3 – Building your IT company so you are ready to sell when it’s time

Dr Paul Hauck is an expert in selling IT Companies and Managed Service Providers. He has handled over 50 deals and in this episode he talks about how to get ready to sell your company. The bottom line is that even if you are not planning on selling your company, you need to plan for an exit at some point. You need a company with a sales and marketing machine as well as a delivery machine and regardless if you are planning on selling it or not, having these engines in your business will make it a better business.

Paul Hauck

 

Episode highlights:

00:15 – Introducing Dr. Paul Hauck

02:31 – The importance of a  business adviser.

05:07 – How Paul assists companies to be ready for an exit.

07:29 – When do people typically engage an adviser for an exit? (typically when it’s too late)

09:20 – How to plan for an exit?

10:40 – Exit considerations

28:59 – Getting deals done in six (6) months.

Full Transcript:

David: Hi everyone. Welcome to another episode of the ResultsPoint podcast. On the ResultsPoint podcast we speak to successful business owners in the consulting in the I.T. space about how they can grow and scale their businesses even further. Now today I am talking to Dr. Paul Hauck from ICT Strategic Consulting. Now what Paul does is he actually helps technology businesses get ready for an exit. He has been doing this for over 15 years and he specializes in getting a great result for business owners. Now Paul has been involved in 50 merger or acquisition projects since 2001.

Now personally this is quite a big thing for me because I sold my business or my share and my previous business in 2015. And before going through the process I didn’t have a clue what was involved in the process it was actually way more painful than I thought.

David: And I think knowing just a little bit about this process would have helped me navigate things better and get a better result. At the end of the day and the other thing that I learned sort of looking back is that business owners they are often working their business in a busy day today and they don’t really think about the exit strategy or they don’t really think about the endgame and the thing is they’re actually planning for a business and taking the required steps for an exit makes your business more valuable and makes it more attractive to someone that wants to acquire it.

Now today we’re going to cover a few things to think about in the long term the medium term and also talk about you know what sort of things you can do today. To start you know systemizing your business and planning for exit.

David: So welcome Paul.

Dr. Paul Hauck: Hi David

Dr. Paul Hauck: When you had your venture with your business, I’m gonna ask you, Do you have an advisor like me?

David: No I didn’t.

David: And I actually regret not doing that.

Dr. Paul Hauck: Happy to help you next time.

David: Sure. I think I think I would definitely get an advisor next time. My situation was quite tricky and I can’t talk a lot about it because obviously there’s NDA’s and things around it. But. I think, having multiple partners and exiting as one of those partners is tricky. I mean the only advice I can give to people from my experiences. You know it’s easy to get in but sometimes really hard to get out. And if you can think about how to make it easy for everyone to get out I think. That would make things way easier and help with sleepless nights and all that stuff.

Dr. Paul Hauck: Yeah we see that a lot with people when they starting businesses and also when they starting with partners and place your honorship programs or getting profit shares or equity shares to think that people they tend of to think about how that’s gonna unwind other people with the business or they try to sell the business or when certain individuals wanted try to sell. That’s something that you need to think in a long term before you start doing those such of things. They’d get very complicated.

David: That’s exactly the problem we had.

David: What’s the value of that? And how do you value that? And back when when it was all drawn up the value, the formula is a little bit weird and now things have changed. I’m sure you see that I’m sure you see that every day.

Dr. Paul Hauck: We see that a lot. I tend to deal a lot with companies in the sort of second and third year. At that stage they really just starting to be able to share out the equity and have the significant value and the people worry about. And a lot of those problems come out when people have, not saying a lot a value in the equity cause the business that just start out or a lifestyle business or another transition that has a real value and that changes the relationships between people on how they value the equity and how they see the future and potentially if they have a thought about those things. These people are walking themselves in the a really difficult situation. Very often the only way to get out of it is to sell the whole business or undertake a full acquisition, take out all of the shares and give everybody the same deal. Often partial acquisition, things like that become hard and too difficult in that situation.  

