E156: E156: How to Sell My IT/MSP Company: Insights from Tim Mueller

[00:00:00] Ronald Skelton: And welcome to the How2Exit podcast. Today I'm here with a guest, I've known for a while and I'm excited to have back on here, Tim Mueller. You are the President of IT ExchangeNet.

[00:00:09] You guys have been around for a long time. I want to say thank you for being on the show today. I think we've got some great information.

[00:00:15] Tim Mueller: Sounds good, Ron. Good to see you again. And really happy to do this followup conference with you. 

[00:00:20] Ronald Skelton: Just for people who, have never met you or seen you on the show before you were on, we've been working together for a while now. All my guests and all my listeners who read the show notes, they see the ads for your company inside of there.

[00:00:33] So we have an arrangement there, but, just for those who don't know who you are or what you do, can you give me a kind of a origin story. How you got involved in this and how you ended up being the president of this company? 

[00:00:43] Tim Mueller: Yeah, that's great, Ron. Thank you for that. So I T Exchange now has been around for a little bit more than 25 years and we are a subsidiary of Martin Wolf M& A Advisors.

[00:00:54] So Martin Wolf is our parent company and we specialize and focus on companies that are typically $25 million in transaction value or less. So we love that smaller mid market. I know a lot of your listeners are in that space. When really a far majority, 85, 90 percent of these IT companies around the world are less than 10 million in revenue and certainly less than 25 million in transaction value.

[00:01:22] Our focus is IT only. So that includes managed service providers, managed security service providers, channel partners, like Microsoft, Oracle, Salesforce, ServiceNow. And then we also do some VARs, which really was the genesis of the business way back. And less VARs today, certainly less valuable than some of these other companies with high recurring revenue.

[00:01:45] So that's just a little bit about our firm. And, we've been working with you now for well over a year in launching an M& A marketplace, with How2Exit. And it's something that,certainly a lot of your listeners are looking for a way to, move on from their life, whether they're going to retire. Perhaps to go on to another venture or stay with the firm and just want to be with some larger company.

[00:02:08] We work directly with How2Exit in creating this M& A marketplace. 

[00:02:12] Ronald Skelton: Awesome. I think that's what we're going to focus here on today. We're going to actually focus on, what does somebody need to bring to you as far as a managed service provider, managed security service provider, or even a value added reseller?

[00:02:22] Basically, if I have a company, I think it's in your ballpark. I think where we're going to start is what do we need to have, as far as our ducks in order? I mean, what do we need to have when we come and say, Hey, I think I've got something, I'm ready to exit. I think this is something that fits your marketplace.

[00:02:37] I think you're the best. And, I want you to help me out here. What is that initial step into the, knock on the door. Here's what I've got. What do they need to bring? 

[00:02:48] Tim Mueller: Yeah. So we kind of refer to that as getting in position to be in position. Kind of an athletic firm from, or athletic term. And that basically is whether you're going to exit in the next couple of months or the next couple of years. There are a lot of things that you just basically want to firm up.

[00:03:05] So from a legal standpoint, all of your operating agreements, any kind ofboard minutes, things in the lines that do more of your procedures. You want to make sure that you speak with your business attorney to say, if you are a transaction attorney, looking at our business, what has to be true for all of our legal materials to be together.

[00:03:26] And then we suggest you talk with your accountant. The accountant will typically know exactly how to make sure that the books are in order for due diligence on a transaction. Your financials, buyers want to look back at first glance at the last three years of all your financials. And they want to make sure that everything is categorized in the right way. 

[00:03:46] That it is essentially, for most buyers, they want to see revenue going up into the right, as well as profitability. But, where they get caught is what we call a quality of earnings report where they really go in and with a fine tooth comb, they're looking through to make sure that everything lines up year after year, quarter after quarter, to ensure that the day after the transaction is closed, there are no surprises.

[00:04:12] And the better buyers will go in deeply for the audience that you and I go after these smaller bid market firms. They're not expecting you to have audited numbers. It's just too expensive for smaller businesses to do audits every year. But an audit light, where if they go in there and they just do their procedures to make sure that all the numbers do correspond and substantiate. Those are a couple of the most important things from a financial and accounting side.

[00:04:41] From an operational piece, they want to know that the processes are in line. They want to take a real good look at your management team. To make sure that your first Lieutenant and other managers are strong in place because they know eventually if you exit within a few years, you're going to want to completely remove yourself from the business. Sometimes they raise their hand and say, Hey, I've got a lot of gas left in my tank and I want to stay on for years to come. Perhaps even find a place, a prominent place in the family photo of the acquiring company and stay on. 

[00:05:15] Where others are saying, you know what, I really want to do something else, or I really do want to retire. And so that's where we get into making sure that you have a strong management team to take over once you depart. 

[00:05:28] Ronald Skelton: So we've talked about the financials, the strong management team.

[00:05:32] What are the other things that you need to have documented and have the ability to articulate through this process? I'm thinking of like, standard operating procedures. Thinking about some of the language and like a lot of these, managed service providers, managed security service providers, they might have recurring contracts and stuff.

[00:05:50] Maybe there's language in those contracts that is advantageous to have if you're going to sell. What are some of the other things that would benefit them to make the process smoother? 

[00:05:59] Tim Mueller: Great question, Ron. For those, let's talk about managed security and managed service providers.

[00:06:05] One of the reasons why they are so seductive to the buyers is that typically they will have one, two or three year contracts. And because at that point, you really have to mess up pretty badly in order to get released from those contracts. It's not impossible, but you have to really be negligent in some way.

[00:06:23] So the buyers come in and say that mitigates my risk quite a bit if you've got these contracts. So to your point, make sure that those contracts are up to date. If they have expired, kindly ask them to renew and the longer the contract, the better it is and more valuable it is to a buyer. So those contracts certainly in order.

