How to Source Deals and Build Your Pipeline

M&A deals don’t just fall from the sky. Proactively sourcing deals is the best way to approach M&A, and in this episode of the M&A Science podcast, Jeremy Segal, EVP, Corporate Development at Progress, teaches us how to source deals and build a pipeline.

How to Source Deals and Build Your Pipeline

6 Jun
Jeremy Segal
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How to Source Deals and Build Your Pipeline

How to Source Deals and Build Your Pipeline

It's so important to build trust and relationships with target companies so you can leverage the intangibles in addition to competitive price, speed, and certainty to close.- Jeremy Segal

In this episode of the M&A Science podcast, Jeremy Segal, EVP, Corporate Development at Progress, teaches us how to source deals and build a pipeline.

special guests

Jeremy Segal
Senior Vice President Corporate Development at Progress

Hosted by

Kison Patel

Episode Transcript

M&A strategy at Progress

It’s actually really easy at Progress. We're a software company that's been around for 40 years, and 30 years on the NASDAQ. We've been around for quite some time, having a great roster of customers – a 600 million revenue size company.

But from an organic growth standpoint, the growth rates just aren't that high. So the big driver for growth is M&A. We are executing a total growth M&A strategy that will get us to be a billion-dollar revenue company within the next four to five years. That is the strategy at the simplest level.

The great thing about our strategy is the company, as a whole, understands what the strategy is and understands that M&A is a core component of it. Even externally, the shareholders, Wall Street - everyone understands what our strategy is because we talk about it.

We talk about it at every one of our earnings calls. The key component of The Progress mission is to execute a total growth M&A plan. You can think of us as a PE-type firm operating as a public company as we are executing a very similar model to what PE firms are doing.

Expanding the M&A Strategy

Progress sits in the infrastructure software ecosystem, we have a whole suite of different solutions that play across that entire software development life cycle. It allows me to look broadly with regard to what it is that I can evaluate from an M&A standpoint. 

I am looking across that entire infrastructure software ecosystem, everything from the early stages of building and developing your applications, through deploying those applications, and all the way through to managing and operating those applications. It allows me to cast a very wide net, which allows us to keep a very large funnel of deals on the top of our funnel. 

The strategy is socialized internally and externally. The investment banks and venture capital firms that we've talked to, and our investors understand what our strategy is because we've been talking about it and executing on it for the last three to four years.

Over the course of the last three years, we've executed three deals of scale that have added over $200 million in top-line to the business. As a result, it led to our ability to be able to maintain some really nice top-line growth rates from an inorganic standpoint. 

It starts at the top with the CEO identifying the strategy, then you go out and find someone like myself to help them execute that strategy, and then it's just a matter of socializing and talking to the venture capital firms. 

The fact that Wall Street, the venture community, and investment bankers understand what it is that we're looking for, and to bring us those kinds of assets that fit within our parameters, makes our job easier. So, I would say our strategy is very well known and very well understood by all of our constituents, both internally and externally, 

The steps to building an active pipeline

  1. Evaluate the ecosystem

We look across the entire infrastructure software ecosystem, so it really starts with taking a step back and evaluating what are the different sub-sectors of the infrastructure software ecosystem. 

We did an exercise when I first got here, where we identified probably 50 to 60 different sub-sectors across that software development life cycle. Within each of those sub-sectors were additional themes, and we identified around 1200 companies through that exercise alone. 

  1. Talk to Business Leaders to Understand What They Need

Then, as part of that exercise, we also do outreach to the business units. Progress has three business units. We work very closely with the general managers as well as with the product leads within each of those business units to understand what's important to them, and to understand important areas that could be relevant for M&A so that we can then go out. 

Having that kind of regular dialogue with the business unit leads, and the product leads within those business units is really valuable to me. And then, we go out and we have regular dialogue with the venture capital community.  

  1. Working closely with investment banks

We work closely with the investment banks, they bring great ideas to us because they understand what our financial parameters are for deals, such as what we're looking for and what doesn’t make sense for us in an acquisition.

When you can get investment bankers that really understand your strategy and bring you companies that are relevant for and fit within those parameters, you're going to have great relationships. 

We have an ongoing dialogue with tons of investment banks from the big ones to the boutique ones and everything in between. Through all those different vehicles, we're able to keep a very active deal pipeline.  

