Optimizing Your Corporate Development Team

21:39You ever had a deal where the CEO, you could tell, is not a good culture fit, but the rest of the team may look pretty good. Have you had something like that where you sort of see some pieces you may need to carve out to make the deal work? Or do you just look at it and say, I'm so old and crotchety. I kind of feel that life is too short to deal with situations like that. I feel like if the CEO isn't backable or isn't acquirable, then that business probably ought to be left alone because there's something there. Because it's going to come down to that person. If he or she is not acquirable, all his or her direct reports are likely the same.

22:16Now, I would say that's for a whole company buyer. If you're talking about the acquisition of just intellectual property, source an object code, or you're talking about buying a piece of IP, that's different because there's not really people coming at that unless it's maybe a few developers that know about that particular kind of IP. But in terms of a whole company buyout, I would say that it would have to be the marginal executive leader that would be left behind in order for a deal to proceed from my perspective. But if it's truly like CEO or COO or CFO or somebody at the top three, top five execs that is that way, that's hard.

22:51That'd have to be a really good reason to boot forward with that because I think it's just going to bite you in the end and the bite is going to be bigger than you ever expected and your britches are just going to be torn up. It's just not good. Is it me? Am I too hard-headed? Because I'll still look at this deal and I may change the perspective on the valuation and say, hey, I'm going to do a valuation adjustment, but I still want to pursue on this deal. Or this is a problem. I don't know if it's me just growing up with Indian immigrant parents where we're just based on you get the right price, you get the deal done.

23:22Yeah. Where from your take, it sounds like I should run away and not do that deal. So here's the thing. Every deal has got its own nuances. And so it's hard for me to generalize because when I do generalize, immediately there's going to be a quarter case that disproves my generalization. That's going to happen. I say that because life is short and because there's so many deals out there to be done and people are so important to getting things done. It's a real challenge to not have that fall into place. Again, unless it's truly an IP buy and you really don't need the people, which is weird in tech.

23:54Because I think most CTOs will tell you just getting the code in and of itself and having their developers pick it up and run with it. The first thing the developers are going to want to do is rebuild the code in the frameworks and language that they like or do a massive number of tweaks. You've basically paid for a starter kit to rebuild the thing you just bought. That's not very efficient. All right. I got to stop looking for these messy deals. Give me best cases. What are the really good deals that you see companies with these certain elements? Those are the ones you really want to pay attention to and go after.

24:24It starts with recognizing what are the elements that you want to go after. I think about corporate strategy and I think about inorganic strategy below that. And so in the inorganic strategy, I think about CorpDev as strategy sourcing, execution, integration. So on the strategy and sourcing side, what that means is what is the size of the company? What is the growth and profit profile of the company? What is the product portfolio of the company? So what does the management team look like? What are the people based and what are their skill sets? How would that fit overall? How would you tell the story to existing employees at your company?

24:53Because they're going to be like, hey, we're acquiring who? Why? When? Customers and partners. How do you expand and communicate to them why this is a better together story? It's going to be better for them because either you've got a broader offering or there's going to be an integration that makes the two companies offering more seamless. That means maybe one less screen pop or one less application to view. And then ultimately to the board and investors, why does this make common sense? I often say that a lot of times if you can't explain it to your grandma, your golden retriever, it's too complicated.

25:20It's looking for deals that the explanation in one sentence is pretty clear. That sounds like the big strategic fit is what it comes down to that. Hey, this kind of fuels a lot of those ambitions that you have in your long-term organic growth and that the story component of it, it's going to make a lot of sense to the employees of your company, as well as to the customers. This is the tried and trued, not just get a good deal. Yeah. Hopefully, if all those things come true, then it becomes a good deal. You get a lot more upside potential because of the synergy word we like to throw around. Which I don't pay for.

25:52We can talk about synergies, but I'm not paying for them because in order to achieve them, both of us have to participate. So how is it fair that I pay 100 % for synergies that I have to help you and hire? I work for it. That's the market these days some people believe for some reason. But that part we agree on. That's an entire conversation. We can do a deal together based on that grounded principle. Yeah. So the deal killers, the things that I need to look for to run away. Yeah. Maybe that culture piece, because if somebody's C-suite and got some big red flags, that could be one. Do we agree on that?

26:20Yeah, I think so. Again, if you feel like you have to do a background check on an executive, then probably your spidey sense or something is intuitively telling you that something may be off. Complete assholes. I've met them. I've gone on a deal and just first conversation. Like, these guys are complete assholes. It happens. And maybe rightfully so. I've kind of been in that position. I started a company out of MIT and like I was sitting in Hong Kong having carrot soup about selling some of my founder shares and I was not a nice guy. I was telling the counterparty on the other side, there's no way I'm selling at$4 per share because this thing is going to go through the roof and I appreciate the interest, but no.

26:50And so there are some people that can have a rightful sort of emotional attachment to what they have built and what they're going to build and where it's going to go. And they could be right. You just may be catching it at a time where they are on a trajectory that they see, but you don't, or they believe in, but you don't. And there's just a complete mismatch. That can happen because a lot of life is timing. What are the reasons we should run away from deals? Oh, they are many. One of the things that I've seen pretty consistently in my life is deal heat. So you get emotional lock in on a deal because you don't have a plan B.

27:20And so I'm always pursuing two assets in a space and taking them right up to the altar before crossing that threshold so that you don't get emotionally locked into something because it's sort of a slipping down slope where you're willing to overlook yet one more and one more thing. If you don't have a walkaway price, we are willing to pay up to this and not a penny more. That's also a slipping down slope where you can talk yourself into anything because valuation is an art and a science. You can go and cherry pick a set of precedents or comps or multiples or whatever to justify almost anything.

27:49When I was at UBS, I had one senior banker, I'd go ask him questions about valuation. His first question is always, are you the buyer or are you the seller? Because his advice is going to be different because as the buyer, you're trying to get the lowest price. So you're going to skew low on the comps. your seller, you're trying to get the highest price, you're going to skew high on the comps. And that dictates how you think about valuation. Those are a couple of things that I would do in order to figure out what is the right time to run away from a deal because you're going down that slipping down slope because you're emotionally overinvesting or you don't have a walkaway price and you're about to make an irrational decision because you've got a lot of time invested.