David:  Just to get started you want to tell me a little bit about the sort of businesses that you work with and how you assist them with getting ready for an exit.

Dr. Paul Hauck: Most of the business that I worked with are direct technology businesses. More of them has been services business or a professional services or technical manager businesses and product businesses. Some are start ups. We work with people that built products and starting for the first few years and then they needed to get into the next stage. Many of them are consulting type businesses or managed services businesses, staff businesses. The companies are quite diverse and they tend to be between a million or 20 million in revenue. They have different levels of profitability from below zero to very very profitable. Pretty broad cross section across Australia, I tend to see a lot in the industry. At the moment, we talked about earlier, there’s a lot of managed services businesses talking to us for some reason. I don’t know if coincidence or the time of  year.

David: Yeah if the industry is changing a bit with cloud and all the industry is changing, I wonder if there’s a little bit of pressure there..

Dr. Paul Hauck: To some extent, I think a lot of businesses has moved to the cloud and a lot of businesses were very concerned about that. they worry about potentially losing out, ff their clients move to the cloud. For many service providers somebody is still having to do the work. Someone has to change the cables and provide that cloud service and support it all. I think that transition is probably been a little bit a less dramatic with some people with fear. For some companies migrating software to the cloud has been very painful. But then, we’re almost ready for the new way.

David: So back to servers.  

David: So when do people typically engage your services? Is that actually when they’re looking to sell and I guess a little bit earlier?  Can you talk a little bit about that?

Dr. Paul Hauck: Typically, people come to me to late. Very often people will speak to me when they want to sell a business and say “Alright, we can do … 1 year to 3 years, I want to exit.  What can you do for me?”. Then really the first thing that I can do is, tell them about how they should have been planning for this for probably 3 to 5 years. So they could make some changes that adds value to business, as well as making it salable. 

Dr. Paul Hauck: I am supposed to answer your question, and say “Somebody like me, you opt to be getting involved with, probably between 3 and 5 years, before you actually want to exit. It’s important to talk to somebody who knows what your goals are.

David: That makes sense. So you basically have to plan and you can just say “Oh shit, I’m fighting with my employees, I’m fighting with my.. I don’t like this business anymore. I want to get out”. How long does that process take if someone engaged you? From engagement to sale, how long would it take if you started today without having to sort of with no planning?

Dr. Paul Hauck: Yes, that very sounds commonly, but some other time because people don’t look/stop to engaged somebody like me until it’s too late but if that happens 10:01 or so long some sort of emergency exit. It’s not your decision to sell, but your wife, or your accountant, or your 10:11 is telling you to it’s time to sell and that actually about half of businesses and that people are unprepared that can really cause a lot 10:19 but once you get starting, once you pull the trigger as they say, the project plan will run to about 3 months time, but in actual practices, there’s always some delay or rather. And inside the 6 months, its usually, usually what we’re gonna do of them.

David: Okay, that’s still pretty impressive. I think in my experience that’s not too bad. If we go back to why someone should plan and what happens in that sort of three to five year period. Can you talk a little bit about that and the sort of things that people should be thinking about?

Dr. Paul Hauck: Absolutely.

David: I mean the first thing that comes to mind is often a business is all around the owner.The owner does sales, marketing and everything else. He’s very deeply entrenched. I’m assuming one of the things is getting the owner out of actually doing the work. You know they talk about work on the business instead of in the business.

Dr. Paul Hauck: Indeed. In probably a third of the transaction that I handle, the goal is actually for the principle to retire or to do something. In that case the sooner they can get out of the business, the sooner they can start selling the business independently of themselves, the more interested a buyer would be since the business it isn’t critically dependent on the owner. Probably, seven times out of ten, the principle is going to stay around for period of time. Either for short handover between 3 and 12 months.Often the buyers will try to engage principle under some sort of contract. It’s beneficial to have the principle involved with handover and to show the new owner how to run things.

