Executing the Roll Up Strategy in the Tech Industry

In a highly fragmented industry, roll ups are a great strategy for growth. But integrating multiple entities can be difficult, especially if you don’t have a proven framework. Ntiva has been successful in their M&A strategy, and has completed 15 acquisitions as of today. In this article, Steven Freidkin, CEO and Founder of Ntiva, Inc. and Christopher Vollmond-Carstens, Chief M&A Officer at Ntiva, Inc., share their strategy on how to execute the roll up strategy in the tech industry.

Executing the Roll Up Strategy in the Tech Industry

20 May
Steven Freidkin
Christopher Vollmond-Carstens
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Executing the Roll Up Strategy in the Tech Industry

Executing the Roll Up Strategy in the Tech Industry

“When doing roll-ups, be intentional. Know what you're looking for and be intentional about what you're trying to create with it.” - Steven Freidkin

In a highly fragmented industry, roll ups are a great strategy for growth. But integrating multiple entities can be difficult, especially if you don’t have a proven framework. Ntiva has been successful in their M&A strategy, and has completed 15 acquisitions as of today. In this episode, Steven Freidkin, CEO and Founder of Ntiva, Inc. and Christopher Vollmond-Carstens, Chief M&A Officer at Ntiva, Inc., share their strategy on how to execute the roll up strategy in the tech industry.

special guests

Steven Freidkin
CEO and Founder of Ntiva, Inc.
Christopher Vollmond-Carstens
Chief M&A Officer at Ntiva, Inc.

Hosted by

Kison Patel

Episode Transcript

Creating value using roll up strategy

S.F: In terms of creating value and executing a rollup, I need to zoom back out to what we're about here at Ntiva. And that is the purpose of growing people. Okay, and I know that sounds a little amorphous, but it's the truth.

We exist to grow each other, and technology purely accelerates that growth. Understanding that and really doubling down on that culture and our core values that support that culture is critical. So, before we can create any value in a rollup, we must make sure that the organization has similar values to us.

And if we don't, I've learned this the hard way, it is value destruction, not creation. So once we get over that hurdle, which is a big one, then we're able to bring in other MSPs and provide a deeper set of products and services that could be sold into them. In many cases, these smaller MSPs don't necessarily have effective account management, sales, and marketing.

They might have a handful of security products or services that they resell, but they don't necessarily have the in-house expertise for it. Come 5 p.m. in their local time, they may not have the right after-hours support, so they can't offer 24/7 services. There's just a lot that is expected for the best of breed MSPs to deliver.

And so bringing that to market is expensive, and to do it right in a unique way requires material investment. And a lot of the smaller players are struggling with how to make that investment when they'll see a return, and so forth. So we're able to join forces with them, apply our sales and marketing model, apply our account management, bring our scale of products and services as we integrate and become one, and really create value through the cross-sell upsell that comes with that.

The hopeful improved client retention that we're able to bring to the table, and then ultimately the effective organic sales and marketing engine that we drive in the markets that we serve. So that's just the start of it. 

C.V: It's also important to acknowledge what the managed IT services environment or ecosystem looks like overall. It's an incredibly fragmented market across the U.S. Depending on who has created the count, are there 20,000? Are there 30,000 different MSPs in the U.S. alone? Most of whom are very small.

Mom and pop shops or one or two person outfits, and they've been around for a long period of time, 10, 20, even 30 years or more. And so that question of - where does that business go? Where does it transition? That becomes an ever-present question in the mind of those leaders. To the points that Stephen just mentioned about some of the challenges that business owners are facing.

That's where what helps to create an opportunity where we have a plethora of businesses that we can seek to evaluate so that we can really find those companies that align with Ntiva from a cultural perspective, from a vision perspective, et cetera. It's not as though everyone in the market is going after just one or two organizations.

And if not, then you're out of luck. So that's an important consideration to make as well as why roll-up is such a pervasive strategy within the MSP space. And then it's also worth mentioning, at the end of the day, we are trying to create value for ourselves as a business for our shareholders.

It is somewhat of a classic play that if you can buy smaller organizations at a lower multiple, combine them with your organization. And as you seek to realize your own investment, at some period of time to sell on at a higher multiple, you can take advantage of that multiple arbitrage through the course of that process.

