How2Exit Episode 62:Lowell Ricklefs - CEO & Founder of Traction Advising, and Investor.

Ronald Skelton  0:06  
Hello and welcome to the how to exit podcast where we introduce you to a world of small to medium business acquisitions and mergers. We interview business owners, industry leaders, authors, mentors and other influencers with the sole intent to share with you what it looks like to buy or sell a business. Let's get rolling.

And now a moment for our sponsors. I want to highly recommend you get acquisition Aficionado magazine every month acquisition oficionado magazine brings you tactics for business buying and selling you won't find anywhere else learn firsthand from industry leaders who share their success stories featuring in depth interviews and stories from leading figures in the business acquisition industry. This multi platform mobile magazine speaks to acquisition entrepreneurs wherever they are in the journey and I want you to visit acquisition aficionado.com today. Hello, and welcome to the how to exit Podcast. I'm Ron Skelton, your host and today I'm here with Lowell Ricklefs. Lowell's, the CEO and founder of traction advising who specializes in helping b2b software as a service companies. Man, thank you for being on the show today. I'm looking forward to our conversation.

Lowell Ricklefs  1:21  
Thanks, Ron. appreciate being here.

And if you've watched the show, you know what my first question is going to be. I only have one can question and that's the origin story kinda, could you share with this? I jokingly say You know, you were born now you're ended up on a mergers and acquisitions podcast. Can you kind of fill in the gap in between?

Yeah, that's a good one. Yeah, I was electrical engineer computer science long ago, went down the technical sales route four to 500 company, or 15 years was a global Vice President participated in integrating some, some acquisitions, it was a part of three, three startups helped to scale one from a million to 10 million as their Chief Revenue Officer, another one from 10 to 120 million as a Chief Operating Officer and then was CEO of the FinTech company, all three head exits. And along the way, I acquired about a dozen companies and was just not super impressed with the bankers, all smart people, but not good salespeople. And so when it came time to sell a company with co founded, I just thought I had an enterprise selling background, run up classic enterprise selling process to sell it, it was effective, one of our investors asked for help on another project. And I helped with that and open traction seven years ago, a little bit in, in yeah a lot of reasons why, but I just think selling technology companies is 80% selling and positioning is 20% Finance. Some companies are, are very complex financial instruments, you know, they've got assets, they've got work in progress, they've got intercompany transfer, they got foreign exchange, they got, you know, it's a very complicated financial instrument. In that case, you want someone that's primarily a banker that can run the financials to make sure that it's, it's correct. But software is relatively simple financially, but can be complicated. Technology wise, in theory, it's infinitely scalable. And at scale, a buyer may pay, you know, 234 times what they might if they don't understand what that your company might look like as a, as a part of the acquirer. So, yeah, so that.

Ronald Skelton  3:27  
So one of the things is, I was telling you right before the show, I have a background in technology. But a currently, I'm kind of looking at the old brick and mortar boarding companies. And one of the reasons is for a lot of the software companies, specifically one of the areas you specialize in, which is b2b Software as a Service as much as I love the idea because I'm a recurring revenue guy I have, I have you know my, my biggest investment is real estate, right? So I, I do that because the recurring

Lowell Ricklefs  3:27  
yeah

Ronald Skelton  3:27  
revenue. So I love the idea of it's the valuations behind for the last few years for the for most SaaS companies are just insane in my world. So are they still like that? What does that look like right now? or

Lowell Ricklefs  4:05  
It's a really good question. And I like your analogy to real estate because it is recurring revenue. I mean, that's why people will pay multiples of revenue instead of multiples of EBITDA is because it's a it's in theory, it's a continuous revenue stream, and they can look at the metrics looking back to find out how reliable it is, and, and they'll pay for a growth and retention. I mean, that's, that's the value of those companies. You know, we, we focus on companies, with typically five to 25 million in ARR. So they tend to be smaller SAS companies, the multiples have been in the five to 12 range, and honestly, the vast majority are in the smaller ones are in the, in the four to six range. They haven't gotten a lot higher in the last five years. And so they're not getting compressed that much. Now, what you did see is companies north of 100 million, or you just saw some crazy investment in valuations where you saw, you know, 20, 40, 60, 100x valuations some things that just made your, your head spin, and there was just more money than there were opportunities. So people they, you know, private equity has to put the money to work, they can't just sit on the sidelines. So after losing out on a lot of deals sitting on the sidelines for a year or two, you saw some kind of desperate things going on. Now, the market has kind of flattened, you know, the publicly traded companies have come down under valuations. I think private equity is being much more careful about where they invest, some of the companies they invested in there, they're looking, we're trying to get them closer the, the cashflow. But I'd say it's back to probably where it should be. I, I mean, it was it was higher than it should be. And those that exited at that point, I think many benefited from that. But I think what you see today is, is more typical of where it's been for the long term, and probably Alliance, most correctly with where the value of those companies are, in my personal opinion,

Ronald Skelton  5:57  
not necessarily, so if you're playing seven times multiple of revenue, right?

Lowell Ricklefs  6:02  
Well, and depending on when you invest, if you're, you know, pre revenue, you know, it can be, it can be five to 10 to 15 years, even if you have a successful outcome on paper, right? Even if you've got a unicorn, you know, your investment could be worth, worth a lot on paper, but it's not liquid. So you could be 15 years out, and it looks great on your spreadsheet, but you can't spend that money. So it's a good, that can be a good problem to have, although maybe not with the valuations drop, but, but it's true.

Let's talk about, let's talk about what's going on in the industry right now. I mean, a lot of people concerned about, like the economy and how that's impacting it. Do you see what do you see going on right now in the space?

