Using M&A Best Practices to Get Better Deals

23:46Again, we're not trying to pull one over on you. We wanna do a fair deal where everybody's happy or maybe everyone's just a little bit unhappy. I think they say that's the best deal, but we don't wanna work through a transaction with opposing counsel that doesn't know what they're doing. It's just not good for anyone. And it lengthens the process significantly. And there's the old adage, time is the enemy of the deal. And Brent mentioned that as well. We try to do everything we can to be as quick and efficient as possible. And if that means helping counsel get better advice and guidance on the other side, it's good for everybody.

24:14It is absolutely good for everybody. We did buy-side work in my investment banking days. And we were in a transaction. We proposed a working capital adjustment in the letter of intent. and the seller took that idea to his sole practitioner, CPA tax preparer, who said he had never heard of a working capital adjustment. They're trying to screw you and don't agree to it. Oh my God. Four months later in the highly seasonal business, we were sitting at the closing table. We had$2 million more in his working capital and he said, I should get that back. It's real money, isn't it? And our client said, ask and answer.

24:50You turned it down and we're not gonna change now. that's a huge mistake for an advisor and$2 million out of pocket for the seller. We're not going to discount the quality advisors you can meet at platforms like ACG. So I think that's also valuable. And this is like the reoccurring theme. If anybody follows M &A Science Podcast, you got to have a good attorney when you do these deals. That's one thing you really want to spend the time and have good relationships with. Without a doubt. The mom and pop deals versus bank deals. Welcome to Jeff's world. Indeed. All family of businesses. I'll tell you what though, there's something very rewarding about working with these individuals.

25:24Again, if they haven't built what we view as a great business that we think is going to be a strong strategic and cultural fit, we're not going to have a lengthy discussion with them. So when we get to the point where there's common interest in a deal and we've agreed to move forward, and we do a very formal process even when it's a proprietary one-on-one. So we'll do a very formal written indication of interest. If we're in the right ballpark, we provide them as a secondary request list and we We hone that into a LOI, very formal written document, contains 20 terms that will flow into the purchase agreement.

25:54And we try to be very transparent about what that process is going to look like from start to finish. Otherwise, it's going to be a big mess. Again, the challenge is they're running their business simultaneously. On the positive side, you really are able to develop these great relationships with people and you're helping them achieve their dream. They built a business. Now it's come time for them to monetize it. And unlike private equity dealmakers that are doing it day in and day out, this is likely their one time to do it. Again, it's incredibly important that you're honest, forthright, not trying to pull one over on them and make sure they understand exactly what the process looks like.

26:28You're talking about working capital, Brent. In the previous role, we had an opportunity where we're trying to explain the working capital true-up process to a seller and what that entailed. And we had a great little written example with some numbers and it showed how it's going to flow. And we probably had five at least separate phone calls where that was the only topic of the phone call. And every time we finished the call, they said, OK, now we get it. Now we get it. Ultimately, at the end of the day, we closed the transaction. And when we went to do the true up later, they were like, wait a minute.

27:01I thought we had a chance to earn that back between the closing and the true up period. That's not exactly how it works. I thought in the five plus times we explained it that you guys got it. After the change of control, they get it. That's good. That makes sense. That'd be a good one. That's interesting. Yeah, yeah. Are there interesting stories? These are fun to learn from. When you're dealing with family businesses, they're so remarkably naive and unprepared. As an investment banker, most of the firms you meet start their conversation with something like this. You probably never met a firm quite as unique as ours.

27:37We're really different than anybody else in our industry. There's some really special things you and the buyer are going to need to understand. And they often believe it. I have 70 % of my revenues with one customer, and that shouldn't matter in the multiple or the deal structure. We don't have any control over our contracts. Oh, shit, they're going to ask me about that in due diligence? My goodness. Why do they need to know stuff like that? So it's a big role for the advisors to prepare and for strategics to have the patience and the understanding to work through those kind of issues, because that is the nature of acquiring family businesses.

28:12Adding on to that, another benefit of having a banker involved is controlling and level setting those valuation expectations. We've had many, and I'm sure we'll have more conversations with business owners that say, sure, we're interested in having a conversation. We sign an NDA, we provide our initial request list, we give them a formal written indication of interest. We've been fortunate that we've been paying generally in the five to seven times range historically. We communicate that. And so we put something forward and they come back and say, yeah, our two,$5 million EBITDA business, whatever it is, is worth 10 times.