Pitching to private equity

C.V: Yeah, I can start just at a high level from a multiple perspective. So within the industry, it's typically looked at from a multiple of EBITDA perspective. That's where most transactions are priced off of. 

There are a whole host of factors that can go into determining what an appropriate multiple might be for a business, obviously size, but the measure of recurring revenue as a composition of overall revenue, as well as the overall sophistication or maturity of the business.

And the list goes on and on around client concentration, et cetera. But for the most part, for businesses, you're looking at anywhere from a mid-single digit EBITDA multiple, which is probably a reasonable baseline place to start as businesses start to creep up in size. You could be tracking closer towards a higher single digit multiple.

And then as you can really combine forces and become something much more akin to a scaled MSP, the multiple can jump into the mid-teens or closer towards the mid-teens. 

So you can see a fairly material uplift in the multiple by combining forces, presuming that you can execute well as a combined entity, and you're not facing high levels of client attrition, employee attrition, or other challenges to the operational performance of the business.

But if all things go as intended, that's an element that you're able to take advantage of. And that's before necessarily considering any synergies or other cost opportunities that you could potentially take advantage of.

S.F: Yeah, you know, just to be on the higher end of that multiple. The market is really consolidating now. It's been happening for the last decade, but a lot of activity is going on now with some larger players emerging. I liken this industry to telecom in the 1980s when there were 25,000 mom and pop bells.

Today, there are two or three or four Verizon equivalents out there. So the same thing is happening in our space. A lot of this is new, but the way we see it, to be at the upper end of the valuation spectrum—call it the mid-teens or above—we're talking $25 million or greater of EBITDA.

We're talking about operational maturity that has proven that as new dollars come in at that larger size, you're able to consistently drop the same or more as a percentage as a contribution margin in the business. You need to show that you have a proven track record of client retention.

You need to show that your growth has not just come from acquisition, but also you have an organic sales and marketing engine that supports it as well.

You likely need to have certain industry vertical expertise where you can show knowledge towards one or more industry verticals, where you can market to them and have a bit more price elasticity as a result. You want to show good strong employee retention as well as training programs to help support them.

You need to have a robust and certified security offering as well because the risks associated with not providing security properly for yourself and your clients are huge. You could offer services like digital transformation, help clients leverage generative AI to go where the proverbial puck is going with technology as opposed to where things are today.

Those are just some examples. So if you've got those, you're going to be in the upper right-hand side of valuation. And then the less you could chip away, and we could talk about the negatives. Well, you're not this. You have single customer concentration. You haven't proven that as you grow, your margin goes up.

You don't have organic sales and marketing. That brings you all the way back to the mid singles, in addition to the number being smaller. So as we look at deals, we want to see, first, that culture fit and alignment with purpose.

But then once we see that, we're able to look at all of those variables that I just shared with you and go, 'Are we missing any of those in our investment thesis? If so, does acquiring this company help us achieve that, creating benefit to the whole family?' That's something we're always looking for.

And then, separately from that, bringing them in, they've got almost everything but they're only $2 million of EBITDA. That's the simplest way to think about it. They're rocking and rolling, firing on all cylinders. We can bring them in, and we're bringing them in at 10 and we're worth 15, all example numbers.

But the reality of what I'm trying to share here is there are so many variables that create this value. We know what the market will bear for those that are firing on all of the cylinders or most of the cylinders that I just shared with you. 

There are so many companies out there that have some of these pieces together, but not all of them. So joining forces and bringing it together in an intelligent way creates a tremendous amount of value.

When it comes to synergies, to me, that's always been a dirty word. I love the idea of efficiencies that come from these businesses. I can tell you out of 15, 12 or more were negative synergies. 

So, they were scenarios where we buy a business, maybe there's multiple arbitrage associated with it, but we absolutely needed to go in there and put in account management, help strengthen their technical staff, even increase the compensation of some of these folks, improve their benefits.

It's just really doing things that ultimately cost more money, but create more overall value. So maybe the EBITDA depresses a little, but we're able to move the multiple up because we're doing business the right way.

