The B2B Revenue Executive Experience
The B2B Revenue Executive Experience

Episode · 11 months ago

Considering an Exit? Here's What You Should Know w/ Lowell Ricklefs


One day, you wake up, look in the mirror and notice the bags under your eyes have bags under their eyes — wait, did your eye-bags always have eyes? Now, you’re walking around, semi-catatonic, muttering “the bags have eyes” to your increasingly worried cat… or maybe you’ve just developed an overwhelming urge to play a few hands of canasta on a beach in Aruba.

Whatever the reason, when it comes to an exit strategy for your SaaS business, you better have a solid understanding of how M&As work.

Today’s guest, Lowell Ricklefs, Founder and Managing Partner at Traction Advising M&A, has all the information you need to get the most out of your exit.

In this episode, we discuss:

  • What makes SaaS M&As different
  • The importance of growth and revenue to any M&A proceeding
  • The difference between strategic and financial buyers

Now that you have a solid exit strategy, are you ready to learn how to infuse data literacy into your team, or how to build trust and confidence with your content strategy? Check out the full list of episodes:The B2B Revenue Executive Experience. 

You're listening to the BDB revenue executive experience, a podcast dedicated to helping executives train their sales and marketing teams to optimize growth. Whether you're looking for techniques and strategies or tools and resources, you've come to the right place. Let's accelerate your growth in three, two, one. Welcome everyone to the BB revenue executive experience. I'm your host, Chad Sanderson. Today we're talking about advice for SASCO's considering an exit, metrics that drive higher valuations and will dive into financial versus strategic buying decisions as well. To help us, we have with US low rickless, founder and managing partner attraction, advising Ma well, thank you so much for taking time and welcome to the show. Thanks, Chad. Appreciate the Deptuny to be here. So we always start with just an oddball question so that our audience gets to know you a little bit better, and I'm always curious to know those that know you largely from work. What would they be surprised to learn about you know, from a passion standpoint, something you're passionate about that they may be surprised to hear about. I love mentorship and I love global travel. So I've been able to combine the to volunteering to mentor companies in countries like Georgia and Uganda, anothern Italy, a number of different places, and I've just found that to be a great way to genuinely get to know the the local culture and the local scene, very different the Beta tourists. So that's that's something I'm super passionate about. And and so, of course, through the pandemic, not as much, not as much travel, unfortunately, I would have said not as much. Now have my first trip to Portugal. Actually got back last week, so that was but this spent two years. Yeah, with not not leaving these four walls. Very much nice. I'm glad you're getting back to that. So all right, let's let's start with just kind of how did you get into the MA game? I mean was there? Did we wake up one day and, you know, say, as you were playing with your toys at Christmas, I'm going to go into Ma, or was there some other, you know, other path? I'm just kind of curious how one ends in the MNA. Yeah, it's a good question. Yeah, I as a kid, I didn't say I want to be an investment banker. When I grow up. I was computer science electrical engineer. I went down the technical sales route with the Fortune Five Hundred Company, rock automation. Ended up as a as a global vice president. I managed their software business in America's for three years and then was chief revenue officer, CEO CEO of three software technology companies. Scaled one from a million to fifty million, had an extra to WPP scale another one from ten to a hundred and twenty. Sold that to private equity and then co founded a Fintech company. That was sold to a small strategic and then along the way, acquired it was a part of acquiring and integrating about a dozen companies between the four companies and became very familiar...

