Trajectory Capital is a private equity fund specializing in enterprise technology and data services companies with sub-$20M in ARR. The firm makes control and minority investments, focusing on corporate divestitures and founder-controlled businesses. Leveraging an extensive network of industry leaders and executives, Trajectory Capital accelerates growth and enhances value in its portfolio companies.
Michael Frankel
Michael Frankel is Founder and Managing Partner of Trajectory Capital. He has held c-level executive roles (corporate development, strategy/innovation, CFO, COO) at large and small growth companies. He is a Corporate Development, Innovation, Strategy and Corporate Venture leader who has driven disruptive innovation and aggressive growth/expansion at global technology, information services and professional services companies including Deloitte, LexisNexis Group, IRI, GE Capital and VeriSign.
Michael has extensive experience sourcing, leading and negotiating 110+ transactions, as well as integration planning, management, product development, strategic planning and portfolio management.
Episode Transcript
Alignment in the shared vision of the end-state
The word 'shared' is super important. There are two different pitfalls you can step into with this. The first is not actually thinking through what the end state is, especially the non-financial end state. Everyone always gravitates to creating a financial model, assuming that's the end state. But financial models and financial performance are an outcome, not an input.
The input involves complex factors like:
- What's the product?
- How are you going to build it?
- What customers are you going to target?
- How are you going to reach them?
- How much are you going to charge them?
- What feature functionality do you want to build?
- How are you going to sell it?
- What's the brand going to be?
- How much will you invest?
All of this determines the financial outcomes. You can put anything into a model, but without planning all the steps along the way, you won't achieve the desired financials.
It's not just about asking what we want this thing to do financially, but what we actually want this business to be. This is a much harder question to answer, especially during the heat of diligence and integration planning. However, it's crucial. The word 'shared' is critical, especially in a large corporate organization.
It's easy for someone to create a PowerPoint presentation and declare, 'This is what we're doing.' Then everyone remains quiet, and a year later, people say, 'I didn't buy into that product or pricing. Legal didn't agree with that approach to deal structuring.'
One of the big challenges for a corporate development officer is not only to establish this vision but to drive the leadership of the organization to sign off on it. I know one corporate development leader who wrote a memo outlining all of this, partly as a joke saying everyone needs to get the memo.
But he meant it seriously: he made all the leaders sign it to ensure clear alignment. You can't be passive. You either need to say, 'I don't believe in this vision,' or 'I'm on board.' I've seen many deals fall apart because either nobody thought this through or there wasn't mutual agreement.
If you don't have that, everything else is going to go awry.
Especially if you have a large corporate acquirer, there are many people who can passively veto the deal. They won't speak up during the process but won't do their part later on. This can affect every part of the organization.
For instance, we might agree to compensate employees in a certain way, and then HR says, 'No, we're not going to do that.' Or we plan to push a product through our sales organization, and they respond, 'No, we're not going to prioritize training on this new product.'
There's a large community within the buyer's organization, consisting of five, ten, or even fifteen leaders, who can subtly veto your deal. If you don't get their commitment upfront, your deal can fall apart.
Cultural alignment
Often, it's impossible to change a company's culture. However, sometimes you acquire a different culture on purpose because you want to imbue that into your own. This can lead to reverse cultural integration.
For example, if the target's culture is casual, loose, and developer-driven, and your company is not technology-focused, it could be a problem or a solution if you're trying to evolve into a technology culture.
There's both downside and upside to acquiring a different culture, but recognizing it early on is crucial. You need to analyze if you can mitigate the problems and create value. In any business where people are an important asset, which is most companies today, doing the cultural analysis is critical. It's essential to identify both positives and negatives because most companies are very employee-focused.
Employees are a large asset of most companies, especially in technology companies, companies with a lot of IP, or those with significant brand IP. If you acquire a business and force a culture on them that they don't like, employees will leave, and you could end up with no business.
Early in my career, I acquired a small business without considering employee culture or perception. We waited a month to visit the company, and by then, 40 percent of the employees had left. They were all tech employees with good alternatives.
It was a stark reminder that you can't assume employees will stay just because you buy a company. You need to make the new culture attractive to them or be willing to let them maintain their existing culture. Otherwise, you shouldn't do the deal.
What people often fail to do is recognize two things. The first is that the employees, along with their embedded expertise, knowledge, and systems, are not easy to replicate.
