Brian McDonald from Bay Advisory joins the show for Part 2 of a 2-part series on M&A and raising capital for entrepreneurs and talks through the logic of exit plans, focusing on outcomes rather than actions when taking money off the table, balancing your gut instinct with valuations, the tendencies of different kinds of buyers after the sale…and the potential for doing a deal in the Irish language!
This episode of MoneyNeverSleeps is sponsored by PAT Fintech, the training partner that demystifies fintech and digital finance for financial services professionals.
Brian is the Managing Director at Bay Advisory, a team of corporate finance specialists who apply their knowledge and expertise to the tech sector, helping these small and medium enterprises sell and fundraise at the best value. In Part 1 on episode 118, Brian talked through his origin story and the Bay Advisory approach, so check out that episode first.
On the importance of an entrepreneur’s long-term view: “If you’re starting a business and you don’t ever see yourself exiting, and you’re going to hand this business onto your kids, you better make sure your investors are aligned. In other words, if you never want to exit this business, don’t take in money from angels or VCs.”
On the impact of an exit plan: “I think that having an exit plan has no bearing on your passion or drive for your business, it’s simply a reasonable precaution.”
On what to do when an entrepreneur’s mindset shifts into sell mode: “The very first thing you should do is talk to someone you trust. I don’t want to hear the action; I want to hear the outcome you want as an entrepreneur. It’s not that you want to sell the business, it’s where you want to get to, and then you have options. Always focus on what result you want, and then back-solve from there.”
On the importance of recurring revenue to a valuation: “We always dig down into what’s true recurring revenue, particularly in software businesses that may be closer to a consulting business wrapped us as a SaaS business. We always look for ‘passive’ income, with the perfect example being Microsoft Office, and the other end of the spectrum is Accenture. The question is, are you more like Microsoft or Accenture?”
On the entrepreneur focusing on driving the business during the sale process: “The biggest factor in getting that top valuation is that the seller focuses on the business during the process because they need to drive EBITDA. What can destroy a valuation is overestimating the performance at the point of sale, because that gives all of the negotiating leverage to the buyer.”
On one of the big challenges with buyers: “What’s really hard for a founder is when there is someone that they really like and really want to sell the business to, but their offer is considerably lower than another party. It’s really difficult for the founder to balance the two offers when they want to continue driving the business after the deal.”
On the importance of managing confidentiality: “If you go too wide in the market [by looking for too many offers], there can be a sense of desperation, and now everyone in the market knows your business in detail if you’re not careful.”
On the differences between private equity vs corporate buyers: “Fairly broadly, a PE firm is looking at a business as a standalone entity, and it’s really important for the whole business to come across so they can drive revenue through the same cost base. With a corporate buyer, very often it’s an integration play, they’re usually more open to the founder exiting, and they’re very focused on cost synergies.”
On the hard thing with earn-outs: “Most earn-outs are over a couple of years, but as soon as you agree to the earn-out, you’re effectively starting the process of getting the money out of the buyer’s bank account and into yours. The buyer has to write another check and earn-outs can lead to fights no matter how well the lawyers have structured the agreement.”
You can get in touch with Brian McDonald at firstname.lastname@example.org
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