[00:06:45] You'd be surprised how much of the process that they, buyers want to see, even if it's your sales and marketing. How do you go through the business development process? How do you prospect? How do you communicate? What is your social platform look like? Because the more that you could show that you are in tune with ways to get in front of the eyeballs and in the hearts and minds of potential clients, the more they're going to realize that you are a machine. That you're out there and you understand the sales, you understand marketing. How to on board.

[00:07:18] And then once they're there, what is the stickiness? How do you keep those customers happy? And how do you send them up to long term contracts? So, they're looking first at 30, 000 foot view, and that's really what attracts these buyers, to the conversation. But as the process moves on, and we'll talk perhaps a little bit more about the process itself of selling an MSP or an MSSP, they go digger, dig deeper and deeper, and the layers start to unravel, and they wanna make sure that there is a solid foundation at the very bottom, in the very core of each business.

[00:07:52] Ronald Skelton: I know that when I'm looking. I'm always looking for one of two things. I'm looking for something like you said that's really well put together. It's a well-oiled machine. It's gonna be an acquirer. I could probably leave. Even if the owner wants to leave, I can leave one of the top guys in there and he's the operator.

[00:08:07] And then I'm back to the point where, ideally, I know it's not always true. And, maybe a few months out, but eventually it's to the point where I'm just kind of the chairman of the board and I need to check on them on a quarterly basis or every other month or so. I have one right now that's running that way.

[00:08:22] That said, the other one I'm looking for is, their product is so high quality, that it might be and it's growing and they're succeeding despite of themselves. Meaning maybe their marketing is, they don't even have a decent website or they don't have great content and materials and all the other stuff you would think, but they're still growing. And they're growing because they've got something really unique. People are talking about it. 

[00:08:46] They're great customer service. They're getting referrals. Great sales team. And, I say that, they're succeeding despite themselves. That's always appealing to me too. Cause you think, okay, here they have a fire and they've never poured any gasoline on it whatsoever.

[00:08:59] Is that the same in some of these spaces as people are, if you're just growing and you got a great company and stuff and maybe some of the other stuff isn't put well together, but you're profitable, you got growth, you got good margins. But some of your rest of your acts not together.

[00:09:11] Can you still get a great purchase? Or get valuation?

[00:09:15] Tim Mueller: You can. And I'll look at it more as like stage appropriate leadership. And I'll say guys, pejoratively, because 98 percent of the businesses that we have sold and work with are typically run by men. But the founders, owner, operators that have worked with this, and they're perhaps in the, let's call it the winter of their career. 

[00:09:37] They're not charging as hard as they used to. It's really more of a cash cow. They're getting the income every year and living a really good life. And the only thing that would cause them to sell, would be perhaps, health issues that are coming up. There might be burned out and they don't necessarily have family members to take it over or a management team that could buy him or her out.

[00:09:59] We don't see that as being like a hard charging business, but still of great value. And if you get someone with a lot more energy to come in, they can, in your terms, put some kerosene on that fire and watch it really explode. There are others that, are hard charging, but stage appropriateness.

[00:10:18] They realize that they're not the person to take it beyond 20 million in revenue. They have that hard conversation in the mirror and maybe a couple of advisors might chime in a little bit. But they see that there's so much more potential. So they're more apt to want to layer into something bigger.

[00:10:34] And become an executive in that now larger company. So that would be a great target for private equity to layer in. Or as you're doing right now, you're making your acquisitions and I'm sure you're going to do more about layering in businesses so that the platform becomes much bigger. So we have that kind of idea.

[00:10:52] And then you have the serial entrepreneur who hard charging, growing, but just gets bored very easily. So instead of bringing in a management team, he or she might want to, unlock the value of the business, take some money off the table and sell the business and move on to their next thing, whether it's going to be an AI or selling peanut butter and jelly bread sandwiches in Costa Rica. Whatever it's going to be.

[00:11:15] Ronald Skelton: Yeah, it could be either one. I've seen some interesting stuff recently. Just was watching tweets come by from a guy who said he sold a software company for 200 million. Now knows owns like 19 gas stations. So I'm like, that's a pretty good shift there. But I just asked him to be on the show.

[00:11:30] So hopefully he'll be on here. I want to hear that story. How'd you make that shift? But, let's talk about, okay, now we were at the point where they're prepped. We told them what they need to have. They show up. What's the process look like? What can somebody expect when they submit a form and, from our site and says, Hey, I want you to talk about selling my company.

[00:11:46] What is the next few steps on a look like for them? 

[00:11:49] Tim Mueller: Well, the beginning and middle and end, we are storytellers. I almost say that we are a data and marketing firm that happens to sell I. T. services businesses. What we do is we really want to get to know the business.

[00:12:02] We have them complete a request for information. And then we sit and listen. We want to know what their end goal is. Do they want to walk away at a certain period of time? Do they want to be part of something bigger? So that we can then curate the buyer list to achieve the objectives of what the seller is.

[00:12:19] We'll also ask them what their anticipated valuation is. And if it's something that we can't achieve, we're very transparent with them to say, we hope you can get that. That's nothing that we could achieve in the market today. So we know that we're not going to be able to have a happy ending on that end.

[00:12:38] And typically we'll be seven or eight months down the road. And we'll look at each other all upset and crusty because we never got there. We'd rather circumvent that and not even go to market if we can't achieve their valuation expectation. But we understand that. And then with that, all that information, we start creating marketing materials.

[00:12:57] One of which is a blind profile. And that keeps the anonymity of the seller intact. From interviewing hundreds and hundreds of people in our industry, the idea of the anonymity being broached and all of a sudden competitors know, employees know that you're for sale, you're big customers won't sign a new three year deal because they don't know who's going to buy you.