What we're trying to do is we're trying to understand what the different products are that we have in place today. 

  • What could enhance the value proposition for those products? 
  • What are interesting adjacencies? 
  • What are interesting technologies that could potentially bolt onto those product suites? 
  1. Communication with Product Managers & Product Leads

I find that product managers are actually more valuable because they have a much deeper knowledge of the products than the general managers. The general managers are thinking at a 50,000-foot level, which is helpful for me because they're thinking about the overall strategic vision for their respective business units. 

But then, the product leads really understand the needs of those respective products. They're listening to the salespeople, the customers, and they're figuring out the next things that we need to develop on our product roadmap. From there, they can determine which things we can build, which will take us too long, and see if there's a way to potentially acquire to get certain functionality.

Now, the interesting thing for Progress is we're not doing acquihires, we're not doing small technology targets. We're looking at assets that have scale, having 20 million revenue and above. That becomes challenging sometimes when a product leader just wants really cool technology to bolt onto its product.

I can't look at those types of opportunities because they just don't fit within the corporate development mandate and in what we're focused on. We were very focused on M&A structure. Progress is very focused on doing acquisitions of scale. We don't really look at anything below 20 million in revenue. 

My big thing from an M&A standpoint as someone who has done this for 22 years, I want to see everything. My biggest fears as a corporate development leader are:

  • To miss a deal that I should have looked at
  • To have a banker not think of bringing a deal to Progress
  • Having a venture capital firm not think about Progress when it's selling one of its assets

That is why we have such a consistent, regular dialogue with all those different constituents because it's important for them to always keep Progress top of mind.

We are a very valuable platform for a lot of companies. It's going to take a lot of companies a long time to be able to build up that customer base of the kind of distribution model that we have built up here, both from inside sales, direct sales, and partnership model. We bring a lot to the table for a lot of sellers. 

  1. Other areas for sourcing

We talk to large companies directly that might be evaluating their portfolios. Maybe they're looking to carve out certain assets that are no longer core to them, their company, and their vision but that could be interesting within the Progress portfolio. We do talk to private equity firms too. 

One of the challenging aspects sometimes for us when talking to the private equity firms is they typically, in a lot of the assets that they've invested in, already extracted a lot of the operational efficiencies and have gotten those EBITDA margins to levels that it's hard for us to get additional operational efficiencies and execute on that total growth model that is a key part of our initiative from an organic standpoint. 

Initial Diligence before engaging with a company

Before I reach out, we have access to different tools. We have access to PitchBook, to Capital IQ, so we're able to get some data when looking at a company. We'll look at PitchBook to get a feel for:

  • What kind of fundraising they've done
  • The pre and post valuations they've had
  • How many employees do they have
  • If this company would have the level of scale that makes it worthwhile for us to do outreach. 

We can pretty quickly determine whether or not it's going to be a company that's going to fit within the parameters or not. That is one of the preliminary things that we do. Because we obviously don't have access to the things that are important to us once we start talking to a company, such as:

  • A financial package – to try to understand the financials of the company
  • An anonymized employee census – allows us to take a look at the company to see: 
  • Is there an opportunity for synergies?
  • Are there redundancies within Progress so that we can get some synergies and make this model compelling and create the kind of shareholder value that we want to do in the deals that we do. 

We're not buying these small companies with no revenue without taking a flier saying one to three to five years, maybe they'll generate some revenue for us. And for the next three to five years, they're going to be bleeding money for us. That is not our model. 

First outreach

Given the fact that I've been doing this as long as I have, usually, we can identify a good way for a warm outreach. Because the last thing I want to be doing as a cold outreach, those are tougher. 

I will leverage my network to get warm introductions to company CEOs, just to have a dialogue, just to make the connection.

The cold outreaches are tougher, but I've been doing this a long time and I have a pretty decent hit rate with the cold outreaches too. 

It would be sort of just introducing who I am, introducing Progress and that I've heard about their company through dialogue that I've had with my sales team, with my product team and we'd love to just get to know them. I try to be a lot more smooth and not as aggressive of an initial outreach.

I love the in-person. I love going to the bank and conferences where I can meet with 10, 15 companies face-to-face during the day.

