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Episode 164
Jonathan Baker - The ins and outs of the M&A process
Posted on: 19 Dec 2024
About
Jonathan Baker is the Head of M&A services at Punctuation, an advisory firm that specializes in small- to mid-sized marketing services firms.
In this episode, we explore the ins and outs of Mergers and acquisitions (M&A), diving into pertinent questions such as how buyers determine the value of a firm, knowing the right time to sell, and whether to prioritize the valuation itself or the terms of a specific deal. We also talk about the impact on employees of the M&A process and how to minimize that as much as possible.
Links & mentions:
Transcript
"It's always, you know, a roller coaster. There are always ups and downs. You don't know exactly what they're going to be, but you're also selling something that you have poured your heart and soul into, and it's usually in some way kind of connected to you personally. And that is always just emotionally rough."
Intro:
Welcome to the Agile Digital Transformation Podcast, where we explore different aspects of digital transformation and digital experience with your host, Tim Butara, content and community manager at Agiledrop.Tim Butara: Hello everyone. Thanks for tuning in. Our guest today is Jonathan Baker, head of M&A services at Punctuation, an advisory firm that specializes in small to mid sized marketing services firms.
In today's episode, we'll actually be discussing all about the ins and outs of the M&A. So the merger and acquisition process. Jonathan, welcome to the podcast. Thank you for taking the time for this. Happy to have you here. Want to add anything to the intro before we dive into the discussion?
Jonathan Baker: I'm sure things will come out as, as we move along, but yeah, we work exclusively with small to mid sized independent marketing firms and, you know, we'll do buy side, sell side, partner buyouts, internal transfers.
So we, we just do a lot of M&A work.
Tim Butara: Cool. So I'm sure that you'll have a lot of unique insights to share. And I think that we have some great questions that, that we'll, we'll be kind of tackling today. I try to do it more, not, you know, have it just be the kind of thing where it's like, okay, what is mergers and acquisition, but, you know, actually get, get real value to, to listeners who are interested in these topics.
So like, let, let's start with, The first question, and I'm wondering, like, how do buyers typically determine the value of a firm that they're considering?
Jonathan Baker: Yeah, so first of all, every buyer is a little different, and you have to kind of, you know, understand their reasons for an acquisition. Some might be more financially related, some might be more capability related, but I would say on average, buyers are going to look at your adjusted EBITDA, your earnings before interest, taxes, depreciation, and amortization.
They'll adjust that to make sure that you're, you know, paying yourself a market rate salary. They'll take out any big one time expenses that might not continue. And they'll look at that number for the past three years. They might weight it and then they'll apply a multiple to it. And depending on the size of firm you are, that could be any, anything from a, you know, 2.
5 X to a eight to 10 X, sometimes even higher. So I realized that's a very. wide range, but there's a lot of factors that kind of go into, you know, where you should expect to fall in that multiple range.
Tim Butara: So, yeah, it's a very, very case by case kind of thing, but what about on the other side? So, you know, if you're a company owner, and you're considering selling company, how do you know if and when it's the right time for you to be going into this to sell your company?
Jonathan Baker: I think of it as in terms of trigger points. So, you know, trigger points can be different, but some common ones would be the size that the firm has become. If it becomes, you know, so big that it's no longer fun for you to run, or, you know, you're going to have to make significant investments in order to to keep growing and that's something you don't want to do alone.
Another trigger could be the value of the firm. If you're, you've built it to a size and you know that, okay, now I can get a six X multiple on this, and that's going to be enough to set me up for the future. I would say one of the most common triggers is actually just the, the timeline. So, you know, you're nearing retirement.
Or you are feeling burnt out. So the personal trigger, right? The timeline is often the one that dictates things. Those are the three kind of big ones. And, and, you know, it's a very personal decision. So it's not like you're necessarily just looking at your income statements and saying, okay, now's a good time to sell.
There's, it really depends on you personally and what you're trying to do with, with your life.
Tim Butara: Mm
Jonathan Baker: hmm. So
Tim Butara: would it make sense to assume that like a family firm that's been run by the same family for like, you know, maybe several generations would be less likely to sell because, you know, there's this kind of internal attachment, you know, you, you, you mentioned that the timeline being close to retirement, that might impact the decision to sell.
But if you know that, you know, your, your, your son, your daughter. Is taking over in the company will be in good hands that make it, you know, would that be an important consideration? Would it make it less likely for for someone in that position to sell?
Jonathan Baker: Oh, absolutely. And, you know, I would say really just a small percentage of firms.
Ever end up selling it's, you know, in the minority and there, there aren't as many multi generation family firms as there used to be, but yeah, that's one scenario in which I would not expect someone to be building towards a sale unless they were selling the firm to their kids at some kind of reduced rate or something.
Tim Butara: Or if. You know, the kids needed, like, something special, something occurred in their life and they might need some support and that might, you know, kind of precipitate you because you would want to help them in another way, I guess.
Jonathan Baker: Yep,
Tim Butara: that's fair. So, for somebody who decides to sell their company, What should be a more important consideration, the valuation of the company itself or like the terms of a specific deal with a particular person who's interested in buying or entity who's interested in buying?