Evaluating a target company

C.V:  It's a critical piece of information just to understand the trend of the business. Can they continue to grow? Have they been able to grow themselves without necessarily having to rely on a single anchor client that may have driven a lot of their growth? 

In the early days, being able to have a strong mix or an even spread of clients and being able to see them all continue to grow either through size increase themselves or additional offerings or opportunities to add to wallet share—those are really helpful things to see. 

Because what we want to do is, if we bring a new organization on board, we want to be the extra spring into their springboard for growth in the path going forward. Our preference is not to come across a business that is stagnant or declining, and then having to over-index to fix the organization before taking it forward.

We're really hoping to partner with organizations that are on the up but recognize the challenges that they're facing at the size that they're at and using our broader platform as that extra spring in the springboard to really launch up the curve from a scalability perspective.

So that's an important element that we look at when we're evaluating businesses. It also speaks to just the hunger and the desire and the interest of those owners to get onto the next level with a potentially large organization like Ntiva. That measure of enthusiasm and excitement and passion for their clients and for their people can reflect itself in the top line growth of the business.

All these different pieces fit together to create the picture for us in looking at a target and saying, 'Wow, that's a business that we really want to have as part of our organization.'

What's also important to reflect on is that given the amount of activity in our space, we need to be able to clearly differentiate ourselves from other possible buyers by talking about the things that are incredibly important to us, like being a legacy defining brand with a presence in our community, by being the gold standard where we want clients, employees, vendors, and even other MSPs to want to become part of our organization.

We want to show that this is a place where you can generate real value for everyone that's involved, not just yourself and your pocketbook, but also for your clients and your team from a growth opportunities perspective.

The other thing I would touch on is the fact that we've done 15 acquisitions, being able to demonstrate to a prospective target that we know what we're doing when it comes to the acquisition and integration side of the transaction. That measure of confidence and comfort for them, so they know that their life's work will not be eroded when it comes into the larger organization like Ntiva.

These are really important things to be able to demonstrate to them. We're trying to sell them on Ntiva just as much as they're trying to sell themselves to us, and through that kind of combined effort is really where you can get at the highest and best outcome that everyone's striving for.

It's not a strict formula where if I plug in these four factors, it's going to spit out a specific multiple.

It's much more of a mixed picture that you're trying to create. Given the different factors involved, you can be more creative when it comes to the multiple that you're contemplating, or even the structure of the transaction that we want to talk about as well.

We really want to be able to craft a solution that addresses the goals and aspirations of the seller just as much as it solves the investment thesis and goals for us as we approach the transaction. If you can get a positive overlap between those two sides, that's where the success is going to come from, straight out of the gate.

Importance of recurring revenue

C.V: Yeah. So in our business, it's primarily oriented around recurring revenue as the major driver of value for businesses. It's priced on a per-user basis, paid monthly on an annual or multi-year contract, and that certainty of revenue now and into the future is where value comes from in our business.

For us, we're a majority recurring revenue business, 70 plus percent of what we derive from those recurring revenue sources, and so we want to partner with organizations that share that similar revenue mix and have that similar approach to having that contractual agreement in place with their clients on an annual or multi-year basis, so that we know that when we acquire this business, we've got that view out to that revenue profile with a high degree of certainty on the go forward.

We don't have to keep hunting month in and month out for every dollar that we're going to earn; we're going to start at a pretty solid base level and seek just to grow and expand off of that.

Customer concentration

C.V: A red flag scenario with customer concentration is a company that derives, call it 20 or 30 percent, or sometimes even more of their revenue from a single client. That client happens to be on month-to-month contracts or has been coming up for renewal in a short period of time, and they just found out that they're going up for RFP.

You've got to navigate that. Or you're just going off the basis of, 'We've never really had a contract in place with this client, but they've been around for 10 years or 15 years. So you shouldn't expect them to go anywhere. Take my word for it. You'll be fine.' Those are the sorts of things that cause us a moment of pause or concern that we'll try to understand.

It really helps to be diversified among the client base so that you're not unusually reliant on one or two or a small handful of clients because, as much as we're in a recurring revenue business that does provide greater certainty than other revenue streams, you're never at 100 percent certainty that the clients you've got today are the ones that will stay forever.