There are few  transactions that I handle where people are not looking for an exit. People who’s been building their business  for many years, sometimes a few years, but they’ve gotten to a level where the business is a little bit of a plateau. Rather than trying to sell out, what they wanna do is sell up.  So they’re looking for a big brother company who can take their business to a new level. The bigger business can often give them a marketing budget that they didn’t have, give them access to new revenue sources, send them to a new geography, or bring other products and services to the next level.

Instead of struggling to build their $3 million revenue business, they can be part of a $15 million revenue business. So it allows them to access bigger clients, or bigger bills or whatever it is. In those cases principles are staying in, but in the same time its critical that they’ll not be essential for every part of the business. Because the business is just about one person, and particularly if it becomes a bit of a lifestyle businesses. The value is lot lower for somebody who’s required to run the business. When I say lifestyle business, I mean one that generally doesn’t grow, in tends to be limited to dealing with the things that the principle wants to maintain to suit of a lifestyle and they don’t tend to be very impressive.

Often with the “lifestyle” business they don’t have sales in marketing in place to grow. They’ll try and replace customer churn if they have a SAAS or MSP customer base. They’re really not after adding another zero to the back of their revenue number. Having the sales marketing capability to grow is the most important thing. It takes a business to the next level and puts you a whole new category and value. If you have a stable customer base that you have had for 10 years, that might be interesting to a buyer whose products and services compliments yours.  When they can see the revenue and margin that they’ll be taking out at customer base, that is what they want. If you manage to grow the business by 20, 30, 50, or 100%, each of the last, say 3 years, that buyer is gonna be paying for growth. That’s really the other key: Having a solid marketing base, independent to the principle that will show a buyer that the business is gonna continue to grow and they can help their business grow.

Consequently in the IT industry, sales and marketing is the area where businesses is all over the place. I’m asked often by buyers, particularly strategic buyers. They’re really looking for somebody that can solve the sales and marketing problem. A lot of people can solve the delivery problem or have a great product but they really need people who can sell. That’s really what everyone’s looking for.

David: Do you have metrics around how much more an acquirer would be prepared to pay for a business that has a sales and marketing machine running?

Dr. Paul Hauck: If there is a lot! For a business that gotten past, let’s say $3 or $4 million in revenue, you might be looking at the difference between two and a half (2.5x)or to three and a half times (3.5x) revenue up to five (5x) or six times (6x) even. The big difference there is, when you get a business that’s growing and looking forward, people are going to multiply by next year or the year even after that.

I often see deals where you’ll have an earn out over two or three years. There’s a lot of risk in that, but they can also be far more lucrative. There may someone paying even a singular multiple of last year’s revenue and that’s what they tend to do if you are more consistent. If you had flat revenue and flat profitability for three years that’s really what you gonna be paid for. But if you can manage to make it grow for a couple of years. I would say that growth can easily double the value of business.

David: It’s interesting that you mentioned that people want to sell up and that you doing quite a few deals “selling up”. The first thing that comes to mind when someone wants to sell up is that it means they don’t really want to put in the risk of you know having to invest in a new product doing sales and marketing. They’d rather have the new company take that over but then I guess you pay for it by not having that because you they’ll basically discount the sales price that you’ll get for the exit. Is that correct?

Dr. Paul Hauck: To some extent. I think it’s really about the puzzle pieces that you’d bring and the pieces to the puzzle that the new parent company has to bring. You know if you can bring the key sales and marketing elements, if you know the industry and own it. The other pieces of the puzzle is much easier. If you’ve got a business that’s growing solidly on it’s own.

There’s a lot of value built in. There’s a lot more folks that would want to buy it because if you wanna sell up, you want to become a part of something larger. There are relatively few potential buyers who can do that transaction if your limited to people who have that critical element that you need. But if your business is effective and growing as a stand alone business, then anyone can come in and buy that. So you will have more potential buyers and it tends to be much more competitive. That’s gonna have significant value to the business as well.

David: So if people are thinking about exiting and getting ready for the exit you’ve basically have three areas to think about long term. Where do I actually want to be. What’s the goal.  And then obviously it’s hard to get there, the medium term and then what do I have to do today and how do I execute that? Can you please cover those points and give people an idea of what they should be thinking about and what they should be doing.