...with the MA process and work very closely with a number of different bankers on that process and and I didn't know any different, but I was always they didn't add a lot of help to the process. They were organizers, they're all very, very smart, but weren't natural sales people, didn't have technology backgrounds, and so when it came time to sell the company where I was a CO founder, you know I had a strong enterprise selling background. And just thought that selling our small technology company was more like selling a technology product than it was selling a financial instrument, and I just thought we could do a better job, and so we ran the process ourselves and we were successful. One of our investors asked us to help them with another project, a company that invested in and I just looked around and just thought there are a lot of companies that are, you know, Sass companies are financially relatively simple and in theory there they're infinitely scalable and there's just a different way to sell on position them. And so open traction five years ago and added my partner Mark in London a year ago. We've got a small team and turns out there are a lot of very good companies out there that that appreciate the help. So it's been a lot of fun. It's great. That's excellent. So when you're working with these companies, you got a SASS company that's considering an exit and they come to you, what's the what's the first piece of advice you give them and why is it so important? You know, I guess the first thing I do is try to understand what their objectives are. Is, you know, and because people have different for some people are burned out right they want out. Others just want help, like they've been going it alone for a long time and they want, you know, whether it's capital, whether it's professional advice, but I really try to understand what they're trying to accomplish so we can help them accomplish those goals. As far as kind of practical advice, I think I my advice to them is you get your back office in order. You know, I kind of it sounds mundane with things like Ip assignment. You know, do you know the original founders? Do they all sign those? If one left on maybe not great terms and they didn't sign Ip assignment, you know, prayant to get a signed before clothes. That can be uncomfortable. Financials. Often smaller SASS companies. They run on cash. Financials. Buyers will want to look at a cruel if you don't do it, they'll do a quality of earnings run on it and and and also just make sure it's accurate. Sometimes, you know, have a party. I get it. You know, if you've not had investors and had to present your financials, you know, to a board on a regular basis, often this might be the first time that you've done it. So and you may have years of if you've had a part time bookkeeper just putting things together. Nothing malicious, but it just may not be accurate and it needs to be accurate. So any other thing is by listen, more than one thing alignment. On Valuation, I guess it is just just to kind of you know, I I when I was co founder, I pitching, raising money. I thought I knew how to sell a company or who would buy it. But now that I'm on the other side and I...

...talked to literally thousands of buyers, you know, from the value buyers to the highflyers. I know what they'll pay for, I know what they'll buy, I know what they're interested in and I know what they'll pay. So I try to make sure that that the the expectations are are realistic or at least in alignment with what what we see. Okay, and so when when the companies, you know, if they're kind of I've experienced the executives that get to burn out myself. So when you tell they need to clean up their back office and, you know, basically get their house in order and stuff like that, are there specific metrics that either buyers are looking at or the the SASS executives should focus on amplifying or optimizing that's going to increase their valuation or the speed with which they sell. Yeah, and that's you know, I it's quite common and honestly, I probably did this the same myself when I was, you know, on the other side. But it's a little bit like your house when you put it up for sale. You know, fresh code of paint, you know neutral furniture or their things you can do to get an extra you know, five hundred and ten fifteen percent. That doesn't take a lot of work or money. It's the same thing with your company. There are things that you can do. There's some short term things that you can do a few months ahead of time. Ideally, you know, year two ahead of time. You've been thinking about some of these things, but ultimately the reason people pay a premium for SASS companies is is the reliability of the Revenue Stream. So, you know, retention and growth are really the two biggest drivers of value. So if you've got good retention, if you've got positive net revenue retentions, if you're your ongoing clients continue to buy more, that's a really positive sign and they'll pay a premium for that. The other extreme is if you've got, you know, fifty percent annual churn, you could argue it's not even really SASS. It's not a long term contract. It's almost like, on average, people are buying a two year license and that's not very valuable. Growth is the other thing. You know, if you've got hundred percent growth, you are you are very desirable. If you've got twenty to thirty percent growth, I'd say that's that's the vast majority of companies or are kind of on this linear growth path. You know, twenty, thirty, forty, fifty percent, which is which is absolutely fine. It's actually good. Even flat isn't necessarily bad. It's Obviou it's not great, but declining revenue is tough. You know, want to an acquire once. Tell me. No one wants to catch a falling knife. You know, they just don't know where it's where it's going to go. The kind of kin a graphic thing, but you know, those are two big ones, you know, and you know size matters, right. I mean hundred milliondollar are companies have higher multiples than ten million dollar companies. Then five million dollar companies and then then you know one million dollar companies are are it can be tough as well. And then e but you see anecdotal things where companies lose burning tons of cash, gets sold for big multiples. But that's the minority. Most acquires, most strategics are valued on multiples.

