Executing the Roll Up Strategy in the Tech Industry

Emerson Block, Cardinal Health, Broadcom Toast, Energizer Jam Treehouse Food Forame there's too many to list what do the best corporate development teams in the world have in common? They use Deal Room, Add a crappy data room and Excel trackers. In 2021, Emerson did an $11 billion acquisition on Deal Room. Then this year, a $14 billion platform divestiture to Blackstone. Even with every big bank name involved in the deal, they all had to use Deal Room. Learn why the best in MA combine diligence and integration into one workflow so they can get both diligence and integration done faster. To execute M and A like the Best, you have to know how to use Deal Room. See for yourself@dealroom.net Again, that's dealroom.net let's get to the interview. I'm Kisam Patel and you're listening to M and A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies and what actually happened during M and A deals.

Foreign.

Scientists welcome to the M A Science Podcast where we learn from the best in M and A to uncover proven techniques for enterprise value creation. If you're interested in learning more about how to optimize your M and A practice, or want to get involved with our community of forward thinking M a practitioners, visit mascience.com and subscribe to our free weekly newsletter. If you want to keep up with us on the go, head to LinkedIn and follow M and A Science. I'm your host, Kisan Patel, CEO and Founder of M and A Science. Joining me today is Chris Valmon Carstens, Chief M and A Officer at Intiva, and Steven Fratkin, CEO and Founder of Intiva. Intiva is a managed IT service provider focused on helping customers grow and reduce risk. Today we're going to talk about how to execute a rollup strategy in the tech services industry. Gentlemen, how are you doing today?

Doing well, awesome.

Thanks for having us.

Hey, thanks for taking the time from doing deals to have this conversation. If we can kick off a little.

Bit about your background, it's great to be here today. I'm Steve Bradkin, the founder and CEO of Intiva. Truthfully, I was born a geek and I've loved solving people's problems with technology for many years. In the last six, seven or eight years, I partnered with private equity to help continue to scale our business and our core purpose of growing people. Using technology as that accelerator and through our partnership with some of the greatest private equity groups out there, We've successfully completed 15 acquisitions as of today. And so now I know quite a bit about technology and also the art of deal making and integration and all these other good stuff that comes with M and A.

Awesome. How about you, Chris?

First of all, thanks very much for having us today. Kisan. I'm an avid listener of your podcast. It's exciting to be here on the other side of the microphone. My background is a bit more finance traditional. Coming up to this point in time, I've taken a lot of steps along the way before joining Intiva from fpa, investment banking, energy, infrastructure investing, as well as management consulting. But I've spent the last three and a half years now with Intiva since standing up and leading our corporate development practice, which essentially means that anything from very first conversation, through the diligence and execution of the transactions that we bring on board, as well as the full integration of the companies that we acquire, that all falls under my remit. And I'm very fortunate to be working and partnering with Stephen as we go about trying to build a fantastic MSP here at Intiva.

Steven, you got the founder background, built the business up, then partnered with private equity, really scale it out, which is where M and A got introduced to the strategy. And Chris, you come from the finance background, worked in banking, familiar with the mechanics of the deal, and you're partnering up to join that effort as well. Can you elaborate? How do you guys actually work together?

From my perspective, I've really enjoyed working with cbc. It's actually been a great partnership. The way that I've been able to look at it is I've been in this industry now for close to 30 years. I have relationships with many of the managed service providers that are out there across the us. This is one of these really tight communities where there's enough business to go around and people most of the time are open and learn and grow from each other. So I've been able to do that for many years, share some of the lessons that I've learned and learned from others. So in the process of doing that, I've had the honor of building relationships with fantastic folks who ultimately understand what is happening in our industry and how there is a lot of consolidation going on. So using those relationships which have already established trust, and then introducing them to cvc, who's able to really dig into the details of their business, help us understand what the potential value might be and drive us all the way through a transaction, it's really a great partnership. As I said, CVC doing a lot of the data analysis, helping to figure out what kind of value we can put to these things. Me coming in from time to time and using my relationship with the people, the trust that's been established over the years, and ultimately my hands on understanding of both what it takes to run an MSP as well as what it feels like to sell your business. So I've done that and doing that helps me really get connected on a personal level in a meaningful way with these folks that we hope to bring into our ecosystem. As CDC really is able to dig into all of the detail and ultimately make it so we successfully close the transaction and get it integrated in ways that I could never imagine. His detail orientation and expertise around numbers is unmatched.

