Mergers & acquisitions expert Lowell Ricklefs joins us to share his insights on the key factors that founders looking for an M&A solution should focus on. He also outlines the playbook of a typical M&A process and does a deep dive into M&A strategies for SaaS companies.
Lowell Ricklefs is the Founder and Managing Director of Traction Advising, a premier boutique M&A firm focused on B2B SaaS companies in North America and Europe. He has over twenty years of experience in the M&A space and is also an angel investor.
Intro – 00:00:01:
Welcome to Startup Success, the podcast for startup founders and investors. Here you’ll find stories of success from others in the trenches as they work to scale some of the fastest growing startups in the world. Stories that will help you in your own journey. Startup success starts now.
Kate Adams – 00:00:19:
Welcome to startup success. Today we have Lowell Ricklefs, the Founder and Managing Partner of Traction Advising M&A in the studio. Welcome Lowell.
Lowell Ricklefs- 00:00:30:
Kate Adams – 00:00:31:
Thanks for being here today. I want to start with just a brief overview of your background and how that led you to found Traction Advising M&A?
Lowell Ricklefs – 00:00:41:
Yeah, it was very unplanned. I was a Computer Science Electrical Engineer in undergrad, but I went into Technical Sales with Fortune500 company Rockwell Automation. Was there for 15 years. Moved up the ranks from a Rookie Salesperson to Global Vice President of sales on the channel side. Wanted to get into a smaller, earlier stage company, so went to a sub $1 million online market research data collection company, Early Tech. We scaled that from a million to 50 million that was acquired by WPP, went to work for a competitor based in Europe and it’s our Chief Operating Officer. We scaled that from 10 million to 120 million and that was acquired by private equity and then co-founded a healthcare fintech company as a CEO for six years. And then I reflected back on my career where I had an enterprise selling background and had been a part of acquiring about a dozen companies and really had not been impressed with the bankers that we work with. I just didn’t think they were very good salespeople. They were very, very smart, they were very nice suits, they were very good meeting organizers and financially very sharp. But on the technical side or the sales side, they didn’t really understand the business and they didn’t really help to position it in a way to get maximum value. They were really just trying to run like an auction and to drive the price up based on that. Whereas I felt that if they really understood the buyer and how acquiring this company could help them, they could actually get more for their clients. So with an enterprise background, and I don’t mean to pick on them, I use the analogy that you wouldn’t ever put your CFO in charge of sales and marketing right for a reason. It’s a really different skill set. In fairness, you wouldn’t put your Chief Revenue Officer in charge of financials right because it’s just a bad fit. They’re just different skill sets. So I thought when it came time to sell the company, where I was a co-founder, when it came time to sell the company, I raised my hand and said, I think I can run a better process, I can get more value for the company. So we did, we kind of created our own. We were successful, helped one of our Investors run a process for another company and realized that there’s an opportunity out there to help small B2B SaaS companies get better representation and get a better outcome, better fit in the sales process. So that was about seven years ago. We’re still pretty small. A small team of about five people. I’ve got a business partner based in London. But we do deals all over the world. I mean, from the West Coast to Israel and ever in between. So companies typically in the three to 10 million is kind of the sweet spot. Five to ten is the sweet spot. Three to twenty is kind of where we play.
Kate Adams – 00:03:16:
It makes a lot of sense. Especially when you break it down where skill sets are, because we see that in so many areas. So how does it work when you’re working with a Founder? Do they typically come to you before the process has started, during the process. Like, how does it kick off for most of your clients?
Lowell Ricklefs – 00:03:34:
That’s a really good question. I’m an investor as well. Angel investor and a part of a number of seed funds I’ve been for like twelve years. So I interact with hundreds, probably indirectly thousands of different startups, like through techstars or anything else. So a lot of companies I enjoy mentoring. I like helping, I like being involved. And it’s just fascinating intellectual curiosity to see what problems people are solving, I find pretty interesting. So I guess if I call a client, like a paid client, some will reach out when they’re ready to sell. And they were looking for people to help advise them in selling the company. And they’ll get a referral or they’ll do a search and they’ll come to us fairly cold. So it’s kind of like speed dating to get to know them. But some we’ve known for years. I mean, some we’ve known for up to ten years. Right. And they reach back and they’re in the process of looking. So it’s a mix of both.