[00:13:20] So that's why we want to keep the confidentiality very close. And only when an NDA is signed by a buyer could he or she then learn the identity of the seller. So we do these blind profiles that go out and typically we'll send of our 75,000 global buyers in our database, we'll send out somewhere between 800 and a thousand or so, mailers, outreach, phone calls to who we think are the usual suspects.

[00:13:48] And then we'll go a level deeper and say, who are the unusual suspects? Because, AI tools could probably find a half a dozen or a dozen good buyers for your company, but they're not always the ones you want to exhaust. So they're the ones in the headlines always buying people, but that they may be already down the road with other buyers.

[00:14:08] We try to go to the usual and unusual suspects to make sure that no rock is unturned when it comes to matching a buyer and a seller. And at the heart of our business, we do that. We match buyers and sellers. Once we have drawn up interest and most of our assets in the I. T. side, we'll get somewhere between 50 and 80 buyers.

[00:14:28] And that may sound like a lot, but because they're smaller mid market firms, again, under 25 million in valuation, the universe of buyers is really wide. Doesn't take a lot of companies with a lot of revenue or maybe even some debt financing to be able to buy these smaller mid market firms. On the Martin Wolf side, 100 million to 500 million in transaction value, that universe is smaller. And you have to have a specific, relationship with many of those in order to sell those businesses. For us, there are unknown buyers every day coming forward that we never knew existed because there are tens of thousands of these buyers.

[00:15:11] So not crazy to think we'd get 80, 80 interested buyers. Once they execute an NDA, we then start matching buyer and seller. We do something really unique that, no one in our industry that we've seena video, much like what you and I are doing right now.

[00:15:27] I sit down with each seller and we do a 30 to 40 minute management discussion. And we ask all the questions that typically are covered in that first call between buyer and seller. 

[00:15:39] So we take one call away, so our sellers don't have to have 80 phone calls to get there in there. And from that a natural calling process takes place. We might lose 20 buyers that say, Hey, that wasn't really the company we thought it was. And then, we'll get more questions asked. And from that, we might bring it down even further. So that we can get to maybe a group of 20, very serious and qualified buyers.

[00:16:04] And that's when we open up the club gates for initial discussions. If we find after that first call that let's say all 20 buyers have the same set of 10 follow up questions. I'll go in and do part two of an interview exactly like what you and I are doing today and we'll address those 10 questions, give them the link and we're finding the buyers are using them as podcasts. Where they're going for a walk at night and listening to it. Some guys might listen to watch it, we can track them and they're watching it two and three times in order to get the full essence of that interview. So that when they finally do a face to face zoom or a team's call, they feel like they really know that seller a little bit more personally, and they can start digging in a little bit deeper under the covers in that first discussion.

[00:16:51] So that's a couple of things we do that are very unique to the industry.

[00:16:56] Ronald Skelton: I like that. And on the same hand, I'm a little concerned and here's why. And I'm just wanting to pick your brain on this. I know in the podcast space that I've been approached by people. Like I like to play poker tournaments occasionally. Just a few months I'm sitting in a poker tournament.

[00:17:11] And right beside me was, in the same table was, two teammates. They play, they said professional baseball, but I don't know enough about baseball, but I'm pretty sure there's like tiers. But I'm pretty sure these guys were on the second or third level. And they look over at me and they're like, Hey, I know you. You have that podcast about buying and selling companies.

[00:17:28] I was like, yeah, that's cool. How do you know me? We're pro baseball players, but we're like, I'm in engineering school and he's in, in business. And instead of just getting an engineering job or a business job, I think when we get out, the two of us are going to go together and buy a company.

[00:17:40] So we've been watching your show. The thing I was getting into to shorten the story a little bit is, they both felt like they really knew me and was like really comfortable talking to me, but I didn't know either one of them at all. Do you have some concern that there's something to be said for that deep rapport that you need with a seller, to get a deal done? Especially at our level which is, in my level, in that, or I just say, in that SBA loan and below level, if it's $5 million in evaluation or lower, those smaller deals is like, there's a legacy that, they want to see transferred to a safe pair of hands.

[00:18:10] When you start getting bigger, you start looking at bigger numbers. I can see that there's institutional buyers and there's other stuff. So I'm curious, does that same rapport need to be as deep at that strategic acquirer and an institutional acquirer level? Does that just built later? 

[00:18:25] Tim Mueller: Yeah, for us, it's not an either or. It is an and, clearly an and. So what we're trying to do is just save both the buyer and seller time. Because we'd rather get to a no faster and let everybody go their respective ways, then draw it out and waste both the buyer and the seller's time.

[00:18:44] And so if that video allows them to do that, where they clearly walk away and say, Hey, just wasn't the company I thought it was then, that's a win for us and for both parties. If it says, Hey, it really piques my interest and, there's something about that person that I saw in the interview that I really like and looks trustworthy to me.

[00:19:03] I want to now verify, then we open it up and not only encourage the video calls, but that once offers start flowing in, we really encourage them to fly into the city. Meet with them for three or four hours in the afternoon. Have a nice intimate dinner. Look at each other across the table, so that they both can evaluate each other.

[00:19:21] I think I've heard this on your podcast before, but sellers have to understand that during this process, they are both a buyer and a seller. The first step is they're trying to do their best to portray their business as a seller, but there's a period of time where they have to buy in. And buy the fact that, this is a company that I'd want to hand the keys over to. 

[00:19:43] And will my employees have a safe landing? Would my customers be serviced? Will my legacy be held up if I choose this buyer? So they become a buyer as well. And we think that, by being able to get to those meaningful conversations faster, it's a service to both. 