I think it depends, there's, there's still a lot of money that that's out there, you know, I, I like to tell the story, you go back to 2002, and Enron did some bad things. And so Congress passed Sarbanes Oxley to try to hold people accountable. And which I think was a good thing. But it added a cost to going public of about a million dollars a year, someone said $2 million a year. So now it made it harder for 10 million revenue company to go public, because it might wipe out their, their profitability. So instead, private equity. And they had a longer term approach than quarter to quarter, and they had returns of 30 to 40%, internal rates of return. So just put that in perspective, $100 million fund would return 1.6 billion 10 years later, well, if you were an investor in that fund, what would you do with your share of your 1.6 billion, you throw it back into another fund, and also the 1.6, you know, turns into, I can't do the math in my head turns into 25 billion. So you've seen that happen over and over again, for last 20 years, the funds have gotten much, much larger, there's, there's close to $5 trillion. Now in private equity, it represents 20% of the value of the New York Stock Exchange, there's a massive amount of money out there that that's trying to find a home, and that's still the case. So they're, they're still aggressive, they're being a little bit more cautious right now a little bit more patient, there's a little bit more scrutiny from higher up before they, they make investments. But I, I think as an investor over time, you've seen I think, many of the most successful companies come right after some sort of a, a bad event. So you know, as, as often happens, you know, strategic companies, if their stock price is down, it doesn't mean that they're not interested in, in buying companies. But if their performance is down, that's what really matters. If their performance is down there, they definitely are, are more cautious about spending money to buy companies, they want to preserve it to kind of focus on their core business. Private equity, you know, they they're typically looking for companies with 10 million or more in recurring revenue for a platform. And then they'll do add ons of, you know, the, the three, five $7 million companies. And that's a lot of the companies that we work with our, our add ons. So a lot of the platform companies are still looking for add ons, add ons, don't get the, the sky high multiples, that, that would capture the headlines. And that's still, you know, if, if it's a good fit, those platforms need to grow and acquisition as a part of that core strategy. We see a healthy appetite out there still for that, if it's the right fit. And so that's that that's comfortable, you know, some of the, the thesis will change that they make platform investments in right when you saw COVID kick in, you saw a lot of lot of the investors shift their focus, you know, a lot of them focus to, you know, logistics for small e commerce retailers, right, because everyone went online to buy things and shipping was a big part of that. So there are a lot of things that, that shift like that, you know, the concern about consumer spending is one of the things that we have seen, you know, particularly on the retail side, you know, businesses that are on the retail side, you know, they don't believe that's gonna be a big growth industry over the next two to three years, right. So they're focused focusing on things that will. So retail Tech is a, is a hot space for one example. But if you are actually in the retail selling retail, it, it might be less interesting. So you, you see a shift in the focus. But like I say the, the market is still strong, I, I think it was probably record strength in the, in the history of the world, the past few years, but it's it's still very, very strong. Does not, you know, you kind of hit the high watermark, and we've kind of come off that, but it's not gloom and doom on the acquisition side, I can tell you that, at least at this point, it continues to evolve.

Ronald Skelton  10:32  
Awesome. So you mentioned a couple of times in there, right fit, you know, the phrase right for fit. What would you what are the elements of being the right fit as a software a b2b software as a service company? Like if you're wanting to appeal, you know, you're starting to look at maybe an exit or something and you're wanting to appeal to these private equity or institutional buyers kind of what are the elements of, of a good fit?

Lowell Ricklefs  10:57  
Well, I will tell you, right now, this kind of ties in the last question, one of the things, companies that are burning cash back, I got an email this morning from a company that passed. And is his comment really hit home is he said, We don't want to pay for a company that adds to our burn. So burning cash right now is over. One of things I run across a lot is companies will anecdotally see companies that are, you know, burning cash, I mean, look at, look at Uber, right, they still burn cash and look at their sky high valuation. And they, they said they don't think it matters, it, it does matter. Even just being breakeven is very different than burning cash, people don't want to buy a company, and then have to continue invest in it, they want to buy it, and not have to invest in it. And ideally, believe that it's gonna start generating cash, but they don't want to pick up a potential liability. You know, what you should look at what, what I found. And when I was a CEO of a, of a company, I, I looked at companies in our space, I looked at our customers, I looked at our competitors. And I assumed that those would be the acquirers. And the reality is, oftentimes, the acquirer will be companies that you haven't thought about before, but they sell to the same client base. Now, you may have 500 clients, and you may do 5 million in revenue. But, but some companies out there, you know, let's say you're, it's HR tech, right, and you're selling into the enterprise and in the, in the HR, well, they you, it may be a different solution that they sell, but it's the same buyer, and they've got 50,000 customers. So in many ways, it's almost like a marketing campaign to their existing client base where they can cross sell. And, and even with 10% adoption, they go from, you know, 10% of 50,000 is 5000, you now have 10 times the revenue that, that you have currently. So oftentimes you acquire, it's easy for them to justify the acquisition, not just on your, your existing numbers, but what your numbers would look like, at scale in their company. So, so that's, that's one part of it, then you gotta look at the technology. Is it scalable? Is it current tech? Is there a lot of tech debt? You know, is this a 20 year old tech stack that you're running this thing on? Because then they may look at it and say, Boy, this is a great fit. But if we have to rebuild it anyway, why don't we just build our own? Why would we buy it and rebuild it? Some of the core metrics they'll look at is a retention that we talked about, right? I mean, that's probably the most important thing. I would argue if you've got 50% churn, you don't really have recurring revenue, you're, you're selling the equivalent of a two year license, because if you 50% a year 100% churn in two years. So in they'll pay closer to normal shrink wrap software, like prices more in the, you know, the one to 2x revenue price. Growth is another category, that that's really key, if you can get above you know, 40 to 50%, continuous growth, you are far more valuable than if you're, if you're flat, if you're flat, there are companies that will that may buy you, but they're gonna be more value oriented. And it typically what we'll see are companies in the 20 to 40%, kind of linear growth, they're not the hockey stick growth. And often I would argue if you are a hockey stick exponential growth 50% Plus, and it's a big enough market, often I'll coach people, why would you sell now yes, you'll get a high multiple now. But you're gonna have a much higher baseline, if a multiple be applied to in a year, 18 months, two years, your, your, your company could be 2,4, 8 times as valuable in a year or two. So those are some of the some of the metrics there are a few others as well, but I'll stop.

Ronald Skelton  14:32  
That's cool.

