Fixing Broken Companies Through Smart Deals with Marc Bell Part 2

0:00This episode is sponsored by Dealroom, the only M &A platform designed for buyer led M &A. Most M &A tools were built for sellers or bankers But if you're in corporate development Doing two or more deals a year You need something built for how you work Dealroom is purpose-built for the buy side From pipeline through diligence It gives you centralized control over every deal Clear visibility into tasks Timelines and ownership And reduces manual work with bulk updates and templated rooms And when your process lives in one place you're not reacting to the seller you're driving the deal and that's buyer-led mna whether you're looking to speed up diligence keep integration on track or just cut down on chaotic email threads dealroom gives you the structure to scale go to dealroom.net or hit the link in the episode description and check it out here's to the deal

1:00I'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.

1:24Hello and welcome to the M &A Science Podcast. This podcast is part of a mission to rethink how M &A is done. The old school seller-led approach, it's dead. Buyer-led M &A is all about strategy, alignment, and efficiency. Putting value creation at the center of every deal. We uncover what truly works at M &A by learning directly from the best. I'm your host, Kisan Patel, founder and CEO at Deal Room and chief scientist at M &A Science. I'm joined by Mark Bell, a self-described deal junkie whose career spans everything from newspapers and watches to satellites and data centers. He's taken 17 companies public, executed countless acquisitions, and built businesses across the globe.

2:09Mark brings a mix of grit, strategy, and creativity to M &A. He's not afraid to get his hands dirty in a turnaround. Today, we're going to dive into what it really takes to fix broken companies, how to structure deals using leverage and seller financing, and the principles that guide leadership and success. This episode is part two of our conversation from last episode. If you missed part one, I recommend giving that a listen first. Otherwise, let's pick it up right where we left off. Due diligence. I think it's like an important part in just the examples you gave of investing across so many diversified industries.

2:47How do you approach due diligence? Do you have this sort of adaptive framework for doing diligence on these different types of investments? Or how do you do it? So when we do due diligence, we have a checklist, basically. We start at the top down. We go with sort of revenues, quality of earnings, make sure that cash coming in ticket ties to the bank statements, to the tax returns. We look at cost of goods sold. Are they buying things? Are they spending too much? Or where we could save money? So we try to figure out that we may know ways or places that we could acquire things at a cost savings because at the end of the day, we want to add value.

3:21We don't want to just buy a business. We want to be able to buy it. And then day one, immediately add value to increase the bottom line without harming the business. We look at expenses. What are they spending money on? Are they spending money smartly or foolishly? And you'd be surprised. Are they spending tons and tons of money on very expensive offices? is everyone flying first class instead of coach. And expenses grow. As the company grows, the fat grows along with it. In terms of things that they seem like a good idea when you're a small business, hey, let's bring in pizzas every day for lunch.

3:48And the next thing you know is you have a caterer and a kitchen and all of a sudden it's costing you millions of dollars a year to feed everybody. So you want to try to balance off where it makes sense to feed people on site. But it's a scenario we go through all the time because we want people to always not leave the office. It's a time value of money because most people eat their lunch in 15 minutes. But if they go to lunch, it takes an hour plus. And that's lost time during the day, lost productivity. So almost like the first view is the overall business case. So like, why are we doing this deal?

4:14Does it financially make sense? Do the financial picture look good? And do the numbers back into things that are validatable? First, we look at do we want to be in that business? So there's lots of things we don't do, lots of things we don't want to do. We either stick to things we know or things we easily can understand. And we also want to invest in businesses that we like. Do we like what we're doing? Do we like this? will be fun to do? Or can what we can do to the business be fun? How do we change how they do things and do it in a way that's much more effective? With all the tariffs going on right now, we're seeing all these overseas companies trying to come to the US.