[00:20:02] Ronald Skelton: I've had different people on the show that says, people say I can build rapport in five calls. And I've had people say, before we close a deal, I ended up on 20 calls with every seller or in person. 20 either zoom calls like this or, face to face on camera and some in, some face to face shaking hands.

[00:20:17] My curiosity is that number, I think you get a lot of the BS things out of the way of the first name. Maybe now it's down to, I don't mean BS in a way of this bad. I'm like, the common things like, okay, is this the right size of business? Is this in the right market? Are there a customer basis? Like all the different things you would want to know.

[00:20:35] That's done and said, now it's just, okay, is this somebody that I can work with for the next two or three years as I take over something they built? Am I somebody that they're going to trust with this? I think you potentially in those two or three videos that you create, you probably cut down five or six of those meetings they would have had to have had.

[00:20:52] Tim Mueller: We do. And particularly when it's bringing it down from 80 to 50, there's a lot that has to go down to do that. And we recently had done it is that we heard a lot of feedback from our clients going, Hey, you told me that I've got to run my business at the same time. Make sure that there's no hiccup, make sure the revenue and profitability are going up into the right and take this full time job, whether it's In the afternoon or evenings and weekends to talk with 80 buyers. You got to do something about this.

[00:21:21] And so as a result, we're doing it as a response to it and understanding that the ability for us to do these kinds of video calls with our sellers, we give them all the questions ahead of time. It's not like a gotcha or investigative reporting piece. They know exactly the questions I'm going to ask and they're prepared to do it, but they're going to give their best foot.

[00:21:42] And understand that this is about, again, being a good storyteller. A story that you can back up, but it's being a good storyteller. And so we think that is really one of those areas that goes really, if I could segue to the next step, and that is getting some kind of indication of interest. The chemistry is one step to bring it down from 80 to 20 or so, but the economics is a big reason why they want to sell. And so we try to get an informal non binding indication of interest and it's again, informal.

[00:22:15] It's an email that says hey, I love talking with company X. We think that they're valued at, it's a good MSP with high recurring revenue. We think they're worth nine to 11 times adjusted EBITDA. And we think the structure is 60 percent cash at close. 40 percent earn out over two years.

[00:22:35] And so we want to at least get the economics framework, the building blocks of a deal, if you will, in paper. So that if it's so far off, that might drop off another 15 or so buyers. And then if it is close enough, we could sell them, listen, you're right on the edge. In order that to be at the table and to have meaningful discussions, here's the guidance that you'll need to get to the right minimum to get into the process. 

[00:23:02] And so that goes on several weeks where they start discussing. And that leads to what we'll call the more formal letter of intent. And, as a buyer, you've done this Ron, you've participated in. Again, non binding by law, but it's a lot more detailed.

[00:23:20] You're looking at more 10, 12, 15 pages, and it now becomes the foundation for what a purchase agreement language would be. So we tell a lot of our sellers spend thousands, if you would, with your transaction attorney to make sure that letter of intent, even though it's not binding, is something you could live with. Because you don't want to agree to that and then the purchase agreement starts coming and you start knocking out all the language. 

[00:23:46] And the buyer is going, wait a minute, I thought we got through this already with the letter of intent. That's not showing good faith. And we see deals tank sometimes, when people want to fight too much on the purchase agreement for language that was already agreed to in the letter of intent. 

[00:24:00] Ronald Skelton: Yeah, it's the same person. That's one thing I've noticed in our smaller segment.

[00:24:06] Some people are downloading letters of intent and stuff to outlines or templates offline. And then when they finally get to a purchase agreement, okay, now it's time to hire an attorney. It's a bad move because the language will be out of alignment. Unless you just tell your attorney like, look, this is the letter of intent I got them. 

[00:24:21] Unless it's going to really hurt me, you got to stick to this language. Most of them aren't going to want to do that. 

[00:24:25] Tim Mueller: That's right. And the fact of the matter is, when you get to that LOI stage, you're required to go into a period of exclusivity with the buyer. That exclusivity period, typically for smaller deals, 60, maybe 75 days. Some buyers want 120 days.

[00:24:42] And we think that's probably too long for the smaller deals. But that exclusivity means that neither the seller, nor we, as the representative, can speak with any other buyer during that period. And it makes sense because the buyers are now going to engage accountants. They might do a quality of earnings report that's not cheap. 

[00:25:03] And then their attorneys are going to start working on the purchase agreement. All that means the clock is ticking for the buyer and they're spending a lot of money. And it would be disingenuous for the seller to be working with them, but also trying to talk with other buyers to up the price.

[00:25:19] So we all agree that, in that letter of intent, it says exclusivity for that period. At which point when it expires, the concept is that the purchase agreement is all completed, everybody agrees, and you can get to a closing. 

[00:25:34] Ronald Skelton: It's interesting because what I've done at the level I'm at, and the attorney drew up for me that the LOI was separate because, the LOI is non binding and the exclusivity period is binding.

[00:25:46] So we do two, two different contracts, two different sets of signatures. So we give you an LOI and if you agree upon it, now we're going to enter into exclusivity. That's something else you review and sign. It's really short actually. But because we always say that our LOI is non binding. But the exclusivity stage is.

[00:26:02] Tim Mueller: I agree. And in addition to that, Ron, you've got lost opportunity costs. You are now setting your sites. Both the buyer and seller are setting their sites on each other. And for the seller, we politely will tell all the other, let's say the other five to 10 that all submitted LOIs. We're politely telling them, we appreciate your interest, but our client has elected to go with this other one.

[00:26:27] And we'd happy to circle back with you if the deal doesn't get closed, but they're all off on to another deal. And so the longer that period takes, the harder it is to go back to some of those buyers. If the deal that we think is going to get done doesn't crush the finish line.

