Building your M&A Muscle

0:28Hello, M &A scientists. slash pricing to see how much you'll save when you switch to firm room. And you can do a free trial right there on the spot and do a side-by-side comparison. So you can see why it's a better product for a better price. Dealroom is a leading M &A lifecycle management platform. It manages your pipeline and combines diligence and integration into one process so that the integration is faster and easier. Even if an investment bank is driving the sale process, Dealroom helps you take over once the LOI is signed and drive better integration results. Learn more about Dealroom at dealroom.net.

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1:46I'm Kisan Patel, and you're listening to M &A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M &A deals.

2:25to the next level. Get started by signing up to our free weekly newsletter to stay up to date on our latest courses, upcoming events, and expert interviews. Again, that's mascience.com. I'm your host, Kisan Fatal, CEO and founder of M &A Science. Joining me today is Nate Lemmerman, Senior Vice President, Corporate Development at Cast and Crew. Cast and Crew is a leading cloud-based platform powering a broad range of processes essential to global entertainment and content creation designed to solve customers' payroll and human resource management, accounting and financial management, data and insights, and talent and creative needs.

3:05Today, we're going to talk about how to build your M &A muscle. Nate, how are you doing today? Doing great, Kisan. Thanks for having me on. Hey, thanks for taking a break from doing deals to have this conversation. Can we kick things off a little bit about your background? I had a somewhat traditional background before moving on to CorpDev. So I started off in investment banking, where I worked for a few different firms and was exposed to a broad range of deals in industries from raising private equity and doing debt and public offerings like IPOs, follow-ons, as well as buy-side and sell-side M &A.

3:37I went on to private equity, working for a fast-paced middle market private equity fund and closed a lot of deals of a bunch of different funds that we managed. Worked on a lot of different industries, media entertainment, specialty manufacturing, franchise businesses, casinos, gaming. So I was exposed to a broad range of industries. One of the things that I really enjoyed about PE was partnering with our management teams and working with them to develop like a post-acquisition growth strategy. We'd always focus on that, of course, as investors and making sure our investment works out. And sometimes that strategy was pretty clear and built out by the management teams.

4:09And sometimes we needed to lean in more and just formalize it with the teams. And I just loved watching the management put those strategies into place and in action and ultimately get rewarded for the work that they've done in executing those strategies. And so I came to the conclusion that's what I wanted to do. I wanted to work in a private equity-owned environment at a company in a strategic role. And especially if the large part of that investment strategy and growth was involved M &A. And so that's where I've spent the last about a decade of my career. You hit the full evolution from investment banking and private equity to corporate development.

4:41I love where I'm at right now. It's been great to build out a new strategy for a company that is a leading player in space without having traditionally done M &A. And now that's part of our overall growth strategy and focus for us. What would you say are the skills that are different between the roles when you went from IB to PE, then PE to corporate? Once you go work at a company, you really have to learn how to work cross-functionally and understand the various functional experts and leverage their skill set to bring that to the table to evaluate deals. And of course, once you acquire a company, especially if it's a larger, more transformative rib deal, you really need to have that buy-in amongst the key functional leaders to make sure that the acquisition and the strategy and the integration goes smoothly and well.

5:29You got a lot more moving parts internally got to deal with and leveraging your internal SMEs. Yeah, absolutely. Just building those relationships and partnerships with people. And it helps with everything for what you're doing at the company. It helps with your growth strategy, helps with your focus, helps identify new opportunities and potential pipeline for M &A or partnership. It really is a cross-functional partnership with the leaders that you have to ensure that you have the good relationships with the functions to make sure that M &A deals are successful. Team effort. Now you built the M &A function from scratch at Casting Crew.

6:04Yes. What prompted you to build the function? I was brought in by one of our private equity sponsors at the time. This was seven years ago or so when I joined. It was just a key piece of the investment thesis for the private equity sponsor that there was a big opportunity in the space. I think our management team all thought that and we just hadn't traditionally focused on that. And we just wanted to see if we could diversify the end markets that we're in a little bit more both domestically and internationally. And then also the overall end markets that we're in. We were in a few pieces of entertainment, film, television, streaming, and we wanted to get into other entertainment and markets as well.

6:40And so that was a big growth mandate that we wanted to go and execute. Okay. So part of the PE strategy, they brought you in. What did that look like? How did they explain this to you? We're bringing you in and we're planning to do a bunch of deals and you're going to run all this? Yeah. Started with the top. You develop your kind of overall growth strategy first and where you really want to go in the next several years. We worked together as a team to go out and map that out and what that would look like. M &A was a key enabler of how we go execute that. Once we said, okay, these are the opportunities that we want to go after, we can narrow down where our focus is from an acquisition standpoint and strategy.

