Know Your Business Value Before an M&A Venture

Knowing your business value can mean the difference between a successful and failed merger or acquisition.

That was a key message during this week’s Channel Partners Business Success Workshop: Planning for the Future. The goal was to teach channel businesses critical M&A skills. Those include correctly calculating your business value, performing a GAP analysis, and successfully negotiating a merger or acquisition.

Everbridge sponsored the workshop.

Seth Collins is managing director and head of LMM Group at Martinwolf M&A Advisors. He spoke about the critical need to know your business value before considering any M&A.

Martinwolf’s Seth Collins

“You need to understand the value of your business to increase the likelihood of success at the end of a transaction,” he said. “When you run a process, when you sell your company, it’s so emotionally draining and physically draining. And it’s such a physical distraction to your business that if you are going to pursue it, you have to increase the odds and maximize the likelihood that you’ll be successful. And one of the ways to do that is to understand what you’re worth, not what you want or not what you need to live on post-transaction. It’s not what your buddy down the block sold his company for, but what you’re worth in terms of your business as it pertains to the market.”

As long as you have close alignment with that, the offers you get will allow you to actually close on your deal, Collins said.

Emotional Toll

Juan Fernandez is vice president of managed IT services at ImageNet, a managed service provider. He said everyone underestimates the emotion toll associated with M&A.

ImageNet’s Juan Fernandez

“Coming from the field, I’ve been in a position where I had an opportunity to sell my company,” he said. “And you don’t realize the emotional drain it’s going to take on not just you, but your family and everyone that’s invested in your success. You just can’t comprehend that. So being mentally prepared is one of the biggest things that I advise people when they’re looking to sell, or are thinking about it or asking how I did it or they’re looking to buy a company.”

Fernandez also stressed the importance of knowing your business value.

“What are you made up of?” he said. “How much am I worth? What’s the true value of my organization? If you’re a break-fix company, it’s going to change you drastically comparing yourself to a managed services company. So it’s definitely understanding your numbers, knowing where you’re coming from, and then really being emotionally prepared.”

The first step to determining your business value is talking to others, Collins said.

“What I would do is talk to some bankers,” he said. “Talk to people within the industry and some of your peer groups, and talk about experiences and whatnot. But it’s important to learn the drivers of value, more so than just how much you are. I would focus on understanding how buyers value companies. Talk about what key factors drive or influence valuation. Ultimately your value’s going to be determined by the market. But if you understand the drivers behind it, understand the behavior of buyers … I think you’ll be in a better position to understand what your value range ultimately will be.”

The Pandemic Effect

Dave Dyson is CEO of Eclipse Telecom, the telecom consulting and management provider. He addressed how the ongoing COVID-19 pandemic could impact business valuation. Dealing with the pandemic has pivoted from “let’s deal with it” to …

… “something that is going to be the go forward.”

Eclipse Telecom’s Dave Dyson

“A good example is a big enterprise customer of mine, with 400 offices around the globe, suddenly said we have 6,000 people we’re never sending back to an office again,” he said. “That was a pivot from six months prior. It was nothing they anticipated doing. So it reflects a couple of really positive things for this ecosystem. One, we all know how to do this stuff. We know how to get these guys to where they’re going. And philosophically it should be driving big business value for us as we sell and guide people in this new era.”

Another issue is building business value by building culture, Dyson said. This can be challenging with everyone working remotely.

“That’s a new conversation in this era where we’re all separate, we’re working alone and we’re feeling disconnected,” he said. “I think that’s something we’re all working on and thinking about how to continue to build culture and value in an era where we’re no longer in the same space together.”

Jasmina Muller is Everbridge‘s vice president of channel partnerships. She said the pandemic is “truly a black swan moment.”

A key topic at an Everbridge symposium last week was that organizations need to have a strategy to protect their people during critical events, she said.

Everbridge’s Jasmina Muller

“So from a partner business, to differentiate yourselves, I would say go out there to see what’s happening. How do you go ahead and work with those companies and understand what’s their priority?” Muller said. “Protecting their assets and all that is probably going to be a clear differentiator for a lot of the businesses.”

Learn from Mistakes

The panel also addressed making mistakes when it comes to business value and M&A.

“A lot of the mistakes we make are maybe not knowing our numbers,” Fernandez said. “That’s probably the biggest mistake that I’ve ever made. I remember getting to a deal table and thinking, I really don’t know what I’m worth. And now I’m going to let somebody else tell me how much I’m worth right now. And that can come as a shock.”

It’s important to know your numbers, he said.

“You really need to know whether you’re a monthly recurring revenue (MRR) billing business or you’re a managed services business, or you’re a break-fix type of business,” Fernandez said. “Not knowing who you are really, really impacts your ability to be successful. So that’s one of the big mistakes that I think we make as MSPs, is not understanding our true identity and what it is we are trying to accomplish because it can be convoluted. Buyers buy with different appetites. And if you’re aligned [with] a break-fix and an MRR billing company, there are different valuations for all those different things. And you can land different places depending on how those things kind of iron out.”

Muller said it goes back to being children — parents discipline them to ensure they don’t make the same mistakes twice.

“Take that same approach, except now it’s on [you] to understand what you did and you won’t do it again,” she said. “So making mistakes, honestly, is a part of entrepreneurship. The key is to fail fast, learn from the things that don’t work and adapt. Successful businesses literally and constantly adapt.”