time I did one, I was like, how does this even work, right? And so if that would be helpful, I could just kind of talk from like beginning to end of what does it look like to buy a company? So stage one is like finding and identifying the company. So that can be through networking, going to events, going to, Kaseya's got the M&A symposium that's coming up at Connect IT. They have that every year at Connect IT. I believe they have one, yeah, they have one at DattoCon as well. And there's other industry events that are out there that are specific, right? So you could go do networking and find somebody. You could hire a buyer's broker that would go out on your behalf and just call on companies, especially if you wanted to find someone in your own city or in a geographic, that might be a good idea. Or there's all sorts of brokers out there that you can be like, hey, look, I'm looking for something. If you see anything, let me know. I've kind of built that network of people. So I got one just yesterday. The broker emailed and said, hey, I think this might fit into what you're looking for, right? And so then take a look at the details of it. And usually it starts with like a one page teaser that gives maybe the general region of the country that it's in or region of the country it's in, what's revenues are, what's rough eva does, kind of the profile of the customers, what the ARPU is of their customers, those kinds of general stats. You sign an NDA, they give you the longer, usually 20 to 40 pages, sort of SIM or SIP that'll have all of the information about the company and whatnot. If you find one that you like, of course, on the NDA, you can't tell people about it. You gotta be real, you can't disclose anything you learn. So you have to be confidential with all that. You find a company that you like. Depending on the size of the deal, some of them will do IOI first and then jump into LOI. The big difference between IOI and LOI, and I'm being overly generic, I'm sure there's some people out there that are listening to this that could get more technical than that. My general interpretation is IOI is non-exclusive and less binding, where LOI is exclusive and a little more binding. Very rarely is an LOI fully binding because it is just, I mean, LOI is letter of intent. An IOI, a lot of times, they at least get interest and they're continuing to talk to multiple different parties. And then you kind of narrow in maybe on the party that you want. Some people will kind of jump the gun and just go ahead and give an LOI. And then usually the big part of LOI is that exclusivity point, right? So, hey, you're not gonna keep marketing your business and talk to other people. You're only gonna talk to me for this period of exclusivity. Some people may say, well, I don't wanna have exclusivity. I wanna keep seeing what the options are out there. But if you're on the buyer side, you don't want that because look, I'm about to spend some real money and some real time and some energy and effort to do a deep dive and due diligence to ask all these questions and learn about your business. And usually an exclusivity period would be somewhere like the 45 to 75 days, say 60 kind of in the middle. Where it's like, hey, look, I'm gonna go through the due diligence. So I don't want all of a sudden, you to be talking to other people that's a little more interesting. And then now I've spent 100,000 in due diligence and now you decide to go with another suitor. So you have that exclusivity period that gets us both focused in on, hey, look, and then LOI is gonna have the major terms. Here's how we're valuing the business and here's some of the things we talked about. Here's the structure in terms of cash or debt or retained stake or employment agreements, all the main terms, right? So you should kind of get those things out and say, hey, at the real high level, usually that LOI is like about two pages, maybe three pages or something like that in terms of what's there. And so it's kind of high level notes to say, hey, we all agree on the major terms of the agreement and in terms of what we're doing. And then now we're gonna go exclusive to you go get all your questions answered. Maybe get my questions answered and see if we can move to a definitive agreement. So you get the LOI done. From there, that's where you jump into due diligence. So normally there's some sort of financial due diligence that can be done. Some smaller companies may do that in-house with a good finance team. Usually if there's any sort of banks or things involved, they're gonna want some sort of outside perspective. The same bit like, I keep using real estate, but it's so similar to real estate. In real estate, you'd have an appraisal come in, right? And so you need some sort of third party that comes in and values the business. A lot of times it's a Q of E form, quality of earnings, that an outside accounting firm is gonna come in and look at all the cashflow of the business and validate that cashflow was really there. And then gives the bank, especially if you have a bank involved, that comfortability to lend you that money based upon you're buying a real business that really exists and really has those cashflows and validating all those. So you got the financial, which is the most important of that. But then you get into all of the operational diligence pieces, right? What are the software that they're using in their stack? How many employees do they have? What's the average tenure of employees? Let's