Episode 14 – Rick Murphy – Cogent Growth Partners

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Episode 14 – Rick Murphy – Cogent Growth Partners

Welcome to the Confessions of an IT Business Owner podcast. In this episode, you’ll learn about some experiences related to Mergers and Acquisitions from the perspective of Rick Murphy, CEO of Cogent Growth Partners.

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Ryan Goodman:
Welcome to the Confessions of an IT Business Owner podcast, where we believe that healthy cash flow is critical for your IT business. Automation is paramount and building trust with your clients by looking professional will help grow your business. I’m your host, Ryan Goodman, and today, we’re going to break from our normal theme and talk with Rick Murphy from Cogent Growth Partners about his experience with mergers and acquisitions related to IT service providers and MSPs.
Rick Murphy:
If you’re going to go buy a company, what matters most to you is return on your cash. If I spend this money on this business, the most important thing you’re concerned about is return on that cash. When am I going to break-even on my investment? There’s a period of time, that’s reasonable and there’s a period of time, both short and long, that’s unreasonable.
Ryan Goodman:
Here’s the podcast with Rick. Rick, thanks for being on the call. Thanks for being on the podcast. I appreciate you spending the time with us. I know entrepreneurs and guys like you and me are busy and I’ll tell you what. I do appreciate you spending the time with us here at ConnectBooster today.
Rick Murphy:
Thanks a lot. I really appreciate being here. I’m looking forward to it.
Ryan Goodman:
Cool. Let’s get some of the basics out of the way. Tell us about your business or really, where people can find you guys, find more details about your company and services and possibly, even engage you in a discussion.
Rick Murphy:
Shameless self-promotion. Well, thank you. I appreciate that. Our website is growth, cogentmergers.com. We just had to relaunch this website just recently so you can find lots of interesting information up there. Lots of different opportunities to contact somebody in the company through the website so I encourage you to go visit that. We’re coming up on our ninth anniversary.
Rick Murphy:
We’ll be nine years old in February and sometime before the end of this month, we will have closed deal 100.
Ryan Goodman:
Dude, that’s a milestone. That’s incredible.
Rick Murphy:
Yeah, it’s a good one. Thank you.
Ryan Goodman:
Very cool and the site looks great by the way. I was playing around on it and poking around. You’re doing some cool, cool innovations with industry and channel partners that are relevant to everyone listening today as well.
Rick Murphy:
Yeah, I appreciate that. We want to make sure people can … We can help the community connect with each other and be connected to the community and what’s our … Being a buy-side advisor in the space that we also are looking for candidate companies and communicate with candidate companies so the website now has a lot of better information in it relative to potential candidates.
Rick Murphy:
We’re curious about potentially maybe selling the company someday along some more products and services and our team and off the testimonials of people who worked with us before so it should be very helpful for anybody that’s interested in learning a little bit more about us.
Ryan Goodman:
No, that’s great and I recommend it. Go check the site out, guys. Now, to drive into a couple of questions, a big broad one here so how did you get involved in mergers and acquisitions and also, what’s your background in managed services because you guys are focused on this space as well?
Rick Murphy:
Yeah, so we are exclusively focused on the IT services space so all of the transactions we accomplished today have been IT services companies buying and merging with other IT services companies of pick the acronym of your choice, MSSP, MSP, CSP and so on, so on. Now, of course, everything is a service and jumping into service in IoT and what have you.
Rick Murphy:
Everybody in the company comes from the IT services background. Actually, except for myself. I actually come out of a technology background in the internet space and long before that, in the production space. We were using a technology as a network dash in the ’80s, in the ’90s before the internet was the internet.
Rick Murphy:
Using technology to make television and motion pictures. Buying and selling a lot of companies back in the day. Did a lot of that after the turn of the century as weird as that sounds to say out loud. Doing a lot of that in the 2000s there, the 2000s in the screening space so broadband streaming media, the dawn of broadband streaming media.
Rick Murphy:
I was right in the middle of that. The company I founded back in ’99 and did acquisitions for those companies. I really like and understood the … One of my skillsets is being able to work with business owners and help realize the benefit of teaming together and pooling the resources and realizing the growth opportunities around synergies and integration opportunities and so forth.
Rick Murphy:
That’s not something exclusive only to that key space but applying that to the IT services space, I don’t think had been really done. There’s still plenty of brokers on the sell-side out there.
Ryan Goodman:
Right.
Rick Murphy:
Other industries and lots of different spaces and of course, interested in the IT services space and there’s certainly lots of companies out there who want to buy so back about 11 years ago, I decided to actually go to work with what became our first client.
Ryan Goodman:
Okay.
Rick Murphy:
I worked with him here in Atlanta exclusively for about a year and we did two acquisitions in the space. As I was researching those acquisitions, I discovered how interesting the IT services market was and how fragmented it was. There’s so many companies doing this. Each doing it their own way and also doing it in a common way which is a tremendous opportunity for companies who build management teams and talent pools with vertical expertise. All those things that you do when you’re looking to put two companies together.
Ryan Goodman:
Sure. Sure. No, that’s great. Thanks for the info and interesting and I think people are interested in learning about the birth as well as the background. What got you here today? All right. I’m going to shift gears a minute here on you. I’m going to play a scenario. Let’s play out a scenario here together. Imagine I’m an MSP IT service provider and I’m seriously planning to exit my business in the next five years.
Ryan Goodman:
What are the top three things that I need to be focused on? What are those steps that I should be taking?
