Text Version of the Interview
How do you engineer deals for success?
There's art and science involved. Certainly, there's a construct that you want to follow that's a little more cookie-cutter, like when you're looking at financials and valuations. But there's an aspect of art to it where you have to pay attention to the end state.
Acquiring a company and getting a deal done is the easier part of the transaction. The more difficult part is digesting the company, ensuring a cultural fit and alignment, and having a point of view of what that might look like 12 to 18 months out. That is how you give a deal the best chance to succeed.
Where Does Value Leak?
There are two places, in my opinion, where you can end up losing value. One is the people and the knowledge they bring, and if they end up leaving, that's one area where you lose value.
The other is if it's a company that's actually on a pretty good trajectory business-wise, and you bring them in with the hope of accelerating that, but you messed it up. And that is also how you lose value in the deal.
That's the piece where you have to give enough attention to the size of the acquiring company and the target. I think that has a vital role to play.
If you are a relatively young organization and looking to buy another company, it is more important to pay attention to the overall culture. You need to make sure that you do not disrupt what you already have going. If you were trying to digest a company of a similar size, you might have two conflicting organizational styles and processes that can be very disruptive.
On the other hand, if it is a much larger organization and you're doing smaller deals, it's not that big of a risk, and you can easily do tuck-ins. If it's a decent target acquisition, you want to allow them enough freedom to keep growing and not burden them with all sorts of processes of a large organization that might come with.
This is why when we work on deals, we always make sure to build alignment internally because we want to make sure that everyone is marching in the same direction to reduce that execution risk.
Planning the End Game
Planning the end game manifest in various ways. Usually, you want to think about:
- What is the size of the company?
- What is the current culture?
- What products do they have?
- What business are they in?
- Is this something that is better executed on stand-alone or as part of the overall bigger organization?
That plays a big role in whether you are going to try and subsume it, or whether you're going to try and keep it as an independent business unit and just provide some air cover. The air cover could come in the form of G&A or the mothership's sales team is providing leads to the new organization.
Those are the types of things that you want to pay attention to within the maturation of your own organization and the target. When you do acquisitions, it's a great way to build bench strength and bring the additional fantastic talent.
It's usually the target CEO who has an idea of the incredible talents that we could subsume and add additional bench strength. Also, the product folks, HR, and finance help build the overall plan.
It depends. If it's a smaller deal that is not going to be as disruptive, and it's not going to impact as much of the financial modeling and the people, then it's pretty much at the tail end where we are spending more time externally and then less internally.
On the other hand, if it is a sizable deal and the model might be more along the lines of keeping them as a separate operating unit, then the socialization and the planning starts well in advance.
And it's with a very select group of people. This is not something that you can float around with ideas. It's usually, the CEO, the CFO, and the head of product at this point. You have to be careful about who you share those ideas with and who you talk to because this is all pre- LOI.
And once you get into LOI, that's when the heavy lifting starts, and all the various functions are in there trying to figure out what this would look like and make sure that there's enough bias towards the ends state.
Real Life Timeline of Deals
Usually, when we have a target in mind, it has been brought up by a handful of our product teams. Then either someone from my team or myself will end up meeting the target, build some conviction.
And then at that point, the meetings that are had internally are usually with the CEO, the head of product, and the CFO. To some extent, that's where we leave it, and then we start working on the LOI.
We might get more people involved on the finance and product side, just to make sure that we are thinking of things the right way and, in some instances, sales and leadership. So it just really depends on the size of the deal.
But the way to think about it is, early on, pre LOI, the type of talk that my team will have with other folks internally is hypothetical. That's how we try and architect things because we don't want the word getting out and confidentiality matters a lot. And then, at the same time, we don't want people getting emotional, and we want to keep expectations in check on both sides.
Difference of Deal Sizes
It just depends on the size of the business. If the target is anywhere less than 20 to 30% of the overall business, generally, you can get away with tucking the acquired company into the organization. On the other hand, if it is far more material, you want to try and keep it separate.
Once you cross 70 to 100 million dollars of business and it's growing over 50 to 70%, it almost behooves you to try and keep that separate because they have a good thing going on.
If, on the other hand, you're picking up something that is sub 50, then it's easy to digest and lump it in, and use the mothership to actually amplify it. That's how we think of it.
That's why it's very dependent on the acquiring company size, scale, maturation. So there's no right or wrong answer here. It's just generally you want to feel things out in the overall corpus that exists within the target and what's best to try and amplify it.
Target CEO's Perspective
This is not just related to the CEOs but to any professionals as well. There are a few things that matter to any professionals:
- The progress that they're making
- It's the people that they are around
- Personal compensation
And if these three pieces are taken care of, without a whole lot of politics, they usually will not look to leave your organization. I use that same mindset when I'm talking to the target company. That's how I sell them on joining our company.
And while your selling, you're also trying to understand their past track record. So if you're dealing with a CEO that has a track record of being a serial entrepreneur, then it's important to have the awareness and the realization that it might be in their DNA. And the idea of trying to find a good role for them, 18 to 24 months out, might not be the best of assumptions.
Some people would just prefer to keep building new companies. And that does play a factor in how we orient things. And we are transparent about it too. I think that these types of discussions are best to have openly.