4:48And because there's such cheap labor in a lot of China and other countries, they don't take advantage of automation. They don't take advantage of things because labor is so cheap. But in the US, we don't take advantage of a lot of automation either. So there's an immense opportunity to onshore all these products and goods from overseas, go back to Made in USA. Remember that from years ago? Yeah. Bring Made in USA back, Made in America. And people say, well, you know, cost of labor here is too expensive. But when you're doing assembly lines with robotics, you don't have that much labor. Your CapEx is very high, but your cost per year, but then the robots work 24-7, 365.

5:22They don't need health insurance. They don't need unions. They don't unionize, we hope. It's a huge opportunity. That's a good point. So the industry that you want to be in, then you can build like an actual business case, Make sure this is an area that either you know or you can learn quickly. And then the efficiency part was interesting because it's like, how do they operate their business? Where are these opportunities for us to be more efficient about running the business? Anything like you've learned in terms of really digging in to make sure there's no gotcha surprises? Because even some of these deals that you mentioned, buying things out of bankruptcy, I feel would be so hard to do diligence on.

5:53What have you learned to like really dig in to sort of avoid the big surprises? With every business, there's going to be surprises. with every business that's going to be grafted and theft. Fortunately, it's very unfortunate. We don't read about it every day, but it happens every day. But we're always going to find something that, oops, missed something. But we try to be thorough so we don't miss anything. As we get older, our checklist went from a very small checklist to a very large checklist. So it was one page is now hundreds of pages. As we go through all the different checkboxes we have to do to make sure that we don't miss anything.

6:22Hey, Mark, the big thing when I talk to people, you look at diligence, you look at the factors that drive success. it's always culture comes up big time. And I feel like there's such a wide view on the impact of culture. Some are like, you know what? Once you buy the company, you're going to make the culture to what it is or what you want it to be. Or others are like, hey, I'll walk away from the deal if the culture doesn't line up. What's your sense on it? We have a few different premises. Family first. We never want to see an employee miss their child's school play, miss a birthday, miss a baptism, any kid event.

6:53They have to be there for their family first. We don't want them to go home, build their performance and come back, do what they have to do, but we don't want people missing out on their family. That's number one. Different age groups, we've noticed, have different needs, and we want to try to appeal to those needs. So we had a company, it was a technology company, and we were hiring people, and we had an older workforce that we was building. We decided, you know what, if you were 60 or 70 years old, we still give you a job, because we see a lot of people discriminating against age. We've thought the exact opposite.

7:21They have all these decades of knowledge on what we were building, and it was very interesting, because what happens is, and we learned, is they would come in on the weekends. And we were trying to figure out why. As a group, out of 700 employees, we had 130 who were AARP members. And we saw a lot of them on the weekends. It turned out most of them were single, mostly men, mostly single, and they had no place else to go. What we did is on the weekends, we made sure that they had environments so they could all sit together and have lunch. And they weren't getting paid overtime. They were just, they were doing it because they wanted to be around people.

7:52That became their social life. So we encouraged it. and we did things for them that made it easier for them. We got them bigger monitors to make sure they could see everything. We got them all the ergonomic tools for their desk, different chairs for some people. We made sure we had ADA bathrooms everywhere, even beyond what the code required to make sure that we were definitely meeting their needs. Then they started bringing their friends. It was amazing. They were very loyal. They never quit. It just was an amazing thing. We also look at different religions. We built in our offices in California, we put a prayer room in for people who are Muslim.

8:21So for the five calls to prayer they could do. And we had a big prayer room and we had a place where they could wash their feet, hands and feet to keep their shoes outside. And we thought it's important to make everybody comfortable regardless of who they are. That's so interesting. That's a really different lens and just going beyond just understanding the culture. It's like you're sort of catering and finding ways to create a better people experience. Create a better people experience. We want people to feel comfortable regardless of their religion, regardless of their race, because of what they do.