You've really got to work to keep them. You want to give yourself some measure of protection as you're going through an evaluation, and frankly, if someone's too concentrated, we'll raise that up to them. 

And if it's over the course of an evolving relationship and friendship with the prospective owner, if you can work with them over a year or two years, or sometimes even three years for us to diversify their client mix, then they become that much more of a palatable business to acquire. 

And frankly, the multiple that we'd be willing to pay is higher. So they themselves will be able to generate more off of it than they might otherwise would if they sold right at that moment in time when they had 20 percent single client concentration.

S.F: Yeah, over the years, we have developed a ton of great relationships with folks that may have had something like single customer concentration or any of the other factors holding them back from the valuation that they really wanted. So, we kind of stick it out with them and help support them, giving them advice and guidance along the way.

Similarly, where people may want a bit more of an accelerated outcome, we're not able to adjust our value that we put to a business that has high customer concentration. However, we can work with a seller to roll over more into our business where that customer concentration may not seem as great.

So, as an example, maybe we can only value this business at six or seven times their earnings, but we could allow the seller to roll over 50 percent instead of what we might expect 10 percent.

This allows them to get an opportunity to experience the value creation and the accretion that comes from us bringing together where a $5,000,000 revenue business with a $3,000,000 annual recurring customer represents heavy customer concentration, but a $3,000,000 annual customer in our $175,000,000 a year business.

Challenges of doing roll ups

C.V: The biggest one is the culture, the people, getting on the same page, or ensuring that you're on the same page with a prospective buyer from a vision, mission, and priority before you really get down the path.

It can be very distracting sometimes just on the level of interest and activity in our space to get sellers clamoring after the highest dollar or the most aggressive potential buyer out there. 

So being able to be disciplined in our approach when it comes to evaluating a business across all the factors we've talked about, qualitative as well as quantitative, is one of the biggest challenges we face. 

If we get too aggressive with dollars in our eyes on a particular business because it's got a very attractive, even top margin profile, we have seen that come back to bite us because we got over our skis a little too far on an acquisition.

It really helps reinforce the need for this kind of discipline to be smart in the space.

S.F: Yeah, my two biggest challenges, if I just had to name them, would be first, unqualified investment banker involvement.

This can range from the early stages of whispering in somebody's ear that their half a million dollar EBITDA business with single customer concentration making 95 percent of it is worth 20 times earnings, to taking them through the process and not actually being with them through it to help them understand what is coming up next, where they need to be providing value, but at the same time blocking folks like us from working directly with the seller.

So, number one would be unqualified investment bankers. And by the way, there are qualified ones, but the unqualified ones create a lot of challenges. 

The second is the emotions of the sellers, and really getting in touch with what those are and connecting with people at a deeper level so that we can work through that together.

And I gotta tell you, these are typically, not always, but typically alpha male CEO founders of these businesses that we're dealing with. They're feeling scared, out of control, and confused, changing what they've spent many years of their life focused on, and this is their identity and they don't know anything else.

It's a very scary time and the person I just described doesn't always get in tune with those emotions. It might display itself in an erratic, illogical behavior through the diligence process to try to get to close, and that can create conflicts and fights on both sides and just make people keep one-upping each other versus really getting to the core of what is going on.

This is emotional, this is challenging. I get it, I feel it. Let's talk about what's really going on so we're not distracted with the details of this one customer contract that we think says this and you think says that. Let's get to the core of really where the challenge is because we're together wanting to create something amazing that would be better together than separate.

So again, number one, unqualified investment bankers, and then two, getting in touch with and working with the emotions on both sides, frankly, buyers and sellers.

Mismanaging M&A

S.F: I must admit I am really grateful for both private equity sponsors that I've had. They have both been phenomenal. They do what they say they're going to do. They care about people. We're culturally aligned. I spent a lot of time and energy making sure that was the case with both of the sponsors that we've had for Ntiva.

Early on in the hold with my first sponsor, there was a managed service provider that was literally less than a mile physically from a big location that we had lots of mass in the market. This was a group that did not share our values. 

