You are so hands-on resourcing deals. Can you tell me a bit more about your shift from a small firm to a serial acquirer? How things have changed for you?
At this point in my career, I want to make sure I have a good hands-on understanding of the fundamentals, from start to finish of the deal process, from origination through closing and integration.
Origination requires some basic building blocks of
- building a network,
- building a database of targets
- mining that database
- making the phone calls
- doing some of the ‘’grunt’’ work
in order to set yourself up to be successful with deal closings. Those are the things that help me maintain active pipelines and I highly recommend it for those looking to build a corporate development process or accelerate a corporate development function within an organization.
What would be the steps for setting up an origination process?
Being good at just collecting and keeping track of information on targets, getting the list of targets to begin with, not starting so broad as not every company in the world is a target and so you need to create some criteria to help refine what your broader target metrics are, while also not getting too narrow.
Finding the information to populate the database with, be it from industry association lists or other available lists, developing those lists and working on them so they make sense from a corporate development standpoint and ultimately mine that list.
Can you share some strategies for effective corporate development cold calling?
It’s usually the owner of the company or the C-suite, be it a CEO or a CFO that is empowered to have conversations about the sale of the business.
This is why getting through to these folks, talking to them or finding their executive admen is a great skillset to have from a corporate development standpoint. However, don’t connect with them right away.
Sometimes there is only one chance to talk to that person, so make sure you are polished and well-practiced when making the initial connection and do it at your pace, as it will help improve the flow of conversation, the cadence and the process by which you elaborate what you are looking to accomplish in that conversation.
Is there anything, in particular, you found good for data sets? What is the best way to cultivate accurate and strong data sets?
The best sources I found for creating the list, to begin with, are industry association lists, as I am coming from a strategic buyer standpoint, a corporate development standpoint and in-house corporate development.
There are some paid lists available that are a reasonable investment to make as you get started in the process. In terms of boiling the ocean, having a huge list of targets does help to refine the criteria of what you are looking for in many cases and for me, that would be the deal size. Having some data on the size of the companies helps refine the data.
The next step, in my mind, would be creating a list of twenty-five A-plus targets that are right when it comes to size, are a strategic fit and make a great M&A target, which are the ones you want to work on and build relationships with.
Is there anything else you can think of, beyond that, that may be potential sources? What is your perspective on sourcing deals from those on the front line of your organization?
From a strategic buyer standpoint, the ones on the front lines trying to grow the business are going to be great sources of ideas or, potentially, acquisition targets, be it salespeople, marketing strategy or even operations team members.
The farther reach you can have to these folks, the better, and that may end up going through some senior-level people at the organization, ahead of sales, strategy or marketing. Hopefully, those resources will be able to filter information correctly on their end on what may be good targets, and then communicate that to you.
Networking and making connections is key, both outwards to targets, owners and sellers, and inwards.
Would you incentivize your internal people for finding deals?
Yes, absolutely. Deal finder fees can be small in the context of a larger deal. When you are talking about million-dollar purchase prices or value-creating opportunities, to really incent your team or organization from top to bottom to have their antenna up for deal opportunities is a really wise thing to do.
Let’s talk about working with bankers in terms of sourcing deals - what’s the good and bad?
The good is that they are going to work with you, their client, bankers on the sell-side to get things done.
On the buy-side, you would typically employ bankers and hire a buy-side banker or broker if you don’t have a robust corporate development team. It’s more typical to give the mandate to either divest a component of the business, a carve-out, or the whole business in general.
You are not talking about owner-operators at that level, you are talking about the board and C-suite that’s going to engage in bankers to sell a business, which is more common as well from a private equity own standpoint.
Institutional investors are going to engage a banker to sell their business and their portfolio companies. My overall experience with bankers has been positive, as hiring them gives you high powered resources to support your efforts.
Let’s go back to the proprietary process. What are the strategies for getting through gatekeepers at target organizations?
In cases when I feel like I am dealing with someone who may be actively engaged in trying to keep me away from the intended target, I will sometimes discuss partnership and growth opportunities - things that should be benign enough to that gatekeeper that they would finally allow me to get access to the ultimate decision-maker or the seller.
You will either have to hang up or they will provide some information about who you are trying to reach, typically a president of the company who may not be the owner, but a CEO or CFO who may be concerned about their role if the seller was to engage or consider an exit strategy, especially with a strategic buyer.
Other gatekeepers would be executive assistants or admins. I usually ask to speak with the owner to discuss something of strategic importance, while elaborating on my title and position. Persistence, sharing my name and role with the gatekeeper and asking them for theirs helps me get through a bit better. I make sure to mention that I am not a salesperson, a broker or a buy-side advisor as well, which helps them differentiate me. If you know who the owner connecting with them through Linked-in is also a great option if available.
We get passed the gatekeeper and finally get the CEO owner to pick up that conversation. Now, how do you develop a strong narrative for your pitch?
When you finally make it through those gatekeepers, you need to be on your A-game, have a short, practiced speech of why you are a good buyer, why you think you are a good buyer for them.
I frequently mention things like being a good cultural fit, that we see the world in the same way as they do, and that we are aligned with them and their service model. It is important to elaborate these things in succinct enough manner and be clear as to why you are calling.
I mention that I’d be interested to understand where they stand in their lifecycle of business and that I am an acquirer of business with many great references. Once you’ve elaborated, stop, listen and take notes.
What are the next steps after a successful pitch? Can you walk me through the first meeting?
After that phone conversation, I try to collect enough information from the seller to know if it’s worth my time or not.
Most folks at that stage are comfortable sharing revenue information, but if they are not, we have a few KPIs that we use in our industry. It is important to find out how big the company is and let them know that we are a good partner or subcontractor.