7:18You will really want to align your M &A strategy with the overall company objectives and growth strategy, and then you can consensus and alignment on that strategy so you can prioritize it across the right functions. Overall, growth strategy allowed you to shape your M &A strategy. Then it sounds like you developed a pipeline. Yeah. And if you're doing this and broadly speaking, you just need to think about, okay, what are the key goals do you want to achieve? Do you want to diversify the end markets you're in? Are you filling a product gap? Does your company need to address a competitive threat?

7:46All of this will help narrow down and then help you just with key evaluation criteria for each opportunity and help you build your pipelines. You think about, okay, how well does the company fit in or enhance your company's overall solution? Are there cross-sell opportunities? How close to the core is it? What is the integration going to look like? Those are key questions and things that can help narrow your pipeline once you have that strategy and focus. Okay. How many deals did the company do prior to you getting there? And then how many acquisitions have you done to date post-joining? M &A was new for us when I joined and we've closed nine deals in the last seven or so years that ranged on size and kind of fit and type of deals.

8:27So we've done smaller kind of product tuck-ins and acquires to larger, more transformative type deals. but we hadn't done any M &A prior to me joining. Okay, so we really did all this from scratch. We evaluated a lot more opportunities as well. We just, we typically try to close one to two deals a year. It's just based on the types of deals that we're looking for. Let's break this down. I want to get my little steps on how to do this here. So where did you start? It sounds like you got into it. You started with getting on the same page about the growth strategy, the M &A strategy, and then the pipeline.

9:01Do we miss anything there? You really have to determine with the team, what does the growth of this company look like? And what are the key growth priorities that you want to achieve short-term and long-term goals? For us, we really wanted to diversify the entertainment and markets that we're in as an example. Okay, how do we go do that? What can we do organically? What would it take from a product standpoint for us to go do that? Would we be able to accelerate that through M &A, which is where we ended up focusing? All of those questions need to be answered and at least discussed as a team. In the best case scenario, you have alignment on, okay, now we have alignment on where we want to take this over the next several years.

9:38And then we can say, okay, let's have this team focus on these specific areas. My team at Corporate Development was tasked with, okay, let's go find acquisition opportunities in these specific markets or filling these product gaps for us that we think that we need to fill. And in doing that, you can have a multi-prong approach to get to where you want to be because M &A is not always going to be there. it's hard to go identify companies. Some companies may not be for sale. So you really have to start getting out there and building relationships and finding the targets and starting to see if you can evaluate them and how good of a fit they're going to be.

10:13Do you have the right teams that you would have? Are you going to have to go and add to that team to really make it successful? Deals come up, whether they're in banked or sale processes that you may not be ready for, but it's a good opportunity and you have to just go out and do it. I've been in a good position, lucky position, where we haven't had any issues with financing deals or finding capital for that. But if you're going out and building something from scratch, like we've been talking about, you need to make sure that you have capital that you can go out and figure out how you're going to close these deals so that you have that alignment as well.

10:43I know I've talked to a ton of people in this space, kind of corporate development or M &A and the corporate side that haven't been as fortunate and they've had opportunities missed because they haven't thought through how they're going to go out and finance deals. They found them, but they haven't been able to go to actually close them. And we never want to be in that position. So we've built a good reputation, if you will, of once we find a deal, we have the strategic fit, we have the organizational fit and alignment, and you've agreed on a headline price, we've been successful in closing those deals.

11:13Is this something you work with your PE sponsor on, just to have a good sense of what kind of capital allocation do you have towards M &A? Yeah, absolutely. It's also a conversation with our management team. What can we really take on? We have to have some realistic conversations. There's the day job, which is growing the core business. And we need to make sure that we can successfully acquire these businesses and integrate them or at least develop an integration approach and strategy. Sometimes you do have just like a tuck-in type deal and you're not going to fully integrate. Or sometimes you may just say, hey, we're not ready to integrate, but this is what we're going to do over time.

11:48But you need to make sure you have that discussion and alignment across the board at the company and then eventually with your sponsor as well. How detailed do you get with this strategy? Because I feel like on one extreme, you could be pretty vague about it and maybe just have a general revenue target. Another extreme, you could probably detail a whole market map out and be extremely specific. How do you get a good sense of how much detail or fidelity do you have in your strategy? It just depends on the situation. On the private equity side, I've gone very detailed and done the kind of big market mapping.

12:21And that's where you may not have much of a strategic focus or where you're trying to figure out, hey, where are all the opportunities and everything gets thrown under the sun to see what would stick. There's not really a right or wrong answer for doing that. It's the more focused you can be, of course, the easier it is to evaluate opportunities as they come up. We get opportunities that come to us all the time and you don't want to be spending time on things that you know aren't going to go anywhere. It helps you do your job better and more effectively if you have, okay, this is our strategy.

