I really like to share, to the extent I can, the “behind the scenes” preparation of an M&A deal, because I believe each and every owner can learn something from looking at someone else’s transaction.
Regardless of when you eventually want to sell, there are always lessons you can learn that will help you be successful when you go to market. This transaction was almost a picture-perfect process. And because of it, it yielded a very high multiple, a short earnout period, and lots of cash at close; an almost perfect scenario for every seller.
In total, the entire transaction took about 8 months. We started the process in February in preparation to go to market in March: a perfect time of year, as investors are looking for new opportunities after putting the prior year’s transactions to bed. NDM was off to a roaring start for 2022 and had its best month ever in the first quarter. We carefully sat down and examined the number for the rest of the year to make sure we could come up with a set of projections that were realistically going to be achieved by year-end. Because the company had a very successful first quarter, we actually decided to halt our go-to-market process for a month until after we could see April’s numbers, to make sure the momentum was sustainable. Waiting until April numbers were booked gave us a very credible story to take to market and allowed us to receive LOI’s (yes multiple LOI’s) based upon 12/31 forecasted numbers.
I believe that was a good decision, because the projections showed very significant year-over-year growth and, because of that, investors might have considered the company projections too optimistic (a problem that too many sellers have that ends in an inability to achieve their earnout). Given that much of the company’s revenue was recurring, we wanted our multiples to be calculated on 12/31 numbers rather than the typical trailing twelve months. So, showing the market that we were on the path to achieving those numbers was very important to our valuation, and therefore we waited another month.
Over a period of 90 days and after reviewing and speaking with almost 70 interested buyers, we narrowed our field down to 7, and then eventually down to 2. While we received quite a bit of interest by Private Equity to be a portfolio company, the founders were very clear about wanting to exit the company in a short period of time. Because of this, we were more attractive as a tuck-in or add-on to an existing portfolio company.
During this entire process, the NDM management team continued to stock their virtual data room with the list of items we provided that would be necessary for a thorough due diligence process. This would take a lot of stress off of them when they began the official due diligence process.
Eventually, my sellers met face to face with the final two prospective buyers, each providing a very different opportunity and deal structure. While both had very appealing offers, one company, Absolute Performance, really felt like a good fit culturally, and would allow the NDM management team and other employees tremendous growth opportunities. It felt like an absolutely perfect fit, but we still had to go through financial, legal, and insurance due diligence; we knew deal structure and multiples could change if discrepancies were found. However, I believe due to our focus on financials (an outside accounting firm helped the seller confirm GAAP accounting and accuracy of the numbers), the NDM founders were able to successfully sail through due diligence. We did do a final modification of the terms, but the purchase price never changed from the LOI, which was very important for NDM.
A month before the deal was to be consummated, the founders shared the opportunity with management. Their involvement would be critical for the final due diligence push, which consisted of IT due diligence and customer calls. Management was also given an opportunity to not only share in the sale proceeds at close, but will be working side by side with the new and existing management to achieve the earnout targets.
Every deal has its ups and downs, but this transaction went incredibly smooth, with everyone making a final push for a close at the end of the third quarter.
One thing to note in this transaction was the extensive involvement of the private equity group. Our team dealt with them almost exclusively up to the end. They really understood the business and made a lot of effort to keep the transaction moving on a timely basis. While we had a few tense conversations (what deal doesn’t), we were able to work out any differences quickly and efficiently.
Given today’s environment (the economy taking a hit, inflation increasing, and interest rates on their way up), I feel that this transaction sailed through without a hitch. A good company will always be able to do that, regardless of the economy, and I feel very fortunate to have had the opportunity to work with the founders, Dusty and Sandy Miller. Great job! And congrats again!!!
“There were a number of brokers and advisors we could have chosen. But knowing and understanding the difference between an MSP and MSSP was critical to our success and our valuation. Linda not only understood our area of specialty, but ran a very detailed and methodical process to help us find the “perfect fit.” She not only understood our business, but the culture we wanted to maintain, the opportunities we wanted to provide for our team, and our personal goals of exiting in a short amount of time. Linda’s past experience as a CEO and CPA were invaluable in this process. I am not sure we could have found that combination of skillset in any other advisor”.Dusty and Sandy Miller – Founders of NDM Technologies
To learn more about our other successful transactions, please visit our success page.