28:22And so there's sunk cost, not only your time, but the team's time in investing in the asset or due diligence or maybe money spent with third-party financial or legal advisors that makes you think that we have to go through with it now, even if it's above our walkaway price. That's not true. That's not how the world works. You can always back away from a deal. Yes, there is rocket science, but in most cases, this is not rocket science unless you're actually buying rockets. We're talking a lot about mindset. Like this isn't, hey, here's a list of some gleaming things that you're going to run across that makes you turn around and run away from the deal.

28:51This is more about mindset that there's little things that pop up, the little red flags, gray flags that pop up. And there is probably a threshold that you should turn around and exit out the deal. But this is more about having a mindset that you don't get emotionally bought in, that you can stay disciplined and objective about the value and the tensions you're trying to create to make sure there's a good outcome and not just doing the deal because it's like you're in love with the deal. Yeah, that's exactly right. It's process. Like over time, you develop systems and processes in order to help you perform a little bit better.

29:22Because if you've been around the block a couple of times, maybe you'll remember them. But if you want to build a scalable team, articulate the process to other people, it'll make your process better and it'll help the company not get into harm's way inadvertently. It could come down to asking that extra question. Are we at the threshold of our walkaway price? Or having done diligence, has our walkaway price changed from before diligence? Because we had a set of assumptions about revenue trajectory or product velocity or customer concentration or pick your poison. Facts and circumstances change.

29:54And so So one of the things that has to change with that is what your position is. You can have a relatively hardline position, but having a hardline position in the face of new facts, that's not rational. You have to consider the new facts at every turn because in most deals, every week or two, you're going to learn something that's materially new to you that you did not know a week or two before that should change how you think about that deal. Teach me, how do you cut through the crap? What's your approach to really get in there, get diligence and not waste a lot of time and resources? It's prioritization.

30:23So what I tend to think about is on each deal, what are the two or three work streams where I think the real radioactive waste is? Do I think that there is open source vulnerability in a particular company? Do I think that what they've been talking about from a bookings and pipeline perspective is not true? Do I think that what they're saying about their ability to get from total adjustment market A to total adjustment market B in the next couple of years is true or false? and just really go in on those things versus I'll pick on legal, for example, commercial contracts. If it's a larger company and they don't have any customer concentration, the commercial contracts are relatively benign.

31:01Could you go and investigate a thousand commercial contracts? Yeah. Is that the best use of time and diligence? No. You kind of already have a sense of where issues are going to come up. If you don't spend the time trying to prioritize where you think the landmines are and you peanut butter spread evenly, diligence, you're doing yourself a disservice because you're going to spend more time and more money and delay the finding that may tell you to stop or go. And you need to get that as soon as possible in order to figure out, is this the deal or do I need to revert to my plan B deal? Or maybe it's a price adjustment.

31:32But in general, in my entire career, I've never wanted to put out a non-mining LOI and have to walk it back and say, you know what? Actually, we need to reduce the price 20 % because we found that this one contract had a typo in it. That's a trivial example. That's not a good example. But you understand the point because there's a level of integrity and trust. And you always want to maintain that because that works both ways. A company can sell to you, but they can sell to somebody else. And so how you treat them throughout the process dictates whether or not they're more likely to come to you if they get another offer, if you're not in exclusivity.

32:02Or if you are in exclusivity, the pace of play, because you don't want a seller to kind of run the clock out on you by slowing down diligence so that your exclusivity expires so you haven't learned enough in order to really go forward, take whatever the next step is. Big exercise of prioritization. It's like really thinking through what are the key assumptions you have, but also what are the key facts you want to make sure to hold up the test of diligence. And I guess focusing on that early, you try to hit those because you can't exhaust it before you sign an LOI. I'm just trying to get an example here, right?

32:33Yeah. So for me, the thing I'm always weary about is the customer contracts. Because I've looked at deals and all of a sudden find out there's a change of control provision across all of them. And it's like, well, how are we supposed to predict the actual contract value knowing that once we do a deal, they can easily exit out? How do you look at something like that? Because to me, that's a big risk. Right away, I'm trying to figure out. And that lends to predicting churn. Yep. Because, hey, if we're going to do this deal, we want to make sure the growth is going to stay and that this is a competitor.

33:02Maybe there's going to be some churn we're trying to predict. But that's another factor in it. It's how easy it's going to be for them to churn. Yeah. How do you factor that in? Is that sort of a big thing you would anchor on as like, hey, we need to really dig into this pre-LOI or do I get comfortable enough and then pass the buck on to post-LOI? So it's gross and net retention. So what does that look like? It's customer tenure. What does that look like? Because if all the customers are sub three-year tenure, then that's hard. If you've got some customers that have been around for a decade plus, that's amazing.

33:27It's also third-party validation. If you're a CEO and you're selling a company to me, the last thing you want me to do is go start directly calling your customers in the middle of diligence. So typically in the last 20 % of diligence, some customer calls can be made. And either those can be made directly by the buyer, or I find that sometimes sellers are more comfortable having a third party whose job it is to do customer reference calls to do it without mentioning the buyer's name. So that way it doesn't leak out that buyer X is calling customers of target Y. And that third party can have a script, a set number of customers to call.

33:57That script and the list of customers provided by the seller can be approved. And the actual work product of that third party market research firm can be sent to the seller as well, because they can use that to improve their business. And typically these are not big dollars. You're not paying, unless you're getting one of the big consultancies, you're not going to pay a million bucks for that. You're going to maybe pay a hundred K. What is that worth relative to getting at some peace of mind that customer contracts or customer happiness or customer retention are where you think they are versus what's up with a website?

34:23Because websites are notoriously laggy relative to what's actually happening at a business. Pre-LOI, I think it's customer concentration is at more than 20 to 40 % because that gets really hard. It's customer 10-year longevity because the longer, the better, the more likely the customers are to persist. It's simple things like NPS or CSAT scores. If they're not even measured, then how do you know how happy your customers are? Step one is if NPS and CSAT scores exist, great, because that means that there is a focus on customers and keeping them happy. If NPS and CSAT scores exist and they're good, that's even better.

34:52That's a good indicator that things may be going well. So there's a bunch of different ways that you can get sliced and diced. And then ultimately, there may be ways to get some channel checks or some market checks because if they're not all direct customers and they're selling through channels sometimes, channel partners can be common. Just talking to channel partners about how is product X or how is this category product Z sort of performing in your channel? What is the general feedback? What are customers like? What are customers not like? Is it doing well in North America only? Is it doing well globally?