Kate Adams – 00:04:24:
Interesting. So what are some things that Founders, if they’re starting to think about? M&A. Because we know from our clients more and more are looking that direction as we’re in this economic climate and just seems like a path that more want to take. Now? What are some things that they should be doing now? Like metrics preparing on their side.
Lowell Ricklefs – 00:04:46:
Yeah. Growth and retention, I’ve always said, are the biggest drivers of value. If you think of why a SaaS company people pay multiples of revenue instead of every other business that gets bought on multiples of EBITDA, and it’s because It’s sticky business, you’re buying a dependable revenue stream that you can count on for years to come. And they measure how dependable that is based on retention. So if retention is low, like, really low, like, if you’ve got only 50% gross retention, you’re effectively churning all of your clients every two years. It’s really not even SaaS business. It’s really like it’s a two year license that on average that you’re getting for people. Growth is the other one. If you can show that there is growth, you don’t have to be 100% growth. You don’t have to be rule of 40 company 40, 50% growth. If it’s declining. Those businesses are difficult to sell. One buyer said no one wants to catch a falling knife, right? You just don’t know where it’s going to go or what’s behind it. It doesn’t mean it’s impossible, but it’s much harder. And then I would say about a year ago, I’ve always said that being break even is important because there’s a lot of anecdotal evidence out there. Companies with huge burn rates get bought for large valuations, but those are the exception, right. In the practical space where we play those linear growth companies, people want to buy the company, but they don’t want to have to keep investing in it, typically. So if you’ve got significant gross burn, like more than 10% call it, there are a lot of buyers that will count you out immediately. So those are kind of the three areas. You can also look at customer concentration. If you’ve got one large client that’s 80% of your business, that might be great if the buyer wants to get in with that client. But it’s a big risk because if one contract goes away, they bought a company that’s one fifth the size of what it looks like right now. So things that they should focus on, there are some things that you can do. I use the analogy. It’s like selling your house. If most people’s houses aren’t perfect and if you just throw a for sale sign out there, you won’t get maximum dollar. But if you clean up the yard, like do some yard work, pressure, wash the driveway, do some touch up painting, stage the house, you’ll get more money for your house. I mean, it’s proven that you really will. That first pop makes a big difference. Different with SaaS companies. But it’s important to really understand your metrics, right? You work really hard to solve a problem, create a product, and you work really hard. You throw everything you’ve got into scaling it. So you’ve worked so hard to get there. But sometimes people don’t look at metrics the same way. So if you’ve got a large services component, for example, that can actually be a drag on the revenue. Does it make sense? Because it might be profitable services revenue that helps pay the bills, but that can be a little bit of a detriment. I also encourage people to really take a close look at how you measure retention when you’re in a startup, and I get it when you’re trying to get $10 in the door, like, you’ll take any revenue because it’s all good. And if they go away, it doesn’t matter because you set some revenue for a short term, but those numbers can hurt your churn. So often churn numbers have, there are multiple stories that you can tell. Maybe you’ve got some enterprise clients that are really sticky. You’ve got some mid sized, less sticky, you got some SMB that where there’s a lot of churn in there. Maybe you can set people up on a trial, maybe it’s a paid trial, but they’re not considered like SaaS clients. If you look at the large publicly traded companies, they’re very, very good at finding a way to only let customers hit the metrics considered SaaS and retention once, they’re likely to stick around. They do it in a way that is above boards, but they’re smart about weeding out the people that won’t stick around. Maybe a bad analogy. It’s a little bit like if you’re using an app and it pops up, are you happy with this product? And if you say yes, they throw you into the store to leave review. If you say no, then it goes back and they ask you some other questions. So they’re leading the witnesses. It’s not necessarily wrong, but they’re driving happy clients to the metric. So that’s different. Maybe not a good analogy, but I just think it’s wise to think about that on the profitability side. If you can close the gap to get to break even or better, particularly in this climate right now, I would encourage people to do that. If you’re making investments that won’t pay off for a year or two years and you want to run a process to sell a company, it’s probably not the right time to do that. You might feel like it’s a compelling story, but revenue is an important piece of what buyers look at. And profitability, current revenue.