12:53This is what we want to go do. And of course, there's going to be edge cases out there that are going to come up where you're like, okay, this may be something where we want to go. There's not really a right or wrong answer there. I like to have as much of a narrow focus as you can, as long as the opportunity is there. And then look, some M &A deals, they unlock new markets for you that add a whole new ecosystem of M &A opportunities for you. And those are great. We certainly have done that. There's no real right or wrong answer there. And that's what I was going to ask you, because when you start looking at these opportunities, and I see how it can serve as the guidelines, but I feel like none of these deals really fit perfectly in or rarely.

13:31A lot of times it's how we twist and turn or get creative to make it work. And you can be real creative sometimes on seeing if something has a real strategic fit. You really have to think about, especially for larger, more transformative deals about what does that deal do to the combined company? What does that form your company into? And how are you going to be pitching yourself and your business to future buyers and investors going forward? Especially once you get into those bigger deals, you need to know, okay, what does this do to our business and how we think about the company that we are?

14:06Tuck-ins are easier. If they're smaller tuck-in type deals, you're adding a product to your stack or something and it's complimentary, There's a cross-sell revenue opportunity. Those are a little bit easier because it still fits within the core of the business. It's those ancillary markets or products that you're looking at that could potentially change the type of business that you are, where you really have to start thinking about that from a strategic standpoint. So there could be deals you come across that'll get you to rethink strategy in general. Absolutely. Yeah. Strategy is fluid anyway.

14:37You have to think about, okay, is this the right strategy? We do it every year for us. And we think, okay, these are the growth priorities. These are the company's strategic priorities that we have across the company for the next 12 months to get us to where we think we want to be and what we need to achieve to make sure we're on track for that. And we revisit that during the year. And then you dust that off and talk about that as much as you can and make sure that you're focusing on the right things. And as new opportunities come up, then you can challenge yourselves together as a management the team to see if those really are the opportunities that you want to go after.

15:12We talked about shaping this growth strategy that shapes your M &A strategy, building out the pipeline, making sure you got the capital and you know what you're working with there. What about structure of your process to execute on the deals and then governance? So you mean as an opportunity comes in, how do you go about getting it to eventually a closing? Yeah. Do you just figure that out as you go? Yes, you do. You always figure out and learn things in deals. There's some basic fundamentals for us, especially if we're doing an organic outside of a sale process where a banker has been hired and we've established a relationship and we're saying, OK, this is a potential strategic fit.

15:51Let's see if there's a deal here. we try to do a pretty quick eye-level analysis from a financial perspective outside of the strategic analysis and try to figure out what we think the company's worth for us. And we make some assumptions on that. We look at the deal and size and what we think the synergies are going to be, whether the revenue or cost synergies that we're going to be able to execute and try to come up with internally. And we have a debate as a management team and talk about that and focus and of course, talk about it with our board and our sponsor and come up with a headline kind of price and structure.

16:27Assuming we can get to that with the seller, then we'll move on to a more detailed confirmatory type diligence before moving on to a closing. So we like to get to at least a price. And if things check out in diligence, we're comfortable closing on a price. So there's no surprises to a potential seller in terms of what we're going to do post agreement on those terms. If we get to the little steps, like you find a company in the pipeline, you reach out to have that introductory meeting, you get to know each other and say, hey, there's some pretty explicit interest in making a deal happen. What happens from there?

17:03Do you do another call or multiple calls with some diligence and then a formal request? Or do you do just a formal request at once? What are those little steps to get to your valuation offer? I'll answer this in a kind of non-banked process type deal, because those are pretty established steps and parameters. Those are the ones we want to do anyways. Right. No, we're not afraid of those. And we do those, of course. But the ones that you can originate are always can go a little bit better. Those types of deals, establishing that relationship and culture fit at first, that takes time. And assuming you're through that process, which can take a number of years, even we'll have an NDA in place.

17:44We'll get some basic financial information. At that time, we should have already established the strategic fit and rationale and have general alignment across the company on that. We'll do some basic financial modeling and structuring and things like that, figuring out how we think we want to go back to the seller in terms of a price. We'll do that in the form of an indication of interest or LOI. And then we will typically sign that. We'll want some exclusivity to make sure that we're going to start dedicating some resources and hiring third parties to help legal QOV tax structuring, that kind of stuff.

18:18That will be confirmatory diligence over an expedited period. And we'll pull together a purchase agreement and start negotiating that and moving towards a closing. So we move pretty quickly once we kind of agree on the high level key terms to get to that to an actual closing. And we would want to do that in the form of some kind of signed exclusivity provision in the best case scenario. And sometimes we'll just move towards it without that. How do you know who to let under the tent prior to getting the LOI signed? We will have more meetings diligence-wise, of course, during that period. And that will include the key top leaders from each of our key functions.

