Why can two similar companies in the same industry sell for wildly different amounts? Carlo Minassian studied recent sales in technology industry and discovered the secret to securing a much higher valuation.
When it came time to sell his security services company Minassian sold it for seven times revenue, not two to three times EBITDA like his rivals. He is building a security software company now and following the same methodology.
In this preview of his session at the Accounting Business Expo 2018 (click here to register for free), Minassian shares some of the secrets to getting the highest sale price.
D1: How do you sell your company for 5-10x of sales?
Carlo Minassian: Document your IP and from day 1 start building IP in the company. I can share all the things that made up the IP for my first business, which includes assets for funding, culture, system, product, market, brand, and IP. You break this down into subcategories and you document and work on it from day 1.
When you come to sell your company, during the due diligence and negotiation you put these assets on the table and communicate to the buyer this is what you’re buying. To replicate this will take you so many years and you will never have the IP either.
D1: So how did that go for your first company?
Minassian: When I sold Earthwave, every time the price would go to the buyer’s board for approval an accountant there would say, “There’s something wrong with this spreadsheet, these multiples are out of whack”.
And it was through convincing them and proving to them that we had built these key company assets. They realised it was not just another IT services company, they were buying something that had a lot more going for it.
Methodologies, trademark, IP, systems, concepts, brand – all of these things they didn’t have in their current business. It was through this process that you can increase your company’s valuation between five to 10 times.
I started my first company with $30,000 and sold it for tens of millions of dollars. In my talk I’ll also break into how I did it, the assets I built and what they looked like.
D1: How did you discover that IP was the most important thing?
Minassian: Simply through research. I read a lot and learned about what VCs and buyers value and what they expect to see during due diligence. If you’re a first-time seller and you present your company without these things in place then you’re missing out on a great opportunity.
D1: What do they want to see?
Minassian: They want to see an information pack. I started to reverse engineer that and turned it into key company assets. It’s basically the identification of those things. Some of that takes time – defence certification, PCI certification. But if you know they will increase your company’s valuation by multiples you can start today and work towards obtaining those in the course of a company’s life.
So for me it was through research and watching other companies get bought and sold. I followed the transactions that happened in my industry (technology) and I look at the underpinnings – why they paid and how much. Sometimes there was a significant difference for the same type of company, one person pays 10 times less. It was the same with Earthwave. Right now any managed security services provider can sell their company but they will only get two to three times profit, not seven times revenue.
You will realise they don’t have a portal, trademarks, certifications. Their visions and values aren’t documented, they don’t have channels and retailers in place, or systems. A buyer wants to know there is no key man risk, that applies to marketing, sales, admin, and operations. All of these things are missing in most organisations if they don’t consciously go and document and work on building these key company assets.
D1: Where did you start once you built your blueprint?
Minassian: You start by breaking up all the key company assets that you need to build. I consciously and actively worked on it every day. Whether it was me personally or distributing it to my team to document stuff or to third parties.
Some things you can start early but it doesn’t really matter where you start as long as you know where the end result is. And it doesn’t matter in what order you start. You just need to document it and make it work for you.
Like for example our go-to-market strategy. Buyers spend between five to 10 hours doing research about a company before they buy from them. That could be on your website, marketing collateral, googling, watching videos. Now you know that you need to build that five to 10 hours of content for customers to engage you.
One way is to give gifts away that doesn’t cost the company any money in return for leads. You produce once and give away many times – they could be ebooks, white papers, etc. These are assets.
And there’s no point building it and not using it in real life. You put it into your process of finding customers and selling into your marketing process.
There’s another concept called “product for play”. It’s a low-cost method of getting customers where you give them a good experience and then they want to know what else they can buy from you. I show clients what attackers know about them on the deep dark web. I show them some of their passwords that are for sale – credentials attackers use to log into Google Docs or Office 365, including iTunes on your phone and steal from you without the use of malware.
And 95% of people use the same password across these websites. By communicating this risk in a low-cost way to them and for me, this is product for play. Then I can sell you my core services – advanced threat detection and response capability.
D1: What is the difference between delivering services and building IP assets?
Minassian: IP assets form a part of key company assets. It also includes a registered logo, trademarked or copyrighted systems, website, contracts. And your methodology, how you do things. These are your IP assets.
Under key company assets – IP, brand assets, market assets – your position including your unique value proposition and selling proposition, or why people buy from you. The more ways you can get this messaging out there the better, in magazines, features, radio, TV.
Your channels, including your resellers and partners, that’s a market asset. And your marketing database, the data you collect on customers and the industry in general, and their buying patterns.
