How Not to Bomb Your First M&A Deal

0:00This conversation is with Brock Blake, co-founder and CEO of Lendio. He was named Utah Business Magazine CEO of the Year in 2021. In this interview, he'll teach us how to avoid an M &A disaster on your first deal. We covered common challenges of M &A, the proper deal approach on your first deal, understanding culture of the target company, how to validate assumptions before acquisition commitment, and how to work with earnouts. This episode is sponsored by our flagship products, Dealroom and Firmroom. What's the difference between Dealroom and Firmroom? I get asked this all the time. I know if we could have made the branding any more confusing.

0:39So let me break it down for you. Dealroom is an M &A lifecycle management platform. It's perfect for any company that does two or more acquisitions a year. It manages your pipeline, diligence, and integration. Also divestitures. It automates pipeline reporting and follow-ups. So you stay focused on conversations with potential targets. And this is where it gets good. You can run full diligence for all parties involved, internal, external, and counterparty in one workstream, then create a parallel workstream for all the integration planning. This allows your team to start integration planning at the start of diligence and iteratively update the integration plan with incoming information.

1:20This is how you get integration done faster. Nobody in the world does this better than Dealroom. I know that's a bold statement, but I will take bets on it. Now, Firm Room is a virtual data room that is as simple as it gets. Back in 2018, the team at Deal Room noticed many boutique investment banks and law firms that cared about their customers were just looking for a simple data room solution that wasn't charging ridiculous per page billing fees. So we did something about it and carved out the data room functionality in Deal Room and made it into a dead simple self-service data room offering.

2:00If your deal isn't that complicated, then probably a simple data room is the way to go. You'll find the best value with Firm Room. Pricing starts at 500 bucks a month. So there you have it. Deal Room versus Firm Room settled once and for all. You can check them out for yourself at dealroom.net and firmroom.com. Again, that's dealroom.net and firmroom.com. Let's get to the interview. I'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.

2:51Hello, M &A scientists. Welcome to the M &A Science Podcast, where we learn from the best in M &A to uncover proven techniques for enterprise value creation. If you're interested in learning more about M &A science, how we support world-class M &A teams, or just want to get involved with our community of forward-thinking M &A practitioners, visit mascience.com. You can get started by subscribing to our free weekly newsletter and we'll see you next time. the latest insights and events. Again, that's mascience.com. I'm your host, Kisan Patel, CEO and founder of M &A Science. Joining me today is Brock Blake, co-founder, CEO at Lendio.

3:26Lendio is the nation's leading small business finance solutions provider designed to help small business owners access and manage capital. Lendio matches small business owners with the right lender and loan to meet their needs. Today, we're going to talk about how not to bomb your first M &A deal. Brock, how are you doing today? I'm doing great, Kisan. Thanks for having me. Hey, thanks for taking a break from running your company and doing deals to teach me a few things here. Can we kick things off a little bit about your background? As was mentioned, I'm the co-founder and CEO of Lendio. Lendio is the largest platform in the US for small business lending.

4:00So we're helping Main Street America, restaurant owners, landscapers, dry cleaners, whatnot, get access to capital. So they come to our site, got an application, comparison shop, loan options from a bunch of different lenders. We have about 400 employees. We fund about 4 ,000 loans a month. We are growing quite nicely. Our headquarters are in Salt Lake, and we have an office in New York as well. I started my entrepreneurial career right out of school. I was playing soccer at BYU, and I heard about an entrepreneurial program. With this venture capitalist, this very wealthy venture capitalist decided he wanted to figure out how to give back.

4:37So we created this program where every week there was a four-hour class. You're at the feet of these successful entrepreneurs hearing their stories. And every week, there would be an entrepreneurship sales competition or marketing competition or tech competition. At the end of the eight weeks, there's 100 applicants. They narrowed them down to 20 and we went through this bootcamp. At the end of the eight weeks, they selected five and gave each of us$50 ,000 to go start a business. So I was one of those winners and could use it to go buy a business or start a business or anything that I'd like.