[00:26:42] Ronald Skelton: Okay. Let's go into the next stage. So we've got the LOI sign. We're starting to, as the buyer's starting to like, make some requests. What is that due diligence process? What kind of the managed service provider, managed security service provider expect that their level of engagement? They're going to get busy, right?

[00:26:59] Because there's stuff they have to deliver. How much beforehand do you have prep for them to know this? What they're going to need to give these people? And how much time does, should they expect to be working on the deal now, once they get that LOI and exclusivity thing signed? 

[00:27:16] Tim Mueller: Well, at the beginning of the show, I talked about having a second full time job. And if it wasn't a tough and arduous road to get down to that one final buyer that you sign the LOI, that's when the real work begins. And in most cases with these smaller businesses, they're not telling their controller or operating team or anyone else that they're selling their business.

[00:27:39] So this now seller, owner, operator, founder, they're now scrambling for every piece of data that is being required. And this is pages upon pages of spreadsheet questions that you have to check off as you put your information into. And it's simple, you can put into Dropbox or Box, Google Drive, make it secure.

[00:27:59] But, there's a lot of, data fetching, a lot of reports to run, a lot of ways that the sellers want you to extrapolate specific data. So it seems like the requests are endless. So what we do is we give them that list at the onset of the deal. And we say, we're going to ask you on nights and weekends when you're not running their business and you're not talking with buyers to start populating the data room or virtual data room as it is today.

[00:28:27] In early days, law firms would sometimes have a room and it'd be called the data room and boxes upon boxes of datas printed out so people can go through it. That no longer is there. And thankfully for AI tools, they can now run some algorithms on certain data in order to extrapolate what they want.

[00:28:44] Either way, the seller has to be able to run those reports. In many cases, they're still using QuickBooks. Incredibly robust, platform for a small business. And it does typically get the reports that buyers need. Others might be on other platforms like Microsoft Dynamics and such. But either way, they have to be able to gather that data.

[00:29:05] We said that might take 75, 90 days or whatever it might be. But that is hard charging during that period. And so we try to lessen the burden during due diligence is to have them prepare that ahead of time and start putting it into the data room. 

[00:29:21] Ronald Skelton: Cool. So they've got the data room. I'm sure that almost every deal, the buyer wants something unique or slightly different. Even if I had everything like, you gave me a prep sheet to go by. I put everything in the room. I think I'm a hundred percent prepared. I would imagine there's some things where people go, Hey, can you run this and put X on it. Or, I mean, we all like different things, different way.

[00:29:42] It's kind of like eggs. I won't mind over medium and my wife eats them overeasy. And somebody wants some poach. The X guy wants some boiled. I think the same way it goes with a lot of these reports.

[00:29:51] You get a lot of that still where, the buyers looking at through everything and go, you know what, I see that's all in there, but can you run this, this, and this on the same report? So I can take a look. 

[00:29:59] Tim Mueller: 100 percent because if it's a rollup of MSPs for example, they may have a certain way that they're doing their business, that they want to see if the fingertips match between the seller and themselves.

[00:30:13] So they're asking for data that is more germane to their business. If they're looking for a loan or lenders to, to layer some debt on it, the bank may be asking for information that is unique to their process of their checklist in order to approve a loan to get some debt. And so depending on who the party is and how they go about their M& A, doesn't matter what the standard questions are and how much they do prepare.

[00:30:40] There will always be a question to follow up on the answer from the previous question. In order to dig up down a little bit further. So it's hard work. It can be frustrating. We worry about deal fatigue from our sellers. So part of our job is cheerleader, rabbi, consultant, psychologist, whatever it might be so that they could balance it.

[00:31:03] And most of these people have gotten used to a little bit of a quality of life in building their business. A lot of them go home at six o'clock at night. And now all of a sudden they are putting in some really crazy hours. So we don't ever want to mask the fact that this is going to take a lot of time.

[00:31:21] But the good thing is they've proven as entrepreneurs that you could do anything for a period of time. And so as long as there's a light at the end of the title, and they realize that there is an end in sight, that for them unlocks potentially millions of dollars in their pocket. And perhaps even more importantly is a line of sight to freedom. Then they dig in and everybody gets through it.

[00:31:45] They might be exhausted, they might be a little bitter, but they get through it. And, I will tell you that there are friendships that we then foster with a lot of these because while we didn't build the business, we were the conduit to their freedom and even wealth creation. 

[00:32:00] Ronald Skelton: I'm going to step back, we're at the end of due diligence. The buyer has either found stuff or not found stuff.

[00:32:07] There's a common phrase in some aspects of this industry, merges and acquisition. I think they refer to it most of the time as retrading. And that's when you get done with due diligence, you go back and you try to renegotiate the price because of stuff you found. Is that common in this space too?

[00:32:24] I mean, I know it happens. It has to happen when something of significance is found. And what percentage of deals end up being retraded to some level? 

[00:32:34] Tim Mueller: It's hard to put a finger on the percentage. I'll take a guess and say maybe 10%. But it really has to do with, did the seller have information that was accurate?

[00:32:46] And that's why I encourage, particularly on the financial side, that they work with their accountants to do an audit. Some kind of forensic audit, to make sure that what they're presenting is completely accurate. That it does then true out to the taxes that they had filed each year. And so that when the due diligence happens, the buyer doesn't want to redial it because the buyer wants a positive relationship going into the deal close and they want the seller to be part of it for at least 12 or 18 months on a high note.

[00:33:20] If they're battling it out in the trenches because the seller had inaccurate data that then resulted in redialing or retrailing the deal, then really nobody is real happy at the end personally. And it's not the buyer's fault. Even though many people will say the buyers will look further to try to get a better deal on it.

