Hey everyone, thank you for joining me today for a podcast on a question I am asked often as an M&A advisor. My name is Madhur Dugar. I work at Excendio Advisors an M&A advisory firm that focuses on IT and Software services with over 20 years of successful M&A experience. If you wish to learn more about our firm, please check out our website at www.excendio.com or contact me on LinkedIn.
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One of the questions I am asked by Sellers who are looking for an advisor to list with is why they should hire a boutique advisory firm as opposed to a large bank or find a buyer themselves.
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There are four key reasons why private firms in the mower middle market space should choose to collaborate with a firm such as Excendio.
The first is the need to run a process and have a data set of buyers that can unlock your firm's true value, the second is the importance of working with advisors who have real subject matter expertise to establish credibility with Buyers and the third is the level of seniority, experience and long relationships that boutique firms have with their network of buyers, the fourth is the importance of running a confidential process .
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Let me explain a bit more:
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For private firms in the $2MN to $100MN revenue range valuation discovery is critical. Unlike a large public firm whose value can be easily determined through the public equity markets, a valuation of a smaller private firm can only be determined by running a process that is wide enough to cover the full range of potential buyers. It is important to cast a net wide enough to capture that elusive buyer who will bring the highest bid for the asset. To do this efficiently, boutique firms invest time and energy over decades to build networks with buyers carefully recording their interest areas and building relationships and rapport with them so that that when the time comes, they are able to create a deep market for the seller wide and discover a high valuation for it.
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Imagine a case where the value of a firm ranges between $3MN and $5MN with an average value of $4MN. If a seller were to look for a buyer themselves, they might get lucky and find a buyer who pays a high value. But they are more likely to make a few enquiries as they try and keep things discrete and in that process get an average valuation for that firm. Imagine instead they were to hire Excendio to run a search for them and after doing their work Excendio was able to get offers from ten firms. Let us also say these bids were uniformly distributed between $3MN and $5MN. Statistically, then Excendio would be able to find a bid of $4.5MN or more with a 95% probability. So just hiring a sophisticated advisor raises the valuation of the firm by $0.5MN more than making up for the fee that is paid to the advisor. You take chance out of the equation.
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At Excendio, we have an active database of over 50,000 IT service companies, 80+ IT industry specific data points, 20 years of transactional data. including proprietary, confidential, and public IT specific data from numerous sources and independent research. The value is an IT M&A specific source that cannot be replicated or bought by public means.
It would be easy for us to filter our database to identify targets or acquirers by zip-code, employee size, tech-stack and reach out to them with any search we are running. Further, we are constantly reaching out to our network of clients through year-round content and search campaigns. When they receive an email from us, they recognize it. We also have close relationships with many buyers. When we call them, they try and be available to speak to us about what we are seeing in the marketplace.
In addition to recording a wealth of detailed information on our clients we also have a detailed historical record of our past communication with these buyers which is invaluable when maintaining continuity, deriving insights on the buyer's profile, and establishing credibility. Crucially, when an MD retires from our firm or moves to a different opportunity in their life, the relationships he/she brought to the firm stay with the firm.
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A second critical point is the need for an advisor to have industry and subject matter expertise when speaking with buyers about your firm. This helps buyers understand your business better and they are more willing to engage in an opportunity. It also establishes credibility which helps with valuation.
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At Excendio our MDs have spent actual time practicing in the industries they cover. Many of us have professional degrees like CPAs, MBAs or PhDs and have had experience working in the C-suite working as CFOs or even running their own firms. They will understand your business at a deep level and will anticipate for you what client questions are likely to be. This will save you time and energy when you are preparing marketing materials and minimize the time you need to spend fielding questions. You can go back to doing what you do best – running your firm.
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A third key point connected to Subject Matter Expertise is Seniority and Gravitas. Two things that only come with time and with going through life's lessons. Seniority and Gravitas are important because your M&A advisor is your messenger and ambassador. He or she is the first point of contact that a buyer has with your firm. They are the first chance you get to leave an impression with a buyer. Do they have enough experience to have a high-quality conversation with buyers? Do they have a rapport with Buyers? Are they able to communicate your story to buyers convincingly?
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At Excendio, our MDs, on an aggregate basis, have over two hundred years of IT-related work experience amongst them. Even our Operations staff who play a critical role in helping us with Search and Research have been with the firm for decades and bring a wealth of knowledge and experience. Our advisors have had every manner of conversation with buyers. They know how to go in and out of a fluid conversation, how to present your company in the best light possible while representing fairly its strengths and limitations. And that really matters, again, when you are creating your impression on a buyer.
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Last, but not least, is the importance of running a search process confidentially. This takes the right process and approach. Make a mistake, and you run the risk of letting your employees and clients find out. If they find out, you run the immediate risk of client and employee attrition. Never a good thing. But what does it take to make the process confidential? An advisor has a well-organized process to ensure confidentiality. When Teasers are sent out, they are sent out through the advisor’s emails. The name of the seller is not revealed until confidentiality agreements are signed and names are vetted with the seller. How would a seller do all this? What would their means of communication be? What would a confidentiality agreement need to look like to properly protect the seller? If confidentiality were to be broken, would a seller be prepared to pursue legal actions? What impact would that have on their reputation were a client to find out they were looking to sell themselves?
So to summarize, there are four key reasons why private firms in the lower middle market space should choose to work with a boutique advisory firm such as Excendio – The first is the need to run a process and have a data set of buyers that can unlock your firm's true value, the second is the importance of working with advisors who have real subject matter expertise to establish credibility with Buyers and the third is the level of seniority, experience and long relationships that boutique firms have with their network of buyers.
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And this brings us to the end of this podcast. I hope you find it useful. As always, we are happy to answer any questions you might have about choosing the right process for you as you think of strategic options for your firm. Feel free to reach out me over LinkedIn or email at [email protected]. Looking forward to connecting with you.