The second is that they can leave at any time. Especially in a strong market, but even in a weak market, if you're not considering the human aspect of the transaction, you're missing the majority of it.
Joint Go-to-market planning pre-LOI
Nirvana is a complete joint go-to-market strategy, but at the very least, you need to have this conversation. I've seen many deals where the business leader said, 'We'll just funnel it through our sales organization, and that's how we'll get all the revenue synergies.' That never turns out to be the case.
Combining two different products and sales organizations often involves different pricing structures, go-to-market rhythms, sources of lead generation, discounting, proofs of concept, and channel partnerships. Go-to-market is a very complicated area, and you can't just assume that one plus one equals three. It's critical to have that conversation upfront.
On the positive side, you'll discover integration challenges, but you'll also likely find synergies you weren't aware of. You'll have to combine two go-to-market rhythms and two sets of go-to-market capabilities.
I don't think you need to create a detailed plan, but you should at least identify all the issues you'll face. What's the combined value proposition? Who handles the main selling? Who does the sales engineering? What are the pricing structures? Do you use channel partners or go direct?
I envision everything in spreadsheets. Imagine a spreadsheet with the 30 main variables of a go-to-market organization. Compare yours and mine, then consider how we might merge these and where potential problems could arise. You might not have all the answers, but at least you'll know the issues.
For example, if my sales team sells 47 different products and your team sells just one, we might use a structure where the acquirer's sales team follows a traditional rhythm, and the target's team becomes more like sales engineers. At a high level, I'll discuss all our products, and if you're interested in product 23, Susan is the expert on it.
It's ambitious to think you'll solve all these problems, but identifying them early on is crucial. Determine if an issue is a problem or an opportunity, and understand the integration challenges so the team isn't blindsided. That's a significant accomplishment early on.
You can't assume that a sales organization can just sell more and more products. There's a capacity limit to how many different things a sales organization can handle, especially if they are different.
You need to get into the details of what the sales rhythm will look like. Can the sales organization absorb a new product, both from a capacity and expertise perspective? You have to dig into the specifics to know if you will achieve those often significant revenue synergies.
Parallel diligence and integration planning
If you don't do this, you're going to have two bad outcomes. The first, commonly discussed, is poor integration. The integration team will start from zero the day after closing, delaying integration by three months or more, and leading to bad surprises, such as lacking the right resources.
The second, less spoken about, is the reverse flow—integration planning influencing diligence outcomes. Diligence teams, mainly generalists, need specialists from every area involved, especially pre-LOI, to understand the implications of their findings. For instance, a diligence team might see a set of HR benefits and think they're fine, not realizing the difficulty of integrating them into the corporate system.
Without integration team feedback, diligence might overlook significant issues, like the impact on employee benefits, leading to major cultural problems. Therefore, having diligence provide integration info early on is valuable. Equally important is integration feeding back into diligence, prompting further questions about potentially problematic systems.
And this gets back to the org chart in many ways. Some of the companies I've seen that execute M&A the best are ones where deal execution, diligence, integration, and ideally some portions of strategy all fall under the same organization. It's not that people can't collaborate when they're not part of the same organization, but it's hard to achieve a 'we're one team' dynamic if you're completely separated.
Additionally, it's a strong argument for having dedicated integration and diligence experts. If you're just pulling people out of the organization, unless you do massive amounts of M&A, those people likely aren't familiar with diligence, integration, or how those two feed off each other.
Having at least some professional integration and diligence people, usually within the corp dev team, is important to create that connective tissue.
Reverse diligence
It has several benefits. One benefit is the messaging and tone, which are important because much of the integration work gets done by the target. You want the target team to have a preview so they can start thinking about how they will integrate.
Another reason it's important is you want the seller to raise alarm bells if there are aspects of your operation that could be damaging to their business. They won't know this unless they get that reverse diligence.
For example, in a deal I saw, the acquirer had a standard set of titles and assumed they would merge the target's employees into their title structure. However, the target operated in an industry where certain titles were crucial for client relationships.
The target's team informed us that if they had to change all their titles, their customers would stop talking to them. In their industry, the titles were essential for securing clients, even if they seemed too senior in the acquirer's industry. We had to either make an exception to our title structure or risk making their salespeople less effective. There are many examples like this, but that transparency helps.