28:45That's our valuation expectation. Okay, let's talk about that. Why do you think it's worth that? And what are the characteristics of the business that you think would necessitate a premium multiple like that? And there's rarely an answer, obviously, that justifies that. It's usually, well, my friend sold his business that went for 10 times or look at what Tesla is trading for. And we've heard Apple or Instagram. You're like, okay, how is that relevant to what we're talking about today? And so you have to talk them back down to earth. And a lot of times they just walk away and say, okay, you guys aren't going to pay what we want.

29:15So see you later. Now, sometimes they come back to us. Sometimes they go to a banker and they trade for a market multiple. What I tell everybody, a business is worth really anything that's for sale is worth what someone else will pay for it. While we can talk about average multiples and things like that, every situation is unique. It's rare where a business that we're looking at is going to be worth anywhere near the 10 times range. Fair enough. Let's talk about executing deals. What about diligence? How do you stay agile, efficient? That's something that we've really continued to refine as we've worked together as a team, as the company has grown and developed.

29:45Obviously, it started with a company that has a long history, but the core and main name and sort of company as it exists today was really established in August of 2017. and then I joined in March of 18. And what I really did at the outset was, as I said, a very formalized process for how we're going to go about start to finish. From sourcing through integration, we have, over the last several years, continued to streamline every single aspect of the process from our request list of data requests, discussion topics, and how we handle that. We've continued to focus on what are the key risks that we truly need to tease out in the acquisition or in the due diligence process.

30:23Sometimes you can get caught up in checklists and do we receive that? And you can get lost in the weeds on some of those things. And you have to step back and really look at why are we buying this business? What's the thesis here? And we always come at every acquisition, even though we're very nearly focused in our core here. Why is this business going to be a fit with core remains? We develop a very specific thesis and then try and remember that as we go through the diligence process. Testing the thesis and then making sure that we're focusing on the key risk areas and not getting lost in the weeds.

30:49We've shifted a number of our sort of discussion topics or even some of the info requests to the interim period between signing close. Virtually every deal that we do, we will sign the transaction, announce it publicly, get on site with the team so we can start making them feel comfortable with the future acquisition, becoming part of the core and main family, explaining how that's going to work, providing them offer letters, letting them know that they're going to still have benefits and just trying to ease the anxiety. And then we'll generally close two to four weeks after that. Not everybody does acquisitions that way.

31:20Some do a simultaneous sign and close. We think that because of the impact on the people and the way the messaging resonates, the options are a business owner calls the team in or all hands meeting. Okay, here's the deal. We've signed an agreement. We sold to Core in Maine. You work for them now. Have fun. Versus we've signed a purchase agreement with Core in Maine. They'll be on site tomorrow. The transaction will close in the next two to four weeks. They're going to be there to answer all your questions, provide information. There's always anxiety in any transaction, any acquisition like this.

31:48But we found that helps to ease that and it makes a smoother transition for the people. And ultimately, at the end of the day, while we're buying companies that are distributors of critical infrastructure products, we're buying the people and their relationships and their culture. So we want to make sure that they feel good about becoming part of our family and handling it this way has really helped. I think that's like the whole crux of making it successful is that transition, putting people at ease. It sounds like you learned from time. Sidebar, but important to that. So I've started an education series for all ACG chapter executives and directors so they can better understand the industry we serve.

32:25And I was talking about just the evolution of due diligence. And I'll date myself here, but, and Jeff, you probably remember this as well, the war room where you printed off all these documents and you put them in a conference room and you filled these conference room with boxes. And in came the accounting team from the buyer and the lawyers, and they spent days. And then there's been things like virtual data rooms, folks that have deal room technology where you can close deals virtually and you can control access and you can upload documents and literally hundreds and hundreds of people can coordinate a process, software for coordinating deals, the whole, I'll call it science that is developed around quality of earnings.

33:08it's really radically different now today than it was even 15 or 20 years ago. And that's the impact of technology of firms like yours, frankly, just the sophistication of what we call our M &A partners. The rest of them calls them service providers, but they have really qualitatively changed the ability to get deals done. I should speak more highly of service providers since I fall into the category. But I think that's one of the biggest things I personally found value from being an ACG member where it's like you really connect with the ecosystem. I thought it was cool to find... I'm curious your take on this, Jeff, but you find somebody that just provides a service you never thought existed.

33:47For me, it was customer diligence. And now I'm reigning those people in when I work on deals because it's an odd thing for you to do as a buyer, but you can bring a third party in to help you get way more intel in a less intrusive of a way. Have you found anything like that? Any niche providers that you've been able to lean on? I'm probably not the best example for that, Just given most of what we do is in-house, even on our quality earnings, we do the majority of those in-house. We certainly do in some cases and will, again, use third parties for that. But given the size, scale, the team and the resources we have internally, we're able to work through the vast majority of our diligence without engaging third parties other than M &A counsel.