Rick Murphy:
First thing and I can explain more about this and certainly if you want. Give us a call. I can explain it in graphic and gory detail but you want to start running your company right now if you’re going to sell it tomorrow so you have a track record of running your company successfully when you are ready to sell so just run it like you’re going to sell it today.
Rick Murphy:
It’s a theme and that’s the first thing I’d start doing. There’s lots of things to do in that theme. First and foremost is accounting systems and how you do and book you sales and revenue and so forth like getting good revenue recognition and good accounting practices in place especially early on, well before you’re ready to sell, allow you to be responsive to due diligence requests that would come from any potential suitor.
Ryan Goodman:
Right.
Rick Murphy:
Just from a purely financial reporting perspective, that ties back into all your books and records, not just financial books and records but also customer agreements and vendor agreements and a lot of people say, “I have contacts.” They physically have them but they’re not all signed in where you can find them.
Ryan Goodman:
Sure.
Rick Murphy:
That’s a good thing to have. Even some of the better run companies, you’d be surprised. They’re actually surprised when they discover it. Right? While you’re running a PSA system, maybe Connectwise or what have you and different people do different things with PSAs in their own way. It’s integrated with your accounting systems.
Rick Murphy:
How does the pay, work function flow through that so a lot of times, the agreement might, let’s say, “live in Connectwise” or in an Autotask or pick whatever PSA but it’s not really a signed contract that actually is on record. It’s in SoW or something like that, right?
Rick Murphy:
It’s not necessarily signed, sealed and put away some place so again, a big part of actually selling your company is being able to demonstrate good business acumen, good business practices so regardless of what you’re doing now, perhaps having somebody come in and take a look at that, a third-party to give you a health checkup if you will.
Ryan Goodman:
Sure.
Rick Murphy:
It can be us or anybody that can tell you what you look like now and what you might need to work on.
Ryan Goodman:
That makes a lot of sense so if someone … Again, we’re playing out a scenario. Let’s say this is me. I should be engaging early and obtaining advice on what I need to do to get to market. That makes sense.
Rick Murphy:
Yeah, it’s not … That should be with a peer group. A lot of people are members of various peer groups and those are wonderful things to have. There’s lots of different peer groups out there. Obviously, people would know perhaps about HTG and Vistage Group. There’s lots of interesting peer groups. SLI and so forth, service leadership.
Rick Murphy:
You’re looking at how peer group might be able to help you self-analyze. It’s another good thing to do. Another way to do that is having a third-party look at you. That’s a little more intense, a little more … A consistent reporting because you get together quarterly and so forth as opposed to they might come in and take a one month lookie-loo at your company.
Rick Murphy:
It’s a little bit different commitment. Again, so first thing is start acting like … Run it now like you’re going to sell it now. Start doing that. There’s, again, a lot of pieces to make that happen. The other thing is make a profit.
Ryan Goodman:
Yeah.
Rick Murphy:
I hear a lot of companies that are investing for “growth”, right? There’s two ways to look at that. If you are really truly invested in growth, I would want to hear somebody tell me, “Well, I went out and made the sale and I made the sale. In order to fulfill that sale, I need to either hire or purchase a tool or purchase something to make that sale functional or maybe all of the above.”
Rick Murphy:
That’s investing in your business whereas I’m going to go hire some salespeople. I’m going to go ahead and buy the tool. I’m going to go ahead and make this investment in maybe some data center infrastructure, something like that. That’s actually speculation, right? You’re speculating and that’s the difference is really understanding the difference between investment and speculation in your business and being clear with yourself about that.
Rick Murphy:
Again, a third-party can help you with that because if you’re just spending money hoping the sales will come, whether it’s even just spending on sales activities even, that’s actually speculating as opposed to investing in your business so getting clear about actually investing in your business for growth. Also, being able to make money so that you can actually still make money while you’re investing for growth because a lot of companies that we ran into, well, I’m in growth mode.
Ryan Goodman:
Right. What does that mean?
Rick Murphy:
That means they’re not making any money. Right. That’s what it really means is they’re not making any money. They’re trying to tell me, “We’re not really making a lot of money right now because we’re investing in growth.” Okay. That sounds good-
Ryan Goodman:
It’s a cute way to package it up.
Rick Murphy:
It’s a nice way to package it in your mind but what you should be able to do is hey, look, I make a solid free cash flow number which we can talk more about differences between even and free cash flow but even for those that are more familiar with that term, also thought making money so the bottom line, net profit, net cash.
Ryan Goodman:
Yeah.
Rick Murphy:
Your business should make net cash and still be able to invest in growth. You shouldn’t do one or the other. You should be doing both all the time.
Ryan Goodman:
Right. I like that approach. One of the things in our pre-call that we had talked about was multiple, multiple, multiple. Multiple gets thrown out all the time and oftentimes, that’s a function of looking at a sale in the rearview mirror. It’s easy to create a multiple based on what’s happened in the past and I’d love to have you talk to our listeners about what multiple means to you and the way that you guys look at businesses on the both buy and sell side as a value play versus just a flat out multiple based on revenue.
Rick Murphy:
Every first call I have with anybody, just lots of conversation. People focus on hey, where are the multiples at? Rick, what do you think about the market? What’s the multiple? Yeah, if I told you I was making this much money, what multiple could I expect from my business? It’s a tremendously loaded question and it’s based on all kinds of stuff that’s such a moving target.