35:19Those are things that you got to find out if you've got a network. If you really want to understand customers at a deep level without actually doing direct customer dialogue, which you're not going to do the first week of diligence. That's just silly. I like the direction you took this to understand the customer satisfaction and then better getting a sense of the risks where I don't know if it's me, I'm hanging out with lawyers too much. What are the legal risks that we have for them to get out of this contract? I agree on that. And you probably do get a good sense from the high level metrics.

35:44But I'm curious because the customer diligence firm sounds like a really interesting resource to use. But again, they're not going to get comfortability until LOI sign to utilize that resource. If they do come back with a bunch of things, do you really use that to come renegotiate price? Or what net impact does it actually make if they come back and say, Like, hey, there are some reasons why these customers aren't happy and there's some fundamental flaws with the product. Yeah. So it depends on the magnitude of the issue. If there is customers at risk that you already know from an integration plan perspective, you have to treat them a little bit differently.

36:14You're going to have to have a game plan for either retaining those customers or delivering all the roadmap commitments that those customers were given or figuring out, no, that customer is actually going to a trip. Or maybe you need to expand the number of customers that are listed on a disclosure schedule in the deal docs. There's ways to handle it. And price is one term, but there are also a bunch of other terms. If you've got a 50 to a 200 page stock purchase agreement or asset purchase agreement, then the purchase price is going to be literally one number in a sea of numbers and words. And so there are other terms that you might have in there as well that could also give you relief.

36:47It might not be like for like that you can swap customer weakness for longer indemnification or customer weakness for tighter operating covenants or customer weakness for something else in the SPA. But thinking about it as a basket of terms, you can shake the basket. And if you've got weakness there, you go try to get strength someplace else to offset. The tent. Your pre-LOI tent is going to be a pretty small tent. In terms of the tent of people involved or in the know? Yeah, typically. You got a little two, three person tent. Pre-LOI, obviously it balloons out. I'm trying to get a sense of, again, I just feel like there's so much at stake that you really don't want to screw up early.

37:25Especially you don't want to do a big price adjustment. Yeah. And it sounds like we identify those key assumptions and facts. And I want to get a sense of, I know it's just not you, but who are those key people you bring in, LOI? Yeah. In all situations, at a minimum, it's CEO, CFO, and maybe a few others in executive staff. And eventually, it's got to get to the board because the CFO has certain authority, then the CEO has a certain authority, and then the board has a different authority. Let's say it's$10 million,$100 million, and$1 billion versus who can sign off on a particular M &A transaction.

37:53even if that's formally how it's written, as a courtesy and for good hygiene and communication, you may still want to communicate up even if you don't actually need the board's authority to go and execute a transaction. And so there's a whole host of reasons why it should be kept very small at the early stages is because you don't know. Does the company even want to sell to you? Because in the market that we're in right now where I think the odds of a recession in 2025 are 45 % versus the last economic study that I heard, if that turns out to be the case, and sellers want to either try to get out right now or wait a couple of years to the other side of the recession where maybe the IPO window opens back up again, then buyer and seller are just too far apart right now.

38:33You don't want a whole bunch of people in the know or getting emotionally attached to a deal that's never going to happen anyway. And you need some basic level of information. Now, fortunately, between Google and LinkedIn and CapIQ, FactSet, CrunchBase, Glassdoor, PitchBook, there's just tons of different resources out there that you can go and put together a one-page company profile in an hour, maybe two, depending on a junior person is. After that, you can get a little bit smarter. What I typically do is I will tell a founder or CEO, in order for us to get to LOI, I don't need you to go out and get a banker, even though I sometimes do encourage founders to go get a banker because it really will help them.

39:08I can't be on my side and their side at the same time, even though I'm trying to help them help themselves. I'll tell them, hey, I'm going to send you a list of maybe five to 10 questions. And typically it's going to be things like, give me some quarterly financials, like bookings down to EBITDA, maybe. Get me a customer cube of some type and you can redact it. So I don't need the names of your customers, but maybe I want, let's say, top X customers representing Y percentage of total revenue based on geography or products, or something like that, customer cube. Cap table, who owns what? Because you need to know who you're talking to because he who owns the most shares or she who owns the most shares is going to be calling the shots.

39:41And if he or she is not in the conversation, why, number one, and then two, when? What would they be part of the conversation? Because you need to understand your audience in order to articulate how you're going to approach them. Then I'd also ask for things like a high-level product roadmap. What are the things that you thought that you were going to build that is going to get you to the next level? And maybe a few other things, but keep it simple. So it's not really a 100-hour request of someone who doesn't know if this is going to get there or not. They don't know if there's going to be a huge distraction or they may have an idea that the buyer is earnest, but they've got a business to run.

40:12And so how do you gate and meter the ask to the moment so that you're not overreaching, so that they feel comfortable that they're taking a step that's going to lead to a specific outcome, a go-no-go decision, or a non-binding LOI, or a specific kind of meeting to have, get them comfortable, or a dinner. In a 90-minute dinner, you can accomplish so much. And it's not necessarily getting into a conference room over banker boxes and a lot of data and pulling through thousands of pages. It's like talking about strategy and vision, product, and where the one plus one equals greater than two conversation could be.

40:43And do we believe the same kinds of things or not? Do you continue that? I feel like early in the deal process, you do a lot of that. You do the whining, dining, get to know each other, get comfortability and trust. But then as you continue their process, does that approach still, I take it, apply well as you start meeting other leaders and so forth? I think that's in the honeymoon phase. That's in the first 20%. And then you get to a phase where it's going to be naturally contentious because seller wants the highest price, buyer wants lowest price. And in that contention, there's going to be some puts and takes.

41:12There's going to be some back and forth on terms of the LOI or in terms of the stock purchase agreement or asset purchase agreement. And in those moments, it's hard to sit down and have a cordial meal and not have the deliberations of the deal, not taint the appetite over some rubber chicken that you're eating. I think in the first 20 % of the dance, I think that works well. And then at the very end, at the closing dinner, I think it works well again there. But there will be the messy middle in which it will be more standoffish type communication, but it still has to be good rapport back and forth.

