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Ed Bryant | The Trends Toward Software & Technology Investments
POSTED 3.2.21 M&A Masters Podcast

On this week’s episode of M&A Masters, we speak with Ed Bryant, President and CEO of Sampford Advisors. Sampford Advisors is the most active investment banking firm in Canada, focusing on the lower middle market tech sector, specifically software M&A. Sampford now has offices here in Austin, Texas, and was recently named by Axial as a member of the Top 20 Thought Leaders in the lower middle market for 2020. 

We chat about the trends toward software investing, as well as:

  • The mindset behind the name of a company
  • Sampford’s laser focus on the middle market to outperform their competitors
  • Understanding the nuances of businesses in the lower middle market
  • Fostering private equity relationships
  • Reps and Warranties and the choices behind insuring transactions
  • And more

Listen now…

MENTIONED IN THIS EPISODE:

Transcript

Patrick Stroth: Hello there. I’m Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters, where we speak with the leading experts in mergers and acquisitions, and we’re all about one thing here, that’s as a clean exit for owners, founders and their investors. Today I’m joined by Ed Bryant, President and CEO of Sampford Advisors. Sampford Advisors is the most active investment banking firm in Canada, focusing on the lower middle market tech sector, specifically software M&A. Sampford also has an office here in Austin, Texas. Ed was recently named by Axial as a member of the top 20 thought leaders in the lower middle market for 2020. So as we get into 2021, who better to have on to talk about M&A in the software space. Ed, thanks for joining me. Thanks for coming along. 

Ed Bryant: Thanks, Patrick. Thanks for having me. I’m excited to talk today.

Patrick: Now, before we get into Sampford Advisors in in the tech, the tech sector, let’s set the table with our audience and give them a little context with you. How did you get to this point in your career?

Ed: Yeah, it’s, it’s involved a few continents and a few countries. So I grew up in the UK and graduated in 1996. So just before the first kind of real tech wave, I went and joined Morgan Stanley investment banking, focus on tech media telecom in the Hong Kong office, and then got poached by Deutsche Bank to move to Singapore. And then Deutsche Bank said you want to go to New York and every investment banker’s dream is working in New York like that, in terms of the deal flow and everything. It’s, it’s the investment banking Mecca, if that if that exists. So I jumped at that chance. 

And I’ve always been kind of, you know, very flexible about where I moved to right, just really open minded about that. I was in New York for a total of about 12 years. Unfortunately, New York is great for investment banking, it’s not so great for family life. And so and balancing young kids and that sort of stuff. And randomly out of the blue in 2012, I got a call from a headhunter asking me if I wanted to be VP of m&a for a technology company, in Ottawa, Canada, of all places, and most people can’t find Ottawa, Canada on a map, even though it’s the capital. And I’d been here once before in the in the summer, and it was a beautiful city, and no one tells you how bad the winter is, and, but we jumped to the chance. 

My wife is American, we don’t have any relations in Canada at all. I did that job for a bit, I got promoted to CFO, it was in the mid market tech sector, and there really wasn’t anyone doing what we do. So that’s when I made the leap five years ago, to say, I’ll start my own firm, and focus on mid market tech.

Patrick: And when you were coming around on there was Sampford. Obviously, you didn’t name it Ed Bryant Advisors at Sampford. And I always like asking this to get a feel for the cultures, you can tell a lot about a company by how it’s named. How did that come about?

Ed: Yes, it’s a good story, I was of the school of thought that I didn’t want it to sound like a one man band, right? Like, if you sounds bigger than you are, then you usually win better business than you. You can especially started off no one knew who we were or anything and, and so I spent a lot of time thinking about the name, all the names that I came up with, you know, you go search for the web address or the URL, and it’s unavailable, right. You can’t get a.com on anything these days. And then I heard a story about an Ottawa, a billionaire entrepreneur here who started nearly 100 companies and he names a lot of his companies after places from his childhood. 

And so I thought that was kind of cool. It kind of had a little bit of personal meaning to it. So I, I was born in a village called Great Sampford in England, like a village of about 50 people I think it is, is a population. And as kind of saying Sampford Advisors that I just I was literally like, had GoDaddy up to look for the URL, and I just had punched in Sampford Advisors. And it was available in a.com. And I’m like, okay, Sampford Advisors it is. So it’s got lots of good personal meaning to me, and everything, but it also, it just sounded right. It sounded like an M&A advisory firm.