They were very sales-heavy. Their focus was on closing new deals as often as they could, and the value of an employee was just based on their billable utilization. So the people that got celebrated the most were the people that were over a hundred percent utilization, burning out, and focusing on billing multiple customers at once.

There were some red flags that I saw, and I thought this is really not the Ntiva model. What I heard back was, 'It's okay. They're right around the corner. There are lots of synergies. There is a lot of opportunity for us to have an error here and lose an employee or client or two, and it'll still be okay. Just give it a shot.' And I said, 'Okay, let's give it a shot.' 

Nothing was okay. Not only did we lose employees and clients, but it became the focus of energy to try to make it right, to try to fix the problems that were coming from it instead of focusing on the positive momentum of the rest of the organization.

All that energy and attention went to stopping the bleeding here and trying to turn this around. So all the potential value creation that came from that disappeared very quickly. And it was a result of a mismatch in target customer profile, what they value out of people, and frankly, how they go after customers.

Resolving this problem was a painful process. At first, it was about making these customers and employees happy. We tried to change this, adjust that, and create a division focused solely on addressing these issues. That approach wasn't working. It was like pretending to be something we're not, and it just doesn't work.

Soon after, we pivoted to the concept that we don't need everyone to like us. We need them to respect us and know who we are. If they're going to fit, client or employee, they fit into the model we know we will deliver well, and we can scale for them and create success. 

So after about a year, year and a half of trying almost anything to keep things on the rails, we shifted to acknowledging we were wrong. This is what we stand for, and if you're interested in being part of that, we would love to have you.

For a client, we're going to go out of our way to earn that opportunity. For an employee, if this is not the right fit for you, we'll part ways in a very positive way. Let's not keep trying to put a square peg into a round hole.

That was really hard because a lot of money went out the door, and I felt responsible for protecting it. In retrospect, obviously, don't do the deal, but if you notice what's happening early, think about ways to maybe carve it back out, get it to a different group that might be a better support for what they're doing. 

We apply this now with every deal that we do, however good of a fit or not, we go in right upfront and say, 'This is who we are. This is what we're about. We're going to nail it for you. But this is how we do things, and it's going to be a bit different than before.'

And by the way, we do that in a collaborative way, understanding that if there are better ways that things are done, we're open to that. But we also have certain values and culture that we lead with and are non-negotiables.;

In this specific example, I would walk away from the deal early. I would have walked away upon learning that what was celebrated in the organization was billable utilization, not client satisfaction or technical results, but billable utilization.

Don't get me wrong, I appreciate the importance of finances, but not at the expense of burning people out. It's very much a legacy law firm mentality, where in order to be successful, you need to bill 4,000 hours a year but only show up to work 2,500 or 2,000 hours.

It's like they say, 'Figure it out.' And when I share this, it's not to say Antiva's better. We are just different; we have a certain set of values, and we need to really own them for what they are. And by the way, when you do that, magic is made.

Talking about the other organization that focuses on billable utilization, look, there are business models for that. And if you put two organizations together that focus like that and have competitive technical resources that like to one-up each other by how much they can bill and how many things they can complete, great. You could do that and probably put together an incredibly profitable company, but that's not what we're about.

C.V: But what it gets at is, as we're learning about businesses and speaking with business owners, it's less about spending those initial conversations or that initial time on understanding the ins and outs and the specific drivers of the P&L.

It's really about trying to understand the owner or owners, what their motivation is, what their interests are, what they hope to have happen through a possible transaction, what they see for the outlook for their employees, for their clients, and how they go about delivering service to their clients. 

Getting a sense of all the qualitative aspects of the business to see if there really is that alignment with how we do things here at Antiva. If there is, then you continue to march down the path to learn more and dig into the minutia of the numbers and the like.

And if you recognize early on that there are things that don't look like they line up and don't feel like they ever will, then it's, 'Thank you very much for your time. It was wonderfully insightful to learn about your business. 

It's clearly doing well, but for reasons X or Y, we don't see it as being the right fit for us here at Antiva. But if you're looking to transact, I'm happy to introduce you to others that might be a great spot for you.

Deal sourcing

C.V: It's tough. The challenge is that because it's such a people-driven business, having those connections made is crucial. Any warm introduction is worth infinitely more than a cold outreach.