We are starting to get back on the road a little bit more. But a lot of the initial conversations are typically on Zoom or Teams, just because it's too early to just say, you’re flying to city X and meet with this random company that I have no idea if there's going to be any vision maps whatsoever.

Understand the business history 

  • Where it got started?
  • Where it is today? 
  • Understand the products that a little bit better and how it's differentiated. 
  • Understand why they win, understand why they lose?

Trying to get a feel for the company:

  • The people in the company
  • How big of a team is it? Is the entire team located in one place? 
  • Do they leverage low-cost centers for some of their development? 

Getting a feel for the customer

  • The size of the customers
  • The sales motion
  • Understand what the big drivers are, and where they are in their life cycle? 
  • Are they at a point where they're going to be thinking about selling soon?
  • Are they at a point where they're in full execution mode and they're fully capitalized for the next three years? And they're just going to go for the stars. 

Building the business case to get the buy-in

If it's a competitive process or if it's a banker-led process, the key things that we get upfront are the confidential information memorandum. It's usually like 50 to 60 pages and covers all the key areas that you want to understand about the business. 

Get a financial pack, which gives you all the detail of the financials, everything from ARR trends to customer concentration, to how has your objects built up? What's in your cost of goods sold, giving you really good visibility into the financials and then the anonymous employee census.

With those three things, we can do a pretty, we can pretty accurately do a first pass evaluation assessment, determine what kind of value we could pay for something. What is it worth to us Progress? Can we create that shareholder value that's important to us, and then have that discussion with the target company or with the banker if it's a company that's being sold by a banker. 

If we're doing a direct deal, it's a little bit tougher. And then it's more of a process. We've looked at a couple of assets over the last year where they didn't have a banker, where they weren't really thinking about selling the business.

So getting the kind of information we need can take a little bit more time for sure and it's more of a process. The flip side of that is the value on that is you can get exclusivity and you can spend more time. In some of these competitive situations nowadays, you can't get exclusivity.

They're not going to give exclusivity to a buyer until the very end of the process when you're negotiating the final terms and the definitive agreement. 

Kicking off due diligence

Once you get to that point where you're signing an indication of interest, you're signing a letter of intent, and you're getting more serious, it's at that point that we'll share a due diligence request list with more information that we're going to want across all the different functions.

And those functions are everything from legal requests, to HR requests, to finance requests, to IT requests, to marketing requests, to sales and go-to-market requests, to product engineering requests. So it's a more robust request list, but we've done a really good job of the last year really prioritizing those requests so we don't overwhelm those companies.

Because the last thing you want to do, particularly in a proactive deal where you've identified and sourced the company and they don't have a banker. The last thing you want to do is overwhelm them with this massive due diligence checklist. You want to try to keep it as focused as possible.

And we've worked really closely with each of the functional teams within Progress to really get them focused on what are the key things you need to help us get to a go, no-go decision.  

And similarly, when we are in a process that's banker-led, we're not putting ourselves at a disadvantage by asking for everything under the sun when the other companies that are looking at it or just ask for a select set of things. So it allows us to stay at parody with the other companies that are evaluating. 

Prioritizing and Organizing the pipeline

We're able to wean it down pretty quickly because of the financial parameters that we look for.

  1. We're not looking at assets that are growing super, super fast. So for us, we're looking at assets that are growing anywhere from the lowest single digits to mid digits. If you fit within that financial parameter, we'll move you down the funnel. 
  2. We're looking for assets that have high recurring revenues. If you don't have the kind of revenue streams, recurring revenue streams, you're probably out of the funnel. 
  3. We're looking for customers that have really strong net retention rates. Their customers are very loyal to the company. 
  4. Position from a profitability standpoint. Are you bleeding money? Probably to be a lot harder for us to make that deal work within the operating margin parameters that we need to get to. Are you a breakeven to maybe 20, 25% operating margin? Those are the deals that are right in our sweet spot. 
  5. What are the deals that bring us the kind of scale that can really move the meter faster? 
  6. What are the deals where there's a really interesting strategic story too? Let's move those down the funnel faster because it's going to not only hit all the financial aspects but the strategic story is really strong.

