Not everyone who decides to sell their company really knows how they want to end up. Some sellers know they want to leave, while others just want to stay for a period of time. And then other sellers (ones who are not entirely sure on that next step) will want to test the market and see what happens.
That is exactly what we did with Business Solutions Partners, a top-level NetSuite, Adaptive, and Microsoft Partner who had built a strong business, including their own IP to complement the NetSuite solution.
But what happens when the seller receives multiple offers (12 in this case), where the prospective buyers are offering very different options within each offer?
Do you sell-out completely?
Do you stay for a couple of years and then let your management team take over?
Or do you stay for 5 years as the lead of the portfolio company and help the investing PE firm grow it even more?
These were the options available to my seller through these 12 offers. Not an easy decision, right!?!
That’s when you have to look inward and decide: do you have enough gas in the tank to stay put for another five years and continue to build your business, not only organically but also through acquisitions? My seller and I had those conversations throughout the entire process as we went to market and contemplated 12 very attractive offers for his business, most positioning him as a portfolio company.
To refresh your memory on what a portfolio company is and what a portfolio acquisition looks like, go back and read my article here.
What Makes a Portfolio Company
Let’s talk first about what you need to have in place to be considered a portfolio company:
- First you need to have EBITDA in excess of at least $2M per year – the higher the better. Anything less than that won’t appeal to Private Equity.
- Revenue should be growing by at least 20% per year.
- You must have a solid management team who can continue to run the company while you, as the owner, take on a new role to expand the company through acquisitions (which by the way is very time-consuming, so you need to rely on your team to run the company).
- You must have the energy and stamina to continue on. While becoming a portfolio company sounds exciting, it is very much a new life with new board members to report to and expectations that need to be met. It’s an exciting time for sure, but very exhausting as well while your company goes into overdrive.
While the first three points above are pretty easy to determine, the last one is what really requires a lot of soul-searching. And every buyer you meet will want to feel confident that the owner(s) and management team have what it takes to bring the company to the next level.
Not All Buyers Are Equal – Even If the Offer Is!
Receiving 12 offers does allow you to be choosey, but it also gives you a number of different investor types to pick from. And not all investors are equal. In our 12 offers, we saw a combination of investor types:
- Pure PE Firms – who had both the equity and debt to back up a strong offer.
- Independent Sponsors – who had connections but needed to secure both the debt and equity financing from other sources. A little risker for sure.
- Strong Strategic Buyers – who either had public money to back the offer or deep pockets to make a tuck in acquisition.
As part of this process, we vetted each buyer in terms of their ability to not only finance this acquisition, but future acquisitions as well. And that is actually where some investors fell short: oddly, some didn’t want to make additional acquisitions. We also eliminated some independent sponsors because we were uncomfortable with their ability to raise the funds needed to close the transaction (or additional future acquisitions). There will be a much larger post on this later.
Since we had such a wide variety of buyers, it really allowed us to explore each option thoroughly and come up with the perfect buyer.
How Do You Decide Between 12 Offers?
That’s really the big question here, and I will share the process of how we made those decisions.
First, while all offers were within about 25% of one another in valuation, we started with the top five highest in enterprise value. We reviewed not only enterprise value, but the cash upfront, as well as other terms such as earn-out and equity roll.
From there we had thorough conversations with each investor to understand where the money was coming from for the current investment and future investments, and how much was equity vs debt. It was clear that some investors preferred more equity while others leveraged the deal more. (Remember, the more debt you take on, the higher the debt service number you have to cover each month as the portfolio company.)
We then took a look at who really understood the business. A channel partner organization that sells a few vendor solutions has different challenges then, let’s say, an MSP who might sell multiple solutions, or a custom developer who might not need to answer to any vendors. How will a margin change by the largest vendor impact the bottom line? Does the new equity team truly understand how vendors work with their channel partners? These were all questions we needed our buyers to get comfortable with for future success. And it did eliminate some investors, as they became uncomfortable with a channel relationship.
Finally, there was a hard look at people fit and past success. Did the equity partner have a track record of investing in other technology portfolio companies? How successful were their exits from those companies? And at what multiples? What was their success with the CEOs that ran the companies? Did they stick around for 5 years or leave early? And could my seller speak to those companies as part of our own due diligence process?
But even after all this, you ultimately have to choose someone who you know you can work with during not only the good times, but those challenging and difficult moments; someone you are willing to ride out the next 5 to 7 years with for that second bite of the apple. After all, if you are going to invest another 5 years in your business and not leave for the exit door, you want to make sure you have picked the perfect equity partner who will give you the best chance of success in the end.
I am truly proud of the team at Business Solution Partners for their incredible accomplishments and successes to date, and am positive that the next chapter will be even more rewarding as they forge a path ahead with the team at Columbia River Partners. It has truly been a privilege to work with David Smooha and his team. It has been a wonderful journey and I wish you all much success in 2023 and beyond. To read David’s comments, see Our Successes page.