The, you know, the recurring revenue model is you know, that's, that's something I, I

 look for everything. Like if I'm looking, I, I had a fascination at the beginning of the year, I was looking at a bunch of coffee roasting companies because I could go and do like the, you know, coffee in a box type of, you know, subscription, you know, add subscription plans to them. And I, I just had a couple of models right, seen it work really well. You know, I've said this over and over again on the show, probably. But uh, what turned me off in that industry is the regulations and the international trade and stuff. There's some things that go on in the coffee industry that are just kind of shady. But a side of the software as a service, what are some red flags? That would be like if it'd be hard for to, to basically get in your way if you're trying to sell?

Lowell Ricklefs  15:22  
Well, I mean, one of the things is, is like realistic expectations, right? I mean, I've talked to some people, and they're like, we'll get 2 million revenue. And I said, Well, what, you know, what, what are your valuation expectations? You know, they'll say, Well I'd, I'd take 50 million, and just thinking, you know, 

Ronald Skelton  15:39  
So would I

Lowell Ricklefs  15:40  
you might get, but, but, you know, the odds of us getting that are, are low. So I, I want you to look at just realistic valuation, we kind of have a feel for, you know, there are the, the high performance buyers, that will pay the eight to 10x multiples, the vast majority are in the middle of the normal range, call it three to seven times revenue, then you get the value buyers, right that, that buy companies that are but, but so kind of tied into that probably the, the hardest thing to sell is declining revenue. One of the buyers wants told me no one wants to catch a falling knife, right? They just in, in, in we have sold companies with declining revenue, but it's important to tell the story, understand why and then be able to communicate clearly what, what the fix would be right, it might just be that the software company is really more of a feature, it's not a product. So that feature is a part of a larger product line is, is sticky, it, it makes their product stickier and it's not standalone, you don't just you don't discontinue using, or you may discontinue the feature, but you still subscribe to the whole thing. Another thing I've coached people on is get, get your financials correct. You know, often, you know, companies, when they're small, don't spend a lot, you know, they don't have a CFO and don't spend a lot. And you know, it's I've never seen it intentional, but, but sometimes the, the revenue and, and the costs weren't,  weren't accounted for properly. So you just want to make sure that that's correct. So there aren't any big surprises in there, because you'll, you'll work really hard to get to, you know, an indication of interest and letter of intent, you don't want to get that far and sign it, only to find out that there's some significant errors and And it shifted that one either gives the buyer leverage to, to retrade it and change the price or, or or back out. So that's a big one.

Ronald Skelton  17:37  
And it goes a lot into the trust, too. When you start getting into due diligence, and you start seeing things that are just like, out of place. And, you know, sometimes I mean, I've looked at a bunch, you know, the last couple years, sometimes it's hard to tell whether or not it was intentional or just poorly run. Right, 

Lowell Ricklefs  17:55  
right. 

Ronald Skelton  17:55  
It's like, okay, they either run this really bad, or they're trying to hide this. And there's just a seed of doubt. Right? You tried to give people the benefit of the doubt. Okay, they probably just didn't do their books, right. But that seed of doubt, still, there was like, what else? What else should I be looking for? Right? So

Lowell Ricklefs  18:12  
that's exactly right. It's like peeling back an onion. It's like, (inaudible), when I was on the buying side, where you talk to someone who did it make these claims, you'd say, Wow, that's really interesting. But then you look at the data and the data doesn't support those claims. And, and almost in what I learned over time, is if that, if there's a disconnect on that first level, they're probably further disconnects as you dig deeper. So And likewise, if someone is if what they tell you is consistent with what you see in the data, and there tends to be a consistency, it, it builds trust. And then when when normal things come up, you know, for example, one of the things that often comes up with software, you know, when it was, you know, you and I start up a company in a napkin, and we're at coffee shops, and we're writing code and trying to make it work. You know, we probably don't have IP assignment letters right in place, and noncompetes. Well, it's a big deal, because a buyer often at the 11th hour is, is combing through those and says, you know, Hey, I see Ron help write the code for the first two years and now he's gone, are like, Well, yeah, but he's, he's a good guy. It's all fine. It's like, well, he needs to sign this well. One, if you left on bad terms, or it's all normal, right? Those things happen, but, but it's important to, to track people down. Try to get those signs if you can, ideally, before they have leverage if someone left on less than pleasant terms. Realize that, that could be a problem, right? So anyway, those are normal things that come up. You want to have a high level of trust and capital, because all these things that you negotiate, right, you're gonna negotiate how much cash at close versus an urn out. You're talking to things about non compete, there might be retention bonuses, there's gonna be your title, there's gonna be your cash comp. All of these things are in negotiation, right? And when you negotiate, you start with a, like a an account that's high and every time they, they give up you, you, You know, you're at some point, they're not going to give any more. So you don't want to waste that on things that don't matter. Like, oh, you know, I said we did 6 million last year, we actually did four and a half. Oops. Right. It's like you, you just lost a lot right there. 

Ronald Skelton  20:15  
Right? 

Lowell Ricklefs  20:16  
You

haven't even gotten to the other stuff. Yeah, 

Ronald Skelton  20:18  
it's not it's just I'm just not even the big things like in the brick and mortar companies, sometimes it's like, oh, yeah, yeah, you know, the, it's the Add backs, the things that in the smaller world, like, they're starting to add back. I get the one that keeps coming to my mind is a little small company, but they were doing a one and a half million doing car detailing and do window tinting. And on the surface, like, okay, that's totally cool. And you start looking at it, and like the owners, like we know, I'd be willing to come back part time. And the owner only added back in like, 60,000 for his salary, which was a little low, even where he's located. And you start talking to him, he's like, I'd be willing to come back part time and you start calling me What's what is part time look like to zero 40 hours a week? Okay, how many hours you're working right now? You know, he's like, at 90, you know, I was okay, if you only added back, one salary, and you're doing two and a half jobs. So 

Lowell Ricklefs  21:16  
Yeah, Yeah

Ronald Skelton  21:16  
there's a little bit of that going on in the software industry. I know it came from the software industry is there's no such thing as a 40 hour workweek, least at least back in the day when I was there. You know, you're on call, you're writing code, you're there, you got to get, especially in the startup world, you're, you're, you're there 50, 60 hours a week if you're a slacker. And but is there I guess, once you get past that five to $10 million recurring revenue model that, that things change. One of the things I would be like I would be concerned with if I'm the acquirer is a lot of those companies are backed by VCs, angel investors, a lot of I guess the cap table is what I'm looking for, like where all the shares are, who owns what is that a problem that you see regularly?