[00:33:40] In the end they want a real healthy relationship and it becomes hard when you start asking for less. But I've seen some buyers where some material things came up, but they love the assets so much. And they did trust that it was an honest mistake that they kept the deal as is. Figuring that the payday down the road would far surpass that adjustment that they have to make in the transaction value offer. 

[00:34:06] Ronald Skelton: Okay. I was shocked by the number because I thought it would be higher. Now the reason I think it's higher is I talked a lot of brick and mortar companies and what normally like, the tech companies are what you guys have and what you represent. Fairly sophisticated fairly computerized. A lot of times on these retraded deals for brick and mortar companies and stuff like that, it comes down to things being maintained right. 

[00:34:30] Got it really heavy in assets. you claim that all your machines are perfect and working order. Then when I go, then we actually walk through there and, half your machines are under maintenance or broken. Or things like, you claim you have two million dollars of the inventory and we go through there and two thirds of your inventory are more than three years old and some of it's seven years old and it's just stuff now that nobody buys anymore.

[00:34:50] So now, you know now your inventory value is not two million, it's 300,000, of what's current and actively being sold. So I think that's reason I expected the number to be higher is there are fewer gotchas and if a sophisticated company where these many service providers, these value added, they're selling intellect more than anything right there.

[00:35:12] I've got a team of highly intellectual people who do X, Y, and Z perform certain things, accomplish tasks for our clients. 

[00:35:20] Tim Mueller: Well, you're right by the comparison Ron, because, most everybody is making their money from the neck up. And so, there isn't a lot of brick and mortar inventory, and they're automated in the sense that all their billable hours are put into a system. And they could then report, run reports directly off of that.

[00:35:38] If there is something that redials a deal, it's usually human error in the system. And perhaps how it was, placed or categorized more than the bulldozer that didn't get serviced, they know if their servers are starting to get antiquated, they don't have a choice. They have got to replace those too, because their business depends on it.

[00:36:00] And the integrity of the data, which is a lot of what they're selling is compromised. The one thing that we tell our clients though to watch out is, don't back off on your investments. If you show three or four years of heavy investments into your infrastructure, and all of a sudden you're going to sell, and you're CapEx costs have gone down considerably. Or you take half of your SG and A chopped off just to have better profitability.

[00:36:26] We tell them, listen, these guys are professionals. That's all they do is crunch numbers every day. It's gonna be such a bright white flag or red flag that you did this. And all of a sudden they're gonna start wondering what else are you trying to hide or change. So we tell these, our clients, run the business as though it's never going to be sold because, who knows?

[00:36:48] You may not get the price you want, and you're going to be, quote unquote, stuck with this business that you then stopped water and feeding for the next couple of years until you get the price that you want. So it's kind of a, almost a schizophrenic phrase. We tell them, run it as though you're never going to sell, at the same time, run it as far as your books and auditing and everything as though you're going to sell tomorrow.

[00:37:12] So keep everything tip top. So you can try to run that balance between those two pieces of advice. 

[00:37:17] Ronald Skelton: And so now we've got to the point where new diligence is approved, there's no retrading. I'm good with the offer. You're good with the offer. Hold on for a second I'm going to send a purchase and sale agreement over, right?

[00:37:26] A purchase order, or you call it a purchase contract. And that could be, asset. There's a couple different ways that's done depending on whether it's an asset. Yours primarily is, not asset based, right? 

[00:37:37] Tim Mueller: We do both asset purchase agreements, APAs and SPAs, stock purchase agreements. And it all depends on what the buyer wants and what the economics are behind it.

[00:37:46] But we see a good volume of both asset and stock purchase agreements. 

[00:37:51] Ronald Skelton: So what are some new things, because I already know what they are, but I'm going to have you answer the question. So what are some new things that are, terms and things that to be expected that are going to be introduced in that, right?

[00:38:01] When they see a purchases and sales contract, there's some stuff in there that's not in your LOI or IOI or any of the other stuff, it's new to the person. It's new and unique to the person's sales contract. And most of the time it's really broiler plate standard that still catches the seller off guard.

[00:38:20] So am I leading you far enough to know the answer to that question? 

[00:38:24] Tim Mueller: Well, we see a lot of indemnification language from the buyer that wants to cover them because no matter how far into due diligence they do, and no matter how many months they spend trying to get to know the business, the seller is the one who most intimately knows all the details.

[00:38:41] And whether it's wittingly or unwittingly, they don't tell all the story, the buyer wants to be indemnified to say, Hey, listen, if this thing tanks, because we didn't get all the right information, somebody's gonna pay. Whether it's back in court or oftentimes it gets taken out of the earn out.

[00:39:01] Because, 95 percent of our deals, Ron, are not all cash at close. They're normally 60 to 70 percent cash at close with an earn out for the remaining, say 40 percent, that can go 18, 24 months, maybe even as long as 30 months. And if things happen where the business doesn't perform as advertised or as projected, then the seller might get dinged in that earn out.

[00:39:28] So there's language there that sometimes surprises the seller. There's language aboutoperating capital. What the buyer really wants to say is I'd like to have 60 or 90 days of operating capital left in the business. Even though the offer said on a cash free, debt free basis, meaning if you have any debts, you have to cancel those debts out yourself with the proceeds of the sale seller.

[00:39:54] And it's a cash free basis that anything over a certain amount, you get to take the cash back, you get to keep all of it. But you need to leave me with, let's say, 60 or 90 days of cash flow because I don't want to buy the business and then find you have your top 10 customers late in, in the payables. And all of a sudden I've got to know, raise some more money or go after get some more debt, line of credit.

