Executing the Roll Up Strategy in the Tech Industry

26:39What are the challenges of doing a roll-up? I think the biggest one that Steven talked about, it's the culture, it's the people, it's getting on the same page, ensuring that you're on the same page with a prospective buyer from a vision and mission and priority before you really get down the path. It can be very distracting sometimes just on the level of interest and activity in our space to get sellers clamoring after the highest dollar or the most aggressive potential buyer out there. Being able to be disciplined in our approach when it comes to evaluating a business across all the factors that we've talked about, qualitative as well as quantitative.

27:21That's one of the biggest challenges that we face. And if we get too aggressive with dollars in our eyes on a particular business, because it's got a very attractive, even top margin profile, we have seen that come back to bite us because we got over our skis a little bit too far on an acquisition. And it really helps reinforce the need for this kind of discipline to be smart in the space. My two biggest challenges, if I just had to name them, It would be first unqualified investment banker involvement. And that can be from the early stages of whispering in somebody's ear that their half a million dollar EBITDA business with single customer concentration making 95 % of it is worth 20 times earnings.

28:01So it could be from that stage to taking them through the process and not actually being with them through it to help them really understand what is coming up next, where they need to be providing value, but at the same time blocking folks like us from helping work directly with the seller. Again, number one would be unqualified investment bankers. And by the way, there are qualified ones, but the unqualified ones create a lot of challenge. The second is really, I mean this, and I am guilty of this myself. It's the emotions of the sellers and really getting in touch with what those are and really connecting with people at a deeper level so that we can work through that together.

28:48And I got to tell you, these are the typical profile, not always, but it's typically an alpha male CEO founder of one of these businesses that we're dealing with. And I have outliers to that, but that's the typical. And they're feeling scared and out of control and confused and changing what they've spent the last X number of years in their life focused on. And this is their identity and they don't know anything else. And so it's a very scary time. And the description of that person I just gave you doesn't always get in tune with those emotions. So it might display itself in erratic, illogical behavior through the diligence process to try to get to close.

29:30And that can create conflicts and fights on both sides and just make people just keep wanting up each other versus really getting to the core of that, which is, yeah, this is emotional. This is challenging. I get it. I feel it. Let's talk about what's really going on. So we're not distracted with the details of this one customer contract that we think says this and you think says that. Let's get to the core of really where the challenge is because we're together wanting to create something amazing that would be better together than separate. it. Again, number one, unqualified investment bankers.

30:06And then two, getting in touch with and working with the emotions on both sides, frankly, buyers and sellers. I think that ties right back into the culture piece too of the organization because you got to manage that, but then uncover more about how your broader entities are going to work together. That's right. Earlier, you said you've seen the other side when that doesn't work well, or when you don't put enough emphasis on it. Tell me about that. I want to know, because I haven't done a deal for our company yet and eventually will. Yeah. I want to learn that earlier. So I must admit, I really am grateful for both private equity sponsors that I've had.

30:41They have both been phenomenal. Okay. They do what they say they're going to do. They care about people. We're culturally aligned. I spent a lot of time and energy making sure that was the case in both of the sponsors that we've had for Antiba. Early on in the hold with my first sponsor, there was a mid-market, managed service provider that was literally less than a mile physically from a big location that we had with lots of masks in the market, etc, etc. And this was a group that did not share our values. They were very sales heavy. Their focus was on closing new deals as often as they could and moving to that.

31:23The value of an employee was just based on their billable utilization. so the people that got celebrated the most were the people that were over 100 % utilization and burning out and focusing on billing multiple customers at once, I can keep going. So there were some red flags that I saw that I went, I don't think this is really the Antiba model. And what I heard back was, it's okay. They're right around the corner. There's lots of synergies. There is lots of opportunity for us to have error here and lose an employee or client or two. and it'll still be okay. Just give it a shot. And I said, okay, let's give it a shot.

32:03Nothing was okay. So not only did we lose employees and clients, but it became the energy focus to try to make it right, to try to fix the problems that were coming from it. Instead of focusing on the positive momentum of the rest of the organization, all that energy and attention went to stopping the bleeding here and trying to turn this around. So the potential value creation that came from that disappeared very quickly. It was a mismatch in target customer profile. It was a mismatch in what they value out of people and frankly, how they go after customers. That's interesting. Thanks for being open and honest about that.