Patrick: So well, and also also you’re coming from that, that that real small setting, and then now you’re in focusing on the lower middle market. Let’s talk about that real quick, because it’s very easy for companies that start small and then as they grow their clients and their focus grows with it, and that’s not that’s not the case for you guys. So why the lower middle market? I’ve got my reasons I’d love to hear yours.

Ed: Yeah, I think it’s the most underserved. So I’m sitting there in that technology company, we were doing about 100 million in revenue. And there was one banker that called on me. And, and I thought initially, I was like, you know, maybe it’s just an Ottawa thing, like auto was a, you know, not Toronto. It’s not, you know, a big city. And but there’s a lot of technology companies here. It’s like they, they they nickname it the Silicon Valley of the North, but it’s not, I don’t know whether it’s justified or not, but and so I was just kind of left me kind of saying, like, Is there a gap in the market that matches up with what I do, I’m a, my heart, I’m a deal junkie, I love doing transactions. 

But then also, the other side of the coin was that the middle market is the most active part of the market, there’s like, you know, especially in Canada, right. So there’s not really enough business for the big banks to go around, right. And they’re hyper competitive around all the big mandates and everything. And so we just found that focusing on the middle market, it was less competitive. We didn’t face You know, we faced really no competition in Canada from specialist technology firms. And so we just said, we’re going to do one thing, when and do it really well, we’re going to just focus on technology, we’re just going to focus on m&a and not capital raises or anything like that. 

And we’re just going to focus on the middle market. And that laser focus, you know, five years on is really led us to significantly outperform any of our competitors, just because they don’t specialize like we do. And therefore, they can’t talk about the transactions the way we do, they can’t talk about the buyer universe, the way we do, they just are not well versed in valuation. So that is really paid dividends focusing on the middle market, rather than trying to focus on really large transactions.

Patrick: Yeah, and that’s a real special skill set is dealing with the M&A as opposed to capital raises because M&A I like to think about is the most exciting event in business. Okay, and unlike others would argue that maybe an IPO is a bigger deal or more exciting than than an M&A. But M&A has the potential to be a life changing event. And sometimes, in some cases, generational. And there are a lot of moving parts to it, there are a lot of unique things that happened, there’s a lot of stress, because again, you have this life changing event hanging in the balance. And that just adds to the complexity of the deals. 

And the worry that’s out there and to be an organization focuses just on that transaction element, as opposed to the other services, you can help a client raise to three rounds. And that’s nice. But once you get to the real big, rubber meets the road on those M&A, you need someone that can handle that and knows all the ins and outs. And I think it’s also particularly great that you’ve got these great focus and services and expertise that you find in an institution like Goldman Sachs. But at the low at the lower middle market, targeting Goldman and the large institutions that are fabulous, we need them to handle Apple and Microsoft and all that. But, you know, the lower middle market is underserved where they have huge needs. And it doesn’t take a lot to get those meet needs met. 

And to have somebody that has not only the bandwidth to handle it, the experience and the focus, but the desire. I mean, that’s what we’re trying to do is find organizations and shout out about organizations like Sampford, to say to people in the lower middle market in the middle market, hey, everything you need is right here. And had we not talked about it, they probably never would have heard about it. And unfortunately, they get underserved and overcharged if they just default to the brand names and the institution’s why I’m just so excited to meet more organizations like yours, that are helping these people with literally, again, life changing events.

Ed: And yeah, and and that is especially true in the mid market, right? Because a lot of the entrepreneurs that we help their life savings are tied up in their businesses, so they don’t have you know, they’ve poured everything into their business, not only their capital, but also their all their time. And so even for the middle market, it’s even more life changing, then, you know, for some of the large companies. And then you mentioned a good point, obviously, Goldman Sachs, obviously here in Toronto, like others are really good at M&A, but they can’t make enough money to cover their costs below $150 million deal size. And really, we find ourselves we never go up against the big guys on any of our deals. We’re going up against Deloitte or KPMG or PWC. And they don’t do enough technology deals to understand especially software to understand the market to understand the buyers and how how to think about valuation.

Patrick: So now you mentioned you’ve got the experience, the familiarity, and the focus particularly with that niche in the software, because technology just like healthcare, it’s more than software hardware is all these different, you know, buckets that can be filled. What else besides those three I just mentioned are the things that Sampford Advisors brings to the table?

Ed: Well, so you know, it’s understanding the business model and how to sell it is very important. So just really understanding like, how does the money flow? How does the company make money? Where do they sit in the marketplace, where what’s the competitive landscape look like? That’s really important. Because if you don’t understand that, you can’t sell it, right, you can’t sell it to someone, if you don’t understand what you’re selling. The other thing is that we know, you know, we made a big deal about pushing the private equity relationships. 

