LEAD15 #WPC16 Build, buy, and/or sell your business: how to navigate this crazy market Mike Harvath and Reed Warren Revenue Rocket Consulting Group

Revenue rocket Premier growth strategy consultancy and M&A brokerage firm in the market Focus exclusively on IT services companies Have worked with over 400 firms globally Our team of world class consultants and partners all have over 20 years of experience within Microsoft Partner businesses

Build, buy, or sell All three should be on all partners’ roadmap Sustainable growing profit is how you add value YoY profit growth gives you options Once you have options you can grow, buy, or sell

Build your business 5/25/2018 4:29 PM © 2014 Microsoft Corporation. All rights reserved. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.

Microsoft Worldwide Partner Conference 2016 5/25/2018 4:29 PM - Steve Jobs - © 2016 Microsoft Corporation. All rights reserved. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.

Growing businesses have passion! Love it and want to grow it or leave it Out with the old and in with the new Process, people, and technology Grow profit

The rule of 45 YoY growth rate as a % + EBITDA as % of revenue = 45 Top quartile performer must be greater than 12.5% EBITDA Top quartile performs YOY growth than 30%

Top performing IT service providers Vertically aligned to three or less industries (top performers align to one industry) Services sold as service level agreement (all-in pricing) Cloud services Realizing 12% to 18% EBITDA with sustained 20% to 40% AGR Full lifecycle of services Wedges offerings Technology offerings Managed offerings Can see transaction multiples from 8x to 10x TT EBITDA CUSTOMER VIEW: Industry expert/thought leader

Declining service providers Geographic generalists Realizing 3% to 6% EBITDA with erratic -5% to 10% AGR Focus Sell to anybody in the geography Sell projects—one and done mentality Focus on technology Cozy up to vender for leads Experiencing 1% to 2% YOY negative EBITDA pressure Typically see transaction multiples of 4x to 7x TTM EBITDA Reactive approach to growth CUSTOMER VIEW: Come install it then go away

5/25/2018 4:29 PM It’s time to buy © 2014 Microsoft Corporation. All rights reserved. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.

When to buy Business is larger than $5M (US) Clear organic growth strategy that focuses on balance between growth and profit Revenue growing at least at 10% greater than the market “Best-in-class” profit, processes and vertical markets are well defined Financially healthy, little or no long term debt In a position to take some risk Desire to accelerate your growth

Buying as a competitive strategy Microsoft Worldwide Partner Conference 2016 5/25/2018 4:29 PM Buying as a competitive strategy equally driven by organic and acquisitive strategies 47% mostly by acquisition 29% mostly by organic growth 14% of the market is planning to grow via acquisition 86% “Equiteq” 2015 Buyers Research Report Based on 5-year mean multiple and growth velocity vector analysis © 2016 Microsoft Corporation. All rights reserved. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.

Current landscape of M&A in the IT industry Microsoft Worldwide Partner Conference 2016 5/25/2018 4:29 PM Current landscape of M&A in the IT industry value of the IT Industry $4.4T of all deals are in firms under $40M in revenue 80% of all deals are in firms under $5M in revenue 40% M&A deal volume grew 15% YoY in 2015 15% M&A is a critical ingredient for partner growth and expansion Fragmentation is driving Competition Consolidation Go big, go vertical, or go home Easier to buy than build “Equiteq” 2015 Buyers Research Report © 2016 Microsoft Corporation. All rights reserved. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.

Multiples and trends in IT services Revenue and EBITDA multiples are comparative benchmarks, not valuations It’s about profitability, not revenue Not about the lengths of the contracts Multiples pivot around Strategic fit Blend of recurring revenue/profit Blend of upfront cash versus delayed payout

Multiples and trends in IT services 10% 2015 the average deal was reported as .8X revenue and 8.8X of trailing 12 months EBITDA globally M&A volume is expected to grow 10% YoY in 2016

Multiples and trends in IT services Cash at close versus earn-out as it impacts deal value HISTORICAL VALUE FUTURE VALUE 2015 average IT sector deal 60/40 Guaranteed cash Performance-based payout Revenue Rocket transaction database and Equiteq: 2015 Global M&A Report

5/25/2018 4:29 PM It’s time to sell © 2014 Microsoft Corporation. All rights reserved. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.