Rick Murphy:
That I try my best to not answer the question directly. Not to be evasive but to really explain what a buyer is looking for from a buyer’s perspective. Put yourself in a buyer’s shoes. I often tell even candidate companies, actually almost always tell even a candidate company, just think like a buyer, right? If you’re going to go buy a company, what matters most to you is return on your cash.
Ryan Goodman:
Right.
Rick Murphy:
If I spend this money on this business, if we’re getting structure for it in terms of how I pay for the business, but even if you write a check for the business, day one, you own the business the next day, the most important thing you’re concerned about is return on that cash. When am I going to break-even on my investment?
Ryan Goodman:
Right.
Rick Murphy:
There’s a previous time, that’s reasonable and there’s a previous time, both short and long, that’s unreasonable. It would be unreasonable for anybody. I don’t know if you would but if I said, “Hey, give me a million dollars,” and 10 years from now, you have broken even on your million dollars and you’re making you first dollar profit.
Rick Murphy:
Is that something you would do over, let’s say, hey, give me a million dollars and in three years, you’re going to break even and you’re going to start seeing profit. Which one of those is better for the buyer?
Ryan Goodman:
I can tell you.
Rick Murphy:
Right. What would you do?
Ryan Goodman:
Right. I want a turn faster then.
Rick Murphy:
Yeah. Would you wait 10 years to get your money back?
Ryan Goodman:
No, because there’s lots of places to do that, right?
Rick Murphy:
That’s right, so you hear a lot of people talking about 10 times multiples and nine times multiples and five times multiples. Let’s just go to 10 times multiple. What you’re really saying is based on your opinion of what a 10 times multiple is that those people are prepared to wait 10 years to get their money back and that’s just not true.
Rick Murphy:
What is true, right? It’s just not true. What is true is they saw something in your business. If you in fact got 10 times multiple for your business or somebody offer you 10 times multiple on your trailing … Free cash flow. Let’s just go there for a second.
Ryan Goodman:
Sure.
Rick Murphy:
Not forward. Trailing because that’s something we know about, right? We know what happened in the past so if you said, “Okay, I got 10 times my trailing. Free cash flow for my business. I just got the bill yesterday and they gave me a check.” There’s something that you did wonderfully or that you don’t know about that they’re going to do with your business to make sure that they can get paid back in a shorter timeframe so they’re either going to be cutting heads.
Rick Murphy:
They’re going to be consolidating facilities. Somebody believes in an interesting hockey stick sales ramp maybe. Maybe it’s believable. Maybe it’s not. It could be constructed out of unobtanium perhaps.
Ryan Goodman:
Sure, sure.
Rick Murphy:
For some reason though, that business saw enough in that business whether it’s true or not to make them write that check for that 10 times multiple because there’s no way they’re going to wait 10 years without getting their money back. Most buyers, again, if you’re a buyer, you’re working on trying to get a recoupment somewhere between 48 and 60 months.
Ryan Goodman:
Sure.
Rick Murphy:
It might go a little longer than that. If you do any shorter than that, you’re looking for bargains and bargains might be out there. There’s fixer-uppers out there and things like that that aren’t worth as much money as a more refined business that’s got a track record of making good free cash flow returns. It really comes down to … Multiple is this jargon that’s been invented years ago.
Rick Murphy:
I didn’t invent it. That for people to talk with each other in shorthand can have a thumbnail discussion about generalities that has somehow morphed into this sacrosanct list of what is actually true based on like an index. There’s no such thing. There’s no multiple index.
Ryan Goodman:
Right.
Rick Murphy:
Right? That’s one way to look at that. The truth is from our buyers’ experience and we’ve represented lots and lots of clients over the years and still represent a lot of them today. Private equity investors, professional investors, large corporations, small ones, really small ones. Everybody pretty much thinks the same way.
Rick Murphy:
By the way, it’s not invented just because of the IT space. It’s a universal truth throughout the world and anybody, it’s over blood and soul just about anything that’s trying to create value, is you got to break-even three to six years.
Ryan Goodman:
Right. Yeah. No.
Rick Murphy:
Right? You’re just not going to invest your money anywhere else. Why would you do it? Otherwise, it’s stupid.
Ryan Goodman:
I think the point is really concise in the fact that guys, it’s not about a multiple based on where you’re sitting today and taking a look at your overall revenue. There is a whole value proposition.
Rick Murphy:
Yeah.
Ryan Goodman:
That is baked into making this happen.
Rick Murphy:
Yeah, so the amount of money that your company makes is one thing. By the way, that’s called free cash flow. That is a GAAP turn. Free cash flow, free cash flow is a known, generally accepted accounting principle. GAAP, according to GAAP. When you hear according to GAAP, right? EBITDA, unbeknownst to many people, is not a GAAP principle. Those are either CPAs in the audience. You’re going to stand up and, yay.
Ryan Goodman:
Just drop the tears bomb. Just drop the tear bomb.
Rick Murphy:
That’s right. You can look it up. You can look it up. Even is not GAAP. It’s a made up, again, jargon. It’s actually jargon that was made up eons ago to communicate a proxy for free cash flow especially in the absence of debt and anything on the balance sheet that might be a cash flow related item because many business owners don’t run their business on a cash flow sheet which is the other second thing you should start doing by the way.
Ryan Goodman:
Okay.