There is a risk that the seller might see things that scare them, so you have to be prepared for that. However, it's better to know these issues now than to surprise them after closing, because, as discussed earlier, all those employees can leave if your operation or culture doesn't work for them. It's much better to find out pre-close.
Communication strategy with stakeholders
There are many different constituencies in a deal. Effective communication is one of the closest things to a free positive outcome. Sending an email to customers is costless, and if done well, it can make customers happier, more excited, and make your offering stickier.
Good news is a great asset to leverage. There are several groups of people to consider. Everyone thinks of the target employees, but you should also consider your own employees. They will wonder how the acquisition affects them. Is it a negative? Are they becoming less important? Or is it a positive, providing new opportunities?
It's not just about target employees; it's also about your own employees, ecosystem partners, the general market, competitors, and vendors. Messaging is crucial to avoid negative outcomes and to create positive ones.
For example, reach out to a vendor to let them know about the deal, which might create more opportunities for business and possibly lead to discussions about volume discounts.
It's important to consider two things in your messaging: what you're trying to accomplish and what their perception will be. If you tell employees, 'We've done this great thing for our company,' they might think, 'That's good for the shareholders, but is it good for me?' You need to craft your messaging based on their perspective.
M&A communication has significantly improved these days. Going back to the nineties, there's the classic McKinsey study showing that the majority of deals fail. Investors and the public market have become more aware of the potential downsides of M&A, creating an incentive to explain why a deal is beneficial.
People have become more familiar with M&A as a tool, and various functions within organizations, including the communications group, have become better at telling the story. We've all started to realize the impact these deals have on different constituencies. Often, you either can't send a direct message to these constituencies or can't do it quickly.
For example, if you're announcing a deal, you won't want to send a blast email to your largest customers or biggest ecosystem partners. The one-on-one conversation with them will happen after they've read the press release. Therefore, the press release must create an initial positive impression because they will have already seen it and formed conclusions about how it impacts them.
M&A communication has significantly improved these days. Going back to the nineties, there's the classic McKinsey study showing that the majority of deals fail. Investors and the public market have become more aware of the potential downsides of M&A, creating an incentive to explain why a deal is beneficial.
People have become more familiar with M&A as a tool, and various functions within organizations, including the communications group, have become better at telling the story. We've all started to realize the impact these deals have on different constituencies. Often, you either can't send a direct message to these constituencies or can't do it quickly.
For example, if you're announcing a deal, you won't want to send a blast email to your largest customers or biggest ecosystem partners. The one-on-one conversation with them will happen after they've read the press release. Therefore, the press release must create an initial positive impression because they will have already seen it and formed conclusions about how it impacts them.
Continuous learning and improvement
Part of the fundamental problem is that corporate development teams are super small, and when they're busy, they're extremely busy. They are reasonably focused on deal execution, which includes deal sourcing, execution, and sometimes integration.
It's hard to carve out time in a demanding job to build capabilities, document best practices, and create processes. Although valuable over a 10-year cycle of doing many deals, this often takes a backseat to individual deals at any given time.
You need to be disciplined and recognize its importance for several reasons. First, while you may have corporate development experts, the majority of people involved in any given transaction are not experts. They may have done a deal at some point in their career, or they may have never done a deal. So having best practices documented and shared is crucial.
Many corporate professionals say, 'I've done 100 deals, I have all the best practices,' but those practices are in their heads. The 20-person team assembled for this deal, most of whom are not corporate development professionals, doesn't have that knowledge.
Best practices aren't just generic corporate practices; they are specific to the individual acquisition. What works for General Motors won't necessarily work for a smaller company.
You can't just take a playbook off the shelf and apply it. You need to adapt it to fit your corporate development organization within your company. Platforms like DealRoom help because they force you to structure your process and put best practices into a system that everyone can use.
This is especially important for corporate development teams that are not static. Some teams remain the same, but many, especially at the junior and mid-level, rotate frequently. Without developed best practices, tools, and standards, you'll start from scratch every time you hire a new person.
Anticipate functional challenges
Anticipate legal, tax, and HR challenges. Proactively addressing potential challenges in these areas can significantly smoothen the integration process. I might include finance alongside tax and sometimes other enabling areas like back office IT or real estate. If your thesis is heavily focused on tech, then that's a specific consideration.
As an ex-lawyer, I'm particularly sensitive to this. These three areas—legal, tax, and HR—can be potential minefields. Practitioners in these fields are often frustrated when they get brought in at the end of a deal and are told, 'This is what we're doing. If there's a problem, we can't go back and change everything; we'll just have to deal with it post-close.'