[00:40:17] I want to have enough capital to run the business. And oftentimes the sellers get surprised by that. And they're not excited to know that all the cash in the business doesn't go in their pocket on day one. 

[00:40:29] Ronald Skelton: I honestly think every big M& A firm, if you're a mergers and acquisitions firm or a brokerage and you're doing deals that are more than 5 million. Say you're doing 10 million, $20 million deals, you probably should have a licensed performance coach, therapist on staff. Because, in the 180 people I've interviewed, I've heard more stories of deals dying at the finish line because the owner didn't know what they wanted to do next than anything else.

[00:40:50] Usually if you make it to the finish line and it dies, it'd be really boiled down to it. And I've had a couple of cases where I actually called the, they told me who the seller was. I just called them and dug in. They wouldn't let me put it on mic, but I'm curious. I'm insanely curious. That's why I have a podcast. 

[00:41:04] I would just dig in and go, okay, what happened? They say you didn't close because X, Y, and Z. And he goes, yeah, that was it. And then I dig in a little deeper. It turns out, when a real story was, they just didn't know what they're going to do next. When you really get to know the person and really get to dig and you ask the same question four times and they give you the true answer, it's like, man, I kind of panicked at the end.

[00:41:22] Like I'm going to wake up tomorrow and yeah, I get $10 million, but how I've been paying myself the last 20 years? A million dollars a year. I hope to live more than 10 years. They start putting the math together and taxes is going to take half of it. And this is going to happen and this is going to happen.

[00:41:36] So I honestly really believe that it would be beneficial for every brokerage to have somebody who understands, I always say this, EQ is way more important than IQ. Especially in these deals. Is to understand somebody's emotional process and challenging and what's going through their head. And help them move that process along and stay in alignment with what their goals were and not panic. It's critical, right? Absolutely. 

[00:42:02] Tim Mueller: I agree, Ron. And the other thing I would say is to stay away from the advice you get from the country club friends, because these guys would be golfing and they'd say, my buddy Jack told me that I should be getting 12 times multiple, and you guys are only getting 9.

[00:42:15] I said, what does Jack do? He's a dentist. And he's like, oh, please, don't spoil the punch with this. You'd be amazed, you probably wouldn't, you know this industry so well, but you'd be amazed at how many advisors on the outside giving bogus information for the sellers.

[00:42:31] Ronald Skelton: So if you're out there listening to your buddies, giving you that advice, ask them to stroke that check. Like I used to get this in when I was in real estate all the time.

[00:42:38] Zillow says my property is worth, X, Y, Z. I actually started recording and keeping the phone number to Zillow support, like their customer support number. I was like, here's the number, call them and see if they'll write you that check. I'm offering you something and we're going to write you the check.

[00:42:50] We're going to go to closing. We're going to wire the money and you're going to get it. If they're willing to write you that check, then that's a legitimate offer. Otherwise it's just a guess. So the same thing I tell you, if your dentist buddy at the golf course tells you, you should be in 12 X, say, cool. Get your checkbook, let's do this man.

[00:43:05] So I'll sell it to you right now for 12 X. Meanwhile, the people that have been doing this for since the 1990s and have 75, 000 plus buyers, tell me it's worth, you said it's worth X and they say it's worth Y. I got to go with Y.

[00:43:17] Tim Mueller: I guess the last step I'll tell you as we, look at the end of this journey is, you're going to have a period where with the buyer, you need to call typically your top 10 customers. And to say, Hey, within 48 hours, we'll be closing a deal and we're going to be selling to X.

[00:43:39] And the buyer jumps in and says, Hey, listen, I'd like to understand what the relationship is. How do you feel the services are? If things were to remain the same or better, do you believe you will continue to do business with them? So they do a verification of your top 10 customers. And at that point, You're not only fully committed, but this is happening.

[00:44:01] And so you have to understand that that will happen before the deal is announced, before your employees learn of it. And things go pretty rapidly after that, because once the customers know you've got to get to a closing so that the first group you tell, will be your employees. And you tell them how they'll benefit from it and how, you're looking for this to be a even a better company than it is today.

[00:44:24] Because you can ill afford an exodus. From your employee base soon after the sales done, because remember, you're going to have an earn out. And during that period, you need to have the institutional memory of a well versed employee base that does not have a lot of churn. And so you have to be prescriptive in how you get things done.

[00:44:44] And how you roll out the deal to your employees and then your, the rest of your customers and then the rest of the world. 

[00:44:50] Ronald Skelton: Yeah. If I ever started another software company, I'm going to do a software company that actually tracks early indicators, leading indicators, instead of trailing indicators. And I'm going to track all the, linkedins, the job boards and stuff and i'll be able to tell companies like look, right now on average you get two resume updates for a month. Tell everybody you're about to sell and let's see how many people update their resume. So then they can start worrying and it being early like, people always say I had a, a 15 percent turnover after this merger. Like, cool.

[00:45:19] What was the lead? That was the trailing indicator. That's what happened after it was done and gone. It's done. You can't fix it. What were the leading indicators? What was the indication of people were looking? Cause there's a lot of stuff out there that, the information's out there.

[00:45:30] I don't think it's being gathered and presented. If your employees for the last 12 months only, you've got a thousand employees and only 15 of them regularly update their LinkedIn profile, and all of a sudden you make an announcement like that, or is a rumor starting to spread and 30 percent of your staff is starting to like, make sure their job description is correct on LinkedIn. Probably ought to work on your communication process. Cause people are scared.

[00:45:53] So let's finish this up. So now, purchases and sales agreement. They went back and forth, reps and warranties, indemnification, all that stuff's happened.