32:44How'd you ultimately resolve that issue? It was a painful process. It started with trying to salvage things, trying to, I'll continue the authenticity and transparency for you. So at first it was, how can we make these customers and these employees happy? Okay, let's try to change this. Let's try to adjust that. Let's make a division that just focuses on this. Let's put all this energy to stopping the issues. That was not working. It's like pretending you're something you're not. It just doesn't work. Soon after, we pivoted to this concept of, we don't need everybody to like us. We need them to respect us and know who we are.

33:22Frankly, if they're going to fit, client or employee, they fit into the model. We know we will deliver well and we can scale for them and we create success. So after about a year and a half of trying to almost say anything to keep things on the rails, we shifted to we were wrong. This is what we stand for. This is what we're about. If you're interested in being part of that, we would love to have you. For a client, we're going to go out of our way to give us the opportunity to do that. For an employee, if this is not the right fit for you, we'll part ways in a very positive way, but let's not try to keep putting a square peg into a round hole.

34:00And that was really hard. That was really hard because I spent a lot of money for that. A lot of money went out the door and I felt very responsible for protecting it. In retrospect, obviously don't do the deal, but if you notice what's happening early like that, think about ways to maybe carve it back out, get it to a different group that would be maybe better support for what they're doing. Or, and we apply this now with every deal that we do, however good of a fit or not, we go in right up front and we say, this is who we are. This is what we're about. We're going to nail it for you. This is how we do things.

34:40And it's going to be a little bit different than the way things were done before. And oh, by the way, we do that in a collaborative way, understanding that if there are better ways that things are done, we're open to that. But we also have certain values and culture that we just lead with and are non-negotiables. So if you relive this again in a future deal, I guess, when would be the point in time you'd walk away from the deal? In that specific example, I would walk away from the deal early. Frankly, I would have walked away when learning that what was celebrated in the organization was billable utilization, not client satisfaction, not technical results, but billable utilization.

35:24Don't get me wrong. I like finances and that stuff's important, but doing it by burning people, like it's very legacy law firm mentality. In order to be successful here, you need to bill 4 ,000 hours a year, but you only show up to work 2 ,500 hours or 2 ,000 hours. It's okay, figure it out. Yeah, yeah, that's a really good point in how to look at it that way. And by the way, when I share this, it's not to say Antifa is better. We are just different. We have a certain set of values and we need to really own them for what they are. And by the way, when you do that, magic is made. Talking about the other organization that focuses on billable utilization.

36:01Look, there are business models for that. And if you put two organizations together that focus like that and have competitive technical resources that like to one-up each other by how much they can bill and how many things they can complete, great. You could do that and probably put together an incredibly profitable company. But that's not what we're about. Big emphasis I'm getting is know your culture. Because the better your culture, the better you can identify where there isn't a culture fit. I think that's a key component. By the way, that's easier said than done. I don't think I knew our culture until 20 years into the business.

36:35That's a fair point. What it gets at is as we're learning about businesses and speaking with business owners, it's less about spending those initial conversations or that initial time on understanding the ins and outs and the specific drivers of the P &L. It's really about trying to understand that owner or owners, what is their motivation? What are their interests? What do they hope to have happen through a possible transaction? What do they see for outlook for their employees, for their clients? How do they go about delivering service to their clients? getting a sense of all the qualitative aspects of the business, see if there really is that alignment with how we do things here at Antiva.

37:16And if there is, then you continue to march down the path to learn more and dig into the minutia of the numbers and the like. But if you recognize early on that there are things that don't look like they line up, don't feel like they ever line up, then it's thank you very much for your time. It was wonderfully insightful to learn about your business, it's clearly doing well, but for reasons X or Y, don't see it as being the right fit for us here at Antiva. If you're looking to transact, I'm happy to introduce you to others that you think might be a great spot for you. How do you source deals? We mentioned Steven's Rolodex earlier, but I can't imagine that being infinitely scalable.