Rick Murphy:
If you want to run a good company is you should be using a cash flow sheet. Not your P&L. Paying attention to your balance sheet is a good idea too. Paying attention to your P&L is important but it’s cash flow. Creating free cash flow is the thing you can multiply, right?
Ryan Goodman:
Sure, yeah.
Rick Murphy:
Right, so you got something. A multiple on a company that doesn’t make any money is still none.
Ryan Goodman:
Right, yeah, yeah. Yeah.
Rick Murphy:
Your company is still valuable, right? That’s another example of how multiple, even if it just doesn’t work.
Ryan Goodman:
Right, right, right.
Rick Murphy:
There’s still value in that company, right? How you unlock that value is what we like to call opportunity so we have a couple things that we … You’ll see our website. We talk about the Opportunity-Delta. We talk about a theory of opportunity first and money last when you try to do a deal because when you’re looking at your transaction, why should I do this should be the first question you talk about.
Ryan Goodman:
Right.
Rick Murphy:
Why? Why do we want to do this? What makes our two businesses better together? Why should we work together? Most people start with the money. My business is this big. I have an EBITDA on this, right? Go ahead.
Ryan Goodman:
No. I want to double in the next year. Well, what does that mean? Double in what? Double in cash flow, double in staff, double in cost like what do you want to double?
Rick Murphy:
Exactly. A lot of people are focused on employees. They’re focused on top line. We call that top line disease because you’re infected usually with a staff infection so you got a lot of staff and you’re busy worried about your top line when you should be worried about your bottom line and how much profits you’re making and paying attention to your cash flow on a daily basis so that you’re making money.
Rick Murphy:
You can widely actually invest instead of speculate or speculate if you wish to and hopefully, that will pan out as you run your business and grow your business, right? Again, the peer groups are really good help and people do that. We can certainly help people do that too in a different way. We’re not a peer group. We don’t run peer groups.
Ryan Goodman:
Right.
Rick Murphy:
We highly recommend the peer groups by the way. Mr. Dipple and the rest of the other peer groups that do a great job, but when it comes to understanding the value of your company, you can’t just multiply. You put a factor against revenue for example.
Ryan Goodman:
Right.
Rick Murphy:
A really good way to think about so that’s along the line of what we were just talking about here, right? You got a million-dollar free cash flow company. Let’s call it a million dollar EBITDA coming because they have no debt.
Ryan Goodman:
Sure.
Rick Murphy:
They do 60% gross margin on their sales and let’s say all things are even. In terms of cost, you got another million-dollar company that is doing 30% gross margin.
Ryan Goodman:
Right.
Rick Murphy:
We call her SG&A being equal.
Ryan Goodman:
Right.
Rick Murphy:
Which one’s more valuable?
Ryan Goodman:
Absolutely, yeah. You’re-
Rick Murphy:
Right, so the one that’s making more money, gross margin is more valuable than the one that’s not so if you just said, “Hey, a million dollars.” Let’s say it’s all MRR, right? Let’s say every nickel of their revenue is MRR.
Ryan Goodman:
You can’t give them the same multiple.
Rick Murphy:
Yeah. Exactly.
Ryan Goodman:
The multiple is a function of what they sowed for, not what’s going into the value proposition of the body.
Rick Murphy:
Right. You can’t assume that this MRR because it’s MRR, has some factor value. It’s how much money does it create? Are you doing it wisely? That’s just one instance. An important item in terms of running your business is if you’re making money, you’re making money so you don’t have to sell your business. You’re doing well. You and your partners or your business partners and your staff, you’re doing well as a company.
Rick Murphy:
It means that you can be very thoughtful when it comes the time to sell the business. You’re not under the gun. There’s no urgency to sell. It means you can be a more discerning seller when it comes time to do that. It puts money in the pocket too.
Ryan Goodman:
Yeah, that makes a lot of sense.
Ryan Goodman:
Hey guys, Ryan Goodman here. President at ConnectBooster and your host for this fine podcast. We want to take a quick break from our episode and thank you for listening. We wouldn’t do this if it weren’t for you so thank you for sticking with us on this adventure. We also want to thank Rick for joining us on today’s episode. You can find more about Rick and Cogent at cogentgrowthpartners.com. Rick has given us a lot of great information about mergers and acquisitions that you can’t get anywhere else. There’s a lot more coming after this break. If you want to learn more about Cogent and their services, give them a call. Send an email. Heck, through a carrier pigeon if you have to. They want to help you out.
Before we get back to the episode, we want to let you know all the ways you can find us online, starting with connectbooster.com/podcast. That’s where all our new episodes go up first so if you want to listen right away, connectbooster.com/podcast. All of our episodes are available on iTunes, Spotify, and Google as well. So find us on your favorite podcast platform and they’ll let you know when new episodes are ready to listen to.
Now, lastly, if you want to connect with us or be a guest on the podcast, make sure to email us at podcast@connectbooster.com or send us a message on Facebook, Twitter and we’ll point you in the right direction. Thanks again for listening to the Confessions of an IT Business Owner. We’ll get back to the podcast and talk to you soon.
Ryan Goodman:
This is good stuff. I’ve skipped around my little script but there’s this is flowing really good so this is … It’s real. This is the stuff that-
Rick Murphy:
We’re in the trenches, partner?
Ryan Goodman:
This is the real. This isn’t like I read some report on whatever blog and I’m going to ramp up in 2019 to add 30%. 30% of what? What does that mean? Did you just add 30% more revenue and you lost money? You’re profitable in 20? These are the things that people are surprised by, when it comes down to it, and they’re not giving themselves enough time to figure it out, right?