To address this, I believe in bringing legal, tax, and HR in very early so they're not identifying problems at the last minute. As one of my friends would say, they're not 'peeing in everyone's lemonade.' The trade-off is they need to own identifying and solving the problems.
They have to buy into the vision we've set. They can't just be issue spotters; they need to be partners in addressing and figuring out these issues while staying true to the agreed-upon vision.
Most legal, tax, and HR professionals I've worked with love this approach because they hate being the bad person who comes in at the end and says, 'That won't work.' They'd much rather be involved from the beginning to help accomplish the business goals. They're not trying to be naysayers; they're just responsible for an important area and don't want anyone stepping on their mines.
Getting a seat at the table early gives them a good strategic position. This ties back to the importance of having standardized processes. While a corporate development person might argue that there's no time for early conversations with all specialty areas pre-LOI, setting up standardized processes and communication engines can help.
Creating a mini data room and sending alerts to key contacts in legal, tax, and HR can flag the start of a deal. This allows them to review material without becoming a big distraction.
Empathetic leadership
I'll make a bold statement: I have never negotiated with or worked with a company. Companies are piles of paper. You negotiate with a human being who has a family, hobbies, biases, and interests that represent a company.
Recognizing that everyone involved in the transaction is not an automaton—whether they are lawyers, corporate development professionals, or finance experts—is step one in every deal process.
Understanding the counterparty is crucial. Before engaging, understand what makes them tick. What do they care about? What do they not care about? Often, if you understand the counterparty, you can make the ten things on the table equal to twelve. Finding something they really want and you don't care about creates value for them at no cost to you, and vice versa.
Everyone involved in a deal has inherent biases, from fear of change to excitement about opportunities, to ego. One of my running jokes is that the single biggest driver of M&A is the desire to be the CEO of a $10 billion company rather than a $5 billion one.
While M&A can create shareholder value, it's also a tool to make a company bigger, better, and more impressive, which impacts the management team personally.
Corporate executives have life biases that merge into their decisions. The same is true for HR, tax, legal people, employees, and service providers. Understanding these personal aspects can lead to better outcomes and avoid value destruction.
The human psychology aspect of M&A is fascinating because humans are most interesting when something dramatic and unexpected happens. Empathy and understanding that people are more than their titles can create tremendous value.
Really understand why people do what they do and what will get them to do what you want them to do. I'll give you a great example: acquired companies with dev teams that care deeply about their dress code.
For them, the dress code is a sign that they are like pirates on the high sea—creatives, not big corporate people. Psychologically, telling them they can't wear shorts to work can be far more damaging than telling them you're cutting their pay by 20%.
Proper preparation
You can never perfectly prepare, but using the 80/20 rule, if you do your best and take preparation seriously, you'll accomplish the majority of the value. The key difference is whether you're pretending to prepare or actually preparing. Pretending is just checking the box, while actually preparing means making real changes in the organization.
For example, on the buy side, it's crucial to have conversations with your organization in advance about what you would be willing to change to make integration successful. Are we going to allow developers to keep wearing shorts?
Are we willing to change our technology architecture? Are we willing to change how we compensate salespeople or switch from a direct sales model to a channel model?
If you're shopping for a certain kind of company, a good corporate development officer can predict many of the challenges to integration on the buy side and start to prep for them. The ROI is huge. If you're selling a small company to a large acquirer, some basic preparations over the last two years could increase the purchase price by 30 percent.
Open source code misuse is an extreme example. Small companies might think they'll never get sued, but buyers assume they will. Therefore, they'll either not buy your company or budget for the cost of rebuilding the code, adding a premium for the risk and time.
Not doing this kind of prep is penny-wise and pound-foolish. The ROI is huge, especially when much of this preparation doesn't require large investment dollars but changes in behavior.
You can't plan for everything, but there's definitely an 80/20 or 90/10 rule. If I'm a small tech company selling to a large company, I need to use open source code correctly. I need to have all my technology and product documented, and a clear road mapping process that people understand how I'm building my product.
I need standardized contracts for my customers that resemble those of the big players and include proper IP protection terms. While I might not be able to cover every aspect, I can identify the majority of things that will increase my value to a buyer. Many of these improvements don't require a lot of resources; it's just about doing things differently.