37:52It's tough. The challenge is because it's such a people-driven business, having those connections made. And frankly, any warm introduction is worth infinitely more than a cold outreach. What I'm really driving towards and where I spend a tremendous amount of my time is trying to cultivate warm relationships with individuals through some sort of commonality, whether that's the executive team and their network, whether it's Steven and his network, whether it's vendors of ours and existing within their community of clients, whether it's industry events or other sort of thought pieces like webinars and the like to build the community for ourselves so that when I'm reaching out to have a more frank or direct conversation, or even just to introduce myself, it's not a blank stare as a response.

38:45And it's also just a way to differentiate ourselves given the volume of inbounds that business owners receive, particularly in our space. So it's trying to create that separation for us so that when that conversation can happen, it can be A, it's a response to an inquiry, and B, it can jumpstart into a fruitful conversation. But it's really about trying to go down multiple routes at the same time. And that's notwithstanding the mention of bankers, advisors, other market participants that are in the space to help broaden the outreach. It's really trying to pull down on multiple levers simultaneously because this isn't a business where you can go down just a single route only and hope to have the type of sustained success that you want to have.

39:30Yeah. So as I mentioned before, the managed service community in general is very closely now. While I certainly don't know all of them or even 10 % of them because it's so fragmented, the reality is there's one or two degrees of separation between everyone. That's the reality. Understanding that and really being engaged in this community and doing it in a genuine way where we want to help others be more successful by sharing what has helped us be successful or frankly sharing the failures to avoid. It's a rising tides, lift all boats concept. So we believe we do this for the industry. The industry gets stronger in the process of doing it.

40:13People learn about who we are. There's brand recognition and name recognition. And that leads to inbound lead generation. No different than how we would prospect for a customer that's in need of managed IT services. create meaningful, useful content, get it out to the audience that you're looking to support. Maybe the majority of those people are using it and never call you. But at some point, there's going to be a triggering event where their IT stops working or they need something and our name is going to be familiar. It's the same thing on the M &A side. We help provide guidance of what not to do when doing your first acquisition or what not to do when building a security operation center or what are the best practices to create a 24-7 service desk?

41:02How do you create an effective internship program? How do you break through from a$5 million business to a $10 million business? What's it like to start working with an advisory board and how early should you have that exist in your business? How do you apply a good sales and marketing engine? All of these little things. If we're able to share that openly with our competitors, and that is something that they find value, it creates a relationship. We can obviously ask if there's interest to join forces at some point. But more often than not, these little seeds that get planted, at some point, the owner of this business is going to want to make a change.

41:43They're going to want to maybe focus on something specific within the organization. They might hit a growth plateau where they feel stuck and they would rather not go the next stage alone, whatever it might be. And then they'll remember us, we hope, and they'll reach out. And so it's a lot of seed planting and cultivation. That's really interesting. You're taking a playbook for marketing demand generation and applying it specifically for M &A interest. That's right. I like that in terms of organic approach. A lot of the devs that Chris mentioned in terms of doing the outreach, building those relationships.

42:18The advisors, are you using buy-side M &A advisors? Absolutely. Yeah, absolutely. We've got advisors that are out there looking for us as well. We're happy with them bringing anything to the table. If it's the right fit, we're pleased to compensate them for it as well as celebrate them when the deal is closed and tell the world how awesome they are. To us, that's just casting a wider net. But I can tell you, to date at least, most of the success has come from the cultivation that I described over those leads. So those leads have worked too. Cool. And then do you find a lot of stuff coming in through auction that you're bidding on?

42:53Or is it more of a proprietary? We definitely see a lot that come in on auction. We're one of the names out there that get opportunities brought to us because, frankly, we've shown that we can do these at different sizes and scales and we have the capital to support it. So we do get pulled into many, many auctions, but I would say we probably go forward with less than 10 % of what we see on the auctions front. So let's say we found this proprietary deal, someone we know through conferences, and finally we opened up the conversation about selling their practice. And then you've gone through the early discussions.

43:28Seems like a really good fit. We talked about culture as a red flag, but let's eliminate that. We've said, hey, culture fit seems pretty good. But what are the red flags you're looking for that would be these showstoppers that you'd want to identify before LOI? I personally look at, and CBC will have many others to add here, this is where a lot of his expertise comes in as well. When I see a company that suddenly in the last year or two has gotten wildly profitable, I get concerned. It's the over-preparedness for a sale. It's the removal of extra technical resources, basically squeezing every last ounce of water out of a rock.