Ryan Goodman:
You got to be thinking about this now and the means to an end. Everybody’s going to exit their business one day, right? Whether they die or on an exit or they lose their business. Not all these scenarios are pretty so we all want to have-
Rick Murphy:
Time is up. There’s things that happen. People get sick. People get pissed off with each other. People get divorced and all of the above, I suppose and also, you get bored. I’m done. I’ve been doing this for 25 years or hey, I’m 55 years old or I’m 60 years old or 65 years old and what’s going to happen next in … A lot of business owners have an overinflated sense of what their company is worth because the interweb says so.
Rick Murphy:
The old adage, again, I didn’t invent this. It’s a hacking phrase and I’m trying not to use it too often, but the idea that your business is worth what somebody will pay for it is the truth. It’s a universal truth. Finding the right company to be a suitor is an effort. That’s one of the things we specialize in. Obviously, it’s trying to put suitors with candidates and help them all understand why they should do it and assume that all works out properly.
Rick Murphy:
We can usually get the money right as long as people can be reasonable on both sides which is my personal favorite word, reasonable.
Ryan Goodman:
Right.
Rick Murphy:
It’s when people are unreasonable on one side or the other that things don’t happen. Unreasonable is my God, I want 20 times my forward revenue for my company is unreasonable and hey, I want to buy this company, get my payback in two years is unreasonable.
Ryan Goodman:
Right.
Rick Murphy:
Yeah. Yeah, we try to hit it on the screws as they say in golf. They used to say it in golf anyway. No screws anymore, right? We try to balance both sides to be reasonable. We try to act as intermediaries as much as possible. It’s really what we do for a living and helping our buyers understand what the value is. I’m paying a reasonable price for the business to get it done.
Rick Murphy:
They can benefit from the opportunity and oftentimes, the selling is actually … In participating, it’s still going to be part of the company. A new role in the company. There’s the third thing if you want to bring the third thing around is argue and make yourself employable or make yourself replaceable.
Ryan Goodman:
Sure.
Rick Murphy:
Right? Because in your own business, if you’re irreplaceable, how do I buy it? You have to come along and then you might … Right. You might not be employable. I will admit. I am not employable. I like having my own business. I do. Many entrepreneurs like having their own business and there’s a lot of things when we look at this.
Rick Murphy:
This is one of the biggest issues we have that’s almost a universal issue especially if the business owner is not ready to retire tomorrow which is most often the truth actually is, golly gee whiz, I got to come to work for you tomorrow. I haven’t done that in 25 years and I haven’t had a resume in … I can’t even think of how many years I haven’t had a resume personally. They haven’t either. Yeah, do you have a resume? I don’t know.
Ryan Goodman:
I’m just thinking about that. I’m like if it’s you or me sitting down self-evaluating or if it’s anyone listening, how many of us would be our own worst nightmare?
Rick Murphy:
Of course, right? Then perhaps some of the business partners are probably the same way and then they all have roles or responsibilities in their company that they do well at or think they do well at, that’s sometimes the truth too. How’s that fit in with the suitor’s company and vice versa? Do the corporate cultures fit together?
Rick Murphy:
Do the job roles and responsibilities fit together? Do you sell the same way or do you augment or help each other sell better way which can work too? Our logo for those that have seen our logo or if you put our logo up, it means one plus one equals four. It’s semaphore. Right? The idea there is we do a transaction and you got the color code.
Rick Murphy:
There’s the Copper Core company with a green go deal equals a pot of gold if you stare at the logo long enough. The method there though is you want the Y to add up to a whole bunch more than just some of the parts, right? Doing a good integration, a good consolidation, assimilation. There’s lots of different words you can use which is we’re putting these companies together.
Rick Murphy:
It takes a little time, a little bit of effort and you want to learn how to be good at it. That’s one thing that speaks out with our buyers and our clients is make sure they’re going to be good suitors and good buyers and that they’re going to be successful at it and they can do it time and again. Most of our clients are repeat buyers, serial buyers or we turn them into one. We help them become one.
Ryan Goodman:
Right.
Rick Murphy:
Selfish and altruistic at the same time and they all know that.
Ryan Goodman:
Yeah, it serves everyone’s interest in that case, right?
Rick Murphy:
It does. It does. Then what happens is you got the ability then to … When you think about that is again, running like you’re going to sell, think like a buyer. All of those things should be in your head as you’re thinking about moving forward someday selling. I’m going to sell someday. You never know when somebody’s going to call like us. We say, “Hey, we got a suitor that would like to buy your company tomorrow or soon.”
Ryan Goodman:
Right.
Rick Murphy:
You’re like, “Geez, I’m not ready.” We hear that a lot actually. Well, we hear all kinds of but coming back to the employment thing. Part of the I’m not ready, they’re going, “Geez, I’m going to need a job after this. What am I going to do?” We had a transaction recently where I’m pretty sure the wife looked at the husband right in the eyes. Look, buddy, you’re not employable. You can’t do this.
Ryan Goodman:
You’re not staying home.
Rick Murphy:
That happens a lot. You’re not staying home. That’s right, and you can’t just go up like off every day, so just look at yourself in the mirror and say, “Okay. I want to sell so what am I going to do when I sell? What else am I going to do after I sell?” You need to think about that. Don’t think you’re going to go play golf all day, that’s not true. What you are going to do most likely is wait out your … You’re going to wait out your noncompete. You’re going to go do it again. That’s usually what happens by the way.