Thank you for those kind words, Steven. I think the greatest strength that we bring to bear here is that we do have two different pockets of focus and interest and expertise that we're able to bring together toward the pursuit of bringing on board the right type of MSPs into our intiva ecosystem. So the fact that I'm fortunate enough to speak daily, sometimes multiple times a day with Steven and become armed with his years long, decades long industry expertise, his unvarnished guidance, as well as just frankly the cheerleading and enthusiasm, being able to bring that to bear in the conversations that I'm having with individuals. It's really an honor to be part of this mini M and a team that we do have at Intiva. I think the other thing that's really important to hone in on and something that Steven touched on is the personnel element is such a critical factor for our success and it's something that we really try to impress upon in the transaction work that I'm doing day in and day out. So it can be very easy to check the box when it comes to revenue at this size, EBITDA at that size, growth at X, gross margin at Y. But until you can uncover the personal attributes, the culture, the feeling of those individuals that are coming into this business, that's where ultimately the long term success can come from. As much as this is a technology driven organization, technology driven industry in which we operate, it's really the people that is that core element to it. And so being very wise and smart and relatable to these individuals who share a lifelong passion to technology and managed service, that's where that success can come from. Steven and I work very well together in situations, in conversations with prospects so that we can drive at outstanding outcomes for ourselves, playing on each of our respective strengths.

How do you guys create value when it comes to executing on a rollup.

In terms of creating value in executing a roll up, I got to zoom back out to what we're about here at Intiva. And that is this purpose of growing people, okay? And I know that sounds a little amorphous, but it's the truth. We exist to grow each other and technology purely accelerates that growth. So understanding that and really doubling down on that culture and our core values that support that culture is critical. So before we can create any value in a roll up, we must make sure that the organization has similar values to us. And if we don't, it is, and I've learned this the hard way, it is value destruction, not creation. So once we get over that hurdle, which is a big one, then we're able to bring in other MSPs and provide a deeper set of products and services that could be sold into them. In many cases, these smaller MSPs don't necessarily have effective account management, sales and marketing. They might have a handful of security products or services that they resell, but they don't necessarily have the in house expertise for it. Come 5pm in their local time, they may not have the right after hours support, so they can't offer 24, 7 services. There's just a lot that is expected for the best of breed MSPs to deliver. Bringing that to market is expensive and to do it right in a unique way requires material investment. And a lot of the smaller players are struggling with how to make that investment, when they'll see a return, so on and so forth. So we're able to join forces with them, apply our sales and marketing model, apply our account management, bring our scale of products and services as we integrate and become one and really create value through the cross sell upsell that comes with that, the hopeful improved client retention that we're able to bring to the table, and then ultimately the effective organic sales and marketing engine that we drive in the markets that we serve.

It's also important to acknowledge what the managed IT services, environment or ecosystem looks like. Overall, it's an incredibly fragmented market across the US depending on who has created the count. Are there 20,000, are there 30,000 different MSPs in the US alone, most of whom are very small mom and pop shops or one or two person outfits. And they've been around for a long period of time, 10, 20, even 30 years or more. And so that question of where does that business go, where does it transition? That becomes an ever present question in the mind of those leaders and to, to the points that Steven just mentioned about some of the challenges that business owners are facing. That's where really what helps to create an opportunity where we have a plethora of businesses that we can seek to evaluate so that we can really find those companies that align with Intiva from a cultural perspective, from a vision perspective, et cetera. It's not as though everyone in the market is going after just one or two organizations. And if not, then you're out of luck. That's an important consideration to make as well as to why rollup is such a pervasive strategy within the MSB space. And then I think it's also worth mentioning at the end of the day, we are trying to create value for ourselves as business, for our shareholders. It is somewhat of a classic play that if you can buy smaller organizations at a lower multiple, combine them with your organization and as you seek to realize your own investment at some period of time to sell on at a higher multiple, you can take advantage of that multiple arbitra through the course of that process.

So I'm hearing, improve operations, increase the number of solutions that the business can, can provide of the acquired business and that the opportunities of space is very fragmented, which means there's quite a few of these assets you could potentially acquire. That is you consolidate them and we get the valuation arbitrage on the multiplier. How does the mechanics of that work just at a high level? Like if you're pitching this to the private equity firm in terms of the whole scheme of things of hey, there's value just going to be generated. I don't know if you're open and sharing, just like rough multipliers. I'm looking at the data room space and you see a lot of small ones you can buy at 3x revenue, roll them up, get it to 5x revenue. What does a little bit of that high level fundamental look like versus how much of it do you also forecast around the synergies that you would create from doing the deal? What does that pitch look like at.