44:09That is always concerning for me. So that's certainly a red flag. When I see a lot of customer churn, it's a red flag. And when I see a lot of employee turnover, it is a red flag. So those are just a handful from my side. CBC, what you got? spending a lot of time speaking with the owner. And if the owner or owners, if that individual is not super articulate or doesn't, may not necessarily come across as open and genuine about what he or she wants to do after the transaction, basically just trying to say exactly what they hope I want to hear, that can give me a little bit of pause. It's again, is this too good to be true?

44:52I'm taking this separate aside from the cultural elements that have hopefully checked the box on. But the reason why that's important for us is that when we get close to a letter of intent and putting that forth, it's not just about the value and structure of a transaction. It's about a lot of other ancillary attributes around the business. It's understanding what that leader or leaders want to do after the transaction. How does that fit in with Antiba as a whole? Even being as specific as, this is going to be your manager. This is what you're going to get paid. Oh, and these are also your two or three critical resources that we want to make sure we've got homes for and great spots in development pathways for them.

45:34We want to be able to talk about all those sorts of things. And if there's ever points where there's a measure of hesitation or skepticism or close guardedness that comes through and we're just trying to round out the picture and understanding of the business, that can be a moment of pause or concern to really try to understand what might be leading towards that. The other thing too, is that if you get presented one picture of the business from a financial perspective and you've set forth on the letter of intent and suddenly all the details come in the next week and it looks very different from what you expected it to be, that's a big red flag as well.

46:11And wondering what sort of person this individual might be, that's going to be a big cause for concern as well. Likely a red flag to walk away. These are good ones. We had the over prep. We see even margins jumping up more than they should. You have customer churn. And I think, Chris, you're digging into figuring out what's really meaningful for that owner in this transaction and seeing where there may be hesitation. We get past all this and we find a deal that's worth putting an LOI together. Can you talk me through how do you structure this? I don't know if you're like our business. We're a pretty small company.

46:42We like holding on to cash. I don't know if you're using other tools to reserve cash or do you like doing all your deals in cash? Do you like earnouts? I think CBHC should answer this more holistically. But one of the things that I got from my first sponsor that I'll share with you and I carry forward to today is they valued our equity more than cash. So in an ideal world, we would be paying more cash and having more equity for the shareholders than we would be bringing people in. Now, with that said, we want people to have skin in the game. We want people to be connected to the organization, especially if they're staying and growing with us.

47:21But really, especially at the time when interest rates were near zero, we're a very leverageable company when it comes to debt. So one, knock on every piece of wood around me. Right now, we're profitable and that cash flow allows us to put money into investments such as acquisitions. And also the fact that most of our business, again, knock on every piece of what imaginable is recurring revenue that supports that. It's very lender-friendly. So our ability to use leverage in the business to get access to cash and make it so less equity needs to go in is real. And that includes whether we're looking to take a portion of the seller's proceeds as rollover equity into the business.

48:07Expanding on that, in our transaction history, we were quite creative or felt we were being quite creative by involving not just cash and rollover equity, but also things like earnouts, different kinds of earnouts, different mechanisms in there as a possible means to manage risk, incent the seller, try to do a whole host of things. But what we quickly figured out, particularly because we are an organization that fully integrates the businesses that come on board that utilizing a tool like an earnout while promising in theory is much more challenging to deal with after the transaction has closed itself.

48:52So managing it administratively or operationally or curtailing the speed of integration because there are concerns about an adverse impact to earnout achievement, we've come away from utilizing that as a tool in our structure and gone to a much more simplistic approach where it's majority upfront cash and a slug of rollover equity. The rollover equity, because of how we view the business, how we anticipate we will continue to grow and build and expand, we see that there's tremendous value that can be offered to that buyer so long as they, A, are in with us on the story, but also can help them meet or even exceed their own value guidelines if they afford themselves a period of time to elapse.