take a look at their contracts. Do they have good contracts? How many of their customers are under contract? All that whole litany of just questions. I think we have something like 180 different questions that we ask in our due diligence of, hey, let's just look at everything from your PTO policy, your benefits, your contracts, your leases, your buildings, all of those different, you think about all the different relationships that you have that make your business operate. And then a buyer wants to look at all that and see what sort of risk that they might have on that and make sure that operationally, accounting, sales, all the three major areas that they get covered. So once due diligence, if all that goes well, hopefully there's not a, what they call retrading of the deal. And we try not to do any sort of retrading. It just doesn't feel good to people. And what retrading is where the buyer comes back and says, hey, go back to the example we talked about earlier. Hey, I'm gonna give you a million bucks. Well, you know what? I looked at your stuff and you don't have some things in order. So I'm gonna change my offer to 800 now, right? So they come and cut the offer to something less. So certainly the buyer has the right to be able to do that. If you find stuff that is not good in the business, if you come in with the expectation, everything's being perfect, where you're just kind of being stupid with expectations, especially given the size of the business, you should have some reasonable expectation of where they're gonna be from an operational maturity level. So you try to hold the higher standard than where it maybe is reasonable, then you're kind of just not being a good buyer in that case. But sometimes people, they didn't disclose that 50% of the revenue was all from one customer and then you come and find that out and go, oh, wow, that's pretty risky. I'm not willing to give you that same price of what I was before and have to make some sort of modification. So for us, it has to be something that's really material to the nature of the business. We also, in our due diligence process, we put the most material things first in the process to try to kind of get through those. So that way, if there is something, we catch it early before we and the seller has spent a lot of time investing in it to just get... You don't wanna go through all of the stuff and then you find out, like in the last piece of due diligence that their customers, one customer makes up 90% of their business, then you're like, oh crap, we don't wanna do this. So ask to those things that are most important first. So from there, if all the due diligence stuff goes together, hopefully they've got a good M&A attorney, you've got a good M&A attorney, they put all of the... They duke it out and you both end up spending a lot of money on that. It is good, like it's important with your attorney in managing that relationship. Some attorneys try to prove their value by how much they can argue with the other attorney and how much kind of flesh they can get, bite of flesh that they can get, but you're usually paying them by the hour and so you're paying for that and that may not always be that beneficial. The best transactions I've seen is when people come in with fairly fair documents round one and then they have a good fair attorneys on the other side, they then come in with reasonable edits to that. If you think about it, if you're starting here and then now you're trying to get here, that's gonna take a lot of costs. If you start here and here, yeah, you're gonna have to bridge that gap with some rounds, but that can go a lot faster and be a lot less expensive to both you and the seller in terms of what that is. So this is also another reason of having an M&A attorney is really important. We've had some deals that have cost us a lot more and cost the seller a lot more. And to be frank, the seller was not even in that great of a position because the attorney just didn't understand how M&A worked and now they're asking all sorts of questions that they should just know the answer if they did that day in and day out, they would. So anyway, the attorneys hash that out. There's these things called disclosure schedules. It's really important in the disclosure schedule. I've seen a lot of sellers who wanna not disclose things because it's a lot of work. It's like, I gotta get all these contracts, all these kinds of things. Here's the beautiful thing about disclosure schedule. Everything that you put on the disclosure schedule, now it's the buyer's responsibility to make sure that they look and are okay with it. And you now basically remove the liability from yourself the more that you disclose. So some buyers are like, or some sellers are like, hey, this is so much work. Well, it is a lot of work, but if you disclose that contract and then down the road, they're unhappy with the results of that contract, then you're like, well, look, I disclosed it to you. You had the opportunity to read that contract whether you did or not, it's up to you, but you had the opportunity so you can't now come to me and be upset at me or trying to file a lawsuit against me or whatever. If I didn't give you that contract and then now laid on the backside, it comes up, then there could be some potential risk for a seller in that case. Again, kind of going back to preparing for selling down the road, keep all your contracts in an easy to locate, all your vendor contracts, all your customer contracts, keep all