Dr. Paul Hauck: In the long term, it’s really about the visioning of getting the business sold. It’s about setting your long term goals. Being in a particular area that’s in demand is very useful, even though that’s very difficult to predict. Being focused is critical. It’s important to realize that somebody who’s gonna be buying your business is really gonna buy one thing, I tend to tell people that until you’ve got, roughly $10 million dollars in revenue in Australia.

You really can afford to do two things, the more focused you keep your business, the better and the more value there is going to be in the business. Those critical elements sort of underpin the long term strategy and the longer you build around that, the more value you’re building in. You build the business to stand on its own, to see and grow and build for the long term.

In the medium term, and we’re talking here about a sort of three to five year horizon that the buyers going to be looking at in the business. When we show someone an information memorandum, they’re going see the last 3 years of accounts and performance and that’s really what they’re going to judge the business on.

So, you really need to make sure that those things look as good as I can. Often growing the business for three years is something is more easy done than potentially making it grow speedily over 15 years. For the expense that you’ve chosen to make investments if you’re free, free from outside from seeking an exit, it’s probably not the time to make an investment that’s gonna take ten (10) years to pay off.

You need a little bit of explanation. Well, the right place to be selling a business is when you’re about to peak. So you want to start choosing and timing your investment so that they really starting to pay off but you have an actually put all the benefits in the bank by the time we go to sell the business. And that’s because the buyer wants to see on the one hand proof that the business is grown and the issue is you could’t place that if you’re really paying off. But on the other hand the future that has more growth to come so you don’t want to put all the benefits in the bank before your gonna sell but you do want to have proof that the investment is going to pay off.

Now, in the immediate term, this is a lot more about running the process and once you’ve decided that you’re going to sell, it’s whole a lot of tasks in this phase that are part of the process. Too many people tend to get caught up in writing information memoranda and having  meetings with potential buyers. All of those things have to take place and they take their toll. The revenue starts to either stop growing or diminishing, the profitability suffers and by the time where negotiating an actual transaction the business some value has been lost.

David: And now the buyer has leverage. 

Dr. Paul Hauck: Exactly. And when you do this yourself and I think the revenue solve this when you went through the process, I’m guessing. Doing it yourself is a limited amount of time you can spend on it, you’re not gonna write this as comprehensive and information memorandum as I can. I’m sure you’re good at it, but I’m quicker at it. You’re not as a result gonna able to talk to 100 and 200 potential buyers and you’re probably not gonna be able to handle a dozen simultaneous negotiation to think you had a business to run and as well, and if you are business and you’re selling yourself and that’s emotionally a lot harder.

Somebody from the outside, like me or some of the other guys who do this can be just passionate and talking about your business and in the value. They would that have a lot of benefit but really the biggest thing is you’ll gonna keep the business running and revenue coming in and growth coming in through the whole process. That’s the real key thing. So yeah, operationally that’s the biggest thing in the immediate side. We can talk a lot more about the documentation and how the process work, if you want. It tends to be pretty a lot to reconcile.

David: I was mostly just thinking sort of what people should think about. I mean you don’t always think about the right things. Even with medium term medium term is sort of long term in the IT world. Just knowing the sort of things to think about and I do like I said in the intro I do think that the mindset of setting yourself up for an exit is actually just good for general business practice in terms of systematizing and moving yourself out of the business.

And you know and growth in setting up your sales and marketing processes I think I think that makes a lot of sense and people don’t often think about that.

David: Just quickly in terms of the exit. The actual sales process just can you just briefly is there is they there’s sort of a step by step process that you sort of go through right.

Dr. Paul Hauck: There’s really two processes. I can see you use one of them. There are a lot of people around here use a different method. The easiest way is to talk to the people that I know, and float the idea, to see what sort of a response you’d get back from this conversation. That eventually leads to talking about evaluation and deal structure. Now that approach works very well if you’re absolutely unique and there are only two or three potential buyers out there.