34:24Now, we do have internal counsel that we work very closely with as well. We've got great external M &A legal counsel that we work with on every transaction. All right. For the rest of us that may not be multi-billion publicly traded balance sheet, this is a great platform for providers that could help fill in your gifts. Indeed, there are. Going back to the execution, I was curious about COVID. Everybody's got an interesting story of how that may have impacted or made significant changes, particularly around how you had to execute deals. We've got a pretty interesting story where I guess it was early March of 2020.

34:58The word COVID had just started becoming a household name and events started to be canceled. And we were working on, at the time, one of our largest acquisitions, really just a spectacular company based in Northern California, 14 branches. An exciting opportunity, a really great fit, probably filled in the largest geographic white space on the map that we had. And the cultural fit was incredibly strong. Financially, obviously, made perfect sense. So we're super excited about it. And then COVID hits. We closed the transaction. And I believe it was within like a matter of days. That's when they canceled the Masters and then the NCAA March Madness.

35:35And I guess this COVID thing is real, huh? Now you've got a company that's based in Northern California. And California was highly restrictive in terms of COVID regulations and shutdowns. And obviously, no one was traveling anywhere. We're all sitting in our newly constructed home offices, mingling with our friends at our garage. We're trying to integrate a business halfway across the country with no ability to be on site and meet and welcome our new team members. So that was an incredible challenge. I will tell you, we figured out ways to work through it. Were we perfect? No, but I think people understood it was an interesting time in the world and we did the best we could.

36:10The business sort of remains out there and the branches and the people we brought in are thriving. It's been incredibly successful by any measure. But there was a period of time where there was a lot of anxiety that was really tough to resolve. And we put together videos. At the same time, we brought all of our in-house training that we do in our St. Louis headquarters here, put that all online. Our training team did a remarkable job of making that all virtual training. So we're able to provide that. Ultimately, when we were able to travel again, we really made it a point to make sure we had senior leaders going to visit all those branches, making people feel welcome.

36:44and doing what we would normally do during integration months, if not further down the road, just to let them know, hey, we're still here and we care about you. And how else can we help solve some of these problems that arose over time? But not looking forward to any other experience like COVID. So hopefully we can say that's in the rearview mirror and just move forward. It's interesting how some are pretty dramatic changes, but then they really go back. We can do a whole podcast interview about all of that. And I'll take a moment. And I want to pivot back to your earlier question about innovation.

37:14And this will be another kind of ACG plug, but that's my job. St. Louis has had a corporate peer group for a long time where folks like Jeff can get together on a regular basis and meet their peers. And one of the things I'd observed, CORE in Maine really has an excellent human resource and culture integration process, which is something many acquirers struggle with. But as a company, CORE in Maine buys these relatively small family businesses and then many cases, wants that entrepreneur to stay on and learn how to survive as a corporate person running a branch inside a large organization. It's a very intentional process, what CoreMain does.

37:52And Jeff was able to share that with his colleagues in this peer group setting. And I can tell you they all learned something from that. So that's how you learn innovation too. It's really about engaging with your peers. Sorry for that, Jeff, but I had to throw that in because I remember that presentation today. Any plug for CoreMain and what we built is appreciated. It's interesting. I am now the chairman of the corporate peer group, probably the worst chairman that the organization has ever had, because I think I've maybe been able to attend, I don't know, 10 % of the events that we've had in the last couple of years, because I've been traveling.

38:23I'm like, does nobody else travel anymore? Is it just me? I feel like I'm always out of town during those meetings. We've had some great speakers that have come in, and it is a really valuable group and another aspect of ACG that I think is pretty special and somewhat even unique to the St. Louis market. and we've always had a very strong corporate membership in St. Louis. And that corporate peer group definitely adds value to the members here in St. Louis, whether it's relationships that we talked a lot about or just specific sort of examples or case studies about something they encountered in a transaction and how it can be relevant to someone else who's working on something similar.

38:53I've seen a lot of those sort of offshoots like, hey, what you just said, we need to talk about that. And there's a lot of great, just natural, organic learning that comes as a result of that. I couldn't agree more. The most valuable asset is your peer group. I think especially in this industry, because it's just, there's no standardization. I've heard me echo that so many times, but it's just the industry operates in silos and you really have a tough time getting access to it. The best you can do is get a good peer group and trade notes and learn from each other's experience. Yeah, corporate development is really quite similar, no matter whether you're in a tech company or an industrials or a waste management company.