So when I was at Deutsche Bank, we used to deal with all the big tier one, you know, private equity guys like Blackstone and Apollo and KKR, and all those guys. But they’re not the kind of folks that are buying businesses of sub $150 million in deal size. So we made a big push very early on seeing that the private equity wave was coming into tech. And so we have 500, plus middle market private equity relationships. And we we foster those very actively, just like we do our prospects, but then also the connectivity that we have. So we’re in Canada, but we have tons of connectivity into the US because myself, I was in the US for 12 years. My other senior guy in Texas has been there for a number of years. 

And so we have strategic relationships as well that we can bring to the table for our clients. So I think that’s kind of you know, sector focus is really important, obviously, when thinking through this sort of stuff, but it’s also important when thinking through who’s the who you matchmaking with? And why, why should they care about buying a company out of Toronto for 20 million bucks or 30 million bucks or whatever it is? Really thinking through that. And that level of expertise is critical.

Patrick: Can you give us an idea of just how much because this is largely a US market here for us. But also I can say you’ve actually bridged Rubicon now, so we’re now International. Thanks to you guys. What percentage of your business deal either deal flow or sellers or buyers, give us a feel on how much work you’re doing Canada versus the US.

Ed: So most of the time, we’re representing Canadians but in honesty with selling them to Americans. So Americans have the most money, like both on the financial side, but also on the strategic side, the depth of the market capital markets is that so I would say last year 80, 90% of our deals were cross border representing a Canadian selling to an American. And at about the same percentage were private equity or private equity backed companies as well. So that’s, especially in the mid market. Like if you look at the overall M&A market, private equity makes up about 35-40% of software M&A deals, but in the mid market is much higher. I think it’s probably 60-70%. Because they do an add on acquisitions. So yeah, that’s that’s been an important kind of trend for us. But then most of our stuff is cross border.

Patrick: Is a lot of that, and we might address this later. But you know, since we’re on the subject right now, is is the idea of the lower middle market the volume of deals out there. Is it because software as an industry is just so fragmented?

Ed: Yes, yeah. So that really is like, either, you know, and there’s been so much more money, early stage money going into technology and software over the last 10-20 years. So and we see every day on the private equity side, private equity firms that have never invested in a software business are calling us and saying, we want to do our first software acquisition, what do you what do you have that you could show us? Because everyone realizes in you know, tech is outperforming and and they need exposure to that that piece. So yeah, it’s a very fragmented market across multiple different sub verticals within within software. And that lends itself to a lot of software companies that have kind of between five and 25 million of revenue, which is kind of our sweet spot.

Patrick: You roll out your your profile of an ideal client for you where were you guys just do fabulous work?

Ed: Yeah, so north of 5 million of revenue for sure. Mostly software, but we do do some telecom and kind of new media like Internet stuff as well. Mostly like bootstrapped companies as well. So not VC backed companies, we find that you know, the VCs are typically trying to roll the dice for for outsized outcome. And that makes it a little bit more difficult to get deals done in the mid market. Right? So, yeah, most of our companies, I would say like, of the 10 deals we did last year, I think most of them if not all of them were bootstrapped companies. And that leads itself to different profiles. 

While that because they’re bootstrapped, they’ve been conservative about their cash flow and everything like that, which is actually an important metric, right. In terms of not, especially with the private equity guys, the private equity guys will pay very good multiples, but they won’t pay very good multiples for software businesses losing a lot of money, they want it to be breakeven or better. Otherwise, they probably don’t look at it. So that’s that’s the typical profile. And then I would say, most of our clients are probably have been at it for five to 10 years or more. And and looking, you know, this is their nest egg and looking to monetize on their nest egg and potentially retire.

Patrick: One of the biggest developments has happened in the M&A space. And we can talk about COVID later, but the ability to remove a real tense element of the M&A negotiations and that’s usually involving the indemnification where, you know, sellers don’t realize until they actually start hammering out the deal terms with the prospective buyer that the owner and founder can be held personally liable to the buyer for a breach of the seller reps. That happened after closing where it’s beyond the owners knowledge, they don’t not aware of it, but it’s yet their money or their home or their future. That’s on the hook. 

And so that gets to be a very sensitive part in negotiations on what’s happened, the big developer in the last 18 months has been the insurance industry has come in, and they have an insurance tool called rep a warranty insurance again, was reserved for the you know, 100 million dollar plus deals, that essentially takes the indemnity indemnification obligation away from the seller transfers it to an insurance company. And therefore if there is a breach and the buyer suffers financially, buyer doesn’t pursue the seller, the buyer comes after the insurance company and collects the check is great, because then the buyer knows they can be made whole, they have a peace of mind and security. 