Lowell Ricklefs  22:02  
As far as like who your investors are just that the cap tables? Not correct?

Ronald Skelton  22:06  
The cap table is not correct. It's just like, it's, you know, the owner doesn't own as much as he thinks he used to own or any things he owns, because of the way he structured the deal. I think that's the biggest way you can mess up small company.

Lowell Ricklefs  22:18  
Yeah

Ronald Skelton  22:19  
 So

Lowell Ricklefs  22:20  
people often maybe usually don't really understand how it's all going to flow through on the waterfall, right? Like really, you know, I know. And I know this from experience when you're raising money, and you get these term sheets on legalese. And you say, what was his preferences? And they explain it, and you're, you know, sometimes you like, yeah, maybe in that moment, you understand, and then you're like, whatever, I need money, or this company's gonna die, and you sign it. And then when you're selling it all sudden, you really focus on that stuff and understand it, you know, like, well, who has to go who, who, who can kill this deal? Like who has to vote to approve it right?

Ronald Skelton  22:56  
That's yeah

Lowell Ricklefs  22:55  
 First, have the sole right to approve or disapprove this deal? And what's this look like to them? And do they have preferences? And, and how does this flow, you know, to them, it's a big deal. And then I would say probably the, the biggest issue that I see is that often you'll have a founder, they got 100% of the company, they'll bring on a co-founder, right or a CTO, and they might give them 20%, but they give it as options, right? Which is, which is fine. But two things happen. One is on an exit, the neither side really factored in that those options had a strike price. So, so the founder gets the full value, whereas this, this new person, yeah, they get 20%, they get 20% minus the strike price. So 20% could become 15% pretty quickly. And then there's the tax issue, right with QSBS if you're qualified, qualified. Business stock, you know, if it's held five years, or for the founder, it's tax free, right? So if a company sells for, we'll make it easy, 10 million bucks. And he's got 80%, he gets $8 million, like after tax and the co-founder at 20%, the 2 million that now goes to one and a half. And it's treated as ordinary income. So he's got 35% tax on it. So you know, 20 or so two goes to one and a half is also less than one. And he's saying I got 10. But anyway, so And often it's, it's at that 11th hour when the waterfall is being calculated that both sides realize this isn't what they thought it would be. And, and that can be that can get very emotional. And it's, it's more common than not that people don't really understand the effect of that. So my, my advice to people right now would be if you're in a company, I don't care what role you're in. And the company performing well, like an eye net is it'd be defined differently as long as there's consistent real revenue growth. And then particularly if you think it's profitable, the company will do well. You should exercise your options. Because if you hold it for A year, I'm not giving tax advice, this is just general friendly advice. Because then it, it should be treated as a capital gain. Now you should talk to your tax person to make sure that's really true. But, but then will you actually own shares more than a year and you'll get capital gains treatment, which should be less, it may not be the QSBS. And then I, you know, with founders as well, if you're a co founder, if you can give shares instead of options, it makes you more level on the exit than it is if, if if there are options now, the downside is if you give shares and they have a value, it's treated as income. So you have to write a check, which may not feel good, if in fact, they're never worth anything, right? Because if you give someone a million dollars with a stock, and they have to write a 300,000, or check the IRS, that doesn't feel very good either. But, But particularly early stage companies, if the strike price is low, the risk is relatively low. That's, that's, that's what I would do. Maybe I should do that rather than give tax advice. 

Ronald Skelton  22:56  
right

Lowell Ricklefs  23:34  
So that all continues to change.

Ronald Skelton  26:04  
What are some of the biggest mis, misconceptions in industry? Like I always say, there's everybody in this industry, in any industry, there's some rumors or like, misconceived, you know, notions out there in the space that just, usually there's one or two that just bug you. Is there anything out there that people think about software as a service, or acquisitions and mergers that just like you wish that didn't exist?

Lowell Ricklefs  26:32  
I think, I think the biggest misconception, and I went through this as well, when I was on the buying side and, and bought the first company, and the CEO said, Hey, we want to expand and I found a company and I, I thought I negotiated a price. And I thought it was done like we'd, you know, make get someone to write a page of stuff, and, and underestimated the amount of due diligence work that was required on both sides, the amount of effort that goes into a purchase agreement, the hundreds of items and points that get negotiated. Some are business, some are legal, but the amount of effort and complexity and risk. So once you get to a letter of intent, someone I mean, often I'll see people say, well, well, let's just, let's just do this, and let's get an LOI, and they kind of feel like once an LOI is signed the like the deal is done, the rest of it is trivial. And what they don't realize is, is, is often sometimes the buyers that do the least amount of due diligence will give you an offer. And sometimes there's someone else that does a tremendous amount of due diligence, and they actually seem like a pain in the ass because they've done so much due diligence. And so sometimes the seller will say, Well, these guys are really irritating. These guys are easy to work with. And I'll coach them, I'll say, look, these other guys are just, you know, they're, they're just being a little bit lazy, they haven't done any of the hard work yet. They're waiting until they're exclusive to do the hard work. And there's a lot they don't know yet. They might not like your tech, they might not like you, right, or they may not like your co founder or they may not like your financials or they may not like, you know, your the customer fit may not be there there any number of reasons, they'll sign that loi, that doesn't mean anything, it's non binding, both parties can walk away for any reason or no reason. So I really encourage people to try to do as much due diligence upfront before you sign the LOI, even though it's exhausting, and it's hard, and it's soul sucking, and it's just not fun stuff to do. Because then your eyes wide open. And if they still want to buy the company, once they've seen everything, it's much more likely to go through. So that's probably the biggest thing is sometimes people like, let's just let's just get the LOI signed, I want to get to the front of my board. And I, I tried to kind of coach patients that let's, let's have the tough conversations. And I'll ask buyers, you know, we we, we we close 90% of deals that go to LOI, the industry standard is about 50%. About half ballpark. And probably is because we spent a lot of time upfront, I'll talk to a buyer. And I'll just say, This is great to see Princeton looks like a great fit, I understand it. But if this were to fall apart, what would derail it, right? And they'll say right the only reason this would be derailed is if x, y and z and I'm like, Okay, let's dig into X, Y and Z like tomorrow and make sure that, that you are as comfortable as possible that, that, that's not gonna happen before you get to new LOI. And we've done that sometimes and they get into it. They're like, Oh, wow, this is big monolithic code base. That's, that's not going to fly. My CTO says we're not interested. It's like, Oh, well that we've covered that now before we said no to everyone else. And once LOI,