5:09I was out talking to other business owners trying to figure out what I was going to do, whether I would buy a business or whatnot. And every business owner I talked to, their biggest pain point was capital. I need a loan for this or I need to go raise money for that or I want to grow here. I want to open up a new location. And it was such a pain point. So we decided to figure out a way to solve that. We went through a bunch of iterations, made every mistake in the book, but finally came out with the business model of Lendio, where we're kind of this two-sided marketplace. We've had a nice run.

5:40We founded it in 2011 and keep growing it. Good founder story. I was always curious if any of those accelerator programs ever worked or made any difference. But in your case, yeah, at the very least, it got you through the path to make the iterations that got things in the direction you're in today. I guess some of them do. How about M &A? You've done some deals. How did that get into the picture? What prompted some of the deals you've done? We've grown organically a lot. And then we're always evaluating, are there problems within the business that we could solve faster if we went and made an acquisition?

6:11So we've done three acquisitions. We've learned a lot, some great wins, some painful experiences along the way. We will continue to do M &A as we go. But first deal happened, we founded the company in 2011. and our first acquisition, I think, was around 2015. And then we've done a couple more product acquisitions since then. They've been really helpful to our business. They don't always go the way you think they're going to go. In fact, they go usually very different than you think they're going to go. Can we talk through some of these deals that you've done? What were the drivers behind them?

6:47My goal here is this M &A Science. I've done this for a while. I had a lot of conversation about M &A. Our company's growing and scaling. We have 50 employees. I'm Brock, I'm itching to do deals. And this is the experience where you've got it fresh in mind through those first deals where I feel like the real tough lessons are there. And I just really want to learn in preparation of when we start doing deals ourselves. And I feel like there's some common themes in those first deals that you do and what prompted it. But I'd love to hear a little bit more about what drove those deals. Yeah. So the first one we did was the largest acquisition.

7:17And essentially what we were trying to do is we were trying to go out and acquire a competitor. We wanted to scale more quickly. A big part of our growth was our ability to acquire small business customers. We wanted to find competitors that had figured out unique ways of acquiring customers that were different than the ways we were acquiring customers. Long Island is a hotbed for some of the lending marketplaces or some of the brokers that are out there. So we went out and I started evaluating, meeting with every potential competitor that we could meet with. I went to about 10 or 15 different organizations.

7:55And some of them, I'd walk in the door. And the second I walked in the door, I'm like, this is not it. This is not the right fit. You could just feel by the culture. In fact, some of them were kind of, to me, very shady. I felt like I had to take a shower coming out of what they'd built. It just was totally the opposite of what we were trying to do. And finally came across one that was actually one of the largest players in the space and met with the CEO was someone that I connected with right away. I could tell by walking into the organization just by seeing the type of atmosphere, the environment, the energy, what's on the walls.

8:35They cared about their employees. They cared about culture. So we started building a relationship. Right away, we were like, this is something that we think could turn out. We ended up acquiring that business. The name is Business Bounce. It's interesting what you learn when you're doing an acquisition. The founder, CEO of that company is no longer with us. It lasted a couple of years. It was actually really helpful to our business. Then we started to see things differently. The way he operated versus the way I operated. The way his opinion on growth is different from my opinion on growth. And his opinion on culture and business practices was different than mine.

9:13Not better or worse, different. and just felt like there was an opportunity for us to be able to separate. So we created a separation plan. But as we went through that first acquisition, it was all about culture. We learned a lot around the type of team members that we were acquiring. We're here in Salt Lake City, Utah, which is a very different environment than Long Island, New York. Yeah, imagine. They didn't trust me coming in as a leader. A lot of the first interactions we'd have, I'd get up and stand up to do a town hall. and they just had no trust. Who are these people that are coming in and buying this company?