Kate Adams- 00:09:00:
I’m glad you touched on that again, because I think sometimes founders forget that revenue and profitability is still very important and interesting on the churn. That’s really helpful. So you’re doing that. You’ve staged your house to use your analogy, and you have somebody that’s interested in you. Are there some things you can share that founders should be looking out for in that process?
Lowell Ricklefs – 00:09:25:
The things that we see that trip people up, and I get it right. I was a founder. I know how initially you’re in a coffee shop and you’re excited and you’re hoping you can sell anything to anyone. And so in the early days, there are a couple of things that can trip people up. Intellectual property sounds kind of boring in the early days, right. Anyone that’ll work part time on the product, you’ll take their help. In the late days of due-diligence, if those people worked on the product and they don’t have an IP assignment letter, that can be difficult because in theory, they have a legal right to it, and buyers don’t want a messy situation later. Personal issues, employee issues, if you’ve got people that have left in less than ideal circumstances, you want to make sure that you’ve tidied that up. Again. They don’t want a problem later on. Disgruntled investors, that can happen sometimes. Do what you can to manage their expectations so that they don’t become a problem in the end. And then the financials as well, early on, are often company with less than five, six, seven, eight million in ARR. They don’t have a CFO, almost never have a CFO. Right. And you could argue it’s probably not the right thing to do. And often they’ve just got a bookkeeper. Sometimes a part time bookkeeper, sometimes very informal. It’s important to make sure you don’t need to have accrual-based financials. Usually they’re cash-based financials, but it is important that they’re right. It is important that if you’re using QuickBooks, that all of the expenses actually got into QuickBooks, that all the revenue actually got loaded in there so that they’ve got an accurate picture of it. You don’t want to present some financials. And then when they dig into it, and they will, they will dig into it deeply, like every cell, and find out that there was, even if it’s accidental, that there’s some sort of misrepresentation even on the timing of revenue. Right. You’re showing 20% growth. But when they come back and look at it, the bookkeeper was just late. Right. And so the growth is actually 5%, not 20%. That can make a pretty big difference. And you don’t want that to come up after you’ve accepted IOS, indication of interest, because it can be tricky and it can give the buyer a legitimate reason to reduce the value. So it’s kind of back office stuff. It’s not a lot of fun, it’s not super sexy, but it’s important to have that stuff cleaned up so they don’t find discrepancies in there.
Kate Adams – 00:11:36:
Yeah, I definitely can understand that. And do you see a lot of deals go sideways during that time?
Lowell Ricklefs – 00:11:43:
Well, I would say early on we saw it present some difficulties. Probably only once did I see it put the deal in jeopardy. And in the end, the seller actually ended up backing out. But we spend a lot more time making sure that that can’t happen. So we dig into it, we bring our own resources in to test it as much as we can. We’re not going to do an audit, we’re not doing accountants, we’re not doing a QB, but the client will. So we do a lot more stress testing now to make sure that that can’t happen. That’s part of the service that we had.
Kate Adams- 00:12:13:
That makes sense. Right. Your clients have the benefit of going through your scrutiny so that when the time comes, they’re better prepared.
Lowell Ricklefs – 00:12:22:
Exactly. And I tell people sometimes, we’ve got a great financial model builder, and he’s tough. He asks tough questions. And I tell people, I say, look, you’re going to be faced with these questions in front of a buyer. You’re much better off to be embarrassed now with friendly people than you are in front of a potential buyer where you stub your toe and they pass.