49:43If they're comfortable with a certain slug of cash upfront, but then this can see the value appreciation that can come for that role over equity over a multi-year period of time, that's an approach we would prefer to take because you think it just gets everyone on the same page in a much more straightforward and easy manner. And it doesn't impinge our ability to proceed rapidly with integration. Because frankly, the faster that we can move through integration and get that business part of the Antiva engine, that in and of itself is generating value for that role of equity in a much more expeditious manner than might otherwise happen if you're dealing with the intricacies of managing to a gross margin-based earnout.

50:25So that's how we've evolved our thinking around structuring transactions. And I think from a seller's perspective, it's easier to understand just two components to be thinking about as opposed to having to understand the nuances and track and manage the particulars of some esoteric earn out six months or 12 months or longer post transaction. What's like the ideal structure percentage wise of how much cash versus how much rule of equity? We've found success on the upfront cash side, call it 60 % to 80 % cash and the balance being rollover equity. We'd love for individuals to be committed in for that 20 % to 30 % rollover equity.

51:08We found success with that balance at play that provides enough of a chunk of cash for those buyers to get really excited about while also seeing a meaningful opportunity that can come with the rollover equity in a period of years. So yeah, that's the balance that we've come to. But ultimately, we want to work to a solution or work to a mix that is going to get that individual excited. So if we need to be a little flexible on those numbers based on their particular needs or desires to more rollover equity or more upfront cash, as long as we can have the open conversation about that, what their desires are around it, let's work together to figure out something that's going to get you excited as the seller and us excited as the buyer.

51:49What's your biggest advice for practitioners doing roll-ups for the first time? I would say be intentional. Know what you're looking for and be intentional about what you're trying to create. The other thing that I would say is you may feel as though it is somewhat similar to a sales practice, a sales engine, the sales pipeline that you need to work through. But there are enough differences between it, whether it's the time elapsed, whether it's the magnitude of the decisions being made, that just being aware that it operates on a different timescale from what you may initially anticipate and will likely take more time.

52:26You'll have a lower conversion rate of outbound interest to received messages and conversations to what you were expecting. So just being able to recognize those differences and being able to commit for a long period of time to see the results come through, that's where you're ultimately gonna find success. Doesn't come easy. What's the craziest thing you've seen in M &A? I guess we'll start and end on UltraFit. So there was this opportunity in Fort Wayne, Indiana. One of our earlier opportunities, we come with my whole team and go enter this conference room. Really great numbers, MSP. Good, consistent results.

53:04It's a market that we're really interested in. More than 20 % EBITDA. Not necessarily a ton of growth, but a lot of just consistency in the business. So excited about it. I get there and first we're welcomed by the receptionist and we're about 10 minutes early and we're ushered into this conference room. And we're told very specifically not to sit at the head of the table because the head of the table is where the owner is to sit. Okay. But if you look at the room too, what you'll notice is like all the chairs on the side are about six inches shorter than the chair at the head of the table. To make matters worse, behind the head of the table is like this piece of art that's just like a lion in almost like attack position.

53:48I remember sitting there and waiting. And by the way, it's now five minutes after the appropriate start time. And this person walks in. So he's five minutes late, sits down in a chair that's six inches taller than everybody else in the room with a giant lion looking over his head at us. At that point, it was just curiosity questions, but there was a 0 % chance that this was a culture fit. So I would say from crazy perspective, It was like none of that would have ever been known on paper. Just on the sim, if you will, that was sent to us ahead of this. Looks like a good business. Let's go meet them.

54:19Let's go. Let's see what the deal is. But man, that was the craziest experience that I've had seeing just cultural mismatch. And just frankly, the gall of that approach. Wow. That's interesting. My crazy story is nowhere near that. I like sticking with Steven. I think that's a great one. of just, hey, there's a reason why you want to go there and see it. Yeah. This has been great, gentlemen. I enjoyed this conversation. You've helped me become a better M &A scientist. Thank you. Thank you. Thank you, Kisad. Appreciate it. We really do appreciate this. Hey, those of you still with us, thank you.

54:53And until next time, here's to the deal.

55:08Thank you for taking the time to explore the world of M &A with our podcast. We love hearing feedback. Tag us on a LinkedIn post. Add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M &A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email, Kisan, K-I-S-O-N, at mascience.com. or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter.

55:52Again, that's mascience.com. Here's to the deal.

56:16Thank you.