Build to Sell

1. Build to Sell Creating company value quantitatively and qualitatively for your perfect buyer. Linda Rose

2. Session Objectives: Learn how to build your business to sell for more $$$$$$ The two key buyer types and what they look for Valuations and multiples - by Partner Type 8 Values drivers that will maximize your sales price (Those who stay will get a free tool to assess your current value )

3. Linda Rose • linda@rosebizinc.com • 32 years Licensed CPA - California • 25 years Microsoft VAR • 16 years as a Cloud Service Provider • Successfully bought/sold 4 services companies • Author/Speaker: Get Acquired for Millions • Advisory Board: MSFT Partner’s/ISV’s, SDSU College of Business • Fun: Backpacker, skier, gardener

4. Linda Rose • Here is what I am NOT: • Employee or contractor for Microsoft • M & A Broker • Attorney • Certified Valuation Specialist • Associated with any Private Equity Group (PEG) • Complete independence in my comments/views/assessments

5. Why am I here? To share tools and tips with Partners for a successful sale! • Resources: • Current actual values • Valuation assessment tool • Broker lists • Fees structures • Deal structures • Sample contracts, NDA’s, • Due diligence lists • 100 mistakes to avoid when selling and not here  today

6. Poll Question: Who is an owner or in a leadership position? Who is actively preparing to sell their company…….someday?

7. The data for today….. • Benchmark of Microsoft Partners WW • Interview of IT Brokers • 36 months of closed deals (in our space) • Hours of webinars • Interviews with selling partners • Interviews of Private Equity firms • Interviews with Strategic buyers • Read over a dozen books on M&A • 3 of my own sales and 1 purchase

8. Microsoft (mostly Dynamics)Partners…

10. IT Survey says…. 40% of the Channel will retire in the next 7yrs (of 500,000 firms globally) (Source: Forrester Analyst – Jay McBain) Getting into Position to be in Position – Is it Buy or Sell Time?

11. Current Landscape of M&A in the IT Industry Current Landscape of M&A in the IT Industry Source: Equiteq 2017 Global M&A Report (

12. Key Buyer Types

13. 2 Types of Buyers: Strategic • Strategic Buyers: • Provide similar or complementary products or services • Competitors, suppliers or customers • Looking to diversify existing revenue • Looking to increase geographic footprint • Lots of sub $5M purchases • More emotional / more ego

14. 2 Types of Buyers: Financial • Financial Buyer: • Includes private equity groups (PEG), venture capital firms, family investment • All about returns – ROI in 5 years • $1M EBITDA floor • Will flip in 5 – 7 yrs • Very numbers driven • Not emotional

15. Pros: Strategic • Will pay more (almost every time) • Wants cultural fit • Buys for: • Technology, customer base, geography, IP • Greater career opportunities • Retain some ownership Financial – PEG • Provides equity as part of payout • Continue to run your company • Capital infusion • Cross pollinate with other acquisitions (upsell/cross-sell) • Second bit at the apple • Serious with a process • Higher close rate

16. Cons: Strategic • Loss of control for cash and earnout • Loss of brand • Longer due diligence period • Window shop a lot • Less likely to close • Usually not a lot of upside, even if sold • Owner more likely to depart – own volition • Take longer to close* Financial – PEG • Lower purchase price (ROI = 20%) • Higher level of due-diligence • Less job security • Likely to combined • More rigorous financial reporting • Loss of complete control if bolt on • No control over staff retention • Owner more likely to “let go” * Unless working with a broker

17. Priorities Strategic • Value Proposition/Verticalization • Doesn’t mean IP • Repeatable revenue – different than recurring • Customer Base with high Sat - different than theirs • Intellectual Property – ISV not required Financial – PEG • VERY numbers oriented: • ROI – must have 20% • YOY Growth + Profit > 35% • GPM = 45%+ • Customer base/high Sat • Recurring revenue or repeatable revenue • Strong Management • IP only if a true unique ISV 1 1 2 2 3 3 4 4 5

18. Sell to….. When…. Strategic • You sell something they don’t have – IP or a vertical • Low recurring, but can demonstrate repeatable revenue • Unique diverse customer base • Different geography • High customer retention • Management not as well rounded but key sales, developers, etc. Financial – PEG • Strong financials – high YOY growth with high GPM • Track record of customer retention • High Recurring revenue rate • Tenured management team • Less attention on marketing team • Less attention on unique IP unless an ISV • Want a second bit of the apple

19. When to sell: When to (ideally) Sell: • Steady growth • 3 years at least of YOY growth • Realizing 15 – 25% EBITDA • When you hit the “Rule of 40” • True command of a vertical • 40%+ Recurring revenue • Little or no long-term debt • Strong management team that can take over • When there are buyers willing to buy (duh, but not always so obvious)

20. Rule of 40 = Growth Rate + Profit = 40 If you are growing 100% YOY, you can lose money at a rate of -60% of profits If you are growing 40% YOY, you should be breaking even If you are growing 20% YOY, you should have 20% operating margin If you are not growing, you should have 40% operating margins If your business is declining -10%, you should have 50% operating margin Profit = Operating Margin = EBITDA

21. Multiples Today by Partner Type

22. 5 Partner Types: 90% project revenue – non-recurring Sells/implements vendor software GP Margins dependent on software/services AVG: GP Margin = 30%

23. 5 Partner Types: 50%+ Recurring revenue Sells/implements vendor software GP Margins dependent on software/services AVG GP= 35- 40% MSP and CSP will blend

24. 5 Partner Types: • 85%+ Recurring revenue • Hosts/supports vendor software in public or private cloud • Some IP - procurement/monitoring/security • AVG GP Margins = 50%

25. 5 Partner Types: • Strong “repeatable” revenue • Reusable IP • AVG GP Margins = 55%

26. 5 Partner Types: • 95%+ Recurring revenue • Application runs on own cloud or AWS/Azure cloud – not dependent on other vendor software • Ideally cloud agnostic • Own IP • AVG GP Margins = 70%+ EBITDA multiples increase as revenue increases over $25M ( 15 – 25%)

27. Value beyond the numbers

28. 8 Valuation Drivers that Maximize Market Price • GaaP Financial, accurate GPM • Recurring/repeatable – GPM 45%+ • Strong mgmt team – high retention • Clear, unique VP • Measurable/ monitored results • No SPF: supplier, customer, employee • Packaged solutions/ marketing automation. • IP fetches highest value

29. Value Assessment Tool - Confidential • Comprised of 33 questions • Customized Report Details: • Current Valuation*: • By Partner Type • By Buyer Type • Revenue / Profitability • Written explanation of where you can improve • How improvement will increase value • Areas of concern (if any) • Sample “Deal “ Worksheet with cash, equity, earn-out and payout terms by Buyer type • Updates (if box checked) as value changes in the marketplace • * Valuations are calculated based upon current deals that have closed

30. Closing Thoughts

31. Lessons Learned • The market is flooded with generalists…..don’t be one • Have a minimum 3 year plan • Prepare 2 Sales Presentations – Strategic and Financial • Push for Anything …… AaaS • Businesses are bought on profitabilityNOTrevenue • Revenue multiples are not the same as valuations • Don’t wait too long – markets change, revenue growth halts

32. Next Steps: Sign up to take the Value Assessment Tool* Get notified - Book is available www.rosebizinc.com/book Check the box if you want to take the assessment * Currently in Beta testing

33. Questions? Email: linda.rose@rosebizinc.com

34. Thank You! Please remember to fill out your session survey using the Directions 2018 Mobile App!