For the seller, they get a clean exit, they usually have little or no money held back in escrow. And that in depth, indemnification, you know, burden that’s hanging over them. Now, that’s all removed. And it’s a great win win out there. And, you know, the news about the availability of rep and warranty for deals as low as 15 million in transaction value really was interrupted and didn’t get out there because you know, of the pandemic. And usually this information is shared during conferences and stuff. So I’m just curious, from your perspective, you know, good, bad or indifferent. Tell me about any experience that you guys have had with your clients and rep and warranty?

Ed: Yes, it’s very interesting because that that timeframe very much lines up with my experience. So like three or four years ago, none of our clients even considered it. And more recently, like, so we haven’t done a deal with reps and warranties insurance we’ve had, in the last 12 months, we’ve had a couple of clients get quotes for it, to kind of see where it kind of laid out versus the risk and then they made a determination that they didn’t need it. But we’ve actually got our first deal right now that has reps and warranties insurance. And from an M&A banker;s perspective, I would love all my deals to be done with reps and warranties insurance. 

It makes my life a lot easier than haggling over some of the reps and warranties and the indemnifications. Especially now business around IP intellectual property is the biggest one that everyone always gets hung up on. And if you can’t have a knowledge qualifier, like, you know, you don’t you don’t know if you’re infringing someone’s patent, right, like how do you know your small Toronto based software company? How do you know if you’ve you’re infringing a competitor’s patent or someone else’s patent. 

And when you get acquired by a big buyer, the spotlight gets thrown on you a little bit and then maybe attention from patent trolls or, or whatever it is. So this one that we’re doing right now like a few weeks away from closing and it will have reps and warranties insurance, but so far, I think I’m pretty encouraged by using it more and more. And people get more and more comfortable with that. And especially the on the buyer buyers side, like the buyers getting comfortable that they go to insurance company instead of the sellers, but I think it’s a great tool and I’d love to see more of it ,to be honest.

Patrick: What another investment banking firm shared with me is over a year ago, but I think it’s still pretty consistent is their observation was internally if a deal is insured is eight times more likely to close successfully than uninsured deals. So I think you got all that positive momentum going there. I would also emphasize that, when it comes to the cost of the insurance is often split evenly between buyer and seller. However, I have as we’re having conversations with strategics, now, where we essentially explain to them look, you can go to your target company and say, you have this much of an escrow and this size of an endemic indemnification. Or we will get insurance which will need you to cover the costs, you’ll now have either a tiny or no indemnity exposure, and the escrow is now the deductible of the policy, which is a fraction, okay, which way do you want to go? 

I would tell you from experience that I’ve done this many deals, but 99 out of 100 deals, the seller will take that option to be insured, they just they do that move on. It’s just nice, because there are so many of these transactions happening in this now eligible part of the marketplace. So we’re very, very excited about that. I’m also reminded as you were talking about software a little while ago about a comment that I heard where somebody said, you know, software isn’t limited to just other technology firms. In the wake of McDonald’s buying an artificial intelligence firm a few years ago for a couple billion. You know, what, everybody is now a technology firm? Are you seeing are you seeing that? And, you know, share with me some other trends that you’ve seen with regard to software since the COVID, and so forth?

Ed: Yeah, I think, is financial and strategic buyers that haven’t historically bought software companies are realizing that everything is becoming technology enabled. So like you brought up a good point, McDonald’s, most of their recent acquisitions have not been of restaurants or anything to do with supply chain around food. They’re all around technology, you know, and they’re all about how do they, you know, serve their customers better through the use of technology. So McDonald’s is a great example. And I think, you know, we’re seeing more and more in our process is talking to non technology companies about buying our clients. And I think that’s, that’s very encouraging. 

I would say, like I mentioned earlier, on the private equity side, we’re getting more and more calls, like every couple of weeks from private equity firm that has no, you know, we had one from any, you know, pretty much dominated energy private equity firm the other week that said, we need technology in our portfolio help us think through how do we do it? What should we buy that sort of stuff? What should our exposure be, but it’s so it’s clear that not only on the financial side, but also on the strategic side. Everyone’s very focused on tech. And I think that’s going to make tech M&A, you know, give it real tail winds behind it over the next few years as as not only technology companies buy technology companies, but non technology companies buy technology companies as well.

Patrick: Well Ed we’re now in a new year, and I love talking to thought leaders and you’re you’re recognized as a top 20 thought leader by Axial for lower middle market. Why don’t you share with the audience, what trends do you see either on a macro M&A sideboard for Sampford Advisors?

