Hitting the Right Number on an M&A Deal

I am joined on our panel by Lisë Stewart, the Partner in Charge of EisnerAmper's Center for Individual and Organizational Performance; and Andy Bender, the co-founder and President of Polaris Life Sciences. Andy has led Polaris through the sale to IQVIA, a public company. I would like to publicly thank Lisë and Andy for joining me this morning, and I've asked each of them to briefly introduce themselves. Lisë.
Lisë Stewart:Great. Thank you so much, Alan. And I'm really, really pleased to be here. So as you said, I run this center for individual and organizational performance, and I've been working with privately held companies for, gosh, I have to age myself here about 35 years. So I've worked with a lot of companies that have gone through this type of transition, that have prepared their business to sell and have gone through the process and come out the other end. So I'm really looking forward to having the opportunity to talk a little bit about what I've noticed, what I've learned and maybe some hints and techniques for protecting your own interest as you go through the process. So thanks so much for asking me.
Alan Wink:Thanks, Lisë, Andy. And maybe Andy, in your opening remarks, if you could talk a little bit about the background and history of Polaris.
Andy Bender:Sure. Thank you, Alan. Thank you for having me. I'm Andy bender. I was born in the Netherlands. I immigrated to this country in 1998. Before that I worked in management consulting in the Netherlands. I worked for McKinsey & Company and the Boston Consulting Group as a strategy management consultant.

When I immigrated to the United States in '98, I had a quick introduction to Merck and to Content Integration. Merck as a pharmaceutical company in context, as a systems integrator. And then in 2001, I started my own business, Polaris.

Polaris started off as a consulting firm in healthcare law compliance. We focused on the healthcare law of compliance issues that life sciences companies had, so mainly pharmaceutical and medical device companies. And we helped them with issues across the board that were focused on healthcare law compliance challenges. So things like anti-kickback, false claims, et cetera; where we would go in, assess their processes and fix their processes, make recommendations and help them implement those.

AW:Andy, thank you very much, Andy, first set of questions for you. As you mentioned, you come from a management consulting background. So I assume you're a very strategic thinker. When you thought about of creating value for Polaris, what were the key drivers evaluation in your mind?
AB:Well, the key drivers evaluation in a SaaS business. So, we started off as a consulting business and I quickly learned that managing a consulting business can be quite challenging because you're constantly chasing the next part of revenue. You're trying to constantly keep your team busy.

A SaaS business actually becomes a lot more strategic because you have a recurring revenue stream that comes in, and that allows you to focus a lot more long term and also make investments in the business for the long term. And it kind of makes it a lot easier to run, in the long run.

So that was the lesson that I learned the first two years as I was transitioning my consulting business into a SaaS platform. The valuation drivers of a SaaS business are typically growth. You know, how fast can you grow? Gross margin, typically anywhere between 65 to 80% EBITDA profitability, and then retention of clients in churn.

Those are typically the four major drivers value drivers for a SaaS business.
AW:So Andy, when you made the decision to sell Polaris, you told me an interesting story of how you determined the range of values in the market. Maybe you could just repeat that for our audience.
AB:Yeah. So when I decided to sell the business, I went out and contacted a couple of friends that I've studied together with, during my MBA who were working for banks at that point and helping businesses to be sold and looked for comparables, comps. These comps were important to me because they kind of gave me an indication as to what my business would be worth. And then I specifically focused each time on what the differences in valuation were between the different comps, and how they could explain them.

And so I quickly learned that growth was a very important one at the time that I was selling, and gross margin was a very important one.

I've had experience in valuations before at McKinsey. I helped do research for a book that McKinsey published in '91 on valuation. And during my MBA, I took a couple courses on business valuation. So I've always kind of had valuation as kind of part of a hobby in the back of my mind.
AW:So Lisë, you've consulted with many business owners who are thinking about selling their business. What's the advice you provide to a business owner considering an exit and what can a business owner do to maximize their shareholder value?
LS:Yes. I have worked with a lot of companies that have gone through this, Alan; and you know what I found and I want to echo something that Andy said about trying to build and eventually sell a consulting type practice can be quite difficult. And in fact, a lot of privately held companies kind of bump up against the same problem when it comes to increasing that value. And that is that the business is too dependent upon one particular person. You know, a lot of entrepreneurs we know have got big personalities, they're larger than life and they love what they do. And they're a cornerstone of the success of that business. But if they're the cornerstone of the success of the business and they want to be able to sell and go and do something else with their life, they've got to make sure that business is not dependent upon them.