A high level on the multiples perspective? Within the industry, it's typically looked at from a multiple of EBITDA perspective. That's where most transactions are priced off of. There are a whole host of factors that can go into determining what an appropriate multiple might be for a business. Obviously, size, the measure of recurring revenue as a composition of overall revenue as well as the overall sophistication or maturity of the business. And the list goes on and on around client concentration, et cetera. But for the Most part, for businesses, a mid single digit EBITDA multiple is probably a reasonable baseline place to start. And as businesses start to creep up in size, you could be tracking closer towards a higher single digit multiple. And then as you can really combine forces and become something much more akin to a scaled msp, the multiple can jump into the mid teens or closer towards the mid teens. So you can see a fairly material uplift in multiple by combining forces, presuming that you can execute well as a combined entity and you're not facing high levels of client attrition, employee attrition or other challenges to the operational performance of the business. But if all things equal or all things going as as intended, that's an element that you're able to to take advantage of. And that's before necessarily considering any synergies or other cost opportunities that you could potentially take advantage of, just to be.

On the higher end of that multiple. And the market is really consolidating now. It's been happening for the last decade, but a lot of activity is going on now where there's some larger players coming out. I liken this industry to like telecom in the 1980s when there was 25,000 Monpa Bells and today there's two or three or four Verizon or equivalents that are out there. So the same thing is happening in our space. So a lot of this is new, but the way we see it to be at the upper end of the valuation spectrum. So call it the mid teens or above. We're talking 25 million or greater of EBITDA. We're talking about operational maturity that has proven that as new dollars come in at that larger size, you're able to consistently drop the same or more as a percentage as contribution margin in the business. You need to show that you have a proven track record of client retention. You need to show that your growth has not just come from acquisition, but also you have an organic sales and marketing engine that supports it as well as you likely need to have certain industry vertical expertise where you can show knowledge towards one or more industry verticals where you can market to them and have a little bit more price elasticity as a result of that. You want to show good, strong employee retention as well as training programs to help support them. You need to have a robust and certified security offering as well, because the risks associated with not providing security properly for yourself and your clients is huge. To get to the higher end of this stuff, you could offer services like digital transformation, help clients leverage generative AI to go where the proverbial puck is going with technology as opposed to where things are today. Those are just some examples. So if you've got those, you're going to be in the upper right hand side evaluation and then you could chip away and we could talk about the negatives. You're not this. You have single customer concentration, you have improved, proven that as you grow, your margin goes up. You don't have organic sales and marketing, that brings you all the way back to the mid singles in addition to obviously the number being smaller. So as we look at deals we want to see again, sorry to keep repeating this, but first that culture fit in alignment with purpose first. But then once we see that, then we're able to look at all of those variables that I just shared with you and go, are we missing any of those in our investment thesis? If so, does acquiring this company help us achieve that creating benefit to the whole thing? So that's something we're always looking for and then separate from that. Hey, bringing them in, they've got almost everything, but they're only 2 million of EBITDA. That's the simplest way to think about it. Like they're rocking and rolling, firing on all cylinders. We can bring them in and we're bringing them in at 10 and we're worth 15 all example numbers. That's the simplest way. But the reality of what I'm trying to share here is there's so many variables that create this value. We know that what the market will bear for those that are firing on all of the cylinders or most of the cylinders that I just shared with you. And there are so many companies out there that have some of these pieces together, but not all of them. So joining forces and bringing it together in an intelligent way creates a tremendous amount of value. So that's period. I'll say when it comes to synergies, to me that's always been a dirty word. I love the idea of efficiencies that come from these businesses. I can tell you out of 15, 12 or more were negative synergies. So they were scenarios where we buy a business. Maybe there's multiple arbitrage associated with it, but we absolutely needed to go in there and put in account management, help strengthen their technical staff, even increase the compensation of some of these folks, improve their benefits, just really do things that ultimately cost more money but create more overall value. So maybe the EBITDA depresses a little, but we're able to move the multiple up because we're doing business the right way.

What's Healthy organic growth for you.

From my perspective, healthy organic growth is in the mid teens every year something around, let's call it 12 to 18% is healthy organic year over year growth.

I want to flip this around for when you start evaluating a target. I would take it that growth would actually be a big factor in how you value it. If a company is growing that 15, 20 plus percent versus they're stagnant, walk me through how do you look at that and how that affects the value.