That even does so probably does matter. You don't have to have a lot, but if you're, you know, burning vc cash and losing a lot of money, that will make you less attractive to some buyers. Doesn't mean you can't be solved. The thing is by target market. You know how big is the target market and be able to identify the addressable target market that you've got to that's clear front and so when we think about those buyers, you know you break them down into financial versus strategic, and so kind of get profiles on both of those. When those people are looking for companies, how does the Lens they're looking through change? Are they looking for different metrics? Are they evaluating in different ways? One of the files on those two look like. You know, they're very different animals, although there's probably three different categories. So you've got like a pure strategic and then you've got a pure financial that will buy you as a platform company with the goal of growing you organically and potentially bolting on other companies. But then you've got sort of a third category where you've got a private equity firm that owns a platform and they want and you're the add on to that platform. So the company it's owned by the private equity firm, is effectively a strategic right and you're being bolted on. But you've got a private equity sponsor. So so that's a little bit different. And ultimately the biggest difference is, and I tell people, if you've got a hundred customers and you're bought by private equity, well, to get to two hundred customers takes a lot of hard work. Right, you're going to double it, but it's organic. If you're brought by a strategic and the strategic has a similar client base and they have fiftyzero clients, you know relatively simple marketing campaign to those fiftyzero clients and you get ten percent adoption and you've got fivezero clients where you had a hundred. So you you know, they can justify higher valuations because if they've got largest all base, they can accelerate your growth by fifty x, whereas a financial buyer you know the fat. So the goals are just a little bit different as well. You know financials, you know they're managing someone else's money and they want to buy something, make it more valuable and sell it at a profit. There they're they're entirely focused on their internal rates of return. All right, and so when we think about that whole process of buying it, like I noticed in the prep material you mentioned that investment banks struggle to sell software companies and I'm kind of curious to understand what what the struggle you would I would I'm probably I'm obviously wrong, but would think that an investment bank would be able to turn that around pretty quick. But in the pre materials you mentioned they struggle. So I'd love to understand and why they struggle and what kind of gets in the way. Yeah, I guess if you take a step back, people just assume, well, investment banks so companies, which is true, but if you look at when they when they start it, you know they what would they do? They would they would raise money for companies that take companies public. And what a couple look like back then? Well, you had you had lots of inventory and you had work in process and you had big capital assets and you had lots of factories and employees and... might have had, you know, multiple countries and you had inner company transfers and you had for an exchange. They were very, very complicated financial in the background and it was really important to have someone that could get that right, you know, so that you could understand what you know, the return was on invested capital, all the metrics that you see on publicly traded companies. That's important stuff, right, and that's what that's what bankers are good that's what your CFO does in a company. But I've has I've ever yet for anyone to raise their hand. I mean ask as anyone ever hired a finance person to sell their technology product. I mean, you just don't do that. Think about taking your favorite tax account and CFO in the world, right, and I have incredible respect, I've always relied on and put them in charge of sales. It's just not going to go well. It's a different skill set. You now, in complete fairness, imagine taking your favorite sales person, your best sales person, and putting them in charge of the financials. Right. That's that's not going to go there. Just really different skill sets. So when companies were financially complex, I'd say it was. It was twenty percent, sales was eighty percent, you know, presenting the financials properly and but with SASS companies, I don't think that's the case. It's not the case. And you know it's twenty percent financials. The financials tend to be, you know, pretty simple. It runs on Azure, runs on a WS and understanding some of the SASS metrics is important. But positioning the technology company right, if you think of a strategic acquire use one example a company smart sheet. But one of our clients, tenzero feet and ten thousand feet, had a great project management solution that smarts sheet didn't have, so it fit well within their portfolio. That was just a great example of a larger company that that had a need and and was able to plug it in. Okay, and so let's talk about, you know, traction and how you're working with clients, because I'm sure our audience is curious to know kind of what services are providing and how you engage with those organizations. Or is it like match making, like find something to selifind something wants to buy or you advising them on how to get the house in order. What kind of services are you and providing to your clients? Yeah, we I'm happy to talk to people at any stage on the process and might say we're year out, two years out, three years up. That's fine. I mean we often people that we work with officially we've known, you know, for four, five, six, ten years, and so happy to just provide free advice and kind of an assessment of where they sit and and some things to work on. But then once we formally engage, we do a lot of research on the potential buyers. We look at segments of potential buyers. Like, you know, with this, be a European company that would acquire you because you've got a big footprint in the US, so it would be geographic expansion. You know, there are companies that that might have a hole in their product line that you fill, and there might be people that sell quite different solutions but to the same customer set. So this is...