8:47Zero tolerance policy for any discrimination in the company. You don't even get a warning. It's grounds for instant termination if you are violating our rules. I like that. So we got doing diligence, understanding the cultural piece, and that sort of lends to what are you going to do with the business afterwards? Find ways that you can improve operational efficiency, but also the people experience. I got a big topic I want to run by you. This is one I really want to take apart. If anybody's listening gotten this far, this is where you're going to earn your listening dollars over here. Capital allocation.

9:15It's something I didn't think very much about when you're running a really small business or just an early stage tech company. Now we're growing. We're about 50 people right at 10 million ARR. We're looking at options because there's M &A opportunities popping up and some are profitable. And you're like, well, I can do this deal with private credit. Some are not profitable. And it's like, well, I probably need an equity partner to do this deal. And then you're looking at your own business. We grew 44 % last year. We're strong. I'm pretty optimistic that we're going to grow as much, if not better, this next year.

9:48Checking off trade-offs there. It's like, well, if I raise equity, maybe I should just wait. Keep doing the organic growth, then do some of these things later on. So it's trying to get me to wrap my head and understand capital allocation. And I feel like there's context of a private sense. And then as you mature, it changes because you obviously got more products out there. And then you got the whole public market. Teach me capital allocation. Capital allocation, it's hard. You're making decisions that affect your future. Debt versus equity. I'm going through this now with a friend of mine. He's got an amazing company.

10:18He's growing very fast. He was thinking of selling a third of his business to raise some capital. And I was like, why? Instead of selling a third of your business, why don't you just put on some debt? And you get the same amount of money. But in the case, you could put your government on your upside and have your equity. And I said, if you're really confident, you're going to keep growing. And he is. I'm like, so put debt on the company. That's okay. You can pay the debt. and then in three years where you want to sell the business, you'll earn 100 % of the equity versus only 70 % of the equity if you sell all of equity today.

10:45That'll be worth much more tomorrow. But you have to have confidence. And raising debt is a double-edged sword. If things go bad, all of a sudden your creditors are going to take your company. You have to pick your creditors. You have to build relationships with your creditors, which is very important. They have a lot of power over your future. And some days will be good days. Some days will be bad days. You want a partner who's really going to work with you. The debt is cheaper capital in a sense. Well, debt is cheaper capital. If you have confidence, you're going to keep growing. Okay, so this is like the venture model, right?

11:13If it's like a high-risk thing, nobody really knows the outcome or probability or uncertainty, basically, then the equity is probably better. When I had my first venture business called Globex Ventures, I would always go to people in a half-joking way. I would ask them if they would personally guarantee the money I put in and let me put a lien on their house and their other condo and their car and their kids. and I just want to see the reaction. Then they'll be like, well, I wouldn't let you put a lien on my house, but why not? You're asking me to lend you money. If you have so much confidence, why wouldn't you want that?

11:45Why won't you personally guarantee it? If you're so confident that I should put up my money, why aren't you confident? And you see the reactions. And then sometimes people say, absolutely, I'll totally do it. And we never made people do it. But we wanted to see the reaction of how they would answer the question to give me an idea of what's going on in their head. So you look for that confidence. I believe if you truly believe in what you're doing, you will be successful. You have to be a true believer. People sense that. When people see that you have the passion and you believe in it, I used to teach grad school at FIU in Florida.

12:17And I would tell my students, they should follow their dreams. Don't do something to make money. Do something because you love it and the money will follow. And most of the time it does. I agree. You got to have that interest that keeps you in the game long-term and keeps you motivated. Yeah. You have to really love what you do. You have to want to be at work every day. Like when I started my first company, I lived in the office. There were 120 hours a week. Every week, I loved what I did. And if I don't love it, then I shouldn't do it. But if I love it, it's successful. When I look at doing a minority recap for our business, one of the things I'm interested in is finding the right private equity partner that could potentially bring us two things.