You may realise that 80 percent of customers in the banking vertical have a bad experience with honeypots (a security technique) and so don’t like deception. You can use this knowledge to position your services to overcome this objection.
D1: Which asset is the most difficult to create?
Minassian: The IP. It is difficult to replicate. The rest you can hire people and document and figure out. But IP assets – if I own the slogan “Be the hunter not the prey”, and it takes off and people associate with it, I own that and no-one else can have that.
I could have some sort of technology that I’ve built, that I’ve copyrighted and trademarked that no-one else can replicate. That is mine forever. Because of this it’s really difficult to replicate.
In LMNTRIX the way we go about delivering a detection and response capability that is unique to LMNTRIX. And that is my IP – I don’t give it away on the website, I only share it with clients.
The underpinning technology is mainly a software stack running on our cloud platform and on our clients premises as sensors – but I never disclose that. Our hunting methodology for finding attackers, we never disclose. I show it to clients in a meeting but we have spent lots and lots of man hours building this and it would be really difficult for someone else to do it.
In Earthwave it was the way we had reverse engineered attack patterns using customers’ device logs to see what an attacker was looking for, and we put that into rules. We had about 700 of them and we had built every one from scratch in a 13-year period.
The buyer wanted access to that IP without investing man hours to build something similar. And a company can try and fail miserably to replicate your IP because of the complexities and expertise required to do it.
D1: How does this concept, of building IP, relate to accounting firms?
Minassian: It’s no different to a professional services security consulting firm. The way they do it is they go thru and document all this – I have coached a few already who are looking at selling. They could say, “I just do penetration testing and risk assessments”. But when you sit down and realise they have so much IP in the company but they just haven’t documented it. And then you help them specialise and find a niche for themselves.
One of the partners that I work with they do very advanced red team and penetration testing. They can charge three to five times more than other red teams or pen testers because they have build that reputation for themselves. The way they do it is unique to them.
From an accounting firm’s point of view you could do the same and specialize in startups or using the Xero platform in a way that really differentiates you in the market. You could add additional services that don’t cost you more to find customers or deliver more value that others cannot replicate. I see this play out consistently in accounting and legal firms now.
One accountant charges $3,500 to register a company and another will also include the trademarks as well as registration for the same price. So they have found a way to deliver more for less.
When I went to market for LMNTRIX I saw a huge difference between accountants. I could get two accounts done for the price of one.
It was the same for lawyers. One company quoted $15,000 to $20,000 to do my trademarks and another charged $7,500. I researched the second company and found that they had streamlined their processes so they could lower their prices and take away business from the big guys.
It was the same with 457 visas at Earthwave. One firm quoted $25,000 to $28,000 and another $2,500. We brought in 16 people using the second firm. If we were doing the $25k model it would be completely unaffordable.
There are ways – in automation, mobile, online – to start thinking out of the box, engage differently and explore aggregation models.
D1: Any other tips for increasing the value of an accounting firm?
Minassian: In any business you really need the founder or the owner to be the champion. To be the face of the company and have a great profile of the company and for himself. So that when I google the company he stands out. His profile is very important.
And the company’s pitch is important. You ask an accountant to differentiate himself – he can’t say I’m just another tax accountant – that’s boring. There’s nothing sticky about that.
They need to productise what they do. Stop selling time. We do company registrations for $750, or audit for two-year-old startups for less than $2k a year, or a monthly subscription fee.
And then they need to put a lot of content online. Write blogs, articles, do research, create white papers, write ebooks about something they are good at or know how to do better. All of that material forms the five to 10 hours of research that customers do on you.
D1: You mentioned go-to-market strategy. How can firms find new clients?
Minassian: They need to establish partnerships. A lot of them don’t know how to do that effectively.
I have found software integrators, telecommunications carriers and individuals who form part of my partnership model. They work for other vendors but they work for LMNTRIX under a referral method. I create another source of income for them – everyone wants to pay off their mortgage faster. And it’s non-competitive to what they’re doing right now. They might be selling single-sign on software and they have a lot of access to chief security officers and security managers, and I give them a healthy commission in return.
This is how I sell my services, instead of hiring sales people. If you look at all my competitors they are raising hundreds of millions of dollars and hiring a really expensive salesforce globally. I do it without any of that. I do that without expensive sales people. I don’t have a single sales person at LMNTRIX.
I didn’t have a sales guy at Earthwave until the tenth year, when I bought on one guy. And I paid him all on commission.
Carlo Minassian is talking in “Why you should only build IP in your business” at 4.30 pm – 5.00 pm on Wed 21 March 2018 at the Accounting Business Expo, Darling Harbour.
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