[00:46:00] We all agree. How does the seller get his check? It's not a big check. He has to run into cash. This is a wire transfer. I want to finish the picture. They're going to wake up one day. They're going to log in probably on their cell phone.

[00:46:11] They're going to open their bank account and there's going to be a surprising figure on that. How you prep people for that? I mean, is there a little bit of a shock factor when that hits? 

[00:46:19] Tim Mueller: Yeah, there is. And there are zeros that they had not seen before. They may have seen some of that in their business pass through, but not in their personal account.

[00:46:27] And that's a big deal. The other big deal seeing how much uncle Sam might take away from the larger deals, and there is nothing you could do about that. So you want to talk with your accountant ahead of time to see which shelters and which ways to have the maximum amount of proceeds from a deal that are legal within all IRS schedules and such.

[00:46:48] But,there is basically a schedule of disbursements at the end. And so people like us, we're in that schedule, so we get paid when they get paid. The attorney may have their fees in there and psychologically, it's better for the seller to have that gone right away, as opposed to getting all the money in their account.

[00:47:06] And then they have to personally write checks to all of the different costs of the acquisition or the mergers. But that really does kind of finalize the, the process. For us about 180 days from start to finish for most of these deals. If it goes much longer, we do deal with deal fatigue from the sellers, but also the longer you're out there, it looks like there's hair on the deal. And it looks like it's really difficult to sell the business.

[00:47:34] And so we try to do it as rapidly as we can. We never rush our sellers in making their decisions, but we do all the other parts with strong incentive to accelerate the timeline. So that we can get there where everybody's satisfied at the end. And we don't want seller's remorse or buyer's remorse because that hurts us and our reputation for just getting deals done.

[00:47:57] I just ran a list with my, one of my colleagues today to say, how many clients have we put on pause? So that we can go back to them and see if they're ready to go back out to market. We're never bashful or allergic to putting people on pause. If we don't think we'll be able to get the right deal, or if we find that they're just not ready. Even though we're in the middle of the process, we tell them proactively.

[00:48:21] You know what go on pause for a year. We'll still be here, and we'll go back out to you. We won't charge you any more money to go back to market. But this is not going as planned as you did or we did. Do a stronger recap of your accounting side of it. Look at that again and really use this as a learning experience to be better.

[00:48:41] Ronald Skelton: Yeah. There are a lot of people don't realize that just going through the process, you end up with a stronger, more fortified company that can, if you're doing it right, can run itself because you've already looked at how do I phase myself out of this thing?

[00:48:52] Curiosity question before I go too far and call the show. In a real estate transaction, when I wire the money, it goes to the brokerage and the brokerage does all the distributions. Whose responsibility is in this, when the seller is, assuming when the buyer starts wiring funds around. Does they go to your brokerage?

[00:49:09] Does it go to a third party escrow company? Who handles the money and pays the attorneys? And you just said that the sellers, the buyers, not a stroke and checks. And I know that's the case in some deals, but like it's a smaller deal where I'm at, I pay my attorney. So I'm just curious, is there a, do you access an escrow and they're like kind of closing company in a real estate transaction? Or is there somebody intermediary?

[00:49:31] Tim Mueller: Yeah, we don't do that, but there are third party escrow intermediaries. But oftentimes the law firms that are transaction attorneys have the mechanisms in place that they're the pass through. So they do it as part of their transaction fee. And so that once it goes there, it goes to all the parties like ourselves and even themselves for their fees. 

[00:49:52] And then if it's a small enough deal, it will oftentimes go directly to the seller. We're talking, it's a $3 million deal or $2 million deal. And then, by contract, the lawyers and ourselves state that on the day of the transaction, we are to be wired our fees. And so it's incumbent on the seller then to initiate those wires.

[00:50:14] Ronald Skelton: Yeah, I just wanted to clarify that because, kind of knew the answer to it. One of those things, the answer to it, but it needed to be said because people like, do I have to manage all that? I don't know how to do all those wires and all that. Cause like people get concerned about the randomness things, right?

[00:50:27] It's going to be your attorney or their attorney most of the time. Whenever possible, it's always my attorney, but I'm sure the other guy says the same thing.

[00:50:33] Tim Mueller: I will tell you, Ron, during this like new age of always being on podcasts and zoom calls and tapes. I do a lot of these. I don't think there's anybody in the business who knows it as well as you do. You asked the right questions. Your curiosity is very genuine, but your follow up questions, all the deals that you've done shows in our conversation, because I feel like I'm talking to my peer in the M and A space.

[00:50:59] And it's just a pleasure not only doing that with you, but also doing this M& A marketplace where a lot of your listeners now, if they have IT companies, whether it's an MSP, MSSP, Oracle practice, they now have an avenue that can be trusted to get out to. In this case, more than 70, 75, 000 buyers globally to get their sale done. 

[00:51:19] So I really appreciate this partnership and it really is a pleasure working with you. 

[00:51:24] Ronald Skelton: Thank you. And I think we'll call that a show. So if you're out there, you're listening and you have a company like this, the link you need to get started with the IT ExchangeNet is actually going to be in the show notes, and you'll be able to just click on it there.

[00:51:36] Or you can reach out to me on, if you just had questions and you're still kind of, not sure what's going on or whatever reach out to me on linkedin. That's the fastest way to reach out to me. It's Ron Skelton on linkedin not Ronald. For some reason somebody had the other one got to it first. Even though i'm been on linkedin for like 17 years.

[00:51:51] But i've been on there for a while but somebody beat me to the Ronald Skelton. So it's Ron Skelton and then i'm sure Tim will connect with you too. If you have questions you can find him on LinkedIn and say hi.

[00:52:00] All right. We'll call that a show. Thank you. 

[00:52:03] Tim Mueller: Great. Thanks, Ron. Well talk to you again.