Kate Adams – 00:12:44:
Right. I can see where that adds a lot of value. Definitely. So we have a lot of SaaS founders listening. And you touched on this a little bit earlier, but I wanted to delve a little bit more into SaaS and areas where they should focus. You had mentioned bankers don’t always understand SaaS, the different business nuances. If you could touch on that a little bit more, that would be helpful.
Lowell Ricklefs – 00:13:11:
Sure. And part of it, I pick on bankers. But the vast majority of companies that get sold, they’ve got tangible assets, like they’ve got physical inventory. Right. So it’s important to get that right, because that’s part of what you’re buying. You’ve got work in progress, you’ve got intercompany transfers. Often you’ve got foreign exchange rates that come into play. So SaaS companies are different. If you look at traditional companies, the vast majority of companies that get sold around the world, they’ve got physical assets, so they’ve got work in progress, they’ve got machinery, they’ve got buildings, they’ve got intercompany transfer, they’ve got foreign exchange rates. They’re very complicated financial instruments. So 80% of it is getting the financials right because you’re buying an income stream tied to EBITDA. You have to get that piece right. Whereas SaaS companies are relatively simple financially, right? Typically, they don’t have anything physical. In theory, they’re infinitely scalable. And that’s the part where I think understanding part of it is I’ve been a founder, I’ve been an acquirer, so I know how companies get bought. I’ve seen the internal workings of how HR gets involved, how the CFO gets involved, how the CTO gets involved, the general counsel. I understand how, from multiple companies, how the internal workings work, and then on the selling side as well. So I know how those decisions get made. And yes, much of it, most of it is logical, but at some point, there’s an emotional component to it. Right. At the end of the day, I’ve always said this in sales, it’s classic enterprise selling. You’re trying to help the buyer be successful. So I feel like selling a small SaaS company is more like selling an enterprise software product than it is selling a financial instrument, because the buyer is trying to improve their business. If you can understand what is a win for the buyer, we’re literally helping the buyers become successful. So if you understand their business, if you put yourself in their shoes and say, would I buy this company? Or who would buy it? Is it the same business in a new geography? Is it a hole in our product line that we can’t fill today? Is it a completely different product? But it’s the same buyer, right. The same technical buyer that they’re selling to? If we’ve got 50,000 clients that have got 100, we could just do a marketing campaign because we know the buyers of all those and get 10% adoption. And also the company is huge. So it’s helping giving the buyer confidence that they’re making the right decision or just presenting the right business case up front. Because most companies in the world are struggling top-line and bottom-line to hit their objectives right. I mean, it’s true. Big, medium, small companies, everyone, almost everyone needs more growth. So if you can help them see a path to success, once they start to own that, then it’s less a matter of do I want this? It’s a matter of I can’t lose this. Because this is now they’re thinking about how they’re going to explain this to their board. They’re thinking how they’re going to be the hero. And that’s a big part of it. But it’s truly understanding. Does this make sense? That’s one of the things that we do. It’s a little bit unique just because we’ve had the experience kind of on all sides, but we really try to understand. And often if we have, say we have eight or ten early offers, IOI, indication of interest, and you need to get narrowed down to two or three to go to the LOI stage, certainty is a big deal. It’s easy to throw out a big bid and not do any work. And then you do the hard work once you’re selected on the short list. So we’ll apply a filter. We’ll really try to understand. Does it make sense? And like I say, the fact that you may only be a 4 million ARR company, but if your architecture is current, not a lot of tech debt, it’s infinitely scalable, you with a fairly modest amount of work, could become a $40 million company if you had enough volume. So it’s painting that picture, a credible picture like that to the buyers is a big part of what we do. Try to understand how they value the company, value the company for what they’ve built and then value the company for what it could be. And then try to bridge any gaps in valuation and just the fact that we’ve been there. We can just have a different conversation. If I’m talking, I’ll leave the company a name. But there was a Fortune500 company that acquired one of our clients in the first meeting and went around the room for introductions, buyer, seller. And he wouldn’t even look at me. Just he said, I know the role, don’t need to know the name, right? He’s just like, all right, bankers, I don’t care. We got to know him well enough that by the time we were done, we actually went out for dinner. If I text him now, he’d return my text and he’s actually referred me to other sellers and just saying, these guys do it differently. I like the way they work. We’re very professional, a lot of integrity. We’re super hands on. We don’t give the big partner pitch and then pass it on to a 22 year old new graduate to run it.