...a you know, it's another another Arrow in their quiver that they could sell to the same client base. So we look at we take the perspective and just kind of my experience on the buying side of why would I buy this company? Who would buy like legitimately? Why? Why does this make sense? Create those segments, research all those companies, identify, you know, Ceeo Corp, Dead Person. Will research how many acquisitions have they done recently to kind of give a feeld. Will look at their their stated strategy. Will look at their number of employees. Are they growing? You know, how big are they? Do they have cash? So analyze all of them. We've got about three hundred financial buyers, provactly firms that we work with on a regular basis that have platforms, if it's an add on, or have strategy thesis that might align with what the company is and then we create a confidential information presentation. Again, ours is very different than than what the bankers put together. Bankers in to put the other you know, tutone hundred page thick documents, dense with facts, right, okay, and then they then they send that out and it's kind of like hey, if it's interesting, call us. We try to take their perspective to make it easy to understand why this company would make sense for you to accomplish your objectives. So a fair amount of work and it's more of a marketing like you'd market your I get I cat come back people's imagine putting together a hundred page to tone deck on your product and spam it to clients. Who's going to buy that, So so we put that together and then we do the outreach. We do a fireside chat. Will pre qualify them to make sure they're legit buyers. fireside chat with the founders will get preliminary indications of interest. You know, how much would they pay? How would it be structured? Source of funds, approval, due diligence track and then we'll work towards Ellis, you know, sign and clothes and refresh your bank account to the money shows up. That's the drink champing. Yeah, so of all of that I'm curious what's your favorite part? What's the part that is the juice for you? You know, that's a good question. I guess now probably that that's get more than one answer. But the research is kind of fun. It's it's I like getting to know the founders. We've got a pretty movie. We work with high they're all smart, high integrity driven people. Is Fun to get to know them and their journey. It's fun to help them have a wealth of end you know, and get to the next stage in live and and all of our former clients are are their friends, honestly, and we will stay in touch forever. So goes beyond even the professional side and personally we get pretty attached to people, I think. So there's the upfront. Is Is there's a creative process. It's interesting. In the middle is kind of a it's a grind to work through and get down to the short list. But then negotiating, there are hundreds. You know, people think about how much will I get from my company? But structure often matters more than the price. There are things like negotiating the noncompetes their retention bonuses. There you know what's your what's your position, what's your title? They're texticcause there are...

...lots of little things in the negotiation. I really enjoy that and in part of it is I I in many cases I've got as much and more experience buying companies as the buyer. So even though I represent the seller, I will coach the buyer based on mistakes I've made in the past and this seems like a good idea now, but here's why that may not work well a year from now to trying to craft agreements that work well for both sides. Is there's a lot of fun. I get excite. I wake up and I'm excited to work on that stuff. It's excellent. Yeah, excellent. All right. So let's switch direction here a little bit. We ask all of our guests to standard questions towards the end of e Jennery in the first is simply, as a founder and a revenue executive, that makes you a target, sorry, prospect, for a lot of people out there that are selling, and I'm always curious to know when somebody doesn't have a referral into you. Right, man, you have an extensive network of very powerful people, but somebody wants to get to do they don't have a referral. What works for you when they're trying to capture your attention and earn the right to time on your calendar? Yeah, I actually will keep sometimes. You know, I I think we are all wired to delete emails quickly as we can write, just to keep your inbox clean, and I there's nothing in a story. I spend a lot of time when I'm reaching out, and so I have a lot of respect when someone does a good job on the inbound and I'd say it's pretty rare that people message it correctly. But I guess my let my thoughts would be someone who taps into that that it feels like they understand a problem that I have and they tap into it right away and they offer a legitimate solution. I mean, for example, you know in our our crement, you know, finding companies don't sell very often, right. Typically they sell once in their lifetime, right, and it might be in five or ten years. So, so identifying and getting in front of those companies around the time they're interested in selling is is a large part of of what we do. So if someone reaches out and tap specifically into that, you know, we understand there's we don't look in front of prospects. I'm not articulately very well right now, but if they can think, if the first sentence they zero in on that and it's there's no bs or fluff, they've earned the right that. I'll read another sentence and some point out thing, this looks pretty good and I'll counter that with what most people do is one they try to be nice. Hope you're having a good day. They don't really care if I'm having a good day. My name is so and so. They don't care who you are. My company is this, I don't care what your company is, you know. And then they go through a very, probably accurate but but boring description of what their company does and it just doesn't work. I think you have to get into the head of the person that's receiving it and understand what what are the things that's driving them crazy that they need to solve. As it driving revenue? Is it driving cash flow? Is it, you know, whatever it might be, and the very first sentence should address that in a way that they can relate to. And then even the subject line matters, right because you're earning more...