Jonathan Baker: I am glad you asked this question because I think we focus too much on the valuation itself. You know, what is the number, right? And I think it's easy to focus on that because it is, it's easy to explain, it's easy to understand. But the reality is, when you are selling a firm like this, you are not going to get 100 percent of the money up front.
You're gonna get a portion of it. And so then you have to think about, okay, well, what is the rest of that payment contingent on? And those end up being the really important terms. So, you know, is it tied to my employment? Is it tied to hitting certain revenue targets? How achievable are those revenue targets?
And so I would say neither the terms nor the valuation independently, is kind of enough. You have to look at the total deal as a package and that, you know, if you're comparing two deals, for example, you really have to look at every aspect of it together to get a holistic view because it isn't just the money.
It's, it's what's your life going to be like during the earn out, right? You're going to have a boss again. Well, for how long are you going to like your boss? What's, what's your role going to be? So you have to kind of think through all this stuff together to, to see where you end up.
Tim Butara: And it's not just the impact on your life, right?
I mean, it's also heavily probably going to impact everybody working for you. And that's another important consideration, especially if you're like a firm that places a lot of value on like these internal connections. And then, you know, people being, I hate, I hate the trend of especially startups. Calling themselves families and being like, but like, for the sake of this context and this conversation, if a firm is run similarly to, you know, if the relationships between the employees and between subordinates and employees are similar to like family relationships, really close knit relationships, I would assume that, that, you know, selling the company or going through an M.
A. process would. Even more heavily impact the employees working for you. So, so how can you kind of manage and manage that and minimize this impact?
Jonathan Baker: You know, I, I think there is a misconception that acquisitions will be highly disruptive to staff, and they certainly in the short term can be right. It's always a shock to the system, but one thing that doesn't get talked about enough is that acquisitions almost always at this level, mean selling to a larger.
Agency or, or marketing firm, digital firm, which means that now your employees who might have kind of grown as much as they could in their current situation, they now have career possibilities that they didn't have before. They have upward mobility where they didn't have it before. And yes, there are, you know, cultural concerns when, when putting two companies together and it's the role of both parties, buyer and seller, to try to.
You know, figure out if this is going to be a good cultural fit before, before you, you go too far down the road. So it's really. Like both parties being open and honest with each other, making sure that they get along, that they trust each other. There might be a few employees that, you know, have been more integral to growing the firm.
And if that's the case, then yes, you might treat them a little differently, right? You might let them in before everyone else, for example. But I think for the most part, acquisitions can be very good for employees, even if they are disruptive in the short term.
Tim Butara: Those are some excellent points, actually. I mean, come to think of it, like some recent acquisitions in, you know, our space that I've been kind of following, it was very often the case of like longer standing, more highly capable tech platform or, or tech company basically acquiring a small, more specialized tech thing, which was kind of a win win for both, right?
Because the, the, the smaller business would have a much harder time taking off on their own, especially because there's so much competition and the larger business would, would need to invest a lot more Probably maybe not financially, but like in terms of time and effort and, you know, just time hiring people and stuff like that to develop the same capabilities internally.
So it makes more sense for both parties involved to have it be some kind of merger, some kind of acquisition. And then to your point. That opens up a lot of possibilities to somebody who's been, you know, let's say working in a company that does really great, but is, has, you know, just a few, maybe big, big clients and not a large community behind it.
And then moving into a company that's like, Oh yeah, there's this huge potentially open source community behind it. They get all of these opportunities, not just in terms of like employment and promotion, but also just, you know, connecting with people that they otherwise would never have met if it weren't for this supposedly disruptive process, right?
Jonathan Baker: Yeah, yeah. And it is disruptive, right? But it doesn't, it's not permanently disruptive. Yeah. People adapt. We're, we're an adaptable species. And, you know, I think these things happen all the time, right? There's, there's actually far more acquisitions that, than you would likely think, but a lot of them are smaller.
And so they don't make, you know, big splashes.
Tim Butara: And, and also disruption isn't something that needs to be inherently bad, right? It's disruption, it's disrupting some kind of status quo, right? If something isn't working well, then disruption is actually very beneficial to that. Yes, exactly. Okay. So are there, are there any other, maybe less expected or less frequently discussed impacts of this M&A process that, that, you know, listeners would be interested in, would be, should be aware of like this, this disruption myth was a very great example.
Are there any other similar examples maybe that you can think of?
Jonathan Baker: You know, there are a few. I think one thing that doesn't get discussed enough is the use of evaluation as a planning tool. So, you know, evaluation is, is a way to kind of value your company. It's going to be something that most folks will get done really quickly.
soon before they think about selling. But the firm that you own is likely a very sizable chunk of your net worth. And it's different from, you know, your stock portfolio, your stock portfolio, you can log in and see the value of it at any point. Value of your business is a little bit more ethereal, but of a, a valuation can help put a finer point on that.