12:53One is the ability to mature M &A muscle faster. Help us the strategy, getting more sophisticated with the strategy, build pipeline, help us execute. Second is our product fits into the private equity ecosystem. We sell it to about 200 corp dev teams. Right now we have a handful of private equity. Can you accelerate or go to market in private equity? Because that's a whole learning curve I don't want to do all over again. That's like the incentives that we are beyond capital. Do you start looking at some of those factors and say, okay, maybe there are some reasons. or is it just, let's keep being dizzy?

13:28I still got high confidence. I don't need them for a while. I can still continue that 40 plus percent growth rate than maybe the debt's cheaper. With private equity, some private equity firms are amazing and they're great partners and they will really help you. Some are loan-to-own shops. They're going to invest in the idea of finding a way to squeeze you out of the rest. When you're looking at private equity firms, you should talk to the CEOs or the owners of other deals that they've done and see what their experience was with that firm. And that's the first thing I tell people. Just like interviewing a candidate you're going to hire, you're interviewing a private equity firm.

14:00You want to know about them and you want to know not only their track record, but you want to know from the people who they did business with, what they thought of them. Because the firm may have made money, but they may have screwed the founder and the CEO of the company. That's a good point. That's one I'm working on now. I'm just doing a backdoor. I just go to the portcodes that are adjacent industries, reach out to their CEO and say, hey, talking to so-and-so, would you mind giving me a little bit about your experience with them? Yeah, that's great. And then that probably helps you get that.

14:27It's almost like your own personal justification of, is there going to be more accretive value beyond the capital with this partner as opposed to, otherwise, I'll just go get that. Yeah. KKR had a great model decades ago where they had a whole team that would help come into your business and help find ways for you to save money like a consulting firm. Some firms still do it today. They literally will come in with a team and they'll help you figure it out. They'll help find ways for you to cut costs. They have bulk deals, whether it's with FedEx or whether it's for mobile services, what have you that they can get you cheaper rates.

14:56But it all adds up. Pennies turn into dollars. You got the general evaluation of equity versus debt. That big factor is your confidence in your future. So that's going to be one piece of it. And then that there's obviously a lot of different products. It depends where your business sits. You have asset light. And then I guess your size, because I've noticed that we're bootstrapped still. And you don't get as many options if you're private equity backed. So you got to play with certain private credit firms. You're paying really high interest when you're in that situation. I'm curious about when your business matures and you start thinking about these other levers that come into play.

15:29You mentioned bonds earlier. Going public, you've taken a number of companies public. What's the rationale for doing that? Because now you're seeing all this private capital available. We've seen Stripe and these other companies just stay private forever. Today, I believe if you take a company public, you have some sort of mental deficiency. 30 years ago, it was a lot of fun. Now, it is just you stay private. If you have any brains, you stay private. I will never do another public company again. It is just I will keep everything private. I'll sell to private equity firms. I'll sell to somebody, but I will not go public.

16:02It's just not worth the headache. It's the same reason why a lot of smart people won't want to run for Congress, run for office. It's just not worth the headache. Okay, so let's say the headache in public now, I'm throwing out there. It's a public scrutiny. It's everything you do. Yeah, public scrutiny, investor relations. Everything you do is wrong. You can grow the company through the roof, and it's still wrong. and because you didn't do it there, you're growing 100 % a year and if you grow 99 % one year, oh my God, you're a failure. With social media, you get all these people, short sellers are out there all over social media, just bashing on you.

16:33And I'm like, it's just not worth it. It's not worth the headache. X is not your friend. Like anybody can be an activist now. They can be. It's mind boggling how many people out there, they're probably 14 year old kids sitting there doing this and or people in China doing this. It's just mass rooms. It's just people who are just bashing you. And it's, I don't need this. And I stopped looking at social media. I was like, you know what? It's just not as much fun as it used to be. Okay. I'll rule out going public. Maybe it'll be like, I could exit to a public company and call it a day. There you go.