41:41It's just not going to be as chummy. At those meetings over coffee. Yeah. This deal expands out and we start building these key assumptions and really our deal thesis and it gets more detailed. LOI gets signed. You're a diligence kickoff. You can tell you're a good communicator. Run me through it. So these days we do them mostly virtually because people are distributed more so than they've ever been. Back in IBM days, we'd go to the Learning Center at IBM, which is this massive property. It has like an amphitheater in it. So imagine being in a movie theater and somebody's down in front saying, this is what we're going to talk about today.

42:11And you've got the entire movie theater full. That's really old school due diligence kickoffs. These days, all virtual. It's kind of working with the team to be very precise. Here is why you're invited to this due diligence kickoff. Here's what we're going to talk about. Here's the timeline. Here's what we're going to expect from you. Here's the next steps. Here's where certain information is that we already have or it's going to be stored. And so it's very basic information in terms of who, where, when, what, so that you don't waste people's time. You need your diligence team to be as effective as possible and not worrying about administrative trivia so they can spend their brainpower working on delving deeper from a subject matter expertise perspective into the HR, IT, finance, legal, whatever the hot button issue could be.

42:49And I think a due diligence kickoff session is about an hour. It's great to have someone from leadership kick it off and say the why. I can do that and have done that. But I love speaking to other people. I love getting other people involved, not because I can't do it, because I want accountability. I'm always looking for accountability because I consider it a failure if I have to pick someone's work and do it for them. Either I failed to figure out why they couldn't do it, or I've picked the wrong person to be on the diligence team, or I didn't support them in a way that kind of made them feel that they could be out front and center asking the right questions with their counterpart.

43:18And so I try to guard against that because that just never goes well. That sounds pretty straightforward in terms of setting the expectation, and then you're setting the expectations for reporting and findings. Any other little nuanced details? Do you have formats or templates you expect them to deliver on? It's, you know, it's PowerPoints and spreadsheets. I've looked at lots of different AI technologies that can maybe automate some of the diligence process. And there's, of course, there's deal rooms and there's other tools that you can use in order to sort of collect data. But a lot of it is just trying to be thoughtful, thoughtful and crisp in terms of what do people really need to know?

43:54And then if it's a particularly authority solution for a situation or issue, I may also beta test it. So before we get on a call with 100 people, pick two people from work streams that you know are going to be impactful with subject matter experts in those work streams that have been through multiple deals before, been there, done there, got the t-shirt and say, hey, this is what we're going to plan to use for diligence to get off. What in here to you is confusing? Or what in here could be clearer to you? Or what do you think the team might benefit from that we added to this? So that way, just like in software, you're beta testing something before you're releasing it for general availability to the entire diligence team so that you're more likely than not to have it land, minimize questions, minimize frustration, maximize efficiency.

44:33And we're going that way. This is why. This is when. Get on board. You ever run across accountability issues because we mentioned the conflict of the day-to-day responsibilities versus I got some extra homework to do? Yeah, all the time. All the time. What it comes down to is figuring out a way to support that person, ideally in advance of any hard deadline, the exclusion exclusivity or the expiration of exclusivity or a board meeting coming up. Because somebody might just get sick or they may have a family medical emergency. Life happens. It's not always just somebody can't do their job. I've had people that have, I won't talk about their particular personal situation, but you wouldn't wish it on their worst enemy.

45:15And that is, it has nothing to do with their ability to do their job. It's just, they got taken off the field. And so you have to figure out a way to work with their boss or work with their peer or work with somebody else in that function in order to do some quick knowledge share, sort of restart or pivot in that function so that you can keep doing the diligence. It's just, you've got somebody who goes to need to take care of their life in a meaningful way. And I'm pretty hard nosed, but like, I also have to be empathetic to life happens and we're not curing cancer here. you're playing the long game.

45:45So you've got to be sensitive to the fact that you may need that person again, that relationship again. And if you treat them as though they're a widget that kind of fell off the machine and they should have just kept on plugging through, you will probably never get their best ever again. And you deserve not to. It's an interesting dynamic of just the function of corporate development. It's just so unique compared to all the other functions and organization. And that is like the extreme case of cross-functional. it's dependent on all the different functions and working with them. Yeah. So I think that's treating that as your team and how you support them.

46:20What are like crazy surprises you've come across? Because you got to come across some things in diligence or integration. And I want to hear some stories. That background check story, it was someone who was involved with some rather shady real estate dealings. And at the time I was uneasy getting a third party to do a background check. It's not because of the expense, the background check. It's just the fact that we thought we had to do one. So that's not good for speaking truth to power and telling like a general manager who runs a billion dollar P &L that the deal that he's trying to do is a dumb deal, right?

46:52It's not a dumb deal because of anyone. It's because we figured out that the deal was so sensitive to this particular element in the financial model that the return swung wildly with just a little poke on that one term that we just didn't realize until we're maybe a few weeks in. And moving forward, that deal probably would have been career suicide for that GM. Figuring out how to speak truth to power without being Dr. No or Mr. Negative, that was really valuable because sometimes those can be career-ending conversations because people can have a lot of political power. And so, oh, such and such and corp dev killed that deal because of this, that, and the other.

47:31It can get misconstrued. That could end your upward trajectory at a company. So that's not good. I had a call today with a CEO who, I think he's a good guy, but he calls me and he tells me at the end of our conversation, oh, and by the way, I've got three written offers, so I'm not sure you guys can keep up with the pace at play here. Why didn't you start with that? We spent 30 minutes talking about the business and where he is now relative to where he was a year ago and how our companies could come together. But the reality is, typically at large publicly traded companies, you cannot respond to something within a week and say, we're putting a non-body LOI out to you in a week.

48:05And mostly I just tell people, if that's your pace, then I'm out. And it's not because I don't like you. It's not because I don't like the technology. It's just the reality of we're going to scramble the jets and get more members who could be literally anywhere on the planet, like on a 30 minute or 60 minute call for a deal they've never heard of because you've got an emergency. No, that's not how we're going to do things. That's why I like to sort of work with executive teams and product development teams in order to figure out proactively, what do we want to do next? How do we develop a plan A and plan B?