What I'm really driving towards and where I spend a tremendous amount of my time is trying to cultivate relationships with individuals through some sort of commonality, whether that's the executive team on their network, Stephen and his network, vendors of ours and existing within their community of clients, or industry events and other thought pieces like webinars to build the community for ourselves.

So when I'm reaching out to have a more frank or direct conversation or even just to introduce myself, it's not met with a blank stare as a response. It's also just a way to differentiate ourselves, given the volume of inbounds that business owners receive, particularly in our space.

So, I'm trying to create that separation for us so that when that conversation can happen, it can be a response to an inquiry and jumpstart into a fruitful conversation. But it's really about going down multiple routes at the same time.

And that's notwithstanding the mention of bankers, advisors, other market participants that are in the space to help broaden the outreach. It's really about pulling down on multiple levers simultaneously because this isn't a business where you can go down just a single route only and hope to have the type of sustained success that you want to have.

S.F: Yeah, you know, and I'll add to that. As I mentioned before, the managed service community in general is very closely knit. While I certainly don't know all of them, or even 10 percent of them, because it's so fragmented, the reality is there's one or two degrees of separation between everyone.

Understanding that and really being engaged in this community in a genuine way, where we want to help others be more successful by sharing what has helped us be successful, or frankly sharing the failures to avoid, follows a rising tides lift all boats concept.

We believe by doing this for the industry, the industry gets stronger in the process, people learn about who we are, there's brand recognition and name recognition, and that leads to inbound lead generation. No different than how we would prospect for a customer in need of managed IT services.

Create meaningful, useful content and get it out to the audience you're looking to support. Maybe the majority of those people are using it and never call you, but at some point, there's going to be a triggering event where their IT stops working or they need something, and our name is going to be familiar.

It's the same thing on the M&A side. We help provide guidance on what not to do when doing your first acquisition, or what not to do when building a security operation center, or what are the best practices to create a 24/7 service desk. How do you create an effective internship program?

How do you break through from a $5 million business to a $10 million business? What's it like to start working with an advisory board and how early should you have that in your business? How do you apply a good sales and marketing engine?

If we're able to share that openly with our competitors, and that is something they find value in, it creates a relationship. We can ask if there's interest to join forces at some point. But more often than not, these little seeds that get planted, at some point the owner of the business is going to want to make a change.

They might want to focus on something specific within the organization, they might hit a growth plateau where they feel stuck and would rather not go to the next stage alone. Whatever it might be, then they'll remember us, we hope, and they'll reach out to us. So, it's a lot of seed planting and cultivation.

We definitely see a lot that come in on auction. We're one of the names out there that opportunities are brought to because we've shown that we can handle these at different sizes and scales and we have the capital to support it. We do get pulled into many auctions, but I would say we probably go forward with less than 10 percent of what we see on the auctions front.

Red flags pre-LOI

S.F: When I see a company that has suddenly become wildly profitable in the last year or two, I get concerned. It's the over-preparedness for a sale, which includes the removal of extra technical resources, and squeezing every last ounce of water out of a rock. When I see that in a business, it is always concerning for me.

So, that's certainly a red flag. When I see a lot of customer churn, it's a red flag. And when I see a lot of employee turnover, it is a red flag. Those are just a handful from my side.

C.V: Yeah, for me, spending a lot of time speaking with the owner is crucial. If the owner or owners are not super articulate or don't come across as open and genuine about what they want to do after the transaction, and are just trying to say exactly what they think I want to hear, that can give me a bit of pause. It's like, is this too good to be true?

Taking this separate from the cultural elements that should have checked the box, the reason why this is important for us is that when we get close to a letter of intent and putting that forth, it's not just about the value and structure of a transaction. It's about a lot of other ancillary attributes around the business. 

It's understanding what the leaders want to do after the transaction. How does that fit in with Ntiva as a whole, even being as specific as this is going to be your manager, this is what you're going to get paid, and these are also your two or three critical resources that we want to make sure have great spots and development pathways for them. We want to be able to talk about all those sorts of things.

And if there's ever points where there's a measure of hesitation, skepticism, or guardedness that comes through and we're just trying to round out the picture and understanding of the business, that can be a moment of pause or concern to really try to understand what might be leading towards that.