It's a critical piece of information just to understand the trend of the business. Can they continue to grow? Have they been able to grow themselves without necessarily having to rely on a single anchor client that that may have driven a lot of their growth in early days? Being able to have a strong mix or an even spread of clients and being able see them all continue to grow either through size, increase themselves or additional offerings or opportunities to add to wallet share. What we want to do is if we bring a new organization on board, we want to be the extra spring into their springboard for growth in the path going forward. In an ideal world, our preference is not to come across a business that is stagnant or declining and then having to over index to fix the organization before taking it forward. Really hoping to partner with organizations that are on the up but recognize the challenges that they're facing at the size that they're at and using our broader platform as that extra spring in the springboard to really launch up the curve from a scalability perspective. That's an important element that we look at when we're evaluating businesses. It also speaks to just the hunger and the desire and the interest of those owners to get onto the next level with a potentially larger organization like Intiva. That measure of enthusiasm and excitement and passion for their clients, passion for their people really can reflect itself in the top line growth of the business. All these different pieces fit together to create the picture for us in looking at a target and saying wow, that's a business that we really want to have part of our organization. And I think what's also important to reflect on is that given the amount of M and A activity that's happening in our space, that we need to be able to clearly differentiate ourselves from other possible buyers in the space by talking about the things that are incredibly important to us, like being a legacy defining brand with a presence in our community. By being able to be the quote, gold standard where we want clients, employees, vendors, heck even other MSPs to want to become part of our organization. And then we want to be able to show that this is a place where you can generate real value for everyone that's involved, not just yourself in your pocketbook, but also for your clients, for your team from a growth opportunities perspective. And the other thing that I would just touch on is the fact that we've done 15 acquisitions being able to demonstrate to a perspective target that we know what we're doing when it comes to the acquisition and integration side of the transaction, that measure of confidence and comfort for them so they know that their life's work will not be eroded when it comes into the larger organization like Intiva. Those are really important things to be able to demonstrate to them. We're trying to sell them on Intiva just as much as they're trying to sell themselves to us. And through that kind of combined effort is really where you can get at the highest and best outcome that everyone's striving for.

So I'm getting. It's not like an absolute formula that you have this much growth and it's going to directly impact valuation, but it's more about your level of confidence and how you can work with that organization to grow them. Basically.

Yeah, that's exactly right. It's not a strict formula, Kisan, where if I plug in these four factors, it's going to spit out Y multiple. It's much more of a mixed picture that you're trying to create. And given the different factors that you have involved, you can be more creative when it comes to the multiple that you're contemplating or even the structure of the transaction that you're contemplating. But we really want to be able to craft a solution that gets at solving the goals and aspirations for that seller just as much as it solves the investment thesis and goals for us as we approach the transaction. And if you can get overlap in a positive way between those two sides, that's where that success is going to come from, straight out the gate as well as over the long term.

Is that the same for when you look at the revenue sources of how much of it's reoccurring versus not in.

Our business, it's primarily oriented around recurring revenue as a major driver of value for businesses. It's the price on a by user paid per month on an annual or multi year contract. And that certainty of revenue now and into the future is where value comes from in our business. For us, we're a majority recurring revenue business, 70 plus percent from what we derive from those recurring revenue sources and so want to partner with organizations that share that similar revenue mix and have that similar approach to having that contractual agreement in place with their clients on an annual or multi year basis. So that we know that when we acquire this business, we've got that view out to that revenue profile with a high degree of certainty on the go forward. We don't have to keep punting month in and month out for every dollar that we're going to earn. We're going to start at a pretty solid base level and we seek just to grow and expand off of that.

When you mentioned the customer concentration, what's like a red flag scenario look like to you?

A red flag scenario with customer concentration is a company that derives, call it 20 or 30% or sometimes even more of their revenue from a single client. That client happens to be on month to month contracts or has been coming up for renewal in a short period of time and they just found out that they're going up for rfp. You've got to navigate that or you're just going off the basis of we've never really had a contract in place with this client, but they've been around for 10 years or 15 years, so you shouldn't expect them to go anywhere just on account of this transaction taking place. Take my word for it, you'll be fine. Those are the sorts of things that cause us a little moment of pause or concern that we'll try to understand. It really helps to be diversified among the client base so that you're not unusually reliant on one or two or a small handful of clients. Because as much as we're in a recurring revenue business that does provide greater certainty than other revenue streams, you're never at 100% or 1000% certainty that the clients that you've got today are the ones that are going to stay forever. You've really got to work to keep them. You want to give yourself some measure of protection as you're going through an evaluation. And frankly, if someone's too concentrated, we'll raise that up to them. And if it's over the course of an evolving relationship and friendship with a prospective owner, if you can work with them over a year or two years, sometimes even three years for us to diversify their client mix, then they become that much more of a palatable business to acquire. And frankly, the multiple that we'd be willing to pay is higher. So they themselves will be able to generate more off of it than they might otherwise would if they sold right at that moment in time when they had 20% single client concentration.