Ed: So I think we’re gonna be even busier than we were last year. So we, you know, we, we, you know, three x three x four x our business last year did 10 deals. I think we’re gonna do 20 plus deals this year. And I think, I think there’s a couple of things that are really fueling that, right. Our focus exclusively on tech, I think that helps a lot, right, the M&A market in general is, is is pretty hot. But with it within that tech is the hottest sector and maybe, maybe healthcare along with it, right. But like most of the other sectors are not experienced anywhere, like the volume or increase of transactions. I think the other thing as well is like, really what’s fueling a lot of the mid market now. Now, as I mentioned earlier, is the add on acquisitions that private equity guys are doing for their portfolio companies, and they’re getting more and more aggressive. 

They’re doing them at a greater velocity. And so I think you’re going to see even more private equity backed M&A deals in the software space next year, or this year. Sorry, for sure. So I wouldn’t be surprised if we, you know, hit a new record in terms of the amount of tech and software m&a this year. The only, you know, nervousness for me is just like, you know, is there a more macro shock that could change that right? You know, the the equity markets are pretty strong. Right now and the valuations, especially for technology companies or public technology companies are really high. And the IPO market is really hot. So, you know, at some point, the the, the music stops and things slow down. 

But I would think we’ve got enough legs on this, this momentum to kind of keep us, you know, carrying on through this year at peak kind of M&A volumes. So I think that’s, that’s my view, like more of this more of the same, like, really, if you look at last year, last year was a record in terms of the dollar volume going into software M&A. But we missed a quarter like we only read like, the second quarter was a terrible quarter for M&A. Right. And so really, that record number was hitting three quarters. And so I think, like, if the volume continues at the pace that it did in the fourth quarter will be way, way ahead of what we were last year.

Patrick: So has anything changed in in tech or software as a result of COVID? I mean, we always default and think of zoom. But, you know, any any observations you have on that front?

Ed: I think there’s a real bifurcation because there is a whole swath of technology companies that have been impacted by COVID. So like, if you like, we know, companies that do software for airports or software for travel agents, and anything that’s been economically exposed, those businesses, even though they’re software, or technology, companies are struggling as well. And so that’s actually then taken, I don’t know, how much percent of the market is taken out. But is it 20% 30% of technology companies that can’t be sold in this this environment? 

So it’s almost like the same amount of capital is going off, the less opportunities, right. But the good software companies are still growing, I think they did have a bit of a pause right in terms of signing up new customers and that sort of stuff in in 2020. But that seems to have recovered a lot in the fourth quarter of last year. And so good software companies that are still growing and still getting sold. And if anything because of that scarcity, and the money, the amount of money that’s chasing them, valuations have increased through COVID. Which I, you know, as I sat here last March, you I wouldn’t have expected that for sure.

Patrick: Yeah, I would think that as people go to embrace technology that’s been around like zoom, and become more familiar, they’re more open to do other technological solutions for outsource and remote work and so forth. So I see a lot a lot of resources there that have been on the sideline that people just weren’t familiar with, were forced to learn and forced to get comfortable with. And now they’re their standard operating procedure.

Ed: Yeah, in any of those sectors that are remote work, or, you know, cybersecurity, anything that like, touches on facilitating a distributed workforce is is so hot right now is it’s crazy. And I wouldn’t under emphasize like, even like in the background, some of the network and security and cybersecurity, that sort of stuff that you don’t necessarily tie like zoom, you can look at and say okay, I get it, like zoom’s going through through the roof, because everyone’s doing video calls. But there’s all these other applications and software companies in the background that are really benefiting from from this newly distributed workforce. And and those valuations have gone pretty crazy.

Patrick: Well, Ed this has been real helpful, and very, very informative. I really appreciate this. And again, thanks for helping us step cross border ourselves here with this. How can our audience find you?

Ed: So I’m very active, and so is our firm on LinkedIn. So that’s probably the best place to find us. Google Sampford Advisors, and you’ll find us remember the P. But even if you or if you Google, Canada, tech, M&A we’ll come up in a lot of different places, but it’s yeah, Samfordadvisors.com. And then on LinkedIn, under Sampford Advisors, as well.

Patrick: While you’re number one in Canada, let’s see what you do with your outposts in Texas and see how you can grow that area because Texas is actually considered the Silicon Valley of the energy industry. And they’re going tech like you said, so. Best of luck. Thank you very much, Ed.

Ed: Thanks, Patrick. I really appreciate it.