Kate Adams – 00:17:47:
Lowell Ricklefs – 00:17:48:
So we handle a little bit different?
Lowell Ricklefs – 00:17:49
We take it pretty seriously. It’s a lot of fun.
Kate Adams – 00:17:52:
I like how you framed it, that you paint the picture for them but then it sounds like you do the due diligence and the financials to kind of validate the picture that you’ve painted, in a sense.
Lowell Ricklefs – 00:18:04:
Yeah, exactly. So traditional businesses are 80% financial, 20% sales SaaS companies, I think it’s 80% sales and marketing and positioning is 20% finance so we can do the finance part, that’s not a problem but we’re really good at the selling and positioning part statistically, you can research it. Post-LOI banks average a 50% close rate which means half of LOIs fail. We run it 90% so 90% of our deals close and part of this, we know what it takes part of it is we’d rather take on three deals and close them all than take on ten and close five. So traditional banks, they’ve got quotas, they’ve got a pipeline, they’ve got a funnel they’re trying to jam things in the funnel, close them quickly or kill them and move on whereas we’ll stick with it. If it’s harder to sell, we will stick with it and find a buyer. I get the best price.
Kate Adams- 00:18:56:
I’m glad you shared that. I think people forget that for banks, it’s a pipeline, they’re moving business, they’re expecting a certain percentage to not go through. Right? So that’s important to share. Yes. And 90%, that says a lot about the work you’re doing.
Lowell Ricklefs – 00:19:13:
Yeah, we’re pretty competitive, so we take it very personally once we take on a client. Not that people are looking for new friends, but we’re genuine. It’s a very unique experience. It’s very stressful for a founder to go through it. And so we remain friends with all of the clients that we’ve worked with today. So we’ll go for walks with them. I’m going to dinner with one tonight and his wife. And my wife, because it’s a unique experience to go through. And part of what we offer isn’t just the advice on how to sell your company. There are a lot of other things. There are hundreds of little things that come up along the way when you’re selling your company and whoever you choose, you want a trusted advisor, and it’s stressful, and you’re still trying to run your company, and at some point you just say, what would you do? What’s the right thing to do here? Or what’s normal. And we provide a lot of that advice and counseling that’s really kind of outside the normal bounds of just selling someone’s company. And part is because we care, we have a small number of clients, and we take a lot of pride in them being really happy with the outcome.
Kate Adams – 00:20:07:
I like how you describe that as a trusted advisor, because we see these founders, they’re so close to it. They created it. Right? This is like another child. They so passionate about it, and you can lose your sense in the process. I’m sure it’s extremely stressful. So to have a third party that you trust to talk it through makes a lot of sense.
Lowell Ricklefs – 00:20:31:
Yeah, sometimes we’ve had clients who will tell us because we’ll talk up front, like, what’s important? What do you want to get out of this? Right? They’ve got their employees. There’s a cash component. There are a lot of different variables that come along with it. Sometimes they’ll confide in us in what they need, like, up front when they’re thinking logically, and sometimes when they’re in the heat of the moment, the emotion, like the negotiating capital is down. Nerves are afraid you’re getting close to a deal. And they’ll say, I’m just going to do X, Y and Z. And sometimes we’ll just say, Hold on, time out. Do you remember the conversation we had where you said, I have a mortgage on my wife’s farm. She can’t stop working unless I sell this company. If we do blah, blah, blah, blah. I said, you need this to go through. You’ve said up front, this is what you want. This is what you’ve got. And sometimes they’re like, yeah, you’re right. But sometimes it’s easy. It’s like the fight or flight. Like once that adrenaline hits, sometimes it’s just the stress can be overwhelming. You’re like, I’m not going to do it. We’re just going to walk away and do something else. Sometimes it’s just a voice of reason to say, well, let’s think about this.
