Reviewing the M&A Playbook with Arlin Sorensen

Ok so by now, everyone knows that the industry is seeing a massive hike in M&A activity. The flurry of companies rushing to strengthen their existing offerings by snapping up other capabilities is at an all-time high, so of course this was the topic on the tip of everyone’s tongue at IT Nation Connect last week.

ConnectWise’s Arlin Sorensen

At the conference, we sat down with industry veteran Arlin Sorensen, vice president of brand and ecosystem evangelism at ConnectWise who coaches partners on business strategy and personal succession plans, to get a fresh perspective on things.

With the uptick in M&A activity in mind, we asked Sorensen to take us through his M&A playbook. After heading up 10 such deals, Sorensen is a bit of an expert on the topic.

“It starts with helping owners understand what it is they’re trying to accomplish,” says Sorensen. “The mistake we see is that they don’t think about it until they want to do it. And you can’t get a business ready to transition in a year. You need at least three to five years to maximize it.”

According to Sorensen, it all starts with understanding what your personal wealth target is. How much money do you need to have accumulated when you quit getting paid so you can have the lifestyle you want to have? That is the foundation, the first building block. Once a business owner understands that, then they know that they can assess their current worth.

“There is always a gap,” says Sorensen. “A lot of folks don’t connect the dots, they just assume it’s going to be there. What I hear all the time is, “I worked hard. I worked hard for 30 years. That’s worth something.” Well actually, it’s not. No one will pay for hard work. They pay for free cash flow or profitability.”

So that’s where it all starts. Knowing what it is you’re trying to do, and then building a plan from that perspective. First, you must decide how fast things have to happen. Then you have to factor in taxes, the cost of the professionals you’re going to use to do the deal (because what you get at time of close is not what you get to take with you). Next, you do the math and get to a number that is needed to build their business in terms of value. Then you use the valuation multiples and back that into how much revenue do they need at what percent EBITDA (earnings before interest, tax, depreciation and amortization) to get to the value.

“That to us is the foundational thing,” says Sorensen. “If you don’t know that answer, it’s really hard to have success because you’re not even sure what you’re trying to accomplish. And most partners haven’t really thought through that, which is a problem.”

The massive valuation gap could become quite serious as a growing number of MSP business owners try to sell their businesses over the next few years. One cannot operate on…