We have a deal CRM tool called DealCloud that we utilize. And when we break it out into different buckets 

  • Active
  • Parked 
  • Passed on

So that deal cloud CRM really allows us to manage our deal flow and the director on my team and I, meet regularly to review that deal CRM and take a look at those companies. 

We put reminders in the deal CRM that tell us when we need to reach out to a company after say, 3, 6, or 9 months to get an update on the business.

We track all the active companies there and we keep all of the different CIMs and financial data there. We do not have a formal scoring system per se, but there are certain metrics that we're looking for as we're evaluating these deals. 

  • Return on invested capital
  • Pro forma EBITDA margin

We use those financial criteria to help us lean out and really focus on the ones that make the most sense for Progress for us to go try to execute it. 

The key to a good healthy pipeline 

Part of it is just sort of making sure that you have a very, very active and strong top of the funnel. Because that's the key thing here, and I've talked about this a lot with my CEO and my CFO recently, we've missed out on a couple of deals recently but we don't sweat it because we have four or five deals that are right on its heels that we're just as excited about.

And so, it's managing that kind of deal flow so that you have a constant, so you constantly have companies that are in what I refer to as that active category in my DealCloud CRM. So there's always a handful of five to seven that we're actively looking at. We might get one or two of them done.

You might get none of them done. And we, as a corporate development team knows that us adding value is sometimes saying we should walk away from this deal because we've learned things in diligence that we're just not excited about, or we should walk away from this deal because the seller is not being very flexible from a negotiation standpoint and key deal terms that are important to us.

And while it hurts us to be able to come out of a process like that without a deal, we know that we're adding value and we're doing the right thing for our shareholders. And at the end of the day, that's key. 

Convincing someone to sell their company

It's building that trust. It's spending lots and lots of time with the CEO, getting to know them, getting to know them personally, going out to dinner with them, going out to drinks with them, and just building that relationship. So it's not just this formal zoom interaction. It's getting them to meet with my CEO.

It's meeting with the principal stakeholders of the companies and educating them on who it is that Progress is and why we're an interesting buyer for so many companies. Yogesh talks, he's very passionate about how committed he is to the customer and it's something that we have a maniacal focus towards.

And when we tell sellers that we have this maniacal focus on customers, that resonates with them. When we tell prospective sellers that we're going to take care of all the people extremely well, the people that we keep, the people that we don't ultimately keep, they're all going to get treated well, that resonates well.

Just continue to build that relationship, build that trust, and leverage all the different vehicles. I'm not just going to rely on the banker for a deal. I have to talk to the CEO and build trust there. I got to talk to the principal stakeholders.

There is value in the intangibles for sure, in the qualitative stuff, not just about quantitative, it's not just about the ultimate price.

Some of the ones that are the best fit that we find proactively, they've been at it for 15, 20 years, maybe the founding team is a little bit older and they're looking for that liquidity event and they haven't really necessarily thought about it. 

But when we come and start having a dialogue with them, they start to think about that liquidity and start to think about the fact that, we probably need to think about the next step for their company.

And then it's similar to what we're doing on the banker-led processes, where we're selling them on why Progress would be a great home for them. And building that relationship and getting to understand them and getting to know their team well. 

Strategics vs PE firm

If you're part of Progress, you're going to leverage everything that we have already in place today. We have that hundred thousand customer base. We have that massive sales distribution arm. We have all those things in place and we're dependent on you to help us to execute. 

Whereas the PE firm may or may not want to execute with you and so you roll the dice and yeah, you might get a nice liquidity event, but then you've got to go execute for a few more years before you get that other liquidity event that may or may not happen. And you need to figure out what kind of level of conviction you have in your ability to double-dip and to get liquidity events. 

It's a scenario that we deal with and it's interesting, like three to five years ago, strategics didn't really sweat the PE firms because strategics could just pay more.

And now the PEs can pay as much, if not more than the strategics because they have so much money in their coffers and money is still relatively cheap. It's getting a little bit more expensive, but it's still relatively cheap. 

It does make it challenging for sure, which is again, going back to the reason why it's so important that we build that trust and build those relationships, so we leveraged the intangibles in addition to being able to be competitive on price and being able to be competitive on speed and certainty to close. 

But the differentiating factor is the relationships and building that trust and getting them excited to be a part of Progress. We're not going to get every company to be excited to be part of Progress and that's okay. 

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