A lot of the companies that I work with, major relationships, sales, relationships, contracts, and so on really depend on that one person. So I would say that maybe one of the most important elements of advice that I could give is try to make sure that the business doesn't actually need you. I suggested a lot of my business owners make sure you can go away for vacation and not have to stay online, not have to keep checking in with your computer, go away for three weeks, six weeks, three months. If your company can hum along and do just great without you, that increases the value in the eyes of somebody else who's going to invest in that business.

You want it to be as turnkey as possible. And so that can be a pretty difficult change, I think, for a lot of business owners to make. In order to be able to do that, you've got to figure out what you want to do with the rest of your own life. You've got to have something to go to as opposed to just leave the business behind. Otherwise the idea of no longer being really important and super valuable in your own company can be just too daunting.

And then I would say the second part of advice that I would give for business owners is that investors today are looking for, I think, greater assurance that the company's going to continue to grow, again, without you. And to do that, I think learning a little bit more about locking those customers in, making sure that you've got good long term relationships. You've got long term contracts, you've got subscription services. You're relying on software that can really do this work for you. Things that make sure that your client relationship, your revenue generating relationships are going to last. And so that upward curve that we want to make sure that you can demonstrate, it looks like it's going to keep going up and you can provide some assurances for being able to do that.

I would say that those are probably at least in my experience, two of the most important conversations that we need to have with business owners. Then, of course we can start looking at other elements of the business that are going to impact that value, but those would be two of the biggest steps, I think, at this stage.
AW:So let's transfer to the topic of value and it seemed like Andy was very sophisticated in how he looked at the value of Polaris. And Lisë, you deal with a lot of privately held, family run businesses; when those business owners think about the value of their companies, are they accurate? Are they too overstated? Are there any level of accuracy there?
LS:You know, I know in my own experience, I will say that often business owners overvalue the company, particularly privately held companies. If they're just sort of doing a back of the napkin exercise; a lot of times, they tend to believe that there is, of course, value in the relationships that they've developed, all the history that they have, and so on. That's not always what the market is looking at. It's not always what other investors are looking at.

So, I think that making sure that you are getting realistic advice along the way, that you know that baseline about what the value basically is of the company and that you're working on a plan to be able to increase that value over time, and keeping a finger on the pulse of what the market is really, what they're appreciating at the moment, what it is that the market is looking for. But Andy, I'd be really curious to know from your experience, what do you think?
AB:I believe you're right. It's not always true, but I think you're very right, is that in general people who build a business see it as their baby and they have an emotional attachment with a business like that. And therefore they believe, they always believe that it's worth more. I also think that the other comment you made as to, can you leave the business alone for a while and can it still sustain itself without your involvement is another very important one. So, building a team underneath you that can carry that business and address the clients, support the clients without you being around, I think is another very important one because that's, at the end of the day, kind of what you're selling. Right?
AW:So Andy, you were fortunate to sell Polaris to a public company, IQVIA. Since this session is about hitting the right number, was the price offered by IQVIA in line with your estimates? Was IQVIA the only bidder on the deal? And were there multiple offers that you were also considering?
AB:Yeah, so there were multiple offers. So, let's go back. I sold in 2017, and from 2014 onwards, I'd gotten several offers from different companies on my business. And that's also kind of where, first of all, I went back and got smart or educated myself on the valuation of the business, figure out what I had to do in order to maximize the value of my business. And I think that's an important one, not just to start that process in time. And I would suggest two to three to four years sometimes, before you actually sell, understanding what those drivers are. And then based on that understanding, getting your business ready. So, start managing towards those particular drivers. So, if gross margin is an important driver, or growth is an important driver, that you start managing towards that. So I think that was the first step.

IQVIA came in, first with an offer that was about a third lower than ultimately paid. And that was two years before I actually sold to them. And, us managing the business towards those particular value drivers really increased the value. I think the other major value increase that happened is our way of including a banker in this whole process to go out and put a pitch deck together, really distilled the value of our business and articulated it properly, and then go to a whole host of potential strategic investors, like IQVIA, but also private equity firms.

We had several private equity offers at that time that were actually higher than what the strategics were offering, except the additional conditions as to us having to stay on longer and having to have an earnout were less attractive to us at that point.
AW:You know, Andy, both you and Lisë both mentioned the importance of teams in an organization. Can you talk a little bit about both the internal and the external teams that you put together for the potential sale to IQVIA. And I know you also had an interesting story relative to the hiring of a banker.
AB:Yeah. So, the external team was definitely together with a banker and the accountants, right? Just to make sure that the finances got cleaned up. In my view, they were already pretty clean, but just to kind of get it ready and make sure that we dotted the eyes and cross the Ts. I think that was critical. So anyone who could come in and look at our business got a warm and fuzzy feeling as to that we were on top of things and were doing the right stuff.