Ronald Skelton  29:27  
I've had a few of them were like, I we start the process, you do the standard, like, hey, introductions. Yeah, I'm interested in your industry. You're from what I can see from your website and other stuff. I'm kind of interested in what you got going on. Let's have a conversation. First call is always for me. Just build repport the owner. What's your origin story? Like? Just I don't get in to, to the numbers right off the bat because I kind of need to know who I'm working with and what the process and all look like. But some of the best ones I've seen where they were prepared meeting as soon as we had the NDA signed, there's two different levels of this. So the one of just like overwhelmed me, the second I had the NDA sign, it says, Great. I kind of did some research, I listened to a few of your shows, I really liked it, you know, I really liked you to acquire my company. Here's the deal room. And after an NDA, he gave me like 100 documents to dig through. Like, everything, I would have my checklist for due diligence, you could tell this guy is sold the business before, he

Lowell Ricklefs  30:27  
Yeah

Ronald Skelton  30:27  
 had a due diligence checklist on there. And then you open it up, and it basically had all these legal 30 items, 40 items or whatever on there with a link to where I find them in the folder. Right. And the problem was, is I didn't know the guy let you know, DPO that asked you any set of books, any set of financials, any set of information on the company causes questions, right? You're looking at things like okay, what did you do this? What does this mean? If you get that stuff before you have report the guy, it, it,  it max up the conversation, I think a little bit because in my next call with him was like, Hey, I'm looking at this and this, and we weren't at the point where he felt comfortable. He gave me all the information. But you could tell like, like, there was a little bit of Who are you to question to me about this stuff in, in. But I was just intrigued with the the second guy that, you know, the one I did like was we had a conversation, he said, All I'll give you the first set of data you're probably gonna ask for. And then he gave me kind of a,a he gave me a link to a folder. And it was just a high level profit loss statement, balance sheet, just the stuff you'd normally glance at. And some marketing materials, kind of like he had a little presentation in there where, like, his vision to where we go. And it's if you like, what you see scheduled a second call. And then we, we, we had some questions about that. And then he had the rest of the stuff. Right. But he introduced it to me as, as you know, whoever plant his, his, his folder out was it the only thing stopping that, that transaction was at the very end, like when the due diligence on legal due diligence, he had two pending issues. A patent lawsuit that I just didn't want to fund because I didn't I don't know enough about it to know whether or not the guy was going to win or lose. And the other one was trying to think if I've ever named his company on my podcast, I don't want to say this out loud. I don't think I have. So the other one was a human resources sexual harassment lawsuit that was going on in the company currently with a former VP's gone that they still dealing with this right? The lady was suing the company, not the VP that left, and just didn't want to step into the mess. And I was like, part of me is like, you should have shared that at the beginning. But I guess you wouldn't. 

Lowell Ricklefs  30:27  
Yeah,

Ronald Skelton  31:13  
 but my whole point is, is that, like, the amount of data and when you get it, it's, it's it's part of a conversation. It's an ongoing conversation between you and, and the stuff. And I, I guess if I was a big institutional buyer, I just loved having the big data dump, here's the deal room go through it, if you're still interested, give us a call, is that I haven't, that's the only one I've ever seen that did that's better practice only there's only two or three companies out of 230, 240 that ever been that well prepared? Right. You know, that's, that said, we were approaching companies are not listed, right? We're, we were going directly to companies.

Lowell Ricklefs  33:15  
yeah

Ronald Skelton  33:15  
 You know, matter of fact, if you were kind of listed and brokered, we might look at you, but we didn't reach out to you, you had to hear about what we're doing or reach out to us. So is that normal? I mean, is like, I know that if you're an advisor, do you help build like a deal room for these guys and have all that stuff prepared? So that when the seller or the buyer asked what is just sitting there, or do you guys build it as you go, because you don't know what they're gonna ask for.

Lowell Ricklefs  33:40  
So what we do is we will give an outline of a typical data room to entrepreneurs and some will then spend the next 36 hours without sleeping to fill it, but we give it to them really so that there aren't any surprises I throw the easy stuff in there, the hard stuff, you know, some of its important some of its not as important but just so that you know, like the IP assignment employee contracts, if, you know, if they're missing a third of them, it's like, okay, let's identify that early. But it's less that we'll share that, that data room it's more so that they can, they can kind of get used to it. And then usually by the time we get to and, and we'll do like their financials, p&l balancing like well, we'll build a financial model, it will create a confidential information presentation which is different one thing we do is different than what typical bankers do we sit bankers we used to get that dense two tone deck that, that would just you know, put you to sleep with, with the amount of detail and there was a lot of information in there but, but it was almost like if this looks interesting, call us I thought you could never sell your product that way right your product you had to talk about like you know, what, what, what issues is Ron struggling with and let's, let's talk about those pain points and how we've helped other people that do it. Ron does solve those things. And then people engage in though, though they'll pay attention, because you're talking about their problems, so our decks are, are structured a little bit differently. So we'll start off with those two pieces of information that gives people most of what they need to understand the business, the history, the financials. And from there, we'll do like a, like a fireside chat. But it is it's, it's, it's like getting married, right? I mean, buying a company is a pretty as a relatively permanent thing. I guess it's permanent is getting married right at 50% divorce rate, but it's, you know, it's, and before you get married, you, you need to date first. So you get to gonna get to know each other, like, Do I even want to spend time with this person? Do we have things in common, and then you can dig deeper. So he's on a first date, you wouldn't just roll out, you know, here's my Myers Brigg. And here's my face everything on it, sometimes just a little bit much could, could shock people. So 