Right. And so using that, okay. just as a starting point can be a helpful exercise. The other thing about the valuation process is it helps to crystallize your own thinking around succession. So succession I think can be a really overwhelming topic, right? Like, I think I'll just sit down and do the work. I don't want to think about what's next, but it's coming.
And something like evaluation can help at least narrow down your choices or give you more of a timeline. You're like, okay, well now I know that I'm worth this now, but I also know that if I work a little harder, I can be worth this in two years. And so I'm going to do that or The evaluation comes back, you know, lower than expected.
And you're like, okay, well, I now know that I'm probably not going to want to sell this thing. I'm making a good living now. I'm taking money out and it might, it might not be worth having a boss for three years if I can just work the same amount of time and get the same amount of money. So that also.
helps with succession, right? So there's, you know, just doing the exercise, I think can be a really helpful planning tool.
Tim Butara: Yeah. Another, another very interesting and great point. And I think that we covered a lot of kind of unique and interesting stuff that, that you know, you won't really hear in similar conversations about this.
So, so thank you so much for sharing your time, your insights, your expertise with us today. If anybody listening right now would like to connect with you or learn more about you or, or just, just get in touch with you to what are some of the best ways to, to reach you and to learn more about you.
Jonathan Baker: Yeah. So before I give you that, can I give you one more thing?
That's not,
Tim Butara: of course, of course, the
Jonathan Baker: emotional toll of the sale process. It's always, you know, a roller coaster. There are always ups and downs. You don't know exactly what they're going to be, but you're also selling something that you have poured your heart and soul into, and, you know, it's usually in some way kind of connected to you personally, and that is always just emotionally rough.
The other thing about selling is that it can be lonely. Right? Like you're, you're probably really used to talking to your employees about work related things, or your spouse. But, you can't really talk to your employees until you're really far down the road. And, yes, you can talk to other folks in your life, but they likely have not gone through this process, and so they're not going to be able to understand exactly what you're going through, right?
So when you do end up going through the process, just know that it's going to be perhaps more emotional than you're expecting, which in my mind means that you kind of need to find someone who can act a little bit like a therapist, someone on the You know, M&A side, right? So some, whoever, whatever advisor you're picking, make sure that you vibe with them and can, you know, someone you'll, you'll be in the trenches with.
So, that's actually what got me interested in M&A originally was. Recognizing that, you know, I thought it was pretty analytical, like there's a spreadsheet, we'll all agree on it, and then, you know, we'll hammer out the terms, but it's a lot squishier than that, and it's a lot more relationship and ego driven, and it is a lot more of an art than a science, and so just make sure that you've got a good team around you, and expect that you're going to have some pretty severe ups and downs.
Mm hmm.
Tim Butara: You know what I thought about just now when you were saying all this, what do you think about founders who found a particular company with the explicit intent of selling it down the line? Like, you know, it's not a consideration, but it's like, okay, I'm fine. founding this because I see it as a market niche and I want to, you know, have the valuation in X, X years time be so high that I can basically get to get rich off doing it.
And you know, it's kinda from the get go, you're not in it because of the people you're not in it because of, you know, the business, the legacy from the get go, basically you're in it because you intend to sell at a high valuation. What are your thoughts on this?
Jonathan Baker: Well, you're talking about it like it's a bad thing.
I actually think it's a really good thing. Okay. Okay. And you know, you think about why you get into business, right? Like, why do you want to own and run a business? One of the main reasons is so that it can provide for you financially. But the reality is if you are Building a business to sell, you are going to be making a lot of the right decisions, and you're going to be making the same decisions that you would be making just running a good business.
A business, first and foremost, needs to provide profit. Otherwise, it's not going to be a viable business, right? And so building a business in a way that it will provide consistent profit is not a bad thing. And I also think building towards a sale doesn't mean that you are neglecting people and culture and relationships, right?
You can have all of those things in a really good place and still be building towards a sale. But the thing that I love about Building towards a sale is that you're starting with the end in mind. And so it gives you a little bit more of a roadmap and you might end up there quicker because you're not kind of struggling through the desert, trying to figure out what, what kind of business you want to want to build.
So yeah, I, I actually love it.
Tim Butara: Well, that was actually a very great point and a very great breakdown of, of why you find it actually a very good aspect of this. So, so I'm glad that I asked the question and I'm glad that you gave this answer. If anybody listening right now would like to get even more great insights from you or learn more about you or learn more about how punctuation can maybe help them out, what are the best ways to reach you or to connect with you?
Jonathan Baker: Yeah, you can just go to our website, punctuation. com. You can sign up for a newsletter. We send out free weekly insights or you can contact us. All those emails go straight to me. So you can also email me directly, Jonathan at punctuation. com. We kept it easy.
Tim Butara: Awesome. We'll, we'll make sure to include all the relevant info in the show notes.
And Jonathan, thank you again for your time, for the great conversation, for the great insights. It was very, very pleasant to have you as our guest today.
Jonathan Baker: Thanks for having me.
Tim Butara: And well to our listeners, that's all for this episode. Have a great day, everyone, and stay safe.
Outro:
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