39:28It's about building the pipeline and getting deals done and managing process. there's a lot of generic similarity that I don't think has been as well socialized inside the corporate community as it has been inside the private equity. I want to ask you about tech. Since we brought up tech, how has technology played a role in your M &A processes, particular diligence integration? So, Kisan, you're probably familiar with Deal Room. Oh, never heard of it. What is this Deal Room? Maybe if I get a referral fee, I can share some more information about that with you. Look, we've used a number of different CRM systems and I'm going to just call it a CRM system for now and you can correct me and use the correct terminology.

40:06But when I was in private equity many years ago, started using salesforce.com and spent a lot of time highly customizing that for our needs. And that was really mostly kind of CRM, going out and meeting bankers, logging meetings, logging all the deals, logging all the NDAs and really focusing on those metrics like how many NDAs did we sign with this banker and how many deals did we take to IOI, LOI, these things. And you can look at it and help to prioritize which relationships you spend time with Given what we're doing now, that wasn't the right tool for us. We had another tool that sort of failed on us.

40:36So we've been working with Dealroom over a year now. And it's a great user interface for our pipeline management. We're using it on a daily basis. Great for reporting out both internally to our board. And then inside each sort of deal card within the tool, manage our entire diligence process as well. So tracking all of our requests, all of our document management. It's been a great tool that's made us very efficient. You've got all the information in one place. Again, it's very user-friendly. The learning curve for it is not steep. We've got team members that join the company. They're up and running on it in a matter of days, whether they're helping with diligence, integration.

41:14We've got a lot of functional team members, as you can imagine, different than the way private equity does their due diligence and works through a process. We have 30 to 40 people from the company involved in each individual transaction. So everyone from our HR team, finance team, IT, legal, all of those things, environmental health and safety, they need to be able to understand how to use the platform, how to find all the information. That's been a great tool for us. It's helped us become more efficient, especially with the pace that we've had recently. It's just been a great tool to help us in that regard.

41:44I'm trying to figure out how I can use ChatGPT to my advantage. And I haven't found any great use cases there yet. So I'd love to hear if you guys have any ideas. I have been trying to loosely, as we're identifying adjacent markets, get me thinking about different things that I can look into sort of outside the box. AI is obviously a buzzword that everyone's talking about. And I think we're just scratching the surface in terms of what that's going to mean for virtually every industry. There's not a whole lot we're doing with it currently, but it's absolutely top of mind and going to be a focus going forward here in the near term.

42:16And what are the applications? What are the use cases there? How can we use that to be more efficient, provide more value? it's just changing so rapidly that you can't ignore it. We don't want to become blockbuster video. We're going to need to understand what that opportunity might look like. I know there's a use case out there for me. I just haven't found it yet. I'm glad I appreciate all the compliments. I didn't pay you to say any of that stuff. If those of you do get interested, use reference Jeff's child. Give you a discount or something. But, you know, the AI stuff with chat, I got some stuff.

42:46I was just talking to the marketing team, a few different things. One, I wanted to just take public company data, profile a company, and just start sharing examples. Because I've noticed a lot of people have different competency in how they use an LLM like JITPT. I noticed that internally, I noticed that externally when I've been serving our customers just to figure out what are their ideas around AI. So I think there's one, there's sort of like how can you use the publicly available stuff. And then two, like in the product, definitely we've tested a bunch of learning language model. OpenAI stands to be the best right now.

43:14But we are looking at ways of incorporating it. And it falls in two folds of how to use it to analyze the data that you store in the product, which is a complicated thing of its own because most of them aren't designed to ingest a bunch of data at once. So you got to blend a few technologies together to get the right information in there. And the second is more of the application data, all the things that are moving around, people's activity. There's a lot of cool stuff. So I'm looking forward to following up with you. And I think we're going to be sharing a lot of examples just to help the general community get more confidence around utilizing AI in their daily scope of work.

43:45But I know it's like a big hype cycle right now, but I do think in the aftermath, there's some pretty tangible things you can do with it. I look forward to that. I do use it fairly frequently, but it's more like a Siri replacement for me and just asking random questions about things or helping my daughter with her homework. I was surprised. I got my 10-year-old kid using it and he was doing it with his homework. He's like, dad, I see you do it. I was like, what? Maybe this is slightly off topic. Kids should certainly not be using it to say, write me a five-page essay on the great Gatsby. but where I may or may not have used it in a use case like that is tell me six themes that someone could write about in the novel The Great Gatsby and then you have six kind of prompts that then you can share with your hypothetical daughter if you haven't read The Great Gatsby in 30 years.