Another thing too is that if you get presented one picture of the business from a financial perspective, and you've set forth on the letter of intent, and suddenly all the details come in the next week and it looks very different from what you expected it to be, that's a big red flag as well. And wondering what sort of person this individual might be, that's going to be a big cause for concern as well. Likely a red flag to walk away.

Deal structure on roll ups

S.F: One of the things that I got from my first sponsor that I carry forward to today is they valued our equity more than cash. So in an ideal world, we would be paying more cash and retaining more equity for the shareholders than we would be bringing people in. Now, with that said, we want people to have skin in the game, to be connected to the organization, especially if they're staying and growing with us.

But really, especially at the time when interest rates were near zero, we are a very leverageable company when it comes to debt. One, knock on every piece of wood around me, right now we're profitable and that cash flow allows us to put money into investments such as acquisitions and also the fact that most of our business, again, knock on every piece of wood imaginable, is recurring revenue that supports that.

It's very lender friendly. Our ability to use leverage in the business to get access to cash and make it so less equity needs to go in is real. And that includes doing, whether we're looking to take a portion of the seller's proceeds as rollover equity into the business.

C.V: Just expanding on that, earlier in our transaction history, we felt we were being quite creative by involving not just cash and rollover equity, but also things like earnouts, different kinds of earnouts, different mechanisms in there as a possible means to manage risk, incentivize the seller, and try to do a whole host of things.

But what we quickly figured out, particularly because we are an organization that fully integrates the businesses that come on board, is that utilizing a tool like an earnout, while promising in theory, is much more challenging to deal with after the transaction has closed. Managing it administratively or operationally or curtailing the speed of integration because there are concerns about an adverse impact to earnout achievement.

We've moved away from utilizing that as a tool in our structure and gone to a much more simplistic approach where it's largely majority upfront cash and a slug of rollover equity.

We think that the rollover equity, because of how we view the business, how we anticipate we will continue to grow and build, and expand, offers tremendous value to the buyer so long as they are in with us on the story and can help them meet or even exceed their own value guidelines if they afford themselves the period of time to elapse.

If they're comfortable with a certain amount of cash upfront, they can see the value appreciation that can come from that rollover equity over a multi-year period of time. We prefer to take this approach because it gets everyone on the same page in a much more straightforward and easy manner, and it doesn't impinge our ability to proceed rapidly with integration.

Frankly, the faster that we can move through integration and get that business going as part of the Ntiva engine, the faster it generates value for that rollover equity than might otherwise happen if you're dealing with the intricacies of managing to a gross margin-based earnout.

So, that's how we've evolved our thinking around structuring transactions. From a seller's perspective, it's easier to understand just two key components, as opposed to having to understand the nuances and track and manage the particulars of some esoteric earnout six months or 12 months or longer post-transaction.

For us, we've found success on the upfront cash side, typically 60 to 80 percent cash and the balance being rollover equity. We'd love for individuals to be committed in for that 20 to 30 percent rollover equity. We've found success with that balance.

That provides enough of a chunk of cash for those buyers to get really excited about, while also seeing a meaningful opportunity that can come with the rollover equity over a period of years. So, that's the balance we've come to, but ultimately we want to work toward a solution or mix that is going to get that individual excited.

If we need to be a little flexible on those numbers based on their particular needs or desires for more rollover equity or more upfront cash, as long as we can have an open conversation about that and what their desires are around it, let's work together to figure out something that's going to get you excited as the seller and us excited as the buyer.

Biggest advice for first timers

S.F:  When doing roll-ups, be intentional. Know what you're looking for and be intentional about what you're trying to create with it.

C.V: The other thing that I would say is you may feel as though it is somewhat similar to a sales practice, a sales engine, the sales pipeline that you need to work through. However, there are enough differences between it, whether it's the time elapsed or the magnitude of the decisions being made. 

Just be aware that it operates on a different time scale from what you may initially anticipate and will likely take more time. You'll have a lower conversion rate of outbound interest to received messages and conversations than you were expecting. 

So just being able to recognize those differences and being able to commit for a long period of time to see the results come through, that's where you're ultimately going to find success.

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