17:02Take a stock and run. Hold a roll for a title for a year or two and then call it quits. Exactly. Six months to be done. What are other levers? I mean, there's obviously private equity runs the gamut. You have EC, you got different private equity from majority minority owners. You got just individuals. You have sovereign wealth funds. The large institutional side. Yeah, they are big and massive. And your family offices now have become massive. So much wealth has been created in the past 20 years. It's phenomenal. When I think about it, to give them the Forbes 400 25 years ago, you needed$750 million of net worth.

17:38Today, I don't even know how many billions it is to make the Forbes 400. The wealth that's been created in this country and all over the world is just phenomenal. and these family home offices, they buy businesses and they invest and they spend their money to work. Family offices have become a juggernaut in the investing world. It just didn't exist 25 years ago. We have this capital structure. There's all this different equity options and then debt as well. Private credits open up a bunch of different options and products as well. Is the math like something, I want to understand, go back to capital allocation broadly.

18:09How do you do the math in your head? Because I know you've got a strong investor lens. Is it, hey, I'm looking at five years out. I want to be at this target IRR and working backwards. Because for me, I'm still that bootstrap mentality. I'm just going to work my ass off day in, day out. And at the end of the year, I'll sit with the tax accountant and look at the numbers and he'll tell me how I did. Kind of curious from your sense, if you've got a different view of how you think about capital allocation from where you're targeting returns working backwards, or is there just a different way that you look at it?

18:35When you look at capital allocation, where do we get the biggest bang for the buck? Risk adjusted. So what's the risk? If it's a short thing, and sure they can be defined a million different ways, we'll do it. Like right now, I've been buying up for the past year, lots of bonds and banks. And I'm paying game pay 7%, 8 % coupons right now. So it's a good portfolio move. And it's turned out to be a great portfolio move in this market right now. And equities have gotten pretty, you know, right now, I'm holding pretty flat. The market's down a lot and I'm pretty flat. So we made some good equity choices.

19:01We've seen private companies. It's all about risk reward. What's the odds are going to succeed? What's the odds are going to be a winner? And you're betting on not just jockeying the horse, you're betting on the industry. Is industry going to be a goldmine? We've spent a lot of time lately looking at small modular reactors. We spent a lot of brain cycles trying to figure out now how we can mass produce them, how can we do it cheaper, how are there ways we can do it. At the end of the day, we can't figure out a way to get it below four cents a kilowatt. It just doesn't, math doesn't work. And the amount of how hard we tried on paper, no matter how much we wanted to be able to do it, we couldn't figure out a scenario that it's cheaper than natural gas.

19:39So then you profile as a high risk. So much as we profile. as a super high risk. Then your expectation is like a much higher return. We had this vision that we could make a lot of money doing it because there are all these data centers being built and they need power and there's not enough power in the US. But at the end of the day, it's not going to come from small modular reactors. We just, it doesn't work. The math doesn't work. And that was, we were all very disappointed because we spent months on this project and we just couldn't figure it out. Looking at your investment thesis in a certain time frame or does it just completely vary?

20:09It varies from day to day. Right now, real estate has me all excited. I'm watching the real estate markets around the country start to soften. San Francisco just collapse all in. People are buying things for 20 cents on the dollar. And then office buildings in San Francisco. I've seen it in Chicago too. I look out my window in my hotel here. I see vacant floors all over the place in all these office buildings. I don't know what the vacancy rate in New York City is, but it's dropping like a rocket. There's so much empty space everywhere. Retail around New York City, there's tons of empty stores.

20:36I'm seeing in Miami where I live, prices are coming down. People are getting... And what's going to happen is you're seeing the inventory of things for sale in Miami skyrocket. You're seeing the number of sales drop dramatically. Interest rates have gone up dramatically. No one's buying. And that's going to start putting huge pressure on people who have to sell to really start lowering their prices. And we're seeing some great opportunities all around Miami now to buy real estate. And because people realize that a year from now, it's going to be a lot cheaper. Yeah. That varies on that strategy of what your whole period is going to look like and what the outlook is.