that stuff well-organized. It's worth doing it on the front side. If you keep all that stuff organized, then when you go through a sale process, it should be fairly easy because you're just able to just give them everything they need fairly easy compared to having to call your vendor or go look through your email or whatever. And hopefully it's a bigger company you got, CFO or somebody like that, that's really keeping all that stuff together for you. So that's important. So yeah, you put all the disclosure together as you say, here's all the material contracts and relationships and vendors and contractors and employees and everything that we've got. Everybody signs off and agree to that. You agree to the terms of whatever that structure of that purchase is. And then probably the oddest thing that I learned in that whole process is when you go to close. It's not very glorious. It's kind of anticlimactic. You don't all get in one room. You don't get some big check that you get handed to you or anything like that. Now, a good attorney or somebody will usually, they might bring in some champagne or something and let you come to the office and kind of make it a little bit more ceremonial. But a lot of times it's just on a conference call. And what happens is the buyer and the seller and the attorneys get on there and you just go around and say, everybody has already, all the agreements have been all agreed to. The buyer's council and the seller's council already have exchanged signature pages of documents. And so you basically just go around the room and everybody says, are you good to close? Yes, yes, yes, yes. All right, we're closed. And then the attorneys give each other the virtual high five or whatever. And then it's done. And then depending on what time of day you've closed, if it's earlier enough in the day, then you usually get money in your account that same day and the wires will go through. If it's late in the day, then it might be the next morning before it comes through. But within 24 hours, at some point when your bank does their swift sweep or whatever, then all of a sudden you see that money show up in your account. So it's kind of a little, it's not like a real estate attorney where you meet the buyer and seller and you sometimes shake hands, you sign the documents together, you hand the keys over or something along those lines. It's a lot less kind of process in there. Was actually one transaction we did. I was actually on site at the time. It was kind of weird. We had just finished up our due diligence stuff. It was all kind of coinciding. We actually, me and the seller had gone to lunch. And we were actually in the car together and we closed in the car, both on the phone with the attorney. So that was kind of, that was the one and only I ever got to do in person that was kind of special. But most of the time, you're just all on a conference call together. So then that happens. And then the other things to kind of think about is like, what do you want post acquisition to look like? So, and we could, this is another one of those, Mike, that we could spend a long time talking about of a seller really thinking through, all right, after this is all done and I've got my money and I've got my retirement set aside, like what am I wanting to exit as quickly as possible? Am I wanting to stay on? If I am going to stay on, am I going to be okay with not being the boss? What's that consulting agreement, what's that employment agreement going to look like? What am I going to be required to do? How am I going to feel about doing that after the fact? So it's interesting in my seat because sometimes I feel as much like a counselor or a therapist in some of these transactions post-close as anything else, because you've got somebody who's run a business their whole life, right? And then now, especially if they're exiting, they're entering into a brand new world for themselves and that can be a challenge, right? Just in its own right. So those, but you begin that journey. So it's good to kind of think and plan ahead for what that's going to look like. I don't know that you can do anything to really completely prepare yourself for that, but at least think it through and have a clear goal of what you're trying to accomplish. And so that way you end up achieving what you're trying to do. Well, Will, that was fantastic. Thank you so much for being here. We're going to have you back and I've got, you're going to be doing all sorts of training for the M&A concierge platform for MSPs. And for folks watching this, whether you're a buyer or seller, make sure you go register for the M&A concierge platform for MSPs. Get in there. Tons of training inside here. Some really great live and virtual events coming for you. So Will, thank you so much for being here. If you could just real quick, let us know where we can find you. Yeah, thanks, Mike. Thanks for having me again. I'm on LinkedIn all the time. So LinkedIn, I think it's slash Will Slappy. I can get you the exact link on there, Will-Slappy. But if you search for Will Slappy, there's only one of me, a unique last name, S-L-A-P-P-E-Y. You'll only find one of me there on LinkedIn. I actually post a lot about M&A stuff. I post a lot about leadership that's there. And of course, just like Kaseya's M&A content is free, so is all my content. So I love to engage with people out there and maybe I'll drop some posts that'll be helpful to you on your journey. Great. Well, thank you. Have a great day, everybody.