Ryan Goodman:
Right. Entrepreneurs are looking for purpose no matter what. It’s hard to turn that off and-
Rick Murphy:
Yeah, you’re going to do something. You’re going to be self or you might find out that joining a company is a good thing. Again, a lot of times, the business owners are terrified. I’m going to have to punch a clock. I can take my kid to the doctors today if I need to and I’m just going to ask anybody. Again, like senior executive level management, when I came in, this is purchased.
Rick Murphy:
Usually, they’re going to try to turn the X owner into some sort of a salary man type, punch the clock kind of person. Again, you’re on your own recognizance, and yeah, you might actually be given more responsibility than when you sold or maybe less which can be a lot of fun for people which is another reason people actually do like to sometimes join another team is they can do a little less than they’re used to.
Ryan Goodman:
Sure.
Rick Murphy:
Being able to know what you’re going to do next, being able to think about that. Can I be employed by another company? How would that work? Those are the things that are going to come up. In the romance stage which we like to ensure dating process as opposed to a property purchasing process.
Ryan Goodman:
Sure.
Rick Murphy:
It’s not a war. It’s not supposed to be a war. During the dating process, hey, what am I going to do every day for you, guys? Does that fit? Why? Why are we doing this, right? It always comes back to why. That’s a big part of that.
Ryan Goodman:
A lot of this talk about the principal owner, the person who’s selling, rolling up into the new entity. It actually really leads me to another question that I think a lot of us are going to be interested in hearing your take on. Employees, employees inside of the business and you as an owner, preparing to sell. I think we kicked this off as you advising me if I’m going to sell my MSP in five years.
Ryan Goodman:
What are the things I need to do? From an employee standpoint, the team that I built, when do I involve my staff in this process? Do I involve key players? Do I talk about this broadly? Is there a specific time like how do I deal with my team inside of this process?
Rick Murphy:
That’s a super good question. There’s a lot of different answers to that, okay? Again, I try to be the truth teller here so in terms of running your business again so that you can sell it when it comes the time to sell it, whether it’s now or later, you start doing it now. It’s having good employment agreements in place, good noncompete, non-solicited agreements in place.
Rick Murphy:
It’s really not about noncompete really. We’re just making sure that you’re not going to …There’s really a non-solicited agreement with a tiny bit of noncompete in it. That’s what we believe in anyway. You should be able to go work wherever you want to go work. Again, but having an employee under proper paperwork, a spirit employee with good job description where you have a really good idea what that employee does every day.
Rick Murphy:
Whether they do a lot of different things or just a few things, making sure that’s well-documented so that you’re doing your regular employee reviews, seller reviews, you got that all documented. Then, there’s a history of that employee that you can tell to somebody else later on. You walk through all of your employees and sit down with somebody tomorrow again.
Rick Murphy:
Say, “Hey, Bob does this. He does this really well. Here’s the pros and cons with Bob. We have him do it now. We like Bob a lot and we think he’s a real keeper and here’s how his role would fit with you,” so you can actually then use that information to discuss why we’re doing this and how he fits. The new side guys.
Rick Murphy:
Then, part of that in terms of, must be the core, you’ll have an idea of where you are with the places you can communicate that information to a potential buyer. Typically, to come back to other party in question. Typically, only the top three people of any potential seller should actually know that you’re actually trying to sell.
Ryan Goodman:
Okay.
Rick Murphy:
The main reason being is that it’s impossible to share with everybody on the team who the suitor is and why this is a good idea because you haven’t fully developed the idea yet. Right? It’s not a fully baked idea. I’m not completely sure I’m ready to sell yet until potentially on the other side of a letter of intent or an indication of interest.
Rick Murphy:
Then it’s not a slam dunk that you’re actually going to get the deal done although we have a high batting average post-LOI in terms of Cogent and our ability to get deals done but it’s not fair to complete so until the deal is closed, nothing has happened. If you spin up all employees or a big chunk of the employees, they’re just going to worry.
Rick Murphy:
They’re not going to be able to result and they’re not going to be able to understand why and you’re not going to have time. Mostly because you’re not going to have time to explain it to him and they won’t have met the new guys. You got to trust that you have a good relationship with your employees where they trust you.
Rick Murphy:
That you’re doing the right thing on their behalf. We focus tremendously. That’s a big, huge part of getting a deal done is making sure all the employees are going to make the trip and be happy and well-fed and properly insured. No GAAPs in their benefits and so forth and so on. What you see on TV and all the movies you see, while that is done on some level and really big corporate deals.
Rick Murphy:
Deals like this, that’s not the drill. I couldn’t possibly service all of the new customers who are buying with our existing team. It’s not possible. This is the norm. That’s the norm, right? Again, explaining that to a staff early on, they’re not going to … They’re going to put their resume out is what they’re going to do. They’re going to be worried.
Ryan Goodman:
You have unintended consequences by trying to foster that.
Rick Murphy:
That’s right.
Ryan Goodman:
Yeah. That makes sense.
Rick Murphy:
If in fact you have fostered a wonderful relationship with your employees and they know you’re going to look out for them and you know that about yourself as an owner, we are going to do our best to make sure that everybody’s got a home, that this is a … That’s the merger part, right? It’s the merging of the teams.