9:49The only way we could build trust, we'd say, hey, this is where we're going. This is what we're going to accomplish. This is how it's going to benefit you. And then have your actions and your results match your kind of prediction and you would start to gain credibility. But we went through some really difficult times as we made that acquisition. Just from that buy-in, it required a lot of work and effort to be able to get this relationship built and the integration happen so that it has been successful. I get a sense that it was focused on buying a competitor. The big interest there was not only getting more market share, but seeing a different go-to-market and ways to acquire a customer.

10:29That's right. Interesting on the initial, hey, there's a culture fit, but then later on, discovering the intricacies of culture fit. What about the other deals that you worked on? Because you mentioned they're more product-focused. How did the nature of flow with those deals go or compare? The second one that we did, I'll tell you one thing that we've learned is sometimes we go out and make an acquisition based off of the hope that the idea will help accelerate the business or the technology. And partly, I've learned this from my business partner, acquisitions are more likely to work if you really define the problem statement.

11:06What are you trying to solve for? And then how will this acquisition, this product or this service or this company actually solve that problem specifically? Not just, I go find a cool company and I'm going to acquire it because I hope that it will be additive, one plus one equals five to a scenario. And sometimes that happens, but I think it happens a lot less than you think. We kind of had this idea that, hey, if we could go acquire this, it was a bookkeeping solution technology. It didn't have any revenue or customers, but the technology was pretty good. And we thought if we could go acquire this technology, we're really good at customer acquisition.

11:45We're really good at sales and marketing, but we're a lending marketplace. And we thought, oh, man, we could cross sell. When a customer comes in for a loan, we could cross sell them for bookkeeping. Or when they come in for bookkeeping, we could cross sell them for loans. And the data that we'd be gathering from doing their financials as a lending marketplace, it's really hard to get access to a small business owner's financial data and to build a relationship over time. And so the hope was, okay, let's go acquire this. So we did. This was pre-pandemic. Acquired the technology. Learned that the technology is never as good as you think it is, ever.

12:23It may demo well, but when you get into it, you realize, okay, this is written in a different code base. Our engineers are used to writing in PHP and MySQL. This is in a different code base that you have to learn. Even if it's in the same code base, the learning curve of what it does and how it works and integrating it into your product is way more challenging than you ever anticipate paid it will be takes twice as long twice as much money so it took us eight months at least before we could really even start marketing the product we made some big announcements around it everyone was pretty excited about it okay how's this going to work how are we going to integrate it and when you get into it you realize there's just so much spaghetti code there and you're like oh this is not what we thought we were getting but we started executing on this hypothesis that we could cross sell and it would integrate nicely and you would have financial cash flow management or bookkeeping right alongside lending.

13:23We ended up marketing and selling to customers. Again, the problem was it's hard enough to build one business, your core business, let alone going and adding a second business. The core business is a marketplace. The second business is this monthly SaaS subscription and it's bookkeeping and it's fulfillment and it's cash flow management and everything about operating the second business is different than operating the first business. And now what you're doing is you're spreading your resources so thin that you're trying to run two businesses. And listen, it's hard enough, as I mentioned, just getting one right, let alone two.

14:02We ended up shutting that business down after about 6 to 12 months of trying to operate it because we were just spread too thin and we weren't doing either one of them. Now, we took some of the technology and the concepts and we're using them in different ways today. But the whole hypothesis we had around providing bookkeeping and cash flow management didn't pad out the way we anticipated. You're going right into the complexities the further you get away from your core. Even though in the beginning, you saw some common foundation you could leverage on the go-to-market that you currently had. But then when you looked at the whole scope, what it sounds like of operating the business, they're so uniquely different because it's much further away from your core business that it's tough to manage.

14:46No question. Yep. The other deal is a tech deal too. Yeah. So the third one we did, first of all, we made a decision early on as we were getting into the diligence that we were not going to invite the CEO to be a part of the ongoing merged operation, which was a challenge in and of itself. we were basically buying the technology out of bankruptcy. And so the team had been running on fumes, getting lower salary or no salary for six to 12 months. And we felt like the technology was valuable and there was opportunity to take it and do something valuable with it. But the CEO that we were working with, we didn't see eye to eye.