When to sell Business is approaching your glass ceiling Clear organic growth strategy that focuses on balance between growth and profit Revenue growing at least at 10% greater than the market “Best-in-class” profit, processes and vertical markets are well defined Financially healthy, little or no long term debt In a position to reduce your control of the business Desire to monetize your investment

Microsoft Worldwide Partner Conference 2016 5/25/2018 4:29 PM Increase levers Revenue growth Gross margin Packaged IP Specialization Addressable market © 2016 Microsoft Corporation. All rights reserved. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.

Microsoft Worldwide Partner Conference 2016 5/25/2018 4:29 PM Discount factors Leadership transferability Management experience Liquidity Location Offering maturity © 2016 Microsoft Corporation. All rights reserved. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.

How to make it all work 5/25/2018 4:29 PM © 2014 Microsoft Corporation. All rights reserved. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.

What to expect in the M&A process Microsoft Worldwide Partner Conference 2016 5/25/2018 4:29 PM What to expect in the M&A process READINESS PROSPECT PURSUIT LETTER OF INTENT DUE DILIGENCE DEFINITIVE AGREEMENT PMI Initial meeting Determine readiness Create prospect list Contact prospects Evaluation screening call Prospect signs NDA Client/prospect meeting Preliminary DD list Build valuation Negotiate LOI Comprehensive DD list Legal review Financial review Draft agreements Negotiate agreements Begin PMI Assemble agreements Post-merger integration Review readiness assessment and goals Review prospect list Briefing on prospect details Sign NDA Review preliminary DD list Determine deal structure Sign LOI Review DD All party red line review Create communication plan Sign agreements and fund transaction M&A advisor Buyer Involvement Less More Importance Average Greater Timeline 4 weeks 2–4 months 2–4 weeks 4–8 weeks 3–6 months © 2016 Microsoft Corporation. All rights reserved. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.

Successful transactions Culture fit Business philosophy Core values Customer care philosophy Employee care philosophy Strategic fit Can 1 + 1 > 2 ? Business process alignment Intellectual property Financial fit Seller receiving 6–9x EBITDA Buyer with IRR greater than 20%

Making it work: post-merger integration A wish is not a plan, you must plan success Integration must have clear and quantifiable goals and objectives with incentives Begin post-merger planning 6 to 8 weeks before closing Planned correctly there will be less than 2% employee and/or customer turnover M&A only wins when both parties win

Lifecycle of partner growth GROWTH: optimize company to the Rule of 45 YoY growth rate as a % + EBITDA as % of revenue = 45 Top quartile performer must be greater than 12.5% EBITDA Top quartile performs YOY growth than 30% BUY: acquire a 50% smaller company to... Accelerate growth Drive EBITDA SELL: exit when achieved 3 to 5 years of consistent revenue and profit growth Revenue at or greater than your glass ceiling When you feel you are ready to be doing something else!

Microsoft Worldwide Partner Conference 2016 5/25/2018 4:29 PM Getting deals done The reality: small fraction of opportunities get to due diligence What our clients experience 18% get to a signed NDA 99% get to a signed NDA 93% get past the due diligence stage 2% get as far as LOI 95% get as far as LOI 91% get a deal done 1% get past the due diligence stage “Equiteq” 2015 Buyers Research Report © 2016 Microsoft Corporation. All rights reserved. MICROSOFT MAKES NO WARRANTIES, EXPRESS, IMPLIED OR STATUTORY, AS TO THE INFORMATION IN THIS PRESENTATION.

Q&A

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