44:29That's a fair point. That's why I think the practices are so important. I think that's going to be an important thing just to get grounds with. The other thing I was going to touch on just going back to the last, I don't know, 12, 18 months and we've been so busy and I've just been head down working on acquisitions, bringing great new companies into the corn main family. I keep reading about the slowdown in M &A. I keep looking around. I don't see it, but now I get it. I know just economic environment where rates were and how that impacted valuations. And then ultimately, people, buyers and sellers finding common ground.

45:01Fortunately, it had not been a real issue for us. I do think we're seeing now some stability in interest rates. And certainly, you've got record levels of dry powder on the sidelines. I do think that for those that haven't been as active the last 12 to 18 months, there will be an uptick in activity, hopefully not infringing on our space. I do think it's going to get busier here. The data we see confirms that. We own a data company called GF Data that gets transaction volume quarterly from the private equity community. No question, transaction volume dropped pretty seriously. but the indicators are the folks we talked to, the number of pitches are up by the investment banking firm, private equity is beginning to say they're seeing more activity inbound and there's no question, having the opportunity to go to a number of ACG events, often there's an economist and the economists are talking about what Jeff alluded to, stability or downward trajectory in interest rates and a massive amount of capital that is sitting there that needs to get a return somewhere.

46:02I've got to plug for GF data to a real life scenario. So one of the situations where we're talking with a business owner who had pretty lofty valuation expectations, and he was kind enough to share a study that he had, which was valuations of publicly traded software companies. It was fascinating. It was very interesting. Multiples there are off the charts, as you can imagine, but zero correlation to a Waterworks distributor. I didn't share the report because I didn't want to do that, but I did share some snippets. So here's more what a distributor in this sort of size range over the last 20 years would trade for.

46:36You might find it's a more relevant data set. The numbers are a little different than your publicly traded software companies, but I think we should probably talk here versus there. Very good source of data for us. But it helped. Very nice. I got to ask you guys, what's the craziest thing you've seen in M &A? I probably have a lot. I don't know how many I can share on this podcast here. I will tell you one of the most unique things that we encountered in the deal, and it's totally unrelated to the deal itself. but they had a pet alligator in the pond on their property. We acquired the business and showed up and we had been there, but I guess maybe they hated it or something.

47:07But you can't keep an alligator. We can't have an alligator on the property here. So that's the only time I've encountered that. Divest an alligator. We have an alligator. Yeah, we had to find a special banker to help us divest the alligator. I don't know, Brent, is there an alligator banker at ACG we could meet? I'm sure there is. I'm sure there's somebody that has an alligator story. No doubt. I think more of these M &A award stories at ACG. I think Jeff and I have to host an after nightcap happy hour or something. Would be happy to do it. Yeah, and most of them really aren't for primetime publication.

47:42They have to do with alcoholic ex-wives and all sorts of, or alcoholic sellers or who knows what. It's a whole variety of things we've seen. Yeah, we've been fortunate too. And because culture is such an important part of the integration process and ultimately success in any acquisition, we make sure that we're vetting all of the people involved early on in the process. And if we've got major red flags, we're going to walk away. And we've certainly passed on opportunities where on paper, financially, it looks like it's going to make great sense. But culturally, just some of the interpersonal relationships or things we've seen, we know it's not going to be a fit.

48:20We'll move along. We have not seen, fortunately, a whole lot of crazy stories or situations involving people. The toughest thing is just the timing of it, as we talked about before, is helping them along the way, understanding the process, and really holding their hand and guiding them as they're going through what's a very emotional time for them and sometimes their family as well. Again, probably not for public consumption, maybe the non-recorded at-the-bar conversation at some point. All right, so we're going to be getting together. Jeff, Brett, and I find a set ACG deal max. We're going to be back, but make sure it's the after-after party, and that's where we're going to let loose on the unplugged M &A war stories.

48:58Deal. Gentlemen, thank you so much for taking the time. You've helped contribute to helping me become a better M &A scientist. Those of you still with us, thank you for sticking through. Until next time, here's to the deal.

49:21Thank you for taking the time to explore the world of M &A with our podcast. We love hearing feedback. Tag us on a LinkedIn post, add a review on Apple Podcasts. We'd love to hear from you. If you need help standing up an M &A function or optimizing one that you already have, we're here to help. And if we can't help you, we probably know someone that can. You can reach out to me by email, Kisan, K-I-S-O-N, at mascience.com. Or you can text me directly at 312-857-3711. If you just want to keep learning at your own pace, visit mascience.com for a lot more content and resources. That's where you can also subscribe to our newsletter.

50:05Again, that's mascience.com. Here's to the deal. Thank you.