When Dr. Vijay Jog, a storied Ottawa entrepreneur and chancellor professor emeritus at Carleton University, realized his company, Corporate Renaissance Group (CRG) needed to offer a one-stop cloud-based solutions to its customers to stay competitive, he found himself at a crossroads.
Should he acquire a company to add the expertise he needed, or should he find a company to acquire CRG, a fixture of Ottawa’s business ecosystem for 30 years?
For Jog the choice came down to lifestyle. “Acquiring another company is a young person’s game,” he said. “I have been working long hours for the last 30 years non-stop and it would have meant another three to five years in the business, maybe more.”
While it was a big life change, Jog was committed to making the acquisition financially worthwhile as well as a growth opportunity for his employees, simply because that’s what he’s always done.
Jog learned a few lessons along the way that he wants to share with other entrepreneurs.
Lesson one: People and culture first
In professional services, the biggest asset value lies in the knowledge of its employees and the company culture.
Developing a team-focused culture was always a top priority at CRG and it showed. The median work years of key members of the company was seventeen — an unheard of statistic in this industry.
“At CRG we never laid off anyone due to business conditions,” said Jog. “Our philosophy was that leaders worry about business conditions, not employees.”
Jog says leaders need to give their team room to grow, innovate and focus on creating creative solutions. Laying this strong cultural foundation at CRG was the bedrock of this successful acquisition.
“You need to empower a team that trusts you implicitly so the key people are engaged and there are no surprises,” said Jog. “Nobody should be worried about their job.”
Lesson two: Know what your company is really worth in your market
While exiting a business built over time is never easy for an entrepreneur, removing emotions and understanding the value of the business from the acquirer’s perspective is critical.
“The valuation of a company is not what you think it is,” said Jog. “It’s about why an acquirer may be interested in your company and what they are willing to pay.”
That’s why before starting the exit process, you must know the value of what you are bringing to the table for the acquirer and have reasonable expectations.
In CRG’s case, the value was based on the strength and longevity of CRG’s leadership team, its dominant position in the Ottawa-Gatineau region for Microsoft business applications, its broad and loyal customer base, its recurring revenues from first-party and third-party solutions, its customers, and ongoing profitability that was significantly above industry benchmarks.
Lesson 3: Acquisitions are time consuming and detailed
Acquirers insist on a rigorous due diligence process, for good reason. The information requirements are detailed and delve deep into a company’s history.
Not only will the acquirer want the details on every product, customer and the associated risks, but also:
- employee salaries
- performance reviews
- business planning systems
- governance mechanisms to any and all company trademarks and
- detailed financials and contractual agreements with customers and suppliers
Basically, you need to be ready for at least four to six months of data collection and collation work.
CRG’s leadership team had both accounting & finance as well as consulting & management backgrounds. They had invested heavily in information systems and analytics and were already managing the company based on data.
“If the meaning of luck is preparation meeting opportunity, then we were lucky,” said Jog. “We had all the information at our fingertips.”
Lesson 4: Get professional help where needed
Selling a company is much like selling a house — it’s a significant financial transaction that doesn’t happen every day.
That’s why no one should attempt to sell a company by themselves.
You need to hire professionals including investment bankers, company accountants and an exceptionally good legal firm. Ensuring that the investment banker you choose has done deals in your specific industry is of the utmost importance. The benefits of this investment far outweigh the costs.
This principle holds true when fielding the offers you receive. CRG received inquiries from investment bankers and brokers from Canada and the U.S., as well as companies from the U.K. who wanted to gain a foothold in Canada.
Some offers from private equity firms weren’t worth considering. “It became clear they did not understand — or worse, even cared to understand — our business,” said Jog. “All they wanted to know was the recurring revenues and risk so they could borrow money against our cash flows. We ruled them out almost immediately.”
That’s why ensuring that the investment banker you choose has done deals in your specific industry is of the utmost importance.
Lesson 5: Set up your team for success before, during and after the acquisition
For companies that depend on “people assets,” acquirers will not want to pay cash up front but on earnouts spread over two or three years.
To set your team up for success throughout the acquisition, it’s critical to fully inform the team members and also maintain full operational control during the earnout period.
“I didn’t want anybody to tell us, ‘We’re going to do your finance and accounting and charge you a million dollars,’ and then tell us to start doing business the way they wanted,’” said Jog.
The acquirer also benefits from this structure by ensuring the leadership team stays and is committed to meeting earn out expectations.
It is also critical to ensure that all team members who are in the company at the time of acquisition and at the end of the earnout period remain committed and also share the wealth created due to acquisition.
Jog committed to distributing $2 million to his team, which he did at the end of the earnout period based on longevity and position. “They deserved every penny since they contributed to the company’s success,” said Jog.
Jog is confident that the DNA created by the CRG team will continue to resonate and lead to success in the new world.
Still, he knows it can be difficult for some to move on. “When acquisitions happen, sometimes the owner feels a bit of seller’s remorse. Because that was their baby, right?” he said
Fortunately for Jog, his vision for the future was always clear – it was time to move on and spend some time investing in himself.