Nearly a year after F12.net acquired Xcel Professional Services, one of Xcel’s founders is looking back on the lessons he learned from the deal.
Xcel, a managed IT services provider, was founded in 2009 by Colin Knox. Partners Ray Archer and Ryan Barker later joined the Calgary, Alberta, Canada-based company. In 2014 Knox left daily operations to focus fully on a new venture, Passportal, a password management platform for MSPs. The Xcel executive team continued to execute, and the business continued to expand. Xcel grew to roughly 22 employees, 2,500 endpoints under management, and over 2,000 customer users in 2016.
F12.net, a fellow Albertan company that also offers managed IT services, acquired Xcel for an undisclosed sum on April 30, 2016.
Reflections On An Ending
One year later, Knox has had time to reflect on the deal even as he’s maintained his focus on Passportal. "You have all these discussions immediately after the transaction occurs because everyone wants to know what you had to deal with,” he says. For Knox, it’s easy to talk about stress factors, time consumption, legal fees, and legal recommendations. But he says with most deals there are unforeseen difficulties that aren't clear until months later.
To begin with, the seller has to realize that this is a business deal. You can’t let your emotions get in the way. "An acquiring company's goal is to get a return on its investment,” warns Knox. “They want to minimize their investment anywhere possible. And that's not a greedy thing, it's a business transaction."
To that end, Knox has come up with four points that he thinks anyone selling a company should be aware of.
1. Understand The Buyer’s Motivation
If someone approaches your company with an offer to buy, try and get a grasp on their motivations, says Knox.
There are myriad reasons someone might want to acquire your company. Are they looking to expand into a new geographic region? Maybe they want a better share of an existing region. They may be looking to add more services to their existing solutions or they may have an eye on the talent in your organization. Or it could be as simple as wanting to increase revenue or profit growth.
Understanding why someone wants to buy you out will help you protect your customers and clients, asserts Knox. “I'm not saying that anything went wrong with our deal necessarily because I think we did have a good understanding of what the motivations were,” he says. “If we had not been clear on the motivation it could have spelled bad news for our staff or our clients."
If a new owner decides to terminate clients or get rid of staff that could reflect badly on your reputation. Maintaining your standing in the community is important regardless of whether you sell your company or not. Knox believes he and his former co-owners were fortunate because most of their staff and clients opted to stay on with the new company.
Both sides knew what they wanted from the deal which ensured continuity for employees and customers. Knox says starting and growing a company is a lot like raising a baby. After you sign the dotted line there will invariably be second guesses. “You still want to see your baby grow up and go off to college and get its degree,” he jokes. Understanding everyone’s motivations will alleviate those doubts.
2. Understand Your Reps and Warranties
When you sell a company you must provide what are called Reps and Warranties. These are assertions that the buyer will use to value your company. The seller must hand over all financial data and Reps and Warranties are the documents and information which show the data is true and accurate.
That can include:
- Financial statements
- Customer and supplier listings
- Copies of all major contracts
- Equipment listings
Or, in another example, Knox says you may say (or “represent”) that a certain amount of staff or clients will stay with the company. If they don’t then you risk losing money in the holdback. According to Divestopedia.com, “a holdback is a portion of the purchase price that is not paid at the closing date. This amount is usually held in a third party escrow account (usually the seller's) to secure a future obligation, or until a certain condition is achieved.”
You may also decide to ensure that revenue will grow to a certain target. "By guaranteeing more things you can actually get a much higher valuation,” says Knox. “But you also face a larger risk in not realizing that money when things aren’t in your control to maintain.”
3. Understand The Financial State of Your Company
Cash flow is what matters, according to Knox, which means having a fundamental understanding of your accounts receivable. It goes back to your reps and warranties because you need to ensure your accounts receivable are valid and real, cash flow is at a certain level, and the business has the ability to sustain itself for a certain period.
Knox says this was actually one issue that came back to bite him and his partners. “"We had made assumptions on that. We'd done our quick calculations. And that's one thing that we warrantied that we fell short on,” he says.
For many business owners keeping up to date on the financials of the company can be difficult. Most companies have bookkeepers or someone else managing the finances so the executives can deal with day-to-day operations. Try and answer the question: “If we lost x-number of clients, how long would we survive?” says Knox.
4. Understand All The Agreements You’ve Made
Be meticulous in understanding what agreements you hold with vendors, clients, and employees, says Knox. Even the ones that aren’t on paper. If they were offered by a person with power in the business, even verbally, you have to keep track of those.
Agreements like these will be delivered in the disclosure process. You must give a letter disclosing any agreements you’re aware of that may not be on paper and that wasn’t found during due-diligence. That can include things like promises of promotion, salary increases, bonuses, discounts, or achievements. "You need to disclose those things so that there are no items under the rug, there's nothing hidden in the closet," says Knox.
This can be risky, says Knox, in that if you disclose things and the buyer thinks they're too risky, they could pull out of the deal. But if you aren’t transparent the will be found and it’s going to cost you down the road either way, Knox warns.
Knox says Xcel actually had a situation where employees were verbally promised bonuses if they met certain achievements. In the hustle of the acquisition, the promise was forgotten and since he wasn’t dealing with the daily operations Knox says he was unaware of it.
Four or five months after the deal the employees went to management saying they were owed money. “And the acquiring company said 'we made no such promise to you' and they reviewed the disclosure letter and it wasn't anywhere," says Knox. As a result, the money came out of the holdback.
For his part, Knox says he has zero regrets about the deal. “I think they've done a great job of maintaining a fostering culture for the people,” he says. “To my knowledge they've maintained a lot of people that were working there. They've maintained a lot of the clients. Overall, I think it ended up being a great deal for everybody involved."
Meanwhile, things are going very well at Passportal. Knox says his team has maintained double-digit monthly growth, and annual revenues have grown in the high triple-digit range, though actual dollar figures remain undisclosed.
The company recently launched a new version of its core platform, which was well received by their partners, he says. It’s all made Knox very grateful. "We're extremely appreciative of the support we've gotten from the global IT channel with regard to our endeavors in continuing to deliver valuable, benefiting solutions to IT service providers," he says.
Looking back on the Xcel deal has given Knox perspective. Only with a little distance has he realized how bad it could have gone. Had he and his former co-owners not understood everything from the beginning or had they not been as diligent operating their business things could have ended much differently.
The best advice Knox has is to be clear about what you want. Understand what you must have and what you’re willing to compromise on. “Understand the underlying reason you want to sell your business. And if you sell where do you see yourself in the next couple years?" he says.