I think the banker was really important. We hired a relatively small bank initially, who put a pitch deck together for us, who articulated the value in our business and who really made sure that value was appropriately communicated to the parties out there, and also reached out to enough parties. On the internal side, I worked together with one of my partners and with a financial team. I made a decision early on not to really communicate it to the rest of the company, because I was afraid that this was going to be a distraction to them. I've been in several sales and acquisitions in the past, and I know that getting the word out that you're selling a business, or that your process getting ready, can really distract and can kind of get people not as focused as what they need to be.
AW:Thank you. Lisë, I know you've been part of many teams, external teams, advising clients on the sales of their businesses. What are some of the lessons you've learned as being part of that team that you can convey to other business owners who are contemplating a sale, or thinking about a sale in the future. Like Andy said, planning it out two or three years in advance really creates the opportunity for a successful and more lucrative transaction.
LS:Yes, exactly. And I agree with a lot of the things that Andy said there. I think it's interesting, Andy you mentioned that some of the offers that were coming in would've locked you into a longer term relationship and earnout and so on. I really think that that's an important conversation.

When I'm talking to our business owners, I'm asking them to think a little bit about what kind of a relationship do they want with the next owner of the company, with your investors. Do you really want to stay behind? Do you really want to keep doing this?

Sometimes they think, the owners, that this would be a good way to spend the next few years, and the earnout does get them a little bit more cash and without thinking it through, it can sound like a pretty good opportunity. Not so generally in practice.

We know that particularly in privately held companies, it's upward of almost 80% of those who sell their business are unhappy with the transaction. Not necessarily just the cash, but the way in which it played out. And I think a lot of that is because they don't realize that when somebody comes in and they purchase your business, they have the majority ownership of that business, it's like a marriage. You're now working with someone really closely. You're going need to make sure that you've got clear alignment in your values, your goals, the strategies that are important, how you treat your people, your organizational culture and on and on and on. And it's a much more complex relationship than I think a lot of business owners know about and are prepared to enter into.

So I think really understanding what kind of role do you truly want? Who do you want to be working with? And might you consider perhaps taking a little less for the business, if it means that you can then go on and do something else in your life. So, working through those kinds of relationship issues.

I also want to piggyback off something that Andy said about, who do you involve in the company? Because I agree. I think it can be a distraction. I think that of all the transactions that I've worked on in all these years, maybe the most successful perhaps scenario that I can think of is where you've got at least a small team of trusted people in your senior leadership group; your CFO, perhaps your COO other people that can help you to tell the story. I think sometimes business owners rely on just themselves to be the person who tells the story, but we know, and again, I've been on both sides of the transaction here.

Sometimes business owners tell a pretty rosy story. And I think that investors want to hear from multiple people in the company and to see whether or not those stories line up. So when I'm working with the business, I try to make sure that the management team has worked for a number of years on building the company, according to some strategic goals that they've put in place, that they know how to tell the story of that growth, but they also know how to talk about the future. Because remember, even though you, as a business owner may be leaving, it's quite possible that your senior people will be staying, and an investor is going to want to know what are they like? What is their vision? Can they help us to continue to build a strong and successful and sustainable company over time? So when you're thinking about selling the business, think about also priming your team to be part of that really important story going forward. They also add value to the conversation they add value to the entire transaction.
AW:Andy, did you stay with IQVIA after the Polaris deal?
AB:Yes, I did. I stayed on for two years. So my earnout was for two years. It was a successful earnout. We got a hundred percent of what we bargained for. And as a matter of fact, we actually did three additional acquisitions and integrations. So two additions, actually two of them had already occurred, but had not been integrated. So I ended up running a business unit within IQVIA, where I integrated those two additional acquisitions that occurred before me. And we went out and bought another company that we then integrated. And I actually got a lot of joy out of that. I really like working with people. I'm a people person. And I took pride in the fact that we're able to attract the different teams and bring them under our umbrella and then set it up as one business unit.
AW:Sounds like you were still running your business, making decisions after the deal was completed.
AB:I did. Yes. And that was also part of the deal, right? So we had to have the ability to impact our own earnout. We made that very clear during the acquisition. Frustration of earnout is a term that is well engraved in my brain, from that perspective, but that also gave us the ability to be successful. And I think it became a win-win for both parties at that time. I still am in contact with the business these days. And the business has been very successful, has been growing and flourishing.
AW:So Andy, as you were building Polaris, you were an entrepreneur, you started a business. Did you ever take on outside investors in building the company?
AB:Yeah, that's an interesting topic. I never did. We funded it on a shoestring, and the question is, could I have achieved my goals sooner? And could I have grown bigger if I had taken on outside investors? I deliberately made the decision not to do that at that time. In my future endeavors, I would love likely do it. So I can tell you maybe in five to 10 years from now, which would be more successful.