And what CBC shared there is true. We have over the years developed a ton of great relationships with folks that may have had something like single customer concentration or any of the other factors I told you holding them back from the valuation that they really wanted. And so we stick it out with them and help support them and give them advice and guidance along the way. Similarly, where people may want a little bit more of an accelerated outcome, we're not going to be able to adjust our value that we put to a business that has high customer concentration. However, we can work with a seller to rollover more into our business where that customer concentration may not seem as great. So as an example, maybe we can only value this business at six or seven times their earnings, but we could allow the seller to roll 50% instead of what we might expect, 10%. That allows them to get an opportunity to get the value creation and the accretion that comes from us bringing together where a $5 million revenue business with a $3 million annual recurring customer is heavy customer concentration, but a $3 million annual customer in our $175 million a year business is not.

That's a really good way to look at it. I got more red flag questions, but before we get into that, so far you've made this sound pretty easy to do. What are the challenges of doing a rollup?

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 perspective 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, that'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 EBITDA 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. So to 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. And 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. And 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. Again, number one, unqualified investment bankers. And 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 must admit, I really am grateful for both private equity sponsors that I've had. They 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 Intiva. 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 mass in the market, et cetera, et cetera. And this was a group that did not share our value. They were very sales heavy. Their focus was on closing new deals as often as they could and moving to that. The 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 MTIVA 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. Nothing 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 the 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. How'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. Frankly, 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. And 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 and 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. Don'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 build 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. And how to look at it that way.

And by the way, when I share this, it's not to say, and Tiva's 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. Look, 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 till 20 years into the business.

That'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 and 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 Intiva, and 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'd 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 Intiva. If you're looking to transact like, 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.

It's tough, the challenges, 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 Stephen and his network, whether it's vendors of ours and existing within their community of clients, whether it's industry events or other 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. And 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.

Yeah. So as I mentioned before, the managed service community in general is very closely knit. 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. People 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 and 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 operations center or what are the best practices to create a 247 service desktop. How 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 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. They'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 to us. 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 and A interest.

That's right.

I like that. In terms of organic approach, a lot of the VIZ dev that Chris mentioned in terms of doing the outreach, building those relationships, the advisors, are you using buy side M and A advisors?

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 or is it more of 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. Seems 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. 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, the basically squeezing every last ounce of water out of a rock that 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? I'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 Intiva 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, 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. We 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. And 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 the margins jumping up more than they should. You have customer churn and then 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 hesit. 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. We 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 earn out?

I think CBC 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. But 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 wood 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.

Expanding 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. So managing it administratively or operationally, or curtailing the speed of integration because there are concerns about an adverse impact to earn out 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 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, if they're comfortable with a certain slug of cash upfront. But then this can see the value appreciation that can come for that rollover equity over a multi year period of time. That's an approach we would prefer to take because we 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 intiva engine that in and of itself is generating value for that rollover 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. So 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 6 months or 12 months or longer post transaction.

What's the ideal structure, percentage wise, of how much cash versus how much rollover.

Equity we've found success on the upfront cash side. Call it 60 to 80%. 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. We 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 a 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.

What's your biggest advice for practitioners doing rollups 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 with.

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. You'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 going to find success doesn't come easy.

What's the craziest thing you've seen in M and A?

I guess we'll start and end on Culture Fit. 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. It'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 I was 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 6 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 a tap position. I 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 zero percent 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 him. Let'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 Stephen once.

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 and a scientist. Thank you.

Thank you, thank you. Appreciate it.

We really do appreciate this.

Hey, those of you still with us, thank you. And until next time, here's to the deal. Thank you for taking the time to explore the world of M and 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 and 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 a science.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. Again, that's mascience.com here's to the deal. Views and opinions expressed on MNA Science reflect only those individuals and do not reflect the views of any company or entity mentioned or affiliated with any individual. This podcast is purely educational and is not intended to serve as a basis for any investment or financial decisions.