Sometimes, it relieves the target CEO. Giving them a way out makes them more comfortable rather than tying them up in a long-term contract that they are not happy about. So just having that awareness is important.
On the go-to-market side, we usually meet with their CRO to get a sense of how they go to market.
And if it is different than the acquiring company and it is of interest, then the mindset changes. Because then, what we try and do is take what they have and let them hire and go build this model out.
And so it's in your interest to not just bring their process in and squash it. If anything, you want to actually amplify it and support it. And maybe at some point, it might make sense where both sides are feeding each other.
And we do all this pre LOI. The reason we do that is that we want to sell them on the potential for themselves. That they will play an important role post-acquisition, and they will have a significant strategic impact on the organization.
Once we are into LOI, we usually will kick off various workstreams.
And with all these various workstreams, we'll have leaders on both sides. And what they are trying to do is make sure that they go through checklists, make sure you understand all of this and what this looks like.
And, depending on the timeframe, we could be meeting two or three times a week where we have readouts from both sides. And that's usually how we're trying to bring issues up and then solve for them and try and bring this to a definitive agreement.
You would want to take the acquired company's P&L, take it into the acquiring companies format, and then amplify it by adjusting it. The adjustments could be in the form of G&A, increasing product investments, increasing go-to-market investments, and so on.
So making sure that you do that integration planning within the operating plan early on. It does two things; first, it signals to the target what direction you are thinking, so there is nothing lost in translation, and they understand what is going on for the better or, the worse.
But then, more importantly, your Internal team also understands that this is the new operating plan that we're going to work towards. This will require additional investments, and everyone is on board. So it serves a dual purpose internally as well as externally.
It depends on the stage of the company. I'm usually not a big fan of earnouts, just because they can be tricky and usually as fraught with assumptions and it's tough to plan what happens 12 to 24 months out.
But in a handful of instances, when you're looking to bridge gaps, and if a target is particularly confident of what they bring to the table and what they are worth, we will certainly consider enough.
It just really depends on a case-by-case basis.
Does Earnouts Delay Financial Integration?
To some degree, but even then, the financial piece to the earnout could still be applicable. Let me give an example;
Let's just say the target wanted a valuation of a hundred, and we were prepared for 75. And the 25-million gap is primarily because they believe that in the coming 12 months, they'll do $10 million worth of sales. And I'm saying they'll do five. And I say, let's see what they can do.
And so we build an earnout, the target might say, to get to that 10 or 15, I need additional heads in product and go-to-market. We will fund that. So even with earnouts, there may still be an aspect of financial planning where you are making some investment because you believe in the company's direction.
What's the Second Most Important Function in Integration Planning?
Besides finance, it's the people and the people side. You need to make sure that they find roles and that they can continue to grow professionally. And at the same time, not feel burdened as part of being a large organization, and they should be comfortable with who they're reporting to.
As soon as we enter LOI, one of the workstreams that we kick off is HR. One of the things that they're doing is mapping the organization, the titles, the compensation, all of that.
But then they are also looking at the end-state and where these people would likely fit in. If it's a separate operating unit, then it's not as cumbersome.
If it's something that you are planning to tuck in or integrate, you have to pay more thought to the target and where you would want them to fit in.
IT is also huge. Depending on the organization's size, the systems they use, how easy or difficult they are to integrate are key components in integration planning.
Keeping teams Aligned on the Value Drivers
The best advice I can give is to be adaptable because things change. It could be within the target, it could be within your own organization, and sometimes value drivers change as well. Sometimes you realize the market is changing around you. So you have to keep adapting.
What if the Target CEO losses Motivation?
It's tough, and to be honest, we've had that happen in the past where there was fatigue, and the CEO just wanted an exit. When you're dealing with larger organizations, you have professional CEOs and a professional leadership team, and so it becomes a little easier.
But when you're dealing with smaller organizations, they are more susceptible to fatigue. And that's the one thing that I do say I miss with this COVID era because, in pre-COVID, we would spend a fair amount of time outside of work, getting to know them a little bit.
Keeping the End State in Mind During the Entire Process
The best way to describe it is, when we have a thesis in mind and do the integration planning, we always go back to the thesis and test that. Are the assumptions still hold true?
And if they don't, we will usually do an internal meeting with our CEO, finance, and head of products because we have uncovered something. We may want to change a few things before we keep moving.
Making Agile as Part of Culture
What I do is I spend time talking to customers and customer support people. Why? Because it's very unusual for someone to call customer support and tell them they did a good job. They usually call to complain.
And I find customer support people to be extremely calm, composed, and always ready for a beating because that's what their customers usually do. The reason I bring that up is I've found that their personalities are highly adaptive.
And I try and do that as well. I try to talk to customers because you learn new things, and they'll also give you positive and negative feedback. And I've gotten to a point where I will be able to stay centered and solve any curveball that comes our way.
In my personal life, I try and do physical activities or meditation to stay calm.
Biggest Lessons Learned
Paying attention to people is perhaps the most critical aspect of doing deals. M&A folks usually get a thrill out of doing deals, and you should measure your success by how well those deals are doing 12 to 18 months out. That's when you really see the value that you have contributed to the organization's overall success.
Also, have a sense of what you're passionate about. Pick a side, and it will serve you well in the future.