Ronald Skelton  34:08  
I think they have that

in there. That deal room, they had all their executives, Myers Briggs, all the executives, what's the one by dance all of them are dens all of it and promotes serves as a number in it something 30 something or whatever. Anyway, they had personal evals and stuff of like, you know, basically psychological profiles of other VPs and stuff in there. And at my nerdy first need you reaction on it was, you know what, we're not even interested in this, like anything that looks like that prepared. There's a little bit of, but I started when you start digging into it, you realize the guy was actually who's the guy who wrote built a cell of John Warrillow, or something like that. They were a fan of his one of his coaching client, like they had built their business the entire time. And one of the things he teaches is you create the deal rule from day one, and you run, you know, every month, you're, you're fine, it just gets updated. So if anybody ever says hey, I'm interested, like, go find here, here's everything you'd ever need. So they run it as if 

Lowell Ricklefs  36:46  
Yeah

Ronald Skelton  36:46  
that's what he had done. But my first (inaudible) reaction is like, wait a second, they polish this pony. So, so shiny, that, you know, this, you know, that's just, it raises a red flag. So

Lowell Ricklefs  36:58  
It, it feels unnatural with that sterile, right? So it is funny, though, one of, one of the companies be sold. Earlier this year, the, the founder was pretty funny. He said, The next company I started, he said, first thing I'm gonna do is build the data room. But he, but he said that because going back 12 years, and trying to find everything and put it in there was, was a lot of work. It just I don't ever want to do that again. And it's not hard to just kinda keep all that stuff systematically filed. So that when you sell it's, it's just there. But the other part of that I think that's important is, you know, there's the, the, the classic saying is like, know when to stop selling at some point, they say yes, I want to buy you at that point. Don't just keep throwing stuff out there, because you, you can screw it up by trying to oversell it. I think due diligence is that way, where so, so entrepreneur may have all that information as if they need it. But then you know you usually get a pretty intense spreadsheet from the buyer, usually by sending it to LOI building, how could there possibly be more due diligence, they've looked at everything? And it's like, trust me just wait, right? They think there's nothing else and then they get it? They're like, Are you kidding me? Like I have to supply all this information. But I think it's give them what they want. That's what they want. But don't give them but don't give them anything else. Give them everything they want. Don't hide anything. And you had an interesting thing in there as well. If there have been lawsuits settled or whatever, there's a point I think in the middle where, where you're serious, you want to go ahead, but you want to be but, but the Capitol still pretty high on both sides and say, Look, we just want you to know, we had this employee leave it was it was uncomfortable circumstances, but it was settled. Here's the document that says everything's fine, they've got no rights, bah, bah, bah, and have that early enough where they can say, yeah, we'll review it, you know, we're okay with it. But if that comes up at the 11th hour, just before you sign, when, just in general, both sides are kind of at a capital deal, fatigue setting in emotions tend to be high, the, the reaction to new news later is much higher than it is earlier. So, so you don't want to do it at the front. You don't want to hide it until the end and say, Oh, hey, by the way, you know, we're under current lawsuit by half of our employees for, you know, that's, that's not gonna go well anyway. But so there's a point in the middle, and that's where part of this is a process. Part of it is a, is a science, but a lot of is a bit of, of the art of what people want to know and when to know. And, you know, because you'll do disclosure schedules, right? That's like, the last thing you'll do before you sign is your attorney what you know, you'll you'll, you'll have to disclose anything that's material and anything you disclose, they can't come back as a whole back some money for identification. And if if, if you disclose it, you've been, it's out in the open and they can't come back and say, Oh, you didn't tell us about that. That the rest of you feel like oh, my if I get a screw up the deal if I disclose these things, anything you don't disclose, if in fact that hasn't been material, and it's a problem later on, they can come back and, and, and take money away, away from you for that. So, so all of those things will come out and knowing when the right time is at that time. research is important.

Ronald Skelton  40:01  
And to their defense, I won't, I, I never bought up the name of the company and I won't just because they're good people. But to their defense, it was in that deal room, like I told you, they just like data dumped and said, Here you go, it was in there, I just didn't dig into that folder. That's it, you know, the legal due diligence folder, I figured I'd let my lawyer look out later. And I should have at least glanced through it. Because I had already spent, you know, a week or two on calls with these guys, we weren't deep into this, like, they gave me so much stuff. This went pretty quick. But uh, I was already weakened to in the calls and digging through, you know, probably 30, 40 hours of my time digging through all that dealroom stuff. And, you know, starting to already call people and build my team, like, who you know, who's going to be on, on that and before I stumbled across it. So that said, I love the idea of the deal room, I'm a big fan of, you know, the, the that built the sale model where you build it from day one, but I love what you say you give people what they're asking for. Because, you know, to be honest, there's, there's a little bit of cry of desperation that I felt when you know, when he said, you know, we're interested in like, great, here's everything you'd ever need to know. Like, wait a second was

Lowell Ricklefs  41:11  
Yeah

Ronald Skelton  41:09  
 one of those things so bad, like, you know, this,

Lowell Ricklefs  41:12  
like the Myers Briggs is a good example, if you throw those in there for the management team, if they met the team, they've gone out to dinner, they've had management meetings in person, and they're, they're happy with it, and you throw out Myers Briggs, or whatever psychological values you might get, they might look at that as a possibility, they could look at that and say, Well, boy, that by ENTJ, that's a bad fit for CTO, right? Or whatever it might be right, 