48:33How do we methodically go after those things? Because that puts us a little bit more in control and we're not trying to catch up with fire drills because I've worn asbestos enough in my career and I don't like it. Surprises come in all shapes and sizes. I like hearing them. I don't know any M &A books that you'll learn about that from. Teach me some meat of negotiating and doing these deals. What have you learned? There's a good courting the relationship and then there's just pure, how do you structure the deal right to get it done? I'd like to say that it's a super secret, impossible art to learn.

49:06It's just not. I think most sellers have a number in mind. And sometimes I talk to a CEO and he's, I personally need to take 5 million and put that into my retirement because I need to set up my family as part of a trust and some stuff that he's been thinking about working on. And maybe he's had a couple of X's, they've not gone well, but he's got a number. And that number, you divide that by the percentage of equity he owns, and that's the purchase price that he needs to get. And that may have nothing to do with multiples or what other companies are actually valued, revenue or EBITDA multiples in his space.

49:31It's just that's his or her number. Or it could be, particularly if it's a private equity-backed business. So you know that cash-on-cash returns for private equity tends to be in the two to three times multiple of money area. I think that's true for most of the big PE firms that have raised anywhere between$1 to$20 billion funds. You can figure out how much equity they've put in, multiply that by two or two and a half times, three times, and figure out what the debt is and you can arrive at enterprise value. Of course, there's also multiples. I think at the country club, if a CEO is talking about the deal that he or she did, they want to be able to say, yeah, and I got five times or I got 10 times revenue or I got 10 times or I got 15 times EBITDA.

50:09Knowing that others in their sector are getting those kinds of deals done and so they may have a multiple that they're trying to hit. Ultimately, there's a part of me that doesn't really care what their valuation is. I only care as a buyer what it's worth to us. And what it's worth to us is more dictated by what we think is fair value, where we think we can take it, how we think we can use our go-to-market to get it into the wild faster, where we think there might be disynergy. So you mentioned those customer contracts. Are there going to be customers that atrophy away as a result of us being announced as the buyer on the deal?

50:44That's a reality. And it's having those conversations in a way that leaves some room, but it's also very firm. I can be a nice guy until I'm not. And when I'm not, I'm very direct. Your business isn't worth more than. I don't think we can take another step here. I think this conversation has gone as far as it can go. I don't think we have anything else to talk about. Those phrases are going to come up probably at some point in a conversation. And occasionally I'll use emotion as a tactic. But mostly I'm getting more settled in my ways and sort of like taking the Jordan fadeaway jumper versus trying to thunder dunk down the lane.

51:17I just have a bit of a different style now. And so I just try to tell CEOs and founders like very crisply. So yesterday there was a Singaporean founder who was like, yeah, we've got a tech solution and we're thinking about selling. So that's why I reached out. And in 10 minutes, we had a conversation. I told him why it wouldn't be a fit and specifically where I thought he could spend his time that would be more efficient for him because I don't want to spin up a bunch of people on our side. If he's trying to sell his business, he needs to get all about that like very quickly. It's really about being efficient.

51:43And I think over time, people will respect that because time is the only thing that we can't manufacture and we can't buy. What's like the biggest bid ask spread you've had to overcome? That's a tricky question because sometimes you don't overcome the bid ask spread. In general, I think if bid ask spreads are more than about 20%, you don't overcome them. If somebody is saying their business is worth a billion and you think it's worth half a billion, you're done. Now, it may be that there's a way that you can get an earn out where you can say, okay, we can do 400 upfront. We can do another 300 over three years.

52:11That gets you to 700, which is not your billion, but we're getting a bit closer. Could that work? Maybe, but still, that's about a 30 % difference, right? That's what I was trying to get at. Like, what are your approaches to overcome it? Yeah. Earnout seems to be like the de facto. Yeah, and I hate earnouts. Earnout's a problematic for so many different reasons. The people I've actually done them say the exact same thing they hate earnouts. Yeah, because you're basically setting yourself up for litigation. The seller will not really control his or her destiny after they're acquired and their ability to execute.

52:38Anyway, back to your original question. How do you overcome large bid-ask spreads? If it can be overcome, it's having a conversation about what is the basis for your valuation? early? Are you looking at multiples? Do you have a number that you need to hit? If those things are rational, then you can actually have a conversation. But if they're unwilling to share their valuation approach, or if they're unwilling to share that maybe it's this particular person on the board has an approach that they're not willing to share to you, then you're done. Because unless you're a hyperscaler and you've got a hundred billion in cash on the books right now, why would you overpay for something knowingly?

53:11I've never been in a position where I've had to overcome bid-ass spreads of more than 20, maybe 30%. And beyond that, there's some fundamental disconnect in the belief in the future. The founder belief in the future or the CEO belief in the future and the buyer belief in the future are fundamentally different pictures. And there's no way to make them converge. In those situations, you want to part friends in order to be able to have a conversation a year from now. Because if the buyer's version of the future turns out to be true, you don't want to have torched that CEO and founder and told them, you're the dumbest person I've ever talked to.

53:41I don't ever want to see you again because life is too short for that. That's a good point. There is like a timing element too. And all those factors that you mentioned get me reflecting on my own situation where it's like, we're growing really well, like 60 % year over year. We got a great strong future ahead. That's why we hold to this high valuation expectation. The relationship part, you mentioned that you're pretty straightforward on this stuff. It sounds like you're just right at it. If we got interest, this is where we see an opportunity. Talk to me about the relationship piece, because I feel like this is a stage I'm at.

54:14I'm pipeline building right now, and that's part of it. And sometimes it's just, you know, you got something, you see it there. Do I build a cadence to check in every six months? Is there something I should be doing more of the wining and dining? Yeah. What's your magic on the approach for building the relationships that's going to ultimately get these deals? It's not very magical. I use LinkedIn a lot. I love LinkedIn. So I was in India last week and I had three meetings that I set up based on LinkedIn friends that I'd never met. Well, they're LinkedIn friends now. People that I had never met in life before that I met at a coffee shop in the CEO's office.

54:50And one was this amazing peanut butter chocolate milkshake, which was a revelation in and of itself. Just spend the extra time when you're in a town. So I'll be in New York in, I don't know, three or four weeks. And so when I'm in New York, I'll just spend time making sure that, hey, probably next week or so, I'll start sending out DMs or emails to CEOs and founders that maybe I haven't ever met in person yet, but in the New York metro area and say, hey, do you have 20 minutes to catch coffee? Because I see I'm going to be five blocks from your office on the 21st, for example. And I think that goes a long way.