Rick Murphy:
It’s the merging of the customer base. It’s the merging of the systems. All of those things are the merger part so the acquisition part is really around the money and who’s buying who. The merger part is how you do it after that. Everybody that we work with, most people I know that do this for a living, they care deeply about making sure that that works properly.
Rick Murphy:
That’s really, the business owners do and that’s one of the very first things the business owner is talking about so for those of you that are employees, that aren’t business owners listening to us, you shouldn’t sweat a deal. If you’re good at what you do and you like what you’re doing, you’re going to have a home at the new company.
Ryan Goodman:
I think that’s really valuable and I think that’s some really good insight baseball for those listening that aren’t principal owners is this isn’t something necessary that you should fear and coming from you Rick and in being involved in a lot of deals in this space, you’re seeing those principles. Their employees are a primary factor, making sure that everything is good there as they’re looking to do a deal which is good for, again, the staff.
Rick Murphy:
Good employees are hard to find.
Ryan Goodman:
Right.
Rick Murphy:
They’re employed so one of the best ways to grow a company by the way is to buy another company that has a bunch of good employees. That’s how it really works. That’s the truth.
Ryan Goodman:
That’s great. I love that. I’m going to change it up on you again here a little bit. What is your-
Rick Murphy:
My bat out.
Ryan Goodman:
Yeah, sure. Are you ready for this?
Rick Murphy:
I was like, I got a bat right here. I’m holding my bat as we speak.
Ryan Goodman:
I really like you. I hope I don’t get … I don’t know if I get the wrong end of that one. I don’t owe you money, do I?
Rick Murphy:
Not to the best of my knowledge.
Ryan Goodman:
Okay, good. We’re clear. We’re clear, my man. What is your opinion on the current buying and selling market? Just in general. Just broad, 100,000 ft. view.
Rick Murphy:
The current selling market is pretty white-hot.
Ryan Goodman:
Okay.
Rick Murphy:
There are way more buyers than there are sellers which is what a market is all about. It’s caused a lot of interesting things to happen in the market so one of the symptoms of a white-hot market is a lot of what’s called retrading especially on auction deals where there’s brokers involved. We’re not a broker. We don’t do any sell-side work so we don’t do … We don’t run auctions.
Rick Murphy:
We don’t do that work. There’s plenty of brokers out there that do that and some do it really well but regardless of how well they do it, when you’re running an auction process, you’re trying to gin up interests in buyers and those buyers … Now, it’s a practice, a common practice. Not everybody does it of hey, this is the information you gave me.
Rick Murphy:
Thanks for the CIM, a confidential information memorandum is what a CIM is. Brokers build CIMs on their companies so they can put that material out to potential buyers.
Ryan Goodman:
Sure.
Rick Murphy:
Buyers look at teasers. Buyers look at these CIMs and often, they’re asked to put forward an indication of interest so they can whittle down interested parties. Obviously, an indication of interest, what they’re looking for is who’s paying the most money with the best structure.
Rick Murphy:
Because all I’ve seen is these materials you’ve given me, I haven’t been able to do any other due diligence. That’s universal of any buyer that would be looking at that stuff. Some buyers will just go ahead and say, “Yup, I’ll pay you whatever you want. Here, boom,” so that they could do what’s called a lock-up which is in any IOI or LOI.
Rick Murphy:
You just dance with me and then they finally get a look, a chance to look at the actual due diligence behind the information memorandum, the teasers. It may or may not tell the same story as the teaser does or the information memorandum does and often doesn’t. Sometimes, that material is polished.
Ryan Goodman:
Right.
Rick Murphy:
Right, and so then, there’s a game that’s being played now where and especially in auction deals and sometimes, when a seller is trying auctioning themselves, they’re not really running a process that is what is called running a process with a broker but they might be doing a little bit of on their own and talking to different buyers on their own.
Rick Murphy:
One of them could be talking to us for example and while they’re talking to other people which is fine. You can date other people while you’re dating us. At some point, you want to be serious, right? How do I know you’re taking me seriously? It’s really that letter of intent and the retaining game, we get you to sign and lock-up on an indication of interest or a letter of intent.
Rick Murphy:
Then once we dig in, sometimes, the members aren’t exactly as they’re advertised and then I’m going to have to change the prize. I’m going to have to change the structure. It’s not going to be the same as what we originally promised you. Then sometimes, those deals get done after a lot of hard fought negotiation. The only time I used the word fight ever since with regard to M&A.
Ryan Goodman:
Right.
Rick Murphy:
Then there’s this war that happens and then sometimes, there’s attrition in that war and sometimes, those deals get done so that’s a symptom of a white-hot market. The other symptom is my companies work too much. I’m a potential seller and I’m convinced that my companies work way more than it’s actually worth based on the reality of what numbers say and what the actual opportunity is.
Ryan Goodman:
Right.
Rick Murphy:
We’re going to try to find every square inch opportunity to try to make a transaction happen if we can but again, there’s reasonableness and reality, two R words that are super important. You got to be reasonable and you got to be realist on what you really do here. In the white-hot market, what a potential seller often does, they’re like, “Well, I’m doing well. I’m doing really well so I’m just going to like wait.
Rick Murphy:
“I’m going to keep earning money, keep growing my company and then someone can buy me later.” While that may happen and it’s certainly possible that could work for you, who’s to say it’s going to always be a white-hot market? There’s a lot of noise in that right now in the financial markets, going back and forth and up and down.
Rick Murphy:
Our political climate here in the United States is a little whacky. I’m not going to be political but it’s just all over the place. Polarize might be a really good word.