Ronald Skelton  41:12  
right

Lowell Ricklefs  41:12  
you, you just creating more than it's like, anytime and if you in CEOs know this, if you've got a board, you know you present the information that's important. But if you get carried away with lots of extra stuff, it just becomes more data points. That, that may or may not be positive, right? So I think, know what's important, know what they want, give them what they want, everything they want, and what they need. But don't necessarily give them everything you can think of, because you might think it's really cool, and they should know that. But you also might be making claims that you later had to defend like, oh, and we think we could do five times in this business next year because of this, this and this like, well, if you can't really back that up, don't make those claims (inaudible)

Ronald Skelton  42:14  
I love the people who try to sell me on Coulda, Woulda, Shoulda, right? Or if us, right? If you do this, then you know they want their valuation built on the if you,  if you do this, or if you

Lowell Ricklefs  42:24  
yeah

Ronald Skelton  42:24  
do that, and I'm like, that's not how this works. And I do what a lot of small you know people pre what you would work with, right? As a matter of fact, that's kind of what I'm looking for. I'm looking for the guys that are pre that 5 million, you know, in recurring revenue, because I want to grow them up and sell them like I want we're gonna roll them up, bring them guy, guy like you and we sell them to a PNE, you know? Yeah, you know, I want to be able to pick up companies, you know, and a lot of people on this show that listen to the show, we're looking to pick up companies that within, I'd say, three at the earliest to five, comfortable maybe seven or eight years, they're ready to be sold to a PNE, right? So we're picking up the stuff right underneath the radar, doing our thing and merging two or three of them together and then making them appetizing to a,a an institutional buyer, a private equity, a family office or something to try to get that up, you know that, that there's a what's the word I'm looking for arbitrage and EBITDA are two from 

Lowell Ricklefs  43:25  
absolutely

Ronald Skelton  43:25  
different (inaudible) classes. So we're, we're playing that arbitrage game a little bit. So we're, we're actually running pretty close to it. We're having like, almost 15 minutes here, let's, let's talk a little bit about, you know, your specialty as a company, how people get a hold up and stuff. So what exactly are you looking for as far as your what's your ideal client, I guess, is the word I'm looking for.

Lowell Ricklefs  43:50  
Our core business is our b2b SaaS companies with 5,000,000 5 i would say five to 25 you know, the vast majority are probably in the you know five to 15 million is probably the, the sweet spot of recurring, recurring business, you know, ideally, break even, ideally, some, some growth. Most of the companies we work with, have a vertical niche, right, that they're, they're focused on and it's across the board. It it's quite a few. I've got a business partner in London. So we, we kind of work 24 by seven and we've got a small team that we work with, but software in general, we, we are working on a couple of consumer focused businesses as well. Back one of deals we did earlier this year 60% of it was consumer but, but the vast majority of what we do is, is b2b SaaS, so we don't, we don't do we don't actually don't do any brick and mortar. I, I said, I guess we kind of did one. But, but generally speaking, you know, we're not selling pharmacies or anything else. You know, we don't, we don't. We're, we're just very very specialized in SAS, software

in particular, 

Ronald Skelton  45:03  
US based or US and Europe, do you have a partner in London, right, 

Lowell Ricklefs  45:07  
US

and Europe? Yep. Yep, we've got to active, we've got three active mandates right now. One is based out of Europe. So when we saw both buyers and sellers were, we, we know the European buyers, they're looking to expand and as well as US and Asia as well. So

Ronald Skelton  45:24  
that's really cool, because we have a lot of European listeners, because I, I was trained by a, a European mentor. So then I did, then I did a US mentor. So I'm connected to different networks, but one of the biggest networks I'm connected to and work with is, you know, out of Europe, and I say that he I think he lives in Dubai right now on a yacht, but his home base, where he's from is, is in, in the London area. So let's talk a little bit about what do you guys bring to the table? Somebody calls you they, they've got a software company? What do you guys do for them? And, and how do you help

them?

Lowell Ricklefs  46:01  
 Yeah, so they're kind of three big phases initially. So we'll help to build the, the financial model. And we've got a model builder who's very, very good at that. But the, the CIP the confidential information, presentation, we'll, we'll do a lot of work to create a presentation that really highlights the strengths of, of the business and, and the marketing side of it, and then we'll research buyers as well. So that's a big part of what we'll do is, we'll work we create a Google Sheet, and we'll, we'll reach out to we'll identify two to 300 potential buyers, we'll look at how many employees they have, are they? How well, are they capitalized? How much cash? Do they have? What, what recent acquisitions? Have they done in the description of each of those? We'll share that with the founder to go back and forth and get their, their insight into those as well. We look at different categories of buyers, like is this someone that is just a competitive product that would you know increase their market share? Is this like incremental functionality on a product that they've got? Or is this actually just a different product that's sold into the same client base? You know, are you a US product, and there's a European company that wants us market share? There are different reasons why someone might buy so we'll create those segments. And then we'll segment the buyers that way. And then we'll prioritize them, you know, 123, where one are likely buyers likely interested. Two is looks like a good fit three is kind of a stretch, but still worth having a conversation. And then we'll, we'll reach out to the different groups will, will have the initial conversation, we'll set up we call fireside chat with the founder will target indications of interest. So it's a one page how much we pay, what's the structure look like source of funds, what kind of internal approvals we do a really good job of vetting, how likely are they? We lost the question, sometimes people will talk to founders a lot. And they'll just say, I got two offers, I say well, we'll be talking to let's corp dev is if you talk to any product people CEO, and now it's like well, what, what's the offer? Is there any approval was the funding. There often just, it's a verbal offer, which really doesn't, doesn't carry a lot of weight. So then will we, we do a lot of negotiation? That's a big part of it, understanding who all the decision makers on the buyer side, understand what and we help. Honestly, you know people talking about companies are bought not sold. Some people think that means that companies are like, like, the buyer just decides they want to buy the company, we look at it as really walking the buyer through the buying process understanding, why do you want to buy this company? What are you trying to accomplish, we helped them build the case to buy the company, we can do that as former buyer. So even though we, we work for the seller, we work with the buyer to put together their, their business case and model approvals from the board, etc. Reassure them eliminate the obstacles and the fears and the concerns that they have, so that a deal gets done. So we do a lot of both.

