Metrics that Matter in Strategic Acquisitions - with Lowell Ricklefs

**Ray Rike** (0:00)
Hello, I'm Ray Reich, Founder and CEO of RevOpSquared, and your host of the Metrics that Measure Up podcast. We talked to a wide variety of B2B, SaaS and Cloud thought leaders, executives, investors, and people just like you to discuss the metrics and benchmarks they use to make metrics informed decisions. Now on to today's show. Welcome to today's episode of the Metrics It Measure Up podcast. Today, we are joined by Lowell Ricklefs, the founder and managing partner at Traction Advisors. Today, we'll be covering three main topics with Lowell. First, how to determine if you are ready to sell your B2B SaaS business. Second, what are the key metrics that strategic acquisition partners will evaluate during due diligence? And what are the common metrics issues identified during that due diligence process? Lowell, please take a moment to give a brief background of your journey to becoming a guest on the Metrics that Measure Up podcast.

**Lowell Ricklefs** (1:12)
Thanks, Ray. Appreciate the opportunity to be here. Big fan of your show. You touched on a lot of relevant topics. I was an electrical engineer, computer science graduate. I went up the technical sales route at a Fortune 500 company, Rockwell Automation, ended as a global vice president and managed the software business for three years in the Americas. Went to my first startup as chief revenue officer.
We scaled it from 1 to 50 million. It was sold to WPP for 100 million. Then I was a COO at another tech company. We scaled it from 10 million to 120 It was sold to Private Equity. Then I co-founded a Techstars company, which was eventually sold to a strategic. But part of what's most interesting is that along the way, I was a part of acquiring about a dozen companies and became very familiar with the M&A process and the bankers that executed that. When it came time to sell the company that I had co-founded, I was always curious why bankers sold companies. You don't go to a bank to sell your house. Why would you do that for your company? And I felt that selling small technology companies was more like selling a technology product than it was a financial instrument. And I get it that banks used a lot of financial analysis. You had inventory, you had heavy assets, but with SaaS companies, that's not true. It's more about strategic fit. So I ran the process myself, leveraged enterprise selling techniques and technologies. We were successful. One of our investors asked me for help on another project. And I realized there was an opportunity out there to help small meeting, you know, three to 20 million in ARR companies get, I felt better representation to properly position and sell their company to get the best deal for them.

**Ray Rike** (2:44)
Well, it's great talking to someone who has so much experience both on the buy side and on the sell side, because that gives you two very different perspectives. And as you were talking about some of those numbers, Lowell, I was thinking about too, I've been fortunate to be part of five purchases. Our companies were purchased two by strategic acquirers and three by financial private equity firms. And I just look at some of the valuations of things we sold five to 10 years ago that you looked at these metrics of maybe six to 10x earnings, right? Or EBITDA, or maybe you were lucky and you got four to five x revenues. But today we're looking at these multiples of 10, 20, 30x revenues. It's incredible, isn't it Lowell?

**Lowell Ricklefs** (3:27)
It's unbelievable. And really, since 2020, particularly for publicly traded companies, multiples have doubled. You know, the acceleration of digitization. There's a lot of money out there. There are a lot of reasons why, but it's remarkable.

**Ray Rike** (3:38)
Well, before we talk about all those fortunes to be made out there, let's start at the beginning because founding and growing your own business, especially your B2B SaaS or cloud business, is very personal to most entrepreneurs. And there seem to be a few standard telltale signs that maybe it's the right time to consider selling your baby or exiting your baby. So can you tell me a little bit about what are some of the signs that entrepreneurs should look for to say, maybe I should consider a sale of my company?

**Lowell Ricklefs** (4:08)
Right. I have that conversation a lot with potential sellers. And sometimes it's philosophical. There are personal elements to it. Sometimes a founder has been in it for five, seven. There's a common time frame, sometimes 10 or 12 years, and they're out of ideas and they're burned out. And they may have been underpaying themselves, and a lot of their personal capital is tied up in the company. So that's one issue. On the personal side, someone's ready for a change, either some help, or they may want to get out. But also, I think, it depends on the competition. If you've got a good growing business, but you feel that the area has gotten hot, like HR tech, for example, has gotten pretty hot, like through COVID, which generally you think would be good, but you've seen companies like Microsoft, companies like Pecan get acquired with massive billion-dollar valuations. It's hard to compete with companies that have hundreds of millions of dollars in cash. So sometimes there's a consolidation occurring, it's a good time to get out. Additionally, at the macro level, sometimes, like we mentioned, multiples are double what they were two years ago. Will it continue? It might. Could they get higher? It might. Could they go down? It might. You've got to weigh the macro level things in there as well. We'll talk a little bit more about valuation. There also, I won't jump ahead, but depending on the size of the company, 100 million ARR companies get higher multiples than 10 million, then higher than 5 million. Sometimes 10 million in particular is a pretty serious metric.