Ryan Goodman:
That is a good word.
Rick Murphy:
You look at the bond markets right now. There’s a chance of maybe an inversion happening and while every recession, every … Inversion doesn’t portend a recession. It is a fact by the way so the facts that I’ve read on the interweb and other lines that every recession fact that proceeded by an inversion at some point. Like invest an interesting factoid.
Ryan Goodman:
Yeah, absolutely.
Rick Murphy:
You never know where the world is going to be from day-to-day and when you have an opportunity in front of you, you need to seriously consider whether it’s a great time to put some money in your pocket or not.
Ryan Goodman:
Right.
Rick Murphy:
Is it a worthwhile deal? You need to be rationale. It’s another great word, another great R word, and so that you can decide. What is reasonable and not reasonable as you look through a potential opportunity?
Ryan Goodman:
You really cued out something that I had written down here that I was curious about but I think you actually explained it while we’re … The question was what changes you expect in the S&P marker of the next two to five years and I think what you’ve clearly stated is one thing we can guarantee on is things just don’t always stay the same.
Ryan Goodman:
At some point, it will change and get your house in order now because the best practices that you’ve talked about are not just best practices for selling. They are best practices to operate your MSP, right? They’re just best practices, right?
Rick Murphy:
Make money and put money in your pocket, absolutely so you have some money. There’s nothing wrong with running for-profit businesses. In some businesses we look at and you would swear, they’re philanthropies.
Ryan Goodman:
Right.
Rick Murphy:
It’s like they’re running a for-profit business as a philanthropy and that’s not really a great idea. You’re employing a lot of people and you’re generating a bunch of revenue and you’re making a bunch of other people a lot of money. I’m not sure if the owners are able to pay yourselves well too. Why the heck are you doing that? For what it’s worth.
Ryan Goodman:
I think it’s a good gut check. It’s a good gut check.
Rick Murphy:
It is so sanity around being able to realistically take an introspective look, get your own business. We do have a product for that. If somebody wants to go on our website, you look for a Market Value Analysis project. There’s some shameless self-promotion there.
Ryan Goodman:
Hey. That’s great. Hey. No, it’s valuable though. This is valuable. That’s what we’re talking about. This is valuable.
Rick Murphy:
The Market Value Analysis is a way to see what you look like in the eyes of a buyer, a generic buyer or what you look like to them. Then using that as a template forward to understand the reality of where the market is right now and your business right now. You pull out about a lot of different things you can learn about your own business.
Rick Murphy:
What you can do differently, better or stop doing or hey, you were doing it great. We just need to do more of it. There’s lots of different ways that can go and see, doing the expensive product we’ve developed around our transaction analysis modeling that we do for our clients. It’s basically the same product and it allows someone interested, where am I right now?
Rick Murphy:
Where am I going to be? It’s something we can do. You can find it on our website and link in with us. Whether you did with us or not, being able to have your CPA look at stuff is an interesting thing to do but they don’t really know the buyer market and somebody help someone touch that because when it comes down to financials, I just don’t want to go backwards.
Rick Murphy:
The way you do your books and records out of financial books and records, right? The way you do cost allocation against your revenue is really important and everybody does it a little bit different way so just … The CPA took me on that tangent because you’re talking about working with the CPA, with a public accountant, their accounting practices or accounting practices, it’s good to have good revenue recognition, good counting practice, but putting your charter accounts right so that your cost to goods sold.
Rick Murphy:
The way you treat labor as cost to goods sold or not is different with almost everybody, right? Everybody does it a little bit differently. Again, if you’re part of a peer group, a likelihood is you’re going to do it better. I think the peer groups teach a really good cost recognition but if you’re not part of a peer group, you need to figure out how to work with your accounting company to make sure or just internally with your own accountancy people that work for you directly to properly allocate labor cost against revenue.
Rick Murphy:
It shows up as a cog or a portion of it shows up as a cost to goods sold. It’s not just all showering.
Ryan Goodman:
Sure.
Rick Murphy:
Any good buyer is going to want to line that up so you start doing that now. As a potential seller someday, you’re going to have good history practices behind you and it’s going to help you later on.
Ryan Goodman:
That makes a lot of sense. Rick, this was awesome. This is really good. I think-
Rick Murphy:
I could go on for hours.
Ryan Goodman:
I know and I think that that’s the thing like I love it and I have personally just enjoyed it because it was excellent knowledge for me and I do. I just appreciate you spending the time and sending out all this value to the community and I guess what this sums it up to is what key message would you like to drive home with those that are going to listen to this podcast here?
Rick Murphy:
Be represented whether it’s with us or somebody else.
Ryan Goodman:
Right.
Rick Murphy:
When you introduce thing and get a third-party as soon as you can. Not really just from how do you sell stuff and how do you productize and all the other things. There’s lots of different, all the different kinds of advice we can bring you. Just somebody to give you a measuring sticks that you can use now to figure out where you want to be later. You just can’t do it all by yourself
Ryan Goodman:
Well, and bringing on that experienced advisor as well, right? I think there’s a difference between someone that’s done one deal and done a 100 so I appreciate you spending your time, doing 100 deals and sharing with all of us the wealth of knowledge that you’ve accumulated through, like you said, being in the trenches now.
Rick Murphy:
Right. All right. This has been a pleasure. I appreciate you having me and it’s awesome. We can do it any time you want.

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