(inaudible)

Ronald Skelton  48:51  
I can understand why you would hold the buyers hand, especially if there's a board involved because you're probably better equipped to preparing why it's a good purchase for the board to understand then some m&a guy that the guy hired, you know, or whoever's in charge of acquiring or finding a growth strategy, Business Development guy, you know, at the company, I think that you fish got more experience in that realm. Even, even for myself, if, if somebody if I was worked for a company, and we're doing an acquisition, and you said, hey, I can help you prepare a presentation to the board. I'd probably go Yeah, let's do that. Right. I've been looking at things like this for three or four years. You've got what 20? Yes, yeah.

Lowell Ricklefs  49:31  
Yeah. Yeah, It's just 

Ronald Skelton  49:32  
maybe 

Lowell Ricklefs  49:33  
it's not. I'm no smarter than they are. But it's just

Ronald Skelton  49:35  
Yeah

Lowell Ricklefs  49:35  
 I've just, I've been through that. And I've made I've got the scars from a lot of the mistakes that we've made, and sometimes they'll put things in place and say, I understand why, what you're trying to accomplish, but here's why day one, or day 30 Or day 90, that can work against you, because you're gonna want to try to accomplish this, you might put him there and he's focused on that. And often they're, they're, you know, they're receptive that I mean often they just If we don't have as much experience, oftentimes buyers, strategic buyers may have only acquired one company, right? It didn't go well or, or not you know or if you some, some have bought, you know, far more than that I have, they, they far more experience, but the extent that what I've seen is helpful, and I tried to share that with them. And it builds trust and credibility on their sites, I really do look at one of these I look at is the company most likely to follow through as a company where I understand as a former buyer companies, why they should buy this company, this absolutely makes sense, you're, you're in this, you know, this, this is you're missing this functionality, this will expand. So that's who I lean in heavily with, and then I, I genuinely believe, when I talked to them is like, this absolutely makes sense for you guys, like totally get this. And sometimes I'll even offer, you know, these are the seven reasons if I were in your shoes based on what I understand, I don't want to tell them what to do. I mean, sometimes they don't, it isn't want my advice. But these are the seven reasons why I would be interested in buying this company, this these, these are the boxes it takes for me, because you got to put yourself in the head of the buyer, they're trying they've got a career was the CEO, the CTO, a corp dev, they've got a career, they're trying to be successful, they want to be a hero, right? So how do you help them be successful and be a hero, if you buy this company, and you increase it by three exit can help you, you know, you're you're under the gun to hit your revenue targets and your EBITDA target. So this could contribute that much. And, and really, if you're only 10% successful at converting, it gives you this amount and you know, 10% is pretty safe. So it's like a credible plan, you know, to toward success. So we do a lot of that I, I enjoy, I genuinely love doing that kind of thing. And we work a lot of high quality, like super smart buyers as well. So so it's fun.

Ronald Skelton  51:44  
Awesome. Well, we're running out of time here. So let's make sure everybody, what's the best way people can reach out to you and get a hold of you?

Lowell Ricklefs  51:52  
Two ways. One is through our website, just WW WWW dot traction advising one word.com You can reach out to us through there, or LinkedIn is a great way to reach out. And there's some different things on LinkedIn as well. But just feel free just pull requests on. Never liked my name. And the first and last name hard to say. But it's very unique. There, there's no one else on LinkedIn. I'm not John Smith. So you

Ronald Skelton  52:20  
Right

and I'll have those links in the show notes for everybody's listening here. Well, I want to thank you for being here. And the last thing we always ask all of our guests is what can myself or the audience do to help you out misery? What can we bring to the table to move your game forward?

Lowell Ricklefs  52:32  
Oh, just you know, if you've got an interesting company, even if you're not looking to sell now, you know, I can say we're focused on software companies, and then just give us a shout, we're happy to have a conversation. And we're just curious people. So we're always curious to hear your story and what you're thinking about and, and kind of where where you want to go. But we, we love it. We love to get to know, people and companies, you know, a year, two years, three years before they decide to sell, we're totally fine with that. It's a intense process. We like to get to know people, we, we, we only do a few deals a year. We're pretty psyched about who we work with we you know, we want to make sure it's a good fit for us as well as for you to go through it together. So feel free to reach out and happy to have a conversation or if you know someone that, that has questions, feel free to refer us.

Ronald Skelton  53:18  
Awesome. Well, thank you for being on the show. And we'll call that a wrap. Hey, it's your host, Ronald Skelton. I want to thank you personally for watching the show today and invite you to call our new hotline 918-641-4150 That's 918-641-4150 Call us and tell us about our show, ask questions, suggested guests or even tell me about a business you have for sale and we'll reach back out to you again that number is 918-641-4150 call our hotline leave us some information. Thank you. I don't want to announce our new channel partners the ITX marketplace since 1998 ITX has created 5 billion in value by selling more than 225 IT businesses in 20 countries. ITX works exclusively with IT enabled businesses generating between 5 million and 30 million who are ready to be sold in m&a to decision makers who are ready to buy for over 25 years ITX has developed industry knowledge that helps determine whether a seller is a good fit for their buyers before making the match ITX mergers and acquisition marketplace we have partnered with has a proprietary database of 50,000 plus global buyers seeking it service firms managed service providers, Microsoft service providers software as a service platforms and channel partners with Microsoft Oracle ServiceNow itself and the Salesforce space. If you have an IT enabled business you're ready to sell. I want you to visit the I T exchange net.com/marketplace How to exit that link will be in the show notes visit them now. The investor is an entrepreneur roles professional mastermind. The investors and entrepreneurs professional mastermind combines that additional peer to peer mastermind entities first in Napoleon Hills famous book Thinking Grow Rich, with accountability partnering, where your peers help you ensure that you set goals take action and get results. If you want to scale blow past roadblocks and achieve success faster than you might think is possible. I suggest you take a visit over to tiepm.com That's T I E P M.com. And check out the investors and entrepreneurs professional mastermind