55:20The other thing I think is important is I also at least a couple of times a year try to get to trade shows because not for the content, which can be amazing. But because there may be a dozen CEOs descending on that conference and I can catch coffees with half of them because their calendar hasn't filled up and we're the same place at the same time. We can over a cup of coffee share. This is what we do. This is what they do. I can maybe talk to them about our process and kind of what that looks like. I can talk to them about what their concerns and motivation are. And I can just be very transparent with them.

55:46And based on that, hopefully leave them with a favorable impression because ultimately on the buy side, where you're trying to get to is you want to be the buyer of choice. When a CEO or founders thinks that they are about to sell, maybe they've hired an investment banker, maybe they've not. They give you a call or they say, hey, can we chat? We have a conversation. And if you're in that position, that's fantastic. I got wind that there is the company in our space. There's a banker that's floating around who's saying, hey, such and such may come to market. I've already sat down with one of the founders in Vegas at one of our trade shows.

56:14I know him and I know his situation and I know how he thinks and I know why I think he might choose to sell. I will develop at least a surface level relationship before the banker is sending me a one page teaser and saying I can be amongst 50 competitors for this particular asset. And that puts me in a slightly differentiated position because it just DM the CEO directly. Now, that is up until the point there's an actual process where the information channels have to be more through the banker directly. That's how I think about relationship development. And so when I first came into this sector that I'm in right now, I probably added at least a couple of hundred CEOs, founders on LinkedIn in the first month of hire.

56:51And since then, it's just very consistent. I know that there's a ton that I don't know, but in terms of large companies that I don't know, that's a much smaller percentage now. Is that how we got connected? I think so. Initially, yeah. I'm big on doing that, sending those connections. We found a lot of our podcast speakers. I know we get a bunch of inbound, which we rarely ever take, but most of our is always outbound through LinkedIn. And I like how you take that approach with founder, ultimate goal, buyer of choice when the situation arises. And then you mentioned this direct approach with LinkedIn, connecting with the CEO founders, meeting them as you travel.

57:24Then the trade show component, where there's likely going to be a lot of founders, CEOs in that space there. Does this still apply on the corporate side? And I don't know if this is something you look at where you're looking at the business lines of some of these other strategics and exploring opportunities to potentially carve out or pick up a business line from a competitor. In our space, there are businesses that will separate. Knowing that CEO or that GM who runs that business is important because that's not very dissimilar from a CEO of an independent standalone company. It's a very similar dynamic, except for in the case of a corporate carve out, maybe you have a transition services agreement for G &A functions that needs to come along with it because it's been quasi absorbed into the larger parent years back.

58:08So it's a little different from a deal mechanics perspective, but from a relationship perspective, it's the exact same. The only thing that may be a little bit different in approaching divestitures is sometimes the CFO or corp dev may be a better first call because the CFO will care about the additional capital that's coming into the company to fund other projects. And the corp dev person is probably the person who's been charged with go build an analysis to either wind this thing down or divest it and figure out which one of those is the better. If it turns out that the divest case trumps the wind down case, then there will actually be a sell site process on that particular part of the business.

58:42And if you've developed a relationship there, you get to participate. So there's a little more complexities, but there's more folks involved that gives you more opportunities to drive at that business case, whether it's directly working with that GM or going to the CFO, corp dev, understanding that they may have some strategy in flight that they're looking at, they're winding down or moving the business out. Yeah. More angles to tap into because the company's larger. And so think about the CFO and the corp dev function in that situation as the owner of the business, which might not have a board formally because it's a division of a larger company.

59:15And I think of the GM or president or business unit leader of that business as critical because that person's got direct reports and very much functions like a CEO or like a VP or EVP that would be brought into a buyer. It's very similar on a number of levels. It's just being a little bit more sensitive to the fact that the transition services, the GNA functions, the corporate support that's been provided to that entity is a diligence work stream in and of itself. because what ERP are the financials run on? And can we get an instance of that? Is there a separate instance of Salesforce for the pipeline that they're building?

59:49Or is it commingled with the parent Salesforce instance? Are all employees run on an HR information system at the corporate level? Or is there a separate HRIS at the subsidiary level? Probably not. So those are the kinds of business and IT applications that support the business that someone has got to have because it would be amazing if at closing you could snap your fingers and get all employees onto all your new systems. That's typically not how it works. And from a business continuity perspective, change is hard. You might want to allow some time for transition because you're never going to be able to diligence everything in a TSA or a transition services agreement.

1:00:24In my experience, it's not necessarily an afterthought, but it is not the first thing you start negotiating with a carve out. It's in the last quarter of the discussion that you really have to get into that because if you can't get the terms and conditions on the sort of the main asset, then the TSA is not the tail that's going to wag the dog. You're not going to do a deal because you get a sweetheart TSA deal, but you get a terrible overall deal on the platform you're trying to buy. That's not how it works. I think I'm learning you got some good carve-out experience. Yeah. At much larger companies that were multi-billion dollars and growing single-digit revenue percentages, you have to think about carve-outs as part of the overall portfolio because you can redeploy that capital into things that are growing faster.

1:01:01Investors can make their own capital allocation choices, but inside of a corporate, you can do the same. and why hang on to effectively dead money where you can take that and flip it into something more valuable. This is not the case. But if NVIDIA had a sunglasses business, why on earth wouldn't they sell that to go and set up a new wafer fab? I don't know what the value of a sunglasses business would be at NVIDIA, but you get the point. There's clearly a capital allocation to new chipsets that would probably be more economic. This is going to be the next podcast topic when we do the sequel to this interview.

1:01:33We'll do it all about carve-out. What? We'll see. Let's see how many people ping Andrew on LinkedIn and tell him he should do a sequel after they listen to this. Especially if you could prove that you've gotten this far in the interview. Definitely. Fire led M &A. I've been riffing about it, put a little framework out there. And it's been my reflection in how corporate development teams mature and their process just becomes more and more oriented on the buy side. And I was just curious on your take from your experience. What is a sense of that maturity look like for you? That's all I do. That's my entire career.