I did not take on foreign capital because we had enough cashflow to keep growing the business, and it also gave us a lot of independence at that time. I'm involved through my current businesses, I'm involved with a lot of investors and I sometimes get the feeling that they're really addicted to getting foreign capital and thereby completely diluting themselves. We have businesses right now where the original owners have only six to 7% of the original stake in the business because they've been so addicted to grabbing cash and capital that is completely diluted them.

And I sometimes scratch my head and say, "Well, you have a cash generating business. Why don't you slow down a little bit and focus on generating revenues and making a profit that you can then use to reinvest in that business?" So I can go back and forth on that. I made a decision originally, for Polaris, not to attract any foreign capital and in the long run, I'm actually happy with that.

What I did do, however, and I think this is a very important side note, is that instead of giving a percentage of my business up to outside investors, I gave this substantial part of my business up to my employees, my key employees. And through that, I really gave the major incentive to work with me on a shared set of objectives on the one hand, and also to retain them.

And I think a lot of the key people in my business have been very happy with that decision, in the long run. And I've been very, I'm a very strong believer in putting a clear vision together for one addressing their needs and giving them an incentive to work together with me on building a business. So from that perspective, no, I did not get foreign capital and give up part of my business. But on the other hand, I did give a substantial part away to my team, which I think has incentivized them and, in the long run, made them very happy.
AW:So, Andy, that kind of leads into my next question. You've had at least one or two successful exits; what have you learned in your career that you're going to apply to the next deal?
AB:I think the key thing is to build a team and not really immediately focus on profits and money. I've said for many years, I said, "Give me a bad product or service but a great team, and I'll make something out of it." If you do the reverse, a great product or service with a poor team, you really struggle.

Focusing on people around you, making sure that people buy into your vision and clients buy into your vision and addressing a pain point for your clients, delivering something that's of true value is a lot more important in the long run. Because if you do that, I think the money will come by itself. And also the people interested in buying your business will come by themselves.
AW:So I guess it's time for closing thoughts. Lisë, closing thoughts for business owners who are thinking about selling.
LS:Again, I agree with Andy, having that plan, having a great team. So what I try to encourage my business owners to do is start early, have a plan for your business, but also have a plan for yourself.

A lot of business owners, they might have a strategy in place to be able to grow the business, but they will sometimes not have, say, a personal financial plan or an understanding of what they need for the future. And they don't integrate the two. So make sure that you do have a clear plan for your business, that you are able to communicate to a really good team and get those people to help you to grow; but also make sure you've got your own personal plan and put in place some experts to be able to help you to refine that personal plan. It's the coming together of both of those plans that I think help to make sure that our business owners who transition like this, transition successfully and happily.
AW:Andy, also closing thoughts from you, but I'd like you to add one other point. You've been successful selling this business. What's next?
AB:Yeah. So, closing thoughts. I think taking the time as Lisë already said, right? I think it's important, starting in time, not going with the first offer, truly getting the right advisors around you; accountants, bankers, but also legal advice I think is important. And really thinking it through before you really get out in the market to sell your business, I think is a is a key part. I think an earnout most, businesses in our space get sold with an earnout, making sure that you understand what the earnout is and not just giving into or easily into quickly, into the terms that the buyer is putting on the table is a really key component.

And then the third one, I think Lisë also mentioned is kind of figuring out what you're going to want to do afterwards, right? You're an entrepreneur, you've given your life, your soul, all your energy for so many years into this business. And all of a sudden you're going to need to let it go. Are you able to let it go? And do you have a plan as to how you're going to manage that?

I was 54 when I sold my business and I still considered myself to be young and I've struggled for at least a year to kind of go figure out what I was going to do next. So I found something that I'm going to do next. I actually invested in a business, a medical device business in the Netherlands. I've been supporting them from a financial perspective. I led to be in the sea rounds for them, and made it quite a substantial investment in them. But I've also supporting them by putting a team together, a vision, a story. And we're now in the process of actually selling that. We just signed a letter of intent. And we're now looking to hopefully quickly have a sales agreement within the next 40 to 50 days. So, that's my next thing. And then I need to go figure another passion again.
AW:Andy, thank you so much. Once again, I want to thank Lisë and Andy for joining me today and for their great insights. I want to thank everyone for listening to EisnerAmper's private business services, selling your business series. If you'd like additional information about any of the topics discussed today, please go to our website, EisnerAmper.com\sell. Once again, thanks to everyone.

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