Kate Adams – 00:21:29:
Right? Slow down. Let’s just slow down.
Lowell Ricklefs – 00:21:32:
Remember the big picture? Back up to the big picture. Yes, I know these things seem like a big deal, and then we’ll give on that one. But in the big scheme of things, that doesn’t make a big difference up front. If you ask someone, would that matter? They’d say, I wouldn’t care. But once you get to those things, it becomes a big deal.
Kate Adams – 00:21:47:
That makes a lot of sense. And we always, we’re starting to get to time, we always wrap up the show with general advice for Founders. And you’ve shared so much, but just you’ve been on both sides of it. Just some parting words of wisdom for those that are in it right now. It’s a difficult path.
Lowell Ricklefs – 00:22:06:
It’s tough. It’s tough to start a company. It’s tough to generate that first million in revenue. It’s tough to scale it. It’s tough to sell it right? If there’s a lot that goes on there, I encourage people, just enjoy the journey of building your company. Take time out to celebrate. It’s so easy to just keep moving on to the next thing. Take time out, whether it’s quarterly or annually, and just celebrate what you’ve done. I know there’s pressure to keep on building. And also when you sell your company, I also tell people, very few humans have the opportunity to go through a sales process and you learn a lot about buyers. So there may only be five interested parties, but we’ll typically reach out to three or four hundred companies, and you may have conversations with 50 to 100. And you get to ask them questions about how they built their business. And just try to take a deep breath and don’t just feel the pressure of it, but enjoy the process and the fact that you’ve got an opportunity to go through that, because not many people have that opportunity.
Kate Adams- 00:22:58:
Oh, that’s really positive. I like that. I’ve worked for several startups that have been acquired and the ones that had the process that you’ve described, it’s one of the highlights of their life. As it should be.
Lowell Ricklefs – 00:23:10:
Kate Adams – 00:23:12:
It should be. You achieved something. Yes, absolutely.
Lowell Ricklefs – 00:23:15:
A lot of work.
Kate Adams – 00:23:16:
Lowell Ricklefs – 00:23:17:
It’s a lot of fun, too. It may be not always like fun fun, but it’s rewarding. Non-financially rewarding in a lot of ways that a lot of people don’t realize until they’re out of it, and then they miss it. They miss the camaraderie or the problem solving or the achievements that you could have a lot of money, but would you miss all of those things? It can kind of leave a hole. So that’s why I really encourage people, enjoy it. Just be aware of it and appreciate it while you’ve got it.
Kate Adams – 00:23:42:
That makes sense, I bet. So for those listening that want to find more information about your company, where should they go? If you could share your web address or any other contact information.
Lowell Ricklefs – 00:23:55:
Yeah, it’s tractionadvising.com. One word. Our website is pretty good. There’s a lot of information on there. LinkedIn, you can find me. It’s a unique name. It’s hard to spell, but Lowell Ricklefs, you can find me on LinkedIn. Feel free to reach out. Or you can reach out to me directly as well, email@example.com, and happy to talk to companies at all stages. We’re not going to put pressure on anyone to do anything, so don’t be afraid to reach out if you just have questions and there are no dumb questions. I know what it was like to be a founder and build pitch decks for VCs, talking about what the exit would look like. And I look back and I didn’t know what I was talking, but you had to have a slide on there. So I’d do a few comps so we can help give a little bit of insight, kind of practical, realistic insight into that as well. But we’re happy to talk to people. It’s fun to get to know people and understand their journey as well.
Kate Adams – 00:24:45:
I bet. I bet. Thank you so much, Lowell, for being here today. I really enjoyed this conversation. We haven’t discussed it yet on the podcast, so I know a lot of people will find it helpful. Thank you.
Lowell Ricklefs – 00:24:55:
Thank you. Yeah, that’s been great. Thanks, Kate.
Outro – 00:24:58:
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