1:02:06You know I'm a recovering investment banker. I've got great love and respect for investment bankers at both bulk brackets and boutiques. However, there's almost never been a time in my career where I've gotten an inbound from an investment banker. I said, oh my God, this is the deal I've been waiting for my entire career. Maybe I'm the only one, but I've been really unlucky in that regard. Mostly, I've had to work with various management teams in order to figure out what do we want to go do that can pull the roadmap in from something that we could deliver in two years of version 1.0 that's sort of a version 2.0 that we can start selling right now.

1:02:34or what new geography don't we have that we could get into? So I just come back from India and I've spent time in Brazil and Israel, and I've got an appreciation for what it takes to be on the ground, speak the language, know the locals, have multi-year relationships. That's hard to do from the U.S. in a lot of instances. It's not about the frequent flyer miles. You just can't be in enough places enough times if you don't have somebody who's local. Or if it's private equity backed, and you're trying to get that three times cash on cash return from a private equity perspective, part of that is multiple arbitrage.

1:03:06Let's say private equity firm buys it at 10 times EBITDA, but they can go and add a quarter billion dollars worth of enterprise value by buying tuck-ins at five times EBITDA and integrating it into the business. I'll use integration with a lowercase i versus the capital i. So long as you have at least four to eight quarters of trailing pro-forma financials so that the whole co-business looks better, then maybe you can sell the whole thing at nine or 10 times. So that can work unless maybe I'm on the other side and I ask you the purchase prices of each of your assets and I poke into the integration and figure out that you haven't integrated anything.

1:03:35And maybe I pay you five times for those things. Maybe I walk away because I'm not the buyer for you, but you find somebody who's not me, who's willing to do that for you. I want to be on your team. I don't want to do a deal on the other side of the table with you. You know, buyer led M &A is really all I've done here at Five9, at Dell, at IBM, for Omnitracks, which is downtown, it's backed by Vista, since bought by a sister portfolio company. and it's really about working. Usually what I've done is I work with CEO, CFO or some of the leadership team and I try to figure out where are we going?

1:04:04Who do you want to keep tabs on? Who do you like? Sometimes I walk into a situation, the CEO already knows. I know every company in the space. I've been in the space for 30 years. You're not going to find a new company for me to go acquire. Great, who's on your short list? So those are maybe the five CEOs that I say, hey, I'm in your town. Can we get together? No agenda, but I'd like to tell you about me and what I do and what we do and where we can go together, but we're not having this conversation. But we couldn't even have this conversation. if you want to have this conversation, is something like that.

1:04:27Or it's maybe a, hey, our executive team is getting together for a retreat or getting together for this particular conference. And I'd love to put you in a room with our CEO if you're open to it and if you're around. Because I think we've had good conversations and I think you guys would have good conversations. If that continues, then maybe something good could come out for both of us. It's no more complicated than that. It's just being efficient and trying to be as thoughtful as possible. And so for the junior people, what that looks like is prep work. I would like to think, I've never put a buy-side CEO in a position where he or she had to go into a meeting, not really understanding the minimum about the target without at least some kind of briefing, one-page company profile, understanding of financials, scuttle that we hear in the industry, maybe joint customers that we have that are overlapping, maybe the hot button that the CEO has, maybe even initial stalls on valuation, even though they might not even have that conversation at the outset, or basic background or points of commonality, whether that's schools or companies or where people grew up.

1:05:20That's the kind of glue stuff that I think can make 20-minute coffees pretty impactful. One of the most disrespectful things that can be done is if a CEO walks into a meeting as though nobody knows who they are. I think you torture a relationship faster than anything when there's been just a lackadaisical effort put at the prep work. Why even have the meeting if you're going to set the relationship back versus advancing? Can you be buyer-led in an auction? Yes, and that's why I participate in a few auctions. In an auction process, obviously, you have to keep pace of play with the process letter that the sell-side banker has sent.

1:05:52To the extent that you have interest, to the extent that it makes sense, I would say that in a lot of situations, if there's strategic fit, product fit, technical fit, financial fit, cultural fit, valuation fit, it's the product and technical that tends to need to be sorted out. And so what it can look from the buy side is co-opting the standard management presentation. Okay, the banker, particularly the analyst and the associate, maybe the VP, have spent a lot of time putting together beautiful looking slides. There's 50 pages. Absolutely. They should want the management team to present those slides.

1:06:21And we want to hear it. I don't want to hear all 50 pages. I want to understand you, the executive team. I want to understand where you're going, and then we'll read the rest. And then what we may want to do is assert from a product and technical perspective, we want the management presentation to focus 80 % on that after we get through the 20 % of who you are, why you're here, where you're going, without reading page by page, all 50 pages in the management presentation, which grinds my gears. What I tend to do is I get with the bankers in advance and say, I know that this is your typical process.

1:06:53Here's the three point or five point agenda that we would like to go through. How can we collaborate? So it's a good use of our team's time because we want to get to a position to be a bidder in your process. We don't want to be a no bid, but if you restrain us to only asking this subset of questions, we may not collect enough information to become a bid and we don't want to waste your time. And so if you're not willing to work with us on this, then unfortunately, we may be out. And that's going to be different if it's a publicly traded company versus a private company, because in a public company, we've got a lot more disclosure.

1:07:22And so I'd handle that conversation differently, but it's really just working with the other side to set the expectation. Yeah. Communicate with the banker is what's important to you. In an auction process, if we have to be at an auction. Otherwise avoid the auction altogether. Yeah. And the other thing I did when I first got to this job is I ended up here, here, there's 40 bankers that spend time in our space or say they spend time in our space. It would be the rare banker that I've never heard of that's bringing an asset to 5-9, for example. And more likely than not, that would be a banker in a geography that we maybe don't do business in or who is maybe in a different space that's bringing an asset that's not right down the fairway for us in the CX marketplace.

1:07:56So that's how I think about it. But bankers are people too. You need to treat them with care and respect. You try to do a good job at answering the mail. So if somebody sends a teaser across, do my level best to try and respond at least a got it or will review within three business days. Three business days is generally my SLA in CorpDev. If you can't respond to something in three business days, something's gone wrong. We both work in tech. The future of CorpDev, the next five, 10 years, obviously a lot of emerging technology. What's your view? As I talk to people, I know that people are using ChatGPT and other LLM tools for summaries.

