Editor's note: This is part two of a Q&A with Arlin Sorensen, vice president of peer groups at ConnectWise, and Michael Corey, co-founder of LicenseFortress, on aspects of selling a channel partner business.
Read part one for thoughts on determining business valuations, protecting your interests during the M&A process, and whether to continue investing in your company once it goes on the market.
What types of buyers should sellers target?
Arlin Sorensen: Different types of [channel partner business] buyers pay different multiples of EBITA [earnings before interest, tax, depreciation and amortization]. A strategic buyer will pay the most for a business -- meaning, someone you've already been working with in some way. Then there are what we call 'platform buyers,' who are looking for a high-quality, scalable business ... with their own processes and platforms that they can go out and buy and plug in. This is what a lot of private equity companies are doing.
Michael Corey: That's one of the jobs of an investment banker: Identify potential buyers with you. You should come up with your list [of potential buyers] and then ask them who they think you can sell to and why. They are going to come up with companies you didn't think of, so they should bring players to the table.
Also, if you want to sell your company, you should run it like it could be sold any day. That is a good cadence for running it anyway. You're focused on revenue and profitability, and that's a good thing because windows of opportunity for selling a business open and close all the time.
How do you qualify potential buyers?
Sorensen: The biggest factor that often will blow up a deal or cause it to fail, and one thing you want on the 'non-negotiable' list, is some kind of financial numbers you're going to require to sell the business. A lot of times buyers and sellers spend time talking to each other without talking about price, and they waste a lot of time before they realize they're miles apart. So put a range on your non-negotiable list: 'I want between X and Y for us to talk.'
Then there is the deal structure: How much will be in cash versus other types of compensation? That's where I always recommend people start. A lot of folks waste time talking about things that will never happen because they won't fulfill your non-negotiable list.
You also want to do reference checks: What has their history been? How do they treat customers and employees in the market? It's relationship discovery. I recommend the seller owners go to dinner with the buyer owners to see if there's chemistry there. You want to get acquainted and understand their motives.
Corey: Once again, [qualifying buyers] is part of the job of an investment bank. They should be asking those questions. I expected my investment bankers to give me a rating.
What tips can help during the deal negotiation process?
Sorensen: Build a team that's going to help you with process. For me, that means having a good attorney, a CPA or tax advisor, and a banker, so that I have surrounded myself with people who really understand the [channel partner] business and the market and can help advise me on that. There's always more power in a negotiation if you have a team around you to ... make sure you don't make mistakes along the transaction. I always have those three folks with me at the table, and I give all of them carte blanche approval to kill a deal if they don't feel it's the best deal.
Michael Coreyco-founder, LicenseFortress
There are also good books to learn negotiating skills. I love to recommend ... Crucial Conversations. ... You're going to run into some conflict in a negotiation, but it doesn't have to get ugly or be untruthful; you just have to have the right conversation.
Another tip is I see a lot of sellers -- especially first-time sellers -- sell their company way too early in the process. I made that mistake once. I'm a big believer that you don't tell everyone what's going on all the time. Outside of the people helping you do your due diligence, wait until you have factual information.
Corey: Put yourself in the buyer's shoes. Understand what they need and why they're interested in your [channel partner business]. They may have a product that is complementary to yours and see your product as an easy upsell to theirs. So find out ... their motivation. If you understand their side of the equation, you should be able to show them the right things to drive up the valuation. Second, all buyers want as little risk as possible. So if you can show them you're a quality company that represents little risk, that's a huge upside.
Also, is there a way to [change] your business so you're getting recurring revenue? That makes it more valuable. And understand how you compare to your peers.
Should you work with M&A advisors?
Sorensen: I see this happen more and more, pretty much always with larger deals. The con is it's expensive. So if a deal size is under $1 million, even under $3 million to $5 million, I don't see it as often. But the value of a good M&A broker ... can be significant. They have lots of experience, so they've seen a lot of things go wrong and that can be worth its weight in gold and more than the fee they're charging you. They can help you avoid a lot of potholes, and they know who's in the market and who the likely buyers are and they have access to them, so they can connect you.
They also know the valuation numbers ... so they can provide guidance. They can be extremely valuable, and it's one of the things I recommend because it's really a safety net against disaster. A lot of deals go bad, and anything you can do to avoid getting into those situations is worth the investment.
Corey: This goes back to the investment banker. Someone may come along and say, 'We want to buy your company and do a stock deal.' There's lots of ways to structure a deal to sell a [channel partner business]. So they have to advise you.