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

3. 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

4. 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

5. 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.

6. 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.

7. 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

8. 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%

9. 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

10. 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

11. 5/25/2018 4:29 PM
It’s time to buy
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12. 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

13. 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.

14. 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.

15. 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

16. 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

17. 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

18. 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.

19. 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

20. 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.

21. 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.

22. 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.

23. 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.

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

25. 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

26. 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!

27. 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.

28. Q&A

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