18:55So I'll work really closely with our CTO, our CFO, our head of product. We'll have executive meetings, typically on a weekly or biweekly basis, depending on how quickly the deal is moving. With other key functional areas, Legal and I are obviously really close on all the deals too. So we'll pull into HR. We're talking about, depending on the structure of the deal, we're having positions and organizational structure changes and things like that. We'll be partnering with HR and how that's going to fit and how we're going to put the company in place and where they're going to stand in the company and how the reporting lines are going to work and all of that.

19:30So that's a real collaborative, cross-functional effort with the leaders. And we'll have a bunch of those key leaders, including sales and marketing, of course, in some of those diligence type meetings where we really dig in, have management style meetings where we're going through the business, key findings out of diligence and all that. Pre-LOI. We pretty much do that post IOI or LOI. Once we've agreed on high level key terms of the deal, including our headline price and valuation. Okay. And then what about before that, before you got assigned LOI, who would be under the tent at that point in time?

20:06The executive team. Just purely the executive team? Yeah, purely executive team. Sometimes they're number two or three, depending on if it's a heavy tech focus, product-based deal. We'll want our team where we think that this product is going to fit and integrate into. We'll have that team very involved on the front end as well. Then do you have a legal person there? Yeah, my GC and I will, and his team will be attached to the hip throughout the deal. Same with our CFO on all of our deals. Okay. We'll hire third parties to help with us with confirmatory type diligence for the quality of earnings and tax and structuring and legal as well.

20:41Then once you get assigned, that's when pedal to the metal, you're getting a lot more of the functional lead, a lot more folks under the tent. Every deal's been a little bit different. We want to move quickly and we also need to make sure we get all of our work done, of course. as long as we know we're in alignment with the seller on price and some of the key structural aspects, then we're focused on the diligence because all the legal documentation and all of that, I feel like we pretty much have a good pulse on that. And we've been able to negotiate good deals with that and haven't had any of those things come up in our deals that have prevented us from closing.

21:16So getting to that headline price and general structure has always been like the key. Now, there are some things when we have management teams coming in and fitting in with our broader organization where we need to have conversations from a compensation perspective of like reporting lines and things like that, that we will be very focused on. It's almost more of a legal documentation negotiation that we need to have as part of our deals that will come in that kind of like post agreement on the headline price as well. We don't really need a a signed LOI to go to that step. We just want to make sure after time we have agreement on those key terms, including the valuation, and we're going to be working towards a close and confirmatory type diligence.

22:01Are there any like key ticket diligence things you're looking for prior to getting that offer signed? I imagine you want to try to head off some of these critical things before you sign a deal. First off, we want to make sure that the company's financials are what they say they are. We have third party and internal folks that are experts in that. But we want to make sure we're buying what we're buying and the financials are what they're representing. And that's one of the biggest pieces, of course. We have our technology team, depending on the type of deal, of course, again, we have our team look at the tech and some basic key metrics around the technology and the product stack and architecture and things like that.

22:39And occasionally, we'll have some third parties come in depending on the bandwidth of our team to help us with that. But they're leading that. Our tech team's leading that. So it sounds like you can do a good assessment up front to get to this LOI. And then a lot of the bulk of the work happens post-LOI with a lot of contingencies, basically, that you got the quality of the financials. Because if there's something instrumental change there, then you'd have to change things. When we're having a target and we're having the acquisition conversation, we have done a lot of front-end work before. So we've done kind of phase one of diligence at that point before we deliver our first indication of interest, whether that's in a short letter talking about the value and general structure and kind of key assumptions and what we need to do in our next steps to get to a closing.

23:27Or if we do it in more formalized LOI, which has potentially some longer form type things that you would see in a term sheet that you would use as an outline for a purchase agreement. So most cases, though, it's a more informal, non-binding indication of interest where we talk about those key assumptions. We talk about value. We put a number, not a range, on the valuation, which we negotiate, of course. And once we do that from there, we move into that kind of phase two, phase three of what you would see in a banked process of, OK, let's move towards a closing and confirmatory diligence. We still do a lot of things that you would see in kind of a more formalized process.

24:06We would have a management meeting. We would have the sellers and the management of the seller meet our management team. And we'd have ideally in-person meetings going through key diligence analysis and work and kind of a diligence type discussion. We would talk about our post-acquisition integration strategy and philosophy and make sure we're aligned internally as a team and externally with the seller. Okay, what are we going to do together? And how does this going to look both organizationally and going through and taking advantage of the opportunities that we're going to have by being together?