...time. So yeah, I talked a lot about that. But it's a big believer in, you know that that old saying, apologize for the length of my letter. I didn't have time to write a short one. Write a short one and then people will read it. I find sometimes the emails that are literally one sentence, like that's it. Like if you get a one sentence email, you always read it because no one sends a one sentence email and you're kind of like, okay, that's it. Like so versus, a lot of people try to explain right everything. You know, you're well, I don't go on my but you. I think your goal is is is to get their attention ideally get a response. It's not explain everything. They're just not. That's a great that's a great piece of advice because it is a it is a touch point, it is one step in a longer, hopefully, conversation. So you don't have to dump it all. And Yeah, I love it. Yeah, exactly. So our last question. We call it our acceleration insight. If there was one thing you could tell and I'll just go with Sass CEO, since that's we're talking about, there's one piece of advice you could give Sass CEOS that you believe would help them hit their targets, what would it be and why? Yeah, I well, in the broader picture, I interact with like hundreds of like early stage companies, and most are product focused people. Right, they see a problem and they develop a solution or product and I think they underestimate how difficult it is to generate awareness and interest and engagement and ultimately, like just to sell it, like to ramp sales. So when I I curs people like like focus on the revenue. Revenue is everything. And then the simplest tip I give people is, you know, it's give or take. You know twenty percent of the your potential clients are actively looking for a solution. Right might be ten, I might be thirty percent. You know, eighty percent aren't. They have the problem but they're not actively looking. I see a lot of people they just they just pick ten clients and they beat their heads against the wall with the eight that that aren't actively looking. You can eventually convert them in their ways to do that. But what used to keep me up at night was there are people out there that want my solution that don't know it exists. So generate awareness, try to identify what's the profile of the company that you sell to, what is the title of the decision maker, and then find someone or do it yourself, find every one of those companies, find everyone with that title as a decisionmaker and then get the right message in front of them and then, if you can simply get it again us got you got to articulate the right message. You know why they should care, how it's going to help them, not what you do. You'll get interest from people that are actively trying to solve that problem and they're just way easier to sell to than the people that have eight other things ahead of that problem. Love it so well. People want to talk more about these topics. Is there a specific place you want us to send more where you want them to get in touch? Yeah, Linkedin is great. Low recles on Linkedin. I've got some materials post on there too that the people might find helpful. Feel free to email direct me directly at Lowell lwelll at Traction...

Advisingcom and feel free to check out our website as well. So traction ADVISINGCOM perfect well. I can't give enough for taking time. It's been great having you on the show. Thanks so much. I appreciate the opportunity. All right, everybody, you know the drill that does a f this episode here just it be to be read exactcom share with friends, family, Co workers, leave us a review if you like what you hear, and until next time, we have value selling associates which we all nothing but the greatest success. You've been listening to the BB Revenue Executive Experience to ensure that you never miss an episode subscribe to the show and Itunes or your favorite podcast player. Thank you so much for listening. Until next time,.

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