1:08:28ChatGPT, give me a summary of 10 companies in the high-end art deco chair space, for example. And so maybe that's Noel and Herman Miller and Steelcase. I don't know furniture, but like these are the only names that can come to the top of mind. But you could do that in tech. So whether that's in semiconductors or in cybersecurity or in horizontal SaaS, you could absolutely do that. And you could say, now do that again for private companies. Now do that again for companies on the Eastern half of the US. Now do that again for companies that have been founded after 2000. So you can continue to slice and dice and make ChatGP friendlier and friendlier to the point where you get down to a list of, let's say five, 10 or 20 companies that are kind of like the universe.

1:09:04And back in the day, you'd send some analysts to Google and Capital IQ and to like your old deal files and say, go build this list for me in Excel and then create one page company profiles, which you may still do. It's just, if it's 5 a.m. on a Saturday and you woke up because you just, I've got nothing better to do for some strange reason and you want to compile a list of targets that you want to spend a little bit of time with over a cup of coffee, you can literally do that on your phone. So that's one relatively simple example. The other thing that will start to get automated a little bit more is some of the communication back and forth.

1:09:32Because a lot of the communication back and forth is very manual. And that can be good because, in my experience, you need one-to-one communications conduits early in diligence. And you need many-to-many conduits later in diligence. And that's because you need the teams not to tear each other apart a little bit. Because they don't really know each other and they don't know what ground rules have been set from the executive team on down. That needs to filter down a little bit. The ability to tighten up some of that communication by using some tools and summaries is helpful. And also with diligence calls themselves, recording calls, it's almost standard.

1:10:06It's the odd legal call that's talking about a really thorny issue where no one wants a recording to be used as litigation fodder. So that particular call is not recorded. But a lot of times, particularly if it's a technical call, if it's a finance call, or if it's an IT call, and for whatever reason, you've got people all across the planet and they're literally sleeping at the time that the other half of the planet is having the call. you want the recording so they can figure out like what's next. Or because let's say in HR, you have three people in HR that are working on this. But over time, you may have 30 people in HR that are working on this because you may need to support offer letters or management buyout incentives, or you need to figure out equity.

1:10:40And those are slightly different team members. Then having that information or at least call summaries from the initial calls, I think that'll be helpful. I see technology improving communications because communications is where a deal breaks down. Deals break down all the time because who is it? Mark Twain, who's saying that the problem with communication is believing that it's actually occurred or something similar to that. I think that's very true on a lot of deals. If you can figure out a way to enable technology to help people communicate better and more efficiently, I think that saves a lot of time and heartache.

1:11:08I'm looking forward to that in the future. That's like the right thing for review in terms of the key element is the people relationship part of AI can help do that better or focus better on it. Yeah, I think so because that's one of the things that I think is just really never going to go away. Using AI to do the more monotonous things so that human creativity and brainpower can be spent on the things that change deal to deal, that's where it's at. I don't want AI negotiating for me because I think of like what happens in the stock market with auto trading. If there's no circuit breaker, you could get to some weird outcomes in terms of purchase price.

1:11:42If you had, let's say, an adversarial seller buyer bot going at it from a multi-parameter negotiation on revenue growth and profitability and customer count and like all these things that do go into the mix. No. Let's just talk about summarizing calls. Let's talk about summarizing company profiles. Let's talk about automating some of the work that analysts do in terms of putting together PowerPoint. To this day, I fail to have a good AI tool that auto-builds PowerPoints. There are things out there that we've been trying and looking at, but because most of corporate America, Amazon expected, speaks in PowerPoint, It would be a tremendous boon to have something that automates at least some of the basics of PowerPoint construction.

1:12:20Because a lot of time goes into that because if you're in a 30-minute meeting and you're with people that make a lot of money, sometimes I'll calculate how much it costs per call. If you take the hourly wage of 10 people that are very senior at a company, you could be spending$10 ,000 on that call in terms of their time. If you are not making sure that is the most efficient use of that call, it's a waste. It's not a waste. Trying to be as efficient as soon as possible would be great. The person who creates a PowerPoint autopilot or a PowerPoint copilot that actually works and doesn't just put out kitten pictures, they're going to make a lot of money.

1:12:54I'm pretty optimistic. That's in the zero to three year window. Yeah, I hope so. There's some emerging stuff I've seen the team play around with. Not quite to the level you're describing, but in that direction. Good. Andrew, what's the craziest thing you've seen in M &A? So sadly, there was a point in time where there was a person that I had to let go in investment banking. It just so happened that she was female. And so I've never experienced a person in actual tears being let go. It just turned into a scene and I sort of had to extricate myself. I wish her well and I think she's doing well. The only other time that's happened, it wasn't in the deal businesses.

1:13:30I was running a sales team and one of my sellers was fabricating calls in Salesforce. And so I had to walk him out the door. So it's usually people related and it's usually something that's related to somebody either coming or going. And usually it's going and that's where the craziest things tend to happen. But at this stage, not much surprises me. That's like a whole theme that we could have stories on for anybody that's managed people. The exits can be tough and dramatic and crazy. Yeah. It's people's livelihoods. So you can't take it lightly and you've got to be sensitive and empathetic and understand where they're coming from and meet them where they are.

1:14:01And it can just be sometimes a little bit shocking to get out of the mechanics of like just sort of doing the job and just having to take a step back and realize, oh, this is not about the job. This is about the human and putting the human first sounds silly and sounds trite. It just doesn't always get done. It doesn't always get done because there's earnings pressure. There's revenue pressure. There's performance pressure. There's all these pressures that kind of come into play. And sometimes the human element falls to the bottom. That's the theme of this podcast. Don't forget the human element.

1:14:30Be nice to everybody. Yeah. Andrew, thank you so much for taking the time with me. This has been a great conversation. I'm glad we got to go a lot of time off script. Two thirds of this interview is off the outline. Outstanding. You went with it. So that's what I tend to do. Go with the punches here. Happy to do it. Thanks for having me on. Fellow M &A scientists, if you listen this far, you are a true M &A scientist. Love to hear from you. Welcome the ideas, topic ideas, and the criticism. That's how I actually get better at doing this. Reach out to me on LinkedIn. Blow up Andrew. Let's get Andrew back on.

1:15:04If Andrew gets 100 plus people reaching out, we'll get him back on for a sequel. Let's make that happen. Until next time, here's to the deal.

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1:16:08Again, that's mascience.com. Here's to the deal.

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