15:29So we told him early on, we weren't going to invite him to be a part of the ongoing operations. A lot of the key team members ended up finding other opportunities late into the process. We thought we were going to get this great team and this great technology. And we ended up getting about three or four team members, one of them that was exceptionally strong and is, that knows the technology inside and out. But all of his key team members that were other engineers and developers to be able to help with the code, found other jobs before the deal had closed. I feel like we negotiated a good deal and whatnot, but what happened when the deal closed was that we're highly dependent on this one individual.

16:14Again, the code base is in a separate language. It was in.NET, we code in PHP. We did a lot of diligence around the technology and how differentiated it is, and it is super differentiated. But again, the complexity of trying to write in two code bases and bring those together and integrate them. And then the dependency we had on this in one kind of senior architect made it so post-acquisition to be able to get it to market just took so long. It was a technology that we were taking. Again, we were buying it out of bankruptcy, but the hypothesis we had on what it could solve, we are going to still solve the problem that we were buying it for, but now we're doing it in a different way through a different platform.

16:59We learned a lot around the differentiators and we've taken those differentiators and we're replatforming those. But there's just a lot of complexity. I mean, I'm being quite vulnerable in the discussion around like... Yeah, you are. A lot of these just don't go the way you think they're going to go. And it's really hard to figure that out until the deal's done and you get into operating the business of how complex it is. You'd like to hit all these huge challenges. This is like a whole degree I'm about to learn in this conversation because we talked about the cultural difference and some layers to that.

17:33Then we went into the complexities going away from the core and just running a different business than you anticipated and the resources it's taken up. You had churn while you're doing a deal that you're trying to manage. And then you have the complexities of the tech integration that you can easily overestimate. So there's a lot of fun things for us to talk through. Ultimately, I just want to learn how not to bond my first deal. Maybe we think of the timeline. and I wanted to get the culture one was really interesting because I think you're right. That's one of the first things you start thinking of in a deal is you want to make sure and it'll make up stuff.

18:04But even we're looking at a company, right? Hypothetically, that as 20 people, you may cut a quarter of the people. And then, you know, you're sort of assessing these people in the 15 are any good. Maybe we got to be more optimistic. And I think that's a big piece of it is you really want to know if you're not good people, how's that going to work? I liked how you spent that emphasis doing it, which I think I'm developing that maturity and thinking. But then even from the lessons learned, when you found those differences, how would you re-approach it now looking at a deal to make sure it's not just the gesture of culture, but really understand that culture enough to know that the deals sound in terms of people coming together?

18:43The easy answer to this, and I'm sure people listening are like, oh man, if you would have just done more diligence. And the challenge is, I've got a friend of mine who's doing an acquisition right now. Timing is critical in the deal. The seller wants to do the deal for a reason. The buyer wants to do a deal for a reason. And the motivation for doing the deal is such that it's let's do this in two weeks. You have scenarios like that, where what is your motivation for doing the deal. And you want to move quickly, but you also want to do your diligence. And that's a really challenging thing to balance.

19:22Because your diligence, a lot of times, they're trying to put their best foot forward. The CEO may not want his other team members to know that he's considering selling the business, he or she. So they don't really want to give you free reign and free access to all their team members to be able to start interviewing them until the deal's done. That's very standard. You also are trying to do as much technology diligence as you can. And you go in and you look at the code base and you go in and you look at the demos and you walk through everything in great detail and you start to envision on how these will work together.

20:02But in theory, looking at it is very different than, okay, put two people next to each other and integrate these code bases. And how you do that in practice versus kind of the theory and the diligence becomes a very different experience. So there's a lot you just are not going to find out during diligence. You're not going to find out until you actually get into the deal to be done. You can try and do your best and the more diligence you do, the better. But sometimes it's, I don't know exactly how this is going to work out until we've actually done the deal. That's a fair point to emphasize. that you're not going to get the full scope and story.

