Maximize Company Value - Top 3 Value Drivers Revealed by Linda Rose

1. Top 3 Value Drivers Guaranteed to Increase the Value of your Company Linda Rose

2. Session Objectives: 8 Qualitative Drivers that increase value Know the two buyer types Top 3 Value Drivers (Those who stay will get a free tool to assess your current value )

3. Linda Rose • linda@rosebizinc.com • 32 years Licensed CPA - California • 25 years Microsoft VAR • 16 years as a Cloud Service Provider • Successfully bought/sold 4 services companies • Author/Speaker: Get Acquired for Millions • Advisory Board: MSFT Partner’s/ISV’s, SDSU College of Business • Fun: Backpacker, skier, gardener

4. Linda Rose • Here is what I am NOT: • Employee or contractor for Microsoft • M & A Broker • Attorney • Certified Valuation Specialist • Associated with any Private Equity Group (PEG) • Complete independence in my comments/views/assessments

5. The data for today….. • Benchmark studies - 2 MSFT WW • Interview of: • IT Brokers • Partners who sold • Partners who are bought • Private Equity Firms • Database of 36 months of closed deals • Hours of webinars • Dozen M&A books • 3 of my own sales and 1 purchase

6. Brief View of the Market Today

7. IT Survey says…. 40% of the Channel will retire in the next 7yrs (of 500,000 firms globally) (Source: Forrester Analyst – Jay McBain) Getting into Position to be in Position – Is it Buy or Sell Time?

8. Current Landscape of M&A in the IT Industry Current Landscape of M&A in the IT Industry (Source: Equiteq Trends Report) (

9. Best Practices Statistics Source: Revenue Rocket

10. Poll Question: Who was at my session yesterday?

11. 8 Valuation Drivers that Maximize Market Price • GaaP Financial, accurate GPM • Recurring/repeatable – GPM 45%+ • Strong mgmt team – high retention • Clear, unique VP • Measurable/ monitored results • No SPF: supplier, customer, employee • Packaged solutions/ marketing automation. • IP fetches highest value

12. Overview of the two buyer types: Strategic • Provide similar or complementary products or services • Competitors, suppliers or customers • Looking to diversify existing revenue • Looking to increase geographic footprint • More emotional / more ego • Pay more for companies • May take more time, less likely a deal with close * (cash + note +earn-out) Majority of deals are done by Strategic’s Financial – PEG • Includes private equity groups (PEG), venture capital firms, hedge funds, family investment firm and high worth individuals • In the business of making investments and realizing returns – ROI in 5 years • Typically will sell company in 5 – 7 yrs • Usually combines acquisitions • Very numbers driven • Not emotionally driven • Very decisive, quick due diligence, high likihood to close (cash + earnout + equity)

13. The One Given Factor: (Biggest complaint of Buyers) • Strong financial statements: • 3 years – P&L, B/S, Cash Flow, • Annual Sales Projections • Ability to close the books with 10 days • Need to be GAAP • Proper allocation of revenue/expense • Deferred Income/Expense • Prepaid for Cloud/Maintenance – amortized properly

14. The One Given Factor: (Biggest complaint of Buyers) • Strong financial statements: • Proper allocation of above/below (Gross Profit Margin) • Breakout of revenue types and COGS by revenue type • Breakout of Sales/Marketing as separate segment • Tight hold on AR – nothing past 90 days • Reviews/Audits – (needed? Not needed??) • QB Users – guaranteed audit

15. The One Given Factor: (Biggest complaint of Buyers) • Other Key Financial Metrics: • Actual vs Budget variance analysis • Churn rate on RR • Intercompany expenses • Carveout of personal expenses • Know your cost per customer acquisition (CAC = Sales+Marketing/New Customers) • Sloppy or poorly prepared financials destroys creditability in all other areas.