If you are technology, self specific in a particular industry or particular part of the industry only a couple of people will be viable, that’s the great way to go.

In the process I use, I try to talk to as many potential buyers as I can. This way we can find a folk who really have the keenest need to buy the business. That is pretty simple, the first phase is putting together an information memorandum. Almost all deals tend to have a document like this but basically what we can give to somebody to look at the business, the key is to understand a little bit about the business, where its position, size it is and decide if they want to take a serious look at it.

I tend to do this the memorandum. They tend to run anywhere from 40-60 pages, because they’re designed to give enough information and enough confidence to actually value the business and actually propose a deal before they’ve gotten in it and had meetings with the principle on the team. If you’re working with the very limited audience, you don’t need to put too much in there because you can afford to have a meeting. Putting that information memorandum together is also the process that’s going to collect all the data. Which is really everything about the business for at least the last 3-7 years so that people can look at everything there is and make sure they find all the skeletons in the process.

Starting that early in the process, it is important to something may take you some time to work out, either with your lawyer or with your accountant. So it takes us a few weeks time or often 4-6 weeks time to put that document together.

We can do it with a no-names basis, to the people on what we’re looking at, see if they’re interested. Then we put together a long list of prospects. It is important to manage the process when you’re dealing with a hundred to two hundred prospects. You get some going through the process at the same time. That can take a lot of time, because you tend to investigate one deal until that’s all over. Then look at another deal with someone else, and eventually you’ll get a deal put together.

David: I wondered how you got your deals done in six months.

Dr. Paul Hauck: Yeah. It’s pretty heavily structured and the real focus for me is when we’re selling a business I really like to have maybe a dozen indicative offers put on the table but the real key is having them on the table at the same time. So often I find vendors in the situation where they’ve got an offer from someone but they have to ask the question, “Is this the best offer I can get, should I take this or should I keep looking?”

Then what I want to do is get after as wide across section the audience as I can to see all of the options and then all of the options on the table at the same time. It’s not an easy decision then either, because deals and deals structures are often complicated. Is it better to take $5 million dollars today on a walk out basis or $10 million dollars over 5 years time where you have to work in the business and some of that maybe in shares, some of that maybe in earn out, some of that cash or equity.

Evaluating in those sense can be pretty non-trivial. Once you get through making a decision on it, the indicative offer,  we’ll go into negotiating the contract and the purchase agreement. That’s the thing that get very complicated. And it tends to be a less formal process.

 

David: At least if all the deals on the table at the same time it helps it’s easier to pick one. There’s also leverage between them right.

Dr. Paul Hauck: Absolutely, when we start getting indicative offers we can try and play them off against each other. It’s critical to be upfront about other offers, but the more demand there is, the more that a influence is applied to the price and the deal structure, the more likely you are to get what you want.

David: That makes sense. So if there’s one piece of advice that you can give people, What would that be?

Dr. Paul Hauck: The one piece of advise, for people out there aiming to sell they’re business in 4 or 5 years time, I’d say focus on setting the business off in a clear simple line of business that you can sell. Build your self a selling and marketing engine and as well as the delivery platform that will continue to grow. If you can grow consistently over the next 3 to 5 years, particularly if you can do so profitability, you know whatever area you’re in, that’s the value of the business.

David: Where can people get a hold of you if they have questions or if they want to reach out to you.

Dr. Paul Hauck: All my details are online, through LinkedIn “Paul Hauck”, or the website is http://ictstrategicservices.com.au. I’m pretty easy to find, google does the pretty job they say.

David: Thank you very much Paul for that information.

David: I find it absolutely fascinating. I think many people are too busy working in their business that they don’t really think about you know where they want to go what they want to do. Like you said unexpectedly they have to sell.

David: The message that I get is basically if everything’s in order and your business is systemized it just makes that process way, way easier. And there’s people out there that can actually go and spruik your business for you and get you various deals on the table and make that process pretty easy. Thanks Paul.

 

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