20:41You have to accept the fact. And then when you mentioned that there's a compressed timeline, which pretty much every bank process runs, we want to get this done in a week. Yeah, you're just under that circumstance. You have that mixed with owners that want to keep the toll transaction confidential. Fundamentally, that's what we got to deal with. In the variables that can control, anything particular there that might be the things to really strike proactively on. I found, for example, I just asked directly about culture and really ask deep questions, try to understand the leadership style and things like that.

21:12I found that to be a lot more comfortable after talking to people that approach that in those early conversations, as opposed to just trying to be observant about what culture is. For sure, you're asking a lot about culture, but even then, your philosophies about culture with the senior leadership team may be very aligned, but they may perceive what their culture is or you may perceive what your culture is. But the larger the organization, what does the team members on the ground level say? When they start becoming co-workers, the way they go about the little things that are not going to come up as you're talking about, hey, what are your values?

21:47What's important to your culture? How would you describe your culture? All those questions you can ask, but you don't really know, is my point, until you get it done. Now, I'm not saying that you shouldn't do a deal because of it, but there's just some risk that you're taking no matter what when you're doing a deal. That's interesting. So you look at it from the point of real bottoms up because you can't be assumptive that top down, you know, a leadership team and that view of culture. But as the structure and the folks that are individual contributors could be completely different. That's a good point.

22:17The other thing is on the technology, like, I don't think I'll ever do a deal again where the code bases aren't compatible. Because I know there's philosophies that it doesn't matter what the code language is. You can do.NET and you can PHP or whatever it might be, Java, and you should be able to make those work. But the difference is we have 80 engineers on our team that are really proficient in PHP and Java and SQL. Let's say I want to take 10 resources and move them over and say, I want to integrate this so quick. I need to integrate it in three weeks. The reality is you need to hire a totally different type of engineer or figure out how to cross-train them.

23:01We've come across too many hurdles where it slows things down. The excitement is real at the beginning, but then all of a sudden, you don't have anyone that can work on that code or understand that code or integrate that code. It slows down your ability to execute and deliver. And that's really what's happened on our third one is I have one really strong senior architect, and then I've got some other engineers, we had to go hire.NET and we're not speaking the same language. And so now it creates a bottleneck on execution. That's a good point. And then the timelines to actually integrate and go to market get extended exponentially, it sounds like.

23:36Yeah. So what's the thing to avoid there? If you know you got different co-bases, I guess this is just more upfront diligence on the tech stack, bringing in your top tech guy and really looking at what this is going to take and listening to them. And that's the thing. So again, my learning is we had all of our top engineers doing diligence, like looking at the code base. We knew it was in.NET. It wasn't a surprise to us. The thing is, when you look at the architecture, you're like, oh, it's really well architectured. Oh, wow. The code base is really clean. And that's different than when you're actually starting to code it.

24:10People are optimistic around, oh, we can integrate this. We'll have our two teams work together and do connect it through API and whatnot. But it ends up being very different than you think, at least on the software side. Now, not all companies out there that are doing acquisitions are trying to integrate software. And so it may not be totally applicable to everyone. Yeah, it's interesting. It's a fair point. Because there's a lot to really make sure you get right. Because if you don't get this right, it's going to throw all your other assumptions to generate revenue on the deal off. Yeah. The deals I'm looking at are literally buying IP or buying an old code base that you know is not worth rebuilding.

24:47So the strategy is more around migrating customers to your products. But that's the difference. I guess your whole focus there is more on the customer retention. What I'm trying to get to is either here's a big risk item you ultimately bring it down to that you have to manage. Is there any way to validate that if you have control over risk? Because here, your timeline, I think you mentioned, ended up being like eight months. I think that's what throws everything off. Is there anything that can be done to really have control over what that's going to be? Some of the learnings we've had is how we approach the deal.