16. Adjusted EBITA • Ability to easily identify adjustment to EBITDA • See my blog: https://rosebizinc.com/the-importance-of-understanding-adjusted-ebitda-selling-a-microsoft-tech-company-part-iii/ • Worksheet to Calculate Adjust EBITDA: https://rosebizinc.com/resources/

17. Top 3 Value Drivers

18. Qualitative Factors…..#3 Value Proposition/Verticalization • Too many generalists – don’t be one • Pick one • Without one you are viewed as a commodity • Buyers purchase solutions not technology • Packaged vertical offerings • Unique = stands out = HIGHER MULTIPLES

19. Enhancing your business with industry solutions Full Industry solutions Why industry offers? The IP staircase • Greater differentiation • Delivers stronger margins • Increases customer satisfaction with solutions designed to address their specific needs Full functional solutions Packaged extensions DIFFERENTIATION/CUSTOMER VALUE/USAGE Labeled bundles Office 365 POTENTIAL ISV PARTNERING COMPLEXITY/COST/REVENUE POTENTIAL

20. Qualitative Factors…..#3 Value Proposition Ask yourself these questions: • What product or service is your company selling? • What is the end benefit of using it? • Who is your target customer for this product/service? • What makes your offering unique and different.? Need help creating: https://neuralimpact.ca/valueproposition/ https://conversionxl.com/blog/value-proposition-examples-how-to-create/

21. Qualitative Factors…..#3 – Value Prop/Vertical What to do next: • VP – Create or revisit the one you have • Brand it everywhere – redo website if you must • Keep it to one vertical • 1 per $35M • Give repeatable packages a name • Make sure the entire teams knows elevator speech

22. Qualitative Factors…..#2 Customer Retention/Satisfaction • Looking for less than a 3% churn • Purchasing you for future profitability • Cross-sell/ up-sell to your customer base • Want to see owners with little customer interaction • Proven measurable results = HIGHER MULTIPLES

23. Qualitative Factors…..#2 What to do next? • Begin measuring annual customer churn rate • CSAT – MSFT • Net Promoter Score (NPS) • Customer Effort Score (CES) • Actively measure customer SAT: • Onboarding • Completing of upgrade • Conversion of data • Projects lasting more than 80 hours • Promote the great results on your website • Bonus your team for high customer sat scores.

24. Qualitative Factors….. #1 Quality of Revenue – VARs, MSPs, Hoster’s, ISVs • High level of recurring revenue = 50%+ • Low churn rate = less than 5% • High gross profit margin = greater than 45% Quality of Revenue - Custom Developers • High level of repeatable revenue • Reusable IP • Customer longevity

25. Qualitative Factors….. #1 Recurring Revenue • Higher cash at close • Ability to exit quicker • Higher earn-out achievement • HIGHER MULTIPLES

27. Qualitative Factors….. #1 How to increase (RR) or AaaS: • Cloud services – sell more, transition existing • Can w/o financial impact transition 20% per yr • Find your own, do not rely on MSFT • Transition all hourly work to “managed offerings” • Services sold as a service level agreement (all – in – pricing) • Bolt on IP • Add ISV’s with high margin cloud offerings

28. Qualitative Factors….. #1 To Do: • Show a YOY increase in RR offerings • All new clients should be AaaS • Transition existing with enticing offers – 10 – 20% per year • Measure your RR churn rate and monitor actively • 90 – 95% is marginal • 95%+ - get the word out

29. How buyers look at you: Strategic • Quality of revenue • Value Prop/Vertical • Customer Satisfaction/Retention • Last= Sustainable success Financial – PEG • Customer Satisfaction/Retention • Quality of revenue • Management Strength • Last = Sales/Marketing maturity

30. Closing Thoughts

31. Lessons Learned • Accurate and GAAP financials are step 1 – start now • Track ratios, churn, variances, customer sat – start now • The market is flooded with generalists…..don’t be one • Convert everything to …… AaaS • The higher the RR, the higher the multiple • The higher the RR, the higher the cash at close • Know your ideal buyer

32. Value Assessment Tool - Confidential • Comprised of 33 questions • Customized Report Details: • Current Valuation*: • By Partner Type • By Buyer Type • Revenue / Profitability • Written explanation of where you can improve • How improvement will increase value • Areas of concern (if any) • Sample “Deal “ Worksheet with cash, equity, earn-out and payout terms by Buyer type • Updates (if box checked) as value changes in the marketplace • * Valuations are calculated based upon current deals that have closed

33. Next Steps: Sign up to take the Value Assessment Tool* Get notified - Book is available www.rosebizinc.com/book Linda.rose@rosebizinc.com Check the box if you want to take the assessment * Currently in Beta testing

34. Questions?Email: linda.rose@rosebizinc.comThank You! Please remember to fill out your session survey using the Directions 2018 Mobile App!