We have an initial data request that would accompany a seller’s financials, which we ask them to fill in, with or without a confidentiality agreement or an NDA in place, depending on the circumstance.
What is the best way to frame productive first meetings with potential targets?
Having the list of five most important questions or topics you want to make sure you cover is critical, as well as having broader topics or questions that you come armed with as this allows the seller to start elaborating the business.
It is vitally important to listen to what the other side has to say, as once you meet them, they will probably say a lot about their company, the good and sometimes the bad, which is all useful information for me. This way you learn more about the target which helps you structure the deal properly to protect yourself from issues you hear about.
When you do get this information, do you ever repurpose it? What about utilizing due diligence information in order to win over a target?
From a deal perspective, of course, you are going to be talking about integration at many points throughout the deal process, the sooner to get to specifics the better, as you are going to give the seller enormous confidence that you are paying attention to the right details that are going to allow both of you to be successful with the deal.
I say this because we do structure a lot of our deals with holdbacks, the different purchase prices, such that we both need to be successful post-closing in order for the seller to realize their full value and for me, the buyer, to get off on the right foot and have a good deal going.
If you build the right relationship with the seller, the advisors, and the management team you are acquiring they are going to divulge issues or problems to you before they become disasters and this way you will add so many criteria to the success of your deal.
What do you look for in terms of red flags?
Red flag to me would be difficulty providing some of the basic information about their business. If a banker or broker is not able to provide it, they are not doing their job well and that is not a good sign.
Having sellers struggle to elaborate on the value driver of their business is a huge red flag to me. Sellers can be very coy with the rationale for selling, but with more experience, you get better at recognizing these red flags of why they may be selling under certain circumstances or duress that would cause problems later in the deal.
What about when you need to consider revisiting down the road? When do you know you have to leave a deal for later consideration?
For us, revisiting down the road typically happens because the margins aren’t where they need to be, which gives me difficulty offering a value that’s going to be meaningful to a seller because of the profit-based, free cash flow, cash flow based valuation model that we have.
These are the cases where you suggest to talk to them after six months or a year when they fix that margin, back-office staff structuring or anything else that would possibly make them a more attractive target in the future. Companies grow and so in some cases, I have been really pleasantly surprised by how great of a deal they become when some time passes by.
Is there any indicator that the deal is aligned really well and is going to move fast? What are the key indicators of successful deals?
From a sell-side perspective, when they have a broker or a banker, that is usually a good sign. This lets me know that they are motivated to spend the money and get the deal done.
The ease of providing information, if their financial statements are ready and they don’t need a ton of clarification or adjustments, if they are able to provide those KPIs to me quickly about metrics from the industry and rattle those off either in that initial phone call or very quickly after the request - these are all good signs.
Additionally, deals that move quickly are those that are a good cultural fit, where there is a good rationale for selling and a good grip on value drives.
When it comes to actually making the offer, what does that look like? How to structure a competitive initial offer?
The sooner you can do it, the better, as that way the seller and their advisors are going to perceive you as a legitimate buyer. I have specific industry-focused questions that will allow me to get to evaluation quickly, a deal structure that I want to elaborate with the seller, which is why I justify sending them an Excel spreadsheet to fill in.
Part of my strategy is that I strongly avoid trying to retrade through a deal process, I avoid changing my deal structure and offer structure unless something really checks out significantly poorly. On our tiny deals, we do IOI, and on the bigger deals, deals with bankers and brokers on the sell-side, we do IOI that’s much like a term sheet, we send an email.
If I have a high degree of comfort that I am going to get it signed, then I will put a formal letter of intent in place and we will get that executed. I try to add a lot in those offers about the operations of the business where I am being specific about things like whether I am keeping their office, their office staff, components of their office staff or not, where my synergies may lie and what
I might focus on during diligence. We also offer a lot of consulting agreements to sellers to stick around after the closing and help with integration, which adds more value to our offer.
Were there instances where you had the better price, but they picked somebody else? What are the largest reasons for losing deals?
I am the opposite of that. I am trying to win deals with a lower price, but a better offer and a better home for the seller. I try to be very disciplined in my approach to valuation.
I use my understanding of a five year IRR, understanding of the revenue synergies, cost synergies, cultural fit, qualitative impact, strategic and geographical fit to win deals and structure offers to create that value proposition to a seller more so than just price.
What’s your favorite part of the hunt?
I love the process, start to finish. I love the project orientated nature of it and every deal is different. And from a corporate development standpoint, the closing is a win. The culmination of a deal is the closing diner and I love those.
How would you vision the future in terms of how deal sourcing could be more efficient?
The technology that you are building, the understanding that you have as a deal professional in building that functionality into software is a huge benefit and advantage. Just keeping all information in one centralized portal as Deal Room does is very helpful.
I think we are still on the infancy of seeing where different software and technologies help corporate development professionals to be more efficient and I believe we will see more of that over the next twenty years. This goes for deal flow, sourcing, databases, valuation, and all other pre-deal components.
We are seeing a much better proliferation of deal experience, deal know-how, the awareness of M&A and the importance of M&A get proliferated into organizations more so than in the past. As we get more of that, we will also get more sophisticated sellers.
What is your take on staying engaged during integration to uphold the deal value?
Getting the deal closed in 10 percent of value creation and good integration is ninety percent. Starting the M&A process, diligence process, closing process with your functional area leaders and experts, getting help from deal flow process management and simply the feeling of buying and engagement of matters a lot to that successful integration.
It is important to be able to work with lead liaison people who are critical to the success of the corporate development team and build relationships internally.
What’s the craziest thing you have seen in M&A? Can you share some of your craziest deal experiences?
I had the deals fall through at the closing table because of the things that were out of our control. These are scenarios where you put a lot of effort for nothing. Deals that go bad after the close, where customers leave, employees leave, IRRs go negative are a mess as well.